CONTRACT LAW

INTRODUCTION

The Law of Contract

Whenever the word ‘contract’ is mentioned most people have an idea of a formal document
containing impressive sounding words which has been prepared by lawyers. In fact, the vast
majority of contracts arise from simple everyday transaction: If I buy food I am making a
contract; if I post a letter I am making a contract, if I use public transport I am making a contract
and so on. Also by enrolling in this course with VDTI you have entered into a contract.

Nature of Contract

Although Courts have been dealing with disputes concerning the existence and meaning of
contracts for the last three hundred years, it is rather surprising that no standard definition of the
term ‘contract’ has been given. Nevertheless, most people appreciate that entering a contract
carries with it certain legal consequences. Indeed, this is a common theme in most definitions.

It is difficult to define a very general term like ‘a contract’. It is an oversimplification just to say
it is a legally enforceable agreement. Let us look at some standard definitions to establish a
common theme.

According to Treitel:
‘A contract is an agreement giving rise to obligations which are enforced or recognized by the
law. The fact which distinguishes contractual from other legal obligations is that they are based
on the agreement of the contracting parties.’

According to Anson
‘We may provisionally describe the law of contract as the branch of the law which determines
the circumstances in which a promise shall be legally binding on the person making it.’

According to Pollock
‘A contract is a promise or a set of promises which the law will enforce.’

American Restatement (Second) of the Law of Contract, 1978:

‘A contract is a promise or a set of promises , which, if breached, the law gives the remedy of
performance, which the law in some way recognizes as a duty.’

From these definitions it would appear that the law of contract is about promises and agreements.

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Studying the Law of Contract

Contract is one of the few areas of law with which almost everyone comes into day to day
contact. While it may be regarded as advantageous to the student embarking on a study of
contract law, it is in reality often a hindrance rather than a help.

Everyone makes contracts in their daily lives (for eg. a week’s supply of groceries or a
newspaper, an arrangement for a taxi driver to take your children to school) so everyone tends to
think of themselves as an expert in a rather ‘do-it-yourself’ area of law.

The general principles of contract law are of a judge made origin. This means that the law is
made by a judge when he or she makes a decision in a case. This is what is called ‘case law’.
Most of the major principles in contract law are contained in a judicial decision rather than
statute.

Revision Question:

Give two definitions of contract

Creation of a Contract: Introduction

There are three basic essentials to the creation of a contract which will be recognized and
enforced by the Courts. These are: 1. contractual intention 2. agreement and 3.consideration.

In order to decide whether a contract has come into being, it is essential that there should be
some agreement between the parties. However, the existence of such an agreement is not itself
conclusive of whether a contract exists. Suppose, two friends agreed to meet for lunch at the
Juicy Patties, would this be regarded as a contract? Since this would not be the intention of either
of them to contemplate legal proceedings, if one were not to arrive as agreed then the answer
must be no.

Therefore, for there to be a valid contract there must be an intention to be legally bound by the
terms.

Finally, there must also be an exchange of consideration, which means that there must be an
exchange of ‘something for something’. For example, providing a service in exchange for
payment.

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 ELEMENTS OF A CONTRACT

The elements of a contract are as follows:

1. One party makes an offer to the other.
2. The other accepted that offer.
3. The parties had an intention to enter into legal relations.
4. There was an exchange of consideration.

Offer and Acceptance (Agreement)

The usual test for determining whether the parties have reached agreement is to ask whether an
offer has been made by one party and accepted by the other.

The Courts will apply an objective test as to whether the parties have reached an agreement or
not.

A contract has been described as consisting of an actionable promise or promises. It can be seen
that every such promise involves at least two parties: a promisor and a promisee. There is an
outward expression (an action) of common intention and of expectation as to the declaration or
assurance contained in the promise.

Agreement- The method traditionally adopted is to analyse the dealing between the parties in
terms of offer and acceptance. This is an objective test and the question asked is whether there
has been a definite offer by one party and an unqualified acceptance by the other.

In complex commercial transactions it is difficult to determine the precise stages of offer and
acceptance.

THE OFFER

A legal contract is formed when one person makes an offer and the other party accepts the offer:
 the person making the offer is called the ‘offeror’
 the person receiving the offer is called the ‘offeree’.

The offer is an expression of willingness to make a contract. The offer is made with the intention
(actual or apparent) that it shall become binding on the offeror as soon as it is accepted by the
person to whom it is addressed.

An offer can be made to one person or a group of persons or to the world at large. The offeror is
bound to fulfill the terms of his offer once it is accepted.

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The issue of whether there would be a valid offer to the world at large was considered in Carlill
v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 256

The offer was contained in a newspaper advertisement.

In this case, the manufacturers of a patented cure for the flu advertised that anybody using their
cure would not suffer from flu and that they would pay £100 to anybody who used the medicine
and still caught the flu. The plaintiff, having used the medicine then caught the flu, claimed the
£100. The court held that the advertisement or notice constituted a general offer and that the
manufacturer was bound to pay the reward. The offer in this particular case was accepted by the
conduct of the offeree (by buying and taking the medicine) and was held to be binding.

Justice Bowen said:

“It was also said that the contract was made with all the world- that is with everybody, and you
cannot contract with everybody. It is not a contract made with the world. It is an offer made to all
the world and why should an offer not be made to all the world which is to ripen into a contract
with anybody who comes forward and performs the conditions?”

The offer may be made in writing, by words or conduct. All that is necessary is that the terms of
the offer are clear and that the offer was made with the intention that it should be binding if
accepted.

Types of Offer

Unilateral

Some offers are purely one sided. They are made without the offeror’s having any idea whether
they will ever be taken up and accepted and thereby transformed into a contract. Such an offer is
said to be unilateral.

In Carlill v Carbolic Smoke Ball Co. Ltd this offer (also classified as an offer to the world at
large) is typical of the type in which manufacturers offer to pay compensation to users of their
product, if the product does not live up to expectations.

Similarly, other offers, for example when newspapers offer a reward for the first person to swim
from Kingston Harbour to Lime Cay, are unilateral offers.

The lost and found columns of any newspaper will carry offers of rewards for lost items or pets.
A person making such an offer has no idea whether it will ever be accepted, hence it is unilateral.

Bilateral

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The majority of offers are bilateral. Most contracts are negotiated on a promise for a promise
basis, for example an offer to build a house involves the builder’s offer to construct the house in
return for the customer’s promise to pay for it.

Invitation to Treat

An invitation to treat made by one party to another is not an offer. It is made at a preliminary
stage in the making of an agreement, where one party seeks to ascertain whether the other would
be willing to enter into a contract and, if so upon what terms. It is an invitation extended by one
party to the other to enter into negotiations or to make an offer.

The Difference Between An Offer And An Invitation to Treat

To distinguish between an offer and an invitation to treat it is necessary to look at the intention of
the person making it as revealed by his words or actions and at the surrounding circumstances. It
is not an offer unless it was made with the intention that it should be binding as soon as the
person to whom it was addressed communicates his assent.

The distinction between offers and invitations to treat is often hard to draw as it depends on the
person making the statement, the surrounding circumstances and the normal pattern of dealing
may give a clue as to the parties’ intentions.

Some Types of Invitation to Treat:

Display of goods in a shop

The issue is whether the display of goods in shops, on shelves or in the window with a price tag
attached is an offer or an invitation to treat. If it is an offer, then the customer can accept it by
indicating his desire to buy the item and the shopkeeper must then sell it to him at the stated
price. If on the other hand, it is an invitation to treat, the offer is made by the customer in seeking
to buy the item and the shopkeeper can accept and refuse the offer as he wishes.

Auction Sales

The call for bids is an invitation to treat, in other words, a request for offers. The bids made by
persons at the auction are offers which the auctioneer can accept or reject as he chooses. The sale
by an auction is completed by the fall of the hammer and up until then, a lot can be withdrawn.
Likewise, an auctioneer can generally withdraw lots before he accepts the bid.

Goods put in for sale by auction are sold either with a reserve price or without. If the former is
the case, then there is no contract if the auctioneer mistakenly accepts a bid lower than the
reserve price and the item can be withdrawn even after the hammer has fallen.

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Tenders

Where goods are advertised for sale by tender, the statement is not an offer but an invitation to
treat, that is, it is a request by the owner of the goods for offers to purchase them. It is not an
offer to sell to the person making the highest tender. Likewise where a building contract is put
out for tender, this is a request for offers by contractors which can then be accepted or rejected.

Advertisements

Whether or not advertisements are usually held not to amount to offers depends to a large extent
on whether they are bilateral, that is, capable of acceptance by one or a limited number of
persons or whether it is open to all the world to accept.

Advertisements of bilateral transactions

Such advertisements are usually held not to amount to offers because:

1. Such advertisements usually lead to further bargaining.
2. The vendor may wish to assure himself that the prospective purchaser will be able to pay for
the goods before entering into a binding agreement.

The following are invitations to treat:

- advertisement in the newspaper of goods for sale
- circulation of a catalogue
- advertisement that a scholarship examination will be held.

Advertisements of unilateral contracts

Such advertisements are commonly held to amount to offers. See Carlill v Carbolic Smoke Ball
Co. Ltd [1893] QB 256

Ticket Cases

Whether or not a ticket is a contractual document and plays a role in the formation of the contract
depends on:
1. Whether that ticket was intended to be a contractual document and
2. The mode and timing of its issue.

In some situations it is clear that the ticket is a contractual document and that the request for a
ticket is an offer and the issue of that ticket an acceptance. This would appear to be the case with
cinema.

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In other cases, the giving of the ticket has been held to be an offer and taking of that ticket an
acceptance.
Subject to contract

The words ‘subject to contract’ are used by parties who are negotiating as to the terms of a
contract to indicate that documents passing from one to the other are not intended to be offers
capable of acceptance so as to form a binding contract.

Duration and Termination Of Offer

An offer continues in existence, capable of acceptance until it is brought to an end.

1. Revocation
The offer may be revoked by the offeror at any time up until it is accepted. The only
requirement imposed on the offeror is that the revocation of the offer must be communicated
to the offeree. Unless and until the revocation is so communicated, it is ineffective. There
must be actual communication of the revocation.

For unilateral contracts once the offeree has commenced performance of the act that
constitutes acceptance the offer can no longer be revoked.

2. Rejection by the offeree

An offer that is rejected by the offeree cannot be subsequently accepted by him, once the
rejection has been communicated to the offeror.

3. Lapse of time
Where an offer is stated to be open for a specific length of time, then the offer automatically
terminates when that time limit expires. Where there is no express time limit, an offer is
normally open only for a reasonable time. What constitutes reasonable will depend largely on
the subject matter of the proposed contract. Thus an offer to sell perishable goods will remain
open for far less long than an offer involving land.

