contract Law (first term)
Terms in this set (207)
What is a contract?
- A contract is an agreement giving rise to obligations that are enforced or recognised by the law
- Most contracts comprise of mutual promises where both parties have to do something, these are called bilateral contracts
-In some legal contracts only one party has to make a promise and therefore, only one party is bound to perform this is called a unilateral contract. The other's acceptance is the performance of the requested act
- Simple contracts are valid if they are made orally or written
- Contracts may also be valid in the form of a deed - "a contract made by a deed derives its validity neither from fact of the agreement nor because it is an exchange but soley from the form in which it is expressed"
- an offer arises when there is an expression of willingness on specified terms with the intention to create a binding legal contract to whom the contract is addressed to
Invitation to treat:
- an invitation to treat arises when there is an expression of willingness to negotiate
- Therefore, they do not intend to create a legally binding relationship with the person to whom the statement is addressed
- An invitation to treat does not create a contract
What makes up a bilateral contract?
1: Does the communication amount to an offer? Distinguish between an offer and an invitation to treat
2: Was the offer communicated ?
3: Did the offeree accept that offer or was the offer withdrawn before acceptance?
4: Can the response to the offer constitute an acceptance in law?
- the response must correspond with the exact terms in the offer (mirror image rule)
- it must be a response to the offer, made with knowledge of the offer
- The response must follow any method for acceptance which has been prescribed in the offer
Gibson v Manchester City Council (House of Lords, example of an invitation to treat)
The defendant applied for buying a council house off of the Conservative govt. In Feb 1971 the defendant was given a letter that was an invitation to treat "if you would like to make a formal application to buy your council house...". In May 1971 the Labour govt took control and ordered councils not to sell council houses. The HOL decided that it was an invitation to treat and not an offer
- PRINCIPLE: the language lacks the necessary firmness to qualify as an offer
Instances of invitations to treat:
- Advertisements: Partridge v Crittenden: the advertisement was an invitation to treat using the limited stocks argument i.e. if a brochure constituted an offer, the acceptance would be the customer's order and the supplier would be bound to supply when his stocks were necessarily limited. The supplier should have control over the making of an agreement
Displays of goods: Fisher v Bell, in a shop the offer is made by the customer and the acceptance is made by the shop (scanning the item)
Requests for bids or tenders: Spencer v Harding, an invitation to treat as the requestor can then control the making of a bilateral contract to sell or buy. The contract is awarded to the bidder selected by the person requesting the bids
Carhill v Carbolic Smoke Company (court of appeal, example of an offer and not an invitation to treat)
The defendants owned a medicinal product called a "carbolic smoke ball", the claimant relied of the advert and used the product for the specified amount of time and then caught influenza. The defendants stated that a reward of £100 would be given to anyone who contracted influenza. To display their seniority they deposited £1000 into Alliance Bank. The Ds argued that it was an invitation to treat and not an offer as the advert was a sales puff and lacked intent, it is not possible to make an offer to the world, there was no notification of acceptance and there was no consideration provided as the "offer" did not specify that the user of the balls must have purchased them. The CA rewarded the C, they disregarded all of the D's argument and argued that it was a unilateral contract and because of this no acceptance needs to be communicated.
- This is the final expression of assent to the extract terms of the offer, this means that acceptance and offer must coincide
- A purported offer which does not accept all the terms and conditions proposed by the offeror and introduces new terms is not acceptable
- However, a counter offer which is then treated as a new offer can be accepted or rejected
MIRROR IMAGE RULE...
- if the offeree either (i) introduces a new term (ii) amends a term in the offer, the response will be a counter offer rather than an acceptance
- there can be a request for further information: asking for more information or whether a particular means of performance will be possible before finally committing via acceptance
Hyde v Wrench (chancery division, a counter offer)
- The D offered to sell some land to a C for £1000
- The C replied by offering to purchase the land for £950
- D refused this so C wrote to D offering to pay £1000 however, this was still refused
- The court argued that where a counter offer is made this kills relations with the original contract, making there no contract in this case
Butler Machine Tool co Ltd v Ex-cell-O Corporation Ltd (CA, has an agreement been reached and battle of the forms)
- The sellers (Butler) offered to sell a machine tool to the buyers
- This offer was being made on Butler's standard terms of business which included a price variation clause
- The buyers sent an order for the machine tool which was on their own standard terms of business (this included no price variation clause and that the price of the machine tool was to be fixed)
- This order included a tear off slip which stated "we accept your order on the terms and conditions stated thereon"
- The seller signed and returned the slip along with a letter carrying out the order on the terms of their original offer
- Before delivering the machine tool the sellers wanted the money for the price variation clause and the buyers refused as they argued that they were not contractually obliged to do so
- CA held that the contract has been made on the buyers term
- Reasoning: did not support "mirror image" theory also could be seen as a counter offer (this was the tear off slip)
- This acceptance however occurred by an explicit agreement to the terms and conditions via the tear off slip, stating that they accepted the buyer's order on the basis of its terms and conditions
- This acceptance can also happen via conduct
Communication of acceptance:
- acceptance must be made to the offeror
- acceptance is only validly made when it is brought to the attention of the offeror
- With instantaneous methods of communication, which are treated as face to face communication, it follows that the contract will be made in the jurisdiction in which the acceptance is received i.e. the offerors jurisdiction
Entorres Ltd v Miles Far East Cooperation (1955)
Entorres v Miles Far East  2 QB 327 Court of Appeal
The claimant sent a telex message from England offering to purchase 100 tons of Cathodes from the defendants in Holland. The defendant sent back a telex from Holland to the London office accepting that offer. The question for the court was at what point the contract came into existence. If the acceptance was effective from the time the telex was sent the contract was made in Holland and Dutch law would apply. If the acceptance took place when the telex was received in London then the contract would be governed by English law.
To amount to an effective acceptance the acceptance needed to be communicated to the offeree. Therefore the contract was made in England.
problems with instantaneous communicating methods...
- Lord Denning saw three problems by stating that the onus was on the communicator to get his message through and by focusing on "fault" in the communication process
- communicator fault: if the telephone line is dead the communicator will know that the message must be repeated if he is to ensure that it is received
- recipient fault: where the recipient is aware that a message is being sent to him but has not received it, the communicator wrongly believes the message has been communicated, if the recipient who must ask for the message to be repeated. If she fails to do so she will be estopped from denying that the communication was effectively received
- No fault: acceptance does not reach recipient but the communicator reasonably believes that the message was communicated. There has been no effective communication of the acceptance and therefore there is no contract
Acceptance in ignorance of the offer:
- X offer £100 for the safe return os his missing dog
- Y returns the dog however, is unaware of X's offer
- Is Y entitled to the money? (this could be seen as a unilateral contract)
- However, bilateral contracts impose mutual obligations on both the parties
- If X offered to sell the dog for £50 to someone who returned it
- Y returned the dog but was unaware of the offer, Y should thereby not be seen to have accepted the offer
- It has been suggested that knowledge of the offer is not needed in reward type cases however is vital in bilateral cases
- However, under english law bilateral contracts is that a person who in ignorance of the offer, performs the act or acts requested by the offeror is not entitled to sue as on a contract
Prescribed methods of acceptance:
- When an offeror prescribes a particular method of acceptance, the general rule is that the offeror is not bound unless the terms of his offer are compiled with
- However, the offeror must use clear words to achieve this purpose
- The offer must have made it clear that this method must be followed and that no other method will be permitted as acceptance
Was this acceptance communicated to the offeror? When it was communicated? Howell securities ltd v Hughes: (acceptance by post, prescribed methods of acceptance)
Dr Hughes granted Holwell Securities an option to purchase his house for £45,000. The option was to be exercisable 'by notice in writing' within 6 months. Five days before the expiry, Holwell posted a letter exercising the option. This letter was never received by Hughes. Holwell sought to enforce the option relying on the postal rule stating the acceptance took place before the expiry of the option.
Held: By requiring 'notice in writing', Dr Hughes had specified that he had to actually receive the communication and had therefore excluded the postal rule.
Acceptance by silence:
- The general rule is that acceptance of an offer will not be implied by mere silence on part of the offeree and the offeror cannot impose a contractual obligation
Felthouse v Bindley (1862):
- C and nephew entered negotiations over the sale of a horse
- The C stated that if he heard nothing from the nephew then he considered the horse was his at the price of £30
- The D accepted this and told the auctioneer not to sell the horse as it had already been sold
- However, the auctioneer sold the horse and the C sued the auctioneer
- It was held by the court that the nephew's silence did not amount to acceptance of the offer
Exceptions to the rule requiring acceptance:
- The rule that acceptance must be communicated to the offeror is not absolute
- the terms of the offer may demonstrate that the offeror does not insist that acceptance of the offer must be communicated to him
- The "postal rule" is an example of this
- This rule connotes that acceptance is valid when it has been posted, not when it is physically delivered to the offeror
Adam v Lindsell (1818, postal rule)
- The D wrote to the C offering to sell them some wool and asking for a reply in "the course of post)
- On receiving the letter the C posted a letter of acceptance the same day
- However, due to the delay the D's assumed that the C was not interested in the wool and sold it to a third party
- This case established that there was a valid contract which came into existence the moment the letter was posted
Household Fire Insurance Co v Grant:
-Facts: D applied for shared in P's company which allotted the shared and sent a postal acceptance but it never arrived. Held D had become a shareholder. The letter was effective on posting (postal rule of acceptance) and it was irrelevant that the letter of acceptance did not arrive
- PRINCIPLE: postal rule, where the acceptance is posted but is never received. Remember that the postal rule can be ousted by requiring actual communication of acceptance
Postal rule cont...
- The post office is seen as the agent of the offeror
- The offeror has chosen to start negotiations through the post
- There are problems with the postal rule such as, what if the letter of acceptance has been lost in the post
- Household Fire Insurance v Grant (post lost, still acceptance?) concluded that acceptance still takes place when it is posted and not when it reaches the offeror
- A second issue arise where the offeree posts his acceptance and then sends a rejection by a quicker method so that the rejection reaches the offeror before the acceptance. A logical approach is that the rejection is seen as a breach of contract and may be rejected or accepted by the offeror. However, to hold the contract not concluded when the letter of acceptance was posted allows the offeree to speculate at the offerors expense by sending him a rejection faster means where the contract turns out to be a bad one for him
- It must be highlighted that the postal rule is confined to non-instantaneous forms of communication
- the postal rule only applies to acceptances, it has no application to offers or to revocation of offers to which the actual communication applies
Acceptance in unilateral contracts:
- this is a contract whereby one party promises to pay the other a sum of money or to do some act if that other party will do or refrain from doing something without making a promise to that effect. - a classic example of this is Carhill v Carbolic Smoke Company Ball Co
- Acceptance can be made by fully performing the requested act; there is not need to give advance notification of acceptance
- The difficulty lies with when can the offer be withdrawn as this depends on when the offer has been "accepted" which is hard to gage
- There is a willingness of the courts to imply an obligation not to "prevent the condition becoming satisfied"
- Acceptance must arrive in response to the offer and of knowledge of it
A unilateral offer of reward cannot be accepted if there is no knowledge of the offer...
- One must look at the precise terms of the offer to determine whether there is knowledge at the crucial time
- Gibbons v Proctor: terms of the offer required information to be given to a particular person and at the time the information was received by that person the offer had the required knowledge.A police officer supplied information for which a reward had been offered; he was not aware of the offer at the time that he gave the information but he had become aware of the offer by the time the information reached the relevant party. It was held that the officer was entitled to claim the reward.
Revocations of unilateral contracts:
- English law has now accepted...
- the terms of the offer may contemplate that it is not possible to revoke once the oferee has "started to perform the act", although the exact theoretical basis for this is unclear
- Equally, the terms of the offer may contemplate that revocation should be possible despite commencement of the performance of the act
Errington v Errington (unilateral contract)
a father bought a house for his son and daughter in law and stated that if they paid of the mortgage the house was theirs. The couple began to pay off the mortgage instalments but the father dies while a good deal remained to be paid off. In his will he left the house to his widow and she brought action to eject the daughter in law (since split up with son). However, the CA held that the father's offer of a unilateral contract could not be revoked after the couple had started to pay off the mortgage instalment.
Termination of an offer:
- There are five principle methods of which an offer can be terminated
- There can be rejection with is seen with outright refusal or a counter offer i.e. Hyde v Wrench (killing off the other offer)
- An offer can be terminated when there is a lapse of time, if there was a certain time limit specified
- An offer which is stated to come to an end if a certain event occurs cannot be accepted after that event has actually taken place
- An offer may be terminated by the death of the offeror
- An offer can be withdrawn by an offeror anytime before the offer is accepted
- The notice of a withdrawal must be brought to the attention of the offeree....
- It must be highlighted that it is not entirely clear when the revocation is treated as being brought to his attention
Dickinson v Dodds (communication of revocation)
- where the defendant offered to sell a house to the claimant for £800, the offer to be left open until friday, on Thurs the defendant sold the house to a third party and the C was notified by another third party. The court rules that no contract had been concluded between the parties because the offer had been withdrawn before it was accepted
The Brimes (1975, QB)
- The CA held that in the case of a notice of withdrawal of a vessel sent by telex during ordinary business hours, the withdrawal was effective when it was received on the telex machine
- There was no requirement that it had to be actually read by any particular person in the organisation
Limits to offer and acceptance
- There is a tension between the court's wish to give effect to the intentions of the parties, their desire to achieve a just result based on the facts of the case and the need to establish a clear rule which can be applied to all such cases in the future
Blackpool & Flyde Aeroclub v Blackpool CC (on the issue of offer and acceptance in relation to call for bids)
- D council owned an airport and raised some revenue by granting a concession to operate pleasure flights from the airport
- The C had been granted the concession on three separate occasions since 1975
- The last concession ran out and the D invited the C and six other parties to tender for a new concession
- The invitation stated that tenders were to be submitted in the envelope provided and any after the 12 on the 17th March 1983 were not to be considered
- C tender was put in Town Hall letter box at 11am but not cleared by council staff until 12 and therefore was mistaken as late
- The C was therefore not considered
- The CA dismissed the council's appeal and held that the invitation to tender did here contain an offer to consider tenders received by the deadline
- In order to create a binding contract, the parties must express their agreement in a form which is sufficiently certain for the courts to enforce
- The function of the court is limited to the interpretation of the contract which the parties have made, and it does not extend to making contracts on their behalf
Scammell v Ousten (1941):
- The key principle is where a term is so vague that further agreement is necessary then no contract has been concluded
- Facts: The plaintiff ordered a van from the defendant
- The balance of the purchase price was to be made on "hire purchase terms"over two years
- The D then refused to supply the van
- Held: (HOL), no contract as the language was not capable of any definite meaning as there were many kinds of hire purchase agreement
- Viscount Maugham: "in order to constitute a valid contract the parties must so express themselves that their meaning can be determined with a reasonable degree of certainty"
NEW TOPIC: CONSIDERATION AND FORM
- For a promise to be enforceable there must be (a) an intention to be legally bound by the promise (known as intention to create legal relations) and (b) the promise must be expressed in the form of a deed or the party who is seeking to enforce the promise of the other must show that he has given something in exchange for that promise
- Agreements must be supported by CONSIDERATION, which means an act or a promise given in exchange for the promise
- So if A promises B £1000, B cannot enforce that promise because B has provided no consideration (nothing in exchange) for it
- Currie v Misa (1875) "a valuable consideration, in the sense of law, amy consist either in some right or benefit accruing to one party, or some detriment undertaken by the other"
Definition of consideration cont...
-In a bilateral contract each party's promise is consideration for the other
-In a unilateral contract the promisee's performance of the requested act is the consideration for the act
-The main exception to the requirement of consideration is a contract made by a deed, a gratuitous promise made by a deed is contractually binding
- When examining cases of the doctrine of consideration there are 3 main points
-1: The consideration need not be adequate
-2: Past consideration does not count
-3: Whether performance of or a promise to perform, a pre existing duty is good consideration
Consideration and Motive and consideration must be sufficient:
Thomas v Thomas (1842) - a testator shortly before his death had the desire for his wife to have the house for the rest of her life. After his death the executors promised to keep up the testator's desire on the grounds that the widow paid £1 per annum towards ground rent and kept the house in repair. The consideration was not the desire but was the widow's promise to pay £1 and to keep the house in good repair
- consideration will not be sufficient...
