CONTRACT LAW NOTES

The law of contract

The lifeblood of any business deal is the contract. It turns an ‘agreement’ into a ‘transaction’. It makes an agreement binding/ Business cannot operate without contracts. A contract is a legally binding agreement, between 2 or more parties. The agreement can be evidenced by writing, words or actions. A contract is determined on the principle of consent. The parties are fee to agree any terms they wish. The courts are reluctant to interfere with private agreements. The agreement of terms creates obligations on the parties.

Judges therefore adopt a non-interventionist approach with regard to commercial contracts. The judges work on the assumption that there is equality of bargaining power between commercial men. This assumption underpins the two basic principles of commercial law: freedom of contract and sanctity of contract. The late Professor Schmitthoff wrote that “…the basis of commercial law is the contractual principle of autonomy of the parties’ will. Subject to the ultimate reservation of public policy, the parties are free to arrange their affairs as they like…” The will theory sees contracts as representations of the will of the people and therefore worth of recognition as such. The theory asserts the value of individual judgment, volition, and the liberal principle of individual self-determination. The most referenced legal opinion in the area of freedom of contract is Sir George Jesse’s decision in Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462 where he ruled that competent men and women of age shall have the liberty to contract and that courts of justice shall enforce contracts when such contracts are entered into freely. In Photo Production Ltd v Securicor Ltd [1980] AC 827 at 848 Lord Diplock held that contracting parties are at liberty to decide the terms that they want to abide by and that this was basic principle of the common law of contract. Brennan J later established in Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 369 that a contract enables parties to create rights and obligations that will govern their contract.

We all contract whether consciously or sub consciously. The bulk of the day to day contracts we make do not have all the formalities and are merely agreements. Contract law is therefore a very vital chapter as most persons and companies contract on a daily basis. A contract may therefore be defined as a legally binding agreement made by 2 or more parties. It has also been defined as a promise or set of promises a breach of which the law provides a remedy and the performance of which the law recognizes as an obligation. The most important characteristic of a contract is that it is enforceable. The genesis of a contract is an agreement between the parties hence a contract is an enforceable agreement. However, whereas all contracts are agreements, all agreements are not contracts.

TYPES OF CONTRACTS

Contracts may be classified as:

1. Written / specialty contracts
2. Contracts requiring written evidence
3. Simple contracts
4. Contracts under seal

1. WRITTEN CONTRACTS

These are contracts which under the law must be written, that is embodied in a formal document e.g. hire purchase agreement, contract of marine insurance, contract of sale of land.

Contracts under seal: this is a contract drawn by one party, sealed and sent to the party / parties for signature. Such a contract requires no consideration e.g. a lease agreement, mortgage, charge.

2. CONTACTS REQUIRING WRITTEN EVIDENCE

These are contracts which must be evidenced by some notes or memorandum.

Contents of the note / memorandum:

1)    A description of the parties sufficient to identify them.

2)    A description of the subject matter of the contract

3)    The consideration (value)

4)    Signature of the parties

Examples include; contracts of insurance other than marine, contract of guarantee.

3. SIMPLE CONTRACTS

These are contracts whose formation is not subject to any legal formalities. The contract may be:

·       Oral

·       Written

·       Partly oral and written

·       Implied form conduct of the parties

Examples include; contract of sale of goods, partnership agreement, and construction contracts

SOURCES OF LAW OF CONTRACT

Under section 2 (1) of the Law of Contract Act, Cap 23, the sources of law of contract are:

1. Substance of common law
2. Doctrines of equity
3. Certain Statutes of General Application
4. Other Acts of the Kenyan Parliament

Brief history of the Law of Contract

Contract law developed around a form of action known as the action of assumpsit, which came into effect in the early 16th century as a remedy for the breach of informal agreements made by word of mouth. The common law courts acquired a general jurisdiction over both formal and informal contracts around the 15th century. In setting out the elements of a contract law, it was important to differentiate between formal and informal contracts. As obviously expected, formal contracts were absorbed into the common law before the informal contracts. Important contracts were made in writings and it was important to seal the written documents. The contracts made became actionable by common law by either of two forms of action. The covenant action, which came into effect around the 13th century, originated as an action for the specific performance of agreements to do something, for example to build a house, etc; as opposed to agreement to pay a definite amount of money. This developed into an action of damages, which was assessed by the jury for the wrong of breaking a covenant. It was later limited to agreements under seal, hence the term covenant came to mean ‘’agreement under seal’’.

Roman Law

The Roman law of contracts, as found in the Byzantine emperor Justinian’s law books of the 6th century CE, reflected a long economic, social, and legal evolution. It recognized various types of contracts and agreements, some of them enforceable, others not. A good deal of legal history turns upon the classifications and distinctions of the Roman law. Only at its final stage of development did Roman law enforce, in general terms, informal executory contracts—that is, agreements to be carried out after they were made. This stage of development was lost with the breakup of the Western Empire. As Western Europe declined from an urbanized commercial society into a localized agrarian society, the Roman courts and administrators were replaced by relatively weak and imperfect institutions.

The rebirth and development of contract law was a part of the economic, political, and intellectual renaissance of Western Europe. It was everywhere accompanied by a commercial revival and the rise of national authority. Both in England and on the Continent, the customary arrangements were found to be unsuited to the commercial and industrial societies that were emerging. The informal agreement, so necessary for trade and commerce in market economies, was not enforceable at law. The economic life of England and the Continent flowed, even after a trading economy began to develop, within the legal framework of the formal contract and of the half-executed transaction (that is, a transaction already fully performed on one side). Neither in continental Europe nor in England was the task of developing a law of contracts an easy one. Ultimately, both legal systems succeeded in producing what was needed: a body of contract doctrine by which ordinary business agreements, involving a future exchange of values, could be made enforceable.

The new contract law began to grow up throughout Europe through the practices of merchants; these were at first outside the legal order and could not be upheld in courts of law. Merchants developed informal and flexible practices appropriate for active commercial life. By the 13th century, merchants’ courts had been established at the international trade fairs. The merchant courts provided expeditious procedures and prompt justice and were administered by men who were themselves merchants and thus fully aware of mercantile problems and customs. In the 12th and 13th centuries the development of the law of contracts on the Continent and in England began to diverge. In England the common law of contracts developed pragmatically through the courts. On the Continent the process was very different, with speculative and systematic thinkers playing a much larger role.

Common Law

From perhaps the 13th century on, English common law dealt with contractual problems primarily through two actions: debt and covenant. When a fixed sum of money was owed, under an express or implied agreement, for a thing or a benefit given, the money was recoverable through a simple action at debt. Other debt action was available for breach of a promise, made in an instrument with a seal, to pay a fixed sum of money. A so-called action at covenant could also be brought, but only for breach of a promise under seal. These actions did not, however, provide a remedy for the breach of an informal agreement to do something. In the 15th century the common-law courts started to develop a form of action that would render such agreements enforceable, and by the middle of the 16th century they had done so through the form of action known as assumpsit (Latin: “he has undertaken”). Originating as a form of recovery for the negligent performance of an undertaking, it came step by step to cover the many kinds of agreement called for by expanding commerce and technology. Having established in principle a comprehensive remedy, it was necessary for the courts to limit its scope. The courts found the limiting principle in the doctrine of “consideration,” according to which a promise as a general rule is not binding unless something is given or promised in exchange. This consideration need not be of commensurate value, but it must be of some value, must be bargained for, and cannot be simply a formality.

Civil Law

On the Continent, the revived study of classical Roman law had an immense influence upon the developing law of contract. It stimulated the rediscovery or construction of a general law concerning the validity of agreements. The Roman law, however, as crystallized in Justinian’s law books, tended to confirm the notion that something more than an informal expression of agreement was required if a contract was to be upheld by a court. Another significant influence in the development of contract law on the Continent was the Roman Catholic Church. The church in its own law (canon law) strongly supported the proposition that a simple, informal promise should be binding (pacta sunt servanda). This attitude was to encourage the development of informal contracts. The natural-law philosophers took up such ideas as pacta sunt servanda, although they were slow to abandon the view that some contracts, especially contracts of exchange, should require part performance if they were to be held enforceable. By the 18th century the speculative and systematic thought of jurists and philosophers had finally and fully carried the day. The legal writers and legislators of the period generally considered informal contracts as enforceable in the courts. Thus, in the French civil code (the Napoleonic Code) of 1804, contract was approached essentially in terms of agreement; obligations freely assumed were enforceable except when the welfare of society or the need to protect certain categories of persons, such as minors, dictated otherwise. With the generalization that contract rests ultimately on agreement, the civil-law systems achieved a foundation quite different from the common law’s view that contract is basically a promise supported by a consideration. All the Western systems of modern contract law provide mechanisms through which individuals can voluntarily assume, vis-à-vis others, legally binding obligations enforceable by the other person. Contract law strives to give legal expression to the endlessly varying desires and purposes that human beings seek to express and forward by assuming legal obligations. The resulting system is open-ended; in principle, no limits are set in modern contract law to the number of possible variations of contracts.

The setting of standards

In theory, contractual obligations should be concluded between parties of substantially equal awareness and bargaining power and for purposes fully approved of by society. The law reflects this utopian idea in the sense that it tends to conceive of contract as an arrangement freely negotiated between two or more parties of relatively equal bargaining power. The manifestations of intention required to form a contract are accordingly thought of as indicating real willingness, although in fact they may simply represent acquiescence.

Fairness and social utility

Much of the law of contract is concerned with ensuring that agreements are arrived at in a way that meets at least minimum standards respecting both parties’ understanding of, and freedom to decide whether to enter into, the transactions. Such provisions include rules that void contracts made under duress or that are unconscionable bargains; protection for minors and incompetents; and formal requirements protecting against the ill-considered assumption of obligation. Thus, section 138 of the German Civil Code renders void any contract “whereby a person profiting from the distress, irresponsibility, or inexperience of another” obtains a disproportionately advantageous bargain. In addition, more general social requirements and views impinge upon contracts in a number of ways. Certain agreements are illegal, such as—in the United States—agreements in restraint of trade. Others, such as an agreement to commit a civil wrong, are held by the courts to be contrary to the public interest. Certain systems discourage some purposes, such as the assumption of a legally binding obligation to confer a gift of money or other gratuitous benefit upon another, by various special requirements.

Legal systems often have recourse to interpretation in the interest of fairness and social utility. Many litigated cases in which a remedy is sought for breach of contract are concerned with the meaning to be attached to the verbal expressions and acts of the parties in their dealing with each other. Ambiguities, for example, may be resolved against the party thought to have the superior bargaining position. This decision is common in cases in which one party is able to set the terms of a contract without bargaining. Again, a written agreement may be interpreted against the party who drafts or chooses the language. Or the court may prefer an interpretation it finds to be in accord with the public interest. Although all legal systems try to achieve a reasonable approach to freedom of contract, there are bound to be contractual obligations that depart in some degree from the ideal. No one seeking to enforce a contract is required to show affirmatively that it advances specific ends desired by society or that the contracting process is without blemish. Such a requirement would be administratively cumbersome and expensive. In addition, it would reduce the general usefulness of the contract as an economic and social instrument. Differences in the economic resources available to individuals are found in most societies; to the extent that these differences flow from general conditions and are reflected in, rather than produced by, individual contracts, it is usually not feasible to take remedial action through the law of contracts. A single contract, moreover, is often only one element in a complex of economic and legal relations. Thus, in times of severe inflation or deflation, it may simply not be feasible to seek to deal with the resulting inequities in terms of redoing individual contracts.

Contracts of adhesion

There are large areas of economic life in which the parties to contracts have such unequal bargaining positions that little real negotiation takes place. These contracts are often known as contracts of adhesion. Familiar examples of adhesion contracts are contracts for transportation or service concluded with public carriers and utilities and contracts of large corporations with their suppliers, dealers, and customers. In such circumstances a contract becomes a kind of private legislation, in the sense that the stronger party to a large extent assigns risks and allocates resources by its fiat rather than through a reciprocal process of bargaining. Enforcement of such standard contracts can be justified on the ground that they are economically necessary. The question then becomes whether these decisions are to be made by private enterprise or by other agencies of society—in particular, government—and to what extent the interest of those who deal with such economic enterprises can be represented and protected in the decision-making process. Contract law in such cases provides only what can be called the legal relationship. The content of the relationship derives not from bargaining between the parties but from the fiat of the large enterprise often offset by the fiat of some government agency. In a sense, the socially regulated contract of adhesion seeks to eat the cake of bureaucratic rationality while having, as well, the cake of individual choice and decision. Doubtless both cakes are diminished in the process, but the result may well be more satisfying than if only one had to be chosen. At all events, the resulting legal-economic phenomenon is radically different from that envisaged by traditional contract law. Legislative attempts have been made in a number of countries, such as the former West Germany, the United Kingdom, and France, to strike a balance between the general freedom to contract and the protection of the weaker party.

Summary

This topic has extensively introduced the law of contract and located it under Civil Law where it belongs. The topic has also elaborately discussed the differences between Criminal Law and Civil Law, because the substance and substance and procedure in both branches of law are completely different. The essence was to enable the learner to understand the kind of law that they will be studying in this subject. The types of contracts, sources of the law of contract, the doctrine of freedom of contract, and a brief history of the Law of Contract have also been discussed. Learners are advised to revise this module to establish the right foundation for the topics that follow.

Discussion Questions

1.     Reflect on your understanding of this topic and think about example of agreements that you have previously entered with your friends, relatives or classmates. Did you perform that agreement as agreed? If your answer to this question is negative, were there any repercussions for not performing the contract as agreed? Did any of the parties to that agreement wish that the agreement was legally binding? Was the agreement written or oral?

2.     Can you explain the nature and effect of the doctrine of freedom of contract without referring anywhere? Try explaining to a friend

Additional reading materials

You are advised to read and analyse all the cases in the course outline under Week 1. The Law of Contract heavily relies on common law and therefore case law is very crucial. In addition, read the Law of Contract Act and the Judicature Act.

TOPIC 2 (WEEK 2 & 3): FORMATION OF THE CONTRACT 1: OFFER AND ACCEPTANCE

Learning outcomes

By the end of this topic, learners should be able to:

1.     Explain how the contract is formed, parties to the contract and the elements of a contract

2.     Critically analyse the rules governing the making of an offer and to distinguish between an offer and an invitation to treat

3.     Critically analyse the rules governing acceptance of an offer

4.     Explain at what point that a binding contract is said to be in place

Content

Elements of a contract

Elements of a contract are the constituents or ingredients of a contract. They make an agreement legally enforceable. A contract comes into existence when an offer by one party is unequivocally accepted by another and both parties have the requisite capacity. Some consideration must pass and the parties must have intended their dealings to give rise to a legally binding agreement. The purpose of the agreement must be legal and any necessary formalities must have been complied with. In this class, we will discuss offer and acceptance.

OFFER

An offer has been defined as: an unequivocal manifestation by one party of its intention to contract with another. The party manifesting the intention is the offeror and the party to whom it is manifested is the offeree. The offer must be certain, not vague. Certainty is the test for determining whether there was an offer or not. In Gunthing v Lynn (1831) 2 B7 Ad 232, the buyer of a horse, who was the plaintiff in this case, promised the seller that they would pay $5 more for the horse, or buy another horse from the seller if the horse was lucky. The horse was not in the condition that the plaintiff believed and a dispute arose between the parties as to whether the seller was owed the conditional payment mentioned by the buyer. The most prominent issue was whether the offer from the buyer, to pay more for the horse if it was lucky, could be considered to be a valid offer for the purposes of the sale. This would give an indication as to whether the seller could rely on the payment that had been mentioned. Specifically, the court was required to understand whether the terms ‘lucky’ and ‘buy another horse’ could be defined and considered legally binding on the parties.

The court held that the condition to pay $5 extra for the horse if it was lucky, was deemed to be too vague to create a binding contract between the parties. The words contained in an agreement must be clear so that the parties can be sure of the terms upon they are contracting. As a result of this, the only part of the transaction that was sufficient for the court was the purchase of the horse for the price of $63 and that was the vast majority of the legal agreement between the parties.

An offer may be oral, written or implied from the conduct of the offeror. It must be communicated to the intended offeree or offerees. An offer remains ineffective until it is received by the offeree.

An offer may be conditional or absolute. The offeror may prescribe conditions to be fulfilled by the offerer for an agreement to arise between them.

The offeror may prescribe the duration the offer is to remain open for acceptance. However, the offeror is free to revoke or withdraw his offer at any time before such duration lapses e.g. in Dickinson v Dodds (1875) 2 Ch D 463, the defendant offered to sell a house to the plaintiff on Wednesday 10/06/1874 and the offer was to remain open up to Friday 12th at 9.00 am. However on the 11th of June, the defendant sold the house to a 3rd party. The plaintiff purported to accept the offer of Friday morning before 9.00 am. It was held that there was no agreement between the parties as the defendant had revoked his offer by selling the house to a 3rd party on June 11th. A similar holding was made in Routledge v Grant [1828] 4 Bing 653, where the defendant’s offer was to remain open for 6 weeks but he revoked or withdrew it after 4 weeks. It was held that there was no agreement between the parties

The offeror may prescribe the method of communication of acceptance by the offeree. If he insists on a particular method, it becomes a condition

An offer may be general or specific i.e it may be directed to a particular person, a class of persons or the public at large. In Carlill vs. Carbolic/ Smoke Ball Co. [1893] QB 256, the defendant company manufactured and owned a drug name the “Carbolic Smoke Ball” which the company thought was the best cure for influenza, cold and other diseases associated with taking cold water. The company put an advertisement in a newspaper to the effect that a £100 reward would be given to any person who contracted influenza or related diseases after taking the smoke ball as prescribed i.e. 2 tablets, 3 times a day for 2 weeks. The advertisement further stated that the company had deposited £1000 with the Alliance Bank on Reagent Street as a sign of their sincerity in the matter. Mrs. Carlill who had read the advertisement bought and took the Smoke balls as prescribed but contracted influenza. The company rejected her claim and she sued. The company argued that the advertisement;

a.     Was nothing but mere salestalk

b.     Was not an offer to the whole world

c.     Was not intended to create legal relations

The Court of Appeal held that though the wording of the advertisement was unclear, it amounted to an offer to the whole world and the person who fulfilled its conditions, contracted with the company hence Mrs. Carlill was entitled to the £100 reward

An offer must declare an intention. For example, in Gibson v. Manchester City Council [1974] 1 WLR 1403, the claimant asked whether he could buy his council house. The council wrote to him saying that the council “may be prepared to sell the house to you”. The council later cancelled its plans to sell council houses. Mr Gibson claimed that they had rescinded the offer after he accepted. House of Lords held: “may be” was merely an invitation to treat, not an offer.

When is an offer not an offer?

Invitation to Treat

This is a mere invitation by a party to another or others to make offer or bargain. The invitee becomes the offeror and the invitor becomes the offeree. A positive response to an invitation to treat is an offer

1. Display of goods in a shop

Display of goods in self-service shops is not an offer: the customer makes the offer when they pick the goods and take them to the counter. In Fisher v. Bell [1961] 1 QB 394, the defendant shopkeeper displayed in his shop window a flick knife accompanied by a price ticket displayed just behind it. He was charged with offering for sale a flick knife, contrary to s. 1 (1) of the Restriction of Offensive Weapons Act 1959. The issue was whether the display of the knife constituted an offer for sale (in which case the defendant was guilty) or an invitation to treat (in which case he was not). The court held that in accordance with the general principles of contract law, the display of the knife was not an offer of sale but merely an invitation to treat, and as such the defendant had not offered the knife for sale within the meaning of s1(1) of the Act. Although it was acknowledged that in ordinary language a layman might consider the knife to be offered for sale, in legal terms its position in the window was inviting customers to offer to buy it. The statute must be construed in accordance with the legal meaning, as “…any statute must be looked at in light of the general law of the country, for Parliament must be taken to know the general law” (per Lord Parker C.J. at para. 4). It is well established in contract law that the display of an item in a shop window is an invitation to potential customers to treat. The defendant was therefore not guilty of the offence with which he had been charged..

In Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401, the defendant ran a self-service shop in which non-prescription drugs and medicines, many of which were listed in the Poisons List provided in the Pharmacy and Poisons Act 1933, were sold. These items were displayed in open shelves from which they could be selected by the customer, placed in a shopping basket, and taken to the till where they would be paid for. The till was operated by a registered pharmacist. However, the claimant brought proceedings against the defendant for breach of section 18(1) of the Pharmacy and Poisons Act 1933, which requires the supervision of a registered pharmacist for the sale of any item in the Poisons List. The question was whether the contract of sale was concluded when the customer selected the product from the shelves (in which case the defendant was in breach of the Act due to the lack of supervision at this point) or when the items were paid for (in which case there was no breach due to the presence of the pharmacist at the till). The Court of Appeal held that the defendant was not in breach of the Act, as the contract was completed on payment under the supervision of the pharmacist. The display of the goods on the shelves were not an offer which was accepted when the customer selected the item; rather, the proper construction was that the customer made an offer to the cashier upon arriving at the till, which was accepted when payment was taken. This analysis was supported by the fact that the customer would have been free to return any of the items to the shelves before a payment had been made.

2. Auction

At common law, an advertisement to sell goods or other property by public auction is an invitation to treat. The prospective buyer makes the offer by bidding at the auction and the auctioneer may accept or reject the offer. It was so held in Harris v Nickerson (1873) LR 8 QB 286 where a commission agent had sued as auctioneer for failure to display furniture he had advertised for sale by auction. It was held that there was no contractual relationship between the parties as the advertisement was merely an invitation to treat and as such, the auctioneer was not liable. In Warlow v Harrison (1859) 1 E & E 309, a public auction of a horse, without reserve, was advertised by the defendant, an auctioneer. The plaintiff bid 60 guineas and the owner of the horse bid 61 guineas. There were no further bids and the defendant put down his hammer on the bid for 61 guineas. The plaintiff claimed the horse should be his as he was the highest bona fide bidder. The issue was whether there was a contract for sale. The court held that advertisement, as it included the words without reserve, was an offer to sell to the highest bona fide bidder. The defendant was in breach of that promise. It was an offer of a unilateral contract as the defendant bound himself to sell to the highest bidder. The plaintiff had performed the required act (made the highest bid). However, because the hammer had not been put down on the plaintiff's bid there was no acceptance of his offer. Therefore, there was no contract for the sale. The plaintiff was only entitled to sue the defendant for the loss of the opportunity to buy the horse.

3. Advertisements

Generally these are Invitations to Treat NOT offers. If an advert in the paper was an offer the person who placed the advertisement would be required to contract with anyone/everyone who wanted to purchase the goods at the price stated. See Harris v Nickerson (1873) LR 8 QB 286. In Partridge v Crittenden [1968] 1 WLR 1204, the defendant advertised for sale a number of Bramblefinch cocks and hens, stating that the price was to be 25 shillings for each. Under the Protection of Birds Act 1954, it was unlawful to offer for sale any wild live bird. The Royal Society for the Prevention of Cruelty to Animals (RSPCA) brought a prosecution against the defendant under the Act. At his trial, the defendant was found guilty of the offence by the magistrates; he appealed this conviction. The issue on appeal was whether the advertisement was properly construed as an offer of sale (in which case the defendant was guilty) or an invitation to treat (in which case he had committed no offence). A further issue was whether it was appropriate to adopt a different interpretation of the phrase ‘offer for sale’ in the context of criminal law than was accepted in the context of contract law. The court held that the advertisement was not an offer but an invitation to treat, and as such the defendant was not guilty. The court also rejected the suggestion that the court should adopt a stricter interpretation of the phrase ‘offer for sale’ in the criminal context compared to the contractual context, reasoning that to do so would usurp the legislative function. The legislature had chosen the phrase ‘offer for sale’ based on its existing understanding, and to alter this understanding under the pretext of ‘interpretation’ was not the proper role of the court.

4. Unilateral contracts

In this case, the offeror is the person making the offer, while the offeree is the person or group of people who receive the offer. In Carlill v Carbolic Smoke Ball Co Ltd (1893)1 QB 256, the defendant, the Carbolic Smoke Ball Company, placed an advertisement in a newspaper for their products, stating that any person who purchased and used their product but still contracted influenza despite properly following the instructions would be entitled to a £100 reward. The advert further stated that the company had demonstrated its sincerity by placing £1000 in a bank account to act as the reward. The claimant, Mrs Carlill, thus purchased some smoke balls and, despite proper use, contracted influenza and attempted to claim the £100 reward from the defendants. The defendants contended that they could not be bound by the advert as it was an invitation to treat rather than an offer on the grounds that the advert was: mere ‘puff’ and lacking true intent; that an offer could not be made ‘to the world’; the claimant had not technically provided acceptance; the wording of the advert was insufficiently precise; and, that there was no consideration, as necessary for the creation of a binding contract in law. The issue was whether the advert in question constituted an offer or an invitation to treat. The Court of Appeal found for the claimant, determining that the advert amounted to the offer for a unilateral contract by the defendants. In completing the conditions stipulated by the advert, Mrs Carlill provided acceptance. The Court further found that: the advert’s own claim to sincerity negated the company’s assertion of lacking intent; an offer could indeed be made to the world; wording need only be reasonably clear to imply terms rather than entirely clear; and consideration was identifiable in the use of the balls.

5. Self-service stores

At common law, a sale by self-service is an invitation to treat. Prospective buyers make offers by conduct by picking the goods from the shelves and the offer may be accepted or rejected at the cashier’s desk. The offeror is free to revoke his offer to buy the goods at any time before reaching the cashiers desk. See Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401, discussed earlier.

6. Public transport

When you enter the bus, the bus is making an offer and by entering it you accept the offer. You undertake to pay the price. In Wilkie v London Passenger Transport Board [1947] 1 All ER 258, Wilkie, an employee of the London passenger Transport Board, was given a free pass. The pass contained the following condition: “No. 6. It is issued and accepted on condition that neither the London Passenger Transport Board nor the servants are to be liable to the holder or his or her representative for loss of life, injury or delay or other loss of or damage to property however caused”. Wilkie got injured due to the negligence of the conductor. Following the above stipulation, the board refused to pay any compensation to him. While section 97 of the Road Traffic Act of 1930 provided as follows: “Any contract for the conveyance of a passenger in a public service vehicle shall, so far as it purports to negative or to restrict the liability of any person in respect of any claim which may be made against that person in respect of the death of or bodily injury to the passenger while being carried in, entering or alighting from the vehicle, or purports to impose any conditions with respect to the enforcement of any such liability, be void”.

Thus, if Wilkie had a “contract of conveyance” the clause exempting the transport company from liability would not apply. The court ruled that as the pass was free, there was no contract of conveyance between the board and Wilkie. The pass was only a licence from the Board to Wilkie to use the Bus Service.

Communication of the Offer

An offer must be communicated for it to be valid. In Taylor v Laird (1856) 156 ER 1203, the claimant was employed as the captain of a ship which was owned by the defendants. Whilst in a foreign port during the course of the voyage, he voluntarily gave up his position as captain, and worked as an ordinary crew member during his passage back to Britain. The defendant was not made aware of this change of position. Upon his return, he sought to claim wages from the defendant for his work as a crew member during this journey. The issue was whether the defendant had accepted the claimant’s offer of work despite being unaware of it, and by extension whether the defendant was contractually bound to pay the claimant’s wages for his work on the ship during the return journey. The court held that the claimant was not entitled to wages for the return journey on the basis that he had not entered into any contractual agreement with the defendant for the performance of his work as an ordinary crew member. The defendant had not received any communication or offer of work in this capacity from the claimant, and there was therefore no basis for a contract. The court reasoned that it would be unjust to hold a party bound by an offer which he had not been made aware of, and therefore had no opportunity to accept or reject; as such it is not possible in English contract law to accept an offer ‘in ignorance’.

Types of offers

Cross offer

This is a situation where a party dispatches an offer to another who has sent a similar offer and the two offers cross in the course of communication. No agreement arises from cross offers for lack of consensus between the parties. The parties are not at ad idem

Counter offer

This is a change, variation or modification of the terms of the offer by the offeree. It is a conditional acceptance. A counter offer is an offer in its own right and if accepted an agreement arises between the parties. Its legal effect is to terminate the original offer as in Hyde v. Wrench (1840) 49 ER 132 where the defendant made an offer on June 6th to sell a farm to the plaintiff for £1,000. On 8th June, the plaintiff wrote to the defendant accepting to pay £950 for the farm. On 27th June, the defendant wrote rejecting the £950. On 29th June the plaintiff wrote to the defendant accepting to pay £1,000 for the farm. The defendant declined and the plaintiff sued for specific performance of the contract. It was held that the defendant was not liable as the plaintiff’s counter offer of £950 terminated the original offer which was therefore not available for acceptance by the plaintiff on 29th June as the defendant had not revived it. A counter offer must however be distinguished from a request for information or inquiry.

Request for further information

An inquiry which does not change terms of the offer. The offeree may accept the offer before or after inquiry is responded to as was the case in Stevenson v McLean (1880) 5 QBD 346, where the defendant had offered to sell 3,800 tonnes of iron to the plaintiff at £ 40 per tonne and the offer was to remain open from Saturday to Monday. On Monday morning, the plaintiff telegraphed the defendant inquiring on the duration of delivery. The defendant treated the inquiry as a counter offer and sold the iron to a third party. The plaintiff subsequently accepted the offer but thereafter received the defendant’s notice of the sale to the 3rd party. The plaintiff sued in damages for breach of contract. It was held that the defendant was liable.

Standing offer

A standing offer arises when a person’s tender to supply goods and service to another is accepted. Such acceptance is not an acceptance in the legal sense. It merely converts the tender to a standing offer for the duration specified if any. The offer is promising to supply the goods or services on request and is bound to do so where a requisition is made. Any requisition of goods or services by the offeree amounts to acceptance and failure to supply by the offeror amounts to a breach of contract. In Great Northern Railway Co v Witham (1873) LR 9 CP 16, the plaintiff railway company called for tenders for the supply of goods over a period of time. The defendant tendered to supply certain goods for certain prices during a stated period. The plaintiff stated to defendant that they “accepted” the tender. The defendant replied that their specifications would receive his best attention. The plaintiff gave several orders, which were filled, but the defendant then refused to supply any more. Brett J held as follows: “…the defendant offers that if the plaintiff places orders, he will supply them at a certain price. The plaintiff accepts by placing orders. The defendant objects that the contract is unilateral, but this is no objection. Consideration flows from the plaintiff if and when the plaintiff places the orders. The question of whether the defendant may have absolved himself from further performance by giving notice is left open…”

In standing offer, the offeror is free to revoke the offer at any time before any requisition is made, unless the offeror has provided some consideration for the offeror to keep the standing offer open. This consideration is referred to as ‘an option’. This is an agreement between an offeror and the offeree by which an offeree agrees to keep his offer open for a specified duration. In this case, the offeror cannot revoke the offer. In a standing offer, if no order to requisition is made by the offeree within a reasonable time, the standing offer lapses.

Termination of Offers

1. By Revocation

This is the withdrawal of the offer by the offeror. At common law, an offer is revocable at any time before acceptance

Rules of revocation of offers

a)     An offer is revocable at any time before it becomes effectively accepted. In Payne v Cave (1789) 3 TR 148, Mr Cave was made the highest bid for a good in an auction. But then, Mr Cave changed his mind and he withdrew his bid before the auctioneer brought down his hammer. It was held that Mr. Cave, the defendant, was not bound to purchase the goods. His bid amounted to an offer which he was entitled to withdraw at any time before the auctioneer signified acceptance by knocking down the hammer. Note: The common law rule laid down in this case has now been codified in many countries in variations of the Sale of Goods Act, e.g. UK 1979 s57(2). The court held that Mr Cave was entitled to withdraw his offer at any time before the auctioneer accepted it. The auctioneer's request for bids was an invitation to treat, and each bid constituted an offer which could be withdrawn at any time until it's accepted, and finally, the fall of the auctioneer's hammer constituted acceptance of the highest bid.

In Dickinson v Dodds (1875) 2 Ch D 463, the defendant offered to sell a house to the plaintiff on Wednesday 10/06/1874 and the offer was to remain open up to Friday 12th at 9.00 am. However on the 11th of June, the defendant sold the house to a 3rd party. The plaintiff purported to accept the offer of Friday morning before 9.00 am. It was held that there was no agreement between the parties as the defendant had revoked his offer by selling the house to a 3rd party on June 11th.

b)    Notice of revocation must be communicated to the offeree. However, such communications need not to be effected by the offeror. It suffices, if communicated by a 3rd party as was the case in Dickinson v Dodds (1875) 2 Ch D 463

c)     An offer is revocable even in circumstances in which the offeror has promised to keep it open to a specified duration, unless an option exists, as was the case in Dickinson v Dodds (1875) 2 Ch D 463

d)    Revocation becomes legally effective when notice is received by the offeree

e)     An offer is irrevocable after acceptance. It was so held in Byrne & Co v Leon Van Tien Hoven & Co [1880] 5 CPD 344. In this case, the defendants wrote a letter, on October 1, to the plaintiffs offering the sale of 1000 boxes of tin plates. The defendant was based in Cardiff and the plaintiff was based in New York, and letters took around 10-11 days to be delivered. The plaintiffs received this letter on October 11 and accepted it on the same day by telegram, as well as by letter on October 15. However, on October 8, the defendant sent a letter to the plaintiffs which withdrew their offer and this arrived with the plaintiff on October 20. The plaintiffs claimed for damages for the non-delivery of the tin plates. The court was required to establish whether the withdrawal of the offer for the sale of goods was acceptable. The court would have to consider whether the contract had been agreed by the acceptance by the plaintiffs of the letter of October 1, or whether the defendants had successfully withdrawn their offer by issuing the withdrawal by letter on October 8. The court held that the withdrawal of the offer was ineffective as a contract had been constructed between the parties on October 11 when the plaintiffs accepted the offer in the letter dated October 1. On this basis, it was held that an offer for the sale of goods cannot be withdrawn by simply posting a secondary letter which does not arrive until after the first letter had been responded to and accepted. The court gave judgment for the plaintiff and awarded that the defendant paid their costs

f)     In unilateral contracts, an offer is irrevocable if the offeree has commenced and continues to perform the act which constitutes acceptance

g)    A bid at an auction is revocable until the hammer falls

2 By Rejection

An offer terminates if the offeree refuses to accept the same, the refusal may be express or implied from the conduct of the offeree e.g. silence by the offeree amounts to a rejection as was the case in Felthouse v Bindley [1862] EWHC CP J35. In this case, the complainant, Paul Felthouse, had a conversation with his nephew, John Felthouse, about buying his horse. After their discussion, the uncle replied by letter stating that if he didn’t hear anymore from his nephew concerning the horse, he would consider acceptance of the order done and he would own the horse. His nephew did not reply to this letter and was busy at auctions. The defendant, Mr Bindley, ran the auctions and the nephew advised him not to sell the horse. However, by accident he ended up selling the horse to someone else. Paul Felthouse sued Mr Bindley in the tort of conversion, with it necessary to show that the horse was his property, in order to prove there was a valid contract. Mr Bindley argued there was no valid contract for the horse, since the nephew had not communicated his acceptance of the complainant’s offer. The issue in this case was whether silence or a failure to reject an offer amount to acceptance. It was held that there was no contract for the horse between the complainant and his nephew. There had not been an acceptance of the offer; silence did not amount to acceptance and an obligation cannot be imposed by another. Any acceptance of an offer must be communicated clearly. Although the nephew had intended to sell the horse to the complainant and showed this interest, there was no contract of sale. Thus, the nephew’s failure to respond to the complainant did not amount to an acceptance of his offer.

3 By Counter Offer

This is a change or variation of the terms of the offer by the offeree. It is a form of rejection. The legal effect of a counter offer is to terminate the original offer as was the case in Hyde v Wrench (1840) 49 ER 132. In this case, the defendant, Mr Wrench, offered to sell the farm he owned to the complainant, Mr Hyde. He offered to sell the property for £1,200, but this was declined by Mr Hyde. The defendant decided to write to the complainant with another offer; this time to sell the farm to him for £1,000. He made it clear that this would be his final offer regarding the property. In response, Mr Hyde offered £950 for the farm in his letter. This was refused by Mr Wrench and he confirmed this with the complainant. Mr Hyde then agreed to buy the farm for £1,000, which was the sum that had previously been offered. However, Mr Wrench refused to sell his farm. The complainant brought an action for specific performance, claiming that as Mr Wrench refused to sell the farm, this was a breach of contract. The issue in this case was whether there was a valid contract between the parties and if a counter offer was made in discussions, whether the original offer would still remain open. The court dismissed the claims and held that there was no binding contract for the farm between Mr Hyde and Mr Wrench. It was stated that when a counter offer is made, this supersedes and destroys the original offer. This original offer is no longer available or on the table. In this case, when Mr Hyde offered £950, he cancelled the £1,000 offer and could not back track and accept.

4 By lapse of time

If an offer is not accepted within the stipulated time and not revoked earlier, it lapses on expiration of such duration. Where no duration is specified, the offer lapses on expiration of reasonable time. What is reasonable time is a question of fact and varies from case to case. In Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109 in early 6/1864, the defendant made an offer to purchase 40 shares of the plaintiff company, the offer was not accepted until November by which time the defendant had given up. The company sued for the value of the shares, the defendant pleaded that the offer had not been accepted within a reasonable time. It was held that the defendant was not liable as the offer had lapsed for non-acceptance within a reasonable time. Similarly, in Virji Khimji v Chatterbuck [1955] E.A.C.A 172, the defendant ordered timber from the plaintiff and indicated that it be supplied as soon as possible. The plaintiff did not respond but delivered the timber. 4 ½ months later, the defendant refused to take delivery and was sued. It was held that he was not bound to take delivery as his offer had lapsed for non- acceptance within a reasonable time.

5 By Death

The death of the offeror or offeree before acceptance terminates an offer. However, the offer only lapses when notice of death of the one is communicated to the other

6 By Insanity

The unsoundness of mind of either party terminates an offer. However, the offer only lapses when notice of the insanity of the one is communicated to the other.

