LAW OF CONTRACT

Contract
A valid contract is a legally binding agreement, formed by the mutual consent of the two parties. There are three essential elements needed to form a valid contract. a) b) c) Agreement (i.e. offer and acceptance) Consideration Intention to create legal relations

Validity Factors of a Contract

a) b) c) d) e) Capacity Form Content Genuine consent Legality (Minors cannot enter into contract) (Some contracts need to be in particular form) (Implied terms override by express terms which are override by statutory rules)

a) Offer

Agreement (Offer & Acceptance)

Offer is an express or implied statement of terms by which the maker is prepared to be contractually bound if it is accepted unconditionally. Or An offer sets out the terms upon which an individual is willing to enter into a contractual relationship with another person. It is a promise to be bound on particular terms, which is capable of acceptance. The person who makes the offer is the offeror and the person who receives the offer is the offeree. Offers, once accepted, may be legally enforced but not all statements will amount to an offer. An offer must be capable of acceptance. Therefore, it should not be too vague. (Scammel v Ousten 1941) In (Carlil v Carbolic Smoke Ball Co 1893), it was held that an offer can be made to a particular person, to a class of person or to a whole world and could be accepted and made binding through the conduct of the offeree. In addition an offer should be distinguished from the following. i) ii) A mere statement of intention to sell as held in (Harris v Nickerson 1873) A mere supply of information as held in (Harvey v Facey 1893)

An Invitation to Treat
Invitations to treat are distinct from offers in that rather than being offers to others, they are in fact invitations to others to make offers. The person to whom the invitation to treat is made becomes the actual offeror, and the maker of invitation becomes the offeree. The person extending the invitation to treat is not bound to accept any offers subsequently made to them. Following are the examples involving invitation to treat.

i) ii) iii) iv) iv)

The display of goods in shop windows (Fisher v Bell 1961) The display of goods on a shelf of self-service shop (Pharmaceutical Society of Great Britain v Boots Cash Chemists 1953) A public advertisement (Partridge v Crittenden 1968) Circulation of price list Grainer v Gough 1896) A share prospectus

Termination of an Offer
Once an offer has been terminated, it cannot be accepted. An offer can be terminated by:

a)

Rejection

Express rejection of an offer terminates the offer and the offeree cannot subsequently accept the original offer.

Counter offer
It is an offer made in response to an offer. (Hyde v Wrench 1840). It is where the offeree tries to change the terms of the offer, it acts as an implied rejection of the original offer and has the same effect as express rejection of offer. A counter-offer may of course, be accepted by the original offeror. A mere request for further details does not constitute a counter-offer. (Stevenson v Mclean 1880).

b)

Lapse of Time

Offers will lapse i.e. come to an end automatically and no longer be capable of acceptance in a number of ways. Firstly, after the expiry of a fixed time if any, decided by both the parties or after a reasonable time. Secondly, the death of the offeree automatically brings the offer to a close, and the death of the offeror has also the same effect.

c)

Revocation

Revocation means cancellation and it takes place when the offeror withdraws their offer. Once the offer is withdrawn, it is no longer open to the offeree to accept it. Revocation by offeror can be made at any time before acceptance (Routledge v Grant 1828) Revocation must be communicated to the offeree, i.e. it must be brought to his actual notice. (Byrne v Tienhoven 1880)

Revocation can be communicated by the offeror or a reliable third party. (Dickinson v Dodds 1876) Following are the two exceptions to the above rules of revocation. a) b) If the offeree pays the offeror to keep the offer open, any revocation will amount to a breach of that collateral contract. In case of Unilateral contracts, the offeror cannot revoke his offer once offeree has begun to perform the acts which would amount to acceptance. (Errington v Errington 1952)

Acceptance
Acceptance is the unqualified and unconditional assent to all terms of the offer. Acceptance may be expressed by words, by action or implied from conduct. Silence does not amounts to acceptance. (Felthouse v Bindley 1863) Acceptance is not effective until it is communicated to the offeror as held in Entores v Miles Far Eastern 1955) except in cases which involve reward as held in (Carlil v Carbolic Smoke Ball Co 1893). The general rules for acceptance made in Entores Case are: a) b) If a fax, telex or telegram message is received during the normal business hours, that is when it is communicated. If a fax, telex or telegram message is received outside the normal business hours, it is deemed to be communicated when the business next opens.