- sentimental value
- anything that is not capable of expression in economic terms
- past consideration
- performance of a duty imposed by law
- performance of an existing contractual duty owed to the other party
Consideration need not be adequate
- the courts will not examine whether what has been given in exchange is of equivalent value
- Chappell & Co ltd v Nestle Co Ltd (1960), House of Lords: the claimants owned the copyright in a piece of music called "ROCKIN SHOES", the defendants arranged for records of this tune to be made and offered these to the public for 1s 6d plus three wrappers from their 6d chocolate bars. S 8 of the copyright act 1956 permitted the making of records for retail sale provided notice was given to the owner of the copyright and a royalty was paid of 6 and QUATER % "OF ORIGINAL RETAIL PRICE". Nestle offered for sale gramophone records in return for 1s 6d and THREE WRAPPERS from their chocolate bars. The HOL held that the WRAPPERS WERE OF ECONOMIC VALUE and were netherthelessPART OF CONSIDERATION this was by a 3-2 majority
- The fact that the wrappers were of trivial economic value and were thrown away was irrelevant as consideration need not be adequate
Performance of a duty imposed by law is not good consideration...
-An orthodox position is held that performance of an existing legal obligation that is imposed by law and performance of a contractual duty owed to the promisor do not constitute consideration, while performance of a duty imposed by a contract with a third party does constitute consideration
Ward v Byham:
- the father of an illegitimate child promised to pay the mother of his child £1 a week provided that the child was looked after and kept happy. The mother was under a legal duty to look after the child. The mother sued the father when he stopped making the payments. The father argued that the mother had not provided any consideration for his promise because by looking after the child, she was simply caring out her existing legal duty. Denning lj rejected this argued and argued that the mother had provided consideration by performing her legal duty to support the child. The other judges in the CA did not expressly approve it. However, as "kept happy" was noted in the father's letter this was regarded as the mother was going beyond her legal duty and she was given the money.
- Going beyond the duty is seen as incurring additional detriment and/or giving additional benefit and therefore supplying fresh consideration
Collins v Godefory (1831):
- A trial of civil action brought by Godefroy against Dalton, Godefroy had subpoenaed to attend to give evidence as a witness and promised to pay him a guinea a day as a fee for him attending. C brought action against G claiming for 6 guineas for 6 days of attendance. The claim failed on the basis that there was no good consideration for the promise as Collins was bound by the general law to attend court when subpoenaed.
Glasbrook Brothers ltd v Glamorgan County council (1925):
- A miners strike and the manager requested that the police should be billeted at the colliery so as to ensure that the colliery was kept open. The police agreed to the billeting of 70 policemen at the colliery if in return the defendant would pay for them a certain specified rights. After the strike was over , the defendant refused to pay arguing that the police had been under a duty to provide adequate policing so there was no consideration for the promise to pay for the billeting of the police, the HOL argued that there was no good consideration.
Performance of an existing contractual duty owed to a third party
- This is seen as GOOD consideration
- B owes a contractual duty to A (third party)
- C promises B that she will pay him a sum of money if B does what he is already contractually bound to do with A
- B can use the performance owed to A as consideration to support C's promise
Shadwell v Shadwell:
- The uncle wrote a letter to the nephew stating that he will pay the claimant £150 per year after he was married. On the uncle's death, the nephew alleged that the uncle had not paid him in full during that uncle's lifetimes and he claimed the arrears from the uncle's estate. In allowing the claim, it was held that the uncle's promise was supported by good consideration constituted by the nephew marrying Ellen Nicholl.
Scotson v Pegg (1861):
The claimants had promised under a contract with a third party (X), to deliver a cargo of coal to the defendant. The D on arrival of the coal would unload it at a stated rate. Then D failed to unload the coal at the stated rate as promised and the claimants sued him. The question is whether D was contractually bound to unload the coal as C was already contractually bound with X to deliver the coal. It was held that there was good consideration so that the claim succeeded. - in this case it was held that a promise could constitute as consideration
Pao On v Lau Lin Long:
- the P acquired shared in the Fu Chip Company
- The D's were majority shareholders who were concerned about the falling in the value of their holding if the Ps decided the sell these shared
- The P were persuaded to make a promise to the company that they would not sell 60% of their shares in one year
- The Ds later made a promise to indemnify the Ps against such a loss
- Was this promise enforceable by the P?
- They were held to have provided consideration by promising the company that they would retain their shares
- This amounted to promising to perform an existing duty owed to a third party to the indemnity contract, namely to Fu Chip
Performance of a contractual duty owed to the promisor...
-Until recently under English law the rule was that the performance of an existing contractual duty owed to the promisor was no consideration for a fresh promise given by that promisor - this was not a popular rule
- Stilk v Myrick: on a voyage two of the sailors deserted, the ship's captain had promised the remaining crew extra wages to sail the ship back to port. However, since the contract terms required this to happen anyway in the event of such minor desertions this promise was seen as unenforceable because (i) the sailors had done no more than they were contractually bound to do and (ii) the promise was obtained as a result of extortion so that policy dictated it should not be enforceable
- This argument is that there must be additional performance beyond the scope of the terms of the contractual duty and this would constitute to fresh consideration
Williams v Roffey Bros. 
-Facts: A promise was given by the main contractor to pay more money to the subcontractor in order to get the subcontract work completed , there was an original price of £20,000 and then 6 months after £575 per flatby the original deadline in the contract with the building wonder and thereby avoid payment of a penalty. The promise was enforceable as it was supported by consideration since there were factual benefits to the promisor in making such a promise.
- Comments: the decision is based on the argument that now the doctrine of duress exists to prevent the enforcement of alteration promises under threats, there is not longer the need to have such a strict approach with consideration. THE FACTUAL BENEFIT (practical benefit means the same thing) here can be seen as the consideration. It must be noted that these are not provided by the promisee (consideration here does not flow from the promisee) - it is about benefit rather than detriment
- Practical benefit in this case was seen with they avoided a penalty, they were spared with having to find someone else to do carpentry work
- Practical benefit is viewed subjectively, viewed by the promisor as someone that is beneficial to him
Promising to accept less than a pre-existing duty...
- T owes U £1000 on Friday
- On Friday U agrees to accept £750 in full payment and agrees not to sue for the £250
- Is U's promise enforceable or can U go back on this promise and sue for the rest of the £250?
- Any promise to alter the terms of that debt contact must be supported by consideration it if is to be enforceable. Since promising to perform the existing obligation is not good consideration because there is no additional benefit or detriment in the law, promising to perform only part of that duty cannot be good consideration
- The practical benefit concept in Williams v Roffey does not apply here, this was rejected in the case of Re Selectmove
Foakes v Beer:
- Mrs Beer obtained a court judgement against Dr Foakes for £2090, Mrs Beer was entitled interest on that sum of money until it was paid off. Mrs Beer then agreed that if Foakes paid £500 immediately and £150 on two separate occasions each year until the whole sum of money had been paid off then she "would not take any proceedings whatever on the said judgement". Mrs Beer then brought action claiming interest on the debt. The HOL held that that promise was not binding on her because it was not supported by any consideration. She was therefore entitled to interest on the debt.
Re Selectmove :
- In July 1991, selectmove ltd owed the inland revenue substantial sums of income and tax and insurance contributions. Mr Fooks (s) and Mr Polland (t) discussed at a meeting that the company would pay future tax as it fell due and that the arrears would be paid off at a rate of £1000 a month. Mr Polland said that he would let the company know once he has talked to his superiors however never did. In October 1991 the revenue wrote a demanding payment in full of the arrears of £25,650, and created a winding-up petition which was eventually made in September 1992, the company argued that the petition should be dismissed on the basis of the agreement reached in July 1991. The CA taking the view that no agreement had been reached (as Mr Polland had not bound the Inland Revenue), and that there was no consideration to support that agreement. Selectmove was bound by the House of Lords judgements in F v B.
NEW TOPIC: PROMISSORY ESTOPPEL
- Definition: this is an equitable doctrine designed to prevent the promisor going back on his promise where this would be inequitable (unfair) because the promisee had relied on it
- Where A makes a promise to B which is intended to be binding and to be acted upon, and is in fact acted upon, then A is bound by the promise even where B has considered no good consideration
Central London Property Trust Ltd v High Tress House Ltd :
- Facts: the landlords of a block of flats promised to reduce the rent charged to tenants during the bombing in ww2 when the tenants were unable to sublet. The reduced rent was to be paid until Sep 1945 when the landlords claimed to receive the full rent. Despite the fact that the tenants had provided no consideration to support the promise to accept less rent, the landlord could not go back on that promise as the tenants had relied on it, until it was inequitable to do so.It was held that the P was entitled to full rent from 1945. Obiter by Lord Denning: the landlord was unable to recover the balance on the rental payments while this estoppel operated, as he promised that he would accept less
There must have been an existing legal relationship:
- there must be a legal relationship between the parties which is being altered by promissory estoppel. This will generally though not necessarily be a contract. Coombe v Coombe: "consideration remains a cardinal necessity of the formation of a contract, but not its modification or discharge"
- There must be a clear promise that existing legal rights will not be fully enforced. The doctrine applies to existing legal rights
There must have been (detrimental) reliance:
- The promise must be intended to be binding and to be acted upon and int must in fact be acted upon
- Hughes v Metropolitan Railway Co: A landlord gave a tenant 6 months notice to carry out repairs failure to do so would result in forfeiture of the lease. The landlord and tenant then entered into negotiations for the tenant to purchase the freehold of the property. It was thought by both parties that a conveyance of the property would take place. The tenant had not carried out the repairs as they believed they would be purchasing the freehold and the repairs required by the landlord were not essential to his use of the property. At the last minute negotiations broke down and the Landlord gave the tenant notice to quit for failure to carry out the repairs.Held:The time limit imposed for carrying out the repairs was suspended during the negotiations. the statement must have been relied on my the promisee. So here negotiations led the tenant to suppose that the landlord would not enforce forfeiture and had relied on this by not carrying out repairs to the house. Therefore the landlord could not forfeit, and could only do so from the date of the breakdown of negotiations (so in the following 6 months since last negotiation was made)
The doctrine can only be used as a "shield not a sword":
- In this sense promissory estoppel can only be used as a defence and not a cause of action.
- Coombe v Coombe:A wife obtained a divorce from her husband, who then promised to pay her £100 a year as a maintenance. The wife therefore did not apply to the courts for maintenance payments. The divorce was finalised. The husband never paid the wife maintenance and she sued him on this promise. It was held that the wife could not use promissory estoppel as it merely prevented a party from insisting upon their strict legal rights, when it would be unjust to allow them to do so. PE should be used as "a shield not a sword"
It must be inequitable (unfair) for the promisor to go back on the promise:
- D and C Builders v Rees (1966): The P were a small firm of builders. They were owed £482 for some work which they had done for the D. After making several request to be paid the P were offered £300 in full satisfaction of the debt. The P reluctantly accepted £300 because they were close to bankruptcy, the P sued for the balance. It was held that the P were not estopped from claiming the balance because they did not voluntarily accept the lesser sum.
The doctrine is only suspensory in its effect:
- Promissory estoppel suspends legal rights and unlike consideration it does not generally extinguish them
- So where a promise to accept less is supported by consideration, the entire debt will be discharged
- With promissory estoppel it merely suspends the legal rights to full payment while the estoppel conditions operate (or until the estoppel comes to an end) i.e. when it is no longer inequitable to go back on the promise
- i.e. U could go back on his promise to accept the £750 if he learns two days later that T had inherited a significant amount of money
- However, in High Trees the obiter suggests that payments which were made while the estoppel operated, will be extinguished so that it is not possible to sue for the balance on the individual rent payments
How is PE brought to an end?:
- In the case of Tools Mental Manufacturing Co Ltd V Tungsten Electric Co Ltd: strict legal rights were revived only after the promisor had given reasonable notice of an intention to do so and that notice had elapsed
- The giving of reasonable notice as a means of showing fairness and that it is no longer inequitable to go back to strict contractual rights rather than assuming that esoppel conditions have come to an end i.e. High Trees
Limitations and future of PE:
- it operates only in the context of alteration promises
- it operates only as a defence and not a cause of action
- the exact meaning of its suspensory effect is unclear
Waltons Stores Ltd v Maher , the Australian approach:
- Facts: the P sought specific performance of a lease on the basis that had been encouraged by the D to believe that the lease would be executed and so had acted to its detriment in demolishing the entire structure on the land
- It was held to be unconscionable to have adopted a course of action encouraging the detrimental conduct and therefore the D was estopped from denying that it was bound.
- Principle: this estoppel therefore operated although there was no pre-existing contractual relationship between the parties and it also operated as a cause of action enabling the P to enforce the representation
- This is seen to have more flexibility than the english doctrine
- it uses a general category of estoppel
- it enables the courts to take sufficient action to prevent the detriment resulting from the unconscionable conduct
- It was used as a sword and not a shied and also to create liability where there was no existing legal relationship between the parties
Estoppel by convention:
- This is where the parties to an agreement have acted on the basis that some provision in the contract has a particular meaning. This type of estoppel will operate to prevent one of the parties later trying to argue that the provision means something different
- Amalgamated Investment & Property Co. Ltd. v. Texas Commerce International Bank Ltd 1981:also case clarifies estoppel by convention...claimant seeks deceleration the guarantee for loan made defendant to claimant's subsidiary does not include payment made by the defendant's subsidiary & the court held that by convention of the parities that the claimant was estopped from not providing guarantee
The nature of the promise, Baird Textiles Holdings Ltd v Marks & Spencer ltd:
- The C had been one of the main suppliers of garments to the D for 30 years. In Oct 1999, the C gave notice that from the end of the production season, they would no longer require any more garments from the C. The issue was whether they had entered into a long term contract which could not be terminated by such a short period of notice. The C's argument was that even if there was no concluded long term contract, the D was estopped from terminating the relationship by such a short period. The argument was rejected by the CA which held that, applying the restrictions established by the English authorities, no form of estoppel could be succeeded.
NEW TOPIC: MISREPRESENTATION
What is a term? (a statement, pre-contratcual or included in a written contract constituting to a contractual promise)
-There are sometimes mere statements of opinion or "mere puffs" that have no legal effect
-If a statement is held to be a term of the contract, a failure to simpl comply with it will be a breach of contract, entitling the innocent party to a remedy for breach of contract
-A mere representation means that the innocent party cannot claim that there had been a breach of contract
-The distinction between something that is a mere representation and term depends on the intention with which the statement was made
Distinction between a term and misrepresentation:
- if broken there are remedies for breach of contract - damages, election to terminate or affirm if repudiator breach
- There is a right to claim damages for breach on proof of breach
- The contractual damages seek to put the claimant in a position that they would have been if the contract had properly been performed
- There is a recovery for all losses within the parties reasonable contemplations at the time they made the contract
Distinction between a term and misrepresentation 2:
- the remedies would be recession (avoid contract) damages for misrepresentation
- Damages can only be claimed if the statement maker was fraudulent or negligent
- Damages for misrepresentation seek to restore the C to the position that they were in before the misrepresentation was made, damages will generally be assessed on the basis of the extent that the representee has incurred through reliance on the misrepresentation
- the recovery of losses is likely to allow recovery of all direct losses regardless of forseeability
Distinction between a term and misrepresentation 3:
- You distinguish with the INTENTION
- If the statement maker intended to make a binding promise that the statement is a term
- If not it is representation and not a binding promise
- A statement is unlikely to be a term of the contract if the maker of the statement asks the other party to verify its truth
- For example in Ecay v Godfrey (1947) - a seller of a boat stated that the boat was sound but advised the buyer to have it surveyed. His statement was held to be a mere representation.