7 By failure of a condition subject to which the offer was made

These are conditional offers. If a condition or state of affairs upon which an offer is made fails, the offer lapses. In Financings Ltd v Stimson [1962] 3 All ER 386, the defendant opted to take up a vehicle on hire purchase terms. He completed the hire purchase application form and paid a deposit. This form constituted his offer. He took delivery of the vehicle but returned it to the showroom after 2 days for some minor rectification. The vehicle was stolen from the showroom and when recovered it was badly damaged by reason of an accident. The defendant refused to take delivery or pay instalments and was sued. He pleaded the state of the vehicle. It was held that he was not liable as his offer had lapsed. This offer was conditional upon the motor vehicle remaining in substantially the same condition as it was before and since its condition had changed, his offer had lapsed

ACCEPTANCE

This is the external manifestation of assent by the offeree. It gives rise to an agreement between parties. In legal theory, an agreement comes into existence at the subjective moment when the minds of the parties meet. This moment is referred to as Consensus ad idem (meeting of minds). However, this subjectivity must be externally manifested by the offeree for the agreement to arise. Acceptance may be oral, written or implied from the conduct of the offeree. The following are the rules of acceptance:

a)     Acceptance must be unequivocal and unconditional, as was stated in the case of Entores Ltd. v Miles Far East Corp [1955] 2 QB 327

b)    Acceptance may be oral, written or implied from the conduct of the offeree. In Carlill v. Carbolic Smoke Ball Co, acceptance by Mrs. Carlill took the form of her conduct by purchasing and consuming the smoke balls. In Brogden v. Metropolitan Railway Co (1877) 2 App Cas 666, where it was held that the 1^st load of coal supplied by Brogden constituted acceptance of the defendants offer to supply the coal and hence there was an agreement between the parties

c)     The offeree must have been aware of and intended to accept the offer: A person cannot accept an offer whose existence he is unaware of. In Crown-v-Clarke, the Australian government offered £1,000 to any person who volunteered information leading to the arrest and conviction of the killers of 2 police officers. Any accomplice who gave information would be pardoned. Clarke, who was aware of the murder gave the information and the killers were arrested and convicted. However, he made it clear that he had given the information to clear his name. It was held that he was not entitled to the reward as he had given the information for a different purpose and therefore had not accepted the offer

d)    Acceptance must be unconditional and unqualified: The offeree must accept the offer in its terms, any variation or modification of the offer amounts to a conditional acceptance which is not an acceptance as was the case in Hyde v. Wrench where the plaintiff modified the defendant’s offer of £1,000 to £ 950

e)     An offer must be accepted within the stipulated time if any or within a reasonable time failing which it lapses. As was the case in Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109, where the defendant’s offer made in June was not accepted until November by which time had elapsed

f)     Acceptance must be communicated to the offeror in the prescribed method if any or an equally expeditions method. Where no method of communication is prescribed, the method to apply depends on the type of offer and the circumstances in which the offer is made. There are, however, exceptions to this general rule that acceptance must be communicated. The exceptions arise in the effect of silence, postal rule, and instant acceptance.

The effect of silence: This is seen in the case of Felthouse v Bindley [1862] EWHC CP J35. In this case, the complainant, Paul Felthouse, had a conversation with his nephew, John Felthouse, about buying his horse. After their discussion, the uncle replied by letter stating that if he didn’t hear any more from his nephew concerning the horse, he would consider acceptance of the order done and he would own the horse. His nephew did not reply to this letter and was busy at auctions. The defendant, Mr Bindley, ran the auctions and the nephew advised him not to sell the horse. However, by accident he ended up selling the horse to someone else. Paul Felthouse sued Mr Bindley in the tort of conversion, with it necessary to show that the horse was his property, in order to prove there was a valid contract. Mr Bindley argued there was no valid contract for the horse, since the nephew had not communicated his acceptance of the complainant’s offer. The issue in this case was whether silence or a failure to reject an offer amount to acceptance. It was held that there was no contract for the horse between the complainant and his nephew. There had not been an acceptance of the offer; silence did not amount to acceptance and an obligation cannot be imposed by another. Any acceptance of an offer must be communicated clearly. Although the nephew had intended to sell the horse to the complainant and showed this interest, there was no contract of sale. Thus, the nephew’s failure to respond to the complainant did not amount to an acceptance of his offer

Acceptance by post: The postal rule: Unquestionably, as a general proposition, when an offer is made, it is necessary in order to make a binding contract, not only that it should be accepted, but that the acceptance should be notified.’ And the postal rule is an exception based on ‘commercial expediency… more convenient, and makes on the whole for greater fairness, than the general rule itself would do. General rule is that acceptance is complete on posting. The offeror may require actual communication if he/she wishes. There is no postal rule for the withdrawal or the rejection of offers. The rule will not apply where it will lead to “manifest inconvenience or absurdity” (Holwell Securities v Hughes [1974] 1 WLR 155) or where the letter is misaddressed (Korbetis v Transgrain Shipping BV [2005] EWHC 1345). The ordinary rule does not apply where the letter is wrongly addressed. In Adams v Lindsell (1818) 1 B & Ald 681, the defendant wrote to the claimant offering to sell them some wool and asking for a reply 'in the course of post'. The letter was delayed in the post. On receiving the letter the claimant posted a letter of acceptance the same day. However, due to the delay the defendant's had assumed the claimant was not interested in the wool and sold it on to a third party. The claimant sued for breach of contract. It was held that there was a valid contract which came in to existence the moment the letter of acceptance was placed in the post box. This case established the postal rule. This applies where post is the agreed form of communication between the parties and the letter of acceptance is correctly addressed and carries the right postage stamp. The acceptance then becomes effective when the letter is posted.

In Brinkibon Ltd v Stahag Stahl und Stahl [1983] 2 AC 34

 Brinkibon was a London company that bought steel from Stahag, a seller based in Austria. Brinkibon sent their acceptance to a Stahag offer by Telex to Vienna. Brinkibon later wanted to issue a writ against Stahag and applied to serve an out of jurisdiction party. They would only be able to do so if the contract had been formed in England. The question at issue was where the contract was formed. The Judges decided that the contract was formed in Vienna. They accepted the principle in Entores v Miles Far East Co where in the case of instantaneous communication, which included telex, the formation generally occurs in the place where the acceptance is received. Lord Wilberforce, however, did not see the rule as applying in all circumstances: “... it appears logical that this should be at the place where acceptance is communicated to the offeror.... ... I would accept it as a general rule. Where the condition of simultaneity is met, and where it appears to be within the mutual intention of the parties that contractual exchanges should take place in this way, I think it a sound rule, but not necessarily a universal rule... Since 1955 the use of Telex communication has been greatly expanded, and there are many variants on it. The senders and recipients may not be the principals to the contemplated contract. They may be servants or agents with limited authority. The message may not reach, or be intended to reach, the designated recipient immediately: messages may be sent out of office hours, or at night, with the intention, or on the assumption that they will be read at a later time. There may be some error or default at the recipient’s end which prevents receipt at the time contemplated and believed in by the sender. The message may have been sent and/or received through machines operated by third persons. And many other variants may occur. No universal rule can cover all such cases; they must be resolved by reference to the intentions of the parties, by sound business practice and in some cases by a judgement where the risks should lie”

g)    Where parties negotiate by word of mouth in each other’s presence, acceptance is deemed complete when the offeror hears the offeree’s words of acceptance. It was so held in Entores v Miles Far East Corp [1955] 2 QB 327. The complainants, Entores, were a company that was based in London. They had sent an offer to purchase 100 tons of copper cathodes to the defendants, Miles Far East Corp. Their company was based in Amsterdam and this offer was communicated by Telex, a form of instantaneous communication. The Dutch company sent an acceptance of this offer by Telex to the complainants. When the contract was not fulfilled, the complainants tried to sue the defendants for damages. In order to decide whether the action for damages should arise in English or Dutch law, the court had to decide the moment of acceptance of the contract. If it was when the contract acceptance was sent, damages would be dealt with under Dutch law. If acceptance was when it was received, then it would be under English law. The court held that the contract and damages were to be decided by English law. It was stated that the postal rule did not apply for instantaneous communications. Since Telex was a form of instant messaging, the normal postal rule of acceptance would not apply and instead, acceptance would be when the message by Telex was received. Thus, the contract was created in London. This general principle on acceptance was held to apply to all forms of instantaneous communication methods. Acceptance via these forms of communication had to be clear before any contract is created

h)    Where parties negotiate by telephone, acceptance is deemed complete when the offeror hears the offeree’s words of acceptance. See the case of Entores, above

i)      Where parties negotiate by telex acceptance is deemed complete when the offeree’s words of acceptance are received by the offeror. See the case of Entores, above

j)      In unilateral offers, commencement and continuation of performance constricts acceptance. During performance, the offeror cannot revoke the offer but to do so if performance is discontinued as was the case in Errington v Errington Woods [1952] 1 KB 290. A father bought a house where the son and daughter in-law lived by paying a deposit of £250 and raising the balance by a loan from a Building society. He promised to transfer the house to them if they paid all installments as and when they fall due. The £250 would be a gift to them. They commenced payment of the installments but stopped before the entire sum had been paid. The father was compelled to pay the remaining installments. He declined the transfer of the house to them. It was held that he was not bound to do so as they had discontinued payments’ of the instalments

k)    In standing offers, a specific order or requisition by the offeree constitutes acceptance and the offerer is bound as was the case in. In Great Northern Railway Co v Witham (1873) LR 9 CP 16, the plaintiff railway company called for tenders for the supply of goods over a period of time. The defendant tendered to supply certain goods for certain prices during a stated period. The plaintiff stated to defendant that they “accepted” the tender. The defendant replied that their specifications would receive his best attention. The plaintiff gave several orders, which were filled, but the defendant then refused to supply any more. Brett J held as follows: “…the defendant offers that if the plaintiff places orders, he will supply them at a certain price. The plaintiff accepts by placing orders. The defendant objects that the contract is unilateral, but this is no objection. Consideration flows from the plaintiff if and when the plaintiff places the orders. The question of whether the defendant may have absolved himself from further performance by giving notice is left open…”

l)      An offer to a particular/specific person can only be accepted by that person for an agreement to arise. In Boulton v Jones (1857) 2 H & N 564, the defendant sent a written order for goods to a shop owned by Brocklehurst and which was addressed to him by name. Unknown to the defendant, Brocklehurst had earlier that day sold and transferred his business to Boulton. Boulton fulfilled the order and delivered the goods to the defendant without notifying him that he had taken over the business. The defendant accepted the goods and consumed them in the belief that they had been supplied by Brocklehurst. When he received Boulton’s invoice he refused to pay it, claiming that he had intended to deal with Brocklehurst personally, since he had dealt with him previously and had a set-off on which he had intended to rely. Held: The defendant was not liable for the price. There was no contract. Pollock CB said: ‘Now the rule of law is clear, that if you propose to make a contract with A, then B cannot substitute himself for A without your consent and to your disadvantage, securing to himself all the benefit of the contract.’ Martin B said: ‘Where the facts prove that the defendant never meant to contract with A alone, B can never force a contract upon him; he has dealt with A, and a contract with no one else can be set up against him.’ Bramwell B: ‘I do not lay it down that because a contract was made in one person’s name another person cannot sue upon it, except in cases of agency. But when any one makes a contract in which the personality, so to speak, of the particular party contracted with is important, for any reason, whether because it is to write a book or paint a picture, or do any work of personal skill, or whether because there is a set-off due from that party, no one else is at liberty to step in and maintain that he is the party contracted with, that he has written the book or painted the picture, or supplied the goods; and that he is entitled to sue, although, had the party really contracted with sued, the defendant would have had the benefit of his personal skill, or of a set-off due from him.’ Channell B: ‘The plaintiff is clearly not in a situation to sustain this action, for there was no contract between himself and the defendant. The case is not one of principal and agent; it was a contract made with B, who had transactions with the defendant and owed him money, and upon which A seeks to sue.’

m)   An offer to a class of persons can only be accepted by a member of that class for an agreement to arise. In Wood v. Lectrick, an offer to “hair sufferers” was held to have been properly accepted by Mr. Wood-a young man whose hair was prematurely turning grey and was regarded by the court as a “hair sufferer” within the terms of the offer

n)    An offer to the general public may be accepted by any person who fulfills its conditions. As was the case in Carlill v. Carbolic Smoke Ball Co

The postal rule of acceptance

Where the offeror expressly or impliedly authorizes the offeree to communicate acceptance by post, acceptance is deemed complete when the letter is posted whether it reaches its destination or not. In Byrne & Co v Leon Van Tien Hoven & Co [1880] 5 CPD 344, the defendants wrote a letter, on October 1, to the plaintiffs offering the sale of 1000 boxes of tin plates. The defendant was based in Cardiff and the plaintiff was based in New York, and letters took around 10-11 days to be delivered. The plaintiffs received this letter on October 11 and accepted it on the same day by telegram, as well as by letter on October 15. However, on October 8, the defendant sent a letter to the plaintiffs which withdrew their offer and this arrived with the plaintiff on October 20. The plaintiffs claimed for damages for the non-delivery of the tin plates. The court was required to establish whether the withdrawal of the offer for the sale of goods was acceptable. The court would have to consider whether the contract had been agreed by the acceptance by the plaintiffs of the letter of October 1, or whether the defendants had successfully withdrawn their offer by issuing the withdrawal by letter on October 8. It was held that the withdrawal of the offer was ineffective as a contract had been constructed between the parties on October 11 when the plaintiffs accepted the offer in the letter dated October 1. On this basis, it was held that an offer for the sale of goods cannot be withdrawn by simply posting a secondary letter which does not arrive until after the first letter had been responded to and accepted. The court gave judgment for the plaintiff and awarded that the defendant paid their costs.

Express authorisation

These are circumstances in which the offeror expressly permits the offeree to communicate acceptance by post. As was the case in Adams v. Lindsell, on 2/9/1817, the defendant offered to sell to the plaintiff a quantity of wood on certain terms and required a response ‘in the course of post.’ The plaintiff received the letter on 5/9/1817 and posted an acceptance. On 8/9/1817 the defendant posted a letter revoking the offer. The plaintiff’s letter of acceptance was received on 9/9/1817. It was held that there was a contract between the parties as the plaintiff had posted the letter of acceptance by the time the defendant purported to revoke the offer. Hence, the revocation was ineffective.

Implied authorisation

There are circumstances in which the offeror by implication authorized the offeree to communicate acceptance by post. In Household Fire Insurance v Grant [1879] 4 Ex D 216, the defendant offered to buy 100 shares to the plaintiff company. The offer was communicated by post. The Company allotted the shares to him and the company secretary made out the letter of allotment which was posted but never reached the defendant who was subsequently sued for the amount due on the shares. He denied liability on the ground that the company had not communicated its acceptance. However, it was held that since the company had posted the letter of acceptance, there was a contract and the defendant was liable. In Henthorn v Fraser [1892] 2 Ch 27, the complainant and the defendant had been negotiating the purchase price of houses. An original offer to buy the houses for £600 had been rejected. The defendant, Mr Fraser, handed the complainant, Mr Henthorn, a note that detailed an option to sell the property for £750, which would be valid for 14 days. While this offer was being considered, another buyer was interested and the defendant concluded a contract with them instead. The next day, the defendant then withdrew the offer to the complainant by post. This note did not reach Mr Henthorn until 5pm. In this time, Mr Henthorn had already responded to the offer by post with an unconditional acceptance to buy the houses for £750. But, this was not delivered to Mr Fraser until the office was closed and he did not read this acceptance until the morning. The issue in this case concerned the revocation of the offer. This was completed before the postal acceptance of the offer was received. It was for the court to decide whether the acceptance of the offer was valid or if the contract had been revoked successfully before the acceptance. The court held that the offer was valid and an order for specific performance made for £750 to purchase the property. The postal rule in Adam v Lindsell would apply, which stated that it would be reasonable for acceptance of an offer to take place by post. However, this rule would not apply to the revocation of an offer. Post was a way of communicating offer acceptance, but the acceptance itself is completed as soon as it is posted. This was reasonable to expect since both parties lived in different towns.

No authorisation

If the offeror does not expressly or implied authorizes the offeree to use the post but the offeror uses the post, acceptance is deemed complete when the letter of acceptance is received by the offeror.

Once an offer is accepted, an agreement arises between the parties as there is consensus between them. Offer and acceptance constitutes the foundation of a contractual relationship. They do not constitute a contract as a contract must be characterized by other elements

Summary

In this topic, we have discussed the elements that define a legally binding contract. For this week, we have introduced the two elements of offer and acceptance. You are advised to revisit this topic and read to understand the rules of both the offer and acceptance of the offer. You are also advised to read the court decisions on the various rules. It is only by reading the reasoning of courts in these rules that you will develop an understanding of the crux of these two elements of a contract. For the cases, you will understand them better if you read the full versions. In the notes, we have tried to provide the most important arguments by parties and reasoning of the court in reaching the judgment. That is the much we can do in the notes. But for you, you must read the entire case report to fully understand and appreciate the concepts.

Class activity

Contract drafting; sample offers and acceptance; practical examples of offers and acceptance

Revision questions

·       Reflect on the rules governing a valid offer and valid acceptance. Are you able to explain those rules to your client without referring anywhere

·       How valid are those offers that we see in the newspapers, television and billboards? Do they meet the threshold of a valid offer?

·       Considering the modern development in communication technology, when would you advise that there has been sufficient communication of the acceptance by the offeree, especially in such channels as email, whatsapp, SMS etc?

 

TOPIC 3 (WEEK 4 & 5): FORMATION OF THE CONTRACT 2: INTENTION TO CREATE LEGAL RELATIONS AND CONSIDERATION

Learning outcomes

By the end of this topic, learners are expected to;

1.     Effortlessly explain the second set of elements of a contract: intention to create legal relations and consideration

2.     Explain what amounts to capacity to enter contract

3.     Analyse the doctrine of promissory estoppel and explain its effect on the common law rule of consideration

4.     Discuss the doctrine of privity of contract

Content

INTENTION TO CREATE LEGAL RELATIONS

This is the third limb of the elements of a contract. Courts are not concerned with agreements that are not intended to be legally binding. Some agreements contain what look like contract terms, but are clearly not meant to bind the parties. To determine whether parties intended to create legal relations, courts consider;

1. Nature or type of agreement i.e. whether commercial or business and domestic or social.

2. The circumstances in which the agreement was entered into.

These two factors demonstrate whether the parties intended to contract

1. Business or commercial agreements

In considering such agreements, courts proceed from the presumption that the parties intended to create legal relations.

Advertisements

These are intended to promote sales of the advertiser. They have a commercial objective. In Carlill v. Carbolic Smoke Ball Co. Ltd, the company had manifested an intention to create legal; relations by stating that it had deposited £1,000 with Alliance Bank Regent Street. Hence Mrs Carlill was entitled to the £100 as she had contracted with the company.

Employment agreements

These are commercial agreements intended to impose legal obligations on the parties thereto. In Edwards v Skyways [1969] 1 WLR 349, an airline company in financial difficulties was making a number of its pilots redundant. The airline company agreed with the British Airline Pilots Association to pay each pilot an ‘ex gratia payment’ equivalent to the company’s contribution to the pension fund, upon being made redundant. This was initially the subject of a resolution of the company’s Board, and agreed upon at a meeting between the company’s representatives and the Association’s representatives. The claimant opted to leave the company and claim the payment of his contributions to the pension fund. The company conceded that there was consideration, yet held that there was no legally enforceable obligation, but a mere ‘moral’ one. The issue arose as to whether there was an intention to create legal relations and obligations in the agreement between the airplane company and the Association to pay employee contributions. The Court held that where an agreement is reached in the course of a business affairs, and not in a domestic or social context, the presumption is that the parties have intended to create legal relations and that their legal relations should be affected. The onus is on the party rebutting this presumption to show that they expressly intended to create a mere ‘moral’ agreement and not a legal obligation. The company’s use of the words “ex gratia” in the promise to pay do not show nor imply that the agreement is without legal effect. Thus, the company’s agreement, reached in a business setting with authorised representatives and conceded consideration, was an intention to create a legal obligation with legal consequences to that effect.

However, the circumstances in which a commercial or business agreement is entered into may show that the parties did not intend to create legal relations and this would be the case where honour clauses or honourable pledge clauses are used. This is a clause in agreement to the effect that the parties do not intend to create legal relations. It denies the agreement legal intention thereby converting it to a gentleman’s agreement binding in honour only. Such an agreement is unenforceable in law as was the case in Rose and Frank Co v JR Crompton and Bros Ltd, [1925] AC 445, an American company and English company entered into a sole agency agreement in 1913 for the sale of paper goods in the USA. The written agreement contained a clause stipulating that it was not a formal nor legal agreement, and an “honourable pledge” between business partners. Subsequently, the American company placed orders for paper which were accepted by the British company. Before the orders were fulfilled, the British company terminated the agency agreement and refused to send the goods, claiming that the 1913 agreement was not legally binding and that, consequently, the orders did not create legal obligations. The questions arose as to (1) whether the sole agency agreement of 1913 constituted a legally binding contract, and (2) whether the orders constituted enforceable contracts of sale. It was held, Firstly, as to the 1913 agreement, the Court gave overriding weight to the provision in the agreement that expressly provides that it is to be solely an “honourable pledge”, as demonstrating that the parties did not intend the arrangement as a legally-binding contract. The Court explained that the argument that clauses restricting the legal enforceability of a contract apply solely when the document is otherwise unquestionably of legal force. In this case, the document and circumstances did not intend to create any legal interest, and the clause expressly precluding the agreement’s legal enforceability applies. Secondly, the Court held that the fact that the arrangement does not constitute a legal contract does not preclude the orders and acceptances from constituting legally-binding contracts. The lack of enforceability of an express legal arrangement under an agency agreement does not preclude the legal transactions. The orders constituted mutual offers and acceptances with each transaction having ordinary legal significance.

A similar holding was delivered in Jones v Vernons' Pools Ltd, (1938) 2 All ER 626. In this case, Mr. Jones filled in two winning entries on coupons for a sales promotion and sent it to Vernon Pools. The coupons contained the words of “binding in honour only” and that the entry of the coupon “shall not give rise to any legal relations.” The company claimed to only have received one of the coupons and not the other. However, Mr. Jones claimed that the coupon entry was a contractually binding arrangement and that he was entitled to the prize money. The primary question arose as to whether the coupons legally-bound the company to pay Mr. Jones the winning prize money. The question arose as to whether the coupons created a legally-binding contract between the parties, pursuant to which the football pools company intended to be legally bound to pay the prize money. The Court held that the existence of the terms “binding in honour only” and that the entry of the coupons “shall not give rise to any legal relations” on the coupons themselves demonstrated that the parties did not have the intention to be legally bound. The express provision was held to have the effect of expressly precluding and preventing the existence of a legally binding arrangement. This rebutted the presumption that the coupons would be binding at law. On this basis, Court held that the agreement was an agreement in “honour” and not a contract creating legal relations between the parties. Thus, Mr. Jones’ claim for the prize money was not an enforceable legal contract, and his claim was dismissed.

2. Domestic or social agreements

Courts proceed on the presumption that the parties did not intend to create legal relations.

Agreement between husband and wife

Such agreements are generally not intended to impose upon the parties any rigid obligations. In Balfour v Balfour [1919] 2 KB 571, Mr. Balfour and his wife went to England for a vacation, and his wife became ill and needed medical attention. They made an agreement that Mrs. Balfour was to remain behind in England when the husband returned to Ceylon (Sri Lanka) and that Mr. Balfour would pay her £30 a month until he returned. This understanding was made while their relationship was fine; however the relationship later soured. The lower court found that there was sufficient consideration in the consent of Mrs. Balfour and thus found the contract binding, which Mr. Balfour appealed. Two issues were before the court: Was Mr. Balfour's offer intended to be legally binding? Does the fact that they were husband and wife matter? Mr. Balfour's appeal was allowed. Promises in spousal (or for that matter, family) roles aren't legally binding. Lord Atkin held that the law of contracts is not made for personal family relationships. As there was no intent to be legally bound when the agreement was agreed upon, there can be no legally binding contract. Atkin held that if the courts were to allow all wives to come to court when agreements had been broken with their husbands then the courts would be overrun with frivolous cases. Warrington, concurring in the result, agreed substantially with Atkin, but added that there was no bargain of any kind made by Mrs. Balfour sufficient for a binding contract. The ratio in this case is that arrangements made between husbands and wives are not generally contracts as the parties do not intend to be legally bound by the agreements.

The agreement may, however, be enforced if the parties have manifested an intention to contract. For example, in McGregor v McGregor, a husband and wife sued each other for assault but later resolved to withdraw the cases but live apart. The husband promised to pay a weekly sum as maintenance while the wife promised to maintain the children. The husband was in arrears for 6 weeks and the wife sued. It was held that her action was sustainable as the parties had manifested an intention to contract.

In Merritt v Merritt [1970] EWCA Civ 6, a husband left his wife and went to live with another woman. There was £180 left owing on the house which was jointly owned by the couple. The husband signed an agreement whereby he would pay the wife £40 per month to enable her to meet the mortgage payments and if she paid all the charges in connection with the mortgage until it was paid off he would transfer his share of the house to her. When the mortgage was fully paid she brought an action for a declaration that the house belonged to her. It was held that the agreement was binding. The Court of Appeal distinguished the case of Balfour v Balfour on the grounds that the parties were separated. Where spouses have separated it is generally considered that they do intend to be bound by their agreements. The written agreement signed was further evidence of an intention to be bound

Agreements between parent and child

Such an agreement is ordinarily not intended to be a contract but a working relationship. In Jones v Padavatton [1969] 1 WLR 328, a mother and daughter came to an arrangement whereby the mother agreed to maintain her daughter if she agreed to study for the bar. The daughter commenced her studies and the mother paid her an allowance. The arrangement was later altered and the mother agreed to provide a house in which her daughter could reside whilst she studied. Mother and daughter fell into dispute as to the occupancy of the house, and the mother sought possession. It was held the daughter was entitled to remain in possession and the mother appealed. The daughter argued that the agreement between herself and her mother amounted to a legally binding contract and, as such, she should be entitled to remain in occupation of the house. She claimed there had been an intention to create legal relations and she had provided consideration for her mother’s maintenance by studying for the bar. The mother argued there was merely an informal family arrangement, there had been no intention to create legal relations and she was, therefore, entitled to recover possession of the house. Even if there was an enforceable contract, she asserted the terms of the arrangement were too vague for the court to enforce. The court held that the mother’s appeal was successful and she was awarded possession. There is a presumption that family arrangements are based on mutual trust, family ties and affection, and that there is no intention to create legally binding contracts capable of enforcement in the courts. This presumption can be rebutted, but the lack of formality regarding the agreement between mother and daughter strongly indicated there was no such intention and the daughter had no defence to her mother’s claim for the house.

However the circumstances in which a domestic or social agreement is entered into may show that the parties intended to create legal relations. Such intentions may be collected from the words used by the parties, their conduct and the circumstances of the agreement.

Other social agreements

Such agreements may be enforced if the parties have manifested an intention to contract. For example, in Simpkins v Pays [1955] 1 WLR 975, Ms. Simpkins was a paying boarder at Ms. Pays house, who lived with her granddaughter. Ms. Simpkins habitually entered into newspaper competitions. Concerning one weekly Sunday newspaper competition, the three agreed that Ms. Simpkins would fill in a weekly coupon, with each person making three forecasts, yet submitting them in Ms. Pays name, and divide the prize in the event of winning. A forecast made by Ms. Pays’ granddaughter in one of the coupons submitted won a prize of £750 under Ms. Pays name. Ms. Pays refused to distribute the prize and Ms. Simpkins claimed for one-third of the prize under their agreement. The question arose as to whether there was an intention to create legal relations in the informal arrangement between the Parties so as to constitute a legal agreement to distribute the shares. The Court held that, irrespective of the familial relations and the informal context, there was mutuality in the arrangement between the Parties, by which they agreed to the manner of the submission of the forecast in Ms. Pays name on a weekly basis and that, if there was a success, all three persons would share the prize money equally. Despite the domestic context, the filling out of the coupon by Ms. Simpkins was not a voluntary service to Ms. Pays but rather pursuant to an agreement by which each Party had shares in the result, thus showing an intention to create legal relations. The Court held that the mutual arrangement, no matter how informal, constituted a legally-binding agreement to divide the shares in thirds.

In Parker v Clark [1960] 1 WLR 286, the Clarks were an elderly married couple. Mrs Parker was Mrs Clark’s niece, and Mr Clark suggested she and her husband move into their home with them. Mr Parker supported the idea but expressed concern that it would mean their selling their own house. Mr Clark wrote to Mr Parker stating the Clarks would bequeath their home to Mrs Parker, her sister and her daughter on their death. The Parkers sold their home and moved in with the Clarks. The Clarks told the Parkers the arrangement was not working, and they would have to move out. The Parkers brought an action for breach of contract. The Parkers argued the agreement was contractual in nature, and was intended to be legally binding. In reliance on it being a legally binding agreement, the Parkers sold their home and shared the running costs of the Clarks’ home. They contended the Clarks were in breach of this agreement by wrongfully giving them notice to quit. The Clarks denied the existence of any agreement. Even if there had been an agreement, it was insufficient to satisfy s40(1) Law of Property Act 1925 because it was not in writing. They also claimed the terms of the purported agreement were too vague to form a valid contract. The Parkers were successful in their claim. The language used in the letters and the surrounding circumstances indicated that both parties intended the agreement to have legal force. Mr Clark’s letter was sufficient to satisfy s40(1) Law of Property Act 1925 and amounted to a contractual offer. The Parkers were entitled to damages for the loss of the prospect of inheritance and the loss of the value of the benefit of living in the house.

Capacity to enter contracts

The general rule is that everyone is capable of entering contracts. However, certain categories of people need the protection of the law. They include: minors (under 18), mental patients and drunks. The paradigm of contractual capacity is embodied in the living adult of sound mind. Problems in relation to capacity are usually connected to the mental capacity of the party and/or their age.

Contractual capacity of infants (minors)

Under Section 2 of the Age of Majority Act (Cap 33 Laws of Kenya), an infant or minor is any person who has not attained the age of 18. Contracts entered into by an infant are binding, voidable or void depending on their nature and purpose.

Those that are binding are legally enforceable contracts; the infant can sue or be sued on them. Both parties are bound to honour their obligations. These contracts fall into 4 categories:

Contracts for the Supply of “Necessaries”: Under section 4 (2) of the Sale of Goods Act necessaries mean goods suitable to the condition in life of such an infant or minor and to his actual requirement at the time of sale and delivery. In Nash v Inman 1908 2 KB 1, the defendant was an infant college student at Cambridge. Before proceeding to college, his father bought him all the necessary clothing material. However, while in college, he bought additional clothing material from the plaintiff but did not pay for them and was sued. His father gave evidence that he had bought him all the necessary clothing material. It was held that he was not liable as the goods were not necessaries when supplied

Contracts for the Supply of “Other Necessaries”: These are necessaries other than those covered by Section 4 (2) of the Sale of Goods Act. E.g. Legal services, transport to and from work, lodging facilities etc. An infant is bound by any contract for the supply of such necessaries. Under the Sale of Goods Act, whenever an infant is supplied with necessaries, he is liable to pay not the agreed price but what the court considers as reasonable.

Educational contracts: An infant is bound by a contract whose purpose is to promote his education or instruction

Contracts for beneficial service: These are beneficial contracts of service. Case law demonstrates that an infant can sue or be sued and is bound by contracts whose object is to benefit him as a person. In Doyle v White City Stadium [1935] 1 KB 110, the plaintiff was a qualified infant boxer. He applied to join the British Boxing Board and was granted a license. One of the rules of the body empowered it to withhold payment of any price money won if a boxer was disqualified in a competition. The plaintiff was disqualified on one occasion and the Board withheld payment. The plaintiff sued. Question was whether the plaintiff was bound by the contract between him and the Board. It was held that he was as in substance it was intended to benefit him hence the money was irrecoverable. A similar holding was made in Chaplin V. Leslie Fremin (Publishers) Ltd, where the plaintiff, an infant had engaged the defendant to write a book for him. He subsequently discontinued the transaction. It was held that the contract was binding as it was intended to benefit him. A similar holding was made in Clements v London & North Western Railway [1894] 2 QB 482, where an infant railway servant, as a condition of his employment, joined an insurance society, to whose funds the railway company contributed, and agreed to accept compensation on a certain scale from the society in lieu of any claim under the Employers’ Liability Act, 1880. Held, the contract being for the infant’s benefit, it was binding.

Certain contracts entered into by an infant are voidable i.e. the infant is entitled to repudiate the contract during infancy or within a reasonable time after attaining the age of majority. By avoiding the contract, the infant escapes liability on it. The infant cannot be sued on the contract during infancy. These contracts confer upon the infant a long term benefit. Examples include: Partnership agreements, lease or tenancy agreement and contract for the purchase of shares. Under Section 12 of the Partnership Act, an infant partner is not liable for debts and other liabilities of the partnership during infancy since the contract is voidable at his option. However under Section 13 of the Act, if the infant does not avoid the contract during infancy, or within a reasonable time after attaining the age of majority, he is liable for debts and other obligations of the firm from the debt he became partner. In Davies v Beynon-Harris (1931) 47 TLR 424, a minor was allowed to avoid a lease of a flat without liability for future rent or damages but was not allowed to recover rent paid.

Under the provisions of the Infants Relief Act (1874) which applies in Kenya as a statute of general application, certain contracts entered into by infants are void. These are contracts which the law treats as non-existent. They confer no rights and impose no obligations on the parties. These contracts are;

1. All accounts stated with infants: These are debts admitted by an infant. The infant cannot be sued on such admission.

2. Contracts for the supply of goods other than necessaries.

3. Money lending contracts: An infant is not bound to repay any monies borrowed from a 3rd party as the contract is void. However if the infant repays, the amount is irrecoverable.

In R Leslie Ltd v Sheill [1914] 3 KB 607, the defendant, an infant borrowed £400 from the plaintiff, a money lending firm in 2 lots of £200 each and was liable to pay £475 inclusive of the interest but failed to do so and was sued. The plaintiff argued that it was entitled to damages for misrepresentation as the defendant had fraudulently misrepresented his age. It further argued that the defendant had received the money on its behalf. It was held that the amount was irrecoverable as the contract was void by reason of the Infants Relief Act 1874. Since a money lending contract was void, any security given by the infant is also void and therefore unenforceable by the lending party. It was so held in Valentini v. Canali [1886-90] All ER Rep 883 136. Here, A, a minor entered into an agreement to become the tenant of B and agreed to pay £ 100 for the furniture inside the house. A paid B £ 68 in cash and gave a promissory note for the rest. A occupied the house and used the furniture for a few months and then brought a suit for refund of the money paid. The court ordered the cancellation of the promissory note but not the refund of the consideration already paid. The reason was the minor had made use of the furniture and could not give back this benefit he had taken. In another case, the following observation was made with reference to the Valentini vs. Canali case: “…plaintiff had the quality use of the furniture for some months. He could not give back this benefit or replace the defendant in the position in which he was before the contract…The legislature never intended in making provisions for this purpose to sanction a cruel justice.”

If an infant uses monies borrowed under a void contract to purchase necessaries, the lending party is in Equity put into the shoes of the party supplying the necessaries and can sue the infant for the recovery of the amount borrowed as was used to purchase the necessaries. This is the principle of subrogation as was explained in In re National Permanent Benefit Building Society (1869) L. R. 5 Ch. 309, where it was held that a person who lent money to a society which had under its rules no poser to borrow had no legal or equitable debt against the society and therefore could not maintain a petition for an order to wind up the society. That must mean "no legal or equitable debt upon the contract of loan." In that case there was no suggestion of any claim for money had and received

Questions has arisen as to whether an infant can ratify contracts made during infancy after he has attained the age of majority. Any such purported ratification or adoption has no legal effect.

Contractual capacity of drunken persons

A contract entered by a drunken person is voidable at his option by establishing that: 1. He was too drunk to understand his acts. 2. The other party was aware of his condition. By avoiding the contract, the person escapes liability on it. In Gore v. Gibson (1845) 13 M & W 621; 153 ER 260, the defendant was sued on a bill of exchange he had signed and endorsed. He pleaded that when he did so he was too drunk to understand what he was doing and that the plaintiff was aware of his condition. It was held that he was not liable as the contract was voidable at his option by reason of the drunkenness. If a contract entered into by a person when drunk is ratified by him when sober it is no longer voidable as was the case in Matthews v. Baxter (1873) LR 8 Exch 132. In this case, Baxter, while drunk, agreed at an auction to purchase a property. Once sobriety returned he decided that he wished to affirm the contract that had been made by him while drunk. Sometime later he had a change of mind and he sought to rescind the contract, arguing that he lacked capacity to enter the contract by reason of intoxication. The court held that because Baxter had confirmed the contract it was no longer open to him to avoid the contract on the grounds of intoxication. This was despite the fact that he had made out the necessary element of this defence.

Contractual capacity of persons of unsound mind

A contract entered into by a person of unsound mind is voidable at his option by establishing that: 1. He was too insane to understand his acts.

2. The other party was aware of his mental condition.

By avoiding the contract the party escapes liability on it. In Imperial Loan Co. Ltd. v. Stone [1892] 1 Q.B. 599, the defendant when lunatic signed a promissory note as surety upon which plaintiff brought an action and defendant took the defence of insanity the issue was whether defendant can successfully claim insanity as a defence? It was held that to successfully take the defence of insanity as breach of contract, defendant must show not only that he was so insane at the time of executing the deed such that he was incapable of understanding the implications of the agreement; but also that at the time of the contract his insanity was known to the plaintiff. The burden of proof must lie on the defendant. Since the jury didn’t find on the second question, hence there must be new trial

In the words of Lopes L.J. “In order to avoid a fair contract on the ground of insanity, the mental capacity of the one contracting must be known to the other contracting party. The defendant must plead and prove not merely his insanity but the plaintiff’s knowledge of that fact and unless he proves these 2 things he cannot succeed.”

If a contract entered into by a person of unsound mind is ratified by him when he is of sound mind it ceases to be voidable. Under Section 4 (2) of the Sale of Goods Act, if a person of unsound mind is supplied with necessaries, he is liable to pay a reasonable amount.

Contractual capacity of undischarged bankrupts

These are persons who have been declared bankrupt by a court of competent jurisdiction. Their capacity to contract is restricted by the provisions of the Bankruptcy Act Cap 53 Laws of Kenya.

Contractual capacity of corporations

These are artificial persons created by law, either by the process of registration or by statute. The capacity of the corporations to contract is defined by law e.g. a statutory corporation has capacity to enter in transactions set out in the statute as well as those reasonably incidental thereto. Other transactions are ultra vires and therefore null and void. The contractual capacity of a registered company is defined by the object clause of the memorandum. At common law a registered company has capacity to enter into transactions set forth in the objects and those that are reasonably incidental to the attainment or pursuit of such objects. It was so held in Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 HL 653 and also in Attorney-General v Great Eastern Railway Co: HL 1880.

Other transactions are ultra vires (beyond the powers of) the company and void. Transactions within the powers of a company are said to be intra vires a company. An ultra vires transaction cannot be ratified and any purported ratification has no legal effect. It was so held in Ashbury’s Case

CONSIDERATION

In addition to consensus, capacity and intention, an agreement must be characterized by consideration to be enforceable as a contract. At Common Law, a simple contract is unenforceable unless supported by some consideration. Consideration is the bargain element of a contract. It is nothing but mutuality. It has been defined as “an act or promise offered by the one party and accepted by the other party as price for that others promise.”

Judicial Definitions

In the words of Lush J. in Currie v Misa (1874) LR 10 Ex 153, “a variable consideration may consist of some right, interest, profit or benefit accruing to the one party or some loss, forbearance, detriment or responsibility given, suffered or borne by the other.”

In the words of Patterson J in Thomas v Thomas (1842) 2 QB 851; 114 ER 330, “consideration means something which is of some value in the eye of the law moving from the plaintiff. It may be some benefit to the defendant or detriment to the plaintiff but at all events it must be moving from the plaintiff.”

Consideration is whatever the promisee gives or provides to buy the promisors promises. By so doing the promisee becomes party to the contract. Consideration takes various forms. In Carllil v. Carbolic Smoke Ball Co, it took the form of detriment i.e. swallowing of the smoke balls by Mrs. Carllil. In Patel Bros vs. Hasmani 19 EACA 170, it took the form of forebearance to sue.

