TABLE OF CONTENTS
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WHAT IS CONTRACT LAW ALL ABOUT? LAW OF CONTRACT, LAW OF CONTRACTS OR THE LAW
LAW OF CONTRACT, LAW OF CONTRACTS OR THE LAW RELATING TO CONTRACTS? The phrase ‘the law of contract’ might suggest that there is a single model of contract law applicable to all types of contract. Indeed, the assumption that there is a single model of contract law underlies the 19th century ‘classical
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to govern the relationship between the parties. Instead, some other aspect of the law may have to be invoked in order to resolve the issue. What this serves to illustrate is that the law of contract is not just about making contracts and that there are overlaps with other areas of law concerned with private law rights and obligations. Thus, where a contract fails, it may be the case that there has been a partial performance by one party which has conferred a benefit on the other. If the contract itself is unable to determine how this is to be paid for, it may be necessary to have recourse to restitutionary principles instead. Furthermore, other aspects of a wider law of civil obligations may impinge on the parties to a contract. For example, although the doctrine of privity of contract states that only the parties to a contract may sue and be sued on that contract, there is nothing to prevent the application of rules from another
A primary concern of contract law is the enforcement of promises and it is this concern which dominates the classical theory. The parties make an agreement by the process of offer and acceptance, under which a number of promises are exchanged. This model of the contractual relationship naturally emphasises the voluntary nature of the transaction. Each party to the contract freely
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my promise. Other examples of reliance liability can be found where there is an attempt to vary the terms of a long term contractual arrangement. One of the problems which may arise in this context is that one of the parties promises to vary the existing terms of the contract, for example, by agreeing to pay more than that which was originally contracted. However, applying classical rules, the other party must give consideration for that promise. Unfortunately, what may be given in return for the promise is little more than continued performance of the existing terms of the contract which, in classical terminology, does not involve a true exchange. However, through the application of rules on promissory estoppel, if the promisee relies upon the promise of the other party, that promise may become enforceable to the extent that is necessary in order to achieve a fair result. IDEOLOGIES OF CONTRACT LAW
Some of the extracted materials in later chapters reveal differences in approach between members of the judiciary. One of the possible reasons for these conflicts is that judges may approach a given set of facts from differing ideological positions. In the extract which follows, the authors identify four different ideologies, which to a greater or lesser extent may colour the way in
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voluntarily entered a relationship so that it is reasonable to impose liability for failing to take care when preparing and delivering advice to another. PROTECTED INTERESTS
A further method of distinguishing contractual obligations from those which exist in other branches of obligations law is to consider what interests are protected by a particular set of rules. Generally, it is said that the law of contract is primarily concerned with the claimant’s expectation interest. Accordingly, the normal measure of damages for a breach of contract is
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defendant was nonetheless liable in damages for the loss suffered by the plaintiff. This could not be said to represent status quo loss, since, before the wrong was done, the plaintiff had no interest in the testator’s property. Accordingly, there was no status quo to restore. Instead, what the plaintiff was awarded was a sum which put her into the position she would have been in had the defendants done what they were required to do on behalf of the testator, their client. CONCURRENT CONTRACTUAL AND TORTIOUS LIABILITY
It is sometimes the case that the conduct of the defendant amounts to the commission of a tort and a breach of contract at the same time. In these circumstances, there is said to be concurrent liability. Thus, where there is a contract for the supply of services, there is both a tortious duty on the supplier
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PART II CONTRACT FORMATION AND NEGOTIATION
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AGREEMENT
Conventional wisdom dictates that at the core of the notion of contract lies the idea of agreement. For example, Treitel writes: In similar vein, the current edition of Cheshire, Fifoot and Furmston states:
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The tension between the conventional view of contract as being agreement or promise based and the pragmatism often exhibited by the courts in practice will feature at many points during this chapter. However, on the assumption that contract is, in some sense, based on agreement, it is necessary to examine how such agreements are formed. OFFER AND ACCEPTANCE
Agreements in the above sense are usually thought to arise via a process of offer and acceptance; a proposal by one party which is, eventually, assented to in broadly the same terms by the other party. It might be thought that the law would require an actual subjective intent to be bound (on either side) by the proposed contract, for there to be in the well known (if misleading) phrase, a
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example, by stating the price at which they might be prepared to sell a house) or, more obviously still, may request such information (for example, as to whether goods or services are available). The common practice of
The classic authority is that of Pharmaceutical Society of Great Britain v Boots The defendant carried on a business comprising the retail sale of drugs at premises at Edgware, which were entered in the register of premises kept pursuant to s 12 of the Pharmacy and Poisons Act 1933, and from which they
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Advertisements
The legal position here mirrors that of retail displays (to which it is closely related). Indeed, in Partridge v Crittenden, Lord Parker CJ stated that he came to this conclusion ‘with less reluctance’ than in retail display cases, since ‘when one is dealing with advertisements and circulars, unless they indeed come from manufacturers, there is business sense in their being construed as
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bid would be accepted. One of the rivals (Harvela Investments Ltd) made a bid of $2,175,000; the other (Sir Leonard Outerbridge) made a bid of $2,100,000 ‘or $101,000 in excess of any other offer ...’. The first question for the courts was the legal result of the ‘referential’ element of Sir Leonard’s bid. The House of Lords unanimously held that this could and should be discounted as being incompatible with the spirit of fixed and sealed bidding and, in practice, unworkable if adopted generally. The second question was the result of the Royal Trust Co having committed themselves to accept the highest bid (now Harvela’s). Again, the House unanimously held that it did involve binding legal obligations of a distinct, personal nature. Unilateral offers