-A statement is likely to be a term of a contract if it has importance to the person to whom it is made at, had it not been made, he would not have entered the contract
- Also he made that importance clear to the statement maker prior to the statement being made
-Couchman v Hill (1947) - here a heifer was put up for sale at an auction but no warranty was given to its condition, the claimant asked whether the heifer was in calf and stated that he was not interested in purchasing if not. Seven weeks later the heifer suffered a miscarriage. The statement that the heifer was in calf was held to be a term of the contract because of the importance attached to it by the claimant
- Bannerman v White : would not purchase hops treated with sulphur. Told they had not been
- If the maker of the statement has some special knowledge or skill compared to the other party, the statement may be held as a contractual term however, if the person to whom the statement is made had the greater knowledge, the statement may be held as mere representation
- Such statements are collateral warranties - promise that the "expert forecast" was made with reasonable skill and care rather than a promise that the forecast was correct
Oscar Chess Ltd v Williams (1957): statement maker has no special knowledge of the subject matter but relies on incorrect subject matter
The D's mother owned a Morris car, the registration books showing first registration on the 13th April 1948. The D wanted to aqquire a Hillman Minx for £650 and offered the Morris to the C's in part-exchange. In calculating an allowance for £290 for the Morris, Ladd consulted an industry guide which priced second hand cars according to the year of manufacturer. It had been discovered by the C's that the Morris had actually been made in 1939, if they had known they would have only allowed £175 for it. They brought an action forward to recover damages of £110. The trial judge allowed this but it was overturned by the CA as they stated that the D's representation as to the Morris car's age was not a term of the contract. Held: The statement relating to the age of the car was not a term but a representation. The representee, Oscar Chess ltd as a car dealer, had the greater knowledge and would be in a better position to know the age of the manufacture than the defendant.
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965):
- The C Dick Bentley told the D that he was looking for a well vetted Bentley. D found and bought a Bentley and told the C that since the car had been replaced with a new engine and gear box that it had only done 20,000 miles. C bought car, however, it came to light that the car had done 100,000 miles. The C bought an action for damages against the D for breach of warranty - this was deemed to be a term of the contract
- Held:The statement was a term. Mr Smith as a car dealer had greater expertise and the claimant relied upon that expertise.
Esso Petroleum Co Ltd v Mardon (1976):
- Esso acquired a petrol station site estimating that the annual throughput of petrol at a station on that site would be 200,000 gallons. The planning authorities insisted that the petrol station should not be directly accessible from the main street. Therefore, the petrol station wold attract fewer customers than Esso had originally estimated. Mr Mardon was induced to take a lease of the petrol station by representations made by Esso that the estimated annual throughput of petrol was 200,000 gallons. Mardon negotiated lower rent from Esso (Sep 1964) but continued to put money into the business, overall he lost a considerable amount of money. Mardon counterclaimed seeking damages for Esso's breach of warranty or alternatively the tort of negligence. Held: The Court of Appeal held that there was no action for misrepresentation as the statement was an estimate of future sales rather than a statement of fact. However, the claimant was entitled to damages based on either negligent misstatement at common law or breach of warranty of a collateral contract.
- For the truth of statement - it is likely to be a term, in the case Schawel v Reade : no need to carry out an inspection of horse
- Written contract makes no mention of earlier oral statement
- The assumption is that it was not intended to be included i.e. not intended to be a term of the contract. However, it is possible to rebut this using guidelines e.g. statement made by an expert during negotiations
Written contract and oral contract:
- The parole evidence rule states that if the contract is written then the writing will constitute the whole contract and the parties cannot adduce extrinsic evidence to add to, vary or contradict this writing
- if there is an oral statement and, on the importance attached test, it is classified as a term, then this "term" may override inconsistent terms of the written contract
- City and Westminster Properties Ltd v Mudd: the written new lease of a lock up ship which the tenant was asked to sign contained a prohibition on the using of premises "for lodging, sleeping or dwelling". The tenant was told that if he signed there would be no objection to him living in the shop. The landlord later claimed that the tenant was in breach of covenant by living in the shop. It was held that the tenant had only signed the lease because of the oral promise and this term overrode the prohibition in the lease
Can representation be incorporated into a contract as a term?:
- This issue can be illustrated by reference to the case of Pennsylvania Shipping Co v Compagnie Nationale de Navigation (1936): A tanker was chartered from the defendants by the claimaints. Prior to the conclusion of the contract, the D's provided the C's with incorrect info about the heating of the ship - this was in the contract. The Cs then sought among other things to have the contract set aside on the grounds of misrepresentation. It was held that the representation became "merged in the higher contractual right" and that there was therefore no need to set aside the contract on the ground of misrepresentation; the Cs claim was for breach of contract
What is misrepresentation?:
- this can be defined as an unambiguous, false statement or law which is addressed to the party misled, which is material and which induced the contract.
- Once it has been established that the statement is a representation, one can proceed to establish that is an actionable misrepresentation
- Only a false representation (not an opinion) made by one party to another which induces the other to enter the contract can constitute an actionable misrepresentation rendering the contract voidable
- A "mere puff" cannot constitute statements of existing fact and therefore cannot amount to actionable misrepresentation. Dimmock v Hallett (1866): a representation that the land was "fertile and improvable" (an opinion) would not be considered such a misrepresentation as to entitle the innocent party to rescind the contract.
STEP ONE: IS THERE A FALSE STATEMENT?:
- There can be an actual statement but it can also include conduct (encouraging a false belief) or an omission (failing to speak when there is a duty to do so)
- Conduct: Gordon v Selico Co.Ltd: covering up patches of dry rot so hat they could not be seen on inspection of the flat
- As a general rule silence does not amount to misrepresentation since there is no general duty in pre-contract negotiations to disclose material facts not known by the other party
- However, a "mere puff" (half-truth) cannot constitute statements of existing fact and therefore cannot amount to actionable misrepresentation. Dimmock v Hallett (1866): a representation that the land was "fertile and improvable" (an opinion) would not be considered such a misrepresentation as to entitle the innocent party to rescind the contract.
STEP ONE: IS THERE A FALSE STATEMENT 2?:
- If that statement was true when it was made but then due to change of circumstances has become false by the time that it is acted upon, the representer's failure to disclose the change in circumstances can lead to misrepresentation
- With v O'Flanagan: The D represented to the C purchaser that the medical practice being sold had takings of £2000 per annum. This was true at the time that the representation was made however, when the contact was signed the takings of the practice dwindled to an average of £5 per week due to the illness of the D. It was held by the CA that the C should be allowed to rescind because the D had a duty to point out the change of circumstances and the representation continued from the time he made it to point out where the contract was signed and thus the contract was entered into on the basis of misrepresentation.
- Also Spice Girls Ltd v Aprilia World Services BV : the sponsor had not been informed that a member of the group had decided to leave despite this being known to all the members in the group
STEP TWO: IS IS A STATEMENT OF FACT?:
- Statements of belief or opinion are NOT statements of fact (or where it is clear to both parties that the statement maker had no basis in fact for the belief or opinion stated)
- Bisset v Wilkinson (1927): a vendor of a farm in New Zealand, which had not been used yet for sheep farming represented to the prospective buyer that it could hold 2000 sheep however, in reality it could not. He sought to set aside the contract on the ground of the vendor's misrepresentation however, was unable to do so because the vendor's statement was not a false statement of fact but a statement of opinion which he honestly held.
Statements of future conduct or intention:
- A false statement by a person as to what he will do in the future or what he intends to do is not a misrepresentation
- However, if at the time of stating the intention the person did not in fact have any such intention then it is misrepresentation
- Eddington v Fitzmaurice (1885): directors of a company invited the public to subscribe for debentures on the basis that the money so raised would be used to expand the business. The real purpose however, was to pay off the company debts.
Abstract statements of law:
- This cannot be a statement of fact
- Where there is a factual context, statements of law will be statements of fact
- Pankhania v Hackney London Borough Council : statements concerning the legal status of the current occupier of a property to be sold which impacted the ability to eject that occupier
STEP 3: DOES THE STATEMENT CONDUCT, OR OMISSION INDUCE THE OTHER PARTY TO ENTER INTO THE CONTRACT?:
- The statement of fact must induce the contract, it must actually be relied upon
- It must be shown that the representation played a "real and substantial part" in inducing him into the contract
- Horsfall v Thomas: in this case there was the concealment of a defect in a gun, in Horsfall the defect was discoverable on inspection. It was regarded that the concealment (misrepresentation) could not have included the contract
There must be knowledge of the statement:
- There must be the knowledge of the existence of the statement in order to be induced by it and normally that means that the statement must have been made to the party induced - Peek v Gurney
Where the C relies on their own judgement or investigations, as a general principle, they will not be induced by misrepresentation:
- Attwood v Small: A contracted to sell his mine to S, but exaggerated its earning capacity. S's agents reported that A's representations were true. After the contract was concluded the exaggerations were found by S and sought to rescind the contract, however he was unable to as he had relied on his agent's reports rather than upon A's representations.
- It should be noted that this rule does not apply to the claimant who has the opportunity to discover the truth himself but does not take it. The person to whom the misrepresentation was made could have discovered the true situation must go further and prove that he did not discover it in order to show that the misrepresentation did not induce entry into the contract
Where the C did not allow the representation to affect his judgement:
- This happens where he regards the representation as being unimportant i.e. Smith v Chadwick:An inference of inducement can be made or rebutted on evidence: 'I think if it is proved that the defendants with a view to induce the plaintiff to enter a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement( Lord Blackburn) At common law, there was an additional requirement that the misrepresentation be material. S 6 contains no express requirement of materiality, so in theory even a very minor misrepresentation could be actionable if the plaintiff can show that they were induced by it. However, if the representation is not material, the plaintiff will have substantial difficulty in proving inducement.
Reliance (a requirement of misrepresentation):
- Redgrave v Hurd (1881): A solicitor purchased into the partnership in the solicitors' firm. He was told the partnership had an income of £300 per year and was given the opportunity to look at the accounts. He declined the offer to check the accounts and took them at their word. In fact the income was only £200 per year. Held: He was entitled to rescind the contract as he relied on the statement. The fact that he had declined the offer to check the books reinforced rather than negated that reliance.
STEP 4: WAS THE MISREPRESENTATION MATERIAL TO THE DECISION TO THE CONTRACT:
- Whereas the question of whether the misrepresentee was induced is subjective, the statement must also relate to a matter which would have influenced the reasonable man (objective test) to contract, as opposed to something which has no obvious connection
TYPES OF MISREPRESENTATION:
- There are three types depending on the state of mind of the misrepresentor these are fraudulent, negligent and innocent
- Absence of an honest belief that the statement is true
- In Derry V Peek (In a company prospectus the defendant stated the company had the right to use steam powered trams as oppose to horse powered trams. However, at the time the right to use steam powered trams was subject of approval of the Board of Trade, which was later refused. The claimant purchased shares in the company in reliance of the statement made and brought a claim based on the alleged fraudulent representation of the defendant.Held:
The statement was not fraudulent but made in the honest belief that approval was forthcoming.)
- Lord Herschell pointed out three areas. The statement is made (i) knowing it is false or (ii) not believing that it is true or (iii) recklessly - not caring if it is true or false
- Thomas Witter Ltd v T.B.P Industries Ltd: Jacob J stated that "recklessness" meant dishonesty: making a statement not knowing whether it is true or false and not caring
- An honest belief that the statement is true but the statement maker has failed in their duty to use reasonable skill and care to check accuracy and so failed to appreciate it is false
- Hedley Byrne & co ltd v Heller & partners ltd (1964) - this is when the HOL expanded the ambit of liability for negligent misrepresentation. The C who were advertising agents booked advertising space on behalf of their clients Easipower Ltd, on terms that they were personally liable if Easipower defaulted. They became concerned about Easipower's financial standing and sought from the D's a reference on the financial soundness of Easipower. The D's replied stating that they were "considered good for its ordinary business transactions". In reliance upon the reference the C's placed orders which, because of the subsequent default of Easipower resulted in a loss of them of £17,000. The C's argued that the D's were negligent in the preparation of the reference and were therefore liable to them in damages. Their claim failed because the D's had provided the reference "without responsibility". This case was significant as the HOL would have allowed the claim to succeed had it not been for the disclaimer.
- There are two types of damages claim for negligent misrepresentation:
- (i) negligent mistatement at common law
- (ii) negligent misrepresentation under s 2(1) MA 1967 (D has to establish that she was not negligent). This has greater significance where there is a contract with the statement maker
- An honest belief that the statement is true where that belief is based on reasonable grounds. However, the statement turns out to be false
- The remedy of recession is most likely to be lost in such circumstances and damages awarded in lieu applying the discretion in s 2(2) MA 1967
REMEDIES THAT ARE AVAILABLE FOR MISREPRESENTATION:
- The basic remedy is recession since the contract is voidable. This involves setting aside the contract - handing back the property received under the contract and the return of the price paid
- Fraudulent or negligent misrepresentation:
- AND if there is additional loss suffered
- Damages under s 2(1) MA 1967
- Fraudulent or negligent misrepresentation:
- where recession has been lost
- damages alone
- usually under s 2(1) MA 1967
- Innocent misrepresentation:
- where recession is available, recession maybe too drastic a remedy
- The court may exercise its discretion under s 2(2) MA 1967 to award s 2(2) damages instead of recession
- Innocent misrepresentation:
- Where recession has been lost
- no recession and therefore no damages instead of recession
- possible indemnity only
Recession for misrepresentation v recession for breach:
this is where the contract is set aside for all purposes, the contract is set aside both retrospectively and prospectively. Here the aim is to restore, as far as possible the parties to the position which they were in before they entered into the contract
this is where one contracting party terminates performance of the contract because of the breach by the other party. The effect of recession is to release the parties from their obligations to perform in the future but the contract is not treated as if it had never existed. Therefore, recession for breach does not act retrospectively
BARS TO RECESSION:
- Knows about the misrepresentation but continues performance of the contract or acts in such a way that an unequivocal intention to continue performance can be implied from conduct
- Long v Lloyd: there was the purchase of a lorry, took it out on first journey and defects were discovered identifying misrepresentations. P accepted D's offer to pay part to the costs of the repairs. P then took the lorry on a second journey after the repairs and this was held to be affirmation
BARS TO RECESSION:
Lapse of Time:
- period from the date of contract and from date when fraud could have reasonably been discovered
- lapse of time may be evident from affirmation
- Leaf v International Galleries: picture represented to be "Salisbury Cathedral" by constable. Five years later the purchaser attempted to sell it and discovered it was not by constable. The CA held that recession had been lost as not exercised within a reasonable time
BARS TO RECESSION:
- it has become impossible to restore the parted to their original positions e.e. if the subject matter has deteriorated or changed
- There is equitable discretion in cases of substantial restitution to order recession whilst allowing for a financial adjustment to take account of inability to make full restitution
- Clarke v Dickinson : purchaser of shared in a mining company could not have recession once he had worked out the mine and recession of contract to purchase goods cannot be reminded once the goods have been consumed. Clarke was induced by representations made by Dickson to buy shares in the Welsh Potosi Lead and Copper Mining Company. Later when the company was being wound up Clarke discovered for the first time that the representations by which he was induced to buy the shares were false and fraudulent on the part of Dickson. Clarke therefore brought an action to recover the deposits which he had paid for the shares. The issue before the court was whether it was possible for the court to order restitutio in intergrum given that Clarke's shares were now worthless.
BARS TO RECESSION:
Third Party Rights:
- recession is a personal right against the representer and the misrepresented cannot claim the return of property so as to defeat rights acquired by the bona fide third party purchaser
- If A obtains goods from B as a result of misrepresentation and sells them to C, who takes in good faith, B cannot later rescind on learning of the misrepresentation in order to recover the goods from C
BARS TO RECESSION:
Damages instead of recession s 2(2) MA 1967: the court has a discretion under this to award damages instead of recession that is otherwise available in the case of innocent or negligent misrepresentation. If the court exercises this discretion, then the right to recession is lost and s.2(2) damages are awarded instead
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION:
- Where there is an additional loss (i.e. recession does not cover this alone)
- Fraudulent misrepresentation:
- The aim is to restore the misrepresentee in the position that they would have been originally
- The test of remoteness is very wide indeed that the misrepresntee may recover for all the direct loss incurred as a result for the fraudulent misrepresentation, regardless of forseeability
- Smith New Court Securities Ltd v Scrimgeour Vickers Ltd: The case conceded the purchase of shared in a company as a result of fraudulent misrepresentation. The HL held that the measure of damages would normally be based upon the difference between the price paid for the shares (82p) and the market value of the shares at the date of the contract (78p). It was later discovered that the company had been a victim of serious fraud by a third party so that the real value of the shares at the time of the purchase was in fact only 44p per share. Sicne the purchasers were "locked into" the transaction as a result of FM, this subsequent loss was a direct loss flowing from the misrepresentation. Therefore, the HL allowed the recovery of difference between 82 p and 44p.