4. Occurrence of a terminating condition

An offer may be made subject to a condition. If that condition is not satisfied the offer is not
capable of acceptance. It is an implied term that goods would remain in substantially the
same state at the date of the offer.

5. Death
The effect of the death of the offeror depends upon the nature of the offer. If it involved the
performance of a promise which was personal to the offeror such as performance at Sting or
Rebel Salute, then the offer cannot be accepted once news of the death has been
communicated to the offeree. There must be actual communication. Where the offer was not
dependent upon the offeror personally, then his death has no effect and the offer remains
capable of acceptance and if accepted is binding upon the estate of the offeror.

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 6. Insanity, Incapacity, Insolvency, Illegality and Impossibility
The power to make an offer may be inhibited by, or the power to accept an offer may be
terminated by, the occurrence of any of the following events either before the making of the
offer or before its acceptance: the insanity or drunkenness of either party, intervening
incapacity in the case of a corporation, the intended contract becoming illegal and the
performance of the contract becoming impossible.

ACCEPTANCE

An acceptance is a final and unqualified approval/agreement of the terms of an offer. Unless it

can be shown that there was such an acceptance, then there is no contract. In those
circumstances, the Courts must look carefully at the dealing between the parties to decide
whether there has, in fact been an agreement and upon which terms.

In addition to being a firm and unqualified acceptance of all the terms of the offer, the fact of
acceptance must normally be communicated to the offeror before there is a concluded contract.

Acceptance by conduct

Acceptance of a bilateral offer normally takes the form of words, either spoken or written. But in
the case of unilateral offers, that is, the offer of a promise in return for the performance of some
act by the offeree, the offeree’s performance of that act is the acceptance of the offer.

Counter-offers

In order to create a binding agreement, the offer and the acceptance must match. The offeree
must accept all the terms of the offer. If in his reply to an offer, the offeree introduces a new term
or terms or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead,
the reply is treated as an offer itself, a counter-offer, which the original offeror is free to accept or
reject.

Request for information

It is necessary to distinguish between a reply that amounts to a new offer and a reply which is
merely a request for further information as to the terms of the offer. If the offeree is merely
seeking further information before deciding whether to accept an offer, or enquiring as to
whether the offeror will modify his terms, then he is not necessarily making a counter-offer.
Whether a reply does or does not amount to a counter-offer is a matter of construction for the

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Court. If the reply does not amount to a counter-offer, then the original remains in existence and
is still capable of acceptance.

Clarification of Implied Terms

Where the reply to an offer contains terms that are not expressly set out in the offer, the reply
will not amount to a counter-offer if those terms would, in any case, be implied in the offer. This
is because the offeree is not in fact introducing new terms in the offer.

An example of the above would occur if, in response to an offer to sell goods, the prospective
purchaser stated in his reply that the goods must be suitable for the purpose for which he was
purchasing them. In any such case, such a term would be implied in the contract.

The test to determine whether a reply by an offeree amounts to a counter-offer or not is whether a
reasonable person in the position of the offeror would regard the purported acceptance as
introducing a new term into the bargain and not as a clear acceptance of the offer.

Acceptance of Tenders

A tender is an offer. Normally the acceptance of a tender leads to the formation of a contract by
which the person tendering is bound to perform that which he has offered, at the price stated in
the tender. This would be the case, for instance, where tenders are invited by the parish council
for the building of a new bridge; various builders submit tenders and mindful of their duty to the
tax payers, the council accepts the lowest priced. The acceptance creates a single contract under
which the builders are bound to erect the bridge and the council to pay for it.

Conditional Acceptance

A conditional assent to an offer is not an acceptance of that offer. Conditional assents occur most
often in the case of negotiation for the sale of land. The use of the phrase ‘subject to contract’ in
response to an offer is a conditional assent which means that the offeree is stating that his assent
to the terms of the offer is conditional upon a formal contract being drawn up. Until there is an
acceptance which is not stated to be subject to contract, there is no contract.

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The Communication of Acceptance

The general rule is that an acceptance must be communicated to the offeror. Until and unless the
acceptance is so communicated, no contract comes into existence. In order for an acceptance to
be accepted, it must be brought to the attention of the offeror.

Exceptions to the general rule

1. Where the offeror expressly or impliedly waives the requirement that acceptance be
communicated - This is generally the case with unilateral contracts and may sometimes be the
case with bilateral agreements.

2. Where the offeror is prevented from denying that the acceptance was communicated - This
will be the case if it was in fact sent or spoken by the offeree but was not received or heard by
the offeror as a result of his own fault or omission.

3. Where the acceptance is communicated to the offeror’s agent and that agent has authority to
receive that acceptance on behalf of his principal

4. Where the postal rule applies, in which case the acceptance can be effective before it is in fact
received by the offeror.

What constitutes communication of acceptance?

An acceptance is communicated when and where it is brought to the attention of the offeror,
unless the postal rule applies, in which case the acceptance is communicated when the letter of
acceptance is posted by the offeree. The postal rule applies only to letters and telegrams.

Where the method of communication is instantaneous, then the offer is accepted when the offeror
actually hears the acceptance. If the offeree speaks his acceptance but is not heard by the offeror,
then it has not been effectively communicated.

The postal rule

The postal rule applies where there is a lag between dispatch of an acceptance and receipt of that
acceptance by the offeror. That is, where acceptance is by letter or telegram. In such a case
acceptance is communicated when the offeree post the letter or telegram.

Silence

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An offeree who does nothing in respect to an offer is not bound by the terms of that offer. The
offeror cannot, in other words impose silence as acceptance by the offeree.
INTENTION TO CREATE LEGAL RELATIONSHIPS

One of the first issues that a Court will look at in order to discover whether a binding contract
exists is whether the parties have an intention to be legally bound by their agreement.

With commercial agreements, there is a very strong presumption by the court that the parties did
intend to create a legal agreement as a consequence of their business dealings.
Commercial agreements include:
 Contracts for the sale and purchase of goods
 Contracts for services between a provider and receiver of the services
 Employment contracts (including ‘service contracts’) between employer and employee.

The aims of a contract are:

1. To realize expectations
2. To guard against or allocate certain commercial risks.
3. To ensure smooth running of the commercial system
4. Not to rescue a party from a bad bargain, however some relief may be afforded to a party
in cases of duress or undue influence.
5. To be an instrument of social control, for example, employment, sale of goods and
consumer credit law.

The remedial goals of a plaintiff in a contract action are traditionally said to be one of three
possibilities.

1. Fulfillment of expectation interest. The plaintiff seeks to be put into the position he would
have been in, had the defendant carried out the contract.

2. Protection of the plaintiff’s restitution interest. Here the plaintiff seeks just to be put in
the position he was in before he entered into the contract, that is, return of any goods
delivered or money paid.

3. Protection of the plaintiff’s reliance interest. Here the plaintiff is seeking compensation
for work carried out or expenses incurred in reliance upon the contractual agreement

Punishment of the defendant is not a contractual aid.

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12
 CONSIDERATION

Consideration may be defined as the value element in a contract. For example, if I buy a
newspaper the consideration for my money is the newspaper. From the vendor’s newsagent’s
point of view, the consideration for the newspaper is the price I paid for it.

In law, a simple contract will not be enforceable in the Courts unless the plaintiff can show that
he gave or promised to give some advantage to the defendant in return for the promise. Promises
not supported by consideration are bare promises.

Definition
Consideration is defined by Justice Lush in Currie v Misa (1875) LR 10 Ex 153 at p 162:

‘… a valuable consideration in the sense of law may consist either in some right, interest, profit
or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given
suffered or undertaken by the other.’

FIVE PRINCIPLES/ ELEMENTS

1. Consideration must move from the promisee
2. Consideration need not move to the promisor
3. Past consideration is not good consideration
4. Consideration must be sufficient but need not be adequate
5. Consideration must be legal

Consideration must move from the promisee

A person may provide consideration either by conferring a benefit upon another or by
undertaking to suffer a detriment (harm) to himself. It is, however a personal obligation.

Consideration need not move to the promisor

Where the consideration provided is the suffering of a detriment to the promisee, the
consideration need not move to the promisor.

So in Carlill v. Carbolic Smoke Ball Co. Ltd, the consideration for the promise by the Carbolic
Smoke Ball Co. was using the smoke ball which the plaintiff had bought. That conferred no
direct benefit to the Carbolic Smoke Ball Co. and so consideration did not move to the promisor.
It was, however, a detriment to herself.

Past consideration is not good consideration

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This means that something done in the past, before an agreement is made, cannot be
consideration for that agreement. The consideration must be provided either at the time of the
agreement or at a later date.

The rule is well established. It can be seen in operation in Roscorla v. Thomas (1842) 3 QB 234.
The defendant promised the plaintiff that a horse which had been bought by him was sound and
free from vice. In fact, it was not (it was vicious). It was held that the express promise that the
horse was sound and free from vice had been made after the sale and, therefore, no consideration
for the promise was given.

The payment for the horse was complete before the promise was made.

Consideration must be sufficient but need not be adequate

Valuation- The Court will look to see if the purported consideration contains any value. If it sees
that there can be some value, then it will not concern itself with the accuracy of the valuation.
That may be so even where the motive for undervaluation is a corrupt one.

This means for example that if X owes Y $2000, and offers to wash Y’s car in settlement of the
debt, this would be sufficient consideration provided that Y agreed to accept payment in this
form – even though washing a car is not a service worth $2000.

Consideration must be legal

In order to prove the existence of a contract a plaintiff must prove consideration and if the
consideration consists of some illegal or immoral act, the Courts will presume that there was no
consideration given for the defendant’s promise.

PAYMENT IN KIND
Consideration can take the form of ‘money’s worth’ and does not have to be in the form of
money. ‘Money’s worth’ means something other than money. It could take the form of goods, or
it could be in the form of a service. For example, suppose that X owes Y $2000, but does not
have the money to pay the debt.

X might offer to pay the debt by giving Y a pair of shoes. If Y agrees, the pair of shoes would be
suitable consideration for the settlement of the debt. However, Y would need to agree, if the
original agreement was for payment in cash.

X might offer to settle the debt by washing Y’s car. Again, if Y agrees, washing the car would be
suitable consideration.

Questions:

What are the essential elements of the concept of ‘consideration’?

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Define past consideration.

Promissory Estoppel

The principle of promissory estoppel is based on the law of equity (fairness).