From time to time in the cases and elsewhere in these materials, the concept of the ‘unilateral contract’ is discussed. If taken literally, this would indicate a ‘one sided’ contract, an idea which fits very uneasily with the idea of contract as being based on agreement. In truth, what is really being discussed is a ‘uni- promise’ contract – the key distinction between a ‘unilateral’ and a ‘bilateral’
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ACCEPTANCE
At its simplest, an acceptance is an unconditional assent to the terms proposed in the offer. Much of the relevant law is reasonably straightforward and capable of being reduced to a series of propositions. In essence, a valid acceptance comprises the following elements:
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The case is interesting for a number of reasons. First, it indicates that a promise to hold an offer open is not binding, unless contained in a deed or given for some consideration in return (see Chapter 3). Secondly, it clearly indicates that the offeror need not communicate his/her revocation personally, nor even attempt to, so long as objectively clear information reaches the offeree (it is not clear whether any source of such information will suffice). Thirdly, in the judgments there is an undoubted tension – in
An outright refusal of an offer brings the offer to an end, so that it is not open for subsequent acceptance. Likewise, a counter-proposal (counter-offer) is seen as functioning as a rejection of the original offer. The basic approach of the courts is demonstrated clearly in Hyde v Wrench, where Wrench (on
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Acceptance by conduct
The core idea in acceptance is that it is an unconditional assent to an offer. The concept of assent might suggest that there must always be a written or verbal response by the offeree to the offer to conclude a contract. A moment’s reflection, however, indicates that there are a large number of situations which are contractual on any rational analysis, and yet in which the establishing of a
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clear that the offeree did intend to enter into a contract However, where it is clear that the offeree does have such an intention (as was surely the case in Felthouse), an inflexible rule that silence is not acceptance is hard to justify. In the US, the Restatement of Contracts takes the approach that:
In this area, at least, there is not even the pretence of promise-based agreement (at least not on the part of the offeree). As Bowen LJ in Carlill v required by the offeree lies in performance of the task(s) specified by the offeror. The willingness of the courts to countenance the unilateral contract
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contracting. It appears that for this principle to operate, the course of dealings needs to be long, continuous and consistent. It also seems implicit in the cases that it is considerably easier to advance this argument in a commercial context rather than a consumer one (where it is far less reasonable to assume that information in the small print would put someone on guard).
It was indicated at the beginning of this chapter that (whatever the precise meaning of contract) the common law adopts a broadly objective test as to contract formation. It follows from this that merely because one party mistakenly believes some fact of the contract (for example, the precise nature
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THE ENFORCEMENT OF PROMISES
On the assumption that the law of contract is primarily concerned with either the enforcement of promises or giving a remedy where there has been a breach of a promise, it is necessary to determine which promises will be given legal recognition in the form of an available remedy and which will not. REASONS FOR ENFORCING PROMISES
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Other similar provisions allowing for cancellation of concluded, executory contracts can be found in ss 5 and 6 of the Timeshare Act 1992 and the Consumer Protection (Cancellation of Contracts Concluded Away From Business Premises) Regulations 1987. In the commercial sector, there are probably stronger reasons for enforcing mutual promises, especially since there is generally an expectation that a person who makes a promise expects to have to keep it and he can assume that the same goes for any other business contracting party. The idea that promises give rise to expectations is an integral part of the bargain theory which is considered in more detail below, but there is also a school of thought which emphasises the moral nature of the practice of promise keeping rather than the economic nature of promises as part of the process of bargaining. This alternative approach can be described as the ‘will theory’ which turns on the internalisation of the enforcement of promises – the reason for enforcement is moral compulsion of having promised something in the first place.
The common law has never embraced the view that, in general, contracts have to take any particular form, and there are relatively few types of contract today to which specific rules as to form exist. On one argument, a legal system which adopts rigid requirements as to the form of contracts may be regarded as primitive and less well developed. However, this is not necessarily true
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decide what contracts should be subject to formal requirements. This can cause particular difficulties where contracts of different varieties with similar characteristics are subject to different rules as to form. For example, contracts of guarantee are very similar to contracts of indemnity, yet the latter may be made orally, whereas the former must be evidenced in writing. Accordingly, a number of very fine distinctions have grown up between the two types of contract in order to avoid the problem of unenforceability. CONSIDERATION
Since, for the most part, contracts do not have to take any particular form, some other means of distinguishing enforceable promises from the unenforceable has to be employed. For the purposes of English law, this mechanism is provided partly by the rules on consideration. The rule is that for a promise to be enforceable, consideration must be furnished by the
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party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus, given for value is enforceable’:
Since contractual obligations are generally said to be enforceable only if voluntarily undertaken, it follows that a promise which has been given under illegitimate pressure will not be enforceable. Whilst this issue is of some importance in determining whether there is a good consideration for a promise, the matter of voluntariness is pertinent to the application of rules on
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example, it should become clear that some non-bargain promises are now enforceable with the result that reliance by the promisee on the fulfilment of the promisor’s promise or the receipt of a valuable benefit by the promisor may now be sufficient reasons for the enforcement of a promise, despite the fact that there is no obvious bargain between the parties. Bargain promises Consideration need not be adequate
Hamson states that ‘Consideration, offer and acceptance are an indivisible trinity, facets of one identical notion which is that of bargain. Indeed consideration may be explained as merely the acceptance viewed from the offeror’s side. Acceptance is defined to be the doing of an act (which may be the giving of a promise or the rendering of a performance) which is requested
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to interfere with the arrangements made by the parties, even where the contract might appear to have been made at an undervalue. Generally, the refusal of the courts to take account of the apparent inadequacy of consideration has been applauded by economists on the basis