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION 2:
- Recovery has to be on the tortious basis of restoring the parties to their original position. This was interpreted to mean allowing recovery of the profit that would have been made had the contract not been entered into but another contract made instead
- East v Maurer : the Ps bought one of the D's hair salons for 20,000 as a result of fraudulent misrep the D had not intention of working in his other nearby salon except in emergencies. The D continued to work full time at his other salon and this had a adverse affect on P's business. The P's eventually sold the salon for 7,500. In addition to recovery damages in the tort of deceit i.e. the difference between the price paid and the price of selling, the CA allowed the Ps to recover loss profits as a direct loss flowing from the fraudulent inducement to make this contract - this was calculated to put the P's in a good position as they would have been if the representation had been true (£10,000)
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION 3:
Damages for negligent misrepresentation:
- Hedley Byrne case - in the obiter statement it suggested that it certain circumstances damages may be recoverable in tort for negligent misstatement causing financial loss
- With this claim there is no requirement to establish the existence of a contract between the misrepresentor and the misrepresented e.g. in Hedley Byrne there was no contract between Heller and Hedley but Heller's negligent misstatement led HB to enter into a contract with a third party on behalf of easipower and as a result HB lost money - the C for this would have to establish the D's negligence. The remoteness test is the tort test of reasonable forseeability
- There are also statutory damages claim for NM:
- This is found in s2(1) MA 1967
- The advantages of this....
- There is the reversal of the burden of proof, under this statute the C has to prove an actionable misrep and the D is deemed negligent, the D then bears the burden of showing that he had reasonable ground for believing and did believe up to the contract was made
- Howard Marine & Dredging Co Ltd v Ogden & Sons Ltd: During negotiations to hire out barges the owners' representative misrepresented their carrying capacity. He relied on the Lloyd's register but this was incorrect. The correct info was on file at the owner's head office. Tha majority held that the owners were liable to pay damages under s2(1) as they had not demonstrated that they had reasonable grounds to believe what they said about the carrying capacity. It was unreasonable not to refer to the shipping documents at the company's head office
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION 4:
- The fiction of fraud: damages are assessed on the same basis as if the misrepresentation had been fraudulent: Royscot Trust Ltd v Rogerson: it follows that the remoteness test for recovery under s2(1) is extreme wide, namely "all direct loss regardless of forseeability"
- When applying s2(1) to determine whether particular losses are recoverable, the only question should be one of causation. Does the loss result from misrep? Did the misrep cause the loss? If it did then it is recoverable
- Naughton v O'Callaghan:
The Ps purchased a colt for 26,000 guineas but the pedigree was incorrectly described so that the actual value at the time of the sale was £23,500. Before the truth was discovered the Ps trained and raced the horse, it did badly and fell to £1,500. The judge awarded s2(1) damages for all direct losses flowing from the misrep and considered that the fall in the horse's value was cause by the misrep rather than the intervening actions of the Ps. The fact that the P trained and raced the horse was exactly the conduct which would have been expected in those circumstances. Therefore the Ps recovered the difference between purchase price and the value of the horse at date of judgement
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION 5:
- Damages for innocent misrepresentation:
- The misrepresentor in such a case will be able to discharge the burden of disproving negligence under s2(1) MA 1967
- Damages may NOT be claimed at common law for a wholly innocent misrep. However, s2(2) gives the court discretion, where the injured party would otherwise be entitled to rescind, to award damages instead of that recession based on the fact that recession would be too drastic a remedy given the nature of misrep as innocent
- S2(2) stated that this discretion can be exercised if the court considers it equitable to do so having regard to: the type of misrep, the loss upholding the contract would cause to the representee compared to the loss recession would cause to the representer
STEP TWO: CONSIDER THE REMEDY OF DAMAGES FOR MISREPRESENTATION 6:
- William Sindall plc v Cambridgeshire County Council: the purchaser sought to avoid a contract to purchase land for development when the market value of the land fell dramatically. The purchaser had discovered a sewer running across the land which required a six foot maintenance strip. The CA held that on the facts there was no misrep by the D council and no negligence. Obiter the CA considered that even if there had been actionable misrep, on these facts it would have exercised its discretion under s2(2) MA and awarded damages in lieu of recession. The representation was relatively trivial compared to the value of land. Recession would have placed the risk of a fall in market value on the D council. The CA rejected the argument that s 2(2) damages were the same as s2(1) damages and should compensate for losses caused by entering into the transaction . Instead s2(2) damages are limited to compensating the misrepresentee for the loss suffered if the contract is upheld and are unlikely to include any consequential losses
NEW TOPIC: COMMON MISTAKE
- Where common misapprehension is present at the date of entry into the contract the contract may be set aside on the grounds of common mistake
- Where the mistake is common to both parties, the parties have reached agreement but that agreement is based upon a fundamental mistaken assumption. In such cases the courts may nullify the consent of the parties and set aside the contract which they concluded
- Common mistake if often treated separate;y to frustration on the ground that the latter is concerned with the discharge of a contract whereas mistake relates to the formation of the contract
- It is true that mistake relates to events which exist or occur prior to making the contract, and frustration occurs after the making of the contract
- In the absence of a contractual allocation of the risk, a contract maybe void (of no effect from the beginning)if unknown to the parties at the time the contract was made, it was impossible to perform from the outset (common mistake). Non-performance in such circumstances is excused since there is not valid contract to perform
Bell v Lever Bros. Ltd:
Lever bros appointed Mr Bell and Mr Snelling (the two defendants) as Chairman and Vice Chairman to run a subsidiary company called Niger. Under the contract of employment the appointments were to run 5 years. However, due to poor performance of the Niger company, Lever bros decided to merge Niger with another subsidiary and make the defendants redundant. Lever bros drew up a contract providing for substantial payments to each if they agreed to terminate their employment. The defendants accepted the offer and received the payments. However, it later transpired that the two defendants had committed serious breaches of duty which would have entitled Lever bros to end their employment without notice and without compensation. Lever bros brought an action based on mistake in that they entered the agreement thinking they were under a legal obligation to pay compensation.
The House of Lords held that this was only a mistake as to quality and did not render the contract essentially different from that which it was believed to be. The action therefore failed.
- Nevertheless there is dicta in this case suggesting that a contract may be void if the mistake as to quality is sufficiently fundamental, Lord Atkin commenting
- "a mistake as to quality will affect assent if it as to the existence of some quality which makes the thing without quality essentially different from the thing it was believed to be
- With this case Lord Thankerton stated that common mistake must relate to something which both parties must necessarily adopted in their minds as an essential element of the subject matter"
More analysis of Bell v Lever Bros. Ltd:
- Even applying Lord Thankerton's test one can suggest that they had paid the Ds together £50,000 and this was a colossal sum of money in 1929, when they could have dismissed them without paying them any compensation
- Macmillan (2003) has examined the facts, her first point is that the principal claim brought by the Cs was one of fraud and the mistake claim was added as something of an afterthought. This had the consequence that the consideration given to the mistake claim was not as complete as it might have been. Second, the Cs "fraud" claim failed on the facts. Third, it was found that Bell and Snelling in fact made significant contributions to the success of the company and that the profits which they had made from their wrongdoing were trifling in comparison with the benefits the Cs had obtained from their services
Mistake as to the existence of the subject matter of the contract, res extincta:
- A mistake may be sufficiently fundamental to avoid a contract where both parties are mistaken as to the existence of the subject matter
- In Galloway v Galloway: the D, assuming that his wife was dead married the C. The D and the C later separated and entered into a deed of separation under which the D promised to pay a weekly allowance to the C. The D subsequently discovered that his first wife was still alive and fell into arrears . When the C sued to recover the arrears it was held that she could not do so because the separation agreement was void on the grounds that it was entered into under common mistake that the parties were in fact married
Courtier v Hastie :
- greater difficulties arise in the case of a contract for the sale of non-existent goods, s 6 of the Sale of Goods Act 1979 provides that: "where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void"
-Seller sold corn which was believed to be in transit on board a ship, to the buyer.Unknown to both, the cargo had been sold because it begun to ferment on route. Thus, the SUBJECT MATTER had ceased to exists before the time of the contract. The HL held that: since the contract was for the sale of existing goods, the contract was void and the buyer was not liable to pay for the corn - this is sense in the 1979 Act
*NB: the word "mistake" was not used in any of the judgements , the court was principally concerned with the construction of the contract and the question whether the consideration had totally failed. The court did not establish such an all embracing proposition
McRae V Commonwealth Disposals Commission (Australian case):
- The Ds purported to sell the Cs the wreck of a tanker which was lying on a reef and was said to contain oil
- The Cs embarked upon an expedition in an attempt to salvage the vessel but no tanker was found, no such tanker ever existed
- The Cs succeeded in their action for damages for breach of contract, the Ds argued that there was no liability for a breach of contract because the alleged contract was void owing to the non-existence of the subject matter
- This was rejected by the court on the grounds that Ds had promised that such a tanker was in existence and they were liable in breach of that promise
- The result in this case seems perfectly just as the D's assumed the risk of the non-existence of the tanker and the effect of that risk was to place the risk upon the Ds
- One can suggest that only contracts for the sale of goods which once have existed but have since perished would be governed by section 6 of the 1979 Act, however sale of goods which never existed would not be caught by s 6 but would instead by governed by the more flexible approach adopted by McRae
Associated Japanese Bank International Ltd v Credit du Nord SA:
- Bennet concluded an agreement with the claiming bank concerning four textile compression packaging machines
- This involved Bennet selling the machines to the C and then the C leasing them back to Bennet
- This was done as a means of Bennet raising funds for his business
- The Cs wanted Bennet's quarterly lease payments guarantees and the D bank guaranteed to guarantee the payments
- Bennet defaulted on the payments and was declared bankrupt
- Bennet had been acting fraudulently and that the machines had never actually existed
- The C brought an action against the guarantee against the D and this claim failed
- It was held that there was a condition precedent, express of implied in the guarantee that it only applied in respect of a lease of existing machines
- Had this not been so the common mistake as to the existence of the machines would have meant that in any event, the guarantee was kid
Griffith v Brymer :
- When a contract was made at 11 am on the 24th of June 1902 to hire a room with a view for the coronation procession of Edward VII (the subject matter of the contract), neither party was aware that at 10am on the 24th June the decision had been taken to cancel the procession due to the King's surgery. Wright J held that this went to the root of the hire of the contract , which was therefore void
- The P could not recover the £100 hire change that he had paid
Mistake as to the ownership of the subject matter of the contract:
- Cooper v Phibbs:
- A fishery belonged to the nephew but he thought it was owned by his uncle so that on his uncle's death he entered into an agreement to rent the fishery from the uncle's daughters. The HL held that the nephew was entitled to have the contract set aside
- Although this suggests that the agreement was voidable so that the court needed to intervene with an appropriate order, the agreement was clearly void as this is true impossibility
Mistakes as to the possibility of performing of the contract:
- A mistake may be sufficiently fundamental to avoid a contract where both parties believe that the contract is capable of being performed when in fact it is not
- Physical impossibility:
- This was the case in Sheikh Brothers Ltd v Ochsner: the appellants granted to the respondents a license to enter and cut sisal growing on their land in return the respondents agreed to deliver the appellants 50 tons of sisal per month. Unknown to both parties, the land was incapable of producing an average of 50 tons of sisal a month throughout the term of the license. The Pricy Council held that the contract was void because the mistake of the parties related to a matter which was essential to the agreement and neither party had assumed the risk of the being incapable of such a yield
- Legal impossibility:
- This is to say that the contract provides for something to be done which cannot, as a matter of law be done
- Cooper v Phibbs: the appellant agreed to take a lease of a salmon fishery which both parties believed to be the property of the respondents. It was subsequently discovered that that the appellant, as tenant in tail, was the owner of the fishery, the contract was set aside. One explanation that the agreement was set aside was on the ground that is was legally incapable of performance because the appellant was already the owner of the fishery:
Mistakes as to the possibility of performing of the contract 2:
- Commercial impossibility:
- Griffith v Brymer  - already mentioned before
Mistakes as to quality:
- A mistake as to the quality of the subject-matter of the contract may be sufficiently fundamental to avoid a contract
- A mistake to quality is where both parties mistakenly believe the goods posses, should render the contract void because both would otherwise not have contracted e.g. both parties believe that a picture is painted by a famous artist such as Constable although neither party makes express reference as to their belief
- But the courts are extremely reluctant to conclude that a contract renders the contract void this can be seem from the Bell v Lever Ltd case
- Other remedies if goods of not possess a particular quality that had been anticipated:
- was the quality a term of the contract or otherwise party of the contractual description in sale of goods by description, if so there will be a remedy of breach of contract
- Did the vendor state that the goods possessed a particular quality and this had the effect of induing the contract? If so, there may be a remedy in misrepresentation recession and/or damages for misrepresentation
- If no statement of fact was made, then the last resort remedy of mistake must be attempted
Leaf v International Galleries:
- Both the gallery selling the painting and the purchaser of the painting believed that the painting was by Constable
- The CA stated that the contract for the sale of a picture would not be set aside on the grounds of mistake if both parties entered into the contract erroneously believing the painting to be constable
- The obiter of this case, held that in the absence of any assumption of risk e.g. a promise by the gallery, the contract remained valid despite the parties' mistake. The parties were agreed in the same terms of the same subject matter
- The claim based on mistake was unsuccessful as the mistake related to the quality and did not render the subject matter something essentially different from that which it was believed to be. He believed he was buying a painting and he got a painting.
Shotgun Finance Ltd v Hudson: mistake as to identity
- A rogue acquired by dishonest means the driving license of Mr Durblabh Patel
- He entered a motor show room in Leister and have the details of Mr Patel
- The rouge agreed to hire purchase a car subject to obtaining finance
- The motor dealer faxed through the C finance company form with a forged signature of Mr Patel
- They finance company entered into a hire purchase agreement with "Mr Patel" - actually the rogue
- The rogue then sold the car to Mr Hudson, contending that there had been a intake as to the identity so that there was no contract of hire purchase between it and the rogue
- The HL held that there was no contract of hire purchase bwteen the C (Shotgun finance) and the rogue so that the property remind the C's and the action succeeded
Solle v Butcher : this case introduced a wider and a more flexible doctrine of equitable common mistake. This allowed the courts to rescind the contract where there was a common mistake that was fundamental and the party asking for recession was faultless. It was also possible to rescind "on terms". However, in the Great peace this was overruled as it was held incompatible with Bell v Lever Bros and recession for equitable (fair and impartial) common mistake was erased from law.
- Mr Butcher had a flat that was rent controlled. It was not supposed to be leased at more than £140 this happened in 1939. But neither party knew this and he leased it to Mr Solle for £250 pa, this happened because the flat was rented after renovation. In reality the Rent Act applied which meant that unless the landlord had gone through the particular procedures then the flat should not be rented for more that £140 per annum. When Mr Solle found out, he sought to recover the amount overpaid. Mr Butcher counterclaimed for rescission of the lease on ground of mistake. The CA held that the contract be set "aside on the lease of terms". Jenkins LJ said the contract could not be rescinded because it was a mistake of law.
Denning LJ said the contract was valid at law, but voidable in equity. He clearly wished to restrict the scope of common mistake on law, because of the effect of nullity on innocent third parties.
Bucknill LJ held the landlord was entitled to rescind because 'there was a mutual mistake of fact on a matter of fundamental importance, namely, as to the identity of the flat.'
Great Peace Shipping Ltd v Tsavliris Salvage Ltd , the CA accepted that the test of whether the contract performance would be "essentially different from the performance that the parties contemplated" amount to whether performance in accordance with the contractual terms or adventure is impossible due to common mistake. Only if impossible will the contract be void :
A ship, The Cape Providence, suffered structural damage in the South Indian Ocean. The defendants offered a salvage service which was accepted by the ship owners. The defendants made inquiries as to the nearest salvage ship and were informed that The Great Peace was 35 miles away. They then entered a contract with Great Peace Shipping (GPS) to engage The Great Peace to do the salvage work. In fact The Great Peace was 410 miles away at the time. When the defendants learnt of the actual distance they searched for a closer ship as they believed the Cape Providence was close to sinking and needed to rescue the crew. They found a closer ship and tried cancelled the contract GPS. The contract expressly held that the Cs were subject to paying a cancellation fee of five days hire, the Ds refused to pay that fee and the Cs brought a contractual action to recover it. However, GPS refused to cancel the contract and brought an action for breach. The defendants sought to argue that the contract was void for mistake at common law, alternatively that it was voidable for mistake in equity.