Promissory estoppel is not concerned with facts but with promises and intentions:
‘Where by his words or conduct one party to a transaction makes to the other an unambiguous
promise or assurance which is intended to affect the legal relations between them (whether
contractual or otherwise), and the other party acts upon it, altering his position to his detriment,
the party making the promise or assurance will not be permitted to act inconsistently with it.
(Snell’s Principles of Equity)

Basically, it states that although a promise might not be enforceable in common law, the person
who gave the promise may in fairness be ‘estopped’ (prevented) from enforcing his strict legal
rights. When the principle is applied, this usually means that the person who gave the promise
should be required to carry out the promise, at least for a while.

Original or Previous Agreement - There must have been an original agreement between the
parties whereby the promisee owed an obligation to the promisor.

Waiver - The plaintiff must have promised to waive his rights against the defendant either
wholly or in part and it must have been intended that the promise should be acted upon.

The nature of the promise - The nature of the promise must be clear and unequivocal. The
promise must be intended to affect legal relations and not be simply a gratuitous indulgence

Contractual relationships and beyond - The principle applied when one party to a contract in
the absence of fresh consideration agrees not to enforce his right.

A shield not a sword - That is, it is defensive in nature, not offensive. The doctrine does not
create an action for breach of promise, but it will prevent the promissory acting inconsistently
with his promise.

Detriment - The defendant promised must have relied on the promise and altered his position in
reliance on it.

An equitable doctrine - Being an equitable doctrine, the promisee can only rely on promissory
estoppel if he has himself acted equitably. In the words of the old maxim,’ He who comes to
equity must come with clean hands.’

Acting on the promise - For the promisee to invoke the doctrine of promissory estoppel, he
must in some way have acted on the promise, or altered his position in reliance on it.

Questions

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State the essential elements of the doctrine of ‘promissory estoppel’.
What is the meaning of the phrase ‘a shield, not a sword’ in the context of promissory estoppel?
PRIVITY OF CONTRACT

The doctrine of privity means that a contract cannot, as a general rule, confer (give) rights or
impose obligations arising under it on any person except the parties to it." (GH Treitel, The Law
of Contract)

A party can either be privy to the agreement or to the consideration and only such persons can
sue. The general rule is that a contract only binds the parties to it. The reason that this is so is that
C is a stranger to the contract effected between A and B.

In Dunlop Pneumatic Tyre v Selfridge (1915), Dunlop sold tyres to Dew, subject to a retail price
maintenance scheme. Dew resold the tyres to Selfridge and sought to impose the same retail
price maintenance scheme. Selfridge sold the tyres for a price less than the scheme required.
Dunlop sued Selfridge on the basis that Dew had contracted with Selfridge as Dunlop’s agent.
The House of Lords rejected this argument. Only a person who is party to a contract can sue on
it.

Circumstances falling outside the rule

If the doctrine of privity was inflexibly applied, it would cause considerable injustice and
inconvenience. Many exceptions to it have therefore been developed.

There are some circumstances in which the rule that only a party to the contract can enforce it
does not apply.

1. Collateral contracts - A collateral contract is a contract where one person makes a promise to
another in return for that other person entering a contract with a third person. For example, X
might make a promise to Y on condition that Y enters a particular contract with Z. The contract
between X and Y is a collateral contract.

This is a contract which depends for its validity in another contract, this collateral contract will
involve at least one party who is a party to the main contract. By virtue of that, the Courts may
be prepared to allow enforcement of the collateral contract.

In Shanklin Pier v Detel Products [1951] 2 KB 854 the plaintiffs had employed contractors to
paint a pier. They told them to buy paint made by the defendants. The defendants had told them
that the paint would last for seven years. It only lasted for three months. The Court decided that
the plaintiffs could sue the defendants on a collateral contract. They had provided consideration
for the defendants’ promise by entering into an agreement with the contractors, which entailed
the purchase of the defendant’s paint.

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2. Multi-partite agreements - Clubs or unincorporated associations. Where a person joins a
club or other unincorporated association, he may contract with all the other members, even
though he may not know any of them. For example, in Clarke v Dunraven [1897] AC 59 HL, the
owners of two yachts entered them in a regatta. Each owner undertook in a letter to the secretary
to obey all the rules of the club. These included a rule that members were to pay all damages
caused by fouling. The Satanita fouled the Valkyrie.

The owner of the Valkyrie could rely on the promise to pay ‘all damages’ because a contract
between the members on the terms specified with the club was formed either when they entered
the race or at least at the time of sailing.

Companies - The position is similar where a person becomes the member of an incorporated
body. The company and its members are bound as though signed and sealed by each member,
and amount to a covenant between each member and every other member.

3. Agency - A person may contract as agent for a third party (his principal). The principal is then
bound and the agent is not privy to the contract and cannot (generally) sue or be sued upon it.

The concept of agency is an exception to the doctrine of privity in that an agent may contract on
behalf of his principal with a third party and form a binding contract between the principal and
third party.

For example, a third party may be able to take the benefit of an exclusion clause by proving that
the party imposing the clause was acting as the agent of the third party, thereby bringing the third
party into a direct contractual relationship with the plaintiff:

In Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, a bill of lading limited the liability of a
shipping company to $500 per package. The defendant stevedores had contracted with the
shipping company to unload the plaintiff's goods on the basis that they were to be covered by the
exclusion clause in the bill of lading. The plaintiffs were ignorant of the contract between the
shipping company and the stevedores. Owing to the stevedores negligence, the cargo was
damaged and, when sued, they pleaded the limitation clause in the bill of lading. The House of
Lords held that the stevedores could not rely on the clause as there was no privity of contract
between the plaintiffs and defendants.

Lord Reid suggested that the stevedores could be brought into a contractual relationship with the
owner of the goods through the agency of the carrier provided certain conditions were met:

(1) that the bill of lading makes it clear that the stevedore is intended to be protected by the
exclusion clauses therein.

(2) that the bill of lading makes it clear that the carrier is contracting as agent for the stevedore.

17
(3) the carrier must have authority from the stevedore to act as agent, or perhaps, later ratification
by the stevedore would suffice.

(4) consideration must move from the stevedore.

4. Land Law - The doctrine of privity of contract has limited application in land law.

a. Leases - If a landlord rents premises to a tenant and the lease contains certain covenants
by the tenant, for example, to keep the premises in reasonable repair, those covenants are
enforceable because of the privity of contract. If the tenant later assigns the lease to
another, the covenants are still enforceable even though there is no contract between the
landlord and the assigned lessee. Equally, if the landlord should sell his freehold interest
to another, the new landlord can enforce the covenants against the tenant even though
there is, again no privity of contract.

b. Restrictive Covenant - This is a restriction on the use to which a freeholder can put his
land. It can be enforced in any case where the original covenantee (that is to whom the
promise to observe the covenant was made) retains sufficient interest in the land. It is
therefore quite irrelevant that the defendant is not the original covenantor.

Restrictive covenants may, if certain conditions are satisfied, run with the land and bind
purchasers of it to observe the covenants for the benefit of adjoining owners.

For example, in Tulk v Moxhay (1848) 2 Ph 774, the plaintiff who owned several houses in
Leicester Square sold the garden in the centre to Elms, who covenanted that he would keep the
gardens and railings in their present condition and continue to allow individuals to use the
gardens. The land was sold to the defendants who knew of the restriction contained in the
contract between the plaintiff and Elms. The defendant announced that he was going to build on
the land, and the plaintiff, who still owned several adjacent houses, sought an injunction to
restrain him from doing so. It was held that the covenant would be enforced in equity against all
subsequent purchasers with notice.

This device was carried over into the law of contract by the Privy Council in Strathcona SS Co v
Dominion Coal Co [1926] AC 108, but Diplock J refused to follow the decision in Port Line Ltd
v Ben Line Steamers [1958] 2 QB 146. Most recently, in Law Debenture Trust Corp v Ural
Caspian Oil Corp [1993] 2 All ER 355, it was emphasised that the principle permitted no more
than the grant of a negative injunction to restrain the person acquiring the property from doing
acts which would be inconsistent with the performance of the contract by his predecessor and
had never been used to impose upon a purchaser a positive duty to perform the covenants of his
predecessor.

5. Trusts - If a person creates a trust for the benefit of another, that other has a proprietary right
in the trust property and can enforce the trust obligations against the trustee even though he was
not a party to the original agreement

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Equity developed a general exception to the doctrine of privity by use of the concept of trust. A
trust is an equitable obligation to hold property on behalf of another.

The device was approved by the House of Lords in Les Affreteurs Reunis v Leopold Walford
[1919] AC 801, where a broker (C) negotiated a charterparty by which the ship-owner (A)
promised the charterer (B) to pay the broker a commission. It was held that B was trustee of this
promise for C, who could thus enforce it against A.

However, the trust device has fallen into disuse because of the strict requirements of constituting
a trust and most particularly that there should be a specific intention on the part of the person
declaring the trust that it should be a trust.

Question

Explain the doctrine of privity.

Give three examples which fall outside the doctrine of privity.

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 FORMATION OF THE CONTRACT

The terms of the agreement must be sufficiently certain, that is, capable of being ascertained, to
enable the Court to be sure that an agreement has been reached.

Not every bargain gives rise to a contract.

Social and domestic agreements - The rule where agreements are social or domestic is that
there is a presumption that the parties do not intend to create legal relations. In Balfour v Balfour
[1919]2 KB 571 the Court was asked to decide whether an agreement between a husband and a
wife could be a legally enforceable contract. The parties lived in Sri Lanka. During their leave in
England the wife became ill and was unable to return to Sri Lanka. Her husband agreed to pay
her a monthly allowance of $30. The payments stopped and the wife sued. It was held that her
action failed. There was no contract in existence because the agreement had not been intended to
be legally binding.

Do not interpret this decision to mean that agreements between a husband and a wife can never
be legally binding.

Intention and consideration - In deciding whether there is a contractual intention, it is often

difficult to distinguish the intention from the question of whether consideration has been given.
Natural love and affection is not consideration recognised at law.

Interests in occupation - The presumption against contractual intention is sometimes rebutted

where the occupation of real property is concerned. For example, Hardwick v Johnson [1978] 1
WLR 683, a mother promised to buy for her son and daughter-in-law a house. She would buy it
and they would pay her rent. After one year the marriage broke down. The mother tried to get
possession of the house. The daughter-in-law offered her rent.

The resulting agreement was held to be a licence for occupation. The Court has to look at the
intention of the parties by forming its own opinion as to what would have been the intention of
reasonable men as to the effect of the exchange of promises if it had been present on their minds
at the time.

Separation Agreements - The presumption may be rebutted where an agreement is reached

between spouses who are unhappily married or about to separate or separated but any agreement
reached must be expressed in unambiguous terms.

Commercial Agreements - Where the agreement is a commercial one, there is a presumption

that the parties intended to enter into legal relations. This means that the plaintiff does not have
to prove intention in order to succeed; the Court will presume its existence. The presumption can,
however be rebutted if a contrary intention is expressed. The burden of proof that the agreement
relied upon is contractually binding is on the plaintiff seeking to rely on it.