Types of consideration

Consideration may be executory or executed but must not be past. However in certain circumstance past consideration may support a contractual claim.

1. Executory Consideration

Consideration is executory where the parties exchange mutual promises. Neither of the parties has performed its part of the contract. The whole transaction is in future. Executory consideration is good to support a contractual claim. E.g. purchase of goods on credit for future delivery.

2. Executed Consideration

Consideration is executed where a party does an act to purchase the others promise. The act may be partial or total performance of the party’s contractual obligation. It is good consideration to support a contractual claim.

3. Past Consideration

Consideration is past where a promise is made after services have been rendered. There is no mutuality between the parties. Past consideration is generally not good to support a contractual claim.

In Roscorla v Thomas (1842) 3 QB 234, the plaintiff had just bought a horse from the defendant and as he was leading it away, the defendant assured him that it was a good horse free from any vice. The statement turned out to be untrue and the plaintiff sued for damages. It was held that the defendants promise was unenforceable by the plaintiff as consideration was wholly past. A similar holding was held in Re McArdle [1951] Ch 669. In this case, William McArdle left a house to his five children in equal shares, subject to a life interest for his widow. The wife of one of these sons, Mrs Marjorie McArdle, carried out improvements to the house amounting to £488. She also bore the cost of these repairs. After the repairs had been carried out, she got all the five children of McArdle to sign a document in which they promised to repay Mrs McArdle the £488 out of the estate when it was eventually distributed. After the testator’s widow died, Mrs McArdle asked for payment. However, the other four sons refused to pay her. She tried to enforce her interest in the property in court. Ms McArdle argued that the document was an equitable assignment of a portion of each of the five sons’ interest in the property amounting to £488 out of the testator’s estate. However, the other sons argued that the promise was merely a gift, as Mrs McArdle had provided no consideration for it. As she was a mere volunteer, the equitable maxim ‘Equity will not assist a volunteer’ applied and, therefore, the promise to pay could not be enforced. The Court of Appeal held that the transaction had not been completed and was imperfect. Therefore, it was only a promise to pay and not a gift. Mrs McArdle had already performed the work before she asked for payment. Her consideration was in the past. Past consideration is not good consideration. Therefore, the agreement was unenforceable.

In certain circumstances, past consideration is sufficient to support a contractual claim. These are exceptions to the general rule:

Acknowledgement of a statute barred debt

Under the Limitation of Actions Act, Cap 32 Laws of Kenya, a debt becomes statute barred after 6 years. In such a case, the debtor is not bound to repay. However, a written acknowledgement of the debt by the debtor is enforceable by the creditor though consideration is past.

Negotiable Instruments

One of the characteristics of negotiable instruments e.g. cheques, bills of exchange, promissory notes, share warrants e.t.c. is that past consideration is good to support any action on the instrument. A holder of a negotiable instrument can sue on it even though he has not given consideration provided a previous holder gave some consideration. This exception is contained in Sec 27(1) of the Bills of Exchange Act , and was relied upon to enforce an action in Lombard Banking Ltd v JL Gandhi and another [1965] 1 EA 12 (SCK).

Rendering of Services on request

Where services are rendered by a party, at the express or implied request of another in circumstances that give rise to an implied promise to pay, a subsequent promise to pay for the services is enforceable. The law takes the view that the rendering of the services and the promise to pay are an integral part of the same transaction.

In Lampleigh v Braithwait [1615] EWHC KB J 17, the defendant had killed a man named Patrick. He requested the plaintiff to secure pardon for him from the king. The plaintiff exerted himself and made a number of trips to see the king and ultimately secured the pardon. The defendant promised to pay him £100 for the trouble, a promise he did not honour and was sued. He argued that the plaintiff had not provided consideration for his promise to pay. However it was held that the promise was enforceable as it was inseparable from the request for the services. A similar holding was made in Re Casey's Patents [1892] 1 Ch 104. In this case, the defendant, Casey, managed some patents owned by the plaintiffs, Stewart and Charlton. The plaintiffs later signed a document that read: ‘In consideration of your services… we hereby agree to give you one-third share of the patents’. This payment was in return for work Casey had already done. When Casey registered this document on the patent register in order to claim his 1/3 interest in the patents, the plaintiffs applied to have the document expunged from the register. The plaintiffs stated that the document was not a deed and therefore was required to be supported by consideration before it became a valid agreement. The issue was whether what Casey had already done was past consideration, in which case it would not be good consideration, and the agreement to give him an interest in the patents would be void. The Court of Appeal held that Casey must have assumed his work was to be paid for in some way. The work done was not just a matter of goodwill but something a manager would have expected to have been paid for. The promise to pay was, therefore, just a crystallization of this reasonable expectation. Bowen LJ said (ay 116): ‘a past service raises an implication that at the time it was entered it was to be paid for, and… when you get in the subsequent document a promise to pay that promise may be treated… as an admission which… fixes the amount of that reasonable remuneration’. Therefore, Casey’s past work was good consideration and the agreement was enforceable.

Rules of consideration

Mutual love and affection is not sufficient consideration

In Thomas v Thomas (1842) 2 QB 851; 114 ER 330, Mr. Thomas had expressly stated that if he died before his wife, she was free to use his house as long as she remains unmarried. His brothers who later became executors of his estate knew of this wish. After his death, Mrs. Thomas remained in his house and unmarried. After the death of one of the executors, the other sought to evict Mrs. Thomas from the house. She sued the late husband’s estate. It was held that the husbands promise was enforceable as she had provided consideration by way of the £1 she paid for every year she lived in the house. The love she had for the late husband was not sufficient consideration but the £1 she paid every year was.

Consideration must be legal

The act or promise offered by the promise must be lawful as illegal consideration invalidates the contract

Consideration must not be past

As a general rule, past consideration is not good to support a contractual claim as exemplified by the decisions in Re McArdles case and Roscorla v. Thomas. However, in certain circumstances, past consideration is sufficient to support a contractual claim, as indicated above.

Consideration must be real

This rule means that consideration must be something of value in the eyes of the law. It means that consideration must be sufficient though it need not be adequate. This rule means that as long as something valuable in law passes, the promise is enforceable. It means that the law does not concern itself with the economics of a transaction. It means that the courts of law do not exist to correct bad bargains. In Thomas v. Thomas, the £1 Mrs. Thomas paid per year was sufficient consideration. However if the consideration is too low in comparison and there is evidence of a mistake, misrepresentation, duress or undue influence, the courts may intervene.

Consideration must flow from the plaintiff/ promise

This rule means that the person to whom the promise is made provides consideration and by so doing there is a bargain between the parties or mutuality. By providing consideration, the promise becomes party to the transaction. In Thomas v. Thomas, Patterson J was emphatic that “consideration must at all times flow from the plaintiff.” The rule that consideration must flow from the plaintiff is referred to as The Doctrine of Privity of Contracts.

The Doctrine of Privity of Contracts

This doctrine is to the effect that only a person who is party to a contract can sue or be sued on it. It means that only a person who has provided consideration to a promise can sue or be sued on it. It means that a stranger to consideration cannot sue or be sued even if the contract was intended to benefit him. It was so held in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, where a drum filled with chemicals was shipped from the United States to the United Kingdom, as agreed by a bill of lading which included a clause which referenced the United States Carriage of Goods by Sea Act 1936. This clause limited the liability of the carrier to $500 for any damage that was caused to the goods. The carrier engaged stevedores to deal with the unloading of the cargo on arrival and unfortunately, while lowering the chemical drum onto a lorry, they negligently dropped the drum, causing almost $600 worth of damage. The respondents sued for the loss but the stevedores counter-claimed that their liability should be limited as per the clause stated in the contract. The overriding issue for the court to consider, in this case, was whether the clause in the contract, which was inserted by the United States Carriage of Goods by Sea Act 1936, could be relied upon by the stevedores who had damaged the bottle. It was particularly important for the court to consider whether the stevedores were party to the contract between the buyer and seller. The court held that the clause could not be relied upon by the plaintiffs as the United States Carriage of Goods by Sea Act 1936 did not apply to stevedores. Moreover, the stevedores were not a party to the contract, by either express or implied terms, between the parties. They were, therefore, a stranger to the contract and the court relied upon the fundamental principle that a stranger cannot rely upon a contract they are not a party to.

In Price v Easton (1833) 4 B&Ad 433, a declaration between the parties stated that X owed the plaintiff £3. As such, X agreed to complete work for the defendant in exchange for payment, which would clear the debt that he owed to the plaintiff. The defendant agreed he would pay the plaintiff on X’s behalf once the work was finished. X completed the work for the defendant but the defendant did not pay the plaintiff, or X, as had been promised. The plaintiff sued the defendant for the money that X owed him, which would have been paid by way of the defendant’s payment. The court was required to establish whether the plaintiff had provided any consideration for the agreement between the defendant and X for the work that was carried out. If this could be established, the plaintiff would be able to sue the defendant for the money that would have been paid to the plaintiff as a result of X’s work to clear the debt that was owed from their separate agreement. It was found that X performed his part of the agreement with the defendant but the plaintiff was a stranger to the contract between the parties and therefore could not sue for the sum owed by the defendant. This was despite the fact that the money owed would have been paid to the plaintiff to clear the previous debt. The court found this on the basis that the plaintiff had not provided any consideration for the promise between the parties. The plaintiff’s claim was dismissed by the court.

In Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, Dunlop was a tire manufacturer who agreed with their dealer to not sell the tires below a recommended retail price (RRP). As part of the agreement, Dunlop also required their dealers to gain the same agreement with their retailers, who in this instance was Selfridge. The agreement held that if tires were sold below the RRP, they would be required to pay £5 per tire in damages to Dunlop. This was agreed between the dealer and Selfridge, which effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge sold the tires below the agreed price and Dunlop sued for damages and an injunction to prevent them from continuing this activity. At the initial trial, the decision was given to Dunlop. This was appealed by Selfridge and the decision was reversed. Dunlop appealed. Selfridge argued that Dunlop could not enforce the contract as Dunlop was not part of the agreement between the dealer and Selfridges. On this basis, the question for the court was whether Dunlop had the right to access damages without a contractual relationship. The court held in a unanimous decision that Dunlop could not claim for damages in the circumstances. The court found that firstly, only a party to a contract can claim upon it. Secondly, Dunlop had not given any consideration to Selfridge and therefore there could be no binding contract between the parties. Lastly, Dunlop was not listed as an agent within the contract and could therefore not be included as a valid third-party who had rights to claim on the contract.

In Tweddle v Atkinson (1861) 1 B&S 393, the son and daughter of the parties involved in this dispute were getting married. As such, the father of the groom and father of the bride entered into an agreement that they would both pay sums of money to the couple. Unfortunately, the father of the bride died before he paid the money to the couple and the father of the son died before he could sue on the agreement between the parties. As a result of this, the groom brought a claim against the executor of the will for the payment that was previously agreed between the fathers. The primary issue for the court was whether or not the son could, as a third party to the agreement, enforce the contract between the fathers, which was ultimately for the benefit of him and his wife. It was argued that the intention of the agreement between the fathers was for the couple to derive a benefit from the payment of the money. Moreover, it was argued that preventing the son from being able to enforce the contract would effectively ignore the intention of the fathers. The groom’s claim was rejected by the court. It was held that the groom was not a part of the agreement between the fathers and he did not provide any consideration for the promise made by the father of the bride. Also, as a stranger to the contract, the son could not enforce it. On this basis, the court found in favour for the executor of the will.

However in certain circumstances, persons who are not party to a contract or who have not provided consideration may sue or be sued on it.

These are exceptions to the Doctrine of Privity of Contracts:

Agency

In an agency relationship, the agent contracts on behalf of the principal. The principal is not directly involved in the transaction. However the principal may sue or be sued on a contract entered into by the agent. This exception is more apparent than real as in law the agent represents the principal

Legal assignment

Under the provisions of the ITPA if a creditor assigns his debt to another person in a legal assignment the assignee becomes entitled to sue the debtor as if he were the original creditor.

Negotiable instruments

A holder of a negotiable instrument can sue on it in its own name notwithstanding the absence of consideration provided a previous holder of the instrument gave some consideration

Trust

This is an equitable relationship whereby a party expressly impliedly or constructively holds property on behalf of another known as the beneficiary. In certain circumstances, the beneficiary can sue or be sued under a trust

Third party insurance

Under the provisions of the Insurance (Motor Vehicles Third Party Risks) Act , , victims of motor vehicle accidents are entitled to compensation by Insurance companies for injuries sustained from the use of motor vehicles on the road. However the insurer is only liable if the motor vehicle was in the hands of the insured or some authorized driver. If the authorized driver pays the amount due to the victim for the injury, such amount is recoverable from the insurer but through the insured. In Kayanja -Vs- New India Assurance Company Ltd [1968] EA 295, it was held that if the authorized driver pays the amount due to the victim for the injury,such amount is recoverable from the insurer but through the insured.

Restrictive Covenants (Contracts running with land)

In certain circumstances, certain rights and liabilities attached to land are enforceable by or against subsequent holders of the land. This is particularly the case in the law of leases

Consideration must be something in excess of a public duty owed by the plaintiff

This rule means that performance by the plaintiff of a public duty owed by him is not sufficient consideration for a promise to pay. In Collins v Godefroy (1831) 1 B & Ad 950, Godefroy, the defendant, brought an action against an attorney for negligence and caused Collins, the plaintiff, to be subpoenaed to attend and give evidence. Godefroy was keen to ensure that Collins attended as this would help his case, so he promised to pay him one guinea per day he was at court as compensation for the loss of his time. Collins attended court for six days but was not called to give evidence. At the end of this Collins demanded payment of six guineas as per the agreement. When this was not paid, he brought an action against the defendant for the sum owing. The question for the court was whether the agreement between the plaintiff and the defendant was supported by valuable consideration. The court held that the agreement that the plaintiff’s should attend court was not supported by consideration. This was because the plaintiff was under a public duty to attend court anyway having been subpoenaed. The law would not allow someone to recover expenses incurred in the performance of a duty that they were merely obliged to do anyway by law. Lord Tenterden said (at 956): ‘If it be a duty imposed by law upon a party regularly subpoenaed, to attend from time to time to give his evidence, then a promise to give him any remuneration for loss of time incurred in such attendance is a promise without consideration. We think that such a duty is imposed by law’. Consequently, the agreement was unenforceable.

However anything in excess of a public duty amounts to consideration.

In Glasbrook Bros v Glamorgan County Council [1925] AC 270, during a strike at a colliery the colliery manager asked for additional police protection for the colliery and insisted he required police officers to be stationed on the premises. The police superintendent provided mobile officers but refused to station more officers at the colliery unless the manager paid extra to cover the expense. The manager agreed to this but later refused to pay. The trial judge and the Court of Appeal both held that the police were entitled to do this. The colliery appealed to the House of Lords.  The appellant colliery argued that the police had provided no consideration in return for the promise to be paid. They argued it was the duty of the police to provide protection without payment and the agreement had been signed under duress. By a majority if 3:2 their Lordships held that the police were entitled to be paid. The police had a responsibility without being paid other than by way of ordinary public taxation to provide protection for life and property, keeping the peace and preventing crime. However, by providing officers stationed at the colliery the police had gone beyond their public duty. In doing so they provided good consideration. Therefore, the contract was enforceable and the police could recover the amount charged. Lord Carson and Lord Blanesburgh dissented, however, as they thought the police had done their public duty and nothing more given the particularly organized and threatening nature of the strike which targeted ‘safety men’ responsible for ensuring the colliery could still be safely operated.

Consideration must be something in excess of an existing contractual obligation

This rule means that performance by the plaintiff of an existing contractual obligation is not sufficient consideration for a promise. In Stilk v Myrick (1809) 170 ER 1168, a return voyage between London and the Baltics was in peril when two of the crew abandoned the ship. The seamen were due to receive wages of £5 per month during the voyage. The captain offered the remaining crew an equally divided share of the deserted seamen’s salary if they could return sail the ship to London with reduced crew. The ship was returned to London by the remaining seamen however, the additional payment was not made. Espinasse’s case report based the decision on the grounds that public policy should prevent seamen from demanding extra payment for duties that they were already obligated to do. In this context he uses the example of accident or death during the voyage where the seamen have no option but to continue the journey. The concept of duress is not straightforward here as the promise for additional payment was made whilst the ship was docked and the concept of economic duress was at that time not recognised. Duress at that time was thought to consist of physical violence or a threat of violence. Alternatively Cambell identified that the issue was one where there was no fresh consideration for the promise of additional payment and therefore the claim failed. There are suggestions that both accounts of the case may offer a more complete reflection of the court’s actual decision. In this context, Waddams identifies that “Campbell might have strayed somewhat beyond the role of reporter” by emphasizing “the reason that seemed to him the more principled”. Campbell was, in this respect, highly regarded and his reports are described as frequently going beyond that of mere reporting of the facts and decision. It is most likely that this is the reason his account of the case is the preferred option, and thus has formed the basis for the doctrine of fresh consideration. The requirement of fresh consideration in order to vary the contract can itself be problematic as consideration can come in the form of many guises. Consideration essentially represents an obligation on a contractual party for the receipt of the benefit under the contract. It does not therefore require monetary remuneration although it must be capable of having economic value. Nonetheless, there is no requirement for the consideration in a contract to be adequate in representing a fair contractual bargain. Thus criticisms of the Stilk v Myrick case are that the sailors did not demand additional payment, it was offered to the crew in recognition that they would be required to work harder to achieve the same result. This could also be construed as a greater benefit to the captain that the ship was returned to London as opposed to being docked overseas. The court in Williams v Roffey Brothers took the view that fresh consideration was present, in a promise for additional payment to the contractor in order to ensure the completion of the original contract. The offer was made in light of the contractor’s financial difficulty, the original contractual price was deemed to be too low and that the main contractor was liable to penalties for delays in completion. In this context the court concluded that the “practical benefits” that the promise gave was sufficient to amount to consideration where there was no evidence of duress.

In Hartley v Ponsonby [1857] 26 LJ QB 322, the defendant, Ponsonby, was captain of a ship on which the plaintiff was a sailor. The sailors contracted to serve on board the ship for a maximum of three years to any ports required until her return to the UK. While at sea, seventeen out of the total 37 crew deserted. The ship was left in a much more dangerous condition by the reduced crew. The captain, in order to persuade the remaining crew to man the vessel, promised them extra wages. When the vessel returned to the UK he refused to pay them. The plaintiff sued for breach of contract. The defendant argued that the sailors had provided no consideration and that, therefore, the contract was void. He claimed the sailors were only doing what they were already obliged to do under the ship’s articles, which they had signed. They argued that according to Harris v Watson (1791) Peak Cas 72 in which it was held that a sailor was not owed extra wages in such a situation. Lord Campbell CJ said that Harris v Weston was authority that a sailor is expected to complete a voyage if there is an emergency, such as a large part of the crew being washed overboard. However, there was no such emergency here. The ship was in port and was only unseaworthy due to the lack of sufficient crewmembers. Therefore, the plaintiff was within his rights to refuse to put to sea. Consequently, by agreeing to do the work, the plaintiff supplied fresh consideration. Therefore, the contract was valid.

Payment of a lesser sum on the day in satisfaction of a larger sum is not sufficient consideration for the creditors promise to accept such sum in full settlement for the debt

This is referred as the “Rule in Pinnels Case (1602)”. Cole owed Pinnel 8 pounds payable on 11th November 1600. However on 1st October 1600, Pinnel requested Cole to pay 5 pounds which he agreed to accept in full settlement of the debt. Subsequently, Pinnel sued Cole for the balance. The case was decided on a technical point of pleading and Cole was held liable for the balance.

This rule was applied in Foakes v Beer (1883) LR 9 App Cas 605. In this case, the respondent, Beer, loaned the appellant, Dr Foakes, £2090 19s. When he was unable to repay this loan she received a judgment in her favour to recover this amount. The pair then entered an agreement whereby ‘in consideration’ of an initial payment of £500 and ‘on condition’ of six-monthly payments of £250 until the whole amount was repaid, she would not enforce her judgment against him. Foakes made these regular payments until the entire amount was repaid. However, he had not paid any interest on the judgement debt, which Beer was entitled to under statute. This interest totalled £302 19s 6d. The respondent’s case was that the promise not to enforce the judgement was not supported by good consideration because the appellant had only done what he was already contractually bound to do. The respondent relied on the rule in Pinnel’s Case (1602) 5 Co Rep 117 that part payment of a debt could not be satisfaction of the whole. The House of Lords held that the respondent’s promise not to enforce the judgment was not binding as Dr Foakes had not provided any consideration. Their Lordships approved the rule in Pinnel’s Case. Lord Selborne said that there had to be ‘some independent benefit, actual of contingent, of a kind which might in law be a good and valuable consideration’. However, Lord Blackburn expressed some dissatisfaction with this, noting that by accepting less a creditor could in some cases gain a practical benefit.

These are exceptions to the rule in Pinnel’s Case:

1. If the lesser sum is paid in advance and the creditor accepts the same in full settlement of the debt.

2. If the lesser sum is paid in the form of an object which the creditor accepts in settlement thereof. In Pinnel’s Case, Brian C.J. observed, “but the gift of a horse, hawk or robe, is sufficient consideration.

3. If the lesser sum is paid in addition to an object which the creditor accepts.

4. If the lesser sum is at the creditor’s request paid at a different place.

5. Where the lesser sum is paid in a different currency and the creditor accepts the same in full settlement thereof.

6. Where the lesser sum is paid by a third party. In Welby v. Drake (1825) 1 C. & P. 557, the defendant owed the plaintiff 18 pounds and was unable to pay. The defendant’s father paid the plaintiff 9 pounds which he accepted in full settlement of the debt but subsequently sued for the balance. It was held that the promise was enforceable as it was made to a 3rd party.

7. If a debtor enters into an arrangement with his creditors to compound his debts, whereby he promises to pay part of the amount due to each of the creditors who in turn promise not to sue the debtor or insist on full payment, the lesser sum paid by the debtor extinguishes the entire debt. The mutual promises by the parties constitute consideration.

Doctrine of Promissory or Equitable Estoppel

This doctrine was developed by equity to mitigate the harshness of the common law rule of consideration. It is an equitable intervention which modifies the rule of consideration. The Doctrine was explained by Lord Denning in Combe v Combe [1951] 2 KB 215. In this case, during the divorce process, a husband promised to pay his wife a tax-free sum of £100 each year to represent a permanent maintenance payment. The wife was aware that the husband was not in a good financial state and made no claim to this payment. Several years later, she brought an action to claim the arrears that were owed under their agreement. This case was brought only four years after the landmark decision given in Central London Property Trust LD v High Trees House LTD, which held that a party could not revert on an earlier promise made. Therefore, the court in this instance was required to consider whether the husband could withdraw from his earlier promise to pay the wife the sum of money. It was important for the court to understand whether the wife had given consideration in return for the husband’s promise and whether the wife could claim for the sum of money that had been promised previously, despite the fact she had not claimed for the money for several years. The court held that the wife could only enforce her agreement for the payment which was promised by the husband if she had given consideration. The court found that no consideration was given by the wife as she had not agreed to apply for the maintenance that was promised by the husband. The husband did not request the wife to refrain from taking the maintenance payment and therefore the wife could not claim for the money.

It is to the effect that where parties have a legal relationship and one of them makes a new promise or representation intended to affect their legal relations and to be relied upon by the other, once the other has relied upon it and changed his legal position, the other party cannot be heard to say that their legal relationship was different. The party is estopped from denying its promise. For the doctrine of estoppel to apply the following conditions are necessary:

1. A legal relationship between the parties.

2. A new promise or representation is intended to be relied upon.

3. Reliance upon the representation.

4. Change in legal position as a result of the reliance.

5. It would be unfair not to estop the maker of the representation.

The Doctrine of Promissory Estoppel is often referred to as “The Rule in the High Trees Case.” In Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, the plaintiff owned a block of flats which it leased to the defendant for 99 years at 2500 pounds per year. After the outbreak of the 2nd world war, it became clear that the defendant was not in a position to pay the agreed rent as most of the flats were unoccupied. The plaintiff promised to accept half of the rent as long as the war continued. By the end of 1945, all the flats were occupied. The plaintiff sued for the defendant to be compelled to pay:

1. The full rent.

2. The arrears.

The defendant argued that it was inequitable (unfair) for the plaintiff to claim the arrears. It was held that whereas it was fair for the defendant to pay the full rent, it was unfair to claim the arrears as the plaintiff had made a promise which the defendant had relied upon and changed its legal position. The plaintiff was estopped from insisting on the arrears. The doctrine of equitable estoppel also applies in East Africa. In Century Automobile v. Hutchings Biemer Ltd, the defendant took a lease of the plaintiff’s premises which was terminable by a 3 month notice of either party. The defendant intended to make alterations to the building but feared doing so only for the lease to be terminated. The plaintiff promised not to terminate the lease in 4 years time. As a consequence, the defendant spent 800 pounds on the alterations but 8 months later the defendant received the plaintiff’s notice of termination but refused to honour it and was sued. The defendant pleaded estoppel. The plaintiff was estopped from evicting the defendant as it had made a promise which the defendant had relied upon and changed its legal position. A similar holding was made in Commissioner of Lands v. Hussein.

Effects of estoppel

The Doctrine of Promissory estoppel is a modification of the Common Law rule of consideration in that it enables a person who has not provided consideration to a promise to enforce it if he has relied upon it and changed his legal position. It is argued that the principal weakness of the Doctrine of Promissory Estoppel is that it is defensive and not offensive. It can only be relied upon by the defendant as a defence. However, the so called Doctrine of Proprietary Estoppel which is based on ownership can be used both as a shield and as a sword. Courts however have observed that there is no distinction between promissory and proprietary estoppel.

Summary

In this topic, we have discussed the nature and effect of the second set of elements of a valid contract, that is, consideration and intention to create legal relations. Not all agreements are intended to create legal relations. That means that not all agreements are intended to invite the law to govern them. Some are entered between siblings, parents, friends etc. and are therefore social in nature. Unless there is an express intention to invite the law to govern such contracts, the agreements will not be legally binding on the parties. We have also discussed the rules governing capacity to enter a contract. The law considers as incapacitated those who do not have capacity to contract. You are advised to revisit these rules and understand them well.

Class activity

Contract drafting, guided reasoning, debates as to what amounts to consideration and “intention”

Discussion questions

1.     Critically discuss the nature and effect of promissory estoppel on the common law doctrine of consideration

2.     The law does not recognise third parties who are not privy to a contract. They cannot, therefore, sue or be sued under a contract that they are not party to. Are there any exceptions to this general rule?

3.     Can you satisfactorily advise a client on whether their contract is valid and satisfies all the elements of a contract? if you cannot, you are advised to revise these materials

TOPIC 4 (WEEK 6): CONTENTS OF A CONTRACT

Learning outcomes

By the end of the topic, learners should be able to:

1.     Reflect on and remember the doctrine of freedom of contract: that parties are at liberty to decide the contents and format of their contract and that the law only comes in to enforce the sealed agreement

2.     Differentiate between conditions, warranties and innominate terms

3.     Draft a contract

Content

Parties negotiating a contract make many statements some of which are intended to be terms while the others are mere representations. Whereas terms form the content of the contract, representations are mere inducements and if false they are referred to as misrepresentations and may affect the contract. Whether a statement was intended to be a term or representation is a question of fact and courts are guided by the following rules or presumptions in so ascertaining:

1.     Time Gap: If the duration between making the statement and the conclusion of the contract is long, it is presumed to be a representation and if short it is deemed to be a term.

2.     Guarantee: If a party to the negotiations appears to guarantee its statements, they are presumed to be terms.

3.     Special Knowledge: If either of the parties has special knowledge in relation to the subject matter of the contract, its statements are presumed to be terms. In Oscar Chess Ltd v Williams [1957] EWCA Civ 5, the defendants sold a Morris car to the claimants, who were motor traders, for £290. The defendants provided a copy of the vehicles first registration indicating that the car was first registered in 1948. Some eight months later the claimants became aware that the car had actually been registered in 1939 and was therefore only worth £175. The defendant honestly believed that the car was a 1948 model. The claimants claimed damages for breach of contract. The issue in this context was whether the statements given by the defendants constituted a warranty as to the age of the car. The Court of Appeal found that the defendants’ comments did not constitute a warranty. More importantly, the court set out a number of considerations that should be made when assessing whether a statement is a warranty. (1) Where an assumption is fundamental to a contract, it does not mean that it is a term of the contract. (2) The term warranty means a binding promise as well as a subsidiary, non-essential, term of a contract. (3) A warranty must be distinguished from an innocent misrepresentation. (4) Whether a warranty is intended must, judged objectively, be based on the parties’ words and behaviour. (5) Where one party makes a statement, which should be within his own knowledge, but not the knowledge of the other, it is easy to infer a warranty. If the party states that it is not within his knowledge and is information passed from another, a warranty is less easily inferred. (6) An oral representation repeated in writing suggests a warranty, but the issue is not conclusive. Neither is the fact that it is not stated in writing.

However in Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR, the claimant, Dick Bentley, was aware of the defendant, Harold Smith’s, reputation as an expert in prestige cars and requested that the defendant keep an eye out for a well vetted and kept Bentley car, as he wished to purchase one. When the defendant obtained a Bentley, he informed the claimant and recommended it to him, stating that the vehicle had been previously owned by a German man who had replaced some of the car’s original parts and had only driven approximately 20,000 miles on the car since the replacements, meaning the car was in good shape. The claimant subsequently purchased the vehicle, however faults soon developed. As per warranty, the defendant made some repairs, yet with the development of more faults it became apparent that the car had in fact travelled many more miles than originally believed since the replacement of parts. The claimant thus brought an action against the defendant for breach of contract and seeking damages. In response, the defendant asserted he had made an innocent misrepresentation. The issue was whether the defendant’s statement as to the quality of the vehicle could be deemed a term of contract given his expertise as a prestige car dealer. The Court found for the claimant, viewing the statement as a contractual term. They determined that as the defendant had greater expertise, as a car dealer, the claimant was reasonably entitled to rely upon a representation from them regarding the subject of their expertise

The terms can either be express or implied.

1. Express Terms

These are the oral and written terms agreed upon by the parties. Written terms prevail over oral terms. If contractual terms are written, oral evidence is generally not admissible to vary or explain the written terms. However, such evidence is admissible to prove that:

1.     The contract was subject to a particular trade usage or custom.

2.     The parties had not incorporated all the terms into the document.

3.     The parties had agreed to suspend the agreement until some event occurred. If handwritten, printed and typed terms contradict, the handwritten terms prevail as they are a better manifestation of the parties’ intentions. It was so held in Glynn v Margetson Co 1893 AC 351. In this case, a vessel, the Zena, was chartered to carry a perishable cargo of Seville oranges from Malaga to a marmalade factory in Liverpool. The bill of lading provided that the master was "at liberty to visit any ports in any order". Although a carrier has a duty to "proceed with reasonable despatch" [2] and not to deviate from the agreed course, the ship visited other ports in Spain and North Africa before heading for Liverpool. The deviation caused delays in delivering the cargo, during which time both the cargo and the market for oranges had deteriorated. The cargo-owner sued. The House of Lords held that the "liberty clause" was in effect an exemption clause which sought to limit the carrier's liability for loss caused through unjustifiable deviation. The court went on to establish the "Main Purpose Rule" which provided that no exemption rule may cut into the main purpose of the contract. Accordingly, the carrier was not permitted the protection of the liberty clause and thus was liable for the loss. Lord Herschell LC declared: ‘Where general words are used in a printed form which are obviously intended to apply, ...to a particular contract, ... I think you are justified in looking at the main object and intent of the contract and in limiting the general words used, having in view that object and intent.’ Although the liberty clause could not be relied upon to condone major breach, it follows that exemption clauses might be allowed to excuse breaches of peripheral or minor obligations.

2. Implied Terms

These are terms which though not agreed to by the parties, are an integral part of the contract. These terms may be implied by statutes or by a court of law. Certain statutes imply terms in contracts entered into pursuant to their provisions. These terms become part of the contract.

Terms implied by Statute

The Sale of Goods Act implies both conditions and warranties in contracts of Sale of goods unless a different intention appears.

Conditions

a)    Right to sell

Under Section 4 (a) of the Sale of Goods Act there is an implied condition that the seller of goods shall have the right to sell when property in the goods is to pass.

b)    Correspond to description.

Under Section 5 of the Act, in a sale by description there is an implied condition that the goods shall correspond to the description.

c)     Fitness for purpose.

Under Section 16(a) of the Act, where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to rely on the sellers skill and judgement, there is an implied condition that the goods shall be reasonably fit for that purpose.

d)    Merchantable Quality

Under Section 16 (b) of the Act, where goods are bought by description from a person who deals in such goods in the ordinary course of business whether a seller or manufacturer, there is an implied condition that the goods will be of merchantable quality.

e)     Sale by Sample.

Under Section 17(1) of the Act, in a sale by sample, the following conditions are implied: 1) The bulk shall correspond with the sample in quality. 2) The buyer shall be afforded a reasonable opportunity to compare the bulk with the sample. 3) That the goods shall be free from any defects rendering them unmerchantable.

Warranties

1.     Quiet possession

Under Section 14 (b) of the Act there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.

2.      Free from Charge or encumbrance

Under Section 14 (c) of the Act there is an implied warranty that the goods shall be free from any charge or encumbrance not made known to the buyer when the contract was made.

Terms Implied By Courts of Law

Courts of law reluctantly imply terms in contracts as it is the duty of the parties to agree as to what the contractual terms shall be. However in certain circumstances, courts are called upon to imply terms in contracts and do so for 2 reasons:

a) To give effect to the intentions of the parties.

b) To facilitate commercial transactions or give business efficiency.

Courts of law imply terms in contracts on the basis of:

1. The reasonable by stander test.

2. Trade usages and customs.

The reasonable by-stander test

Under this test a court will imply into a contract any term which a reasonable person overhearing the contract being made would have implied. In Hassanali Issa and Co. V Jeraj Produce Store 1967 E.A. 55, the plaintiff repaired the defendant’s motor cycle. However, the defendant did not collect the repaired item until after 1 year. The plaintiff demanded repair and storage charges. The defendant refused to pay storage charges on the ground that it had not been agreed. The plaintiff threatened to sue the defendant. As a consequence, the defendant wrote a cheque for both amounts but it was dishonoured. The plaintiff sued. It was held that the defendant was liable to pay storage charges. The court implied into the contract a term that if a repaired item is not collected within a reasonable time, the party undertaking storage is entitled to reasonable storage charges.

In The Moorcock (1889) 14 PD 64, the owners of the ship called The Moorcock contracted for space at a wharf owner's jetty in order to unload The Moorcock's cargo. While docked, the tide went down to a point where the hull of the ship hit a ridge, causing damage to the ship. The plaintiff argued that the wharfingers were responsible to ensure that his vessel would remain safe while docked. The wharf owners, in their defense, claimed that there were no provisions in the contract to ensure the vessel's safety and that they could not have foreseen the damage caused to the vessel. The issue before the Court was whether there can be any implied warranty given the circumstances. The trial court found that there was an implied warranty. The Court held for the ship owner, ruling that there was an implied term that the wharfingers had taken reasonable steps to ascertain the state of the riverbed adjacent to the jetty (not, as often stated, an implied term that the jetty would be a safe place to dock). If the wharfingers had taken such responsibility, then they would have discovered the ridge of rock and would have been under the duty to warn the shipowners of the potential hazard. Failure to warn would have been actionable in tort. Therefore, this very restricted term was sufficient to provide protection to the shipowners as it would have be necessary to give the contracted business efficacy. Bowen LJ stated that any implied warranties must be based on the presumed intentions of the parties. An implied warranty may be read into a contract for reasons of "business efficacy," and in order to maintain the presumed intention of the parties. As Bowen LJ said: “…In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men; not to impose on one side all perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events as it must have been in the contemplation of both parties that he should be responsible for in respect to those perils or chances…” Bowen LJ looked at the presumed risks of the agreement and who was expected to bear them. The wharfingers were in such a position that they could have discovered there was a risk of damage to the ship, and would have been in the best position to judge the safety of the vessel.

Trade usages and customs

A court of law may imply a trade usage or custom into a contract if it is proved that the transaction was subject to it. The party relying on the trade custom must prove that: 1. The custom exists. 2. Is certain. 3. Is reasonable. 4. Is known to the parties and 5. The parties had not exempted the custom from their transaction. It was so held in the case of Harilal & Co.v Standard Chartered Bank Ltd (1967) EA 512.

In Fluery and King v. Mohamed Wali & Another, the plaintiff bought 1000 handkerchiefs from the defendants and the same were delivered in batches of 30. The plaintiff took delivery but sued the defendant for a reduction in the purchase price. It was proved that in Zanzibar there was a trade usage that handkerchiefs bought in bulk were supplied in dozens. The court implied the custom into the contract and held that the plaintiff was entitled to the reduction in the price as he had to unpack and repack the pieces in dozens.

Contractual terms may be conditions, warranties or innominate terms.

1.     Conditions

This is a term of major stipulation in a contract. It runs to the root of the contract. It is part of the central theme of the contract. If a condition is breached, it entitles the innocent party to treat the contract as repudiated and to sue in damages. In Poussard v Spiers and Pond (1876) 1 QBD 410, the Claimant (Poussard) was an opera singer. She was contracted by the defendant to perform in that capacity for a duration of three months. This was subject to certain conditions, such as a salary of £11 per week, a start of “on or about” the 14th of November and an option to re-engage the Claimant’s services for another three months for a salary not exceeding 14 pounds per week. Instead of the 14th of November however, the launch performance was subsequently scheduled for the 28th of November, to which the Claimant gave no objection. However, she fell ill just before the start of the opera and could not sing for the first three days. The defendant hired another singer as potential cover and then actual cover when the claimant could not sing for the first three days of performances. Once the Claimant was well again, she wanted to take up her position in the performance but this was refused by the Defendant. An action for wrongful dismissal was then launched against the defendant. At trial, the jury found in favour of the defendant and awarded them the right to claim £83 from the Claimant, as it had been reasonable to hire her replacement. The Claimant appealed against this. The issue in this case was whether failing to turn up to the first day of performance amounted to a breach of a condition of the contract. It was held that failure to turn up did amount to a breach of a condition of the contract as this went to its very root and that Spiers were therefore free to rescind the contract.

2.     Warranties

This is a minor term of a contract or a term of minor stipulation. It is a peripheral or collateral term that does not run into the root of the contract. If breached, it entitles the innocent party to sue in damages only as the contract remains enforceable and both parties are bound to honour their part of the bargain. In Bettini v Gye (1875) LR 1 QBD, the claimant, Alessandro Beacttini (a tenor) entered into an agreement with the defendant, Frederick Gye. The terms of that agreement were that Bettini would not perform within 50 miles of London in any venue, apart from the Royal Italian Opera Covent Garden within the time period of 1 January 1875 to 1 December 1875. Further, between 30 March 1875 and 13 July 1875, Bettini would perform for Gye in return for £150 per month. The agreement also stipulated that Bettini must be in London 6 days before rehearsals “without fail”. Bettini however arrived two days before his performance period was to begin. Gye however declined to have him perform at his opera. The issue in the case was whether the requirement to be in London “without fail” 6 days before the start of rehearsals was a condition of the contract and therefore, whether Gye could rescind the contract on the basis of the breach of that term. Blackburn J held that this requirement did not amount to a condition, but was instead a warranty which meant that Gye could not terminate the contract on that basis. A breach of this warranty is not a repudiation of the contract, and Gye would only have an action in damages. In order for to determine whether the contract was repudiated, the court needed to ask whether what was breached was a term.