The rule that consideration must be sufficient, but need not be adequate appears at first to be contradictory. The extent to which there is more than a verbal contradiction depends on the meaning to be ascribed to ‘sufficiency’. Broadly ‘insufficiency’ in this context means that what is given in return for the promise must have some value, in the eyes of the law. Does this mean that
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good consideration. However, the bargain theory does not cover all cases in which there has been held to be a good consideration. Economic value
The approach taken by the courts has been that the consideration for a promise must have some value in the eyes of the law. This might be taken to mean that in order to amount to a good consideration, what is given must have some economic value. Thus, it has been held that natural love and affection cannot constitute a good consideration. The justification for this
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owner or sniffing a smoke ball have to be proved to be of economic value to the person promising the reward. Indeed, in Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256, p 271, Bowen LJ stated ‘Inconvenience sustained by one party at the request of the other is enough to create a consideration’. (Of course, on the facts, he also felt the company received a benefit at least indirectly, because the use of the smoke balls would help promote their sale. This would have some ascertainable economic value.) Performance of existing duties owed by law
A number of 19th century decisions suggest that if the promisee simply performs that which he is legally bound to perform, he will provide an insufficient consideration for the promise of the other party. Thus, if a witness agrees, for reward, to attend court in order to give evidence on behalf of the promisor, the promise of the latter will be unenforceable because it is given in
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Consideration must move from the promisee
The most overtly bargain-based rule of the doctrine of consideration is that consideration must move from the promisee, that is, the reason for enforcing the promise must be found in the acts, omissions or words of the promisee. This, of course, envisages a bilateral relationship between the contracting parties and is very closely related to the doctrine of privity of contract, since if
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Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB, CA, p 11
Classical contract law can be said to be based on the values of individualism and freedom of contract, which leaves a contracting party the antagonistic
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Effects of reliance
It has been seen above that where action in reliance on a promise has been requested, there will usually be a sufficient consideration to justify the enforcement of the promise. But reliance may also justify judicial intervention in favour of the promisee by means other than through the use of the doctrine of consideration. In particular, the different varieties of estoppel have the
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NEGOTIATING IN GOOD FAITH DISCLOSURE OF MATERIAL FACTS AND THE REQUIREMENT
Subject to some exceptions, English law has never adopted a requirement of good faith in contractual negotiations. Unlike in civilian legal systems, the fundamental principle pacta sunt servanda, which forms the basis of an principle of good faith, was never regarded with any great significance by the common law courts. Indeed, it has been observed recently that the
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remains substantially intact with the result that, except in a small number of cases, there is no duty to disclose facts peculiarly within the knowledge of one of the parties, due in part to the historical strength of the common law rule of caveat emptor. Whilst there is a well established rule that a contracting party must not actively mislead the other by means of an actionable misrepresentation, English law has not gone down the road requiring contracting parties to reveal to the other all facts relevant to the contract which is being negotiated. DISCLOSURE OF MATERIAL FACTS AND THE REQUIREMENT OF GOOD FAITH
As a general rule, English law does not impose upon the parties to a contract a general duty to disclose information to the other party to the contract. Instead, due to the influence of the principle caveat emptor, it is the duty of each party to look after his own interests and exercise his own judgment in deciding
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Insurance
Insurance contracts are said to be contracts uberrimae fidei or contracts of utmost good faith. As a result, there is a duty of disclosure on both sides of the contract. But the most important aspect of the duty is that a person proposing insurance must disclose all facts material to the insured risk. The justification for this approach is said to be that the insurer is engaged in a
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party to enter into a contract with him. In these circumstances, the primary remedy is that of rescission of the contract, but, depending on the nature of the misrepresentation, there is also the possibility of an action for damages, either as of rightor at the discretion of the court.
It is said to be an essential requirement of an actionable misrepresentation that it should be a statement of fact. Because of this rule, there are a number of types of statement which will not give rise to a remedy for misrepresentation. In the first place, a promise as to the future or a statement of intention is not a
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action for damages for misrepresentation, unless the court was able to discover a contractual promise or if the case fell within the tortious rules on negligent misstatement established in Hedley Byrne & Co Ltd v Heller & Partners Ltd. Inducement
The second essential requirement of an actionable misrepresentation raises a causal issue, namely has the misrepresentation induced the other party to enter into the contract? In this respect, the misrepresentee bears the burden of proving that it was the misrepresentation that induced him to enter into the contract. It follows that, if the misrepresentee admits that he took no notice of
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to read the accounts and, had he done so, he would probably have discovered the extent of the defendant’s misrepresentation. It was held, nonetheless, that the plaintiff had relied on the false statement and was therefore entitled to rescission of the contract. If Redgrave v Hurd was decided today, it might be necessary to reconsider whether the court was correct in reaching this conclusion. It is clear that the common law counterpart of a misrepresentation, namely the negligent misstatement, requires reasonableness of reliance. At the very least, this issue should be ‘centre stage’ today. How would it be resolved? Policy dictates that if the misrepresentation is fraudulent an opportunity of inspection (spurned or taken) should not bar reliance on the misrepresentation. To hold otherwise would be a green light for the more effective ‘con artist’! If, on the other hand, the misrepresentation is wholly innocent (particularly if greater expertise resides in the representee) reliance may not be reasonable. As regards negligent misrepresentation, the policy to be adopted is not clear; perhaps the answer lies in the respective skill and knowledge of the parties, particularly as it has now been recognised that at least for the purposes of an action under s2(1) of the Misrepresentation Act 1967, apportionment of damages for contributory negligence is a possibility.