The Court of Appeal held that both claims failed. Equity does not provide relief from mistakes where the common law does not provide relief. At common law the mistake did not render the contract essentially different from that which it was believed to be. The CA held that the common mistake did not fall within the narrow doctrine recognised at common law so as to render the contract void; and that there is no doctrine of equitable common mistake.
Mistake in equity:
- The decision in the HL in Bell v Lever gave birth to an extremely narrow doctrine of common mistake in English Law. For many years the narrow approach adopted in Bell v Lever was "supplemented by the more flexible doctrine of mistake in equity"
- Mistake in equity differed in three major respects from mistake at law
Differences between mistake in equity and mistake at law:
- THE SCOPE OF THE DOCTRINE IS WIDER:
- Lord Denning: in equity the mistake must be "fundamental" and the party seeking to set the contract aside must not himself be at "fault"
- He also asserted the the court had the power to set aside the contract which is valid at law "wherever it is of opinion that it is unconscientious for the other party to avail himself of the legal advantage he has obtained
- MISTAKE IN EQUITY RENDERED A CONTRACT VOIDABLE NOT VOID
- when a contract was set aide on the grounds of mistake in equity, innocent third party rights can be protected
- EQUITY THE COURTS HAD GREATER REMEDIAL FLEXIBILITY BECAUSE THEY COULD NOT SET ASIDE THE CONTRACT "ON TERMS"
- this more flexible doctrine was brought to an end with the case of Great peace, the refusal of the CA to follow the decisions of the CA in Solle v Butcher
MISTAKE NEGATIVING CONSENT, need to finish this:
- Common mistake: this is where both parties enter into a contract sharing the same mistake which nullifies their contract. In this case the parties do initially reach agreement, but the agreement may subsequently be set aside on the ground of the parties shared mistake
- "offer and acceptance mistake": because it negatives consent and prevents a contract coming into existence on the grounds that one party is labouring under a mistake or the parties are at cross-purposes
- The objective test of agreement considerably reduces the scope of the doctrine of mistake, and this restriction is traditionally justified on the ground that it promotes certainty in commercial transactions, despite these restrictions, mistakes can operate to negative consent in the following cases....
NEW TOPIC: UNFAIR CONTRACT TERMS
- An exclusion clause may be defined as a "clause in contract or a term in notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise"
- The key question is whether a particular exclusion clause can be relied upon as a defence to liability or preclude reliance on the usual remedies
- In order to be enforceable on the facts the exclusion clause must be incorporated as a term of the contract (incorporation), cover the liability that has arisen in the circumstances (construction), and not be precluded from operating by legislation
- An exclusion clause can be incorporated as a result of signature, reasonable notice in a contractual document to people in general before or at the time of contracting, or as a result of consistent course of dealing between the parties or their common understandings
The incorporation of written terms:
- It is contained in a signed contractual document?
- The document that is signed must be of a type that it would normally be expected to contain contractual conditions
- L'Estrange v F Graucob Ltd: The C agreed to purchase a cigarette vending machine from the D's for use in her cafe. She signed a form printed on brown paper headed "sales agreement". There was an exclusion clause on this paper in very small print. The machine arrived and did not work properly, she brought an action for damages. The Divisional Court held that, because the C had signed the form, the above clause was incorporated into the contract.
- Chapleton v Barry UDC: the C in paying his money was given a ticket which unknown to him contained a number of conditions including an exclusion clause. The C was injured by the desk chair that he hired. It was held that they could not rely on the exclusion clause as the ticket was not intended to have contractual effect.
Incorporation of written terms 2:
- The notice of terms must be given at or before the time of concluding the contract. It is therefore, crucial to determine the precise moment at which the contract was concluded. This is important where the exemption clause is contained in an unsigned document (ticket) or notice
- In Olley v Marlborough Court Ltd  :there was a notice in a bedroom hotel which purported to exempt the hotel properties from any liability for articles lost or stolen from the hotel, however, this was not seen as incorporated into the contract with a guest whose furs were stolen as she had concluded the contract at the hotel desk before she had seen the notice in her room
Incorporation of written terms 3:
- Has the existence of the clause been given before or at the time of contracting?
- the case of Thornton v Shoe Lane Parking Ltd (1971): The C parked his car at a multi-storey car park operated by the Ds. When he got back to get in his car, there was an accident and he was badly injured. He brought forward an action in tort (for negligence under the Occupier's Liability Act 1957) holding them jointly responsible. The Ds argued that the ticket was a contractual document which incorporated terms and excluded their liability. The conditions were to be found on a pillar opposite the ticket machine and the paying office. It was held by the CA that as insufficient notice had been given at the relevant time, the exclusion clause was not incorporated into the contract - note this case also includes unusual terms
Incorporation of written terms 4:
- A higher standard of incorporation will apply if the particular clause is to be considered onerous or unusual?
- Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd : A clause imposed a fee of £5 per day for the late return of photographic transparencies. These were 47 of these transparencies and they had been kept inadvertently for an addtoanl two weeks and a charge of £3,783.50 had been imposed. Had the clause been incorporated as a term of the contract? The CA said no since the clause was particularly onerous and unusual and therefore had to be fairly reasonably brought to the other's attention which had not been achieved, the Cs were however only entitled to an award of £3.50 per transparency per week on a quantum merit basis. Bingham LJ argued that "whether it would in all circumstances be fair (or reasonable) to hold a party bound by any conditions...of unusual and stringent nature".
- O'Brien v MGN Ltd: the clause in a document relating to a scrathc card competition stated that if there was more than one winder lots would be drawn to determine the prize winner. It was held to neither be onerous or unusual
Incorporation by course of dealing:
- It is easier to find the consistency in dealings between commercial parties. If yes the clause is incorporated and if no the clause will not be incorporated and cannot be relied upon as a defence to the liability
- Hollier v Rambler Motors (AMC) Ltd , it was held that the course of dealing was not regular and consistent. In this case, the C's car developed an oil leak and he took it to the D's garage for repair. Whilst there a fire broke out damaging the car, the C brought an action to recover damages because of the D's negligence. During the five years before the fire, the C had his car repaired or services by the D three of four times and the C accepted that he had signed the invoice (that had an exclusion clause for limiting thd D for cause of damage) on at least three occasions. The invoice form was never read or offered a signature when the car was deposited in March 1970. In allowing the C's appeal it was held that the exclusion clause was not incorporated in the contract by a course of dealing, also not in a matter of construction.
Construction: does the clause on its natural and ordinary meaning cover the liability in question in the circumstances in which it occurred:
-At the second stage it must be shown that the exclusion clause was properly interpreted or properly construed to cover the damages which was caused
- The Courts have had a rather defensive approach to exclusion clauses and this has meant that exclusion clauses have not been interpreted in the same way as other terms of the contract; they have been interpreted more rigorously or restrictively
- this rule is called the Contra proferentum rule ,the "proferens" is the party seeking to rely on the exclusion clause. It also basically means that you take an interpretation which is beneficial for the consumer
(i) is the clause ambigious? If so the ambiguity will be construed against the party relying on the clause:
- Houghton V Trafalger Insurance Co Ltd: car insurance policy reference to "excess load" was ambigious and therefore construed against the insurers to mean excess weight rather than too many passengers. It followed that the insurance policy remained enforceable
(ii) is there any inconsistent undertaking which may prevent reliance on the clause?
If an exemption clause is inconsistent with another term of the contract or with the oral undertaking given before or at the time of contracting, the exemption clause will be overridden
(iii) limitation clauses are construed more favourably than total exclusion clauses which deny all liability
- For example, a limitation clause will cover negligence liability if the clause is "clear and unambiguous"
(iv) is the wording of the clause wide enough to cover a fundamental or serious breach of contract: if the breach is fundamental i.e. affecting the very purpose and substance of the contract, then very clear words will be required for the clues to cover it. However, it is common for exemption clauses to be generously drafted
- Photo production Ltd v Securicor Transport Ltd:
- This was a contract involving provision of security services for a factory contained a wide exemption clause exempting the security provider from loss, The security's firms employee started a fire on the premises and the factory owner suffered significant loss. The HL held that as a matter of construction, on its natural and ordinary meaning the clause in the contract did cover such a deliberate act
(iv) if there is negligence liability on the facts, it is necessary to determine whether the clause covers this negligence liability or whether the clause is limited to providing a defence to the strict contractual liability only:
- If there is negligence liability on the facts then the clause must be construed as converging that negligence liability.
Held, giving judgment for L, that the words "neglect or default" were wide enough to cover negligent acts by L. The clause did satisfy the test of reasonableness. It had been generally accepted in the market, its meaning was clear and both parties could make insurance arrangements on the basis of the clause.
- If such express language of negligence is not used then the clause will be construed so that it covered the strict contractual liability and it cannot operate as a defence to liability in negligence
- White v John Warwick & Co Ltd: both strict contractual liability and negligence involved in hiring a tricycle with a defective saddle and the CA held that the exclusion clause had to be construed as covering only the strict contractual liability and not the negligence
-The first relates to the situation where a contracting party seeks to exclude liability for his own negligence
-One must highlight that the UTCA contains severe restrictions on the ability of a contracting party to exclude liability for its own negligence
- To give effect to this the courts have evolved three specific rules of construction which find there origin in the speech of Lord Morton in Canada Steamship Lines Ltd v The King( in this case the Cs goods were stored in a shed leased from the crown (d). They were destroyed in the fire by the Ds negligence, the D had a clause. The Privy Council held that the exclusion clause did not limit liability for the Ds negligence because the D could realistically have been strictly liable for damages of the goods (e.g. by breach of its statutory obligation to keep the shed in repair). The clause did not indemnify the lessor for the consequences of the lessor's own negligence):
-The first rule is that if a clause contains language which expressly exempts the party relying on the exclusion clause from the consequences of his own negligence then (subject to UCTA) effect must be given to the clause, this rule can be fulfilled by using a synonym of the word negligence
-The first rule stands alone, however the second and the third rule constitute a double hurdle which must be overcome by a clause which fails to satisfy the first rule
-The second rule is whether the words are wide enough, in their ordinary meaning, to cover negligence on the part of the party relying on the exclusion clause
-The third rule is that the court must consider whether the exclusion clause may cover some kind of liability other than negligence, however, if there is such a liability, the clause will generally be confined in its application to that alternative source of liability and will be held not to extend to negligently inflicted loss
- In the CA case The Raphael  it was held that where the alternative source is 'fantiful or remote' it would not prevent the exclusion clause covering liability in negligence
Problems with the second and third rules, how they contradict each other:
-the second rule demand that the clause be drafted as widely as possible so that it will be held to encompass negligently inflicted damage. But the third rule demands that the clause be narrow in scope as the wider it is the more likely it is that it will encompass some source of liability other than negligence and so be confined to this alternative scope of liability
- It has been suggested that Lord Morton's rules should be quietly laid to rest
Other common law controls on exclusion clauses:
- A party cannot rely on an exclusion clause, if the effect which he has misrepresented to the other party
- Curtis v Chemical and Dyeing Co Ltd : The C took a white satin dress to the D's shop for cleaning. She was asked to sign a receipt, the receipt was that the D would not accept responsibility for certain specified risks including damage to beads and sequins with which the dress was trimmed. The form in fact contained a clause excluding all liability for any damage howsoever caused.The D returned the dress with an unexplained stain. The CA held that the D's could not rely on the above clause because it was not incorporated as a term of the contract owing to the shop assistant's misrepresentation. The assistant had misrepresented the effect of the clause and therefore could not rely on the clause in the form even though the claimant had signed it.
- Construing limitation clauses: George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd: The D's were seed merchants and the C's were farmers who ordered Dutch winter white cabbage seeds. The D supplied the wrong kind of seed so that the crop which did not grow properly had to be ploughed as worthless. The damages for the breach of the contract were around £61,000. By conditions in the sale of the contract the D's argued that they had limited their liability to replacement or refund of the seeds worth. It was held by the HL that as a matter of construction the relevant condition did not so limit their liability, but that it was not fair or reasonable to allow the D's to rely on that condition applying the then relevant statutory provision. The Court of Appeal held that the clause was unreasonable as the buyer would not have been aware of the fault whereas the seller would.
STATUTES THAT PREVENT THE USE OF EXEMPTION CLAUSES: the Unfair Contract Terms Act 1977 (UTCA 1977) and the Unfair terms in Consumer Contracts Regulations 1999 (UTCCR 1999)
- UTCA: depending on the liability which the clause seeks to exclude or limit, the UTCA renders the clause in question either totally enforceable or only enforceable it it can be shown that it is reasonable
- UTCCR: The regulations are in ones sense of wider applicability that UTCA since they regulate "unfair terms" in general but they also have narrower application since they apply to unfair terms which are not individually negotiated and which are used against a consumer in a consumer contract. Such "unfair terms" are not binding on the consumer i.e. the consumer can avoid the application of an unfair exemption clause
STEP 1: DOES THE ACT APPLY? UTCA - The Unfair Contract Terms Act 1977 applies only to liability arising in the course of a business. It does not therefore provide comprehensive protection against unfair terms. Also it provides for specific instances of unfair terms. In particular, penalty clauses are outside its remit. The Unfair Contract Terms Act provides different levels of protection. Some provisions provide absolute protection whereas some will be subject to a consideration of whether the term was a reasonable one to include. The Unfair Contract Terms Act extends beyond liability arising from contracts and extends to tortious liability arising from negligence or liability arising from the Occupiers Liability Act 1957.
- UTCA applies to exemption clauses covering business liability, exemption clause has an extended definition within s13(1), one may condor where it is not clear that the clause is excluding or limiting liability
- Does the clause state that there is to be no liability unless some condition is complied with such as identifying and reporting a defect with 7 day - if yes is it covered by the UTCA
- Does the clause limit or exclude any right or remedy that would otherwise be available such as the right to claim damages? - if yes is it covered by the UTCA
- Does the clause restrict or exclude rules of evidence or procedure? - if yes is it covered by the UTCA
- Does the clause exclude or limit the obligation or duty? does the clause deny that there is any contractual promise or responsibility e.g. a general disclaimer? - if yes is it covered by the UTCA
- Smith v Eric S. Bush: a contract for a mortgage valuation of a property contained a clause stating that there was "no acceptance of responsibility for the valuation" being provided. Since this disclaimer purported to prevent amy duty of care from ever arising within s13(1) and the UTCA regulation would apply to it and the disclaimer was held as unreasonable.
STEP TWO: TO DETERMINE HOW THE ACT APPLIES IN AN INDIVIDUAL CASE WE NEED TO IDENTIFY WHICH SECTION OF THE ACT APPLIES TO THE LIABILITY SOUGHT TO BE EXCLUDED:
- This involves looking at what happened and the liability which arose
- assessing which of these liabilities is covered by the clause
- Applying which section of the UTCA is relevant
- Is there any negligence liability:
- Section 1 of the UTCA states that negligence includes (1) breaches of contractual obligations which impose a duty to exercise reasonable care and skill
(2) breach of a duty of care in tort
- Section 2 UTCA must be applied where negligence is a liability on the facts and the clause has been construed to cover that negligence
- You need to identify the loss caused by negligence
- S2(1) death or personal injury resulting from negligence. This liability cannot be excluded
-s2(2) other loss or damage. The liability can only be excluded or limited if the party seeking to rely on the clause establishes that the clause is reasonable s11
IS THERE LIABILITY FOR BREACH OF CONTRACT (I.E. STRICT CONTRACTUAL OBLIGATIONS):
1. Does the liability which it is sought to exclude or limit involve a breach of any implied obligation relating to goods in the sale and supply of goods legislation?
Is the contract a contract for the sale of goods or for work and materials and is the term a breach of sections 13, 14 or 15 of the SGA 1979 relating to goods obligations, if no consider the application of s3 of UTCA
- if yes, is the contract a contract for the sale of goods for the supply of work and materials (s 7 UTCA applies to attempts to exclude implied obligations concerning the goods in a work and materials contract
- Is the clause being relied upon as against a person "dealing as consumer" within s 12 UTCA?
- Can the company deal as a consumer within the UTCA?