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Rebutting the burden of proof- The question of whether the burden of proof has been rebutted is
however, one of fact. In Edwards v Skyways Ltd [1964] 1 WLR 349, an airline pilot was offered
a ‘golden handshake’, that is, a payment expressed to be ex gratia by his employers. They failed
to pay. The pilot sued. The employers said that the offer of the ex gratia payment was not
intended to be contractually binding.

The burden of proof in a commercial agreement is on the person asserting that no legal effect
was intended. The onus was said to be a heavy one and the employers failed to discharge it.

Summary
 An Intention to create legal relations is an essential requirement of a contract

 The Courts generally assume that promises between a husband and wife are not to be
regarded as legally enforceable nor those between members of a family. However, the
presumption will not apply if the spouses are separated or divorced

 Agreements between friends are presumed not to be legally binding but evidence to the
contrary will be admitted.

 Commercial agreements are presumed to be legally binding unless they are expressly
declared not to be so,

 Ambiguity does not itself deny an intention to create legal relations.

 Wherever possible courts will imply essential terms by reference to past dealings.

Revision Questions

Which of the following agreements are valid contracts?

a. A agrees to visit B for the weekend and having paid $50 in rail fares, arrives at
B’s house to discover that B has gone away for the weekend.

b. B and C are business men. They have agreed on the sale and purchase of 300
books on the law of contract, all other terms having been agreed in advance.

c. C and D travel to work each day in D’s car. C pays a contribution to the petrol.

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 TERMS OF A CONTRACT

It is a fundamental principle of the law of contract that the parties are free to agree whatever
terms they choose and provided those terms are not illegal or considered repugnant (completely
unacceptable), the Courts will not readily interfere. Thus the legal duties imposed on the parties
derive from the contract. The terms of the contract will be established by the words used by the
parties (both spoken and written) and where necessary by the conduct of the parties in coming to
their agreement.

The obligations may be relatively straightforward, for example, to pay a sum of money in return
for the handing over of a particular article or they may be more complicated, for example, the
money may have to be paid in a particular currency on a particular day, or the article may have to
be tested or packaged or delivered to a particular destination.

In addition to the terms expressed by the parties, other terms may be implied. Such implied terms
can arise from the common law or by custom.

The terms of the contract can vary in importance. Breach of some terms may have a negligible
effect on the outcome of the contract whereas the breach of other terms may completely destroy
the purpose of the agreement.

Terms of a contract are the contents of a contract, a failure in the performance of which may give
rise to an action for breach of contract.

A statement is a term of the contract when there is a contractual intention that it should be a term,
that is, when the circumstances show that the statement was intended by the parties to form part
of the contract, so that the condition or warranty was assured in one contract by one party to
another.

Classification of Terms:
1. Conditions
2. Warranties
3. Innominate terms

To determine the nature and extent of the obligations involves determination of the following:

1. The terms of the contract.

2. The relative importance of those terms, that is, whether or not a breach of a term
undermines a basic contractual obligation. This is of fundamental importance in
determining the remedy available to the innocent party who has suffered a breach of
contract.

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 3. The manner in which the terms formed part of the contract, that is, whether they were
expressly provided for and the rules applicable to their construction is not expressly
provided, must be implied by custom, by the Courts and by Statute.

Terms and Representations

Terms and representations are statements made before or at the time of the conclusion of the
contract. These can be:
1. A promise amounting to a term of the contract which if unfulfilled will allow a remedy
for breach of contract; or
2. A mere representation which if false will not give rise to an action for breach of contract
but it may allow a remedy for misrepresentation or
3. A collateral contract.

Collateral Contracts
If a promise is not a term of the principal contract it is possible that it may be enforced at a
collateral contract.

Differentiating Between A Representation And A Term

 A term refers to the legal obligations of a party under a contract and sets out what has
been agreed by the parties.
 A representation is a statement of fact made by one party which induces the other to enter
into the contract.

The task of the Court will be to ascertain the intention of the parties. In deciding, whether a
particular statement was intended to be a term of the contract or merely amounted to a
representation, the Court is guided by certain factors.

1. The importance of the statement- A statement may well be a term of the contract if it is of
such importance that if it had not been made, the injured party would not have entered
into the contract at all.

2. Did the party making the statement have special knowledge as against the other party? An
important factor may be the relative capability of the parties to know the truth.

3. Was the contract reduced to writing subsequent to the statement? If the contract is
subsequently reduced to writing and the written contract does not incorporate the
statement, this would be suggestive of the view that the parties did not intend the
statement to be a contractual term.

4. Lapse of time between the statement and conclusion of the contract- This may be relevant
but by no means a decisive factor.

Why is it important to distinguish between a Representation and a Term?

 The importance of the distinction is that different remedies are available if a term is
broken or a representation is untrue.

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  If it is a representation and the statement turns out to be incorrect the innocent party may
sue for misrepresentation.
 If it is a term of the contract then breach of that term of the contract entitles one to claim
damages and, if he has been deprived substantially of what he bargained for, he will also
be able to repudiate the contract.
Express Terms

There are several types of express terms:

1. Conditions

A condition is a major term which is vital to the main purpose of the contract.
A breach of a condition gives the innocent party an option to repudiate (reject the contract), that
is, a cancellation of the contract as well as a common law right of an action for damages.

Condition also means a stipulation that a contract should be brought to an end or should not be
enforceable except on the happening of a given event. The condition is then properly called a
condition subsequent or a condition precedent.

Condition Precedent
Where the operation of an obligation or right is suspended until the happening of a certain event,
there is said to be a ‘condition precedent’. If the event never happens the obligation or right
never arises.

In Pym v Campbell (1856) 6 E& B 370, the defendants agreed in writing to buy from the
plaintiff a share in an invention. The defendants gave oral evidence that it was not to operate
until a third party had approved the invention and that this had not happened. The Court held that
there was a condition precedent which had not been satisfied and the plaintiffs could not recover.

Condition Subsequent
The obligation of one or both parties may be subject to the condition that it is to be immediately
binding, but in the event of a certain occurrence or the ascertaining of certain facts, the obligation
will cease to be binding or the party will have the right to avoid the contract.

2. Warranties

A warranty is a less important term: it does not go to the root of the contract.

The breach of warranties does not entitle the other to treat his obligations as discharged. If the
term is a warranty then there is no right of rescission (cancellation of the agreement) but only a
right to damages.

3. Innominate or Intermediate Terms

It may be impossible to classify a term neatly in advance as either a condition or a warranty.

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It is not certain whether the term will enable a person to repudiate (reject the contract) in the
event of its breach.

Breach of an innominate term will enable the party not in default to treat the contract as
repudiated (rejected/denied) only if the other party has renounced (given up) his obligations
under the contract or the other party has rendered his obligations impossible of performance, or
the party not in default had been deprived of substantially the whole benefit which it was
intended he should obtain from the contract.

Guiding Rules- The test in every case is the parties’ intention in the objective sense. The
intention of the parties can only be deduced from the totality of the evidence.

a. The importance of the statement.

In Bannerman v. White (1861) White was buying hops from Bannerman. Before the
sale White asked if the hops had been treated with sulphur, making it clear that, if
they had, then he would not proceed any further. In fact, a small proportion had been
treated, though Bannerman was unaware of this. It was held that White was not liable
for the price.

b. Special knowledge of the maker.

c. Interval

d. Priority- A statement which precedes a contract in writing or a deed is not likely

to be treated as a term of the contract unless it is incorporated into the text.

Express Terms & Laws of Evidence

Certain words are written but rules and laws of evidence have developed to enable one or other
party to show what the words in the contract do in fact mean.

1. The aim is to discover the intention of the parties.

2. Their intention must be found in the document itself (the parol evidence rule)

3. The popular meaning of words is to be applied unless the context indicates that some other
meaning is intended.

4. Technical words should be given their technical meaning.

5. The contract should be constructed so as to avoid absurdity and inconsistency.

6. The contract should be constructed according to mercantile (commercial) usage.

7. The Courts may look at customs of particular places to interpret the contract.

8. The contract should be read as a whole.

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9. Where clauses are inconsistent or repugnant to each other, effect should be given to the part
which is intended to carry the real intention of the parties on a consideration of the contract as a
whole.

10. Where there are printed and written words, greater significance should be placed on the
written words as more likely to exhibit a true intention.

11. Where a general word is preceded by several words illustrating a class of behaviour or
meaning or intention, the general word shall be limited ‘ejusdem generis’, that is, it only applies
to matters which are in a similar category to the preceding words. For example, the words, ‘be
destroyed by fire, flood, storm, tempest or other inevitable accident’ could not cover losses
caused by acts or default of the parties to the contract.

Rules of Evidence
The ‘parol evidence rule’ as stated in Goss v Lord Nugent (1833) 5 B & Ad 58. “Verbal evidence
is not allowed to be given so as to add to or subtract from or in any manner to vary or qualify the
written contract.’ There are, however, several exceptions to this rule.’

1. To show that an implied term is inapplicable-where the contract is silent on a subject

where usually a term would be implied, parol (verbal evidence as to the extrinsic matters)
evidence is available to show that the usual term should not be implied. So if a person
takes out a policy of marine insurance and evidence can show that the ship was
unseaworthy, the implied term of the contract as to seaworthiness can be excluded.
2. To show when the contract is to commence.
3. To show the capacity of the party acting.
4. To defend an action for specific performance.
5. To construe an ambiguous document.
6. To show a collateral promise.

Implied Terms

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

Terms Implied by the Courts

There are two circumstances in which terms are implied at common law.

1. Where the contract does not deal with a matter expressly but a term is said to be intended
by the parties. The intention is determined by looking at the words of the agreement and
their surrounding circumstances.

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 2. Where the contract does not expressly deal with the matter, but it creates a relationship in
which such a term is usually implied.

Business Efficacy- If a term is so obvious that the parties did not bother to include it but as
reasonable businessmen, they must have intended to apply, then the Court will imply the term in
the contract.

Legal Duty- Occasionally a legal duty will be imposed by means of implied term in the
circumstances where the normal test of business efficacy would not apply.

Intention of the Parties- The circumstances in which a term will be implied are where its
inclusion can be inferred from the agreement.

In Trollope v NW Metropolitan Hospital Board [1973], WLR 601, no term as to overrunning on

a building contract could be implied because the Court could not say which type of term was to
be implied.

Terms Implied by Custom

Terms may be implied by custom or usage of a particular trade or business market or locality.
The custom must be invariable and certain. A contract may be considered as incorporating a
relevant custom unless it is inconsistent with the terms of that contract.