Generally, the common law is concerned with the issue of procedural as opposed to substantive unfairness in the sense that where a requirement of fairness is imposed, it is generally regarded as a matter which relates to the formation of a valid agreement. However, a feature of many aspects of
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PART III OBLIGATIONS AND RISKS
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THE TERMS OF THE CONTRACT
In this chapter and Chapter 6, it is proposed to consider the issue of judicial construction of contracts with a view to the allocation of risks of loss. A preliminary issue is to identify those statements made in the course of negotiations which are to be classified as terms of the contract. In this regard, it is important to distinguish between terms and representations. Terms are
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example, in Clark v Lindsay, the plaintiff had purchased a ticket giving him access to premises which overlooked the route of King Edward VII’s coronation procession. The procession was cancelled and the question arose whether the plaintiff was entitled to recover the £50 he had paid. It was held that, normally, the contract would have been void on the basis of a common mistake of fact that, unknown to the parties, it was inevitable that the procession would be postponed at the time the contract was made (on such mistakes, see, further, Chapter 6). This would have enabled the plaintiff to recover his money. However, on learning that postponement was likely, the parties had varied the contract by inserting a clause entitling the plaintiff to the room whenever the procession took place. This precluded the normal operation of the law on mistake. TERMS AND REPRESENTATIONS
The history of the distinction between contractual terms and mere representations is important as it serves to explain some of the more extreme interpretations of what is a contractual term. For present purposes, the watershed date is 1967, when the Misrepresentation Act was passed. Prior to that date, unless it could be proved that a non-contractual representation had
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longer the period of delay, the more likely it is that the statement will lose some of its force, with the result that it is more likely the statement will be regarded as a representation rather than a term of the contract. CERTAINTY OF TERMS
In any process of interpretation, the raw material with which the courts are to work must sufficiently clearly express the intentions of the parties. It has been seen already that in determining when contractual obligations arise, an important factor is often whether or not an agreement has been reached. One particular problem which may arise in this regard is that the language used by
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that there is an operative mistake. For example, in Raffles v Wichelhaus, the parties contracted for the sale of goods to be shipped on board a vessel called Peerless which was due to sail from Bombay. In fact, there were two ships by the name of Peerless, one of which was due to sail in December and the other in October. The parties each had a different ship in mind. On these facts, it was held that there was no contract. It might not, however, take much to alter the facts of the case to reveal a situation in which the court would almost certainly find evidence of agreement on an objective basis. Suppose, for example, the contract had been one for the sale of oil, one of the ships was an oil tanker and the other was a general cargo vessel. In these circumstances, an objective understanding of the agreement would lead the reasonable man to believe that the parties had in mind the use of the oil tanker in performance of the contract. Although as a general rule, the courts will strive to keep the contract alive by seeking to resolve the ambiguity, it may not be possible to choose between the rival interpretations. In this case, the contract is likely to fail on the ground that there is no finalised agreement. In such a case, the court may be forced to apply restitutionary principles in order to determine how a particular risk of loss is to be allocated. For example, in Lind (Peter) & Co Ltd v Mersey Docks & Harbour Board, construction work had commenced under the terms of a
Where a term in a contract is meaningless or unintelligible or where the court is unable to select between a number of reasonably possible interpretations of it or where the terms of the contract require further agreement between the parties so as to allow implementation of the term, it is said that the term is uncertain. The consequence of uncertainty or vagueness is that either the
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agreement to sell land for £500,000, the price to be paid in three instalments of £250,000, £125,000 and £125,000. It was further agreed that a proportionate part of the land would be released at each payment date. The parties had made no provision for allocation of the proportionate parts, with the result that the contract was held to be void for uncertainty. In these circumstances, no actual benefit, apart from a mere expectation, would have been conferred on either party; therefore, there was no urgent need to look for an implied solution. EXPRESS TERMS
Where the parties have entered a contract, a number of statements may have been made, some of which form part of the contract, which, in the event of breach, will give rise to a remedy for breach of contract. In contrast, other statements may have a lesser effect if interpreted to amount to no more than a representation which has induced the other party to enter into the contract
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Terms implied in fact
These are terms implied on a one-off basis so as to give effect to the presumed intention of both parties. For the most part, such terms need to be so obvious that, if an officious bystander suggested the term should be implied, both parties would immediately agree to its implication. It is apparently insufficient that the term sought to be implied is a reasonable one as this
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professional valuers who would apply objective standards in coming to their assessment. However, it is clear that, were the language used by the parties explicit and clear, it is largely impossible to imply ‘reasonable’ terms which contradict the clear language of the contract. If a builder agrees to construct the walls of a house using nine inch brick and he complies with the contract specification, a term that the house will be reasonably fit for habitation may not be implied.
Many contractual obligations arise out of rules of law imposed upon the parties either by statute or by the court acting out of necessity. In these circumstances, any resort to the notion of agreement as an explanation of the source of the obligation is unhelpful, since these obligations are imposed by operation of law.