Postal Rule
The offeror may expressly or impliedly state that he expects acceptance by means of a letter send through post, in that case Postal Rule will apply. Postal rule states that, where the use of post is within the contemplation of both the parties, the acceptance is complete and effective as soon as a letter is posted. Even though, it may be delayed or even lost. However, the postal rule only applies if: a) b) The letter is properly stamped, addressed and posted. (Adams v Lindsell 1818) The post is a reasonable method of communication. (Household Fire Insurance v Grant 1879)

The Doctrine of Privity of a Contract

The doctrine of Privity states that contractual agreements can only affect those persons who have entered into agreement expressed in the terms of contract. Thus, it is the case that no third party can rely on, or enforce, any terms in a contractual agreement to which they are not themselves a party. There are a number of ways in which consequences of the application of strict rule of Privity may be avoided to allow a third party to enforce a contract. These occur at both common law and under statute.

a)

Common Law

i-

The beneficiary sues in some other capacity: A person who was not originally a party to contract acquires the power to enforce the contract if legally appointed to administer the affairs of one of the original parties. (Beswick v Beswick 1967) The situation involves collateral contract: A collateral contract arises where on party promises something to another party if that other party enters into a contract with a third party. (Shamklin Pier v Detel Products Ltd 1951) Assignment: A party to a contract transfers the benefit of a contract to third party through formal process of Assignment. It must be made in writing. Where it is foreseeable that damage caused by any breach of contract will cause a loss to third party. Implied trusts: One of the parties has entered the contract as a trustee for a third party. (Gregory & Parker v Willimans 1817)

ii-

iiiivv-

b)
iiiiii-

Statute
Agency law allows an agent to make a contract between his principal and a third party. Trust law allows beneficiary to enforce a trust. Insurance law allows a third party to take the benefit of insurance.

Intention to create legal relations

An agreement will only become a legally binding contract, if the parties intend to enter into legal relationship. The law presumes the intention of the parties based on the type of agreement. There are two types of agreement.

a)

Domestic or Social agreements

In such agreements, it is presumed that there is no intention to be legally bound, unless it can be shown otherwise. (Balfour v Balfour 1919) The usual presumption that agreements between spouses living happily together are not legally enforceable does not apply when they are about to separate or have already separated. (Merritt v Merritt 1970) The presumption that there is no intention to be legally bound will be rebutted where the evidence shows that the parties made formal and / or detailed financial agreements. (Simpkins v Pays 1955)

b)

Commercial agreements

In these situations, the strong presumption is that the parties intend to enter into a legally binding relationship in consequence of their dealings. (Edwards v Skyways 1964) This strong presumption can only be rebuttable by clear evidence to contrary. (Rose & Frank Co v Crompton Bros 1925)

Contractual Terms
A statement, written or oral, made during the negotiations leading to a contract, may be a term of the contract or merely a representation inducing the contract. Statements that are considered as part of the contract are known as terms. If statement is made by a person with special knowledge, then it is more likely to be treated as term of the contract. A representation is something (Pre-contract statements) said by the offeror in order to induce the offeree to enter into the contract. It may or may not become a term of the contract. The distinction between both is important because: a) b) If the representation becomes a term of the contract, the innocent party has remedies for breach of a contract as well as for misrepresentation. If however, the representation does not become a term of the contract, the innocent party will have remedies available only for misrepresentation.

Sources of Terms
Terms may be express or implied.

a)

Express Terms

Express terms are statements actually made by one of the parties with the intention that they become part of the contract and thus binding and enforceable through court action if necessary. Express terms may be made by words of mouth or in writing. (Scammell v Ouston 1941) Express terms generally override implied terms. However, some statutory terms cannot be overridden by express agreement. (E.g. terms inserted by the sale of Goods Act 1979)

b)

Implied Terms

Implied terms, however, are not actually stated or expressly included in the contract, but are introduced into the contract by implication. Terms can be implied in three ways.

i-

Terms implied by Statute

In some cases, the statute permits the parties to contract out the statutory terms. But in other cases, the statutory terms are obligatory. E.g. the protection given by the sales of Goods Act 1979 to a consumer cannot be taken away by trader.

ii-

Terms implied by Custom or Usage

The parties may enter into a contract subject to the customs of their particular market, trade or locality. Any express terms override a term which may be implied by custom. (Hutton v Warron)

iii-

Terms implied by Courts

The courts will imply certain terms into unspecific contracts where the parties have not reduced the general agreement into specific details. They will do so where it is necessary to give business efficacy to the contract. The court may imply terms because the court believe that such term to be necessary incident of this type of contract. (Liverpool City Council v Irwin 1977)

Types of Terms
There are three types of terms.

a)

Conditions

It is a fundamental part of agreement; it is something which goes to the root of the contract. Breach of a condition gives the injured party the right, either to terminate the contract and refuse to perform their part of it, or to go through with the agreement and sue for damages. (Poussard v Spiers & Pond 1876)

b)

Warranties

A warranty is a subsidry obligation which is not vital to the overall agreement, and in relation to which failure to perform does not totally destroy the whole purpose of the contract. Breach of a warranty does not give the rights to terminate the agreement. The injured party has to complete their side of agreement, and can only sue for damages. (Bettini v Gye 1876)

c)

Innominate terms

Recently, the courts have held that where the breach of a contract deprives, the injured party from substantially benefit of the contract, the term broken can be called Innominate and the injured party could choose to end the contract even if it could not be regarded as condition.