Terms Implied by Statute

Terms can be implied by statute such as the Sale of Goods Act 1979.

Sale of Goods- Certain terms are implied in contracts for sale of goods

Sale by Description- Where goods are sold by description, the goods will correspond with the
description.

Implied Terms about Quality-Where the seller sells goods in the course of a business there is an
implied term that the goods are of satisfactory quality except where the defects were specifically
drawn to the buyers attention or where the buyer examined the goods before the contract was
made regarding defects which that examination ought to have revealed.

Implied terms about quality and fitness- There is an implied term that the goods are reasonably
fit for the purpose for which they were bought.

Sale by Sample- There is an implied term that the bulk will correspond with the sample in quality
that the buyer will have a reasonable opportunity of comparing the bulk with the sample and that
the goods will be free from any defect rendering them of unsatisfactory quality, not apparent in
reasonable examination of the sample.

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Contracts of hire purchase- Certain terms are implied into all contracts of hire purchase. They
relate similarly to the title, description, quality of fitness for purpose and samples correspond
very closely to the implied terms in contracts for the sale of goods.

Supply of Goods and Services- The basic obligations are those relating to care and skill, time for
performance and consideration. In respect of these obligations certain terms are implied.

Time for Performance- Where the time for carrying out of the service is not fixed by the contract
or by the course of dealing between the parties there is an implied term that the supplier will
carry out the service in a reasonable time. What is reasonable time is a question of fact.

Consideration- If the price for the service is not fixed by contract or determined by the course of
dealing, the party contracting with the supplier will pay a reasonable charge. What is a
reasonable cost is a question of fact.

SUMMARY

 Terms of a contract can be classified as terms or as mere representation. This latter term
is not a part of the contract.

 Oral evidence may be admitted to cure uncertainty or to restrict the operation of an

exclusion clause in a contract or as collateral.

 Express terms of the contract can be classified either as conditions (important terms) or as
warranties (minor terms). The classification is for the court.

 Conditions may be divided into conditions precedent and conditions subsequent. The
former require something to be done for the contract to be valid; the latter only discharge
a contract if the condition is fulfilled.

 Courts may ignore the classification of condition and warranty and label the term instead,
whereby the consequences of breach are considered.

 The Courts may be prepared to imply terms into a contract to give business efficacy, but
this may be ignored in cases of necessity.

 Statute will imply terms into a contract for the sale of goods regardless of what the parties
have said. These terms cannot be excluded in the case of consumer sales and may only be
excluded in business sales if it is reasonable.

 Where there is contract of hire or for work or materials then statute will imply terms as to
satisfactory quality or as time for performance and payment.

Questions
1. Name three situations where parol (oral) evidence will be admissible.

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 2. Compare the effect of a statement which is a term and a statement which is not a term of
the contract.
3. Which party has the onus of proving the existence of an implied term?
4. A contracts with B to assemble bicycles to B’s specifications. One of these specifications
is that the bicycles will be fitted with a unique gear system. B manufactures these gears
systems. Is there an implied term that B will supply A with this gear system in sufficient
quantities to manufacture the requisite number of bicycles?

Answer.
4. The answer to this question depends upon whether or not a term can be implied by operation
of the common law. It may be possible to establish that the commercial practice in such a
situation requires B to supply the gear system. A Court would require convincing evidence of
such an invariable practice and this may not exist.
A second argument rests upon necessity- that the parties by necessity, intended such a term to be
within their contract. A possible weakness in such an argument is that it may be that while B is
the only manufacturer of such a gearing system, B may not be the only supplier of such a system.
If it can be obtained elsewhere, there may be no necessity to imply the term.

Certainty/Written Formalities

Certainty- The general principle is that the parties must make their contract; the law cannot make
it for them.
In Loftus v. Roberts (1901) the contract to engage an actress at West End salary to be mutually
arranged between the parties. This was held not to be sufficiently certain to create any binding
agreement.

Certainty- While it is not the function of the Courts to make an agreement for the parties, they
will not defeat the intention of the parties to contract merely because the agreement has been
loosely worded. Gaps in the contract may often be filled by reference to the custom of the trade
or the course of dealings between the parties. If, however, no such reference can be made or it
cannot be objectively determined what the parties intended, then the Courts may be forced to
conclude that the lack of certainty militates against contractual validity.

Statute - In the absence of express provision in an agreement, statute may be able to provide the
missing terms, for example, the Sale of Goods Act.

Vagueness - If an agreement is too vague to permit a meaning to be given to it, no enforceable

contract can be construed. However, Courts may be able to find a meaning to an apparently
vague term by reference to custom or to what is reasonable. Further, it may be possible to ignore
certain meaningless words and still leave a valid contract.

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Incompleteness - If there is an essential term yet to be agreed and there is no express or implied
provision for its solution, there is no binding contract.
British Bank for Foreign Trade [1949] 1 KB 623.

An agreement will not be void for uncertainty if it provides a means for resolving matters left
open.

Meaningless Terms- The general rule is that meaningless terms can be ignored. Any other
interpretation will cause difficulties, for the parties can hardly be agreed on terms that are
without any meaning since that would destroy the consensus or agreement on the same thing that
is essential for any contract.

Form of the contract

The general rule at common law is that contracts can be made informally. No writing or other
document is necessary. A contract made orally is valid and enforceable, unless the contract falls
into one of the exceptions set out below.

There may, however, be practical problems of proof when trying to enforce an oral contract in
the Courts.

Exceptions to the General Rule

1. Contracts for the sale of land-must be in writing, must be signed by each party and the written
document must contain all the terms agreed on.

2. Contracts of Guarantee-that is a special promise to answer for debt, default or miscarriage of

another person. Such contracts are not enforceable by legal proceedings unless evidenced in
writing.

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 CAPACITY TO CONTRACT

Generally the law assumes that all persons have full capacity to contract. A few classes of
persons are in a special position and do not have this power and they are said to be under
incapacity. These are minor (under 18 years old), drunk and insane and corporations.

1. Minors
That is anyone under 18 years is a minor.

The parents of minors are not liable for the minors’ contracts unless they acted as their agents in
law. Thus the law tries to protect minors by encouraging them to make their own contracts. At
the same time however, the law tries to ensure that they are not exploited so minors are given
special powers not given to any other group.

There are two kinds of contract.

1. Contracts for necessaries (which are valid).
2. Voidable contracts.
At common law these are of two types:
a) those binding on the minor, unless he repudiated (rejected) them during minority or
within a reasonable time thereafter; and
b) those which were not binding upon him, unless and until he ratified them (signed the
agreement making it officially valid) after attaining his majority

Necessaries
What are necessary goods? There are goods suitable to the condition of life of the minor and to
his actual requirements at the time of the sale and delivery. It must be shown, first that the class
into which the goods fall is capable of being described as necessary and secondly that the goods
supplied even if within such a class were actually necessary at the time of the contract. Clothes,
food, drink medicine etc will fall within the definition of necessaries. The onus of showing that
the goods are necessaries lies on the supplier.

The basic rule is that a minor is liable under a contract for necessaries only if as a whole it is for
his benefit. If it is not, then he is not bound, unless he ratifies it after reaching his majority. He is
not bound by one entire contract covering both necessaries and non-necessaries.

Necessary services –These would include contracts by an infant for legal and medical assistance.

Contracts for necessaries must be for the benefit of the minor taken as a whole- If it contains
terms which are harsh and onerous, the contract will not be enforceable against the infant.

Contracts for service, apprenticeship and education- Contracts for service are valid if the service
is taken as a whole, beneficial to the minor, for example an apprenticeship which may on
occasions appear exploitive but which have beneficial consequences in the long term.

Other beneficial contracts- Some other beneficial contracts but not all contracts, for example,
trading contracts will be binding on a minor. In Doyle v While City Stadium [1935] 1 KB 110 a

31
minor who was a professional boxer contracted with the British
Boxing Board of Control and agreed to adhere to the rules of the Board. The contract was held to
be binding on him because he could not have earned his living otherwise.

Voidable Contracts

Valid until repudiated

Voidable contracts generally are contracts which subsist unless and until avoided as contrasted
with void contract, which are a complete nullity ab initio (from the beginning). In the case of
minors’ voidable contracts, only one party the minor may avoid them. The rules as to liability are
that once the minor has avoided the contract, he avoids liabilities which accrue after that date,
but remains bound to meet obligations which have already arisen. He cannot receive back money
that was paid prior to the date of his avoiding the contract.

Contracts which are voidable are:

1. Real property contracts
2. Contracts involving shares
3. Partnership agreements
4. Marriage settlements

How are minors’ voidable contracts avoided?

This is usually accomplished by notice, which the minor may revoke before he attains his
majority. Notice that he wishes to avoid a voidable contract must be given before the minor
becomes 18 years old or within a reasonable time thereafter. What is reasonable time varies with
the circumstances.

Contracts valid when ratified

At common law, all contracts which are not enforceable against the minor during his minority
may be ratified by him when he attains his majority. Upon ratification they become enforceable.

Liability of a party contracting with a minor

The general rule is that the lack of capacity is a personal advantage, so that the person
contracting with the minor cannot rely upon it to invalidate the contract. To permit this to happen
would transform the advantage to the minor into a disadvantage. Accordingly, a minor can
recover damages from a person who refuses to perform his part of the contract. He would not,
however be able to obtain an order for specific performance: not at least unless he had himself
performed the contract, because there would not be mutuality.

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2. Mentally disordered persons

There are two categories:

1. If a person is certified by two medical practitioners as being incapable of dealing with his
property, then the Court will have control over his property, and will delegate the day to day
management of it, often to a relative, who will then be accountable to the Court. The person
certified cannot then dispose of any of his property.

2. If there has been no certification, the contract may be set aside:

a) if the other party knew of the disorder
b) if the disordered person did not understand the transaction by reason of his disorder.

The contract may be ratified by the disordered person once the disorder has ceased temporarily
or permanently.

A person who supplies necessaries may recover a reasonable price, therefore, even if he knew of
the disorder.

3. Persons who are drunk

The contract may be set aside if: one party was very drunk and this prevented his understanding
of the transaction and the other party knew of this.

The drunken person is liable to pay a reasonable price for necessaries and may in any event ratify
the contract when he is sober.

Questions

1. Which of the following would be necessary to a minor?

a. An item which he does not already possess.
b. An item suitable to his standard of living.
c. An item he must buy in order to finish his training.
d. Items with which he is not already adequately supplied.

2. What are contracts for necessaries?

3. What is the position of a minor who purchases and pays for non-necessary goods but who
now wants to cancel the transaction?