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Terms implied by custom or out of business practice
In addition to implied terms imposed on the parties by operation of law and those apparently representing the intention of the parties, terms may also be implied by virtue of custom or usage. To regard customary practice as being based on the presumed intention of the parties is somewhat unrealistic. If a custom is regarded as reasonable, it will bind the parties, even though they How a particular term of the contract is to be classified is important because it impinges on the remedial consequences of a breach of that term. At one stage, the remedy available to a party in the event of a breach of contract by the other would depend on how the broken term was classified. In this regard, English law has drawn a distinction between conditions of the contract and
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UNANTICIPATED RISKS
Where the parties enter into a contractual relationship, it will not always be the case that the contract will be performed without mishap. It has been seen in the previous chapter that disputes may arise based on an alleged failure to perform the contract according to its terms, in which case, the court must
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In this chapter, it is proposed to consider, in relation to the issue of construction of contracts, the issue of unforeseen risks. These may arise either before the parties enter their contract or after performance of the contract has commenced. In either event, it will be necessary for the court to determine how such risks of loss are to be allocated. For the purposes of English law, the devices used to allocate such risks are, in the case of pre-contract risks, rules on mistake and in the case of post-contract risks, the rules encapsulated in the doctrine of frustration. NON-AGREEMENT MISTAKES
Fundamental mistakes Where a mistake is operative, it serves to negative, or in some cases to nullify consent. The former type of mistake is concerned with the question of agreement and is not considered in any detail at this stage. Mistakes which nullify consent, on the other hand, do raise important issues of risk allocation.
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Best insurer and least cost avoider
In the risk allocation process, it is important to consider how best to allocate a particular risk of loss. If one of the parties is actually or constructively aware of the risk of loss and has failed to take precautions to guard himself against that risk, he may be regarded as the most appropriate person to bear that risk. Furthermore, if one of the parties is responsible for bringing about the mistake
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Frustration and principles of risk allocation The intentions of the parties
If the contract expressly allocates the risk of loss arising from a particular event to one party rather than the other, it should follow as a matter of course that the court should heed the intention of the parties. However, the nature of frustrating events is that in the majority of cases, there will be no express
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Impossibility of performance
In cases which involve an application of the doctrine of frustration, it is much more likely that there will be no provision in the contract for the allocation of risks. In these circumstances, it is for the court to determine what the parties, as reasonable businessmen, would have intended in the circumstances. Where performance of the contract has become physically impossible due to, for
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Impracticability
Impossibility of performance is not the same as impracticability or difficulty of performance. In the latter case, if the court were to treat the contract as frustrated, the impression might be given that the parties were being relieved from the ordinary consequences of an imprudent commercial bargain. Moreover, in many such cases, impracticability of performance is usually a
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best position to take reasonable steps to avoid the risk of loss created by the contract. In this regard, it is relevant to consider whether a contract may be frustrated if the risk of loss is foreseeable; whether either of the parties has been at fault, especially where the frustrating event is self-induced and whether there are reasonable steps which could have been taken by one of the parties which might have averted the risk of loss. Foreseeable risks
If a particular risk of loss has been foreseen, it may be reasonable to assume that the parties will have provided for that eventuality in their contract. Taken to its logical conclusion, this should mean that the risk of loss should lie where it falls. Similarly, even if the event has not been provided for in the contract but ought to have been foreseen by the parties, it will normally be the case
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contract. If it cannot be shown on a balance of probability that the fault of the performer brought about the frustrating event, then the parties will be discharged from their contract on the ground of supervening incapacity: Joseph Constantine SS Line Ltd v Imperial Smelting Corpn Ltd [1942] AC 154, HL, p 166
While prevention is one way of averting a risk of loss, it is equally possible to insure against such a risk. In this regard, insurance includes both market insurance and self-insurance. For example, in a contract for the sale of goods to be shipped to the buyer’s place of business, once property in those goods has passed to the buyer then, in the absence of a contrary intention, the buyer
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created by the common law rule were addressed by Parliament in the Law Reform (Frustrated Contracts) Act 1943, considered below, but the unjust enrichment principle is also relevant in other respects in determining whether a particular event is capable of frustrating a contract. If the decision to treat a contract as frustrated might give one of the parties an undue advantage this may operate as a justification for refusing to treat the contract as frustrated. For example, in Tamplin SS Co v Anglo-Mexican Petroleum Products Co Ltd, an oil tanker was chartered for a period of five years, but was subject to government requisition when the charterparty still had nearly three years to run. In the circumstances, there was no prejudice to the charterers, since the government compensation payable to the charterers exceeded the agreed hire charges. However, the owners of the ship claimed that the contract was frustrated. The House of Lords held, by a narrow majority, that the contract was not frustrated. One explanation for the action of the owners is that they wanted to secure the increased benefit of the government compensation in replacement for the lower hire charges. In this case, it is readily understandable that the majority of the House of Lords preferred not to allow the owners to benefit in this way at the expense of the charterers. Remedies, unjust enrichment and frustration Money paid or payable before the date of frustration
Where a contract is frustrated, the common law rule stipulates that the parties are discharged from their respective obligations from the date of the frustrating event. A particular problem with this rule is that prior to the date of frustration, it is quite possible that one of the parties has made an advance payment for the goods or services which are the subject matter of the contract.
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CONTRACTUAL UNFAIRNESS
CONFLICTING VALUES Two opposing values cause strains within the law of contract. On the one hand, there is a desire to do justice, but at the same time, the courts are keen to promote certainty or predictability. The contract rule book developed in the 19th century is generally said to epitomise the value of certainty. In Printing
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INEQUALITY OF BARGAINING POWER – A GENERAL PRINCIPLE?