-A company will deal as a consumer if both (a) the contract is not an integral part of the company's business
(b) the contract is not entered not with sufficient regularity
- This definition came from the case of R & B Customs Brokers: The C company was as a business a shipping broker and freight forwarding agent. It bought a car from the D finance company under a conditional sales agreement. This was to be a "company car" and to be driven by the managing director. The roof leaked and it was not in dispute that there was a breach of at least the implied condition under s 14(3) of the SGA that the car should be fit for purpose. There was a clause in the contract excluding that liability. The CA held that while the exclusion clause would have passed the reasonableness test s6(2) of the UTCA 1977, not s6(3) applied. This was because the C company in buying the car was dealing as a consumer. Applying s6(2) the exclusion was automatically invalid.
IS THERE LIABILITY FOR BREACH OF CONTRACT (I.E. STRICT CONTRACTUAL OBLIGATIONS) 2:
- Is the clause being relied upon AS AGAINST A CONSUMER? - s 6(2)
- Is the clues being relied upon AS AGAINST A NON-CONSUMER - s6(3) and s7(3)
- Other strict contractual liability and the application of s3: if the breach is a breach if some term of the contract (1.e. other than one of the implied term as the goods in the sales and the supply legislation) does s3 apply to the clause
- S3 will apply if either:
(a) the clause is being used as against a consumer
(b) where the contract is between two businesses and one of them is dealing on the other's written standard terms of business
- s3 applies it can be applied to:
(a) clauses allowing for substantially different contractual performance e.e. allowing the terms to be changed AND
(b) clauses allowing the party in breach to tender no performance at all
- if S3 applies, he clause can be used to exclude or limit the strict contractual liability but only if the clause is shown to be reasonable
The reasonableness requirement:The term is required to be a fair and reasonable one to include in the contract.
This is judged by all the circumstance which were known, or ought to have been known or in the contemplation of the parties
The fairness and reasonableness is decided at the time the contract is entered - not with hindsight knowing of the events which in fact occurred
Where the term is restricting rather than excluding liability regard is to be had to the resources of the party seeking to rely on the term and the availability of insurance.
The burden is on the party seeking to enforce the term to show that it was fair and reasonable.
-If the clause has to be shown to reasonable (s.11) before it can be relied upon to exclude or limit the liability, can that burden be discharged by the party seeking to rely on the clause (s11(5))
- The test is whether the clause is "fair and reasonable" when judged at the time the contract is made (as opposed to in the light of the breach) and on basis of the circumstances which were, or ought reasonably to have been known to or in the contemplation of the parties (s11.1))
- Reasonableness is determined by adopting a balancing test and placing factors on either side of the balance. It follows that each case turns on its own facts and findings have no precedent
Assessing reasonableness under s11:
1. Factors favouring the reasonableness of the clues
- the clause is contained in a commercial contract between commercial parties of equal bargaining power. The courts adopt a policy of non-intervention with the parties' agreement
- The clause is a standard operating class in the particular industry and has been negotiated by the relevant trade bodies
- Where it is possible to cover the risk excluded by the exemption clause with insurance which could more economically and should reasonably be taken out by the non-breaching party e.g. Photo Production Ltd v Securicor Transport Ltd: insurance cover should betaken out by the owner who would be the reasonable directly sustaining any loss, particularly as the fee for service was modest
- The fact that a breaching party's resources are limited may favour the reasonableness of a limitation clause (s11.4)
- Where there was an inducement to agree to accept the exemption clause, such as a lower price
- If there is a realistic possibility that an alternative contract should have been entered into without the existence of an exemption clause
- Where the goods which are the subject of the exemption clause have been manufactured to customer's special order
Assessing reasonableness under s11:
Factors favouring the unreasonableness of the clause:
- An inbalance in the parties' bargaining positions of the favour of the party seeking to rely on the clause. In the case of an exemption clause in a consumer contract the courts have a clear idea that they are expected to protect consumers, weighing the balance in favour of a conclusion to unreasonableness. Smith V Eric Bush is a rare example of an exemption clause used agains a consumer receiving attention in the higher courts. Lack of bargaining power, lack of consumer voice and the cost of individual insurance cover that would fall on the consumer were all factors favouring the conclusion that the disclaimer was unreasonable in this context
- A party's negligence may weight in the balance against the reasonableness of a clause designed to protect that e.g. suppliers in George Mitchell v Finney Lock Seeds had been negligent in supplying incorrect seed
- If the insurance cover could more easily and cost effective ly have been secured by the party in breach such as with smith and bush insurance was available to valuers and they could have speed the cost across all customers.In the commercial context the reasonableness of say a supplier taking out insurance cover in relation to the fitness of product it supplies may depend on what that party knows of the intended uses for those products
- If the clause is ignored in practice that may be evidence that it is regarded as unreasonable e.g. George Mitchell
- Where a clause provides that there will be no liability unless a condition is complied with (i) it will fall for assessment under the UTCA due to the s13(1) extended definition and (ii) the question is whether is it reasonable and practicable to expect compliance with the condition or imposed: R. W. Green Ltd v Cade Brother Farms: clause required rejection, claim or complaint within three days of the arrival of the potato seed. However, the defect that occurred would not be discoverable by inspecting the seed. It followed that this clause was unreasonable and could not be relied upon as a ground for denying liability
George Mitchell v Finney Lock Seeds:
- In breach of a contract for the supply of specific cabbage seed the wrong type of seed was supplied and the crop failed resulting in actual loss of over £60,000. However, the contract contained a limitation clause limiting the supplier's liability to the purchase price. Although the breach involved the supply of a different product, the clause was unreasonable in the circumstances and could not be relied upon the supplier
The Unfair Terms in Consumer Contracts Regulations 1999, (UTCCR 1999):
- The UTTCR are concerned ONLY within the regulation of unfair terms in consumer contracts that have been individually negotiated, this is different to the scope of UTCA, although there is some overlap
- (1) regulations cover "terms" and not just exemption clauses
- (2) UTCA: a - covers negotiated exemptions, b - can apply to commercial contracts
- Approach to the application of the regulations, 1 - do the regulations apply to the term in the question, 2 - is th term in question unfair?, 3 - what is the consequence if a term is "unfair" within the regulations?
Do the regulations apply to the term in question?
(a) Is the term being applied against a consumer?
- The regulations attack "unfair terms" in contracts concluded between a seller or supplier and a consumer. A consumer is defined as a natural person who is acting for purposes outside his trade, business or profession. It follows that the regulations do not apply and cannot provide protection for companies
(b) Is the term in question a "core term", within reg 6(2), if so the regulations do not apply to that term?
- The regulations do not apply to core terms such as terms which define the main subject matter of the contract or concern the adequacy of the price or remuneration. This regulation had tended to be narrowly defined in order to avoid excluding the application of UTCCR and the application of the test of "unfair term"
Director General of Fair Trading v First National Bank plc:
A term of loan agreement issued by the bank provided that if the debtor defaulted on the load, contractual interest on the outstanding debt remained payable until the debt was discharged. The debtor was taken to court and the judgement debt was ordered to be paid by instalments. However, the judgement debt installments did not include the contractual interest so that having paid the instalments off the debtor would find that he still owed money in respect of the interest. It was argued that there term could not be challenged as unfair under the UTCCR since the contractual interest term was a "core term" relating to the price if the goods and therefore the UTCCR did not apply. However, the HL rejected this arg, concluding that the interest term was ancillary and not "core". It was not concerned with the price since it was not concerned with the Bank's remuneration for the service supplied
2. Is the term in question "unfair" within regulations?
- Regulation 5: an unfair term for the purposes of the regulations is a term which is
- Not individually negotiated and contrary to good faith causes significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer
(a) what is the burden of proof? The burden of establishing unfairness rests with the consumer
(b) When is a term "not individually negotiated"? Regulation 5(2) it is presumed that a term was not individually negotiated if it was drafted in advance and the consumer was not able to influence its substance , (3) even if the particular term was negotiated, the regulations will still apply if overall it appears to be a pre-formulated standard contract , (4) if the seller/ supplier wants to ague that the term was in fact individually negotiated, the has the burden of proof on this matter
(c) what guidance is there on judging whether a term is "unfair"?
- Regulation 6(1) contains some guidance regarding how the unfairness of a contractual term shall be assessed, one has to consider
- the circumstances at the time the contract was made
- the nature of the goods and services supplied in the light of all the oner terms of the contract
(d) When contrary to the requirement of good faith, does a term cause a significant imbalance in the pretties' rights and obligations to the consumer's detriment?
- Director General of Fair Trading v First National Bank plc: the CA had concluded that the inters term was unfair to the debtor because of the element of unfair surprise i.e. the judgement debtor would think that the entire debt had been repaid only to discover that the interest was also owed. On appeal the HL disagreed and heeled that the term was not unfair as it stood. The expectation is that interest will be payable on money owed and any unfairness stemmed not from this term but from the fact that the judgement debt instalments did not incorporate the interest due on top of the capital sum owed
(d) When contrary to the requirement of good faith, does a term cause a significant imbalance in the pretties' rights and obligations to the consumer's detriment 2?
- The HL dealt separately with "significant imbalance" and "good faith"
- There would be a significant imbalance if the term was weighted in its substance so heavily in favour of the supplier that the parties' rights and obligations under the contract was titled significantly in favour of the supplier e.g. a discretion or power granted to supplier or imposition of a disadvantage, risk or duty of a consumer. To determine this substantive fairness it is necessarily to assess the particular term in the context of the contract as a whole e.g. there might be balancing provision in favour of the consumer
(b) good faith meant "fair and open dealing"
- openness is procedural and requires the terms to be clearly and legibly expressed with no concealed pitfalls or traps. In particular, prominence needs to be given to terms which might operate to the disadvantage of the consumer
- Fair dealing, refers to the fact that the supplier should not seek to take disadvantage of the inequality of bargaining position and the consumer's lack of experience or knowledge. It follows that "fair dealing" is both procedural and substantive since the substance of a term if relevant to whether advantage to whether advantage has been taken
3. What is the consequence if the term is "unfair" within the regulations?
- If a term is "unfair", it is not binding on the consumer, although the contractcan continue without that term
NEW TOPIC: THIRD PARTY EFFECTS
- The doctrine of the privity of contract, which remains the general rule in England, provides that a person who is not party to the contract (third party) cannot acquire rights under or enforce the provisions of that contract or rely on its protections even if the provisions were intended to benefit that third party
- Consideration moves from the promisee, and a third party is not the promisee. This means that a P had to have supplied the consideration to support their promise.
Privity in operation:
- A person who was not a party to a contract cannot sue upon the contract to obtain the promised performance
- This applies both where the C was seeking to assert a POSITIVE RIGHT and seeking to rely on the term as a DEFENCE
Beswick v Beswick , seeking to assert a positive right:
- The nephew had promised his uncle that we would pay a weekly sum to the uncle's widow on the uncle's death
- The widow could not enforce this contract because of privity but acting as the late husband's represented she could
- Principle: promisee remedies and the difficulties of the promisee seeking to enforce a promise in favour of a third party beneficiary. Specific performance was available because the promisee could not recover substantial damages if it had no loss
Scruttons Ltd v Midland Silicones Ltd, trying to rely on an exclusion cluase:
- The C who were owners of a drum of chemicals entered into a contract with a firm of carriers for the transportation of the drum
- Under this contract the carriers limited their liability to the Cs to $500
- The stevedores who were employed by the carriers to discharge the drum negligently dropped the drum
- The S wanted to rely on the limitation clause ($500) between the Cs and the carriers, but it was held that they could not as they were not privy to the contract
- This conclusion gave rise to a considerable amount of commercial inconvienicne because it made it extremely difficult for an employer to give his employees and agents the benefit of an exclusion clause negotiated by the employer, even where the exclusion clause was a legitimate method of allocating risks under the contract between the employer and the claimant
- Lord Reid attempted to show a way to get round this inconvienice, he envisaged that at the moment the carrier signed the contract, two contracts would come into existence the first between the owner and the carrier and the second between the owner and the stevedore - however , it was extremely difficult at this time to show if any consideration by the stevedores had been given
- In this case the stevedores were held to be entitled to the exclusion clause contained in the contract between the carriers and the consignors
- The facts are very similar to Scruttons
- The bill of lading expressly stated that the benefit of the exclusion clause to any independent contractors employed by the carriers
- The carriers had also contracted as the agents the stevedores and they authorised the stevedores to act
- The principal problem here laid with the consideration provided by the stevedores for the consignor's offer of immunity
- It was argued that they had provided consideration and this was accepted by the stevedores unloading the goods at the point of discharge, at this point a binding contract had come into existence. The consideration supplied by the stevedores was the performance of their contractual duty owed to the carriers
- Principle: agency device to establish a binding promise of exemption between a contracting party and third party to the clause
Privity and consideration:
- The historical development of privity is very closely linked with the doctrine of consideration
- Tweddle v Atkinson: the fathers of the intended bride and groom promised each other that they would pay a sum of money to the P (the groom). The bride's father failed to pay and although the promise was for the P's benefit he was unable to enforce it because (i) he was not party to the contract containing the promise (ii) he had not provided any consideration
Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co Ltd:
- Contract 1: Dunlop sold tires to Dew & Co under the terms of this contract Dew &Co promised not to sell the tires at less than the list price and to obtain a similar understanding from trade buyers
- Contract 2: Dew & Co sold some tires to Selfridge and Selfridge promise Dew & Co to abide by the list price
- Contract 3: In breach of contract 2 self ridge sold tyres to customers
- Dunlop sued Selfridge for breach of its undertaking not to sell at below list price
- HL held that Dunlop could not succeed:
(i) it was not party to the contract containing the promise may by Selfridge (contract 2)
(ii) Dunlop had also not provided any consideration to support Selfridge's promise. The discount only applied between Dunlop and Dew & Co with no obligation to pass it on
Consideration and privity:
- It can be suggested that both of the above cases are consistent with the view that the the C could not sue because he had not provided consideration to the D's promise
- However, the view widely now taken by those such as Viscount Haldane in Dunlop is that the doctrine of privity is separate and distinct from the rule of consideration and that consideration must move from the promisee
- If X makes a promise to Y and Z to pay £100 to Z in exchange for consideration by Y. In such case Z is privy to the contract but cannot maintain an action against X unless he had provided consideration for X's promise. Privity and consideration constitute two hurdles for Z to surmount and not just one
Criticisms of the doctrine of privity:
- FOUR PRINCIPAL PROBLEMS:
- The first was that it failed to give effect to the expressed intentions of the parties
- The second was that the law was unduly complex and a number of exceptions had grown up to the doctrine and some of them were extremely artificial
- the contorted reasoning of the Privy Council in The Eurymdeon seeking to give effect to the intention of the contracting parties
- The third deficiency was that the application of the doctrine of privity was commercially inconvenient
- The final problem was that the application of the doctrine could sometimes lead to results which were regarded as fundamentally unjust
- These recommendations were finally implemented in the 1999 Act
The Contracts (Rights of Third Parties) Act 1999:
- It could be said the this Act introduces into English law a limited third party right of action to enforce a term of a contract made between two other parties or alternatively that it carves out further (substantial) exception to the privity of contract
- The Act is based on the Law Commission Report 1996
- (a) the right to enforce remedies for breach of contract that would have been available had the third party been a contracting party
- (b) the right to enforce an exemption clause as if the third path was party to the contract
- However, it must be noted that "there will remain may contracts where a third party stands to benefit and yet will not have a right of enforceability", this means that the old rule of privity of contract and its exceptions still remains entact
- There is still great complexity as the old law and the new act must coexist
- Four situations appear to be visible
- (1) This is where the third party has a right under the Act but not at common law, in such a case the act will override case law
- (2) Where the party has not claim under the Act but does have a claim apart from the act thus, at common law, the third party's right will continue to be governed by that alternative provision
- (3) Where the party has a right under the Act and under common law, the third party in the case can choose which right to assert
- (4) Where the third party has not claim under the Act or under common law, the third party can only bring forward a claim if it can persuade the court that it ought to introduce a new exception to the doctrine of privity of contract
- The Act cannot have a freezing effect on common law
When might a third party be able to enforce a contract? The test of enforceability...