“…going to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different from what the defendant has stipulated for…” (Blackburn J)

A similar holding was made in Kampala General Agency Ltd Vs Mody's (EA) Ltd [1963] EA 549 where the parties had agreed to buy a large quantity of cotton deliverable at Saroti. However the seller took the cotton to another town named Aloi where the buyer had a cotton ginnery. The buyer refused to take delivery on the ground that the misdelivery was a breach of a condition. However, it was held that it was a breach of a warranty and the buyer was only entitled to damages.

3.     Innominate Terms

These are terms of a contract categorized as neither conditions nor warranties. The breach of such terms may be attended by trivial or grave consequences. The remedy available depends on the nature, effect and consequence of the breach. It was so held in Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962) EWCA Civ 7. Under the English sale of goods principles, a condition is a term whose breach entitles the injured party to repudiate the contract, but a breach of warranty shall give rise only to damages. In this case, Diplock LJ proposed that some terms could lead either to the right to terminate a contract as a remedy, or to the mere entitlement to damages (without a right to terminate). What mattered was not whether a particular contract term was called a "warranty" or a "condition", but how serious was the breach of the term. In short, the test for whether or not one may repudiate has now become, "does the breach deny the claimant the main benefit of the contract?" However, modern commercial custom has since established that some breaches, such as failure to meet a "notice of readiness to load" a sea cargo, will always be repudiatory.

In this case, the Ship owners let the vessel, Hong Kong fir, to charterers for a period of 24 months. Clause 1 of the contract obliged the owners to deliver a “seaworthy” vessel and Clause 3 further obliged them to maintain the vessel’s seaworthiness and good condition. Upon initial delivery, the vessel’s machinery was described to be in ‘reasonably good condition,’ yet required constant maintenance due to its age. The vessel owner’s chief engineer was inefficient and incompetent, and the vessel suffered numerous breakdowns and delays. The charterer’s repudiated the contract, alleging a breach of the obligations to deliver and maintain a seaworthy vessel. The questions arose as to (1) whether the seaworthiness obligation constituted a ‘condition’ of contract, the breach of which entitles the party to repudiate; and (2) whether the breach caused delays of a sufficient degree so as to entitle the charterer to treat the contract as repudiated. Firstly, the Court held that in order to construe whether a contractual clause constitutes a condition precedent, the breach of which permits repudiation, or an innominate term, the breach of which permits damages, depends on a holistic assessment of the contract’s surrounding circumstances in determining the intention of the parties in their treatment of the clause. On the facts, the Court held that the seaworthiness and maintenance clause was not viewed as so fundamental so as to amount to a condition of the contract, but rather constitutes a term allowing damages. Secondly, the Court held that an innocent party cannot treat the contract as repudiated due to delays, however significant, if the breach falls short of a frustration of the contract rendering performance impossible. On the facts, the delays, albeit serious and repeated, did not amount to a frustration of contract that entitled repudiation of the contract, but merely a breach allowing for damages

EXEMPTION OR EXCLUSION CLAUSES (Limiting or Excluding clauses)

The theory of freedom of contract assumes that parties are free to contract with one another and can protect their own interests. It assumes parity in contractual bargains which is not necessarily the case. The stronger party may insert terms favourable to it. This is the genesis of exemption clauses. An exemption clause is a clause inserted in a contract by the stronger party exempting, itself from liability or limiting the extent of any liability arising under the contract. These clauses are common in standard form contracts e.g. conveyance of goods, hire purchase agreements contracts of insurance etc. These clauses are justified on the theory of freedom of contract. For an exemption clause to be given effect, the court must be satisfied that it was an integral part of the contract.

It must have been incorporated into the contract. For example, in L'Estrange v F Graucob Ltd [1934] 2 KB 394, the claimant, L’Estrange, contracted to purchase a slot machine for cigarettes from the defendant, Graucob, and the agreement included an express clause stating ‘This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement, or warranty, statutory or otherwise not stated herein is hereby excluded’. The machine proved to be faulty and the claimant thus brought an action against the defendant, alleging that the machine breached the Sale of Goods Act by not being of merchantable quality. The defendant asserted that the statute was made irrelevant by the express clause, and that he was not in breach of the agreement they had made. The claimant responded she had been unaware of the clause as she had not properly read the agreement and it ought not to apply. The issue was whether the clause excluding all terms not stated in the contract should be deemed effective and binding. The Court of Appeal found for the defendant, determining that the express provisions of the contract were binding and effectively excluded the relevance of statutory sales provisions. Furthermore, the fact that the claimant had not properly read the contract did not impact its validity, as in signing the contract she consented to be bound by its contents. Significantly this case emphasizes the Court’s respect for sanctity of contract.

Incorporation of exemption clauses in contracts

An exemption clause may be made part of a contract: -

a.     By signature

b.     By notice

Incorporation by signature

If a document signed by the parties to a contract contains an exemption clause, the court must be satisfied that: -

a. The document contained the terms of the contract between the parties

b. It was signed by the party affected voluntarily Signature prima facie means acceptance.

A party cannot after signing a document argue that it did not read, understand or that the print was too small. It was so held in L’Estrange V. Graucob. However if there is evidence that the signature was procured by fraud or misrepresentation of the contents of the document the signature is voidable at the option of the innocent party.

In Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805, The claimant, Curtis, took her wedding dress to be cleaned by a professional laundry service, the defendants, the Chemical Cleaning and Dyeing Company. Upon purchasing their services, the defendants asked the claimant to sign a form, and she asked the service assistant what the consequences of signing would be. The assistant replied that the form merely included an exclusion of liability clause for any damage they may cause to any beading and sequins on garments, however in actuality the exclusion of liability clause pertained to all possible damage that may befall a garment whilst being cleaned. When the claimant returned to pick up her dress, it had been damaged by the defendants and she thus brought a claim for damages against them. In response, the defendants submitted that she had no grounds for a claim due to the exclusion of liability clause. The issue was whether the exclusion of liability clause was binding upon the claimant given that the service assistant had misrepresented its consequence. The Court of Appeal found for the claimant, viewing that whilst a party is typically bound by all the contents of a signed written contract, even where they had not properly read the contract, a clause ought not to be deemed legally enforceable where the drafting party misrepresents the effect of a clause to the other party. Thus, the exemption of liability clause was not deemed properly incorporated into the contract and the claimant was awarded damages.

Incorporation by notice

When the exemption clause is not contained in a document requiring any signature, the court must be satisfied that the party affected by the clause was aware of its existence when the contract was entered into. In Parker v South Eastern Railway [1877] 2 CPD 416, Parker paid to leave his bag in the cloakroom of South Eastern Railway (SER). There was a notice within the cloakroom stating that SER would not be responsible for any deposits exceeding £10 in value. The tickets given to customers on making their deposit had the same notice printed on them in legible writing. Parker’s bag exceeded £10 in value and it was lost or stolen. Parker successfully claimed against SER for his lost bag and SER appealed. Parker argued that he had not seen the notice in the cloak room and had not read the terms on the ticket, but had simply placed it into his pocket believing it to be a mere receipt for his deposited goods. As such, SER should not be able to rely on the exclusion clause because it would be unreasonable to expect customers to know that a receipt for deposited goods contains special conditions. SER claimed it was irrelevant whether Parker had read the notice or the ticket, because a party could still be bound by a contract irrespective of whether he had read its terms. They argued they had taken sufficient steps to bring the terms to customers’ attention. A re-trial was ordered. The judge’s direction at first instance that Parker was not bound by terms he had failed to read was incorrect. Parker would not be bound by terms he did not know were printed on the ticket, but where he knew there were terms on the ticket, or that there was writing on the ticket, he would be bound providing the jury were satisfied he had been given sufficient notice.

However, a belated notice of an exemption clause has no effect on the contract as it is not part of it.

In Olley v Marlborough Court Ltd [1949] 1 KB 532, Olley was a guest in the defendant hotel. On arrival, Olley paid for a week’s board in advance and then went to the room. In the room, a notice was displayed stating the proprietors would not be responsible for any items lost or stolen, unless handed to them for safe keeping. Olley left the room and deposited her key on the board in reception before leaving the hotel. The key was taken and several items were stolen from her room. Olley sought damages in negligence. Olley contended the hotel were negligent in failing to appropriately safeguard the keys to guest rooms. She further claimed there was an implied term within the contract between herself and the hotel that they would take reasonable care of her property in her bedroom. Olley asserted the failure to supervise the keys amounted to a breach of that contract. The hotel argued the guests were bound by the terms displayed on the notice in the bedrooms, and therefore, the hotel had effectively excluded liability even if they had been negligent. The notice was clearly visible in the bedrooms and the exclusion clause unambiguously absolved the hotel of any liability for stolen items. The hotel also argued that Olley had been contributorily negligent by depositing her key on the board in reception. Olley was successful in her claim and recovered the cost of the stolen items in their entirety. The exclusion clause had not been successfully incorporated into the contract because the contract was concluded at reception, and the notice purporting to exclude liability was not visible until after the contract was formed, when the guest entered the bedroom.

A similar holding was made in Lougher v Kenya Safari Lodges & Hotels Ltd [1977] eKLR, where the plaintiff who was a guest in a hotel was injured near the swimming pool next to which was a notice exempting the hotel from liability for injuries sustained by persons near the swimming pool. It was held that the hotel was liable as the exemption clause was not part of the contract.

It should be noted that at common law exemption clauses contained in tickets or receipts issued after payment of a sum of money are not deemed to be part of the contract as the ticket or receipts is evidence of payment and not the basis of the contract

In Thornton v Shoe Lane Parking Ltd [1971] QB 163, Thornton drove his car to a car park. Outside the car park, the prices were displayed and a notice stated cars were parked at their owner’s risk. An automatic ticket machine provided a ticket, a barrier was raised and Thornton parked his car. In small print on the ticket it was stated to be issued subject to conditions displayed on the premises. On a pillar opposite the machine was a notice stating the owners would not be liable for any injuries occurring on their premises. Thornton had an accident and sought damages from Shoe Lane Parking (SLP). SLP contended the contract was made when Thornton received the ticket and parked his car. The ticket amounted to a contractual document which effectively referred to the terms which were clearly visible on the premises. They had taken reasonable steps to bring them to Thornton’s attention, and they could rely on the exclusion clause and were not liable. Thornton argued the notice outside the car park amounted to the offer and the ticket machine could not then seek to introduce new terms because the contract was already formed. He contended if terms are to be successfully incorporated, they should be communicated before money is placed into the machine, or before the machine is operated. It was held that the exclusion clause had not been successfully incorporated into the contract. SLP had not done enough to bring the existence of the terms to Thornton’s attention prior to the contract formation. The offer was contained within the notice at the entrance, and Thornton accepted the offer on those terms when he drove in. It was too late to seek to incorporate further terms after he had driven in to the car park.

A similar ruling was made in Chapelton v Barry Urban District Council [1940] 1 KB 532. In this case, Chapelton wished to hire a deck chair and approached a pile of chairs owned by Barry Urban District Council (BUDC). A notice adjacent to the chairs detailed the cost of hire and advised customers to obtain tickets and retain them for inspection. Chapelton purchased tickets and placed them in his pocket. On one side of the tickets, the council purported to exclude liability for any accidents caused by hiring the chairs. Chapelton sat down and the canvas gave way. He sought damages from BUDC and it was held they had effectively excluded liability. Chapelton appealed. Chapelton argued he had not been given sufficient notice of the clauses printed on the ticket and, therefore, he should not be bound by them. There was nothing on the notice adjacent to the chairs, or on the face of the ticket to alert customers’ attention to the clauses on the back. The ticket should be regarded as a receipt provided after the formation of the contract. BUDC contended Chapelton did have notice of the terms because the exclusion clause was clearly printed on the ticket. The notice adjacent to the deck chairs was merely an invitation to treat. The ticket was not merely a receipt but it amounted to a written contract detailing the terms by which the parties agreed to be bound. Chapelton’s appeal was successful. The ticket was held to be a receipt and the conditions by which BUDC were held to have offered the chairs for hire were those contained in the notice, and the notice did not contain any exclusion clause. BUDC had not, therefore, brought Chapelton’s attention to the clause and they could not rely on it.

Rules relating to the enforcement of exemption/exclusion clases

For a court of law to give effect or consider the effect of an exemption clause it must be satisfied that the exemption clause was an integral part of the contract. Since exemption clauses are generally unfair to the weaker party, Courts have evolved rules which to some extent ensure that the unfairness is mitigated.

1.     An exemption clause must have been incorporated into the contract either by notice or signature. The party affected must have been aware of the exemption clause when the contract was entered into.

2.     If contractual terms are contained in a document, it must be evidence that the document was the basis of the contract and was signed by the parties voluntarily as was the case of L’Estrange v. Graucob. 

3.     For an exemption clause to be given effect it must be clear and definition free from vagueness or ambiguity. In the event of any ambiguity the clause is interpreted contra proferentes. This is the Contra Proferentem Rule of interpretation under which clauses are interpreted restrictively against the party relying on them. As was the case in Omar Sale v. Besse and Co. Ltd, where in a contract of sales of goods, the seller exempted itself from liability for breach of ‘warranties’. It breached an implied condition in the Sale of Goods Act. A question was whether the term warranties included conditions. It was held that since the term warranties were vague, it had to be interpreted restrictively against the seller and therefore did not include conditions. Hence the seller was liable.

4.     As a general rule, only person’s privy to a contract can take advantage of an exemption clause in the contract. It was so held in Scruttons Ltd v Midland Silicones Ltd [1961] UKHL 4. In Halal Shipping Co. v. SBA and Another, a contract of carriage of goods by sea exempted the carrier from liability for any damage to the goods in the course of transit. The goods were damaged in the course of unloading from the ship and the plaintiff sued. The carrier relied on the exemption clause and escaped liability. The unloading company purported to rely on the same clause. It was held that it could not do so as it was not party to that contract and was therefore liable.

5.     A court of law would generally not give an exemption clause effect if doing so would enable the party evade what amounts to be the fundamental obligation of the contract or a fundamental breach. This rule is based on the premise that every contract has a fundamental obligation to be discharged and a party must not use an exemption clause to evade such obligation. In Karsales (Harrow) Ltd v Wallis [1956] EWCA Civ 4, the defendant inspected a vehicle and decided to take it on Hire Purchase terms. To facilitate the transaction, the vehicle was sold to the plaintiff for hiring to the defendant. The defendant completed the Hire purchase application form and paid a deposit. The form contained a clause to the effect that “no condition or warranty that the vehicle is roadworthy or fit for any purpose is implied herein”. One day, the defendant saw a vehicle outside his house which resembled the vehicle in question. However on scrutiny he discovered it was a mere shell in that the cylinder head was broken, all valves were burnt and 2 pistons were broken. The vehicle could not move. The defendant refused to take delivery or pay instalments and was sued. He pleaded the condition of the vehicle. The plaintiff relied on the clause exempting it from liability. It was held that though the exemption clause was part of the contract. It could not be given effect as to do so would have enabled the plaintiff evade a fundamental obligation of the contract, as it had contracted to sell a vehicle. But exempted itself from liability if the subject matter turned out not to be a vehicle at all. The party arguing that a fundamental breach has been committed must prove it and must seek judicial redress within a reasonable time.

Summary

This topic has presented the contents of a contract. The contents of a contract are basically the terms of the contract and it is the parties who decide which terms will govern their agreement. The obligations of each of the parties to the contract are clearly stated in the document. Some contracts could be as brief as a single page, or even half a page, yet other contracts could be so huge that they form books or booklets. It all depends on the nature and subject matter of the contract. For example, benefit-sharing agreements in mining projects made between the government and mining companies are extremely huge. Construction agreements are also huge. A simple agreement for sale of land is, however, very brief. Other agreements are entered through word of mouth and are not included in any document.

Activity

Contract drafting; tracing the contents of a contract; sample terms, conditions, warranties of a contract.

Discussion questions

1.     Differentiate between conditions and warranties

2.     From the sample contracts sent to you, isolate the clauses that are conditions and those that are warranties. Can you identify any innominate terms in any of those contracts?

TOPIC 5 (WEEK 7): CONSTRUCTION/INTERPRETATION OF CONTRACTS

Learning outcomes

By the end of the lesson, learners should be able to explain and apply the various rules of contract interpretation

Content

In its broad sense, construction of a contract denotes the determination of the total legal effect of the agreement concluded by the parties. This may involve two entirely distinct processes: interpretation of the language used by the parties and implication of terms where the contract is silent.

The interpretation process

The contextual approach in interpretation of contracts was laid down by Lord Goffman in Investors Compensation Scheme Ltd. v West Bromwich Building Society [1997] UKHL 28. In this case, Investors received negligent advice from their financial advisers, solicitors and building societies, including West Bromwich Building Society ('West Bromwich BS'). They had claims in tort and for breach of statutory duty. The investors had been encouraged by financiers to enter "Home Income Plans", which meant mortgaging their properties to get cash that they would put into equity linked bonds. They lost money when house prices and stocks fell. Under the Financial Services Act 1986 section 54 the Securities and Investments Board established the Investors Compensation Scheme Ltd, where investors could be directly compensated for their losses, and ICS would try recoup the cost by suing the building societies on everyone’s behalf. Accordingly, to get the compensation, investors signed a contract to assign their claims to ICS. But in section 3(b) of the claim form the assignment excluded ‘Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society’, so that investors could still sue on some claims individually. While ICS Ltd was suing, West Bromwich BS argued that ‘or otherwise’ meant that claims for damages, as well as rescission, had not been assigned. ICS Ltd argued that the clause actually meant that claims for damages had been assigned, because ‘or otherwise’ referred to rescission based claims other than undue influence, but not damages. Evan-Lombes J held that the right to claim rescission had been retained but the right to claim damages had been assigned. Leggatt LJ overturned the High Court, and ICS Ltd appealed.

The House of Lords held by a majority that the right to claim rescission was retained by the investors, but the right to claim for damages had indeed been assigned. Construed in its context, the words ‘Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society’ in effect had meant 'Any claim sounding in rescission (whether for undue influence or otherwise)'. It followed that ICS Ltd could sue West Bromwich BS, and other building societies, to vindicate the investors' claims. Lord Lloyd dissented

See the following judgment by Lord Goffman to which Lord Goff, Lord Hope and Lord Clyde concurred.

“In the Court of Appeal, Leggatt L.J. said that the judge's interpretation was "not an available meaning of the words." "Any claim (whether sounding in rescission for undue influence or otherwise)" could not mean "Any claim sounding in rescission (whether for undue influence or otherwise)" and that was that. He was unimpressed by the alleged commercial nonsense of the alternative construction. My Lords, I will say at once that I prefer the approach of the learned judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated.

The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191, 201: "... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common-sense." If one applies these principles, it seems to me that the judge must be right and, as we are dealing with one badly drafted clause which is happily no longer in use, there is little advantage in my repeating his reasons at greater length. The only remark of his which I would respectfully question is when he said that he was "doing violence" to the natural meaning of the words. This is an over-energetic way to describe the process of interpretation. Many people, including politicians, celebrities and Mrs. Malaprop, mangle meanings and syntax but nevertheless communicate tolerably clearly what they are using the words to mean. If anyone is doing violence to natural meanings, it is they rather than their listeners.

[...]

Finally, on this part of the case, I must make some comments upon the judgment of the Court of Appeal. Leggatt L.J. said that his construction was "the natural and ordinary meaning of the words used." I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in choosing between competing unnatural meanings. Secondly, Leggatt L.J. said that the judge's construction was not an "available meaning" of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Alice Through the Looking Glass. Alice and Humpty Dumpty were agreed that the word "glory" did not mean "a nice knock-down argument." Anyone with a dictionary could see that. Humpty Dumpty's point was that "a nice knock-down argument" was what he meant by using the word "glory." He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant.”

For this reason therefore, the starting point for the court is to identify the intention of the contracting parties. This is an objective test; the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean". The genesis of this approach was the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38. In this case, Persimmon agreed to get planning permission, build some residences on Chartbrook’s land at 1 to 9 Hardwicks Way, Wandsworth, and then sell the properties. Chartbrook would pay for it, subject to a balancing payment or ‘additional residential payment’ (ARP) defined as ‘23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value less the costs and incentives.’ This would be paid by Persimmon to Chartbrook. Chartbrook calculated this to mean £4,484,862 but Persimmon said on a proper construction the amount was £897,051. Persimmon argued that even if they were wrong on construction of the document, rectification should be granted, and if not their pre-contractual negotiations should be taken into account. Chartbrook argued the precontractual negotiations were inadmissible. The High Court and Court of Appeal agreed with Chartbrook's interpretation. Persimmon Ltd appealed on the interpretation given and argued that if they failed on those grounds, the contract should be construed in light of previous negotiations, or that the court should allow for the document to be rectified, because it was clear that the intentions of the parties was different from that found. Accordingly, it contended that the rule in Prenn v Simmonds[1] that pre contractual negotiations should be ignored, was an illogical rule and should be overturned. The House of Lords held that Persimmon’s interpretation was right, and the amount due was £897,051. There was no limit to the ‘red ink’ that the court could use to correct the verbiage when it was clear that in its commercial context, an agreement could not make sense. The only requirement was that it should be clear to a reasonable person what was meant. It was rejected that pre-contractual negotiations should be taken into account. If they had not so held, they would have granted rectification. See the dictum of Lord Hoffman below, to which Lord Hope, Lord Rodge, and Lord Walker agreed:

15. It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand, Lawrence Collins LJ thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another: compare the Kirin-Amgen case [2005] RPC 169 at pp. 189-190. Such a division of opinion occurred in the Investors Compensation Scheme case itself. The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed.

16. I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense.

[...]

27. If your Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of very considerable general importance and I think it is appropriate that your Lordships should deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmon’s argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.

28. The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn v Simmonds [1971] 1 WLR 1381...

30. To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (“well-established and salutary", per Lord President Rodger; Alexiou v Campbell [2007] UKPC 11 (“vouched by…compelling authorities", per Lord Bingham of Cornhill.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the Lord Justice Clerk in Inglis v John Buttery & Co (1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.

31. In Prenn v Simmonds [1971] 1 WLR 1381, 1384 Lord Wilberforce said by way of justification of the rule: “The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus.... In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found....

32. Critics of the rule, such as Thomas J in New Zealand (Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523, 538-549) Professor David McLauchlan (“Contract Interpretation: What is it About?” (2009) 31:5 Sydney Law Review 5-51) and Lord Nicholls of Birkenhead (“My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr Christopher Nugee QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.

33. I do however accept that it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule, as I said in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord Wilberforce, that will usually be the case. But not always. In exceptional cases, as Lord Nicholls has forcibly argued, a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523. Thomas J thought he had found gold in the negotiations but the Privy Council said it was only dirt. As I have said, there is nothing unusual or surprising about such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant.

34. It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the whole rejected by academic writers but supported by some practitioners.

35. The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to be taken from those who took part in oral negotiations. Not only would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement (as in the Yoshimoto case) would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in Prenn v Simmonds and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation.

36. There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. As Popham CJ said in the Countess of Rutland’s Case (1604) 5 Co Rep 25, 25b, 26a: “it would be inconvenient, that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory.”

[...]

38. I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. Your Lordships’ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart [1993] AC 593 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements.

39. Supporters of the admissibility of pre-contractual negotiations draw attention to the fact that Continental legal systems seem to have little difficulty in taking them into account. Both the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) provide that in ascertaining the “common intention of the parties", regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the United Nations Convention on Contracts for the International Sale of Goods (1980). But these instruments reflect the French philosophy of contractual interpretation, which is altogether different from that of English law. As Professor Catherine Valcke explains in an illuminating article (“On Comparing French and English Contract Law: Insights from Social Contract Theory”) (16 January 2009), French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said or did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect. English law, on the other hand, mixes up the ascertainment of intention with the rules of law by depersonalising the contracting parties and asking, not what their intentions actually were, but what a reasonable outside observer would have taken them to be. One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a Continental system.

40. In his judgment in the present case, Briggs J thought that the most powerful argument against admitting evidence of pre-contractual negotiations was that it would be unfair to a third party who took an assignment of the contract or advanced money on its security. Such a person would not have been privy to the negotiations and may have taken the terms of the contract at face value. There is clearly strength in this argument, but it is fair to say that the same point can be made (and has been made, notably by Saville LJ in National Bank of Sharjah v Dellborg [1997] EWCA Civ 2070, which is unreported, but the relevant passage is cited in Lord Bingham’s paper in the Edinburgh Law Review) in respect of the admissibility of any form of background.

41. The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Your Lordships do not have the material on which to form a view. It is possible that empirical study (for example, by the Law Commission) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. But the determination of where the balance of advantage lies is not in my opinion suitable for judicial decision. Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But that power was intended, as Lord Reid said in R v National Insurance Comrs, Ex p Hudson [1972] AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were “thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy". I do not think that anyone can be confident that this is true of the exclusionary rule.

42. The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

[...]

47. On its facts, the Karen Oltmann was in my opinion an illegitimate extension of the “private dictionary” principle which, taken to its logical conclusion, would destroy the exclusionary rule and any practical advantages which it may have. There are two legitimate safety devices which will in most cases prevent the exclusionary rule from causing injustice. But they have to be specifically pleaded and clearly established. One is rectification. The other is estoppel by convention, which has been developed since the decision in the Karen Oltmann: see Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84. If the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning. Both of these remedies lie outside the exclusionary rule, since they start from the premise that, as a matter of construction, the agreement does not have the meaning for which the party seeking rectification or raising an estoppel contends.

Baroness Hale agreed with the result, but also said the following.

“99. But I have to confess that I would not have found it quite so easy to reach this conclusion had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the matter crystal clear. This, to me, increased the attractions of accepting counsel’s eloquent invitation to reconsider the rule in Prenn v Simmonds [1971] 1 WLR 1381, the pot so gently but effectively stirred by Lord Nicholls of Birkenhead in his Chancery Bar Association lecture of 2005 ([2005] 121 LQR 577). My experience at the Law Commission has shown me how difficult it is to achieve flexible and nuanced reform to a rule of the common law by way of legislation. In the end abolition may be the only workable legislative solution, as eventually happened with the hearsay rule (Law Com No 216 (1993), BAILII: [1993] EWLC 216), The Hearsay Rule in Civil Proceedings). Even that can prove difficult if, on analysis, the view is taken that the rule has no real content, as with the parol evidence rule (Law Com No 154 (1986, BAILII: [1986] EWLC 154), The Parol Evidence Rule). The courts, on the other hand, are able to achieve step-by-step changes which can distinguish cases in which such evidence is “helpful” from cases in which it is not.

100. However, the approach to rectification adopted by Lord Hoffmann would go a long way towards providing a solution. If the test of the parties’ continuing common intentions is an objective one, then the court is looking to see whether there was such a prior consensus and if so what it was. Negotiations where there was no such consensus are indeed “unhelpful". But negotiations where consensus was reached are very helpful indeed. If the language in the eventual contract does not reflect that consensus, then unless there has been a later variation of it, the formal contract should be rectified to reflect it. It makes little sense if the test for construing their prior consensus is different from the objective test for construing their eventual contract. This situation is, and should be, quite different from the situation where one party is mistaken as to its meaning and the other party knows this - the latter should not be permitted to take advantage of the former.

The court looks, therefore, at the contract as a whole and considers not only the words of the relevant clauses, but also the "documentary, factual and commercial context" (see Arnold -v- Britton [2015] UKSC 36). The following considerations will be relevant to the court's analysis: The natural and ordinary meaning of the clause (see BCCI -v- Ali (No.1) [2002] 1 AC 251, where the court held “This is not necessarily the dictionary meaning of the word, but that which is generally understood". But the court will not "attribute to the parties an intention which they plainly could not have had" and will not rewrite the contract (The Antaios Compania Naviera SA -v- Salen Rederierna AB [1985] 1 AC 191 and Co-Operative Wholesale Society Limited -v- National Westminster Bank PLC [1995] 1 EGLR 97)”.  The courts "do not easily accept that people have made linguistic mistakes, particularly in formal documents". However, the worse the drafting of a particular clause, the more readily a court will depart from its natural meaning. Any other relevant provisions of the contract. The overall purpose of the clause and the contract. The facts and circumstances known or assumed by the parties at the time the contract was executed. Commercial common sense. The court will not take into account any subjective evidence of either party's intentions.

What about special or technical meanings?

The court first tries to find the ordinary meaning of words as they are popularly understood but if the context clearly requires a special or peculiar interpretation, the court will accept that special meaning. Technical or scientific words are usually given their technical or scientific meanings unless the context indicates otherwise.

Commercial common sense

The courts will take into account commercial common sense when interpreting a contract. In recent years there has been a shift in emphasis in the importance of commercial common sense when interpreting contractual terms. However, the starting point is the natural meaning of the language used; commercial common sense cannot be relied on to undervalue the importance of the language of the provision which is to be construed. Courts will be slow to reject the meaning of a provision simply because one of the parties made a bad bargain; it is not for the court to improve the positions of the parties by re-writing the contract. However, where there is ambiguity and more than one possible construction, the court will select the interpretation that makes the most commercial sense, the presumption being that the parties would not have intended an uncommercial result (see Rainy Sky SA and Others –v- Kookmin Bank [2011] UKSC 50; and Andrew Wood –v- Sureterm Direct Ltd [2014] EWHR 3240)

Canons of construction

English courts sometimes employ certain "canons of construction" or "rules of thumb" in an attempt to do justice between the parties. However, these principles are just pointers and the court will only resort to applying them if the meaning cannot be found using the general rules of interpretation outlined above.

Clear words. The court will be reluctant to adopt a meaning that gives an unfair result in the absence of clear drafting. For example, the courts have held that unambiguous language is required to exclude certain contractual remedies.

In whose favour should ambiguities be decided? Usually the court will resolve any uncertainty or doubt surrounding a provision against the party who would benefit from the suggested interpretation. This is the so-called "contra proferentem" rule whereby the clause is construed against the party seeking to rely on it. It applies in particular to the party seeking to take the benefit of an exclusion or limitation of liability. However, recent cases indicate that the rule has a very limited role in relation to commercial contracts negotiated between sophisticated parties of equal bargaining strength.

Categories and lists. Where the preceding words are each part of a common genus or category, subsequent words will be interpreted "ejusdem generis", i.e. read as being part of that same class, in the absence of a contrary indication. So, for example, the words "or other inevitable accident" in a clause making reference to "fire, flood, storm, tempest" means other accidents of a similar kind.

Can the court look beyond the contract?

Can the court look beyond the written contract when construing the meaning of a contract? While the court must examine the full background to the contract, it cannot look at prior negotiations or the parties' "declarations of subjective intent". This means that the court cannot look at extrinsic evidence such as antecedent agreements, oral negotiations, exchanges of letters, etc., preceding the contract. However, the Court of Appeal has held that in construing the meaning of an unusual combination of words not defined in the agreement and with no obvious natural and ordinary meaning, the court can "explore the factual hinterland of the agreement" to ascertain how the parties understood the phrase. In so doing the court is not taking into account the parties' "declarations of subjective intent", rather it is identifying the meaning shared by the parties and in effect incorporated into their agreement. Subsequent unintended events If an event occurs which, judging from the language of the contract, was "plainly not intended or contemplated by the parties" at the time the contract was made, the court will give effect to the intention of the parties where it is clear what the parties would have intended.

2 Implication

Implication is the process by which the court arrives at the presumed intention of the parties, but it is clear that in many cases the intention thus attributed to the parties is fictitious since the facts generating the dispute were not within their contemplation at all and no one can tell with confidence how they would have framed the contract if they had addressed their minds to the question. In such cases, the court is in truth reaching a solution by the application of external rules based on considerations of policy though it may disguise this process by use of labels such as “construing the contract” or “deducing the intention of the parties’.  Thus, terms implied by law, whether established by prior authority or enunciated in light of the relationship between the parties and other policy factors will be imported into a contract without the court finding it necessary to consider what the parties would have been likely to agree if they had addressed their mind to the prospect of terms in the question. Similarly, rules of determining whether a contract is frustrated by change of circumstances represent a judicially imposed solution which may be buttressed by appeal to the presumed intention of the parties but which in reality depends on the court’s view of the fundamentality of the change.

If, having regard to the express words of the agreement, it is still not possible to ascertain the meaning, the court may be willing to imply certain terms. However, courts are reluctant to depart from the express wording, particularly if the contract is detailed and appears comprehensive. In practice the situations in which courts are prepared to imply a term into a contract are limited.

Terms implied by law, custom and practice or a prior course of dealing

In particular kinds of contract, for example employment, consumer and landlord and tenant agreements, certain standard terms are implied by legislation and/or common law. In appropriate cases the court will recognise standard practice in particular trades or areas of industry and is willing to imply terms into an agreement to reflect this practice, provided the wording of the contract is not inconsistent with the implication. Finally, if it can be shown that the parties have consistently and clearly dealt with each other on a particular basis the court may be prepared to imply terms to reflect this, again provided the actual wording of the contract does not contradict this.

Terms implied to reflect the parties' presumed intentions

The court will only be prepared to accept other implications if it is satisfied that the implication sought reflects the presumed intention of the parties. The court will look at the particular context of the contract and its language and the relationship between the parties to ascertain if the implication sought can be inferred. The criteria for implying a term were expressed succinctly by the Privy Council in B.P. Refinery (Westernport) Pty Ltd -v- Shire of Hastings (1978) 52 ALJR 20 as follows:

"(1) it must be reasonable and equitable;

(2) it must be necessary to give "business efficacy" to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

 (4) it must be capable of clear expression;

 (5) it must not contradict any express term of the contract."

Further clarification has since been given by the Supreme Court in Marks and Spencer plc -v- BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72. This decision clarified that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances at the time the contract was made, would consider the term to be so obvious as to go without saying or to be necessary for business efficacy. Essentially the court is trying to make the contract workable and to ascertain the parties' presumed intentions (in the sense of what they would have agreed if they had thought about the point)

Summary

The flowchart below gives a broad overview of the general way in which the English courts tend to approach the task of construing disputed or ambiguous wording. Ultimately, however, the "rules" of construction are no more than guidance tools and the particular facts and circumstances of the case determine how they are applied. In practice it is open to judges to select from these tools at their discretion in order to make the contract work, give effect to the parties' (presumed) intentions and to try to achieve reasonable justice between them.

 

3 The Parole evidence rule

If there be a contract which has been reduced into writing, verbal evidence is not supposed to be given of what passed between the parties, either before the written instrument was made, or during the time that it was in a state of preparation so as to add to or subtract from or in any manner to vary or qualify the written contract

This is the classical exposition of the so-called parole evidence rule, a rule which in truth extends to all extrinsic evidence, whether oral or otherwise, and which, moreover, is in some respects a rule of substantive law rather than a mere rule of evidence. Thus, it has been held impermissible to construe a contract by reference to the negotiations that led up to it or the conduct of the parties after conclusion of the contract. Such a rigid rule, characteristic of the law of evidence has little to commend it, and is believed to be widely ignored in practice. Very often, the record of negotiations culminating in the contract is the best guide to the intention of the parties, as is their behaviour subsequently. It is well-established that in construing a contract the court looks at the factual matrix, or business setting, in which it was made. It is clear that it is not confined to cases where the disputed term is ambiguously expressed. This being so, it is hard to see why the court should ignore pre-contract and post-contract acts and documents to construe the contract, even if on its face there is no ambiguity.

The parole evidence rule is in any event subject to numerous exceptions. It does not apply where the evidence establishes the existence of a collateral contract, or where it can be shown that the document was not intended as a complete record of the contract terms. (a typical case is where the contract is partly in writing, partly oral), or where its existence or operation was dependent on some prior unexpressed stipulation, or that it was procured by misrepresentation or was tainted by illegality or that it disguised the true nature of the transaction. Further, the court may order rectification of a document which does not correctly record the agreement between the parties. These exceptions have largely destroyed the rule and today’s judges are more reluctant to use it as a short-cut method of doubtful credibility, preferring to avoid the risk of injustice or even the appearance of injustice by letting in the evidence while requiring it to be of a compelling nature before accepting it in the face of an apparently comprehensive contract document. As that outstanding contract scholar Corbin said some 60 years ago: “The writing cannot prove its own completeness and accuracy”

But where the parties have included an “entire agreement” clause in their contract stating that it represents the entirety of what they have agreed to the exclusion of all prior agreements, the court will usually refuse to give effect to prior supplemental or inconsistent terms

Collateral contracts

One way of surmounting the parole evidence rule is to find that statements by a party preceding the contract were distinct promises constituting a collateral warranty or undertaking, the consideration for this being the other party’s entry into the main contract. The device of the collateral contract has been developed with some vigour by the courts and has been extended to cases where the statement induces the recipient of it to enter into a contract not with the maker of the statement but with a third party. For example, a motor dealer induces a customer to take one of his cars on hire purchase from a finance house by representing the car to be in excellent condition. If the court is satisfied that the representation was a warranty, that is, that it was given as a promise by which the dealer bargained for the customer’s entry into the hire purchase agreement with the finance house, if the representation was false, the dealer will be held liable in damages for breach of the warranty embodied in a collateral contract between him and the customer. Of course liability of this kind cannot logically be confined to cases where the action induced was the representee’s entry into a contract. Any activity bargained for by the warranty suffices to ground an action for damages if the warranty is broken, for the warranty is promissory in nature

Summary

This topic has explained the various approaches to construction of contracts. As noted in the discussion, the rules and approaches to construction of contracts will only arise when the parties to the contract have a dispute and therefore call upon the court to interpret certain clauses in the contract. The courts do not redraft the contract afresh; all they do is to interpret what the parties put down into writing. It is their contract and not the court’s contract.

Activities

Interpreting clauses in sample contracts provided to the class on email

Discussion questions

A question will be sent to you through the e-learning portal and you will be required to apply these rules to interpret the contract in that question.

TOPIC 6: (WEEK 8) VITIATING ELEMENTS (FACTORS AFFECTING CONTRACTS): MISREPRESENTATION AND MISTAKE

Learning outcomes

By the end of this lesson, learners should be able to;

1.     Explain what vitiating elements are

2.     Explain how these elements affect the performance of a contract

3.     Explain how misrepresentation and mistake affect the performance of a contract

4.     Apply these principles in solving real-life contractual problems

Content

VITIATING FACTORS

These are circumstances which interfere with the enforceability of a contract. They have a negative effect on contracts. They may render a contract void or avoidable. A void contract is unenforceable while avoidable contract is enforceable unless avoided. These factors include: -

1. Misrepresentation

2. Mistake

3. Duress

4. Undue influence

1. MISREPRESENTATION.

This is a false representation. It is a false statement made by a party to induce another to enter into a contractual relationship. It renders the contract avoidable at the option of the innocent party. However for the innocent party to avoid the contract, it must be proved that: -

1.     The statement in question was false in a natural particular i.e. it was untrue in whatever it referred to.

2.     The statement was more than a mere puff or sales talk. Whether a statement is a puff or a misrepresentation depends on what a reasonable person could deem it to be.