In some jurisdictions, an express attempt has been made to state a generalised principle of unconscionability. For example, in the US, the Uniform Commercial Code, para 2-302, provides:
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However, despite further valiant efforts by Lord Denning to develop these principles, the ‘genie’ was put firmly back in the bottle by the House of Lords in: National Westminster Bank plc v Morgan [1985] AC 686, p 707
The classical rule book understanding of duress is that it is a variety of procedural unfairness which prevents a valid agreement from being reached, due largely to the ‘overborne will’ theory, which emerges from some of the case extracts below. But, arguably, where a person is faced with a threat amounting to common law duress, his consent is real, albeit that he had made
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‘Hobson’s’ choice. More recent authorities appear to have moved away from a literal application of the ‘overborne will’ theory and, instead, concentrate on the impropriety or otherwise of the words or actions of the person making the threat. Where the courts are more concerned with the actions of the threatener, they would appear to be as much concerned with the substantive fairness of the result as with the procedural improprieties in the process. Threats sufficient to constitute duress
The traditional rule at common law confined actionable duress to actual or threatened physical violence to the person or unlawful constraint of the person. Thus, threats of lawful imprisonment or threats directed at propertyat one time, did not amount to common law duress. There was a wider jurisdiction to intervene in equity and through the
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states that if such a requirement existed any disadvantage, provided it was ‘clear and obvious and more than de minimis’ may be small. The message is very clear that Morgan is something of an aberration on this point, proceeding from an unwarranted reliance on a single appeal from India (Poosathurai) and, at an appropriate point, the House of Lords will override it. As Nourse LJ states (at p 399): ‘Although in CIBC Mortgages plc, judicial courtesy no doubt prevented Lord Browne-Wilkinson from saying so, my strong impression is that he thought its introduction into cases of presumed undue influence was no more appropriate than into cases of actual undue influence.’ A further uncertainty arising out of the decision in Morgan is that Lord Scarman does not make it clear which class of undue influence he was dealing with. Subsequently, the Court of Appeal in Bank of Credit & Commerce International SA v Aboody, adopted a threefold classification, namely: • Class 1 Actual undue influence. • Class 2A Presumed undue influence arising out of recognised relationships such as solicitor and client, etc. • Class 2B Presumed undue influence not based on a recognised relationship, but in which there is a relationship of trust and confidence. Lord Scarman at no point indicates which of the relevant categories the respondent in Morgan fell into. Vicarious undue influence
In Morgan, as in Bundy, the wrongdoer was an employee of the bank, but a far more common problem is that such pressure as is applied comes from a relative of the party seeking relief. Usually, that relative will be a spouse, but there are also cases in which the pressure is applied by, for example, an independent son or daughter on ageing parents.
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STANDARD FORM CONTRACTS AND EXEMPTION
The willingness of the courts to intervene and ‘police’ a bargain, however apparently freely made, was stated in the previous chapter to turn on questions of procedural unfairness, substantive unfairness or (perhaps) both. This section illustrates perhaps better than any other area of the law the
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requirement to adhere to the terms, however one-sided, laid down by the stronger party. A general statutory definition is, however, lacking in the UK. EXEMPTION CLAUSES
Despite the above comments, the main focus of legislative and judicial attention over the years has been on the control of exemption clauses. In many ways, this is unsurprising; clauses which take away, or seriously limit, one party’s rights can very clearly illustrate substantive unfairness and their widespread use in consumer transactions often buried in the small print of
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JUDICIAL INTERVENTION
Perhaps the earliest, and certainly the most widely used judicial techniques to curb the excesses of the unfettered use of exemption clauses were the rules on incorporation of terms referred to in Chapter 2. Although ostensibly neutral in scope, their use in an exemption clause context was often particularly searching. However, as cases such as L’Estrange v Graucob and Thompson v
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substantive doctrine, the lack of adequate consumer protection against ‘small print’ denial of basic rights has now largely been redressed by the Unfair Contract Terms Act 1977, it seems that the substantive doctrine of ‘fundamental breach’ has ‘had its day’. This, of course, still leaves the problem of the status of the earlier (principally Court of Appeal) decisions. In Photo Production, the House of Lords did overrule a small number of cases, but the majority remained unscathed. Perhaps it is simplest to say that even on a ‘rule of construction’ approach, it is hard to see that the majority of decisions could have gone any other way (Karsales is a good example of this). A final point is that the practical importance of the cases in this area will now be confined to situations in which the validity of the exemption clause is not affected by the Unfair Contract Terms Act 1977. Limitation clauses
A consistent theme in recent case law (particularly at House of Lords level) is that limitation clauses (even less than wholesale exclusions of liability) are not to be subjected to ‘strained construction’, since judicial hostility to them is less. These judicial observations reflect the more limited ‘substantive unfairness’ which limitation clauses are likely to manifest:
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LEGISLATIVE INTERVENTION
As noted earlier, there is a relatively long history of legislative involvement aimed at curbing the excesses of exemption clauses. However, the first statute of general importance came in 1973 with the Supply of Goods (Implied Terms) Act, which controlled the exclusion or restriction of liability for breach of terms implied under the (then) Sale of Goods Act 1893. The 1973 provisions
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Smith v Eric S Bush (A Firm) [1990] 1 AC 831, p 856
With limited exceptions, most noticeably s 6(4) and s 8 (amending s 3 of the Misrepresentation Act 1967), s 1(3) provides that the Act only applies to ‘business’ liability:
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transactions were not likely to give rise to the same problems concerning the use of exemption clauses as commercial transactions. All areas, then, not clearly private would come within the Act. Certainly, it would be consistent with the policy underlying the 1977 Act to enable it to apply relatively widely. Dealing as consumer
The scope and consequent definition of ‘dealing as a consumer’ is too limited to wholly illuminate the ‘business’ conundrum posed above (although it does shed some light on it). It functions primarily with regard to the differential tests on those in ‘business’ and ‘consumer’ as set out in ss 6 and 7, although it also has impact in relation to s 3 (below). A definition of ‘dealing as a
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car for the use of one of its directors, having only made two or three such purchases in the past. Dillon LJ (at p 330) said:
In principle, numerous control mechanisms are open to Parliament when legislating afresh, as was the case when the 1977 Act was passed. The provisions could focus on procedural unfairness by providing for statutory cooling-off periods or for defences based on the unconscionable way in which the contract was brought about. Alternatively, they could focus on
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was upon substantive unfairness, via the twin controls of voidness and a reasonableness test. As regards voidness, there is little more that requires stating. Any contractual provision declared to be void within ss 2(1), 5, 6(1) and (2), 7(1), 7(2) and 7(3A) of the Unfair Contract Terms Act 1977 (considered below) is simply of no legal effect and can be disregarded in any dispute concerning the contract in question. As regards reasonableness, the situation is considerably more complex. The reasonableness test
Other than the sections mentioned immediately above, the 1977 Act, in line with the Law Commission’s thinking in their Second Report, generally adopts controls based on the reasonableness (or otherwise) of the provisions under scrutiny. By this stratagem, it is clearly envisaged that a court will be able to sift all the evidence and determine on the particular facts whether the
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(although this, in turn, ignores the likelihood of most – if not all – potential suppliers using the same or similar terms). Provisions subjecting exemption clauses to the test of reasonableness
Effectively, all the remaining provisions in the Act, plus s 8, which inserts a new s 3 in the Misrepresentation Act 1967, impose a requirement of reasonableness. The main provisions are to be found in s 2(2), s 3 and s 7(3):
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of providing for substitute performers in entertainment contracts could be caught (and subjected to the reasonableness test). One interesting application of s3(2)(b)(ii) could be to catch the all too common practice in contracts for sporting events of refusing monetary refunds even if there is no play. General remarks OTHER REGULATION OF STANDARD FORMS
The Unfair Contract Terms Act 1977 was a major breakthrough in the control of unfairly wide exemption, limitation and disclaimer clauses. However, as already stated, it is neither logical in structure, nor always consistent in approach. Moreover its name is a serious misnomer, being doubly misleading. First, the legislation has a wider sweep than merely the regulation of It was stated at the beginning of this chapter that by far the greatest attention, in our law, has been given to the regulation of clauses, within standard forms, excluding or limiting liability. This is not necessarily true elsewhere, particularly in the civil law jurisdictions and in the US. From time to time in this country, the broader view has been taken, the most famous being Lord
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PART IV PERFORMANCE, BREACH AND REMEDIES FOR BREACH OF CONTRACT
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FACTORS GIVING RISE TO A REMEDY
PERFORMANCE OBLIGATIONS AND BREACH OF CONTRACT The principal remedies dealt with in later chapters are those of damages, specific performance and injunction. However, there are other remedies, such as an action for an agreed sum, which works in a manner similar to specific
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contracted amount of 1,000 tons and seeks to deliver the shortfall two weeks later, the buyer has the right to reject the whole consignment. The effect of s 31(2) is that, in order to decide whether defective deliveries or refusal to pay or take deliveries is to be regarded as a repudiation giving rise to the right in favour of the innocent party to treat his own performance obligations as being at an end is a question of fact in each case. It has been held that what has to be considered in these circumstances is the ‘ratio quantitatively which the breach bears to the contract as a whole’ and the likelihood that the breach will or will not be repeated.
It has been seen from the earlier discussion of Cutter v Powell that a strict application of the rule on performance of entire obligations can have the effect of placing the risk of non-performance on the performer of a contract of personal services. Important considerations in Cutter v Powell were that the contract provided for payment only on completion of the voyage from
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quantity of work contracted for, whereas in the former, the defect related to the quality of the work which is only remediable in damages, not giving rise to a right to reject. The cases considered so far have all involved bilateral contracts in which the parties are normally dependent upon each other for the successful completion of the contract. However, different problems may arise in the case of performance of unilateral contracts, since in this case, the promisee is forced to perform his/her side of the contract before any performance obligation falls upon the promisor.
Where there is a breach of contract, there will always be a right in favour of the party not in breach to recover damages. However, monetary compensation may not always be sufficient, if the innocent party’s trust in the other party has evaporated and it may be that he wishes to escape from the
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Breach of condition
Traditionally, English law distinguishes between conditions and warranties as the two major varieties of contractual term. However, recent years have seen the development of the innominate terms doctrine, under which the courts are prepared to look more closely at the nature and effect of a breach of contract in an ex post facto consideration of the seriousness of the breach of contract in
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The effect of refusal to perform and breach of condition
In the event of a breach of contract being sufficiently serious to allow repudiation of the contract, the party not in breach has two options. He can either waive the breach and choose to treat the contract as still remaining in force or he can accept the breach and activate his right to a remedy. Before the innocent party can be taken to have waived the breach, he must
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LONG TERM RELATIONSHIPS
DISCRETE AND RELATIONAL CONTRACTING A particular difficulty associated with the classical contract rule book is that it is probably better equipped to deal with short term or discrete transactions rather than long term relationships. A discrete transaction is one which can be said to have relatively easily measurable objectives, such as a typical contract
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VARIATION OF THE CONTRACT
A key feature of relational contracting is the need to allow for adjustments as the parties progress towards performance of their respective obligations. A major problem in this regard is that the rules applicable to adjustments in long term relationships are supposed to operate along the same lines as the rules which apply to the formation of discrete contractual relationships. It has been
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COMPELLING PERFORMANCE
SPECIFIC PERFORMANCE AND INJUNCTIONS The principal equitable remedies of specific performance and injunction are both discretionary remedies which serve literally to enforce a contractual obligation. The two differ in that specific performance is used to enforce a positive obligation, such as a promise to sell or purchase land whereas an
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THE BARS TO SPECIFIC PERFORMANCE
A number of bars to the availability of specific performance have been developed. These bars also apply to the award of an injunction where the effect of the remedy is to operate as a form of specific performance. Adequacy of damages It is said that specific performance will not be ordered where an award of