Answer for #3
The minor will not be able to recover his money unless he can establish that there has been a
total failure of consideration. In general terms the incapacity of a minor will act as a defence
to a claim by the other party who seeks to enforce the contract rather than as the basis of a
claim by the minor for the restitution of the benefit he has conferred upon the other party.

33
 DISCHARGE OF CONTRACT

The discharge of a contract means in general terms that the parties are freed from the mutual
obligations imposed by the contract. However, the extent of this freedom depends on the method
chosen to discharge the contract.

A contract may be discharged in the following ways:

1. by Performance
2. by Agreement
3. by Breach
4. by Frustration

The performance of his obligations by a contracting party discharges that party from his
obligations under the contract. Unless a term of the contract is expressly stated to have effect
after the existence of the contract has ceased, all restrictions, liabilities and duties end with the
discharge or breach of contract.

1. Performance

Generally, parties must perform precisely all the terms of the contract in order to discharge their
obligations

Modification of the general rule

a) Divisible Contracts
A contract may be entire or divisible. A divisible contract is one which is so framed that it
permits one party to demand performance without tendering performance himself. This is where
part of the consideration of one party is set off against part of the performance of the other, for
example, a builder agrees to build a house for 2.5 million, 1million for the completion of the
foundation, 1 million for the erection of the superstructure and .5 million, 6 months after
completion of the house in accordance with the specifications. Then if after the foundations are
laid and the builder fails to do any further work, he can nevertheless recover 1 million.

b) Acceptance of partial performance

Where the plaintiff to whom the promise of performance was made receives the benefit of partial
performance of the promise under such circumstances that he is able to accept or reject the work
and he accepts the work, then the promisee is obliged to pay a reasonable price for the benefit
received. But it must be possible to infer from the circumstances a fresh agreement by the parties
that payment shall be made for the goods or services in fact supplied.

In Sumpter v. Hedges (1898) the plaintiff agreed to build some stables for the defendant. After
partially completing the work he abandoned the project. The defendant completed the building
using materials left at the site. The plaintiff sued for work done and for materials supplied. It was
held that the first claim failed and the second succeeded.

34
c) Completion of Performance prevented by the promisee
Where a party to an entire contract is prevented by the promisee from performing all his
obligations then he can recover a reasonable price for what he has in fact done on a quantum
meruit basis.

In Planche v. Colburn (1831) Planche agreed to write a book for Colburn. The book was to be
completed by a specified date. Before that date but after Planche had completed his research,
Colburn wrote canceling the project. Since Planche had not written the book at the date of
cancellation, he could not sue for damages. It was held that he was entitled to make a quantum
meruit claim for the work he had done.

d) Substantial Performance
When a man fully performs his contract in the hope that he has done all that he agreed to do or
has supplied all he agreed to supply but subject to defects of so minor a character that he can be
said to have substantially performed his promise, it is regarded as far more just to allow him to
recover the contract price diminished by the extent to which his breach of contract lessened the
value of what was done, than to leave him with no right of recovery at all.

In Hoening v. Isaacs (1952) Hoening agreed to decorate and furnish Isaacs’s flat for $750. After
the work was completed Isaacs alleged certain problems and offered $400. The court assessed
the cost of repairs at $55. It was held that Hoening had substantially performed his part of the
contract and so was entitled to $750 less a deduction to cover the cost of repairs.

Tender of Performance- Is equivalent to performance in the situation where one party cannot
complete performance without the assistance of the other and the one party makes an offer to
perform which the other refuses.

In Startup v M’Donald (1843) 6 M & G 593 the plaintiffs agreed to sell 10 tons of oil to the
defendant and to deliver to him within the last 14 days of March payment to be cash at the end of
that period. Delivery was tendered at 8:30 pm on 31st March. The defendant refused to accept or
pay for the goods because of the late hour. The tender was held to be equivalent to performance
and the plaintiffs were entitled to recover damages for non-acceptance.

Stipulations as to time of performance – If time is not of the essence, late performance does
not give rise to a right to terminate, but it gives a right to damages.

2. Agreement

What has been created by agreement may be extinguished by agreement. An agreement by the
parties to an existing contract to extinguish the rights and obligations that have been created is
itself a binding contract provided that it is either made under seal or supported by consideration.

35
3. Breach

A breach of contract occurs where a defendant fails to perform or refuses to perform contractual
obligations. In fact, a breach does not automatically discharge a contract. It is only when there is
a sufficiently serious breach, that is, a breach of a condition that the innocent party is given the
option of treating the contract as at an end so as to be relieved of further performance. In every
other case, the innocent party is given an option: he can either accept the breach and refuse to
perform his obligations, or he can refuse to accept the breach and insist that the guilty party
performs the obligations.

The nature of a breach- The failure to perform the terms of a contract constitutes a breach. Not
all breaches entitle the innocent party to treat the contract as repudiated (rejected).

A breach does not automatically discharge a contract. In Thornton v. Abbey National Plc (1993)
The Times 4 March, the Court ruled that where a breach of contract occurs which in no way
disadvantages the plaintiff the defendants may effectively take advantage of their own breach of
contract. If you benefit from it, it is not a breach.

Anticipatory Breach- an Anticipatory breach is where the guilty party has repudiated the
contract before it has been fully performed. In this situation the innocent party can treat the
contract as immediately discharged and can sue for damages for any loss caused as a result of
that breach. Alternatively, he can treat the contract as still in force and sue only when it in fact
takes place through the failure of the other party to perform the contract on the appointed day.

In Hochster v. De La Tour (1853) Hochster, a travel courier was engaged in April for a tour to
take place in June. In May the defendant wrote him stating that the contract was now cancelled.
Hochster sued for damages immediately. It was held he could do so.

An innocent party who chooses to ignore the breach can continue to insist on the fulfillment of
the contract. So long as he does so, the contract remains in existence. If this happens, then the
innocent party takes the risk that the contract may later become frustrated thereby destroying his
right of action. This happened in the case of Avery v. Bowden (1855). Bowden chartered a ship
from Avery to load a cargo at the port of Odessa. When the ship arrived, Bowden’s agent at the
port had no cargo to load. Instead of treating the contract as ended by this breach, Avery
continued to insist on the ship being loaded with a cargo. The contract provided for a loading
time. Before this period had expired the Crimean War broke out which made the contract
impossible to perform. It was held that the action failed. By choosing to treat the contract as still
valid Avery was accepting any risks that this course of action involved. Since the Crimean War
frustrated the contract Avery’s action failed.

36
Act of Party Creating Impossibility
In this situation a party does not repudiate the contract but makes any further performance
impossible, he may do so either before the contract is performed or during its performance.

Before Performance
If a party by his own act makes further performance by him impossible then he has committed an
anticipatory breach and the other party is entitled to treat the contract as discharged and sue
immediately.

During Performance
In this situation the contract is once again discharged and the plaintiff can sue for damages. In
O’Neill v. Armstrong Mitchell & Co (1895) the plaintiff, a British subject was employed as a
fireman on a Japanese warship for a journey from Tyne to Japan. During the voyage Japan
declared war on China. An Act of Parliament made it illegal for the plaintiff to work on the ship
in these circumstances. He therefore left the ship and sued for his wages. It was held that the
Japanese government had by its action made the fulfillment of the plaintiff’s contract legally
impossible and he was entitled to succeed.

Fundamental Breach
The important question here is when a breach of contract gives rise to a claim for damages only
and when the breach gives rise to a right to rescind the contract.

Conditions Precedent and Concurrent Conditions

A concurrent condition arises when A agrees to do something in return for B’s agreement to do
something at the same time. For example, a seller must deliver the goods if the buyer pays the
price and the buyer must likewise pay the agreed price if and when the seller delivers the goods.

A condition precedent may arise for example, if A agrees to sell his tractors to B if B pays $2,000
by way of an advance and agrees to pay the balance on delivery. The condition precedent is the
advance payment. If it is not made, there will generally be a right of rescission accruing to the
seller, in practice the seller could then sell to another buyer and sue B for the difference in price
obtained provided that the resale was effected with reasonable care and in good faith.

In both cases, therefore there is a right to rescind.

Going to the Root of the Contract

A breach of a condition is a breach going to the root of the contract. It is an issue of fact in every
case whether the breach was, in fact serious as to go to the root of the contract and entitle the
injured party to treat the contract as discharged.

37
4. Frustration

Where it is established that due to subsequent change in circumstances, the contract becomes
impossible to perform or it has become deprived of its commercial purpose by an event not due
to the act or default of either party.

Destruction of the specific object essential for performance of the contract.

(Frustration Due to Physical Impossibility)
When it can be shown that a contract can only be performed if a particular person or thing is
available, then any unforeseen event which makes that person or thing unavailable will mean that
the contract is now at an end.

In Taylor v Caldwell (1863) 3 B & S 826. Caldwell agreed to rent a music hall to Taylor so that
four concerts could be held there. Before the date of the first concert the hall was destroyed by
fire. Taylor claimed damages for Caldwell’s failure to make the premises available. The Court
held that the claim for breach of contract must fail since it had become impossible to fulfill. The
contractual obligation of the contract was dependent upon the continued existence of a particular
object.

Personal Incapacity where the personality of one of the parties is significant.

In Graves v Cohen (1929) 46 TLR 121 the Court held that the death of a racehorse owner
frustrated the contract with his employee, a jockey, because the contract created a relationship of
mutual confidence.

The non-occurrence of a specified event.

In Krell v Henry [1903] 2 KB 740. Henry hired a room from Krell for two days to be used as a
position from which to view the coronation procession of Edward VII but the contract itself
made no reference to that intended use. The King’s illness caused a postponement of the
procession. It was held that Henry was excused from paying the rent for the room. Holding of the
procession on the dates planned was regarded by both parties as basic to enforcement of the
contract.

Interference by the government

Interference by the government may frustrate a contract. See:
Metropolitan Water Board v Dick Kerr [1918]
Kerr agreed to build a reservoir for the Water Board within six years. After two years, Kerr were
required by a wartime statute to cease work on the contract and to sell their plant. The contract
was held to be frustrated because the interruption was of such a nature as to make the contract, if
resumed, a different contract.

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Supervening illegality
Where there is supervening illegality, the parties cannot rely on the contractual terms to prevent
the contract being frustrated.

Delay
Inordinate and unexpected delay may frustrate a contract. The problem is to know how long a
party must wait before the delay can be said to be frustrating.

Delay as Frustration
The fact that delay is serious and expensive will not by itself be sufficient to cause a frustration.
This will happen only if the delay puts an end in a commercial sense, to the undertaking or it
makes it unreasonable for the parties to continue with the contract.

Frustration of the Adventure

A contract is discharged if subsequent events effect such a change in the circumstances that the
parties would be performing something different from what contracted for, if they were to
proceed with the contract.