Exclusion Clauses
Exclusion clauses are intended to exempt, or limit, the liability of a party in breach of the agreement. The law relating to exclusion clauses is governed by common law, the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contract Regulation 1999 and the various other acts.

ia) b) a) i-

Common Law Rules

It must be incorporated into the contract. Its wording must cover the loss. An exclusion clause can be incorporated into the contract by: Signature

In order to be valid, exclusion clause must satisfy two conditions.

Clause is incorporated by signature even if the signatory did not read or understand the document. (Lestrange v Graucob 1934) Contrary to it, signature does not incorporate the clause if the effect of the term was misrepresented. (Curtis v Chemical Cleaning 1951) iiNotice For an exclusion clause to be incorporated by notice, reasonable steps must have been taken to bring it to the attention of the other party at the time the contract was made. What are the reasonable steps depends upon the circumstances. (Thompson v LMS Railway 1930) A clause can be incorporated by notice, provided it was given before making the contract. A notice in a hotel room did not exclude liability as the contract was made at the reception desk. (Olley v Marlborough Court 1949) iiiPrevious Dealing For exclusion clause to be incorporated by previous dealings there must have been a consistent course of dealings between the parties. (Spurling v Bradshaw 1966) b) The wording must cover the loss Under the Contra Proferentem Rule, the courts interpret the words narrowly against the interests of the person seeking to rely on the clause. (Photo Productions Ltd v Securicor 1980)

Statutory Rules
If a clause passes the common law test, it must also satisfy the statutory rules. iThe Unfair Contract Terms Act (UCTA) 1977 The UCTA represents the statutory attempt to control exclusion clauses. In spite of its title, it is really aimed at unfair exemption clauses, rather than contract terms generally. UCTA 1977 applies to exemption clauses in contracts made in the course of business. It states that a clause exempting liability for: Death or personal injuring due to negligence is void. Other loss due to negligence is void unless reasonable. The burden of proving reasonableness is on the party seeking to rely on the clause. In assessing whether a term is unfair or unreasonable, the court has regard to: iiThe strength of bargaining position of the parties. Whether the buyer received an inducement to agree to the term. Whether the buyer knew or ought to have known of the existence and the extent of the term. The ability of the party to insure against liability. The Unfair Terms In Consumer Contract Regulations (UTCCR) 1999

UTCCR 1999 applies to contracts where: The seller is acting in the course of business. The other party is a consumer. The terms have not been individually negotiated. A term is unfair if: It is not expressed in plain, intelligible language. Contrary to the requirement of good faith. It allows the seller to alter the terms of the contract unilaterally without a valid reason which is specified in the contract.

Breach of Contract
Breach of a contract occurs where one of the parties to the agreement fails to perform their part of agreement, either completely or satisfactorily with their obligations under it. i.e. they fail completely to perform what they have contracted to do, or they have perform their obligation in a defective manner.

Types of Breach iiiActual Breach Anticipatory Breach

Actual breach is the breach occurs on the due date for performance.

Anticipatory Breach occurs where, before the due date for performance, a party shows an intention not to be bound by their agreement and indicates that they will not perform their contractual obligations. Anticipatory breach may be express or implied. Express anticipatory breach occurs where one of the parties declares, before the due date for performance, that they have no intention of carrying out their contractual obligations. (Hochster v De La Tour 1853) Implied anticipatory breach occurs where one of the parties does something which makes subsequent performance of their contractual undertaking impossible. (Omnium DEnterprises v Sutherland 1919)

Effects of Breach
Anticipatory breach does not automatically bring the contract to an end. The innocent party has two options: Treat the contract as discharged and bring an action for damages immediately, without waiting for the contractual date of performance. (Hochster v De La Tour 1853)

 Elect to treat the contract as still valid, complete his side of the bargain and then sue for payment by the other side.