3.     The statement was one of fact not opinion. As a general rule opinion does not amount to misrepresentation. It was so held in Edgington v Fitzmaurice (1885) 29 Ch D 459. In this case, directors sent shareholders a prospectus inviting subscriptions for debenture bonds. It said money would go to alter their buildings, buy horses, vans and expand into supplying fish. Really though, the purpose was to pay off liabilities, because the company was in trouble. Mistakenly believing he would get a first charge on company property, Mr Edgington bought bonds. He would have bought them anyway, had he known he would have no charge. Mr Edgington sought to recover money for deceit. The Court of Appeal upheld Denman J at first instance, saying that the directors were liable for deceit. Cotton LJ held that the statement of purpose was a fraudulent misrepresentation and Mr Edgington had relied on that despite his admission of mistake over charges. He said: “…It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss nonetheless resulted from that misstatement. It is not necessary to show that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous supposition, the defendants will still be liable... It was a statement of intention, but it is nevertheless a statement of fact, and if it could not be fairly said that the objects of the issue of the debentures were those which were stated in the prospectus the Defendants were stating a fact which was not true…”

 

To fulfil the requirement that Mr Edgington relied on the statement, it is not necessary to show the misstatement was the sole cause of acting, so long as there was an influence. Bowen LJ said ‘the state of a man’s mind is as much a fact as the state of his digestion... A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact... such misstatement was material if it was actively present to his mind when he decided to advance his money.’ Fry LJ said the ‘inquiry is whether this statement materially affected the conduct of the Plaintiff in advancing his money.’ He pointed out the ‘prospectus was intended to influence the mind of the reader.’

 

However an opinion may amount to misrepresentation if: -

a.     The maker does not honestly hold that opinion

b.     The opinion purports to be based on certain facts within the maker’s knowledge but whose truthfulness he does not verify.

4.     The false statement was intended to be relied upon by the representer (recipient).

5.     The false statement was in fact made by the other party to the contract. As a general rule, omission, silence or non-disclosure does not amount to misrepresentation. However it may:-

a.     In contracts of utmost good faith e.g. insurance

b.     In confidential relationships

c.     Where disclosure is a statutory requirement

d.     Where the statement made is half true

e.     If the statement was true when made but turns false due to changes in circumstances before the contract is concluded but the maker does not disclose its falsity as was the case in With v O’Flanagan [1936] Ch 575. In this case, Dr O’Flanagan said truthfully in January 1934 that his medical practice had takings of £2000 pa. However, in May the takings were only £5 a week because O’Flanagan had become ill. The contract was signed with Mr With to buy the medical practice, but Mr O'Flanagan did not disclose the change in circumstances. At trial the judge held that the contract was not made uberrimae fidei. Where a statement is rendered false by a change in circumstances there is a duty to disclose the change. A failure to do so will result in an actionable misrepresentation. Lord Wright MR held that Mr With could rescind either because there was a duty to point out the change in circumstance or because the representation continued till the point when the contract was signed. He further stated that there is no duty to disclose, even when someone believes facts to be operating on another’s mind. He noted fiduciary relationships can bring an entire duty of disclosure. Uberrimae fidei contracts, including partnership and marine insurance, do too. But also where in negotiations a statement is false and then the representor discovers it, though if he had said nothing he is entitled to hold his tongue throughout. He noted that a ‘representation made as a matter of inducement to enter a contract is to be treated as a continuing representation

6.     The false statement influenced the party’s decision to enter into the contract. The party must show that the false statement was made before or when the contract was concluded. However the false statement need not have been the only factor the party considered. In Andrews v. Mockford (1896) 1 Q.B 372; where the plaintiff had relied on untrue statement in a company’s prospectus, issued by the defendants it was held that the defendants were liable in damages for the statements as the plaintiff had relied on them

7.     The false statement was innocently, fraudulently or negligently made

Types of misrepresentation

Innocent misrepresentation

A statement is deemed to be innocently misrepresented if the maker honestly believed in its truth though it was false and had no means of ascertaining that it was false as was the case in Oscar Chess v Williams [1957] 1 WLR 370 where the defendant had no means of ascertaining that the year of registration of the vehicle was incorrect. In Alkerhielm v. De Mare [1959] AC 789, a company prospectus contained the following: ‘About a third of the capital has already been subscribed in Denmark.’ Though the directors believed this to be true, it was not true at the time the prospectus was issued. It was held that the statement was not fraudulent having been made with an honest belief in its truth. The court held: “…The question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made…”

Similarly, in Derry v Peek (1889) 14 App Cas 337, In the prospectus released by the defendant company, it was stated that the company was permitted to use trams that were powered by steam, rather than by horses. In reality, the company did not possess such a right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the Board was considered a formality in such circumstances and the claim was put forward in the prospectus with this information in mind. However, the claim of the company for this right was later refused by the Board. The individuals who had purchased a stake in the business, upon reliance on the statement, brought a claim for deceit against the defendant’s business after it became liquidated. The claim of the shareholders was rejected by the House of Lords. The court held that it was not proven by the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit.

If innocent misrepresentation is proved, the innocent party may either: -

1. Apply for rescission of the contract

2. Sue for indemnity for any direct financial loss occasioned by the representation as was the case in Whittington v Seale-Hayne (1900) 82 LT 49. In this case, Mr Whittington bred prize poultry. He bought a long farm lease, induced by Seale-Hayne's representation that the premises were sanitary and in good repair. However, the water supply was poisoned, Mr Whittington’s manager got very ill and the poultry died. Under the lease, Mr Whittington had covenanted to carry out repairs required by the council, which were needed after the council declared the premises unfit for habitation and the drains needed renewing. It was undisputed that Whittington was entitled to indemnity for rates paid or repairs costs. Whittington sought rescission and indemnity for loss of poultry, profits and medical expenses. Farwell J held no further losses could be claimed because it was beyond the ambit of the indemnity to which Mr Whittington was entitled. The losses did not result in a benefit to Seale. Since the representation was not fraudulent, there could be no damages and therefore no compensation either. It was not the case that the rescinder should be in a position status quo ante because 'to make good by way of compensation for the consequences of the misrepresentations is the same thing as asking for damages'

Fraudulent misrepresentation

A statement is deemed to be fraudulently misrepresented if the maker: -

a) Has knowledge that it is false

b) Makes it carelessly and recklessly

c) Does not believe in its truth

This test of fraud was formulated in Derry v Peek and Andrews v. Mockford (above).

Remedies for fraudulent misrepresentation are either: -

i.               Action for rescission of contract.

ii.              Damages for the tort of deceit.

Negligent Misrepresentation

A statement is deemed to be negligently misrepresented if the maker has both means and capacity of ascertaining its falsity but fails to do so. The maker is deemed negligent as a reasonable person in such circumstances would have so ascertained. However, for negligent misrepresentation to be relied upon, it must be proved that: -

1.     There was a special relationship between the maker and recipient of the statements hence the maker owed the recipient a legal duty of care.

This principle was established in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.  Hedley Byrne were a firm of advertising agents. A customer, Easipower Ltd, put in a large order. Hedley Byrne wanted to check their financial position, and creditworthiness, and subsequently asked their bank, National Provincial Bank, to get a report from Easipower’s bank, Heller & Partners Ltd., who replied in a letter that was headed,

 "without responsibility on the part of this bank"

It said that Easipower was,

"considered good for its ordinary business engagements".

The letter was sent for free. Easipower went into liquidation, and Hedley Byrne lost £17,000 on contracts. Hedley Byrne sued Heller & Partners for negligence, claiming that the information was given negligently and was misleading. Heller & Partners argued there was no duty of care owed regarding the statements, and, in any case, liability was excluded.

The court found that the relationship between the parties was "sufficiently proximate" as to create a duty of care. It was reasonable for them to have known that the information that they had given would likely have been relied upon for entering into a contract of some sort. That would give rise, the court said, to a "special relationship", in which the defendant would have to take sufficient care in giving advice to avoid negligence liability. However, on the facts, the disclaimer was found to be sufficient to discharge any duty created by Heller's actions. There were no orders for damages, because:

“…A man cannot be said voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it he declares that in fact he is not…”

Lord Morris of Borth-y-Gest wrote, “ …I consider that it follows and that it should now be regarded as settled that if someone possessing special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise. ...in my judgment, the bank in the present case, by the words which they employed, effectively disclaimed any assumption of a duty of care. They stated that they only responded to the inquiry on the basis that their reply was without responsibility. If the inquirers chose to receive and act upon the reply they cannot disregard the definite terms upon which it was given. They cannot accept a reply given with a stipulation and then reject the stipulation. Furthermore, within accepted principles... the words employed were apt to exclude any liability for negligence…”

2.     That the party suffered loss of a financial nature

In Kirimu Estate (UG) Ltd. v. K.G. Korde, the plaintiff company instructed the defendant, a lawyer, to value a piece of land for it. The defendant gave a figure without the assistance of a proper valuation of the estate. The figure was far above the market value and the company sued in damages for negligent misrepresentation. It was held that the defendant was liable to pay the difference in value by reason of negligence

2. MISTAKE

There are two types of mistakes viz:

-Mistake of law

-Mistake of fact

As a general rule a mistake of law does not affect a contract however, a mistake of foreign law may affect a contract. Mistakes of facts affect contractual relationships. A mistake is said to be misapprehension of a fact or factual situation. It is an erroneous assumption. Mistakes of fact that affect contracts are generally referred to as operative mistakes and the law recognizes various types of operative mistakes:

a) Common

b) Mutual

c) Unilateral

d) Mistakenly signed documents

e) Mistake as to quality of subject matter

Common mistake

This is a mistake as to the existence or ownership of the subject matter. Both parties make the same mistakes. Each party understands the others intention but both are mistaken about some underlying fundamental fact. Common mistake rendered void in two circumstances:

Cases of Res Extincta: These are circumstances in which parties are mistaken about the subject matter. This circumstance is contained in sec 8 of the sale of goods Act which provides where there is a contract for the sale of specific goods which without the seller’s knowledge have perished the contract is void.

In Couturier v Hastie (1856) 5 HLC 673, Couturier agreed with Hastie to deliver some corn. They thought it was in transit between Salonica (now Thessaloniki) and the UK. But the corn had already decayed. The shipmaster had sold it. Couturier argued that Hastie was liable for the corn because Hastie had already bought an ‘interest in the adventure’, or rights under the shipping documents. The House of Lords held that because the corn effectively did not exist at the time of the contract, there was a total failure of consideration and the buyers were not liable to pay the price. Lord Cranworth L.C. said: "The whole question turns upon the construction of the contract... Looking to the contract... alone it appears to me clearly that what the parties contemplated... was that there was an existing something to be sold and bought."

A similar holding was delivered in Lessie Anderson V. Vallabdos Khalidas Company 21, where parties had contracted to buy and sell a quality of gunny bags but unknown to them the bags had been destroyed by fire. It was held that the contract was void for common mistake.

Case of Res Sua: These are circumstances in which parties are mistaken about the ownership of the subject matter. The party purporting to buy is the legal owner but both are unaware of the fact. The purported seller has no title to pass hence the purported contract is void.

Mutual mistake

This is a mistake to the subject matter of contract. It arises when parties misunderstand each other or at cross purposes. No agreement arises between them for lack of consensus ad idem. However, not every misunderstanding constitutes a mutual mistake; it depends on what a reasonable person would deem the circumstances to be. In Raffles v Wichelhaus [1864] EWHC Exch J19, often called "The Peerless" case, the claimant entered into a contract to sell "125 bales of Surat cotton, guarantied middling fair merchant's Dhollorah" to the defendant at the rate of ​17 1⁄4 d. per pound. The contract specified that the cotton would be arriving in Liverpool on the ship Peerless from Bombay ("to arrive ex Peerless from Bombay"). It so happened that there were two British ships named Peerless arriving in Liverpool from Bombay, one departing in October and another departing in December. The defendant, according to statements presented in court, thought the contract was for cotton on the October ship while the claimant thought the contract was for the cotton on the December ship. When the December Peerless arrived, the claimant tried to deliver it, however the defendant repudiated the agreement, saying that their contract was for the cotton on the October Peerless. The claimant sued for breach of contract, arguing that the date of the ship was not relevant and the only purpose of specifying the name of the ship is that in the contingency that the ship sink en route, the contract could be voided. The issue before the Court was whether the defendant should be bound by the agreement to buy the cotton of the claimant's Peerless. Though courts will strive to find a reasonable interpretation in order to preserve the agreement whenever possible, the court in Raffles could not determine which ship named Peerless was intended in the contract. Consequently, as there was no consensus ad idem (as defendant alleged), the two parties did not agree to the same thing and there was no binding contract. Therefore, the defendants prevailed, and did not have to pay.

Unilateral mistake

This is a mistake as to the identity of one of the parties to the contract. Only one party is mistaken and the mistake is induced by the other party. Unilateral mistake arises where a fraudulent person misrepresents his identity to another so as to obtain goods on credit or other favourable terms which he then sells to a bona fide 3rd party who takes without notice of the fraud. The dispute is usually between the original owner of the goods and the bonafide purchaser. The original owner is entitled to the goods or their value by establishing that the contract between him and the fraudulent person was void for unilateral mistake.

The party must prove that: -

i.               It dealt with a person other than the one it intended to deal with.

ii.              The person it dealt with was aware of that fact.

iii.            The identity of the person, the party intended to deal with was fundamental to the contract.

By proving these facts the party establishes that the contract was void.

In Cundy v Lindsey (1878) 3 App Cas 459, Lindsay & Co were manufacturers of linen handkerchiefs, amongst other things. They received correspondence from a man named Blenkarn. He had rented a room at 37 Wood Street, Cheapside, but purported to be 'Blenkiron & Co'. Lindsay & Co knew of a reputable business of this name which resided at 123 Wood Street. Believing the correspondence to be from this company, Lindsay & Co delivered to Blenkarn a large order of handkerchiefs. Blenkarn then sold the goods – 250 dozen linen handkerchiefs – to an innocent third party, Cundy. When Blenkarn failed to pay, Lindsay & Co sued Cundy for the goods. The Divisional Court held that Lindsay could not recover the handkerchiefs from Cundy. The Court of Appeal, with Mellish LJ, Brett J and Amphlett JA overturned the Divisional Court, holding that Lindsay could recover the handkerchiefs, since the mistake about the identity of the rogue voided the contract from the start. Cundy appealed.

The House of Lords held that Lindsay & Co had meant to deal only with Blenkiron & Co. There could therefore have been no agreement or contract between them and the rogue. Accordingly, title did not pass to the rogue, and could not have passed to Cundy. They were forced to therefore return the goods. Lord Cairns explained the mistake to identity, and the consequences: “ Now, my Lords, stating the matter shortly in that way, I ask the question, how is it possible to imagine that in that state of things any contract could have arisen between the Respondents and Blenkarn, the dishonest man? Of him they knew nothing, and of him they never thought. With him they never intended to deal. Their minds never, even for an instant of time rested upon him, and as between him and them there was no consensus of mind which could lead to any agreement or any contract whatever. As between him and them there was merely the one side to a contract, where, in order to produce a contract, two sides would be required. With the firm of Blenkiron & Co. of course there was no contract, for as to them the matter was entirely unknown, and therefore the pretence of a contract was a failure.”

A similar holding was delivered in Ingram v Little [1961] 1 QB 31. In this case, two sisters Hilda and Elsie Ingram sold their car to a rogue calling himself Mr. Hutchinson. They agreed a price for cash, but when the rogue offered a cheque, Elsie said the deal was off. She wanted cash or no sale. The rogue then gave them his full name and address and Hilda went to the post office, which was two minutes down the road, to check the details out. When she returned she informed Elsie that the details checked out and the sisters agreed to let Mr. Hutchinson take the car. The cheque was dishonoured and the car was sold on to Mr. Little. The sisters brought an action to recover the car. Held: The contract was void for mistake. The Court of Appeal held that the sisters only intended to deal with Mr. Hutchinson at the address given because they were not willing to offer a sale for payment by cheque from anyone else. This case has received widespread criticism and has not been followed since.

These two decisions should however be contrasted with Phillips v Brooks Ltd [1919] 2 KB 243. 209. In this case, on 15 April 1918, a man named North entered Phillip's jewellery shop and said, "I am Sir George Bullough". He wrote a dud cheque for £3000 to pay for some pearls and a ring. He said he lived in St. James's Square. Mr Phillips checked the phone directory and found there was someone there by that name. Mr Phillips asked if he would like to take the jewellery with him and Mr North said he would leave the pearls but take the ring 'for his wife's birthday tomorrow'. Mr North then pawned the ring to Brooks Ltd for £350. When the false cheque was dishonoured, Phillips sued Brooks Ltd to get the ring back. Note that there are conflicting reports showing that Mr North identified himself after the ring was sold, as Viscount Haldane said in Lake v Simmons, but others say that North identified himself straight away.

The earlier judgement of Cundy v Lindsay had established that contracts could be automatically void for mistake to identity. Where this is the case, title does not pass to the fraudulent buyer, and the third party loses out in the entirety. This principle is different where parties contract face to face; Horridge J stated: “…I have carefully considered the evidence of the plaintiff, and have come to the conclusion that, although he believed the person to whom he was handing the ring was Sir George Bullough, he in fact contracted to sell and deliver it to the person who came into his shop…”

This outcome can be explained by putting it as such: Mr Phillips hoped he was contracting with Sir George Bullough, but in reality he agreed to contract with whoever came into his shop, taking a risk that he was not who he said he was. It had the mere effect of making the contract voidable for fraud, meaning that title passed to the rogue and subsequently to the third party buyer: “…The following expressions used in the judgment of Horridge J seem to me to fit the facts in this case: "The minds of the parties met and agreed upon all the terms of the sale, the thing sold, the price and time of payment, the person selling and the person buying. The fact that the seller was induced to sell by fraud of the buyer made the sale voidable, but not void. He could not have supposed that he was selling to any other person; his intention was to sell to the person present, and identified by sight and hearing; it does not defeat the sale because the buyer assumed a false name or practised any other deceit to induce the vendor to sell…"

Documents mistakenly signed

This is a mistake as to the nature of the contract; it arises when a party to a contract signs the wrong document. Such a mistake does not render the contract void but avoidable at the option of the party. To avoid the contract, the party must prove that: -

a. The document signed was fundamentally different from the one the party thought it was signing.

b. The party was neither careless nor negligent when it signed the document.

By proving these facts, the party establishes the plea of non-est factum which literally means this is not my deed. Unless these facts are proved, the contract cannot be avoided as was the case in Gallie v Lee CA ([1969] 2 Ch 17 (CA)). In this case, it was held that a deed bearing a false signature is a forgery and creates no rights at all. ‘If the deed was not his deed at all (non-est factum), he is not bound by his signature any more than he is bound by a forgery. The document is a nullity just as if a rogue had forged his signature. No one can claim title under it, not even an innocent purchaser who bought on the faith of it, nor an innocent lender who lent his money on the faith of it. No matter that this innocent person acted in the utmost good faith, without notice of anything wrong, yet he takes nothing by the document.

Mistake as to the quality of the subject matter

This mistake arises when one of the parties to the contract is mistaken about the quality of the subject matter of the contract. Such a mistake renders the contract voidable at the option of the innocent party.

Summary

This topic has introduced the topic of vitiating factors. These are factors that negatively affect the performance of a contract. When, for example, a contract was entered on the basis of a mistake as to the existence of the subject matter, that contract cannot be performed. If, for example, it is a sale of goods contract and the seller had misrepresented to the buyer that the goods exist and the buyer later realises that the goods do not exist, that contract is void. It cannot be performed. This is an on-going topic and in the next class we will discuss another set of vitiating factors.

Activity

Debate: “Mistake and misrepresentation should not, all other factors constant, vitiate a contract”

Discussion questions

Consider the following question:

Nancy offers to sell her bicycle to Olive. She tells Olive that it is two years old and has hardly been used. Olive asks if she can go for a ride on it but Nancy refuses, afraid that Olive might ride away on it. Nancy tells her, “You don’t need to worry. The bike is fast, comfortable and reliable.” Olive points out that the tyres are worn and Nancy assures her that, if she decides to buy the bicycle, she will replace them. She also tells Olive that, although there is no front light, there is no law requiring bicycles to have front lights in the dark. This is incorrect. Olive spends the rest of the day checking on bicycle prices and that evening accepts Nancy’s offer telling her that at Kshs 7500 the bicycle is by far the best value that she has seen. Olive finds the bicycle uncomfortable from the start. The day after buying it she also realises that Nancy has not replaced the worn tyres. Three weeks later Olive finds out that the bicycle is five years old (although there is no evidence that Nancy knew this) and belonged to Pat before Nancy. Six months later Olive is involved in an accident on the bicycle and finds out from a bicycle repairer that the frame (which was not damaged in the accident) has been welded together from two different bicycles, so that the bicycle is unsafe and not worth repairing. Advise Olive

TOPIC 7 (WEEK 9): VITIATING ELEMENTS: DURESS AND UNDUE INFLUENCE

Learning outcomes

By the end of the lesson, learners should be able to:

1.     Analyse duress and undue influence as factors that vitiate the performance of a contract

2.     Apply the principles discussed herein in solving real-life problems on duress and undue influence in contract performance

Content

VITIATING ELEMENTS: DURESS AND UNDUE INFLUENCE

1.     DURESS

At common law duress means actual violence or threats thereof. It exists where a contractual relationship is procured by actual violence on the person or threats thereof. The party is compelled or coerced to contract. For the most part, duress consists of threats. Duress was developed by the common law with a very narrow scope. It renders a contract voidable at the option of the innocent party. For the contract to be avoided, the innocent party must prove that: -

• The threat was intended to cause fear, injury or loss of life

• The threat was directed to his person or body as opposed to his property. It was so held in Atlee v Backhouse [1838] 3 M & W 633. A threat directed at the body of a member of the party’s household amounts to duress

• The threat was illegal e.g. a threat to sue, prosecute or cause imprisonment for no reasonable cause. A threat to enforce one’s legal rights does not amount to duress. It was so held in Hassanali Issa and Co. v Jeraj Produce Store 1967 E.A. 55 where the defendant had alleged that the cheque had been written under duress in that the plaintiff had threatened to sue if repair and storage charges were not paid. It was held that the threat did not amount to duress. In Friedeberg-Seeley v Klass (1957) 101 S.J. 275 the defendants gained access to the plaintiff’s house and threatened not to leave unless she sold her jewels to them.

Duress in contract law relates to where a person enters an agreement as a result of threats. Where a party enters a contract because of duress they may have the contract set aside. Originally, the common law only recognised threats of unlawful physical violence, however, in more recent times the courts have recognised economic duress as giving rise to a valid claim. Where the threat is to goods, the courts have been less willing to intervene, although analogous claims in restitution suggest that this position of the law may change. The basis of the duress as a vitiating factor in contract law is that there is an absence of free consent. Duress operates at common law. Pressure not amounting to duress may give rise to an action for undue influence in equity. The effect of a finding of duress and undue influence is that the contract is voidable. The innocent party may rescind the contract and claim damages. The normal bars to rescission operate

Duress can be placed under a number of categories as outlined below:

Duress to the person

Where a person enters a contract as a result of threats of physical violence, the contract may be set aside providing the threat was a cause of entering the contract. There is no need to establish that they would not have entered the contract but for the threat. In Barton v Armstrong [1976] AC 104 for example, Barton was the managing director of a company, whose main business was property development, its projects passing through 'Paradise Waters (Sales) Pty Ltd'. Barton executed a deed whereby the company would pay $140,000 to Alexander Armstrong, a NSW state politician, and buy his shares for $180,000. Armstrong was the chairman of the board. Street J found Armstrong had indeed threatened to have Barton killed. But the NSW Court of Appeal said Barton failed to discharge the onus that the threat had caused him to make the contract. The Privy Council, however, advised that Barton could avoid the contract for being under duress, and it did not matter that he may have agreed to the deal anyway. Lord Cross, Lord Kilbrandon and Sir Garfield Barwick held that physical duress does not need to be the main reason, it must merely be one reason for entering an agreement. Lord Cross said the same rule should apply for duress as in misrepresentation, 'that if Armstrong's threats were 'a' reason for Barton’s executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong had uttered no threats to induce him to do so...' Lord Wilberforce and Lord Simon, dissenting jointly, held that while in substantial agreement on the law, there was no duress on the facts, but the threats needed to be at least "a" reason for entering the contract. They held the case:

“…involves consideration of what the law regards as voluntary or its opposite… Absence of choice… does not negate consent in law; for this the pressure must be one of a kind which the law does not regard as legitimate. Thus, out of the various means by which consent may be obtained - advice, persuasion, influence, inducement, representation, commercial pressure - the law had come to select some which it will not accept as a reason for voluntary action: fraud, abuse of relation of confidence, undue influence, duress or coercion. In this the law, under the influence of equity, has developed from the old common law conception of duress - threat to life and limb - and it has arrived at the modern generalisation expressed by Holmes J - 'subjected to an improper motive for action' (Fairbanks v Snow)…”

The three tests for physical duress....... are to, first, 'show that some illegitimate means of persuasion was used' and second that ‘the illegitimate means used was a reason (not the reason, nor the predominant reason nor the clinching reason)' and third that his evidence is 'honest and accepted'

Duress to goods

Duress to goods is not recognised as giving rise to grounds for having the contract set aside. In Skeate v Beale [1840] 11 Ad & El 983, a landlord threatened a tenant that he will levy duties if the tenant failed to pay the debt owed. The tenant proceeded to pay part of the amount and further gave a promise to pay the balance in a period of one month. The tenant was unable to keep the promise when the period lapsed. The landlord therefore proceeded to bring a suit against the tenant and the tenant pleaded duress. The court declined and refused to set aside the contract. The court held the position that the threat was not to the person but to the goods and therefore the Defendant cannot sustain the defense of duress.

However, this decision has received widespread criticism and is out of line with restitutionary claims. For example, in Maskell v Horner [1915] 3 KB 106, the defendant demanded money from the claimant by way of a 'toll fee' for his market stall. The defendant had no legal basis for demanding this money. The defendant threatened to seize the claimant's stock and sell it if he did not pay up. The claimant paid the toll fee for a considerable period of time and then brought an action for money had and received to recover the money paid under duress. It was held that the claimant was entitled to recover the sums paid in the law of restitution. This decision is out of line with the law on duress of goods in contract law and is considered by some as demonstrating that the position taken in contract law should be revised.

It is thought that the position in relation to duress to goods is unlikely to survive if it is tested in the higher courts, particularly given the more liberal position that has taken hold in response to claims for economic duress.

Economic Duress

The doctrine of economic duress was first canvassed by Kerr J in The Sibeon and the Sibotre. Whilst the contract was not held to be voidable for duress, Kerr J did state that where there exists coercion of the will so as to vitiate consent, it should be possible to set the contract aside. However, commercial pressure was not enough. In Occidental Worldwide Investment v Skibs (The Sibeon & The Sibotre) [1976] 1 Lloyds Rep 293, the defendants chartered two vessels from the claimant. The defendants told the claimants that they would go bankrupt if they did not lower the cost of charter. This was completely untrue. The claimants feared that they would lose valuable customers and they were also owed substantial amounts of money by the defendant which they feared they would lose if the defendants did become insolvent. The claimants therefore agreed to renegotiate the contract to lower the cost of charter. They later sought to have the renegotiated contract set aside. It was held that whilst recognising that it would be possible to render a contract voidable for economic duress, it was not established in this case. To amount to economic duress there had to be a coercion of the will so as to vitiate consent. Commercial pressure was not sufficient. Note that this was the first case where economic duress was recognised as giving rise to a cause of action. More recent cases look to absence of choice rather than coercion of the will vitiating consent. In Universe Tankships v International Transport Workers Federation, The Universe Sentinel [1983] 1AC 366, for example, ITWF blacked a ship, The Universe Sentinel, to prevent it from leaving port. They made several demands in relation to pay and conditions and also demanded the ship owners pay a large sum of money to the Seafarers International Welfare Fund. The ship owners agreed in order that the ship could leave port and then sought to recover the sum paid to the welfare fund. It was held that the money had been extracted under economic duress and could be recovered. The House of Lords held that earlier case law had been wrong to look at coercion of the will so as to vitiate consent. During an analogy with the defence in criminal law where it is recognised that a defendant acting under duress has the intention to commit the offence but is excused from the crime because they had no choice but to submit. Accordingly two elements of duress were identified:

1. Compulsion of the will - absence of choice

2. Illegitimacy of the pressure

Following Kerr J's line of reasoning, economic duress was found to exist in The Atlantic Baron, however, the claimant lost their right to rescind. In this case, i.e., North Ocean Shipping v Hyundai Construction (The Atlantic Baron) [1979] QB 705, the defendants agreed to build a ship for the claimants for a certain price specified in US dollars. After entering the contract the US dollar was devalued by 10%. The defendants threatened not to complete unless the claimants paid an additional 10% on the contractually agreed price. The claimants had a valuable charter lined up so agreed to pay the additional sums and did pay them without protest. 8 months after delivery of the ship the claimants brought an action to recover the additional sums paid. It was held that the contract was voidable for duress, however, since the claimants had left it so long in bringing their claim they had affirmed the contract and lost their right to rescind.

Similarly, in Pao on v Lau yiu Long [1979] 3 All ER 65, the claimant had threatened not to complete the main contract for the purchase of shares unless subsidiary agreements were met including a guarantee and an indemnity. The defendant was anxious to complete the main contract as there had been a public announcement of the acquisition of shares and did not want to undermine public confidence in the company and the consequent effect on share prices. The defendant could have sued for specific performance of the agreement but this would have delayed matters and damaged the company's reputation. The defendant had taken legal advice on all these matters before agreeing to the guarantee and indemnity. The claimant then sought to enforce the guarantee and the defendant sought to have the agreement set aside for economic duress. It was held that there was no economic duress. The Privy Council identified 4 factors to consider in assessing whether economic duress was present:

Did the person claiming to be coerced protest?

Did that person have any other available course of action?

Were they independently advised?

After entering into the contract, did they take steps to avoid it?

In the present case the defendant did not protest at the time. He also could have enforced the contract of sale through specific performance and thus had another avenue of redress available to him. He had taken legal advice and took no steps to avoid the agreement prior to the claimant seeking to enforce the guarantee. Therefore no economic duress could be established. It was simply commercial pressure far short of duress

Illegitimacy of the pressure

Initially it was thought that the threat must be unlawful. In Dimskal Shipping v International Transport Workers Federation (The Evia Luck) [1991]4 All ER 871, the International Transport Workers Federation threatened strike action unless certain demands were met. The cost of strike action would be astronomical for Dimskal and therefore they agreed to the demands. They later sought to have the agreement set aside as being procured by duress. There was clearly present a coercion of the will and absence of choice the main question for the court was the legitimacy of the pressure. At the time of the threatened strike the Evia Luck was in Sweden. The court had to determine whether English law applied or Swedish law applied to the threatened strike action as under Swedish law the threatened strike would be lawful so there would be no illegitimate pressure applied, however, under English law the strike would be unlawful and the threat would be regarded as illegitimate. It was held that English Law applied and the threat was therefore unlawful and illegitimate.

Similarly, in CTN Cash & Carry v Gallagher [1994] 4 All ER 714, the defendants sent a consignment of cigarettes to the wrong address. The cigarettes were then stolen. The defendant mistakenly believed that the cigarettes were at the claimant's risk and sent them an invoice. The defendant threatened to withdraw the claimant's credit facility unless the invoice was paid. The claimants needed the credit facilities and so paid the invoice and then sought to reclaim the money on the grounds of economic duress. It was held that the threat to withdraw credit facility was lawful since under the terms of the credit agreement credit could be withdrawn at any time. Therefore the threat was legitimate and consequently, economic duress could not be established.

However, Lord Hoffman’s distum in the Privy Council case of R v Attorney General for England and Wales [2003] UKPC 22 suggests a different approach:

"…The legitimacy of the pressure must be examined from two aspects: first, the nature of the pressure and secondly, the nature of the demand which the pressure is applied to support: see Lord Scarman in the Universe Tankships case, at p 401. Generally speaking, the threat of any form of unlawful action will be regarded as illegitimate. On the other hand, that fact that the threat is lawful does not necessarily make the pressure legitimate. As Lord Atkin said in Thorne v Motor Trade Association [1937] AC 797, 806: "The ordinary blackmailer normally threatens to do what he has a perfect right to do - namely, communicate some compromising conduct to a person whose knowledge is likely to affect the person threatened ... What he has to justify is not the threat, but the demand of money."…"

The facts of the case are that after the Gulf War, a Special Air Service soldier of the Bravo Two Zero patrol was told to sign a confidentiality agreement or be demoted. He signed. Then he returned to New Zealand. He got a publishing contract for his memoirs, about material in the Gulf War. The New Zealand Court of Appeal denied an injunction, but allowed an account of profits and an assessment of damages for breach of contract. R appealed to the Privy Council, contending the contract was under duress when he signed, given the threat of demotion. Additionally R contended that the contract was signed under undue influence, given the position of the MOD in relation to him. The Privy Council advised that the contract was not avoidable for duress. Lord Hoffmann said there was no illegitimate pressure, so no duress. That first element is "pressure amounting to compulsion of the will of the victim and the second was the illegitimacy of the pressure"

Effect of finding duress

Since duress operates to deflect the will of the party rather than vitiate consent, the effect of a finding of duress is always to make the contract voidable not void. The case of IFR ltd v Federal Trade Spa [2001] EWHC 519 is authoritative in this regard. In 1998 an agreement was entered in to between IFR (English company) and Federal (Italian company) whereby IFR were to distribute and give sole right of resale of certain specified items including radio, electronic and telecommunication equipment. The agreement was to last for 2 years. This succeeded an earlier agreement and contained a jurisdiction clause (stating the agreement would be governed by English law) and an arbitration clause which were not in the earlier agreement. Three months before the contract was due to expire IFR gave notice in writing that they would not be renewing the contract when it expired. Under Italian law this termination would give rise to compensation. However, no such compensation was payable under English law. Federal sought to raise duress to render the 1998 agreement void so as to take advantage of the Italian right to compensation. The effect of a finding of duress has always been to render a contract voidable as opposed to void, however, a voidable contract would not have aided Federal as they had acted on the contract without protest for nearly 2 years so would most certainly have lost their right to rescind. In their argument they raised the earlier case law relating to vitiating consent (The Sibeon & Sibotre, The Atlantic Baron and Pao On) and stated that where there is no consent the contract must be void ab initio as oppose to voidable. It was held that following later case law (Universe Sentinel etc) the basis of duress is not the absence of consent; when acting under duress the actor will give consent for the contract. The contract is therefore initially valid. It is the absence of choice that renders the contract voidable.

UNDUE INFLUENCE

Undue influence in contract law is the inappropriate pressure (or the unlawful intensity of persuasion) applied by a trusted, more powerful party on a trusting, less powerful party to enter into (or refrain from entering into) a legally binding agreement (written or oral) against their will, which falls slightly short of duress. It is said to exist where a party dominates the other’s will thereby inhibiting its exercise of an independent judgement on the contract. One party thus exercises overwhelming influence over the other. Undue influence was developed by equity with a fairly wide scope. It renders a contract voidable at the option of the innocent party.

Forms and Elements of Undue Influence

To provide evidence for undue influence in a contract, an entity has to prove that the victimized party is someone with disadvantages, which makes them prone to be affected by such pressure, and that the influencing party is a person in a special relationship with their victim, which gives them an advantage over their victim.

Undue influence can take several forms such as:

·       Importuning (insistently bothering someone to do something).

·       Exhortation (strongly urging someone to do something).

·       Flattery (excessively and insincerely complimenting someone to gain advantage).

·       Deception (misleading someone).

·       Insinuation (cunningly making indirect suggestions to gain advantage).

·       Trickery.

Relationships Prone to Undue Influence   

Undue influence typically occurs when parties relate in a certain way such as in the special relationships between the following set of people:

·       A husband and wife.

·       A parent and child.

·       A fiancé and fiancée.

·       A guardian and ward.

·       A doctor and patient.

·       A lawyer and client.

·       A pastor and parishioner.

Undue influence operates where there exists a relationship between the parties which has been exploited by one party to gain an unfair advantage. Undue influence is divided into actual undue influence and presumed undue influence. Where a contract is found to be entered into as a result of undue influence, this will render the contract voidable. This will enable the person influenced to have the contract set aside as against a party who subjected the other to such influence. In addition, in some instances the party influenced may be able to have a contract set aside as against a party who was not the person inflicting the influence or pressure.

Classes of undue influence

There are three classes of undue influence which were set out in the case of Bank of Credit & Commerce International v Aboody [1990] 1 QB 923.

In this case, a husband exerted actual undue influence over his wife in order to get her to sign a charge securing the family home on the debts owed by the company in which the husband and wife owned shares. The couple were unable to repay the mortgage and the bank sought to repossess the home. The wife sought to have the mortgage set aside on the grounds that it was procured by actual undue influence of the husband. It was held that the husband had exerted actual undue influence on the wife. However, the transaction was not to the manifest disadvantage of the wife since she owned shares in the company. In considering whether a transaction was to the manifest disadvantage the court was to have regard to any benefits received in addition to the risks undertaken. Therefore the bank were granted possession.

NB - it is no longer necessary to establish manifest disadvantage in cases involving actual undue influence. The Court of Appeal set out the classes of undue influence:

Class 1 - Actual undue influence (requires proof of the influence)

Class 2a - presumed undue influence (relationship as a matter of law gives rise to presumption that influence was exerted)

Class 2b - presumed undue influence (requires proof of relationship of trust and confidence if established the presumption of influence arises)

Class 1 – Actual undue influence

As the name suggests, requires proof that the contract was entered into as a result of actual influence exerted. The claimant must plead and prove the acts which they assert amounted to undue influence. This may include such acts as threats to end a relationship, continuing to badger the party where they have refused consent until they eventually give in. There is no precise definition of undue influence. Lord Nicholls, in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 described the concept as:

"Undue influence is one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused. In everyday life people constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to enter into transactions, whether great or small. The law has set limits to the means properly employable for this purpose. The law will investigate the manner in which the intention to enter into the transaction was secured: If the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or 'undue' influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person's free will. It is impossible to be more precise or definitive. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion."

Originally it was a requirement that the claimant seeking to find relief through actual undue influence must also establish that they had suffered a manifest disadvantage (See Bank of Credit & Commerce International v Aboody above). However, it was held in CIBC Mortgages v Pitt [1994] 1 AC 200 that manifest disadvantage was not required in cases of actual undue influence. In this case, Mr Pitt wished to purchase some shares on the stock market. He pressured his wife into signing a mortgage of £150,000 securing the family home. The stated purpose of the loan was to purchase a holiday home and pay off the existing mortgage. The husband used the money to purchase shares and then used those shares as collateral to purchase further shares. For a time the shares did very well and he was a millionaire on paper. The wife saw no benefit from these shares as any income was always used to purchase more shares. In 1987 the stock market crashed. The bank sought to enforce the security under the mortgage which at the time exceeded the value of the home. The wife raised actual undue influence in defence. It was held, overruling Bank of Credit & Commerce International v Aboody that it is not necessary for a claimant to demonstrate manifest disadvantage where a defence is based on actual undue influence. However, as the transaction on its face did not seem to the manifest disadvantage of the wife, because the stated purpose was to purchase a holiday home, the bank was not put on enquiry and therefore could not be fixed with constructive notice.