- The scope of the third party right of action created by the act is determined by the intention of the contracting parties themselves. The third party is given a right of action in 2 circumstances
- The FIRST situation where a third party is given the right to enforce a contract is where the S1(1)(A)"contract expressly provides that he may"
- However, it must be noted that s1(2) means that s1(b) "does not apply if on proper construction of the contract it appears that the parties did not intended the term to be enforceable by the third party"
- The SECOND situation is the case where the contracting parties do not make their intneition express and the contract term "purports to confer a benefit on the third party AND there must be nothing in the contract which indicates that the parties did NOT intent that the term should be enforceable by the third party" S1(1)(B) AND S1(2)
- Legislation: Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if—
(a)the contract expressly provides that he may, or
(b)subject to subsection (2), the term purports to confer a benefit on him.
(2)Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
- In order for a term to "purport to confer a benefit" on the third party, one of the purposes of the parties' bargain must have been to benefit the third party
- Dolphin & Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening, The Swedish Club :
- A contract between U and the club C with which that vessel was registered, provided for C to pay sums recovered to D, a recovery agent for those underwriters, who would pass these sums on to U. When C paid the sums direct to U, U had refused to pay D for any commission and D therefore sought to enforce the provision in the contract with C, arguing that the contract "purported to confer a benefit". However, the court held that the contract was concerned with how payment was to be made to U and D not a beneficiary of the agreement, albeit it was more convenient for D to receive the sums of that it could deduct its commission before passing on the balance
tStep 2: Consider the effect of s1.(2):
- There must be nothing in the contract which denies the third party a right to enforce the term or rely on it for protection
- This has caused some difficulties because it appears to suggest having to prove a negative, this is not necessary
- Nisshin Shipping Co Ltd v Cleaves & Co Ltd : C had negotiated charter contracts on behalf of the owners of the vessel (N) and each contract had provided for the payment of commission to C, although the contracts were made between N and the individual charters. C sought the commission and argued that the 1999 Act applied. There was also an arbitration clause by which the parties agreed to refer all disputes arising out of the contract to arbitration. Clearly the commission clauses purported to confer a benefit on C but N argued that C could not show that the parties intended that the benefit of this term should be directly enforceable by C. It was held that the clause purported to confer a benefit on broker so that the broker could enforce it directly. The court of Appeal held that Cleaves are entitled under s.1 of the CRTPA 1999 to the unpaid commissions.
- s1(2) proviso to s1(1)(b) of 1999 Act to deny enforceability by a third party if the contracting party denying this is able to satisfy the court thats the parties' contract indicates that the parties were denying any right of enforcement or protection for the third party. The third party does not need to prove a negative
The primary limitation in the test of enforacbility is the first part of s1(3):
- s1(3) "the third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into"
- Positive rights: where contracting party A enters into a construction contract with B under which B agrees to construct a building for A. At some later point A sells to C, it is discovered that extensive building work is needed caused by the failure of B to exercise reasonable care when constructing the building. Can C sue B? The answer is relating to the act is no as C was not "expressly identified" in the contract
- Avaarmides v Colwill : A had employed C to refurbish A's bathroom. C's performance was defective and C was therefore liable to A. However, before enforcement, C sold its business to B on terms whereby B assumed liabilities "to pay in the normal course of time any liabilities properly incurred by C as at 21 March 2003". Did this mean that A as a third party beneficiary to the contract C/B had the ability to enforce this agreement against B? The CA held that since A as a third party was not expressly identified in the contract C/B by name, it could not be said that the effect of the agreement was to give those with rights against C the ability to enforce those rights directly against B
If the third party has a direct right of enforcement, could the promisor argue against enforcement on the basis that the third party had not supplied any consideration for the promise:
- No consideration required:
- the third party will be able to enforce the term of the contract notwithstanding the fact that he himself has not provided any consideration for his right to sue to enforce the terms of the contract
- The fact that the contract is supported by consideration supplied by the original contracting parties is sufficient to give him a right of action
- Section 1 states that the third party may "in his own right enface a term of the contract" was though to be sufficiently explicit to confer a right of action on the third party whether he had provided consideration or not
The remedies available to the third party:
- There "shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been party to the contract" S1(5)
Variation and Cancellation:
- Can the original contracting parties maintain their right to vary or cancel the contract as to deprive the third party of his benefit at a later stage. If the third party has a right to enforceability under section 1 then the contracting parties cannot take this away without the third party's consent by varying or rescinding the contract
- Substantial limitations haven been placed on the ability of the contracting parties to do so. This issue is addressed in section 2 of the Act which states....
- The usual right of contracting parties to vary contract terms is maintained unless...
- (a) the third party has communicated his assent to the term to the promisor
- (b) the third party has relied on his rights and the promisor knows this
- The overall effect of s2(1) in practical terms is to protect the third path
- Contracting parties are permitted to expressly opt out of this by stipulating for a different crystallisation test or by reserving the right to vary or cancel the third party's right irrespective of reliance or acceptance by the third party
- In order to opt out the parties would need to be aware of their ability to do so
Defences available to the promisor:
- The right which the third party acquires is essentially the right to enforce the term of the contract subject to the defences which would have been available to the promisor had he been sued on the contract by the promisee
- Thus, s3(2) of the act states the defence for the promisor
Defences available to promisor 2:
-3(2) that defences available to the promisor had the promisee been suing are also available for a third party's action
- Where a contract is void or unenforceable or has been discharged by frustration it cannot be enforced by the third party anymore than it could have been by the promisee
- 3(3) where the parties depart from the default position by an express term whereby the range of defences is expanded so that the defence does not need to arise out of connection with the contract
- 3(5) the parties can depart from the above default position by an express term whereby the range of defences is narrowed
- s3(4) this is a clarafactory provision dealing with defences and counterclaims that are specific to the third party i.e. would have not been available to the promisor in action by the promisee
Overlapping claims and the question of priority of action:
- There have been steps to reduce, if not eliminate the possibility of double liability on the part of the promisor. Where the third party has recovered damages from the promisor, the promisee's claim for damages is likely to fail on the ground that the promisee has suffered no loss. More difficult is the case where the promisee has sued and recovered damages from the promisor and the third party then brings an action against the promisor
- This is dealt in within section 5
- The aim of this provision is to protect the promisor against double liability
Rights of the promisee:
- Section 4 of the 1999 Act preserves the right of the promisee to enforce any term of the contract. Suppose that A and B enter into a contract under which in return for some act to be performed by B, A agrees to pay £50 to C. A failure by A to pay £50 to C will constitute a breach of contract between A and B
- This means that the promisee retains its rights to due on the contract even though it is enforceable by the third party. The third party's right is additional to and does not replace the promisee's rights
(1) to bring an action for damages for breach of contract, the difficulty here is that B does not appear to have suffered any loss as a result of A's breach and so his damages are likely to be nominal
- Thus, generally it will not be possible for the promisee to recover substantial damages for the loss suffered by a third party because a party is limited to recovering for losses it has suffered and the promisee's loss may be purely nominal
- There are two exemptions:
- Where, for reasons of convienicne a contract is made by one party for the benefit of a group of people, that person can recover substantial damages for the losses suffered by all members of that group
- Jackson v Horizon Holidays Ltd: this was where a family holiday was booked by a a husband on behalf of his wife and children where the holiday failed to meet contractual promises. The husband was able to recover for his won loss and that of his wife and children, although they were not parties to the contract
- Woodar Investment Development Ltd v Wimpey Construction UK Ltd: Wimpey had contracted to purchase development land from Woodar. The purchase price was £850,000 and £150,o00 was payable to the third party. The property market fell and it was argued that Wimpey had wrongfully repudiated the contract. The HL held that there had been no breach of contract and therefore did not decide whether woodar could recover for the third party's loss in addition to their own. The HL held that there was no substantial recovery in such circumstances. Lord Wilberforce recognised the contracts "calling for special treatment" i.e. "party convenience" contracts where substantial damages could be recovered
- The Alberzo Exception: a promisee can recover a third party's loss on a contract relating to property where the parties contemplated that the property in question would be transferred to the third party
- A is a land owning developer who has contracted with B for B to carry out work on the property. A sells the building to C so that C is the person suffering loss in the event that B defectively performs the building contract. However, A is not successful in its attempt to transfer the benefit of the building contract to C which would have transferred the contractual rights enabling C to sue B in his own right
- C who is the new building owner is the person who suffers the loss resulting from defective performance of the building contract by B
- This exception means that A nevertheless retains the right to sue B in respect of the defective performance of the building contract and can recover substantial damages despite not personally suffering a financial loss as a result of the breach
Rights of the promisee 2:
- An award of specific performance us an order of the court which compels the promisor to carry out his promise and the third party therefore gets the intended benefit under the contract resulting from this ordered performance. This is a discretional remedy and will only be awarded where damages would not be an adequate remedy. It has also no application to circumstances of defective product, where there is failure to perform the contractual obligation
Rights of the promisee, limitation:
- This follows where the new building owner or person suffering loss has a direct right of action against the contractor , the original developer cannot rely on the narrow ground to argue that it can also recover substantial damages, it is instead limited to recovering substantial nominal loss
- In the following case it was laid down that the exception does not apply where a third party has its own contractual right against the promisor
- Alfred McAlpine Construction Ltd v Panatown Ltd (HL): McAlpine had been employed by Panatwon to construct an office building on land belonging to UIPL, an associate company of panatwon, defects arose with the building and panatown sought damages. M claimed that P suffered no loss as a result of its breaches of contract because panatown neither owned the land or occupied the building. It should be noted that these companies were in the same group of companies and the contract was made with Panatown to avoid VAT. HL refused the recovery but the decision was based on the fact that McAlpine had entered into a separate duty of care deed directly with UIPL, giving UIPL remedies for defective work and that deed had to prevail
- Principle: HL held that normally the narrow ground in st martins enabled a party in the position of panatown to recover substantial damages. Where a contract between a builder and an employer was for the construction of a building the land of a third party who would own that building, the employer could seek substantial damages from the builder for defects where the third party had no direct remedy against that builder. The third party here had its own contractual right against the promisor (the deed)
Darlington Borough Council v Wiltshier Northern Ltd:
- The council owned land on which it wished to construct a leisure centre
- The council was unable to enter into a construction contract at this time due to restrictions on such local authority expenditure
- MG was engaged to enter into the construction contract, the contractor was fully aware that the centre was for the council and was being build on council land and the contractual rights were assigned from MG to the council
- The council fought to bring a claim against the contractor for defective work but needed to establish that MG could have recovered substantial losses despite not owning the land and therefore could transfer that right to the council via assignment
- The CA applied the St Martin's property exception to concluded that the assignor (MG) had the right to recover substantial damages. It was clearly contemplated by the contractor that the centre was being construed for the council on council land
- The collateral contract avoids privity by finding a separate collateral contract between the third party and the promisor relaying to the contractual obligation. This is where a separate contract coexists alongside the main contract.
- This is also the effect of a unilateral contract such as in The Eurymedon:
-contract between shipper and carrier containing the exemption clause
- collateral contract (shipper and stevedore - offer by shipper as to the benefit of the exemption, accepted by the Stevedore's unloading)
Shanklin Pier v Detel Products Ltd:
(1) Contract whereby the Ps (owner of the pier) employ the contractors to pain the pier and have the right to specify what paint is to be used
(2) contract between contractors and the Ds (paint suppliers) for the purchase of the paint (sale of goods contract)
(3) Collateral contract between the Ds and Ps based on the statement made by the Ds to the Ps that the Ds paint was suitable for painting the pier and that two coats would last seven years. The consideration of this contract was the instruction leading to the making of the contract
- It would cause great commercial hardship if a businessman who appointed an agent to enter a contract on his behalf was prevented by the doctrine of privity from suing upon that contract himself
- An agency relationship arises where one party, the agent, is authorised by another, the principal to negotiate and to enter contracts on behalf of the principal. Once an agency relationship is created, the agent thereby authorised to commit the principal to contractual relationships with third parties
- The general rule is that the contract is made between the principal and the third party and the agent cannot sue or be sued on the contract
- However, there are certain aspects of the law of agency which appear to flout out of the doctrine of privity. One such aspect is the rule that a principal may in certain limited circumstances, sue upon the contract even though the agent had not disclosed to the third party that he is acting as a agent for the principal
- The ability of a principal to ratify an unauthorised act of his agent is also said to be an exception to the doctrine of privity
Trust of contractual obligations:
- It may be possible to argue that a contracting party holds the benefit of a contractual promise in trust for the third party
- For example an argument involving Becky held the benefit of the delivery promise on trust for Charlie. If trust existed then Becky may sue Alex for trustee for Charlie
- However, there is no evidence to support the creation of such a trust since there must be an express intention to create a trust of the promise, the case of Re Schebsman  asserted this
- The court recognised this in the case of Nissin. The ship owners promised the charter that they would pay the broker commission but then refused to pay this. The broker's action was treated as if the charterers (as trustees of the brokers) had been added as Cs and so could not enforce the clause against the ship owners. The judge also confirmed that it did not follow from the recognition of a trust that there could therefore be no reliance on the direct enforceability rights contained in the 1999 Act
NEW TOPIC: FRUSTRATION
- A contract may be automatically discharged if during the currency of the contract, and without the fault of either party, some event occurs which renders further performance. For example, that makes it impossible, illegal or radically different so that the purpose of both parties is no longer possible and the contract becomes essentially different. A contract which is discharged on the ground of frustration is brought to an end automatically by the operation of the rule of law, irrespective of the wishes of the parties.
- It will be necessary to rule out "fault" on any part of any party since the frustration doctrine applies only where the event is "external" and occurs without the fault of either party
Frustration, force majeure and hardship:
- THERE ARE TWO PRINCIPAL REASONS WHY THE DOCTRINE OF FRUSTRATION HAS BEEN HARD TO IMPLEMENT
-The first is that the courts do not want to allow the doctrine to act as an escape route for a party whom the contract has simply become a bad bargain
- Davis Contractors Ltd v Fareham UDC : The C contractors agreed to build 78 houses for the D for £94,000. The work was scheduled to last for 8 months, but owing to shortages of skilled labour, the work to an extra 14 months to complete and cost around £115,000. The Cs in an attempt to recover the sum of money in excess of the contract price, argued that the contract had become frustrated. This was rejected by the HL. The principle of this is that shortages had made the contract more onerous to perform but had not altered the fundamental nature of the contractual performance. The shortages should have been foreseen so in absence of a risk provision, this was a risk which fell on the contractor.
Lord radcliffe analysis of Davis case....
- Lord Radcliffe stated that "hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing than contracted for"
- the doctrine of frustration still operates within narrow confines and that it is not lightly to be invoked. Frustration can be invoked only where the supervening event radically or fundamentally changes the nature of performance: it cannot be invoked simply because the performance has become more onerous
- The similar case of Tsakiroglou & Co Ltd v Noblee Thorl GmbH : contract was not frustrated by the closure of the Suez Canal as the seller could perform by shipping the goods via cape of Good Hope, although that would be more expensive and would take longer
Factors at which the court look at to see if a contract has become frustrated:
- (i) the terms of the contract itself (ii) its matrix or content (iii) the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then (iv) the nature of the supervening event and 9v) the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Factors (i) to (iii) can be described as "ex ante factors" while factors (iv) to (v) are post contractual
- - The second reason for the narrowness of the doctrine of frustrate is that we all know that the future is uncertain; prices may suddenly increase, inflation may rise, labour disputes break out. Contracting parties are expected to foresee many such possibilities when entering into a contract and guard against them in the contract
-Contracts today make a provision for the impact of unexpected events upon contractual performance, this is a clause called the force majeure clause
- Another clause which is in commercial contracts is a hardship clause and will lay down a procedure to be adopted by the parties in the event of such a hardship occurring
Benefits of the force majure and hardship clauses:
-For example it is often difficult to know whether ot not a contract has been frustrated. To an extent this uncertainty can be reduced by the parties agreeing a list of events which are to constitute force majeure or hardship events
-Frustration also operates within very narrow limits. The frustrating events and the width of doctrines such as self-induced frustration which deny to a party the ability to argue that the contract was frustrated, force majerure and hardship clauses give to the patois the opportunities should they want to avail themselves of it, to agree that a wider class of events shall constitute force majeure or hardship events
-The third advantage is that the parties can make provision for the consequences of the occurrence of a force majeure or hardship event. Frustration operates to drastically because it terminates the contract, irrespective of the wishes of the parties. Very often the parties want to continue their relationship but to adapt the terms to meet the new situation
-Hardship and intervener clauses are particularly well suited to contracting parties who wish their relationship to continue through changing circumstances. The remedial rigidity of the doctrine of frustration contrasts unfavourably with the flexibility which can be obtained by drafting an appropriate force majeure or hardship clause
Is frustration a sterile doctrine?:
- It must be noted that the scope of frustration is being expanded such as with the HL decision in the case of National Carriers v Panalpina (Northern) Ltd . In this case it was held that a lease of land could be frustrated. In the case the D's leased a warehouse from the claimants for 10 years. In 1979, owing to the dangerous condition of the derelict warehouse opposite the only vehicular access to the warehouse was closed, so that the other warehouse could be demolished. It was closed for a total of 20 months. In 1979 the Ds stopped paying for the lease as they argued that the contract had become frustrated. In dismissing the D's appeal it was held (unanimously) that the interruption here was not sufficiently grave to constitute frustration - as there was still 3 years of the 10 year lease. The Cs were therefore entitled to their unpaid rent. However, in this case it was debated that the type of lease which might be frustrated is a lease of a holiday flat or some other lease of short duration. In any event, the tenant failed: the loss of 20 months out of a 10 year term was held not to be serious enough to fall within the doctrine of frustration.