Remedies to a breach of contract

Any breach will result in the innocent party being able to sue for an appropriate remedy. Principal remedies are: Common Law Remedies Damages Quantum Meruit Action for price Equitable Remedies Specific Performance Injunction Rescission

Common Law Remedies 1) Damages

Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of contract-breaker, by implication of common law, is to pay monetary compensation to the other party for the loss sustained by him as a result of breach. (Photo Productions Ltd v Securicor Transport Ltd 1980) Such monetary compensation for the breach of contract is known as damages. Liquidated damages and penalty clauses Where a contract provides for the payment of a fixed sum on breach, it may either be a liquidated damages or a penalty clause. Liquidated damages are a genuine pre-estimate of the expected loss. The amount stated is the amount of damages claimable. The clause is enforceable by the court. (Dunlop v New Garage & Motor Co 1915) A penalty clause threatens large damages for breach. The amount is often very large in relation to the expected loss. It is unenforceable. A clause is presumed to be penalty clause if: The stipulated sum is extravagant in comparison with the maximum loss that could be incurred. The same sum is payable in respect of one or more breaches, both trifling and serious. The sum stipulated is larger than the amount which would actually be payable if the contract were performed. In deciding the legality of such clauses, the court will consider the effect rather than the form of the clause as seen in Cellulose Acetate Silk Co Ltd v Widnes Foundry 1925. Assessment of unliquidated damages

Where the contract does not make any provision for damages, the court will determine the damages payable. These are known as unliquidated damages. There are two factors to consider in determining the amount of unliquidated damages. 1) Remoteness of Loss (i.e. What losses can be claimed for) Remoteness of damage is tested by two limbs of the rule in Hadley v Baxendale 1854 which states that: i

Damages will only be awarded in respect of losses which arise naturally, i.e. in the natural course of things. The effect of this is that the party in breach is deemed to expect the normal consequences of the breach, whether they actually expected them or not. Damages will only be awarded where both parties may reasonably be supposed to have contemplated, when the contract was made, as a probable result of its breach. The effect of this is that the party in breach can only be held liable for abnormal consequences where they have actual knowledge that the abnormal consequences might follow. (Victoria Laundry Ltd v Newham Industries Ltd 1949)

ii-

2)

Measure of damages (i.e. How much are those losses worth) As a general rule, the amount awarded as damages is what is needed to put the claimant in the position he would have achieved if the contract have been performed, this is sometimes referred to as protecting the expectation interest of the claimant. (Ruxley Electronics & Construction Ltd v Forsyth 1995).

A claimant may alternatively seek to have his reliance interest protected; this refers to the position he would have been in had he had not relied on the contract. This compensates for wasted expenditure. The onus is on defendant to show that expenditure would not have been recovered if the contract had been performed.

Market Price Rule The measure of damages for breaches of contract for sale of goods is usually made in relation to the market price of the goods. Where a seller fails to sell the goods, the buyer can go into the market and purchase equivalent goods instead. The seller would have to compensate the buyer for any additional costs, the buyer incurred over the contract cost. Non-financial loss In some cases, damages have been recovered for mental distress where that is the main result of the breach. (Jarvis v Swan Tour 1973)

Cost of Cure Where there have been breach and claimant is seeking to put in position he would have been in if the contract had been performed, by seeking a sum of money to cure the defect which constituted the breach, he may be denied the cost of cure if it is wholly disproportionate to the breach.

2)

Quantum Meruit

It is a claim available as an alternative to damages. The injured party in a breach of contract may calaim the value of his work. The aim of such an award is to restore the claimant to the position he would have been in had the contract never been made. It is a measure of value of contractual work which has been performed. It is likely to sought in case of anticipatory breach. (De Barndardy v Harding 1853)

3)

Action for Price

A simple action for the price to recover the agreed sum should be brought if breach of contract is failure to pay the price. But the property must have passed from seller to buyer, and complications arise where there is anticipatory breach.

Equitable Remedies
Equitable remedies are only available at the discretion of the court. They are not granted if: Damages are an adequate remedy. The claimant has acted unfairly. (i.e. he who comes to equity must come with clean hands) The order would cause undue hardships. There is undue delay in seeking the remedy. (i.e. delay defeats the equities)

1)

Specific Performance

An order for specific performance requires that the party in breach to complete their part of the contract. Specific performance enforces positive covenants within the contract. The following rules govern the award of such a remedy: iiiiiiSpecific performance will not be granted in cases where the common law remedy of damages is inadequate. It is granted in cases involving the sale of land. Specific performance will not be granted where the court cannot supervise its enforcement. It will not be available in contracts of employment or personal service. Specific performance will not be granted where the plaintiffs themselves have not acted properly.

2)

Injunction

This is also an equitable order of the court, which directs a person not to break their contract. An injunction will only be granted to enforce negative covenants within the agreement, and cannot be used to enforce positive obligations. However, it can have the effect of indirectly enforcing contracts for personal service. (Warner Bros v Nelson 1937)

3)

Rescission

Rescinding the contract means that is cancelled or rejected and the parties are restored to their pre-contract condition. Strictly speaking, rescind an agreement is not a remedy for breach of contract, it is a right which exists in certain circumstances, such as where contract is voidable.