Class 2a - Presumed undue influence

Under class 2a, there is no requirement to prove that improper influence was actually exerted. Instead it must be established:

1. There was a relationship which as a matter of law gives rise to a presumption of undue influence

2. The transaction is one which cannot readily be explained by the relationship of the parties.

1. Relationships capable of giving rise to an automatic presumption of undue influence are those of a fiduciary nature and include:

·       Parent: child

·       Solicitor: Client

·       Religious advisor: disciple

·       Doctor: Patient

·       Trustee: beneficiary

2. The transaction is one which cannot readily be explained by the relationship of the parties: Where the transaction is obviously not to the benefit of the vulnerable party but confers a great advantage to the party in a fiduciary position, the law will raise a presumption that the transaction was entered as a result of some sort of abuse of the relationship. This requirement used to be expressed in terms of manifest disadvantage. However, this lead to confusion particularly where a wife had an interest in the husband's business

For example, in Natwest Bank v Morgan [1985] AC 686, the family home was subject to a mortgage for the purchase price (with Abbey National) and a second charge securing a loan of the husband's business. The couple were unable to meet the payments and got into arrears. Abbey obtained a possession order. Natwest offered a rescue package to help the couple save the home whereby they would pay off the existing mortgages and give a bridging loan which was to last 5 weeks for the purposes of aiding the husbands business. The manager called at the couples' home in order to explain the effect of the charge and to obtain the signatures of both parties. He was at the house for 20 minutes and spent 5 minutes alone with the wife. The husband was reluctant to leave them alone and was said to be hanging around close by at all times. The manager told the wife the charge was to pay off the existing debt and to provide a bridging loan for a period of 5 weeks which was what the bank had intended to provide, however, the actual document did not limited the amount or time. Mrs Morgan had told the manager that she did not want to be exposed to any extra risks of her husband’s business as she had no faith in his ability as a business man. The manager assured her that the risks were limited in the way he had described. At no time did the manager advise her to get independent legal advice. She signed the charge. The bank later called in the charge. In her defence the wife stated that the bank manager had exercised undue influence over her in procuring her signature. It was held that the normal relationship between a customer and banker was not one so as to give rise to a relationship of trust and confidence. Lloyds Bank v Bundy was confined to its facts but not expressly overruled. The wife had not established a relationship of trust and confidence and therefore no presumption of undue influence could arise.

Given the difficulties in relation to manifest disadvantage, the House of Lords in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021 held that the term should no longer be used and replaced with the requirement that the transaction must be one which cannot be readily explained by the relationship of the parties. This is intended to exclude trivial gifts but bring within its realm substantial benefits even where the vulnerable party also receives a benefit. The court should consider the transaction as a whole.

Class 2b - Presumed undue influence

Establishing the presumption

Under class 2b there is no automatic presumption arising as a matter of law. Here it must be established that there is a relationship of such a kind that one party in fact placed their trust and confidence in the other to safeguard their interest. Any relationship is capable of amounting to this examples include husband and wife, cohabitees, employer and employee. The important distinction between class 2a and 2b is the fact that the trust and confidence relationship must be proved. In modern times it is no longer the case that wives will generally place all their trust in their husbands to deal with the financial matters although in some marriages this may be the case. If the wife exercises independence of mind in financial matters then no presumption will be established.

For example, in Barclays Bank v O Brien [1994] 1 AC 180, Mr O'Brien was a chartered accountant and he also had a shareholding in a company in which he was an auditor. The company was experiencing financial difficulty and the bank wished to find security for the company debts. Mr O'Brien offered the matrimonial home as security. He told his wife that the charge was limited to £60,000 and that it was only to last for a few weeks. Initially the wife refused to sign but was later persuaded to sign as the husband told her that the company would fail if she did not and that her son, who also had an interest in the company, would lose his home. In fact the charge was not limited in the amount or time. The wife agreed to sign the charge. The manager of the bank had left sent the documents to their local branch with instructions that the wife was to be advised of the full extent of the liability and that the wife should be advised to take independent advice before signing. However, the bank clerk got the wife to sign and failed to carry out the instructions. The bank sought to enforce the charge and the wife raised undue influence and misrepresentation in her defence to have the charge set aside. It was held that the defence based on undue influence failed because the wife was supposed to exercise independence of thought on financial matters and was used to dealing with the family finances whilst her husband was working away. The wife was successful with regards to misrepresentation. The charge was set aside as the bank had constructive notice of the misrepresentation and failed to take reasonable steps to ensure that the charge had been obtained without influence or that Mrs O'Brien was aware of the full extent of liability.

Lord Brown Wilkinson introduced the concept of constructive notice and set out the steps required to be taken by banks to avoid being fixed with constructive notice:

"…Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors:

(a) the transaction is on its face not to the financial advantage of the wife; and

(b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.

It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights. What, then are the reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should inquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife's rights. I should make it clear that I have been considering the ordinary case where the creditor knows only that the wife is to stand surety for her husband's debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible but probaduressble. In such cases, the creditor to be safe will have to insist that the wife is separately advised..."

Exceptionally, it has been held that a relationship of trust and confidence existed between a bank manager and his client. In Lloyds Bank v Bundy [1975] QB 326, for example, a father secured the debts of his son's business on his farm which had been in the family for generations. The father and son had both banked at the branch for many years and relied on advice given. The son's company also banked at the same branch and the bank manager was aware of the dire financial position of the company. The bank had allowed the son to run up an overdraft exceeding security given thus far and was fearful that the company would go under leaving them with an unsecured debt. The bank manager and the son called at the farm with the forms already filled in. The father was told of the amount of the charge which was £11,000 and exceeded the value of the farm and he was also required to give a guarantee. The father agreed to sign in order to help his son. He was not given the opportunity to think it over or to obtain legal advice. It was held that there was a relationship of trust and confidence between the father and the bank manager giving rise to a presumption of undue influence under class 2 b. The charge and guarantee were therefore set aside.

NB the normal relationship between a banker and customer is not one of trust and confidence but a business relationship whereby the bank is looking out for its own interest (See Natwest v Morgan) however, the bank manager in giving evidence admitted that the father relied implicitly and solely on the advice given by him and the father stated that he had trusted the bank and had a long relationship with the bank and generally acted on advice given.

However, it has been held that the normal relationship between banker and client is not one of trust and confidence. In Natwest Bank v Morgan [1985] AC 686, for example, the family home was subject to a mortgage for the purchase price (with Abbey National) and a second charge securing a loan of the husband's business. The couple were unable to meet the payments and got into arrears. Abbey obtained a possession order. Natwest offered a rescue package to help the couple save the home whereby they would pay off the existing mortgages and give a bridging loan which was to last 5 weeks for the purposes of aiding the husbands business. The manager called at the couples' home in order to explain the effect of the charge and to obtain the signatures of both parties. He was at the house for 20 minutes and spent 5 minutes alone with the wife. The husband was reluctant to leave them alone and was said to be hanging around close by at all times. The manager told the wife the charge was to pay off the existing debt and to provide a bridging loan for a period of 5 weeks which was what the bank had intended to provide, however, the actual document did not limited the amount or time. Mrs Morgan had told the manager that she did not want to be exposed to any extra risks of her husband’s business as she had no faith in his ability as a business man. The manager assured her that the risks were limited in the way he had described. At no time did the manager advise her to get independent legal advice. She signed the charge. The bank later called in the charge. In her defence the wife stated that the bank manager had exercised undue influence over her in procuring her signature. It was held that the normal relationship between a customer and banker was not one so as to give rise to a relationship of trust and confidence. Lloyds Bank v Bundy was confined to its facts but not expressly overruled. The wife had not established a relationship of trust and confidence and therefore no presumption of undue influence could arise.

A relationship of trust and confidence has also been seen in employer and employee relationship. In Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, Miss Burch started working for her employer at the age of 18. She became close to the director, Mr Pelosi, who was an Italian business man 10 years older and trusted him implicitly. She often visited his home to do babysitting and went on holiday with the family to Italy. At the age of 21 she purchased a flat. 5 years later, she was still working for him but the company was experiencing financial difficulty. Mr Pelosi asked her to put her flat up as security for a loan taken out by the company. He told her that his home and villa in Italy were also secured on the debt but they would not accept 100% mortgage on these properties and needed another £20,000. She agreed to allow her home to be used as security believing that it was only £20,000 and that Mr Pelosi's properties would first be sold which would release the debt so that there was no risk to her. The bank had written to her and informed her that the charge was unlimited in amount and time and advised her to seek independent advice. She at no time was told of the extent of the company's borrowings which stood at £270,000 neither did the bank satisfy themselves that she had in fact received independent advice. It was held that the agreement of Miss Burch had been obtained by undue influence and the bank had notice of this as the transaction was so obviously to her disadvantage. The bank had taken insufficient steps to avoid constructive notice. Therefore the transaction could be set aside.

There is no need to establish that the party subject to the influence would not have entered into the contract but for the influence. There is also no need to establish a causal link in relation to misrepresentation beyond reliance. In UCB v Williams [2002] EWCA Civ 555, the Williams family (Mr & Mrs Jack Williams and their three grown up children) ran a garage business as a partnership with the benefit of a franchise from Toyota. Toyota threatened to withdraw the franchise unless the showrooms were extended and improved. The cost for this was £500,000. The Williams approached the bank for a loan which asked for security by way of a charge on the three showrooms in addition to a charge on each of the partners' homes. The defendant, Mrs Williams, was the wife of one of the sons. She had signed the charge without having been told the full extent of the liability. The signature was executed in the presence of all the other partners and witnessed by Mr. Howells, the solicitor of the partnership. The charge secured all debts present and future of the partnership and provided for joint and several liability of all the partners. The business was unable to repay the loan and became bankrupt. UCB sought to enforce the charge and Mrs Williams raised undue influence and misrepresentation in her defence. The trial judge, HHJ Hickinbottom, held that undue influence and misrepresentation were established. However, he held that Mrs Williams would have signed the charge in any event had she known the full facts and also that UCB were not fixed with constructive notice as a solicitor had witnessed the signature therefore they could assume Mrs Williams had been advised accordingly. Mrs Williams appealed to the Court of Appeal. The Court of Appeal held that Mrs Williams was successful on both grounds.

For both undue influence and misrepresentation there is no requirement to establish that a person would not have entered the contract but for the influence or misrepresentation. It was sufficient for undue influence, that an equitable wrong has been committed. For misrepresentation it is sufficient to demonstrate the party relied on the false statement. UCB were fixed with constructive notice. The fact that the signature was witnessed by a solicitor does not necessarily mean that they would have advised her. The role of a solicitor will depend upon what they had been instructed to do. If there were no instructions to advise Mrs Williams they would not be expected to do so and it was wrong of UCB to assume this had taken place. They were under a duty to check if she had in fact been advised

Rebutting the presumption in class 2a and class 2b

The party accused of exercising undue influence may rebut the presumption by demonstrating that the vulnerable party exercised free will in entering the transaction. This is most commonly established by demonstrating that they were fully aware of the risks involved and had received legal advice before agreeing to the transaction.

Undue influence and third parties

 Generally the undue influence is exercised between a husband and wife. Where a wife establishes undue influence it will entitle her to have the transaction set aside as against her husband, however, the transaction is generally with a bank who was not a party to the influence. Following the decision in Natwest v Morgan, it became clear that banks were not acting in a fiduciary capacity so as to give rise to a presumption of undue influence. There had to exist another factor in order to have the contract set aside as against a bank. Barclays Bank v O'Brien [1993] QB 109 introduced the concept of constructive notice.

Constructive notice

Constructive notice arises where the bank is

1. put on enquiry and

2. fails to take reasonable steps to ensure that the transaction was entered freely without the exercise of undue influence.

Enquiry: Consideration of factors which put the bank on enquiry. In Bank of Scotland v Bennett & Anor [1998] EWCA Civ 1965, the bank held a guarantee and charge on the Bennett family home securing the debts of a business in which the husband was the director and 47% shareholder. The wife also held shares (11%). The wife was the sole beneficial owner of the matrimonial home. The wife was against her husband's involvement in the business. He had left a well-paid reliable job to start it. She had no faith in the business and did not want to sign the charge but her husband pressured her and threatened to end the relationship if she did not sign. The trial judge held that the charge was procured by actual undue influence of which the bank had constructive notice. The bank appealed. It was held that the charge was procured by actual undue influence although the trial judge erred in finding constructive notice. The trial judge had assumed the bank had the knowledge that the wife was the sole beneficial owner of the property and only held an 11% sharing holding when there was in fact no evidence that they were aware of these facts.

Lord Justice Chadwick: "The correct approach, in cases of this nature, is to look at the transaction through the eyes of the lender and to ask whether, in the light of all the facts which the lender does know, it is put on inquiry that there is a real risk that the wife’s apparent consent to the transaction may have been obtained by some improper conduct (pressure, abuse of trust and confidence or misrepresentation) on the part of the husband."

Further, in Conoco Ltd v Khan & Anor [1996] EWCA Civ 968, the defendants, Mr and Mrs Khan, owned a petrol station which was run by Mr Khan. Mr Khan entered an agreement with the claimant supplier of petrol whereby the defendants were to borrow £300,000, which was to be secured on the petrol station, to be repaid by 5 annual instalments. The loan was to pay for the supply of petrol during that five years. Also by the agreement the defendants were not to purchase petrol from any other supplier. The defendants breached the agreement by purchasing petrol elsewhere. The claimants terminated the contract and demanded the balance outstanding under the loan standing at £240,000. Mrs Khan raised class 2 b undue influence in her defence stating she took no part in the running of the business and always signed what her husband asked her to. She did not speak English and had no knowledge of the affect of what she signed. She trusted her husband implicitly not to prejudice her interest. She had not been given any advice at all as to what she was signing. It was held that the bank was not put on enquiry. The agreement was a commercial agreement under which she was to obtain benefits. The claimant would have no reason to consider that the wife should obtain independent advice

The current factors to be considered were set out in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021 (discussed earlier).

The case concerned a number of conjoined appeals concerning banks seeking possession of homes where a wife had signed a charge or mortgage agreeing to secure the debts of the husband on the family home. The House of Lords reviewed the current authorities and restated some of the principles. The main changes:

1. Manifest disadvantage

This term should no longer be used as it is ambiguous and leads to many misunderstandings and is often misapplied. Instead the transaction must be one which cannot readily be explained on ground of friendship, relationship or charity.

2. Constructive notice

A bank will be put on enquiry whenever a wife offers to stand surety for her husband's debts. There is no need to show that the bank was aware of the relationship capable of giving rise to a presumption of influence. There is no absolute obligation on a bank to have a private meeting with the wife provided they take other steps to satisfy themselves that the wife has been appropriately advised. This may be achieved through confirmation from a solicitor that she has been advised.

The steps a solicitor should take as a core minimum:

(1) He will need to explain the nature of the documents and the practical consequences these will have for the wife if she signs them. She could lose her home if her husband's business does not prosper. Her home may be her only substantial asset, as well as the family's home. She could be made bankrupt.

(2) He will need to point out the seriousness of the risks involved. The wife should be told the purpose of the proposed new facility, the amount and principal terms of the new facility, and that the bank might increase the amount of the facility, or change its terms, or grant a new facility, without reference to her. She should be told the amount of her liability under her guarantee. The solicitor should discuss the wife's financial means, including her understanding of the value of the property being charged. The solicitor should discuss whether the wife or her husband has any other assets out of which repayment could be made if the husband's business should fail. These matters are relevant to the seriousness of the risks involved.

(3) The solicitor will need to state clearly that the wife has a choice. The decision is hers and hers alone. Explanation of the choice facing the wife will call for some discussion of the present financial position, including the amount of the husband's present indebtedness, and the amount of his current overdraft facility.

(4) The solicitor should check whether the wife wishes to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming he has explained to her the nature of the documents and the practical implications they may have for her, or whether, for instance, she would prefer him to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. The solicitor should not give any confirmation to the bank without the wife's authority. The solicitor's discussion with the wife should take place at a face-to-face meeting, in the absence of the husband. The solicitor's explanations should use non-technical language. The solicitor should obtain from the bank any information he needs. If the bank fails for any reason to provide information requested by the solicitor, the solicitor should decline to provide the confirmation sought by the bank.

Agency?

Where a bank instructs solicitors to advise the wife, the solicitor acts solely for the wife and not as an agent for the bank. In Barclays Bank Plc v Thompson [1997] 4 All ER 816 Mrs Thompson was the sole beneficial owner of the family home. She signed a mortgage securing the debts of the husband's business on the family home. She had received advice from a firm of solicitors appointed by the bank who were also the husband's solicitors. The advice she received was defective in that it failed to explain the full extent of liability. The solicitors wrote to the bank certifying that Mrs Thompson had been advised. The bank later sought possession of the property. Mrs Thompson argued that the fact that the solicitor was that of the bank that the knowledge of the defective advice should be imputed to the bank. It was held that Mrs Thompson was unsuccessful. The bank were entitled to assume that the solicitors had correctly advised the wife. The doctrine of imputed knowledge had not survived Barclays Bank v O'Brien. The correct analysis was in terms of constructive notice and reasonable steps. Whilst the solicitor was the agent of the bank there was no duty of an agent to disclose their short comings to the principal.

This applies even where the bank paid for the advice. In Natwest v Beaton [1997] EWCA Civ 1391, Mr Beaton was an architect and was a partner in the business. Mrs Beaton had no interest in the business. The partnership had a debt of £20,000 secured on the Beaton's family home. The Beatons then wished to move house. The bank agreed to transfer the charge to the new property. The bank instructed a solicitor to execute the charge and to advise the wife explaining that she had no interest in the business and was putting up her interest in the home as security. The solicitor executed the charge and witnessed the wife's signature. The solicitor wrote to the bank and confirmed that they had executed the charge and advised Mrs Beaton accordingly. The new charge was not limited to £20,000. The document did state the limit of £20,000 but this was deleted. The wife claimed that neither her husband nor the solicitor had explained the change to her and she believed it to be limited to £20,000. She argued the failure to disclose the information amounted to a misrepresentation as they were both under an obligation to disclose the true nature of the charge. She also the bank would have constructive notice of the inadequate advice of the solicitor either under s.199 Law of Property Act 1925 or because the solicitor was the agent of the bank. It was held that when the solicitor was advising the wife he was not acting as an agent for the bank his duty was to the wife alone. The bank were entitled to assume the solicitor had advised the wife appropriately and were thus not fixed with constructive notice.

For consideration of the position of unjust enrichment of the wife, see Dunbar Bank Plc v Nadeem & Anor [1998] EWCA Civ 1027,

Summary

In this lesson, we have discussed the second set of vitiating elements. We have been able to see how duress and undue influence affect the performance of a contract. This discussion takes back on the doctrine of freedom of a contract. Parties enter the contract voluntarily. There should be no coercion. The free will of any party should never be compelled. In the event this free will of any party is interfered with, the performance of the contract is also affected.

Activity

Discussion on the various practical ways in which a party’s free will to contract can be coerced by duress and undue influence

Discussion questions

1.     Discuss how duress affects the performance of a contract.

2.     A problem question will be sent through the e-learning portal and you will be expected to analyse it and advise the parties in that question

TOPIC 8: (WEEK 10) VITIATING ELEMENTS: ILLEGALITY

Learning outcomes

By the end of this lesson, learners should be able to:

1.     Explain what illegal contracts are

2.     Explain how illegality affects the performance of a contract

3.     Apply the principles studied in the lesson to solve real-life contract problems

Content

ILLEGALITY AS A VITIATING FACTOR IN CONTRACTS

As a general rule, the courts will not enforce an illegal contract or provide for any other remedies that arise out of it. However, in determining the consequences of illegal acts carried out pursuant to a contract, the courts will distinguish between those contracts that are said to be illegal at their formation, and those that are illegal through performance.

CONTRACTS CONSIDERED ILLEGAL AT FORMATION

A contract will be considered illegal at its formation when it is incapable of performance without an illegal act. Contracts falling into this category cannot be enforced. Where a contract is illegal when formed, neither party will acquire rights under that contract, regardless of whether there was any intention to break the law. The contract will be void and treated as if it was never entered into. The case of David Taylor & Son v Barnett Trading Co [1953] provides us with an example of a contract that was deemed illegal at its formation. In that case, Barnett Trading agreed to sell David Taylor Irish steak for delivery between April and July for a set price. At the date the contract was entered into, an order was in force preventing the buying or selling of meat over a certain price (which the contract exceeded). When Barnett Trading did not make delivery, Mr Taylor claimed damages. At first instance, the arbitrators ordered that Barnett Trading pay Mr Taylor compensation for non-delivery. On appeal, the Court of Appeal held that the contract had been illegal at its formation due to the provision of set prices that exceeded the legal limits and accordingly set aside the award as it was based on an illegal contract.

In the case of Anderson Ltd v Daniel [1924], the Fertiliser Act 1906 required every person that sold for use as a fertiliser any soil that had been subject to an artificial process, to provide the purchaser with an invoice stating the respective percentages of certain chemicals. The court held that the effect of non-compliance did not merely render the vendor liable to pay a penalty, but made the sale illegal and precluded the vendor for suing for the price of the contract.

CONTRACTS ILLEGAL AS PERFORMED

A contract which need not necessarily be performed in an illegal manner, but which is ultimately performed illegally by one of the parties, will be considered slightly differently from those that are illegal at formation. In these circumstances, all rights are withheld from the party that committed the illegal act, but the appropriate remedies will still be available to an innocent party that was not aware of the illegality. If, however, the innocent party has been privy to, or taken part in, the illegality they will not be able to enforce or rely on the contract.

In Colen v Cebrian [2003], a husband and wife claimed commission that was owed prior to their dismissal from the company for whom they worked. The husband had evaded tax, by giving to his wife commission to which he alone was contractually entitled. The company claimed that they should not have to pay the commission because the contract was tainted by illegality and the employment tribunal ruled that they did not have to pay the commission. The Court of Appeal, however, overturned the tribunal’s decision, ruling that there was a clear distinction between the method of calculating the commission and the ultimate destination of that commission. The Court of Appeal upheld the contract, providing that illegality as to performance will not always result in the unenforceability of the contract. Lord Justice Carnwath said that: ‘… if at the date of the contract the contract was perfectly lawful and it was intended to be performed lawfully, the effect of some illegal performance is not automatically to render the contract unenforceable’.

The nature of illegality

The term illegality does not necessarily mean that a criminal offence is involved. It means that the contract in question is unenforceable as it is injurious to the public or is inconsistent with the public good. An illegal contract is un-enforceable. This is because for an agreement to be enforceable, it must have been entered into for a lawful purpose. A contract may be declared, illegal by statutes or a court of law

a) Contracts declared illegal by Statutes.

Under the employment act, wages or salaries are payable in money or money’s worth. A contact to pay wages or salary in kind is illegal and void. Such a contract is said to be illegal as formed and is unenforceable.

b) Contracts declared illegal by courts of law (contracts illegal at common law)

Long before statutory intervention, courts had declared money contracts illegal for being contrary to public policy e.g.

A contract to commit a crime, tort, or fraud: Such a contract is illegal and unenforceable as it is a contrary to public policy to commit crimes, torts or fraud. In Bigos v Bousted [1951] 1 All ER 92, the plaintiff agreed to make available £150 worth of Italian currency for the defendant's wife and daughter during their stay in Italy, the money to be repaid to the plaintiff in England in English currency. The agreement, as both parties were aware, contravened the provisions of the Exchange Control Act 1947. As security for the repayment of the money, the defendant deposited a share certitificate. His wife and daughter went to Italy but the plaintiff failed to supply any currency, but sued for the payment of £150. The defendant counterclaimed for the return of the share certificate on the ground that the contract had not been performed and that he had repented of it. But it was held that this was not a case of repentance. The contract was illegal and its performance was prevented not by the defendant's repentance but by the refusal on the part of the plaintiff to lend the money.

Contracts prejudicial to public safety: These are contracts which promote harmful activities in a country or its neighbours. E.g. a contract to finance rebels in a country or coup plotters, assisting alien enemies

Contracts prejudicial to the administration of justice: These are contracts which interfere with the judicial process e.g.

a. A contract to stifle prosecution of an alleged crime.

b. Champerty agreements: This is a contract whereby a party provides financial assistance to another involved in a civil case so as to share the amount awarded by the court. Such a contract is illegal and unenforceable.

c. Maintenance: this is a contract whereby a party provides financial assistance to another to enable him sue a 3rd party for no reasonable course. Such a contract facilitates the harassment of a party by another through the courts. It is illegal and unenforceable.

Contracts to defraud state revenue: A contract whose object is to deny the state whether central government or local government revenue by way of evading tax is illegal and unenforceable. In Miller v Karlinski (1945) 62 TLR 85 the plaintiff who was an employee of the defendant a ₤10 per week had agreed that the amount deducted from the salary as tax was refundable as an allowance. In an action to recover the refund, it was held that it was irrecoverable as the object of the contract was to defraud the state revenue.

Contracts liable to promote corruption in public: Such a contract is unenforceable as corruption is contrary to public policy. In Parkinson v College of Ambulance Ltd [1925] 2 KB, Colonel Parkinson was approached by the secretary to the College of Ambulance who fraudulently told him that if he made a contribution to the College (a charity), it would be able to obtain a knighthood for him. Parkinson made a contribution of £3,000, but no knighthood was forthcoming. He brought an action to recover his money. It was held that the contract was illegal, as being contrary to public policy. Parkinson could not sustain his action without disclosing this, and his own complicity. The donation was on its face a gift, and therefore irrecoverable. It could only be explained as being part of a contract by disclosing the consideration alleged to have been given for it, that is, the promise of the knighthood. The plaintiff's action could only have any force as being for breach of this contract, but since the contract was illegal, the action had to fail.

Contracts liable to promote sexual immorality: These are contracts contra bonos mores (contrary to good morals). Such a contract is unenforceable on account of illegality. The contract may be illegal as performed. In Pearce v Brooks (1865) LR 1 Ex 213, there was a contract under which the claimants supplied the defendant with an ornamental broughman (a type of carriage) which was to be paid for by installments. After one installment has been paid, the broughman was returned in a damaged condition. The claimants sued for £15 compensation which was payable under a forfeiture clause in the agreement if the broughman was returned damaged. The defendant, however, was a prostitute, and there was evidence that she intended to use the broughman to attract customers. Moreover, it seems at least one partner in the claimant’s firm was aware of this. On this basis, the court held that this would be an illegal contract, so that the claimants would be unable to recover either under the contract or for the damage. The knowledge of the claimants was relevant here, but not every contract with a known prostitute will be illegal. In Appleton v Campbell, the action was for the recovery of board and lodging in relation to a room rented from the claimant. The court held that the plaintiff could not recover if he knew that the defendant was a prostitute, and that she was using the room to entertain her clients. But: ‘…if the defendant had her lodgings there, and received her visitors elsewhere, the claimant may recover, although she be a woman of the town, because persons of that description must have a place to lay their heads.’ There are thus two factors necessary for the contract to be unenforceable. First, there must be knowledge that the other party is a prostitute and, second, knowledge that what was supplied under the contract is to be used for the purposes of prostitution.

One might expect that the same approach would apply to other ‘immoral contracts.’ The extent to which the other contracts are likely to be treated as ‘immoral,’ however, must now be considered in the light of the decision in Armhouse Lee Ltd v Chappell (1996). In this case, the publishers of a magazine sought to recover payment for advertisements which had been placed by the defendants. The defendants resisted the claim on the basis that the content of the advertisements was illegal or immoral, since they related to telephone ‘sex lines.’ The trial judge found for the claimants. On appeal, the Court of Appeal considered a range of ways in which the advertisements could be said to be illegal, including prostitution, obscenity, and conspiracy to corrupt public morals. All were rejected. In addition, the court refused to find that ‘public policy’ required the contracts to be treated as unenforceable. There was no evidence that any ‘generally accepted moral code condemned these sex lines’. Moreover, ‘it was undesirable in such a case, involving an area regarded as the province of the criminal law, for individual judges exercising a civil jurisdiction to impose their own moral attitudes’. The decision of the trial judge was therefore upheld, and the contracts were enforceable by the plaintiffs. This case suggests it is unlikely that there will be any significant extension of the range of contracts that will be struck down on the basis of sexual ‘immorality.’ In the light of the Court of Appeal’s decision, it would seem likely that illegality will only operate to prevent the enforcement of a contract where the behaviour concerned amounts to, or involves, a criminal offence.

A contract based on an illegal contract is also an illegality of the other contract

Effects of illegality

An illegal contract is said to be ‘beyond the pale of law’. Such a contract is unenforceable as it creates no rights and imposes no obligations on the parties. Neither party is bound to perform. Money or assets changing hands under an illegal contract is irrecoverable as gains and losses remain where they have fallen.

However such money or assets may be recovered in certain circumstances;

1. Where either party repents/ regrets the illegality before the contract is substantially performed.
2. Where the parties are not in pari delicto (not equally to blame for the illegality), the less blameworthy party may recover.

If the owner of the money or asset establishes title thereto without relying upon the illegal contract. As was the case in Mistry Amar Singh v. Serwano Wofunira Kulubya [1963] 3 W.L.B.. 513 (P.C.), where a piece of land had changed hands under an illegal; contract but the plaintiff established his title. The judgment of Lord Morris of BORTH-Y-GEST of the Privy Council summarised the several authorities which hold that a Plaintiff cannot rely on his own illegality to found a cause of action against the Defendant and the court will not aid the Plaintiff where he relies on his own illegality to sue the Defendant. Lord Morris of BORTH-Y-GEST said:

“In his judgment in Scott v Brown, Doering, McNab & Co, Slaughter and May v Brown, Doering, McNab & Co Lindley LJ ([1891–94] All ER Rep at p 657, [1892] 2 QB at p 728) thus expressed a well-established principle of law:

“Ex turpi causa non oritur action (Latin for "from a dishonorable cause an action does not arise". It is a legal doctrine which states that a plaintiff will be unable to pursue legal remedy if it arises in connection with his own illegal act). This old and well-known legal maxim is founded in good sense, and expresses a clear and well-recognised legal principle, which is not confined to indictable offences. No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal, if the illegality is duly brought to the notice of the court, and if the person invoking the aid of the court is himself implicated in the illegality. It matters not whether the Defendant has pleaded the illegality or whether he has not. If the evidence adduced by the Plaintiff proves the illegality the court ought not to assist him.”

Lindley LJ added ([1891–94] All ER Rep at p 657, [1892] 2 QB at p 729): “Any rights which he may have irrespective of his illegal contract will, of course, be recognised and enforced”. A L Smith LJ ([1891–94] All ER Rep at p 660, [1892] 2 QB at p 734), said:

“If a Plaintiff cannot maintain his cause of action without showing, as part of such cause of action, that he has been guilty of illegality, then the courts will not assist him in his cause of action.”

In the earlier case of Taylor v Chester it was said ((1869), LR 4 QB at p 314):

“The true test for determining whether or not the Plaintiff and the Defendant were in pari delicto, is by considering whether the Plaintiff could make out his case otherwise than through the medium and by the aid of the illegal transaction to which he was himself a party.”

In the Kenyan case of Kenya Airways Limited versus Satwant Singh Flora [2013] eKLR, the Court set out the following guidelines when determining rights and obligations of parties where one party pleads alleged illegality of the contract as justification for refusal to be bound under such a contract:-

(i)             No person can claim any right or remedy whatsoever under an illegal transaction in which he/she has participated. The Court is bound to veto the enforcement of a contract once it knows that it is illegal whether that knowledge comes from the statement of the guilty party or from outside.

(ii)           If the statute prohibits the contract, it is unenforceable whether the parties meant to break the law or not.

(iii)         No Court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of the contract or transaction which is illegal, if the illegality is duly brought to the notice of the Court, and if the person invoking the aid of the Court is himself implicated in the illegality. It matters not whether the defendant has pleaded the illegality or whether he has not. If the evidence adduced by the plaintiff proves the illegality, the Court ought not to assist him.”

(iv)          No Court ought to enforce an illegal contract where the illegality is brought to its notice and if the person invoking the aid of the Court is himself implicated in the illegality.

(v)           In order for the doctrine to act as a defence to the claim, there must be illegal performance of the contract by one party to the contract and knowledge that illegal performance and participation in it by the other party to the contact.”

Summary

In this lesson, you have learnt that some contracts are illegal at formation while others are illegal as performed. Contracts that are illegal at formation cannot be enforced in a court of law. They are said to be void ab initio. Contracts that are illegal as performed can partially be enforced, especially where only one party is to blame for the illegality while the other party is innocent. You are advised to read the suggested cases to further understand these principles.

Activity

Scrutinising various contracts to ascertain their legality

Discussion questions

Solve the following problem:

Brad and Jen want to buy a pearl pendant. They look at a number of pearls at a licensed pearl farm but decide that they are too expensive. They then find a shop in Broome –Pearl Jewellery and Repair Barn – and see that the pearls are much more reasonably priced. The shop owner shows them a number of pendants and suitable gold chains. After looking at a few, they see a pendant and chain they like and agree to purchase them for a bargain price.

Jen prefers a much shorter silver chain to the gold long one that is attached to the pendant, and so they arrange to pay for the pendant and replacement silver chain immediately, and to pick up both the pendant and chain the next day, after the shop has swapped and adjusted the chain. The assistant gives them a receipt for the purchase and a repair docket for the chain alteration. The repair docket states: “One pearl pendant with silver chain.”

The next day, Brad and Jen go to the shop to pick up their pendant and chain, but are blithely told by the shop owner that she cannot remember them ever making their purchase. The owner is an ex-law student and so, when they become angry and threaten legal action, she also smugly suggests that they perhaps should be careful dealing with an unregistered pearl trader. Brad and Jen knew about the law when they bought the pendant, and that the seller was not registered, but were just so keen to get a pearl they could afford.

The applicable statute, The Pearl Purchasing Act 1997 states in s.20:

It is an offence to purchase pearls or any product containing pearls, from an unregistered seller.

Penalty: $10,000 for every purchase.

Brad and Jen have come to you for advice. Specifically they would like to know:

1) Is the contract illegal under the Pearl Purchasing Act 1997? Is there anything else you would need to know about that statute to decide?

2) If the contract is illegal under the Act, should the court nonetheless enforce it? i.e. allow Brad and Jen to claim their property or get their money back.

TOPIC 9 (WEEK 11): VOID CONTRACTS

Learning outcomes

By the end of the lesson, students should be able to:

1.     Distinguish between void contracts and voidable contracts

2.     Explain how contracts become void

3.     Discuss the fate of void contracts in the law of contract

Content

VOID CONTRACTS

These are contracts which the law treats as non-existent, they are generally unenforceable. However, if a contract is only void but not illegal, some rights may be enforced by exception. A contract may be declared void by statute or a court of law.

1. Contracts void by Statute

Under the Employment Act, a contract to pay wages or salary in kind is null and void. Under the Gaming Act, 1845, wagering contracts are void. A wager is a contract whereby 2 persons or groups of persons with different views on the outcome of some uncertain event agree that some consideration is to pass between them depending on the outcome. Such a contract is void. In Earl of Ellesmere v. Wallace (1929) 2 Ch. D. 1, a Jockey Club was bound by contract to hold a race and to pay prize money to the owner of whichever horse won. The owner who entered his horse into the race was not in competition with the Jockey Club, who were indifferent as to which horse won (the prize money would be paid in any event). The owner was not therefore playing a game with the Jockey Club. Russell, J., held that there cannot be more than two parties or two sides to a bet and that there may be a multipartite agreement to contribute to a sweepstakes, which may be illegal as a lottery, if the winner is determined by chance, but not if the winner is determined by skill. Lord Hanworth MR on the other hand held that a contract is void as wagering or gaming contract if it is entered into by the parties for no purpose other than wagering or gaming.

2. Contracts void at Common Law (Courts of Law)

These are contracts declared void by courts of law for being contrary to public policy e.g.

a) Contract to oust the jurisdiction of the court

This is a contract which purports to deny the parties the right to seek judicial redress. It is a principle of law that parties cannot by contract oust the courts of their jurisdiction; but any person may covenant that no right of action shall accrue till a third person has decided on any difference that may arise between himself and the other party to the covenant. At common law an agreement to oust the jurisdiction of the Courts was invalid. However, if the parties agreed that their rights were to be determined by arbitration as a condition precedent to the accrual of a complete cause of action and therefore to the Courts having jurisdiction, such an agreement was valid. This was the case in Scott v Avery. The wording of the clause is the key. If the covenant is framed so there will be no cause of action until after arbitration, then the parties must arbitrate before seeking a remedy in the courts of law, but, if the wording is such that the arbitration will only arise after a cause of action has arisen, then the courts are not excluded. In Scott v. Avery (1855) 5 HL Cas 81, the 1856 British case from which the rule of law draws its name, Alexander Scott and George Avery, at issue was a contract which provided that any differences or disputes had to be referred to arbitration. A Scott v Avery clause makes arbitration a condition precedent to any court action. The House of Lords reviewed the judicial treatment of such an arbitration clause through the history of British courts. Some of the judges thought that such a clause would be against public policy; an attempt to avoid the courts of law and the rule of law. Justice Campbell states as follows:

"... where it is expressly, directly and unequivocally agreed upon between the parties that there shall be no right of action whatever till the arbitrators have decided, it is a bar to the action that there has been no such arbitration."

Lord Cranworth stated as follows:

 “This doctrine depends upon the general policy of the law that parties cannot enter into a contract which gives rise to a right of action for the breach of it, and then withdraw the jurisdiction on such a case from the ordinary tribunals. But surely there can be no principle or policy of the law which prevents parties from entering into such a contract as that no breach shall occur until after a reference has been made to arbitration.” “……..it appears to me perfectly clear that, until the award was made, no right of action accrued, and consequently the judgment of the court below, reversing the judgment of the Court of Exchequer and allowing the plea, was a perfectly correct judgment.”

Similarly, in Hyman v Hyman [1929] AC 601, the appellant, Mr Hyman, was married to respondent. He left her to live with another woman. Both he and the respondent executed a deed of separation in which he covenanted to pay his wife £2000 alimony as well as a weekly sum of £20 for her maintenance during her life. The wife in return covenanted not to petition any court for further alimony or maintenance other than the sums that had already been agreed. After divorcing her husband, she petitioned the court for maintenance. At first instance the court ordered that the deed did not prevent the wife from claiming maintenance. The husband appealed. The ex-husband argued that the respondent was still bound by her covenant in the deed of separation not to petition the court for permanent maintenance even though they had divorced. He also argued that public policy required that contracts should be kept and covenants honoured, and that he was simply keeping his ex-wife to her bargain. Their Lordships held that there was no provision in the covenant terminating it on dissolution of the marriage. Therefore, it still operated. However, Lord Hailsham said that under the Judicature Act 1925 s.190(1), a court had discretion to make an order granting such sums of maintenance as it thought reasonable and order payment of alimony that it thought just. The agreement in the deed amounted to a covenant not to bring proceedings. This would have ousted the jurisdiction of the court to make such orders. Therefore, it was illegal and invalid. Consequently, the appeal was dismissed.

b) Contracts prejudicial to the status of marriage

This is a contract which interferes with the marriage institution. E.g.

a. Marriage brokerage contracts.

b. Contracts whose tendency is to encourage separation.