Effects of Frustration

Frustration discharges the contract automatically: no question of election of one of the parties.
However, this discharge does not relate back to the making of the contract, therefore in principle
rights and liabilities already acquired up to the termination of the contract remain intact, only
subsequent obligations are discharged.

The doctrine of frustration operates to relieve parties of any further obligations under a contract.
It applies when some event which is not the responsibility of either party has made performance
of the contract impossible or radically different from what was originally agreed. Examples of
events which will lead to frustration include the destruction of the subject matter, the non-
occurrence of an event, outbreak of war and government intervention. The contract will not be
frustrated if the performance is simply made more difficult or expensive, or if a significant part
of the contract survives the frustrating event.

Leases are not generally affected by frustration but a lease could be frustrated in rare
circumstances such as an earthquake or flood.

Questions:

1. Explain the principle of substantial performance.

2. Give examples of the types of events which will be regarded as frustrating a contract.

39
 VITIATING ELEMENTS

MISREPRESENTATION

INTRODUCTION

A misrepresentation is a false statement of fact made by one party to another, which, while not
being a term of the contract, induces the other party to enter the contract. This makes the
contract voidable, giving the innocent party the right to rescind the contract and/or claim
damages.

A. THE STATEMENT MUST BE A FALSE STATEMENT OF FACT

An actionable misrepresentation must be a false statement of fact, not opinion or future intention
or law.

(A) STATEMENTS OF OPINION

A false statement of opinion is not a misrepresentation of fact.

(B) STATEMENTS AS TO THE FUTURE

A false statement by a person as to what he will do in the future is not a misrepresentation and
will not be binding on a person unless the statement is incorporated into a contract.

However, if a person knows that his promise, which has induced another to enter into a contract,
will not in fact be carried out then he will be liable.

(C) STATEMENTS OF THE LAW

Traditionally, a false statement as to the law was not an actionable misrepresentation because
everyone is presumed to know the law. However, the distinction between fact and law is not
simple.

(D) SILENCE

Generally, silence is not a misrepresentation. The effect of the maxim caveat emptor (buyer
beware) is that the other party has no duty to disclose problems voluntarily. Thus if one party is
labouring under a misapprehension there is no duty on the other party to correct it.

40
However, there are three fundamental exceptions to this rule:

(i) HALF TRUTHS

The representor must not misleadingly tell only part of the truth. Thus, a statement that does not
present the whole truth may be regarded as a misrepresentation.

(ii) STATEMENTS WHICH BECOME FALSE

Where a statement was true when made out but due to a change of circumstances has become
false by the time it is acted upon, there is a duty to disclose the truth. .

(iii) CONTRACTS UBERRIMAE FIDEI

Contracts uberrimae fidei (contracts of the utmost good faith) impose a duty of disclosure of all
material facts because one party is in a strong position to know the truth. Examples would
include contracts of insurance and family settlements.

A material fact is something which would influence a reasonable person in making the contract.
If one party fails to do this, the contract may be avoided.

Where there is a fiduciary relationship between the parties to a contract, a duty of disclosure will
arise, eg, solicitor and client, bank manager and client, trustee and beneficiary, and inter-family
agreements.

(E) OTHER REPRESENTATIONS

The term 'statement' is not to be interpreted too literally:

* In Gordon v Selico Ltd (1986) 278 EG 53, it was held that painting over dry rot, immediately
prior to sale of the property, was a fraudulent misrepresentation.

B. THE MISREPRESENTATION MUST HAVE INDUCED THE CONTRACT

The false statement must have induced the representee to enter into the contract. The
requirements here are that (a) the misrepresentation must be material and (b) it must have been
relied on.

(A) MATERIALITY

The misrepresentation must be material, in the sense that it would have induced a reasonable
person to enter into the contract. However, the rule is not strictly objective:

41
(B) RELIANCE

The representee must have relied on the misrepresentation.

There will be no reliance if the misrepresentee was unaware of the misrepresentation. There will
be no reliance if the representee does not rely on the misrepresentation but on his own judgment
or investigations. If one is unaware of the misrepresentation then he/she could not have relied on
it.

TYPES OF MISREPRESENTATION

Once misrepresentation has been established it is necessary to consider what type of

misrepresentation has been made. There are three types of misrepresentation: fraudulent,
negligent and wholly innocent. The importance of the distinction lies in the remedies available
for each type.

(A) FRAUDULENT MISREPRESENTATION

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false
statement that is "made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly,
careless as to whether it be true or false." Therefore, if someone makes a statement which they
honestly believe is true, then it cannot be fraudulent.

The burden of proof is on the plaintiff - he who asserts fraud must prove it.

(B) NEGLIGENT MISREPRESENTATION

This is a false statement made by a person who had no reasonable grounds for believing it to be
true. There are two possible ways to claim: either under common law or statute.

(i) NEGLIGENT MISSTATEMENT AT COMMON LAW

The House of Lords have held that in certain circumstances damages may be recoverable in tort
for negligent misstatement causing financial loss: Hedley Byrne v Heller [1964] AC 465.

Success depends upon proof of a special relationship existing between the parties. Such a duty
can arise in a purely commercial relationship where the representor has (or purports to have)
some special skill or knowledge and knows (or it is reasonable for him to assume) that the
representee will rely on the representation.

(ii) NEGLIGENT MISREPRESENTATION (under Misrepresentation Legislation eg. UK

Misrepresentation Act 1967

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(C) WHOLLY INNOCENT MISREPRESENTATION

This is a false statement which the person makes honestly believing it to be true. The remedy is
either (i) rescission with an indemnity, or (ii) damages in lieu of rescission under the courts
discretion.

REMEDIES FOR MISREPRESENTATION

Once an actionable misrepresentation has been established, it is then necessary to consider the
remedies available to the misrepresentee.

(A) RESCISSION

Rescission, ie setting aside the contract, is possible in all cases of misrepresentation. The aim of
rescission is to put the parties back in their original position, as though the contract had not been
made.

Bars To Rescission
Rescission is an equitable remedy and is awarded at the discretion of the court. The injured party
may lose the right to rescind in the following four circumstances:

(i) AFFIRMATION OF THE CONTRACT

The injured party will affirm the contract if, with full knowledge of the misrepresentation and of
their right to rescind, they expressly state that they intend to continue with the contract, or if they
do an act from which the intention may be implied.

(ii) LAPSE OF TIME

If the injured party does not take action to rescind within a reasonable time, the right will be lost.
Where the misrepresentation is fraudulent, time runs from the time when the fraud was, or with
reasonable diligence could have been discovered. In the case of non-fraudulent
misrepresentation, time runs from the date of the contract, not the date of discovery of the
misrepresentation.

(iii) RESTITUTION IN INTEGRUM IMPOSSIBLE (Restitution to the original position is

impossible)
The injured party will lose the right to rescind if substantial restoration is impossible, ie if the
parties cannot be restored to their original position.
Precise restoration is not required and the remedy is still available if substantial restoration is
possible. Thus, deterioration in the value or condition of property is not a bar to rescission.

(iv) THIRD PARTY ACQUIRES RIGHTS

43
If a third party acquires rights in property, in good faith and for value, the misrepresentee will
lose their right to rescind. See: Phillips v Brooks [1919] 2 KB 243 under Mistake.

Thus, if A obtains goods from B by misrepresentation and sells them to C, who takes in good
faith, B cannot later rescind when he discovers the misrepresentation in order to recover the
goods from C.

(B) INDEMNITY

An order of rescission may be accompanied by the court ordering an indemnity. This is a money
payment by the misrepresentor in respect of expenses necessarily created in complying with the
terms of the contract and is different from damages.

(C) DAMAGES

(i) FRAUDULENT MISREPRESENTATION

The injured party may claim damages for fraudulent misrepresentation in tort. The purpose of
damages is to restore the victim to the position he occupied before the representation had been
made.

The test of remoteness in tort is that the injured party may recover for all the direct loss incurred
as a result of the fraudulent misrepresentation, regardless of foreseeability:

Moreover, damages may include lost opportunity costs, eg loss of profits.

(ii) NEGLIGENT MISREPRESENTATION

The injured party may elect to claim damages for negligent misrepresentation at common law.
The test of remoteness in the tort of negligence is that the injured party may recover for only
reasonably foreseeable loss.

EXCLUDING LIABILITY FOR MISREPRESENTATION

Any term of a contract which excludes liability for misrepresentation or restricts the remedy
available is subject to the test of reasonableness.

44
 MISTAKE

INTRODUCTION

For a mistake to affect the validity of a contract it must be an "operative mistake", ie, a mistake
which operates to make the contract void. The effect of a mistake is:

· At common law, when the mistake is operative the contract is usually void ab initio, ie, from
the beginning. Therefore, no property will pass under it and no obligations can arise under it.

· Even if the contract is valid at common law, in equity the contract may be voidable on the
ground of mistake. Property will pass and obligations will arise unless or until the contract is
avoided. However, the right to rescission may be lost.

Unfortunately, there is no general doctrine of mistake - the rules are contained in a disparate
group of cases. This is also an area of confusing terminology. No two authorities seem to agree
on a common classification, and often the same terminology is used to cover different forms of
mistake.

COMMON MISTAKE

A common mistake is one when both parties make the same error relating to a fundamental fact.
The cases may be categorised as follows:

(A) RES EXTINCTA

A contract will be void at common law if the subject matter of the agreement is, in fact, non-
existent.

(B) RES SUA

Where a person makes a contract to purchase that which, in fact, belongs to him, the contract is
void.

(C) MISTAKE AS TO QUALITY

A mistake as to the quality of the subject matter of a contract has been confined to very narrow
limits. According to Lord Atkin: "A mistake will not affect assent unless it is the mistake of both
parties, and is as to the existence of some quality which makes the thing without the quality
essentially different from the thing as it was believed to be."

REMEDIES

45
Where a contract is void for identical mistake, the court exercising its equitable jurisdiction, can:

· Refuse specific performance

· Rescind any contractual document between the parties
· Impose terms between the parties, in order to do justice.

UNILATERAL MISTAKE

The case of unilateral mistake is where only one party is mistaken. The cases may be categorised
as follows:

(A) MISTAKE AS TO THE TERMS OF THE CONTRACT

Where one party is mistaken as to the nature of the contract and the other party is aware of the
mistake, or the circumstances are such that he may be taken to be aware of it, the contract is
void.

For the mistake to be operative, the mistake by one party must be as to the terms of the contract
itself.

A mere error of judgement as to the quality of the subject matter will not suffice to render the
contract void for unilateral mistake.

REMEDY

Equity follows the law and will rescind a contract affected by unilateral mistake or refuse
specific performance.