Is further performance of the contract impossible:
-A contract which has become impossible of performance is frustrated such as in the case of Taylor v Caldwell: In this case the D's granted the Cs a license to use the "Surrey Gardens and Music Hall" for a series of concerts at a fee of around £100 per concert. After the contract had been concluded but the first concert was yet to be performed the music hall was accidentally burnt down by a fire and it was impossible to stage the concerts. It was held that the frustrating event released both parties of their obligations
- Is there an agreed means of performing the contract and this becomes unavailable, the contract will become frustrated
- For example in Nickoll & Knight v Ashton, Eldridge and Co: shipment to be made on a specified ship which was stranded at sea
- Is this a personal performance, where ahead of the performance the performer dies or has permanent illness preventing performance on the date of question such as Robinson v Davidson: contract to play the piano at a concert at a particular day. The pianist was unable to play due to illness and this was successfully pleased as a defence of the breach of contract
Is further performance of the contract impossible 2:
-Temporary unavailability of the subject matter may also frustrate a contract such as in the case of Jackson v Union Marine Insurance Co Ltd: here a ship was chartered in Nov 1871 and was required to proceed with all possible dispatch from Liverpool to Newport , and there load a cargo for carriage to San Francisco. On the way to Newport the ship run aground and was not fully repaired till around August, It was held that the contract was frustrated as it was not available for the voyage of which it was chartered for
- When the contract is one of fixed duration and the unavailability of the subject matter is only temporary, the court must, in deciding whether the contract has been frustrated, consider the ratio of the likely interruption in contractual performance to the duration of the contract, the higher the ratio the more likely that the contract will be frustrated
-In The Nemo a charterparty was frustrated when a long strike close the port at which the ship was due to load so that, of the six or seven voyages contracted to be made between April and December, no more than two could be completed
Has the common purpose of both parties been ended by the subsequent event?
-When the common purpose for which the contract was entered into can no longer be carried out because of some supervening event the contract may be frustrated
-This was the case in Krell v Henry: in this case a contract to hire rooms advertised as rooms to see the coronation procession of Edward VII was frustrated when the coronation was postponed because of the king's illness. The CA held that the viewing of the procession as the "foundation of the contract" for BOTH parties. The principle of this is that a contract may be frustrated if the common purpose of BOTH parties has been destroyed by the event. It is not enough that the purpose of ONE party is destroyed.
- This can be contrasted with that of Herne Bay Steam Boat Co v Hutton: in this case, the D wanted to hire the C's vessel for two days, the first day was to take out a party to view the royal naval review at Spithead and the second day was of similar purposes. The naval review was cancelled because of the king's illness, although the fleet remained at Spithead. The D argued that he did not require the vessel and refused to pay the agreed balance. The C sued for the money and the CA allowed him the £110 in damages
The difference between these two cases is that the Krell the "foundation of the contract" as the viewing of the coronation. However, the contract in Krell was an extremely unusual one. The rooms were hired out for the day, excluding the night, and the only purpose for BOTH of the parties had in entering into such an unusual contract was to hire the rooms for the purpose of viewing the coronation. With Herne the D could still see the fleet, and, the D's motive in entering the contract to see the naval review, it could not be said that is was the "common foundation of the purpose"
Is further performance of the contract illegal?:
- If during currency of the contract, a change in law renders further perforce illegal, the contract will be frustrated for subsequent impossibility
-In the case of Fibrosa Spokla Akcyjna v Fairbairn Lawson Combe Barbour Ltd: in this case the respondents agreed to manufacture machines for the appellants and to deliver them to Poland. Before the respondents had completed the manufacture of the machines there was the outbreak of WW2. It was held that the contract was frustrated because in time of war it is against the law to trade with the enemy. In this context the concern of the court was with public policy considerations, particularly ensuring that the law is observed.
-Where the illegality is only temporary or partial, the contract will be frustrated only if the illegality affects the performance of the contract in a substantial or fundamental way
The limitations on the doctrine of frustration:
- Was the frustrating event foreseen by the parties - or by one of the parties and not provided for?
- The first is that a contract is not frustrated where the parties have made express provisions for the occurrence of that alleged frustrating event in their contract. A frustrating event is a supervening, unforeseen event; it is not a event which has been anticipated in the contract itself
Metropolitan Water Board v Dick, Kerr and Co :
- here the contractors agreed to contract a reservoir in six years. The contract provided that, in the event of delay "whatsoever and howsoever occasioned" the contractors were to apply to the engineer for an extension of time. When the contractors were required by government order to stop work and to sell their plant, it was held that the contract was frustrated because the delay clause was not intended to apply to such a fundamental change or circumstances. It was held that the clause was intended to cover only temporary difficulties and did not cover fundamental changes in the nature of the contract
-So the courts insist that provision for the event be "full and complete" before frustration if excluded, and the greater the magnitude of the event, the less likely it is that it will be held to fall within the scope of the contract
Walton Harvey Ltd v Walker and Homfrays Ltd :
- Given that a frustrating event is a supervening, unforeseen event, the doctrine not ought to apply to an event which is within the contemplation of the parties at the time the contract was concluded
- it was considered that the contract between the parties had not become frustrated by the compulsory purchase and demolition of the hotel because it was within the contemplation of the D
What if the parties should have foreseen the event but neither made express provision to deal with it? Is this risk allocation or does the doctrine of frustration apply?
(a) it has been suggested with house of lords authority that a contract would not be frustrated in these circumstances. In Davis Contractors the shortage or labour and materials was foreseeable but since there was no express contractual provision to provide for it the contracts had taken this risk on themselves and the contract was not frustrated
Self induced frustration:
- A party cannot invoke the doctrine of frustration where the alleged frustrating event is brought about through his own conduct or the conduct of those for whom he is responsible
-Where the frustration is held to be "self-induced", the consequences is that the D is unable to rely on frustration and so, in the absence of any other defence, will be found in breach of contract
-Thus a negligent act by the defendant will generally amount to self induced frustration because such an event is not "altogether outside the control" of the defendant
-Self induced frustration can be seen in the case of Maritime National Fish Ltd v Ocean Trawlers Ltd : here the Ds chartered a ship from the claimants but the vessel could only be used for its intended purpose it was fitted with an otter trawl. An otter trawl could only be used under licsne, although the Ds applied for license for the five vessels which they operated, they were allocated only three licenses. They elected ti apply the licenses to the trawlers which they owned directly or indirectly rather than to the vessel chartered from the claimants. The claimants sued for the hire due under the terms of the contract but the defendants denied liability to pay on the ground that the contract had been frustrated by their failure to obtain license. The Privy Council held that the contract was not frustrated as a result of the D's failure to obtain a license for the vessel; this was a case of self-induced frustration
Self induced frustration can come about with the mere existence of a choice may be sufficient to establish self induced frustration:
The Super Servant Two': The Ds agreed to transport the C's oil rig using at their option either super servant one or super servant two. Prior to the time of perforce of the contract the D's decided to allocate super servant one to the performance of other concluded contracts. Unfortunately, after the contract had been concluded but before the time fixed for performance, super servant two sinked so the contract was evtually perfumed by another, more expensive method of transportation. The Cs brought an actions against the Ds alleging that they were in breach of their contract in failing to transport the rig in the agreed manner. The Ds denied liability on two grounds, the first was that the contract had been frustrated by the sinking of SS2. The CA held that this did not frustrate the contract as it was the choice of the Ds to allocate SS1 to the performance of other contracts - this was held to be self induced frustration. However, the D's had a second defence which was that they were entitled to terminate performance of the contract without incurring any liability under the terms of a force majeure clause contained in the contract. One of these was "perils or dangers and accidents of the sea". This clause gave to the Ds an effective defence to the C's claim for damages
Given the narrow confines within which frustration currently operates, SS2 demonstrates that a contracting party who wishes to be released from his obligations to perform in a wider range of circumstances must bargain for the inclusion of a force majeure, hardship or intervener clause in the contract
The effects of frustration:
- What about the position of obligations which had arisen prior to frustration, expenses incurred and any performance conferred
-One needs to look at claims where money paid prior to the frustration of the contract was recoverable upon a total failure of consideration. A total failure of consideration arises where a party seeking recovery has got no part of what he has bargained for
-Such as one may look at the case of Fibrosa, the appellants sought to recover the £1000 they had paid to the respondents in signing the contract. The HL held that the consideration of the payment had wholly failed because the machines had not been delivered to the appellants and that they were entitled to the recovery of their prepayment
- However, there are two principal defects of this, firstly that the payer could only recover the money paid upon a total failure of consideration; where the failure was only partial he could not recover. The second is that the payee could not set off against the money to be repaid any expenditure which he had incurred in the performance of the contract
- This position has been rectified by the enactment of section 1(2) of the Law Reform (Frustrated Contracts) Act 1943, the first is that moneys paid prior to the frustrating event are recoverable. The second is that sums payable prior to the time of discharge cease to be payable. The third is that the payee may be entitled to set off against the sums so paid expenses which he has incurred before the time of discharge, in, or for the purpose of, the performance of the contract. S1(2) meets the two deficiencies of the common law in that the right to recover money is not confined to a total failure of consideration and the payee can set off against the sums repayable any reliance expenditure which he has incurred in the performance of the contract
(1) the expenses must have been incurred prior to termination in or purpose of performing the contract
(2) the amount of sums paid or payable prior to discharge is the maximum that can be retained or recovered in respect of expenses incurred
(3) the court has an overall discretion to be exercised according to how much if any expenses are recoverable
What about when the payment under a contract was to be made on the completion of the work and frustration occurred before the work was completed, then no payment could be recovered at common law:
- The case is Appleby v Myers : The Cs contracted to make and erect machinery in the Ds factory and to maintain the machinery for two years. Payment was to be upon completion of the work. After part of the machinery had been erected, an accidental fire destroyed the factory and machinery and frustrated the contract. It was held that the Cs could not recover in respect of their work because they were only entitled to payment when performance was completed and as the fire had prevented completion of the work, they were not entitled to payment. This rule caused obvious hardship to the provider of services under a frustrated contract and it has since been replaced by section1(3) of the Law Reforms (Frustrated Contracts) Act 1943. (3)Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular,—
The Law Reform (Frustrated Contracts) Act 1943:
1. Recovery of advance payments:
- This is seen in section 1(2), recovering paid money in advance
- 1(2) meets the two deficiencies of the common law in that the right to recover money is not confined to a total failure of consideration and the payee can set off against the sums repayable any reliance expenditure which he has incurred in the performance of the contract
- However, it the party to whom the sums are paid or payable, incurred expenses before discharge in performance of the contract, the court may award him such expenses up to the limit of money paid or payable before the frustrating event
- Gamerco SA v I.C.M/Fair Warning (Agency) Ltd: there was a concert by Guns N roses at a stadium in Madrid and this was cancelled due to safety issues with the stadium. The promoters had already paid $412,000 and had incurred expenses of $450,000 prior to the cancellation. Ds had the expenses of $50,000. It was held that the contract was frustrated and the Ps could recover advance payment under s.1(2). There was no deduction for Ds' expenses under the proviso bearing in mind that Ps expenses of recovering $450,000 which they had no way of recovering. The principle here is that s.2(1) and the exercise of the discretion to permit expenses to be retained before the return of the advance payment to the payer
2. Recovery for performance prior to frustration:
- A performing party can recover for his pre-frustration performance
- Only where this performance confers a valuable benefit on the party receiving performance
- Recovery is subject to the court's discretion
- - The basic effect is that where one party to the contract has conferred upon the other party a "valuable benefit" before the time of discharge, he shall be entitled to recover a "just sum" which shall not exceed the value of the benefit which he has conferred upon the other party
- There are two steps involved in a s1(3) claim, the first was the identification and valuation of the benefit, this could apply to either the value of services performed or it could be the end product of services. There are two circumstances where a court could have regard to the value of the services in identifying the benefit, the first arising where the service by its very nature does not result in an end product and the second where the service results in an end product which has no objective value. If the end product is destroyed by the frustrating event, the provider of the services has no claim under s1(3) because of the value of the benefit has been reduced to zero by the frustrating event
-The second step in section 1(3) claim is the assessment of a "just sum"
-Robert Goff J sought to provide a measure of certainty by stating that the aim of the court in assessing the just sum ought to be "the prevention of the unjust enrichment of the D at the C's expense"
BP Exploration Co (Libya) Ltd v Hunt:t
- P oil company had agreed to explore for oil and develop D's oil concession in Libya. With this agreement BP undertook to transfer certain contributions in cash and oil and when the oil came on stream the profits would be shared. P sound considerable sums drilling for oil and found it. However, the Libyan government then expropriated BP's half of the concession, two years later Hunt's share was exproportionated, BP held that the contract was frustrated. P sought under a "just sum" s.1(3) for the benefit it had conferred on D prior to frustration. It was held that contract had been frustrated and the Act applied. The principle here is that the decision is of greatest significance for what is is said in the judgement about the purpose of the Act and calculation of a just sum under s.1(3). The court considered the setting of damages where the plaintiff had delayed in notifying the defendant of the claim. Interest is awarded not as a punishment but to compensate a claimant for having been deprived of the money which was due to him, though: "The basic principle, is, however, that interest will be awarded from the date of loss."
are (a) receipt by the defendant of a benefit (b) at the plaintiff's expense, (c) in such circumstances that would be unjust to allow the defendant to retain the benefit."
In a claim for unjust enrichment, the formulation of the requirements of the cause of action are: (a) receipt by the defendant of a benefit (b) at the plaintiff's expense, (c) in such circumstances that would be unjust to allow the defendant to retain the benefit.
Consequences of the approach adopted by Robert Goff J:
- Goff J considered that the Act was concerned with preventing unjust enrichment which meant allowing recovery of no more than the value of any benefit received from performance. He defined "benefit" as the end product of services. It follows that, on this view, if there is no valuable benefit because the effect of frustration is to destroy it, then there can be no s.1(3) award of a "just sum"
The Eugenia :
- The Suez canal became a 'dangerous zone' as The Eugenia, carrying iron and steel, sailed towards it on the way to India from Odessa (but starting in Genoa). The charterers, in breach of a 'general war clause' in the contract saying dangerous zones should be avoided, sailed into Port Said, thinking they could make it through the canal in time. The alternative was to sail around the Cape of Good Hope, which would have taken a long time. The ship was impounded as the canal was closed. The charterers then abandoned the contract and claimed it was frustrated. The claimant owners of the iron and steel claimed it was breach of contract. Lord Denning MR held that there was no frustration of the contract. First, that the charterers could not rely on any self-induced frustration (sailing into the canal) as a ground for arguing the contract was frustrated. If they had not tried the Suez canal, they would have had to sail round the Cape, but this would not have rendered the contract radically different. He said if the contract says something, 'the contract must govern. There is no frustration.' But if the contract says nothing, onerous or more expensive is not enough, 'It must be positively unjust to hold the parties bound. It is often difficult to draw the line. But it must be done, and it is the courts to do it as a matter of law: see Tsakiroglou.' He said that the material factors were that the difference in time was 108 days from Genoa via the Suez and 138 days via the Cape. The goods would not be adversely affected. The only trouble was it took longer. He firmly rejected, however, that frustration can only apply where the event is unforeseen or
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