A contract in total restraint of marriage is void. Under English Law, agreements which restrain marriage are discouraged as they are injurious to the increase in population and the moral welfare of the citizens. In Lowe v. Peers (1768) 4 Burr 2225, plaintiff covenanted that if he married any person except the plaintiff he would pay her 1,000 within three months of the marriage. Held, the contract was void. The Court remarked- “that it was not a promise to marry her, but not to marry anyone else, and yet she was under no obligation to marry him.” The Court found the contract void as it was purely restrictive and carried no promise to carry on either side.

In Hartley v Rice (1808) 10 East 22, it was held that a bet between two men that one of them would not marry within a specified time was void as it gave one of the parties a pecuniary interest in the man’s celibacy. Further, under English Law brokerage contracts or promises made on the consideration of procuring or bringing about marriage, are held illegal on several social grounds. According to Chitty, a contract whose object is to restrain or prevent a party from marrying, or a deterrent to marriage in so far it makes any person uncertain whether he may marry or not, is against public policy. English Law, however, does not find agreements which partially restrain marriage to be void.

In Hermann v. Charlesworth (1905) 2 KB 123., it was held that a marriage brokerage contract, i. e., the promising for money to bring about a marriage, is void, and money paid under such a contract may be recovered before the marriage takes place. The plaintiff paid the defendant 52 to introduce gentlemen to her with a view to matrimony. Four months later she sued for the return of the money. It was held, she could succeed.

(c) Contracts in restraint of trade

This is a contract by which a person’s future liberty to engage in a profession or trade in a particular manner or with particular persons is voluntarily or involuntarily restricted e.g. An employee covenant not to work for a business rival or set up a similar business after leaving employment. At Common Law, a contract in restraint of trade is prima facie void for being contrary to public policy. However, such a contract may be enforced if it is proved that;

1. The restraint was reasonably necessary to protect the interests of the restraining party.

2. The restraint was reasonable to the party being restrained.

3. The restraint was not injurious to the public.

In Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616, Macaulay, a novice songwriter aged 21, entered a standard form agreement with Schroeder Music, whereby they would have the exclusive benefit of his compositions. The global copyright was assigned to another party in return for a fixed percentage of any royalties. This was to last five years and could be automatically extended for five years if the royalties went above £5000. Schroeder Music could terminate or assign the contract, but Macaulay could not, and Schroeder was under no obligation to publish or promote anything. Macaulay claimed the agreement was contrary to public policy. The House of Lords held the standard form agreement could not be justified as being purely moulded through negotiation, competition and public opinion. Macaulay had no bargaining power. The defendants purported to be able to arbitrarily decline to exploit the plaintiff's work in which event the plaintiff's remuneration under the agreement would be limited to a £50 advance payable thereunder during the five-year period. The defendants' power to assign precluded the argument that the restrictions would not be enforced oppressively. The defendants had failed to justify restrictions which appeared unnecessary and capable of oppressive enforcement.

Restraint may however be reasonable and commercially necessary for protection of legitimate interest. In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, the appellant, Thorsten Nordenfelt, was a Swedish gun manufacturer with a valuable, world-wide business. He sold the business to a company, the respondents, and agreed to enter into a restrictive covenant not to work for any rival business for a 25 year period in an unlimited geographical area. Later, he worked for a rival business. The respondents brought an action to enforce the covenant by injunction. The case came to the House of Lords. The appellant argued that clause was a restraint of trade clause and had to be reasonable to be upheld. He argued that a worldwide geographical limitation was unreasonable. The respondents argued that the restraint was only such as was necessary to protect themselves. Lord McNaughton said a clause by which someone restrains themselves from the exercise of his trade was prima facie unlawful. It was a principle of English law that all trade should be free. However, it would discourage trade if someone who has built up a valuable business could not dispose of it to his best advantage. Therefore, restraint of trade clauses would be upheld if they were reasonable (at 564):

“in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.”

The House of Lords therefore held that the restraint was reasonable in the interests of the parties. They placed emphasis on the £200,000 that Thomas Nordenfelt had received as full value for his sale. Restraint of trade clauses were prima facie void at common law, but they may be deemed valid if three conditions are met: the terms seek to protect a legitimate interest, the terms are reasonable in scope from the viewpoint of the parties involved, and the terms are reasonable in scope from the viewpoint of public policy. The question on severability was whether the reasonable restriction could be enforced when it was in the same contract as an unreasonable and unenforceable restriction. The court used the test of whether striking out (with a blue pencil) words containing unreasonable provisions would leave behind a contractual obligation that still made sense. If it did, then the amended contract would be enforced by the court. In this case, the unreasonable restraint was severable, and the court enforced the amended agreement that Nordenfelt "for the next 25 years, would not make guns or ammunition anywhere in the world, thus permitting him to trade in those very items in direct competition with Maxim, illustrating the limited practical utility of the rule under its strike-out only stricture.

The case also established the "Blue pencil doctrine" as a method for deciding whether contractual obligations can be partially enforced when the obligation as drafted in the contract has an element of illegality. This is a legal concept where a court finds that portions of a contract is void or unenforceable, but other portions of the contract are enforceable. The Blue Pencil Rule allows the legally-valid, enforceable provisions of the contract to stand despite the nullification of the legally-void, unenforceable provisions. However, the revised version must represent the original meaning; the rule may not be invoked, for example, to delete the word "not" and thereby change a negative to a positive.

Courts will be ready to distinguish restrictions that are unnecessarily too wide. For example, in Vancouver Malt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. (1934) AC 181, A & Co were brewers of sake; they sold their business to B & Co and promised, for a period, not to brew beer. Since the only goodwill A & Co had acquired was in respect of what they had actually brewed (namely sake) the covenant was unnecessarily wide. It was held that they were free to brew beer other than sake.

Courts are also willing to sever parts which might be too wide in area or period. In Goldsoll v Goldman [1915] 1 Ch 292, the plaintiff and the defendant carried out similar business as dealers of imitation jewellery. The defendant sold his business to the plaintiff and covenanted that, for two years, he would not: “…be engaged concerned or interested in or render services (gratuitously or otherwise) to the business of a vendor of or dealer in real or imitation jewellery in the county of London or any part of the United Kingdom of Great Britain and Ireland and the Isle of Man or in France, the United States, Russia, or Spain, or within twenty-five miles of Potsdamerstrasse, Berlin, or St. Stefans Kirche, Vienna.” The plaintiff sought an injunction against the defendant for an alleged breach of this covenant. At first instance, Neville J held that the covenant was not too wide in area but the part referring to the UK or the Isle of Man was severable from the rest. Furthermore, the covenant was not too wide because it extended to real jewellery, though the plaintiffs’ business was chiefly if not entirely confined to imitation jewellery. Court of Appeal upheld the decision of Neville J. The covenant was unnecessarily broad in so far as it intended to cover foreign countries. Neville J was correct to limit the injunction in area so that it only extended to the UK and the Isle of Man. Furthermore, the doctrine of severability was applicable to the part of the covenant regarding the scope of the defendant’s business. The covenant must be limited to what is reasonable necessary for the protection of the plaintiff’s business. Therefore, the covenant was only good to the extent that it restrained the defendant from carrying on business in imitation jewellery.

The doctrine of severability is however not applicable to covenant for protection of plaintiff’s entire business. In Attwood v Lamont [1920] 3 KB 571, the plaintiff was a tailor and general outfitter who employed the defendant as an assistant. In the contract of employment, the defendant agreed “either on his own account or on that of any wife of his or in partnership with or as assistant, servant, or agent to any other person, persons or company carry on or be in any way directly or indirectly concerned in any of the following trades or businesses; that is to say, the trade or business of a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentlemen’s, ladies’ or children’s outfitter at any place within a radius of ten miles of Kidderminster.” The defendant established a business as a tailor outside the agreed radius but obtained orders within the radius. The Divisional Court held that the covenant was wider than what was reasonably necessary for the protection of the plaintiff’s business but it was severable and, accordingly, granted an injunction which referred only to the tailoring trade. The defendant appealed to the Court of Appeal which reversed the decision of the Divisional Court. The covenant was not severable because it was a single covenant for the protection of the plaintiff’s entire business and not several covenants for the protection of several businesses. In any case, even if the covenant could be severed by confining it to the tailoring business it would still be void as being in restraint of competition. The Court observed that it may now be taken to be established that it is for a covenantee to show that the restraint sought to be imposed upon the covenantor goes no further than is reasonable for the protection of the business.

Restraints in a contract of employment

These apply in the protection of trade secrets and confidential information. A distinction should however, be made between trade secrets and confidential information. In FSS Travel and Leisure Systems Ltd v Johnson [1998] IRLR 382, CA, Mr Johnson worked as a computer programmer for a company which develops computer software for the travel industry. There was a restrictive covenant in his contract of employment which restrained him from working in competition with his employer for one year following the termination of his employment. In May 1997 he resigned from the company and intended to go to work for a competitor. The company sought to enforce the covenant and Mr Johnson argued that it was invalid because there was no legitimate interest to be protected and the one year restriction was too long. The Court of Appeal held that the covenant was invalid. For a covenant to be enforceable the employer had to have a legitimate protectable interest. The Court drew a distinction between trade secrets which an employee learns in the course of his employment and general skill, know-how and experience acquired whilst working in the job. It was necessary to look at all the evidence to determine the nature of the employment and the information in question and what harm could be done to the employer. Although Mr Johnson had knowledge of the computer systems and what to do this was not enough to qualify as a trade secret which could have legitimate protection under a restrictive covenant. The covenant was invalid on this basis and the Court did not find it necessary to go on to consider the validity of the duration of the covenant.

Accordingly, a covenant will not be upheld simply because it restrains competition. As well as issues of scope and duration, the employer must show that there is a legitimate interest to protect. General skill and know-how did not fall within this category.

In Herbert Morris Ltd v Saxelby [1916] AC 688, the plaintiffs, Herbert Morris Ltd, manufactured hoisting machinery. The defendant, Saxelby, was employed and trained by them as a specialized engineer. His contract contained a covenant that said if he left the company he would not work directly or indirectly on any similar businesses for seven years. When he left the company the plaintiffs sought an injunction to stop him working for a rival company. The defendant argued that the covenant was in restraint of trade as it restrained the defendant’s ability to make a livelihood. As a result he could not gain employment in a general engineering firm because his training was in one specialized branch of engineering. This made his specialized qualification a hindrance. Therefore, it was not in the public interest for it to be enforced. He also argued that Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 should not be applied here as that decision referred to a business owner and not an employee. The House of Lords held that it was in the public interest that someone was free to earn a living. The employer’s legitimate interests was confined to protecting its trade secrets and customers. This covenant went far beyond this and was trying to stop the defendant using his own skills and experience, even though these had been developed by working at the company. This could not be in the public interest. Lord Shaw stated (at 718): “it is, justly interpreted, a claim to put him in such bondage as regard to his own labour that he must, for seven years of his life, become an exile”. Therefore, the clause was unenforceable.

A covenant that is reasonably necessary to protect an employer against the betrayal of trade secrets or confidential information is not void merely because it unavoidably protects the employer against competition. Likewise, a restraint against competition is justifiable if its object is to prevent the exploitation of trade secrets that learned by the servant, in the course of his employment. An instance of this occurred in Forster & Sons Ltd. v. Suggett (1918) 35 T. L. R. 87, where a works manager had knowledge of certain confidential methods concerning the correct mixture of gas and air in furnaces for making glass and glass bottles. It was held in the above case that a restraint is justifiable if its purpose is to prevent the exploitation of trade secrets and/or confidential information. Apart from the protection of trade secrets or confidential information an employer is not entitled to restrain an employee from making use after the employment has ceased of any knowledge or skill gained during the period of employment

There are three categories of information that are accessible to the employee as laid down in Faccenda Chicken Ltd. v. Fowler (1985) 1 All. E.R. 724. The first category includes things that are within the reach of any interested individual. Such information does not require any kind of protection. The next category consists of information that must remain confidential during the entire time during which employment exists because there is an implicit loyalty clause in any lease and hire of work. This prohibits an employee from giving away privileged information to a competitor. However, once the employment is over, the use of skill and knowledge acquired while working with the former employer is allowed even when in direct competition. Finally, the only kind of information protected even after the termination of work with an enterprise is information that is likened to trade secrets, which are the property of the employer. In this case, Faccenda Chicken employed Mr Fowler as a sales manager. The company used a system suggested by him. He left their employment and started a similar business employing some of Faccenda’s staff. This matter was not covered in Mr Fowler’s contract of employment. Faccenda sought an injunction to restrain Mr Fowler from using confidential sales information. When their application was refused, they appealed to the Court of Appeal. The sales information did not amount to a trade secret and was not protected. The appeal was dismissed.

In the absence of an express term in the contract, the employer must rely on implied terms. During the course of employment it is much easier for the employer to protect confidential information as the employer may rely on the implied duty of fidelity. After the termination of employment the obligation is more restricted in scope. The obligation may be used to protect secret processes of manufacture, such as chemical formulae, designs, special methods of construction and other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret. The obligation will not cover information which might be termed “confidential” only in the sense that it would be a breach of the duty of fidelity to disclose it during the course of employment. To determine whether the implied obligation prevents disclosure after employment, a number of factors must be considered.

1.     The nature of the employment — would the employee be expected to realise the sensitive nature of the information handled?

2.     The nature of the information itself — it is impossible to provide a list, but secret processes of manufacture would be a good example.

3.     Has the employer impressed on the employee the confidentiality of the information?

4.     Can the confidential information be readily isolated from information which the employee is entitled to disclose?

In this case the sales information, namely names and addresses of customers, the most convenient routes to those customers, customer’s requirements and prices charged did not fall within such a category of confidential information so as to protect it following the termination of employment.

Whilst an employer may be able to prevent an employee from disclosing “confidential information” during the course of his or her employment on the basis of the duty of fidelity implied into every employment relationship, this ability is much more restricted after termination and all factors such as the sensitivity of the information and the employee’s understanding of it must be considered. If there is “confidential information” which an employer does not wish to be disclosed after termination, express provision should be made for this in a contract of employment, bearing in mind that any restriction will only be enforceable insofar as it is reasonable to protect the employer’s genuine business interests: it must be a “trade secret”, rather than general information. Where there are appropriate restrictions, employers should also be careful not to terminate a person’s employment in breach of contract so as to release the employee from his or her obligations.

It is difficult to prevent an employee from doing certain things, for example, using their skill, aptitude and general technical knowledge with regard to the production of a commodity and also the business organization and methods of his employer. In Commercial Plastics Ltd v. Vincent [1964] 3 All E.R. 546, CP Ltd were engaged in the business of manufacturing thin P.V.C. sheeting which was used in the manufacture of adhesive tape. The company produced about 80% of the total plastic sheeting produced in the UK, and it represented about 20% of their total output. V was employed in research by CP Ltd. His contract of employment contained the following clause: 'In view of the highly technical and confidential nature of this appointment, you have agreed not to seek employment with any of our competitors in the PVC field for at least one year after leaving our employ.' On leaving the company V went to work for a competitor, and CP Ltd sought to enforce the restraint clause. Held the clause was too wide and went beyond protecting the company's legitimate interests and the injunction was refused. The court said there were certain things which an ex-employee could not be prevented from using, e.g. his skill, aptitude and general technical knowledge with regard to the production of a commodity and also the business organization and methods of his employer. However, confidential information which gives the possessor a competitive advantage and gained during employment could legitimately be protected by a reasonable restraint clause.

In Littlewoods Organization Ltd v. Harris (1978) 1 ALL ER, the employers rain a mail order business with their main rivals being Great Universal Stores. The employee covenanted specifically not to work for GUS for a period of 12 months post-employment but then resigned and went to work for GUS. He argued that the covenant as drafted was unreasonably wide since it would prevent him from working for GUS or any of its subsidiary companies anywhere in the world even if the particular operation with which he was concerned did not involve mail order. However, the majority of the Court of Appeal were prepared to uphold the covenant on the ground that where a covenant in restraint of trade was drafted in general terms which were capable without alteration of being construed in a more specific manner so as to protect the legitimate business interests of the employer, the court would so construe it. Accordingly, it was capable of being construed as applying only to the mail order interests of the employer. Regarded in this way, it was not unreasonably wide and in fact was necessary to protect the employer’s legitimate business interests. Accordingly, the fact that the covenant in respect of Bates is very wide (“selling”), it is probable that a court would interpret “selling” in this context as applying to door-to-door sales activity of the type in which Bates was previously engaged.

Factors on which reasonableness of restraint depends

The restraint in order to prevent misuse of confidential information has to be reasonable so that the interest of the parties afford adequate protection to the covenantee, which depends upon two factors of time and space. As the time of restriction lengthens or the space of its operation grows, the weight of the onus on the covenantee to justify it grows too. But a restraint for life was held valid in Fitch v. Dewes (1921) 2 A. C. 158. An ex-servant confidentially employed in the manufacture of an article under a secret process is under an implied obligation to his late master not to disclose any knowledge or information as to that secret process acquired during his employment. This applies to information retained in the servant’s memory as well as to information committed to writing and existing in a tangible form as was the case in Amber Size & Chemical Co. v. Menzel (1913) 2 Ch. 239. A contract not to divulge a trade secret may be reasonable though unlimited as to space or time and a restraint imposed in order to give effect to such a contract would apparently be treated in the same way as stated in the Halsbury’s Laws of England, Vol. 38, p.33 (3rd Edition).

The courts will consider the nature and extent of the contact between the employee and the customers. This is due to the fact that the more frequent and close the contact between the parties, the greater the opportunity for the former employee to influence the customer from the new position. Thus if, as in Marion White Ltd v Francis (1972) 3 ALL ER 857, a hair stylist who has built a reputation in a particular salon were to set up in rival business within a relatively short distance of the previous premises, a restraint would be regarded as reasonable.

In Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, the appellant was employed as a canvasser by the respondent. A restrictive covenant in the employment contract provided that the appellant could not, within three years of the termination of his employment, be employed by “any person, firm, or company carrying on or engaged in a business the same as or similar to that of the [respondent], or assist any person employed or assisting in any such business, within twenty-five miles of London aforesaid where the company carry on business.” The County Court judge had granted an injunction in favour of the respondent to prevent the appellant from breaching this restrictive covenant. This was reversed by the Divisional Court on the basis that the relevant clause in the contract was too vague to be capable of being enforced by injunction. The Court of Appeal reinstated the order of the County Court. On appeal to the House of Lords, the appellant submitted, inter alia, that the agreement between the parties was an unreasonable restraint on trade and, upon any construction the agreement of a radius of twenty-five miles is wider that was reasonably required for the protection of the respondents. Viscount Haldane L.C. held that the respondents had failed to show that the restriction went no further than was reasonable for the protection of their business. Notably, there was no evidence that a canvasser, such as the appellant, was likely to have come into possession of any special knowledge of the respondent’s business which would be recognised as a trade secret. Accordingly, the respondents had bound the appellant in a manner which might only have been necessary if they were carrying on a business of a different kind.

The “springboard” theory

In the field of protection of confidential information and trade secrets, it is very pertinent to mention the doctrine of the Springboard theory. This theory has been expressed as follows in Terrapin Ltd. v. Builders Supply Co. (Hayes) Ltd. and Others (R.P.C. (1967) p.375). "... a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental to the person who made the confidential communication, and springboard it remains even when all the features have been published as can be ascertained by actual inspection by any member of the public... The possessor of the confidential information still has a long start over any member of the public... It is, in my view, inherent in the principle upon which the Saltman case rests that the possessor of such information must be placed under a special disability in the field of competition to ensure that he does not get an unfair start."

When confidential information or trade secrets are leaked to a competitor, the application of the Springboard theory will protect the "head start" of the owner of this information and trade secrets and will "set back" those who illegally obtained access to the information.

Remedies against breach of confidential information

Although an injunction is the most common remedy in cases of breach of confidential information the confidence can be enforced by damages also (National Broach & Machine Co. v. Churchill Gear Machines Ltd. (1965) 2 All. E.R.961). In Cranleigh Precision Engineering Ltd. v. Bryant ((1965) 1 W. L. R. 1293, 1311), an injunction was given against a servant who as a servant acquired confidential information and sought to take advantage of it after leaving the service of the master. The Courts have awarded damages as compensation even though the breach committed was innocent (Seager v. Copydex (1967) 2 All. E.R. 415).

Restrictive trade practices are governed by the Restrictive Trade Practices, Monopolies and Price control Act CAP 504 Laws of Kenya

Contracts in restraint of trade may be voluntary or involuntary.

a) Voluntary Restraints

These are restraints agreed to by the parties to the contract e.g.

1. Restraints accepted by employee.

2. Restraints accepted by the seller of business.

3. Restraints accepted by a seller or distributor of goods

Restraints accepted by employee: The employee covenants not to work for a business rival after leaving employment or not to setup a similar business next door. Such a restraint is prima facie void. In Putsman v. Taylor. [1927] 1 K. B. 637, the defendant who was an employee in a tailoring business, covenanted not to work for the plaintiffs business rival in some 3 defined areas of the city of Birmingham within 3 years of leaving employment. He worked in one of them within the 3 years and the plaintiff applied for an injunction to retrain him from doing so and the court granted the same on the ground that the restraint was reasonable to the parties.

In Kores Manufacturing Co. v. Kolok Manufacturing Co. Ltd (1958) Ch. 108, two companies dealing in similar products covenanted not to employ former employee of the plaintiff company. The defendant company engaged the plaintiff company’s former employee of the plaintiff within 5 hours. The plaintiff sued for an injunction to restraint the defendant. It was held that the restraint was not enforceable as it was unreasonable to the parties.

Restraint accepted by vendors of business: The seller of a business may covenant not to set up a similar business next door, this may be necessary to protect the buyer’s business. Such a restraint is void in common law. However, it may be enforced if the court is satisfied that having regard to the type or nature of business, duration of the restraint, area covered and other circumstances, the restraint is reasonable to the parties. In Dias v R X Souto [1960] 1 EA 669 (HCZ), the defendant sold a business situate on the Island of Zanzibar, it specialized in merchandise for the expatriate community. He covenanted not to set up similar business within the Zanzibar protectorate. He established a similar business on the Island of Pemba. The plaintiff applied for an injunction to restrain him from doing so. The court enforced the restraint on the ground that it was reasonable. This decision was based on the specialized nature of the plaintiff business.

Restraint accepted by sellers or distributors of goods (solus agreements): A seller or distributor may enter in to a contract with a wholesaler or manufacturer which restricts his acquisition of goods, trading hours etc. The restraint is often referred to as Solus Agreements and they include:

1. Tying Covenant. The seller undertakes to purchase all his products from a particular wholesaler or manufacturer; this is in return for certain discounts.

2. Compulsory Trading Covenant. The seller covenants to keep his business open for reasonable hours every day.

3. Continuity Covenants. The seller takes to extract similar covenants form the person who purchases the business from him. Such restraints are Prima Facie void but may be enforced by a court of law if reasonable to the parties and not injurious to the public.

(b) Involuntary restraints

These are restraints imposed by trade associations and professional bodies on their members. They are involuntary in character. Such restraints are Prima Facie void but may be enforced if reasonable to the parties and are not injurious to the public.

Summary

In this lesson, you have learnt that void contracts are unenforceable. You have also learnt that contracts can be void at common law or by statute. There are statutes that declare certain contracts void. For instance, section 8 of the Sale of Goods Act provides that where parties enter a contract of sale of goods but unknown to them the goods perish, such a contract is void. It cannot be enforced. You are advised to revise these notes to develop a better understanding on the subject.

Activity

Debate: Void and Voidable contracts

Discussion questions

1.     Why would courts decline to enforce a void contract, especially one that is founded on a common mistake? Won’t they be interfering with the doctrine of freedom of contract?

2.     What is the difference between a void and a voidable contract?

TOPIC 10 (WEEK 12): DISCHARGE OF A CONTRACT

Learning outcomes

By the end of the lesson, learners should be able to:

1.     Distinguish between discharge and termination of a contract

2.     Explain the various ways in which a contract may be discharged

3.     Discuss the concept of the “blue pencil”

4.     Explain the doctrine of frustration of contracts

Content

A contract is said to be discharged, when the obligation created by it ceases to bind the parties who are now freed from performance. However, whether a party is liable or not after discharge, depends on the method of discharge. When parties enter into a contract, each has rights and duties that are spelled out in the agreement. When the sides perform their rights and duties, the contract is then discharged. In these cases, discharge of contract refers to an agreement that's fully performed. However, discharge of contract can happen due to other circumstances. Sometimes, obligations are incomplete, but the parties are no longer liable for them. When a contract is discharged, it's no longer binding. The following events may cause discharge of contract:

·       Substituted agreement

·       Performance

·       Lapse of time

·       Operation of law

·       Impossibility of performance

·       Accord and satisfaction

·       Contract breach

·       Release

·       Extinguishment

·       Set off

·       Confusion, when the obligation to pay and the duty to receive unite in the same party

·       Defeasance

·       Extinction, or a contract's loss of subject matter

·       An inability of a party to fulfill his or her obligation

·       Bankruptcy

·       Death of a contractor who undertook to teach an apprentice

·       Neglect to give notice to the party charged

·       Neglect to sue a principal at the surety's request

·       Discharge of a defendant

·       By certificate and discharge according to bankruptcy laws

Discharge of a contract therefore relates to the circumstances in which the contract is brought to an end. Where a contract is discharged, each party is freed from their continuing obligations under the contract. Discharge of a contract occurs when the main obligations of a contract end. The ending of this contract entails a termination of a contractual relationship. Yet parties may terminate a contract even when they do not fulfill to the end the primary obligations required by a contract. Thus, the main difference between discharge and termination of a contract is the conditions under which a contractual relationship ends.

A contract may be discharged in a number of ways:

1. DISCHARGE BY EXPRESS AGREEMENT

A contract may be discharged by agreement if the parties thereto expressly agree to discharge the contract. The mutual promises constitute consideration to support the discharge. Discharge by agreement justified on the premise that whatever is created by agreement may be extinguished by agreement. Discharge by agreement may be bilateral or unilateral

a) Bilateral Discharge: If neither performs its part of the contract, the obligation are said to be executory and the discharge is bilateral as both parties agree not to perform. The mutual promises constitute consideration. Where a simple contract is executory on both sides, an agreement to discharge the contract provides its own consideration; each party agrees to release the other from their outstanding obligations under the contract

b) Unilateral Discharge: If either of the parties has wholly or partially performed its part of the contract, the obligations are said to be executed and the discharge is unilateral. The party that has performed discharges the other from performance. Where a simple contract is executed on one side, a deed will be effective to release the other party from their obligation under the contract. In the absence of a deed, the other party must provide fresh consideration. This termed an “accord and satisfaction” This was explained by Scrutton L.J. in British Russian Gazette & Trade Outlook, Ltd. v. Associated Newspapers,. Ltd. [1933] 2 K. B. 616 as follows” “Accord and satisfaction is the purchase of a release from an obligation, whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.” What constitutes “satisfaction” is illustrated by Pinnel’s Case which concerned the payment of a debt. That case envisaged executed satisfaction but it seems that an executory promise may suffice. In Elton Cop Dyeing Co v Broadbent & Son (1920) 89 L.J. K.B. 186, a purchaser of a defective machinery reached a compromise with the seller that he would withdraw an action for breach of contract if the seller would promise to repair the machinery, sharing the cost. The seller’s executory promise to repair was effective to discharge the buyer’s cause of action. The satisfaction must not consist of a lesser obligation than was owed the original contract. But even in the absence of valid satisfaction a promise to discharge a party from a liability may be binding under the doctrine of promissory estoppel although it should not be forgotten that there is debate as to whether the doctrine extends to a promise to extinguish rights.

Formalities

There are two special cases:

1) Contracts required to be evidenced in writing. Where the contract is one that is required to be evidenced in writing in order to be enforceable it may be discharged by an oral agreement with no requirement of written evidence. Although the oral words will suffice to discharge the original agreement, any new agreement substituted in its place will be required to be evidenced in writing.

2) Contracts contained in a deed. At common law, a contract contained in a deed could only be discharged in the form in which it was made. However, in equity (which now prevails) such a contract may be discharged by an oral or written simple contract. This was confirmed in Berry v Berry [1929] 2 K.B. 316

A contract may be discharged by agreement when both parties agree to bring the contract to an end and release each other from their contractual obligations. This can be through:

1. Novation

2. Rescission

3. Alteration

4. Remission

5. Waiver

6. Merger

Novation: putting a new contract in place of the old one and can be done between the original contracting parties or different parties. Novation When a new contract is substituted for an existing one between the same parties When a new contract is substituted for an existing one between one of the parties and a third party. Novation should take place before the expiry of the time of the performance of the contract.

Rescission/Release by one party Is where one party has completed their contractual promise, and agrees to release the other party from further performance of the contract. Takes place when all or some of the terms of the contract are cancelled. Could be done by: a) mutual consent or b) when one party fails in the performance of contract, the other party could rescind the contract without fear of claim of compensation.

Mutual discharge: is where both parties agree to release one another from what was agreed upon before either party has performed any of the acts promised.

Remission It is acceptance of lesser fulfillment of the promise made.

Waiver of a contract: is where the strict performance of the contract is no longer required, even though strict performance of the contractual agreement can still be claimed by one of the parties.

Merger of lesser agreement into a greater agreement: is where parties to a simple contract enter into a formal contract or deed, and the simple contract has been merged by the formal contract which has become enforceable. Merger may also operate in such a way where the obligations under the agreement will have the effect of discharge.

Discharge by accord and satisfaction: arises where one party is in breach of the contractual agreement and the other party agrees to release the party who is in breach by requiring performance of another promise, which would then mean that the previous agreement has been discharged by accord (the new promise) and satisfaction (performance).

Accord = agreement Each party must agree to end the contract. The agreement must be freely given. Satisfaction = consideration

Both parties must also provide consideration. If both parties have continuing obligations then generally the consideration will be simply each of them giving up their rights under the contract. The only time consideration becomes an issue is where one party has fully performed their part of the contract when the other has not. The non-performing party must then provide consideration to make the agreement binding. Also if the agreement is made by deed there is no requirement to provide consideration. There is in effect a contract to end a contract.

Variation and Waiver

Variation involves an alteration in the terms of a contract A waiver is an indulgence voluntarily given by one party to the other that the former will not insist on the precise mode of performance laid down in the contract. A waiver may take effect without consideration and without the formalities that may be required for certain types of variation. The waiver is binding on the party who grants it and the party seeking indulgence is not permitted to repudiate the waiver and set up the original terms of the contract. A party granting the waiver may be able to revert to their strict legal rights by giving reasonable notice.

2. DISCHARGE BY PERFORMANCE

A contract is discharged by performance if both parties perform their mutual obligations as agreed. Each party must have performed its party. Medieval common law insisted that discharge by performance was only possible if parties had performed their obligations precisely and exactly. This is the common law Doctrine of Precise and Exact which is to the effect that parties must however their contractual obligations to the letter. Every aspect of the contract must be performed. It has been observed that it is a fundamental principle of law that contractual obligations be performed precisely and exactly.

The rule that performance must be precise and exact has been applied very strictly in cases under section 15 of the Sale of Goods Act. This section implies an obligation that where there is a sale by description, the goods shall correspond with the description. As held in Re Moore & Landauer [1921] 2 KB 519. The defendants agreed to buy from the claimants 3000 tins of canned fruit to be packed in cases containing 30 tins. Some of the consignment was packed in cases containing 24 tins and because of this the following was held. It was held that the defendants were entitled to reject the whole consignment. There had not been satisfactory performance. Although the Sale of Goods Act prevents the purchaser from unreasonably rejecting goods which are only slightly different from the contract description.

The Doctrine of precise and exact is exemplified by the decision in Cutter v Powell [1795] EWHC KB J13. Mr. Cutter agreed to assist Powell, a ship captain as a second matter on a journey from Jamaica to Liverpool. The ship sailed on August 2nd, and Cutter died on September 20th, 19 days before the ship was due at Liverpool. Mrs. Cutter sued for compensation for the work done by Mr. Cutter, it was held that nothing was payable by the defendant as Mr. Cutter had not performed the contract precisely and exactly. This case demonstrates that strict application of the doctrine of precise and exact occasions unjust enrichment. Common Law admitted exceptions to the doctrine of precise and exact to mitigate its harshness. These are circumstances in which parties will be compensated for work done (quantum meruit) or discharged even though they have not performed precisely and exactly

The hardship of the general rule regarding performance is mitigated by various exceptions:

1. Divisible contracts and obligations

2. Substantial Performance

3. Voluntary acceptance of partial performance

4. Prevention of performance

5. Frustration of Contracts

6. Time of performance

(a) Divisible contracts

Many contracts are “divisible” (divided in stages) which means that once a certain stage has been completed satisfactorily by a party, they are entitled to payment. e.g. Large-scale construction. A further example in contracts of employment which may provide for employees to be paid weekly or monthly. They are entitled to payment on the completion of each week or month. Obligations: This is where obligations in the contract (not necessarily all of them) may be enforced independently of performance by the other party. Whether this is the case will be a question of construction of the contract. In Roberts v Havelock (1832) 3 B. & Ad. 404, a ship was damaged en route from Cardiff to Alexandria and had to be docked at Milford Haven for essential repairs. The claimant carried out the repairs, but before he had completed the contract he requested payment for the work carried out thus far. Held: His action to recover payment succeeded as the contract did not require all the repairs before making a demand for payment.

Although there is a presumption that the contract ought to be viewed in its entirety, some contracts are by their nature divisible and performance of part thereof entitles the party to payment for work done. E.g. Contract of carriage of goods payable per tonne. The carrier is entitled to payment for the quantity carried but may be sued for not carrying the entire quantity as was the case in Ritchie v Atkinson (1808) 10 East 295. By contract the claimant agreed to carry a cargo of specified quantity of hemp and iron. The price agreed was £5 per ton for the hemp and 5 shillings per ton of iron. The claimant only carried part of the agreed quantity. The defendant argued the contract had not been fully performed and therefore no payment was due. Held: The contract could be divided into separate parts as the parties had agreed a price per ton. The claimant was thus entitled to payment for the amount carried although the defendant was entitled to damages for non-performance in relation to the amount not carried. It was held that the shipper was entitled to payment on Quantum Meruit (for work done).

In Sumpter v Hedges [1898] 1 QB 673, Mr Sumpter was a builder. He had a contract to build two houses and stables for Mr Hedges for £560. He did work valued at £333 and said he had to stop because he had no more money. Substantial payments on account had in fact been made to the builder. Hedges finished the building, using materials which Sumpter had left behind. Sumpter sued for the outstanding money. Bruce J found that Mr Sumpter had abandoned the contract, and said he could obtain money for the value of the materials but nothing for the work. The question arose as to whether (1) the partial performance of the contractual works entitled the employee for payment of the value of the work done; or, alternatively, (2) there was a right to recover for value of the work separately. Firstly, the Court held that, under a contract of work for a lump sum payment, the contractual price cannot be recovered, neither in whole nor in part, until the contractual work is complete. If the work was completed, yet with certain omissions or defects, then the employer would take the benefit of the completed works and the employee would be entitled to payment of the contract price with deductions. However, on the facts, the employee abandoned the contract without completion. This partial performance of the contract works does not entitle the employee to recover any payment of the contract price under a lump sum contract. Secondly, the Court held that, alternatively, quantum meruit payment would require the inference of a new contract for the partial work, independent from the lump sum contract. Yet, on the facts, there is no inference of a new contract for partial works. As the only applicable contract is the lump sum contract, the employee was not entitled to recover the contract price for his partial performance of the contractual works.

(b) Substantial performance

There is authority that a person who performs their contractual obligations substantially, though not precisely may be able to enforce the contract. However: the substantial performer may be liable to compensate the other party for his imprecise performance.

If a party has substantially performed its part of the contract, it is entitled to payment for work done. Whether a contract is substantially performed is a question is a question of fact. This is the rule in Dakin v Lee [1916] 1 KB 566  of substantial performance which was also applied with approval in the case of Marshides Mehta and Co Ltd V Baron Verhegen 21 EACA 153. In this case, the defendant engaged the plaintiff to construct a house for him and the contractual price was payable by installments. After completion of the house, the defendant refused to pay the last instalment on the ground that the house had some structural defects. The plaintiff sued. It was held that the plaintiff was entitled to the installment less the amount due defendant may likely to spend to correct the defect. This decision was based on the fact the plaintiff had substantially performed its part of the contract.

In Dakin v Lee [1916] 1 KB 566, the claimant builder agreed to carry out repairs at the defendant’s house for 1,500. The defendant refused to pay the outstanding balance because of certain defects. The concrete underpinning of a wall was only two feet thick instead of four as specified in the contract; columns of solid iron four inches in diameter; and steel joists over a bay window had not been bolted as agreed. The Court of Appeal held that the claimants could recover the outstanding balance, less the cost of remedying the defects, which amounted to 80 Pounds. “Where the builder has supplied work and labor for the erection or repair of a house under a lump sum contract, but has departed from the terms of the contract, he is entitled to recover for his services, unless (1) the work that has done is no benefit to the owner; (2) the work that he has done is entirely different from the work he has contracted to do; or (3) he has abandoned the work and left it unfinished. The case was one of negligence and bad workmanship and not a case where items in the specification had been omitted or the job abandoned. The result therefore seems entirely sensible and just.

In Hoenig v Isaacs [1952] EWCA Civ 6, the claimant agreed to redecorate and refurnish the defendant’s flat at a cost of 750 Pounds. After the claimant said that he had completed the work, the defendant alleged that there was faulty design and bad workmanship, and the defendant paid only 400 Pounds. The claimant sued for the balance. Held: It was held that the only defects were in the furniture which could be corrected at a cost of 55 Pounds and as the claimant had substantially performed the contract, he was entitled to the balance less 55 Pounds.

In Bolton v Mahadeva [1972] 2 All ER 1322, The Court of Appeal ruled that a claim for substantial performance failed. The claimant agreed to install a central heating system in the defendant’s house for a lump sum of £560. The system he installed was defective in that the house was on average 10 percent less warm, than it should have been and, because of a defective flue, the system gave off fumes. The cost of remedying the defects was £174. As the system as a whole was ineffective for its intended purpose, the claimant could recover nothing. Thus the defendant obtained a benefit a benefit whilst the claimant received nothing for the work done. Held: The action by the claimant to enforce the payment failed since the court held there was no substantial performance.

(c) Voluntary Acceptance of Partial Performance

Where performance by one party is partial, the other party may elect to accept the partial performance. Such as in Christy v Row. Where a partial performance has been accepted, the partial performer will be discharged from further performance and have a claim on a quantum meruit basis in respect to the work done. The other party however must have a genuine choice whether or not to accept the partial performance. Such was the case in Sumpter v Hedges.