(B) MISTAKE AS TO IDENTITY

Here one party makes a contract with a second party, believing him to be a third party (ie,
someone else). The law makes a distinction between contracts where the parties are inter
absentes and where the parties are inter praesentes.

Contract made inter absentes

Where the parties are not physically in each others presence, eg, they are dealing by

46
correspondence, and one party is mistaken as to the identity, not the attributes, of the other and
intends instead to deal with some identifiable third party, and the other knows this, then the
contract will be void for mistake.

If the innocent party believes that he is dealing with a reputable firm, not a rogue,

Two conclusions are commonly drawn from these two cases: (1) that to succeed in the case of a
mistake as to identity there must be an identifiable third party with whom one intended to
contract; and (2) the mistake must be as to identity and not attributes.

Contract made inter praesentes

Where the parties are inter praesentes (face to face) there is a presumption that the mistaken
party intends to deal with the other person who is physically present and identifiable by sight
and sound, irrespective of the identity which one or other may assume. For such a mistake to be
an operative mistake and to make the agreement void the mistaken party must show that:

(i) they intended to deal with someone else;

(ii) the party they dealt with knew of this intention;
(iii) they regarded identity as of crucial importance; and
(iv) they took reasonable steps to check the identity of the other person

Even where the contract is not void, it may be voidable for fraudulent misrepresentation but if
the goods which are the subject-matter have passed to an innocent third party before the contract
is avoided, that third party may acquire a good title.

The exception to the above rule is that if a party intended to contract only with the person so
identified, such a mistake will render the contract void.

MUTUAL MISTAKE

A mutual mistake is one where both parties fail to understand each other.

WHERE THE PARTIES ARE AT CROSS PURPOSES

In cases where the parties misunderstand each other's intentions and are at cross purposes, the
Court will apply an objective test and consider whether a 'reasonable man' would take the
agreement to mean what one party understood it to mean or what the other party understood it to
mean:

* If the test leads to the conclusion that the contract could be understood in one sense only, both

47
parties will be bound by the contract in this sense.

* If the transaction is totally ambiguous under this objective test then there will be no consensus
ad idem (agreement as to the same thing) and the contract will be void

REMEDY

If the contract is void at law on the ground of mistake, equity "follows the law" and specific
performance will be refused and, in appropriate circumstances, the contract will be rescinded.
However, even where the contract is valid at law, specific performance will be refused if to grant
it would cause hardship.

MISTAKE RELATING TO DOCUMENTS

NON EST FACTUM

As a general rule, a person is bound by their signature to a document, whether or not they have
read or understood the document: L'Estrange v Graucob [1934] 2 KB 394. However, where a
person has been induced to sign a contractual document by fraud or misrepresentation, the
transaction will be voidable.

Sometimes, the plea of non est factum, namely that 'it is not my deed' may be available. A
successful plea makes a document void. The plea was originally used to protect illiterate persons
who were tricked into putting their mark on documents. It eventually became available to literate
persons who had signed a document believing it to be something totally different from what it
actually was.

The use of the rule in modern times has been restricted. For a successful plea of non est factum
two factors have to be established:

(i) the signer was not careless in signing; and

(ii) there is a radical difference between the document which was signed and what the signer
thought he was signing.

48
 UNDUE INFLUENCE IN EQUITY
INTRODUCTION

"Equity gives relief on the ground of undue influence where an agreement has been obtained by
certain kinds of improper pressure which were thought not to amount to duress at common law
because no element of violence to the person was involved" (GH Treitel, The Law of Contract).

A person who has been induced to enter into a transaction (e.g., a gift, contract or guarantee) by
the undue influence of another (the wrongdoer) is entitled to set that transaction aside as against
the wrongdoer. The effect of undue influence, like duress, is to make the contract voidable.

Such undue influence is either actual or presumed.

CLASSIFICATION OF UNDUE INFLUENCE

CLASS 1: ACTUAL UNDUE INFLUENCE

In these cases it is necessary for the claimant to prove affirmatively that the wrongdoer exerted
undue influence on the complainant to enter into the particular transaction which is impugned.

Undue influence was described by Lindley LJ in Allcard v Skinner (1887) 36 Ch D 145, as "…
some unfair and improper conduct, some coercion from outside, some overreaching, some form of
cheating and generally, though not always, some personal advantage gained."

CLASS 2: PRESUMED UNDUE INFLUENCE

In these cases the complainant only has to show, in the first instance, that there was a relationship
of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair
to presume that the wrongdoer abused that relationship in procuring the complainant to enter the
impugned transaction.

In class 2 cases therefore, there is no need to produce evidence that actual undue influence was
exerted in relation to the particular transaction impugned: once a confidential relationship has been
proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the
impugned transaction freely, for example by showing that the complainant had independent
advice.

Note that it must also be shown that the transaction was manifestly disadvantageous to the party
alleged to be influenced.

49
Such a confidential relationship can be established in two ways:

CLASS 2A

Certain relationships as a matter of law raise the presumption that undue influence has been
exercised.

The relationships where undue influence is presumed have been held to be: parent & child , lawyer
& client; doctor & patient ; trustee & beneficiary ; and religious adviser & disciple

The relationship of husband and wife does not, as a matter of law, raise a presumption of undue
influence within class 2A (Midland Bank v Shepherd (1988)). Nor does the rule apply between
employer and employee (Matthew v Bobbins (1980)).

CLASS 2B

If the complainant proves the existence of a relationship under which the complainant generally
reposed trust and confidence in the wrongdoer, the existence of such relationship raises the
presumption of undue influence.

In a class 2B case therefore, in the absence of evidence disproving undue influence, the
complainant will succeed in setting aside the impugned transaction merely by proof that the
complainant reposed trust and confidence in the wrongdoer without having to prove that the
wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in
relation to the particular transaction impugned.

The relation of banker and customer will not normally give rise to a presumption of undue
influence, but it can do so in exceptional cases if the customer has placed himself entirely in the
hands of the bank and has not been given any opportunity to seek independent advice.

MANIFEST DISADVANTAGE

With both of the above presumptions (class 2A and 2B), the transaction must be to the 'manifest
disadvantage' of the party claiming undue influence.

UNDUE INFLUENCE AND THIRD PARTIES

Undue influence is now regularly invoked by wife-sureties where their relationship with the bank-
creditor is manipulated when the debtor-husband acts as intermediary. For example, a husband

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persuading his wife to guarantee his company's overdraft with a bank, using the matrimonial
home, of which she is joint owner, as security for the debt. In such situations the creditor may be
'tainted' by the undue influence of the intermediary. If a bank entrusts certain duties to a debtor-
husband who, as intermediary, is capable of exerting some influence over his wife, the position is
as follows:

1. If the transaction is one which is (a) on its face not to the financial advantage of the party
seeking to set it aside, and (b) if there is a substantial risk of its having been obtained by undue
influence, then the third party will have constructive notice of undue influence giving the right to
set aside the transaction. The creditor must take reasonable steps to ensure that the wife's consent
was properly obtained.

2. However, if the transaction is not of this kind, but is on its face capable of benefiting the party
who seeks to set it aside, the third party will not have constructive notice of any undue influence
which may in fact have existed.

REBUTTING THE PRESUMPTION

The presumption of undue influence is rebutted if the party benefiting from the transaction shows
that it was "the free exercise of independent will", even if no external advice was given or even
though it was not taken (Inche Noriah v Shaik Allie bin Omar [1928] All ER 189). However, the
most usual way of rebutting the presumption is to show that the other party had independent
advice before entering into the transaction.

Where a bank seeks to enforce its security against a wife who claims to have been induced by her
husband's undue influence or misrepresentation to charge the matrimonial home by way of
security, the principles which apply in determining whether the bank is able to rely on the fact that
the wife received legal advice before entering into the charge to rebut the presumption of undue
influence and imputed or constructive notice thereof and whether the bank ought to have been put
on inquiry to ascertain whether the wife was subject to her husband's undue influence, were given
by the Court of Appeal in:

Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705.

REMEDIES

The remedy in cases of undue influence is rescission. Damages are not available, but see below.

RESCISSION
Where rescission is ordered, the whole transaction will be set aside.

Bars to rescission:

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(i) IMPOSSIBILITY OF RESTITUTION
However, the fact that restitutio in integrum is impossible will not be a bar to rescission:

(ii) DELAY
Delay defeats equity.

SEVERANCE
It may be possible for the court to sever from an instrument affected by undue influence the
objectionable parts leaving the part uncontaminated by undue influence enforceable.

DAMAGES
Damages are not available for undue influence, but if a bank has broken a duty of care to a wife
surety, damages may be available in negligence under Hedley Byrne v Heller (1964).

DURESS

In order for there to be a valid contract the parties must act freely. If one of the parties is forced
to make the contract by violence or the threat of violence, that is duress, and renders the contract
voidable.

DURESS TO THE PERSON

The original common law of duress confined the doctrine within very narrow limits. Only duress
to the person was recognised during the nineteenth century, and this required actual or threatened
violence to the victim.

DURESS TO GOODS

The nineteenth century limitation on duress meant that it could not be applied to 'duress of
goods'. If a person, unlawfully detained, or threatened to detain, another's goods, this was not
considered to be sufficient duress to enable a contract to be avoided.

Although this case lays down the rule that a contract entered into in pursuance of a threat to
retain goods cannot be thereby set aside, there is a restitutionary rule to the effect that money
paid to obtain the release of goods wrongfully retained, or to avoid their seizure, may be
recovered.

ECONOMIC DURESS

In recent times, the courts have extended the concept of duress from its earlier limits so as to
recognise that certain forms of commercial pressure could amount to economic duress.

All that is now required to prove economic duress is a suppression of the victim's will and

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voluntary consent.

REMEDIES FOR DURESS

(A) The effect of duress is to make the contract voidable (not void). The injured party will,
therefore, be entitled to have the contract set aside for operative duress, unless he has expressly
or impliedly affirmed it. The victim of duress must seek rescission as soon as possible after the
original pressure has ceased to operate.

(B) As duress has been equated with the tort of intimidation, it would follow that a remedy for
damages would lie in tort.

(C) There is, as yet, no authority on the question of whether or not an injured party who has
affirmed the contract may nevertheless recover damages in tort. Damages should be recoverable,
since otherwise a party who has lost the right to avoid the contract is left without a remedy for a
clearly unlawful act.

ILLEGAL CONTRACTS AND CONTRACTS CONTRARY TO PUBLIC POLICY

Contracts which have an illegal purpose or require illegal performance will not be enforced by
the Courts.

Also contracts which are in a category considered as to be against public policy, for example, to
oust the jurisdiction of the Courts or contracts in unreasonable restraint of trade are
unenforceable and to all intents and purposes, void.

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