If a party to a contract has expressly or by implication agreement to pay for partial performance, the party performing is entitled to payment for work done. In Sumpter v. Hedges, the defendant engaged the plaintiff to construct 2 houses and stables at cost of £565. The plaintiff abandoned the house after putting up structures valued at £333, the defendant was compelled to complete the houses, subsequently, the plaintiff sued for compensation work done. It was held that he was not entitled to payment as the defendant had not expressly or by implication agreed to pay for partial performance.

In Christy v Row (1808) 1 Taunt 300, the claimant was contracted to ship the defendant’s coal from Shields to the Hamburg. The ship was unable to reach that destination and, at the request of the consignee, the master of the ship delivered some of the cargo at a different port. Held: The claimant’s action for freight succeeded. Although he had not completely performed the contract, his partial performance had been accepted.

The rule concerning acceptance of partial performance is recognized by the Sale of Goods Act section 31 regarding delivery of wrong quantity or description.

(d) Prevented Performance

A party that provides for payment on completion may be wrongfully prevented by the other party from completing performance. The position in such circumstances was explained by Alderson B. in De Bernard v Harding as follows: “Where one party has refused to perform, or has rendered himself incapable of performing, his part of the contract, he puts it in the power of the other party either to sue for breach of it or rescind the contract and sue on a quantum meruit for the work actually done.”

If a party is ready and willing to perform its part of the contract but is prevented from doing so by the other or the others fault, such party is entitled to payment on quantum meruit. In Planche v Colburn [1831] EWHC KB J56, the claimant agreed to write a book on costume and armour for the defendant as part of a series called 'the Juvenile Library'. The agreed contract price was £100 to be payable on completion. The claimant commenced writing and had completed a great deal of it when the defendant cancelled the series. The defendant refused to pay the claimant despite his undertaking and the fact that the claimant was still willing to complete. The claimant brought an action to enforce payment. It was held that the claimant was entitled to recover £50 because the defendant had prevented the performance.

e) Time of Performance

Contractual obligations must be performed within the prescribed time if any or within a reasonable time. If the contract specifies the date of performance, time is said to be of the essence of the contract and non-performance thereof damages the contract. In Panesar V Popat, (1968) EA 17, The defendant ordered furniture to be delivered on April 30^th. However, it was not ready by this date, the defendant extended the delivery date to May 10th but the furniture was not ready where upon he cancelled the transaction. The furniture was delivered on May 12th; the defendant refused to take delivery and was sued. Held: It was held that he was not bound to do so as time was of the essence of the contract and the plaintiff had failed to perform.

f) Tender of Performance

Where one party is unable to complete performance without the collaboration of the other party they may make an offer or “tender” performance. If this is rejected by the other party the party tendering the performance will be discharged from further liability. Thus it is said that a tender of performance is equivalent to performance. The principle is illustrated by Startup v MacDonald (1843) 6 Mann & G 593. Where a party is under a contractual obligation to pay a sum of money, a tender of money by the debtor, if refused, will not discharge the debtor from liability. If sued, the tender may pay the sum of money into court and if the action is proceeded with, the other party may be ordered to pay costs. The debtor must tender the exact amount of money due to the creditor in “legal tender” i.e. bank notes and particular types of coinage up to certain amounts as determined by statute.

In Startup v MacDonald (1843) 6 Mann & G 593, a contract stated that 10 tons of linseed oil to the defendant and to deliver it within the last 14 days of March. The claimants delivered it at 8:30pm on Saturday March 31st but the defendant refused to take or pay the goods before the end of March with sufficient time for the defendant to examine the goods to ensure that they were in compliance with the contract. It should be noted, however, that s.30 (4) of the Sale of Goods Act now provides that: “Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour, and what is a reasonable hour is a question of fact.” Held: This tender of performance was as good as performance and the claimants were entitled to damages for non-compliance.

Stipulations as to time

Where the contract does not fix time for performance, general rule is that it must be effected at a reasonable time. Given statutory effect by the sale of goods act. At common law time was regarded as being ‘of the essence’ in a contract, unless the parties had agreed otherwise. Equity did not, however, regard time as being of the essence and would apply equitable remedies to the contract even where there was a failure to comply with the time fixed for completion of the contract.

Equity does, however, regard time as being of the essence in three situations. 1. The parties expressly stipulate that conditions as to time must be strictly complied with: or 2. the nature of the subject of the contract or the surrounding circumstances show that time should be considered to be of the essence: or 3. a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence. This statement of law has been stated to be correct and confirmed by the House of Lords in United Scientific Holdings Ltd v Burnley Borough Council [1978] A.C. 904, HL and illustrated by the case of Charles Rickards Ltd v Oppenheim [1950] 1 KB 616 (CA).

In Charles Rickards Ltd v Oppenheim [1950] 1 KB 616 (CA), A chassis for a Rolls-Royce was ordered from the plaintiffs, who later also agreed to build a body for it in ‘six to seven months’. At the end of seven months the body had not been completed and the defendant agreed to wait another three months. At the end of this period it was still not ready so the defendant gave notice that if it was not ready within four weeks he would cancel the order. At the end of this period the body was still not ready so the order was cancelled. Held: The Court of Appeal held that he was entitled to do so since, even though he had waived the stipulation as to time of delivery, he had given reasonable notice of his intention to make time of the essence.

When does the right to give such notice arise?

* British Commonwealth Holdings Plc v. Quadrex Holdings Inc. [1989] Q.B. 842. Considered that before an innocent party could give such notice there had to be an unreasonable delay in the performance of the contract. This requires some qualification where a specific date for performance is given in the contract, albeit that the time is not stated as being of the essence.

*In Behzadi v Shaftesbury Hotels Ltd [1992] Ch 1. The Court of Appeal stated that reasonable notice could be given making time of the essence as soon as the contractual date for performance had passed. Where time is of the essence in a contract then any delay will amount to repudiation of the contract.

In Union Eagle Ltd v Golden Achievement Ltd [1997] UKPC 5, There was a written agreement for the sale of a flat which provided that the completion date was to be September 31, 1991 before 17.00. The purchaser paid a deposit of 10% and the contract stated that time was to be of the essence and that non-compliance with any terms would give the vendor the right to rescind the contract and forfeit the deposit. In fact, the purchaser tendered the purchase price at 5.10pm on the day of completion. The vendor therefore rescinded the contract and forfeited the deposit. Held: By a majority decision of the Court of Appeal of Hong Kong the purchaser’s action for specific performance failed. On Appeal to the Privy Council it was held that the failure to complete on time was a repudiatory breach of contract entitling the vendor to rescind the contract and forfeit the deposit-there had been a breach of an essential condition of the contract.

3. DISCHARGE BY IMPOSSIBILITY OR DOCTRINE OF FRUSTRATION

Medieval common law was based on the principle of absolute contractual obligations. Under this principle, parties to a contract must perform their obligations failing which damages are payable by the party in the default. In Paradine v Jane [1647] EWHC KB J5 the plaintiff leased a piece of land to the defendant for purposes of farming. This action grew out of the English Civil War. Prince Rupert was commander of the armies of his uncle, King Charles I. Forces on both sides often looted the estates of the nobles for the purpose of gaining supplies. On July 19, 1643, the British Royalist forces, known as the Cavaliers, took possession of land owned by the plaintiff, Paradine, which was under lease to the defendant, Jane. The Royalists held the land for three years, finally relinquishing it in 1646 after the remaining Royalist resistance collapsed. Paradine brought suit against Jane to recover for breach of the lease. The issue before the court was: Should a lessee who was expelled from his land be liable for rent for a period in which he has been expelled from the land. It was held as follows:

(1) Where a party creates a duty or charge upon himself by virtue of a contract, he is bound to perform the duty or pay the charge, notwithstanding any accident. The reason why this is so, is because the party could have inserted a clause in the contract, which prescribes what is to be done with the rent in case of an accident.

(2) In the absence of an express covenant, the lessee is equally liable as the rent is an obligation created upon the reservation.

(3) The lessee in the present case is bound to pay rent, despite the fact that the house may have been burnt by lightning, thrown down by enemies and although he may have been expelled from the land or the land may have been inundated.

This case demonstrates that the Common Law did not originally recognize the doctrine of frustration. The Doctrine is an exception to the principle of absolute contractual obligations.

A contract is said to be frustrated if performance of the obligation is rendered impossible, illegal or commercially useless by unforeseen or extraneous circumstances for which neither party is to blame. When a contract is frustrated, it terminates and the parties are discharged The Doctrine of Frustration may be justified on various grounds:-

1. Implied Term Theory. It is argued that in every contract, there is an implied term that should such an event occur the parties will be discharged

2. Just and Reasonable solution Theory. It is only fair that the parties will be discharged.

3. Disappearance of Foundation Theory It is argued that when a contract is frustrated, its foundation disappears.

4. Change of Obligation Theory It’s argued that when a contract is frustrated, the obligations of the parties change hence the need to discharge the contract.

CIRCUMSTANCES IN WHICH A CONTRACT MAY BE FRUSTRATED

a. Destruction of Subject Matter

If the subject matter of the contract is destroyed before performance and neither of the parties is to blame, the contract is frustrated. If must be evident that the subject matter was the foundation of the contract. The destruction need not be total but must affect the commercial characteristics of the subject matter. In Taylor v Caldwell (1863) 3 B & S 826, the claimant hired out a music hall in Surrey for the purpose of holding four grand concerts. The claimant went to great expense and effort in organising the concerts. However, a week before the first concert was due to take place the music hall was destroyed by an accidental fire. The claimant sought to bring an action for breach of contract for failing to provide the hall and claiming damages for the expenses incurred. It was held that the claimant's action for breach of contract failed. The contract had been frustrated as the fire meant the contract was impossible to perform.

b. Non-occurrence of an event

If a contract is based on a particular event or state of affairs to obtain at a particular time, its non-occurrence frustrating the contract and discharges the parties. However, for the contract to be frustrated, it must be evident that the event or state of affairs was the only foundation of the contract. In Krell v Henry [1903] 2 KB 740, by contract in writing of 20 June 1902, the defendant agreed to hire from the plaintiff a flat in Pall Mall on 26 June and 27 June, on which days it had been announced that the coronation processions would take place and pass along Pall Mall. The contract did not contain any express terms on the coronation processions or any other purposes for which the flat was to be hired. The defendant paid the deposit upon signing the contract. The processions, however, did not take place on the announced dates. As a result, the defendant declined to pay the balance of the agreed rent. The issue was whether the defendant was obliged to pay the rent despite the fact that the processions did not take place as planned. The decision was in favour of the defendant.

(1) Applying Taylor v Caldwell (1863) 3 B & S 826, as both parties recognised that they regarded the taking place of the coronation processions on the days originally fixed as the foundation of the contract, the words of the obligation on the defendant to pay for the use of the flat for the days named were not used with reference to the possibility that the processions might not take place.

(2) The plaintiff was not entitled to recover the balance of the rent fixed by the contract.

This case set forth the doctrine of frustration of purpose in contract law. It is one of a group of cases, known as the "coronation cases", which arose from events surrounding the coronation of King Edward VII and Queen Alexandra in 1902.

However, if a contract has more than one foundation the disappearance of one does not frustrate it as the other is capable of performance, as was the case in Herne Bay Steamboat Co v Hutton [1903] 2 KB 683. A Royal naval review was planned to take place in Spithead on 28 June 1902. The plaintiff and the defendant agreed in writing that the plaintiff’s steamship Cynthia would be at the defendant’s disposal on 28 and 29 June to take passengers from Herne Bay for the purposes of viewing the naval review and for a day’s cruise around the fleet. This was subject to a specified deposit and rental fee. On signing of the agreement, the defendant paid the deposit. On 25 June, the review was cancelled. The plaintiffs contacted the defendant for instructions and informed him that the ship was ready to start and they demanded a payment. The plaintiffs received no reply, so they decided tcoronationo use the ship for their own purposes on 28 and 29 June and made a profit from this use. On 29 June, the defendant repudiated the contract in whole. The plaintiffs took an action against the defendant to recover the balance for the rent less of the profits they made by the use of the ship during the two days. The issue was whether the plaintiffs were entitled to recover the rent due for the two days despite the fact that Royal naval review was cancelled.

The decision was in favour of the plaintiffs. The plaintiffs were entitled to recover the rent arrears since: (1) the venture was the defendant’s and therefore, the risk was his alone; (2) the taking place of the Royal naval review was not the sole basis of the contract, so there had been no total destruction of the subject matter of the contract. It was held further that the contract did not operate as a demise of the ship.

c. Illegality

If performance of contractual obligations becomes illegal by reason of change of law or otherwise the parties are discharged as there is no obligation to perform that which has become illegal.

d. Death or Permanent Incapacitation

In contracts of personal service or performance e.g. employment, the death or permanent incapacitation of a party frustrates the contract and discharges the parties as the obligations are not generally transferable.

e. Government Intervention

If a policy act or regulation make it impossible for a party to complete its contractual undertaking the contract is frustrated and the parties discharged e.g. refusal to grant a licence as was the case in Karachi Gas Company vs H. Issaq (1965) E A 42 where the government refused to grant an export licence in respect of certain pipes to be exported to Karachi. When sued, the defendant relied on the government refusal to grant the licence. However, it was held that the contract had not been made to obtain the licence.

A contract would be frustrated if a government takes possession of the subject matter or stops the transaction, as was the case in Metropolitan Water Board v Dick Kerr and Co Ltd [1918] AC 119. In July 1914, the respondent entered into a contract to construct a dam for the appellant within 6 years subject to an extension. However, sometimes in early 1916, a government minister ordered the respondent to stop the contract and dispose of its equipment and the respondent complied. It was held that the minister’s act frustrated the contract and thereby discharged the respondent.

f. Supervening Events

These are events that delay performance and thereby change the commercial characteristics of the contract. The change must be fundamental. As a general rule, additional expenses do not frustrate a contract; however, they may if they render the transaction commercially useless. Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, the parties entered into a contract for the purchase of a large quantity of Groundnuts to be shipped from Port Sudan to Humburg, the supplier contemplated using the Suez Canal but which by the time of performance had been closed and as a consequence the groundnuts were not supplied. When sued, the supplier argued that the alternative route was too expensive and hence the contract had been frustrated. It was held the contract had not been frustrated as ;-

1. The additional expenses were recoverable from the buyer

2. The contract had no time limit.

3. The longer route could not damaged the commercial characterizes of the groundnuts

The supplier was liable in damages. In Victoria Industries Ltd. Vs. Ramanbhai And Brothers Ltd [1961] E.A. 11, the parties contracted to buy and sell a quantity of corn maize to be shipped from Jinja to Mwanza and transported by rail to Dar-es-salam for export. The East Africa Railways and Harbours Corporation had agreed to ship and rail the maize to Dar. However, subsequently, the corporation decline to do so and the seller was unable to supplier the maize. When sued, the seller pleaded that the contract had been frustrated by the change of heart of the corporation as there was no alternative route to the coast. It was held that the supplier was not liable as the contract had been frustrated.

However, a contract is not frustrated if:-

1. Either of the parties is to blame for the occurrence or non-occurrence of an event

2. The event is expressly provided for in the contract.

EFFECTS/CONSEQUENCES OF FRUSTRATION (ADJUSTMENMT OF THE RIGHTS OF PARTIES ON FRUSTRATION)

Frustrated contracts in Kenya ae governed by the Law Reform (Frustrated Contracts) Act, 1943 which applies in Kenya as a statute of general application by reason of the schedule to the Law of Contract Act. Under this Act, when a contract is frustrated:-

1. It is terminated

2. Money pad is recoverable

3. Money payable ceases to be payable

4. If a party has suffered loss by reason of performance, the court may order the other to pay to such party a sum of money

5. If a party has derived benefit other than financial, the court may order such party to pay to the order a sum of money which must be less than the benefit it so derived.

Limits to the Doctrine of Frustration

These include:

1. Contract merely more onerous

2. Self-induced Frustration

3. Supervening event foreseeable

4. Common Assumption

5. Event provided For

1. Contract merely more onerous

• A contract will not be frustrated where a change of circumstances makes it more onerous or expensive to perform but does not bring about a radical change in the obligation originally entered into by the parties. In Davis Contractors v Fareham UDC [1956] AC 696, Davis Contractors agreed to build 78 houses for Fareham Council within 8 months for an agreed price of £85,000.  Due to a shortage in skilled labor and material the contract took 22 months to complete and was much more expensive than anticipated.  Davis Contractors were paid the contractually agreed price but bought an action arguing for more money based on the fact that the contract had become frustrated and therefore they were entitled to further payment based on a quantum meruit basis. Held:  The contract was not frustrated.  The fact that a contract becomes more difficult to perform or not so profitable is not sufficient to amount to frustration.  It was still possible to perform the contract.

In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, the defendant agreed to ship some Sudanese peanuts during November or December 1956 to Hamburg for a certain price. On 2nd of Nov the Suez Canal was closed to shipping. The defendant could still have transported the peanuts within the contractually agreed time but this would mean going via the Cape of Good Hope which would have taken four times as long and increased the cost of transport considerably. The defendant did not carry the goods and argued that the contract had been frustrated. Held: The contract was not frustrated. It was still possible to perform the contract without any damage to the peanuts. The fact that it was more difficult or costly to perform is not sufficient to amount to frustration.

2. Self-induced frustration

• Frustration cannot apply where the alleged frustration event arises from deliberate act or choices of one party. In Maritime National Fish v Ocean Trawlers [1935] AC 524, the claimant owned five fishing vessels one of which was chartered to the defendants. The fishing vessels were all fitted with otter trawler nets. New legislation was introduced requiring licence to be held by those using otter trawl nets. The claimant applied for five licenses but was only granted three. He had to name which vessels the licence would be used on. He named his own vessels and excluded the vessel which the defendant was using. This meant that the defendant was unable to use the vessel for fishing. The claimant sued the defendant for the price of hire and the defendant in his defence stated the defendant had committed a breach in not providing a licence so he was not obliged to pay for the cost of hire. The claimant argued there was no breach as the failure to provide a licence was a frustrating event in that the decision to grant licenses rested with the secretary of state. Held: The contract was not frustrated since the claimant had chosen to keep the three licenses granted for himself rather than using one to fulfil his contractual obligation. He had therefore induced the frustrating event and was therefore in breach of contract. The principle in the Martime National Fish case was applied controversially by the court of Appeal in: J. Lauritzen A.S. v Wijsmuller B.V, (The Super Servant Two) [1990] 1 Lloyd's Rep 1. In this case, the defendants contracted with the claimants to transport a large drilling rig belonging to the claimants from a Japanese shipyard to Rotterdam. Under the terms of the contract, the rig was to be transported by either the vessel Super Servant One or Super Servant Two at the defendants’ option. The defendants allocated the Super Servant Two to perform the contract and allocated her sister ship Super Servant one to other contracts with third parties. Prior to the performance, Super Servant Two sank whilst being used on another job in the Zaire River. Since Super Servant One was engaged on other duties, the defendants informed the claimants that they would not be performing the contract. Held:  It was held that the claimants could not rely on frustration.

What is the position where a party commits a negligent act so as to bring about the particular event which is claimed frustrates the contract? 

Taylor v Caldwell – frustration would be regarded as self-induced.

3. Supervening event foreseeable

As a general rule a contract will not be frustrated by events which were foreseen, or should have been foreseen by both parties, on the basis that they could have provided for it in their contract.  The parties may foresee a particular event but are unable to agree as to what provision to place in the contract to provide for it (The Eugenia (or Ocean Tramp Tankers Corp v V/O Sovfracht) [1964] 2 QB 226) Look at Lord Denning’s Dictum. In this case, the Suez Canal became a "dangerous zone" as The Eugenia, carrying iron and steel, sailed towards it on the way to India from Odessa (but starting in Genoa). The charterers, in breach of a "general war clause" in the contract saying dangerous zones should be avoided, sailed into Port Said, thinking they could make it through the canal in time. The alternative was to sail around the Cape of Good Hope, which would have taken a long time. The ship was impounded as the canal was closed. The charterers then abandoned the contract and claimed it was frustrated. The claimant owners of the iron and steel claimed it was breach of contract. Lord Denning MR held that there was no frustration of the contract. First, that the charterers could not rely on any self-induced frustration (sailing into the canal) as a ground for arguing the contract was frustrated. If they had not tried the Suez canal, they would have had to sail round the Cape, but this would not have rendered the contract radically different. See Lord Denning’s dictum below:

“…This means that, once again, we have had to consider the authorities on this vexed topic of frustration. But I think that the position is now reasonably clear. It is simply this: If it should happen, in the course of carrying out a contract, that a fundamentally different situation arises for which the parties made no provision – so much so that it would not be just in the new situation to hold them bound to its terms – then the contract is at an end ... the theory of an implied term has now been discarded by everyone, or nearly everyone, for the simple reason that it does not represent the truth. The parties would not have said: "It is all over between us". They would have differed about what was to happen. ... So here, the parties foresaw that the canal might become impassable. It was the very thing that they feared. But they made no provision for it. So the doctrine may still apply, if it be a proper case for it…”

He further said that if the contract says something, "the contract must govern. There is no frustration." But if the contract says nothing, onerous or more expensive is not enough; "It must be positively unjust to hold the parties bound. It is often difficult to draw the line. But it must be done, and it is the courts to do it as a matter of law: see Tsakiroglou." He said that the material factors were that the difference in time was 108 days from Genoa via the Suez and 138 days via the Cape. The goods would not be adversely affected. The only trouble was it took longer. He firmly rejected, however, that frustration can only apply where the event is unforeseen or unexpected.

In Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 it was held that a building contract was not frustrated by labour shortages. Ratio – the delay was not due to any new state affairs which parties could have reasonable foreseen; and the possibility of insufficient recourses was within the parties’ contemplation but was not made the subject of special provision in the contract. What about where the particular event is foreseen by one party but not the other?

In Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274, a hotel owner entered a contract with an advertising agency enabling them to put illuminated adverts on the roof of their hotel. The hotel was then compulsorily purchased by the Local Authority and demolished.  The advertising agency sued for breach of contract and the hotel argued the contract had become frustrated. Held: The contract was not frustrated as the hotel owners were aware that the Local Authority were looking to purchase the hotel at the time they entered the contract. They should have foreseen the fact that this could happen in the life time of the contract and made provision in the contract for such an eventuality. They were therefore liable to pay damages for breach of contract.

4. Common assumption

Although the particular event may or may not have been foreseen, performance is rendered impossible in a manner contemplated by only one of the parties.  Frustration may not be ousted here. In Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540, the defendants sold to the plaintiffs timber to be imported from Finland through a contract, made in early 1914. The timber was to be delivered in Hull for free by rail in June-July 1914. The contract did not contain any clauses on war or force majeure. The practice before World War I was to load timber on vessels in Finland for direct sea carriage to England, but this practice was not known to the plaintiffs. The plaintiffs also did not know that the timber merchants in England did not keep Finnish timber in stock. Up to the outbreak of World War I in August 1914, the defendants had not delivered any of the timber. After this, it became impossible for the defendants to obtain any Finnish timber due to the chaos with the transport, caused by the war. The defendants contended that the contract was dissolved by the outbreak of the war. The decision was in favour of the plaintiffs.

(1) A person expressly contracts absolutely to do a thing not naturally impossible, is not excused from non-performance because of being prevented by vis major, except in certain cases such as that of common carriers and bailees.

(2) Applying Jacobs,Marcus & Co. v. Crédit Lyonnais (1884) 12 QBD 589, the contract had not been dissolved by the outbreak of the war and the defendants were liable in damages for the non-delivery of the timber.

(3) The case was distinguished from Krell v Henry [1903] 2 KB 740 because if the rule in Krell v Henry [1903] 2 KB 740 had been extended to the present case, that would have created a rule the results of which no one could foresee.

5. Event provided for

A contract may contain an express provision dealing with the possibility of a frustrating event which then in fact occurs. If this is the case, the doctrine of frustration does not apply and the risks allocated in accordance with the terms of the contract (illegality excepted). In Jackson v Union Marine Insurance (1874) 10 Common Pleas 125, Mr. Jackson owned a ship - the Spirit of the Dawn. In November 1871 he entered a charter-party for the ship to go from Liverpool to Newport, and load iron rails, which were going to be used for a new line in San Francisco. Mr Jackson also had an insurance policy with Union Marine Insurance, which covered losses for "perils of the sea". The ship left on 2 January 1872 but ran aground in Carnarvon Bay the next day. She needed repairs until August. The charterers on 15 February secured another ship to carry the rails. Jackson brought an action on the insurance policy on the chartered freight. The jury held that the delay for repairs was so long that it brought the contract in a commercial sense to an end. Bramwell B held with the majority (Blackburn J, Mellor J, Lush J and Amphlett B) that the jury had been correct. The delay meant the charterers were not bound to load the ship and that there was a loss of the chartered freight by perils of the sea.

 

4. DISCHARGE BY BREACH OF CONTRACT

Definition: A breach of contract will occur where in a party fails to fulfil, or states that they do not intend to fulfil, their obligations under the contract. It may be recalled that a breach of warranty- a less important term- entitles the innocent party to sue for damages only. Breaches of major terms, i.e. Conditions, will entitle the innocent party, in addition to claiming damages, to treat themselves as discharged from the contract. The position will also be the same where there has been the breach of an innominate term giving rise to serious consequences. Where the breach gives rise to a right to terminate in this way, it is generally described as a “repudiatory breach”. A repudiatory breach may also occur where a party simply abandons the contract and intimates that they do not intend to continue with it. This could occur expressly or it might be implied from conduct that renders performance impossible. The important point to grasp is that termination of the contract does not arise automatically upon a repudiatory breach. After such a breach, the innocent party has an election- they may decide to “accept” the breach as a repudiation of the contract or they may decide to affirm the contract (“reject” the breach). Thus innocent parties are not bound to discharge themselves from the contract after a breach. In reality, however, in many cases they will have little choice but to accept the breach as they may be unable to continue performance of the contract without the co-operation of the other party. A contract of employment is a good example.

 

Breaches occurring during performance

Where the breach occurs during performance, the task of the court is to decide whether a breach alleged by one party to be a repudiatory breach amounts to such in law. This is essentially a question of construction of the contract. The issue of whether or not the breach is repudiatory involves a decision as to whether or not the innocent party has been deprived of the substantial benefit of the contract. This is not always as easy matter, however, and there may be exceptional cases where the breach of an apparently minor term has serious consequences for the innocent party. A good illustration of the latter phenomenon is the case of Aerial Advertising Co v Batchelors Peas Ltd. [1938] 2 All ER 788. In this case, In this case the claimants entered into a contract with the defendants whereby the claimants were to advertise the defendant’s goods. This involved flying over various towns trailing a banner with the legend “Eat Batchelors Peas”. Each day the pilot was required to agree a flight plan with the defendants. On November 11, 1937, Armistice Day, the pilot failed to do this and he flew close to a large crowd which had convened in Salford town center to observe the traditional two minutes silence at 11.00. The outrage of those congregated in Salford that day led to a public outcry and threats to boycott the defendants’ products- the event caused much damage to the company and its reputation. The issue was whether the defendants were entitled to treat the contract as repudiated. Held: Atkinson J. considered that the principle involved was whether the conduct of the pilot made it commercially wholly unreasonable for the defendants to be expected to carry out the contract. He concluded that it did so and held that the defendants were released from further performance. In effect, it was the serious consequences of the breach that led to termination rather than the importance of the broken term itself. A type of contract that can give rise to difficulties with regard to repudiation is a contract to be carried out in instalments.

Suppose that A agrees to sell goods to B and deliver them by instalments, each instalment to be separately paid for. Does the failure of A to deliver one or more instalment, or the failure of B to pay for one or more instalment, entitle either party to repudiate the whole contract? In such a case, regard may be had to the express terms of the agreement, as the parties themselves may have determined what are to be their rights and obligations in the event if an instalment breach. In sales of goods cases, s.32(2) of the Sale of Goods Act, reflecting the established position at common law, provides: “Where there is a contract for the sale of goods to be delivered by stated instalments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more instalments, or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to claim for compensation but not a right to treat the whole contract as repudiated.” Two contrasting cases involving instalment contracts merit examination.

In Maple Flock Co v Universal Furniture Products (Wembley) (1934) 1 KB 148, In the Maple Flock case, there was a contract for the delivery of 100 tons of rag flock, The first 15 deliveries were in order; the 16th delivery was defective but deliveries 17-20 were in order, The buyers then purported to repudiate the contract. Held: The Court of Appeal held that they were not entitled to do so. Giving the judgment of the court, Lord Hewart C.J. said: “[T]he main tests to be considered…are, first, the ratio quantitatively which the breach bears to the contract as a whole, and secondly the degree of probability or improbability that such a breach will be repeated. On the first point, the delivery complained of amounts to no more than [1.5] tons out of a contract for 100 tons. On the second point, our conclusion is that the chance of the breach being repeated is practically negligence.”

In Robert A Munro and Co Ltd v Meyer [1930] 2 KB 312, there was an instalment contract for the delivery of 1,500 tons of meat and bone meal. Held: The buyer was held to be entitled to repudiate the whole contract when more than half of the total quantity delivered was found to be seriously defective.

In Mersey Steel and Iron Co Ltd v Naylor Benzon & Co (1884) 9 App Cas 434, Mersey Steel (MS) sold To Naylor Benzon (NB) 5,000 tons of steel, to be delivered at the rate of 1,000 tons per month, commencing January 1881, payment to be made within three days after receipt of shipping documents. In January MS delivered only about half of that month’s instalment and made a further delivery in February. Shortly before payment for these deliveries became due, a petition was presented to wind up the MS company. On the erroneous advice of their solicitor, NB bona fide refused to pay unless MS obtained the sanction of the court, which they asked the company to obtain. MS then informed NB that they would consider this refusal to pay as a breach of contract releasing them from further obligation. In the ensuing correspondence between the parties, NB stated that they were still ready to accept deliveries and make payments. Held: The House of Lords held that NB’s conduct could not have ascribed to it the character of a renunciation, repudiation or a refusal to fulfil the contract. As Lord Selbourne L.C. observed: “It is just the reverse; the purchasers were desirous of fulfilling the contract; they were advised that there was a difficulty in the way, and they expressed anxiety that the difficulty should be as soon a possible removed, and which they pointed out to the solicitors of the company.”

Breach of a contract does not discharge it; it gives the innocent party an opportunity to treat the contract as repudiated or as existing. If it treats the contract as existing, it is bound to honour its part however, if treats it as repudiated it is not bound to do so. Breach of contract may be:-

 a) Anticipatory

b) Actual

a) ANTICIPATORY BREACH OF CONTRACT

This is a situation where a party to a contract expressly or by implication intimates to the other in advance its intention not to perform on the date of performance. Evidence must clearly suggest breach of contract. It is quite common that a repudiatory breach is “anticipatory” in nature. An anticipatory breach is one that occurs before performance is due such as where a party, in advance, indicated to the other party that they do not intend to perform their part of the contract. It must be clear beyond reasonable doubt that they do not intend to perform their part of the contract. It must be clear beyond reasonable doubt that they are renouncing the contract, otherwise there will be no repudiation. Anticipatory breach may be:

1. Explicit as in Hochster v De La Tour (1853) 2 E&B 678

2. Implicit as in Frost v Knight (1872) LR 7 Exch 111, p 112

The innocent parties take any of the following steps:-

i) Sue in Damages. The party must prove the anticipatory breach of the contracts well as its willingness to perform its part of the contract. In Frost v Knight (1872) LR 7 Exch 111, p 112, where the defendant had contracted to marry the plaintiff after his father’s death but married another person during the lifetime of the plaintiff ‘s father, it was held that the defendant was liable in damages for anticipatory breach of the contract.

In Hochster v De La Tour (1853) 2 E&B 678, Where the defendant agreed in April to employ the claimant as a courier commencing in June. In May, the defendant informed the claimant that he would not require his services. Held: The claimant’s action for damages in May succeeded.

ii) Wait for the party to perform by the due date/affirmation

If the innocent party elects to affirm the contract, the contract remains in being for the future on both sides. The possible dangers of not accepting a repudiation are illustrated by Avery v Bowden (1856) 5 E & B 714. Another possible outcome was in Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC 788. The innocent party may opt to afford the other party a chance to perform its part of the contract, however, if the contract is in the meantime frustrated, the innocent party loses all remedies as was the case in Avery v Bowden (1856) 5 E & B 714. By contract the claimant was to carry cargo for the defendant. The claimant arrived early to collect the cargo and the defendant told them to sale on as they did not have any cargo for them to carry and would not have by the agreed date. The claimant decided to wait around in the hope that the defendant would be able to supply some cargo. However, before the date the cargo was supposed to be shipped the Crimean war broke out which meant the contract became frustrated. The claimant therefore lost their right to sue for breach. Had they brought their action immediately they would have had a valid claim.

In Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC 788, It seems that a party who affirmed he contract following an anticipatory breach may not be allowed to rely on that breach to justify their own failure to perform the contract. In this case, the charter party of a ship provided that the charterers were entitled to cancel if the ship was not ready to load on or before July 9. On July 2, the owners requested an extension of the loading date to July 13-16- such a request is not a repudiation. The charterers responded by purporting to cancel the contract which constituted an anticipatory beach. The owners did not accept this repudiation and on July 5 told the charterers' that the ship would after all be ready to load on July 8. However, the owners were not ready to load on that date and so the charters exercised their option to cancel. The owners brought an action for dread freight. Held: The Court of Appeal held that the charterers’ wrongful repudiation, which had not been accepted by the owners’ failure to fulfill the obligations of the contract. The House of Lords upheld the decision of the Court of Appeal that the cancellation was valid-the contract had survived intact with its right of cancellation unaffected. A Lord Ackner explained: “When ‘A’ wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party ‘B’ with two choices. He may either affirm the contract by treating it as a still in force or he may treat it as finally and conclusively discharged from tendering further performance unless and until ‘A’ gives reasonable notice that he is once again able and willing to perform.” The contract is kept alive for the benefit of both parties.

iii) Sue for the Decree of Specific Performance

The innocent party may apply for the equitable remedy of specific performance to compel the other party to for the equitable remedy of specific performance to compel the other party to perform its part of the contract and the same may be granted if circumstances justify as was the case in Jiwa Hasham v Zenab d/o Ohandu Nansi [1957] EA 38 where parties entered into a contract for the sale of a piece of land but the defendant repudiated the same before the date of completion and the plaintiff applied for specific performance. The court granted the order and the defendant were compelled to perform. Where a contract is breach in anticipation, the innocent person is not bound to mitigate its loss.

Whatever the type of anticipatory breach, the innocent party has an immediate right of action; they may accept the repudiation and sue for breach of contract at once, or they may await the date of performance and hold the other party to the contract. The possible controversial consequences of this with regard to a claim for compensation by the innocent party are illustrates by the case of White and Carter (Councils) Ltd v McGregor [1961] UKHL 5. Allowing innocent parties to sue at once for damages is sensible-it permits them to mitigate their losses and move on.

Acceptance of repudiation

Where the innocent party elects the breach as repudiation of the contract, this must, as a general rule, be communicated to the other party in a clear and unequivocal way. The issue of what constitutes adequate communication in such circumstances came before the House of Lords in Vitol SA v Norelf Ltd, The Santa Clare [1996] AC 800.

b. ACTUAL BREACH OF CONTRACT

This entails the non-performance of a party’s obligation on the due date or tendering defective performance. The innocent party may treat the contract as repudiated if the breach is fundamental to the contract as was the case in Poussard v Spiers and Pond (1876) 1 QBD 410  where the plaintiff’s non-appearance from the beginning of the season entitled the defendant to treat the contact as having come to an end. The Claimant (Poussard) was an opera singer. She was contracted by the defendant to perform in that capacity for a duration of three months. This was to subject to certain conditions, such as a salary of £11 per week, a start of “on or about” the 14th of November and an option to re-engage the Claimant’s services for another three months for a salary not exceeding 14 pounds per week. Instead of the 14th of November however, the launch performance was subsequently scheduled for the 28th of November, to which the Claimant gave no objection. However, she fell ill just before the start of the opera and could not sing for the first three days. The defendant hired another singer as potential cover and then actual cover when the claimant could not sing for the first three days of performances. Once the Claimant was well again, she wanted to take up her position in the performance but this was refused by the Defendant. An action for wrongful dismissal was then launched against the defendant. At trial, the jury found in favour of the defendant and awarded them the right to claim £83 from the Claimant, as it had been reasonable to hire her replacement. The Claimant appealed against this. The issue in this case was whether failing to turn up to the first day of performance amounted to a breach of a condition of the contract. It was held that failure to turn up did amount to a breach of a condition of the contract as this went to its very root and that Spiers were therefore free to rescind the contract.

5. DISCHARGE BY OPERATION OF LAW

Discharge of the operation of law entails the discharge of parties form their contractual obligations at the instance of the law. The parties are freed by law. Such a discharge may take place in the event of:-

1. Merger: This is the incorporation of the items of a simple contract into a subsequent written agreement between the parties. The simple contract is discharged by the operation of the law.

2. Death: In contract of personal service or performance, the death of a party discharges the contract.

3. Lapse of Time: If time is of the essence of the contract and a party fails to perform within the prescribed time, the contract is terminated as was the case in Panesar V Popat, (1968) EA 17. The defendant ordered furniture to be delivered on April 30^th. However, it was not ready by this date, the defendant extended the delivery date to May 10th but the furniture was not ready where upon he cancelled the transaction. The furniture was delivered on May 12th; the defendant refused to take delivery and was sued. It was held that he was not bound to do so as time was of the essence of the contract and the plaintiff had failed to perform.

Summary

In this lesson, we have discussed the various ways in which a contract can be discharged. Discharge of a contract refers to the moment where parties to the contract are discharged from their obligations. The contract comes to an end. Such a contract can come to an end even when the parties have not performed their obligations, and we have seen how that is possible. You are advised to revise this topic as it is an important topic in the Law of Contract

Activities

Seminar discussion on the role of parties in ensuring that the contract is performed based on its terms

Revision questions

Discuss the following statements:

1.     “A ‘mere’ increase in costs will never operate to frustrate a contract.”

2.     How would you advise an employee whose contract has been terminated by the employer citing “harsh” times brought about by COVID-19?

3.     “Discharge of a contract and termination are not coterminous”

TOPIC 11 (WEEK 13 & 14): REMEDIES FOR BREACH OF CONTRACT

Learning outcomes

By the end of this lesson, learners should be able to:

1.     Distinguish between common law and equitable remedies

2.     Discuss the nature and effect of damages

3.     Discuss the various types of equitable remedies that are available to an aggrieved party in the Law of Contract

4.     Solve real-life problems involving remedies in the Law of Contract

Content

NOTES IN THIS UNIT WILL BE SENT IN POWERPOINT SLIDES.

Summary

In this lesson, we have discussed the various categories of remedies that are available to an aggrieved party in the Law of Contract. The remedies are either common law remedies or equitable remedies. Under common law remedies we only have damages. Damages are monetary compensation. Under equitable remedies, we have several remedies, for example, injunctions, specific performance, and quantum meruit, to mention a few. Equitable remedies are available when damages cannot adequately compensate the plaintiff. They are at the discretion of the court.

Activity

Debate: Does the law provide adequate remedies for breach of contract?

Discussion questions

1.     Why do you think the law provides for equitable remedies for breach of contract?

2.     Discuss and elaborate on the doctrine of causation as far as breach of contract and remedies are concerned

3.     List and discuss the various types of damages in the Law of Contract