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Contracts for the sale of land Contracts for the sale of goods
Specific performance of contracts for the sale of land is regarded as the usual remedy on the ground that each parcel of land is regarded as unique. Accordingly, since a unique parcel cannot be replaced, it has no obvious market value, so that damages could be regarded as an inadequate remedy. Of course, the label of ‘uniqueness’ is a pure fiction, because the remedy is still
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INJUNCTIONS ACTIONS FOR THE PRICE
Injunctions may be mandatory, ordering the defendant to do something. This variety of injunction is rarely used because a decree of specific performance will normally fulfil the same function by enforcing positive undertakings. Alternatively, an injunction may be prohibitory, ordering the defendant not to do something, such as will be the case where the defendant has entered into
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FACTORS LIMITING AN AWARD OF DAMAGES
Once a claimant has established that the defendant is in breach of contract, he will normally seek damages to compensate for the loss flowing from the breach. However, it does not follow that all the loss suffered in consequence of the other party’s breach will be recoverable. Three major factors may limit or exclude the claimant’s entitlement to damages. First, it must be established
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The third category covers cases in which the defendant is in breach of a contractual duty which is capable of giving rise to liability in the tort of negligence. In these circumstances, it seems to be accepted that the defence is applicable. Thus, where loss is caused by the professional negligence of a solicitor or valuer, but the client is in part to blame for that loss, it will be possible to reduce the claimant’s damages, whether the action is framed in contract or in tort. For the purposes of all of the above categories, there is one overriding difficulty, namely that the definition of the claimant’s fault in s 4 requires the defence to have been available at common law before the 1945 Act was passed. However, it remains the case that, at common law, the defence was
Even where the defendant’s breach of contract is a factual cause of the claimant’s loss, an award of damages may be denied on the ground that the breach was not the legal cause of that loss. Where the claimant complains that he has suffered financial loss, the issue may become clouded by the tort/contract dichotomy and policy issues may play an important part, since
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Financial loss cases
Typically, the 19th century contract rule book saw financial loss as an issue for the law of contract. On the issue of remoteness of loss, the leading case is that of Hadley v Baxendale, which developed a judicially controlled test based on reasonable foresight of loss. The extent of the confusion created by this test was not immediately apparent until the emerging tort of negligence also
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Physical damage cases
The expression ‘physical damage’ covers personal injuries, damage to property and consequential expenses. This form of loss is recoverable in both contract and tort cases, but the majority of such actions arise in the law of tort. For the purposes of the tort of negligence in particular, the relevant test of remoteness of damage or legal causation is relatively favourable to the
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QUANTIFICATION OF DAMAGES
TYPES OF DAMAGE Losses suffered as a result of a breach of contract are of three possible varieties, namely personal injury, property damage and economic loss. Since contracts are essentially concerned with the exchange of economic resources between the parties, it is more likely than not that the most frequently
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If the claimant suffers consequential loss as a result of the property damage, such as expense incurred or profits lost as a result of the destruction of a ship subject to a charterparty, that loss is recoverable, except where it amounts to loss of general future profit. The claimant may also recover for the cost of hiring a substitute until the replacement is available.
The claimant is entitled to recover in respect of both losses caused and gains prevented by the breach of contract. This necessitates making a deduction where the claimant has saved money or has made a gain as a result of the breach. In British Westinghouse Co Ltd v Underground Electric Railways Ltd,
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RESTITUTIONARY REMEDIES
Restitutionary remedies are based on the reversal of an unjust enrichment by the defendant at the expense of the claimant. Since the law of restitution is quite distinct from the law of contract, the availability of a restitutionary remedy does not depend upon a breach of contract, but there is an overlap between the two branches of the law of obligations where a breach of contract
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the defendant has declined to take a reasonable opportunity to reject the benefit. This principle will be especially relevant where there has been a request from the defendant that the benefit be conferred, such as is common where work is commenced on the basis of a letter of intent where the parties subsequently intend to enter into a contract but the contract fails to materialise due to an inability to agree on fundamental terms.
Whether the enrichment is unjust can be judged by the tests of non-voluntary transfer, free acceptance or by reference to policy considerations. The test of non-voluntary transfer requires the court to consider the reasons why an enrichment has been conferred on the defendant by the claimant. In the context of restitution within contract the main reasons why an enrichment
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may be regarded as unjust are that the benefit has been conferred by mistake or due to a misrepresentation, by compulsion. Moreover, subsequent events may unfold in such a way that a benefit is conferred in circumstances which suggest that to allow it to be retained would create injustice. Mistake
Before the relationship of mistake and restitutionary principles is considered, it is important to distinguish a mistake from a mere misprediction. The latter does not give rise to a remedy and is something the claimant must live with. Thus, if one of two joint owners of a house decorates it in the hope that the other owner will contribute to the cost, but later chooses not to, there will be
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by the claimant. In either case, the claimant should get back what he has paid otherwise the defendant would be unjustly enriched. In equity, there is a wider jurisdiction in respect of mistakes made in the process of contracting, coupled with a more mellow array of remedies. Although the rule at common law and in equity is that the mistake must be fundamental before the court will intervene, what appears to be fundamental in equity seems to differ from the very narrow range of mistakes recognised at common law. An important feature of the equitable remedies for mistake is that the court may rescind the contract but at the same time may impose terms upon the order for rescission, thereby recognising the restitutionary and counter-restitutionary claims of both parties. For example, in Cooper v Phibbs, a mistake as to the ownership of certain fishery rights rendered a contract for the sale of those rights invalid. The court ordered rescission, but because the party in occupation had improved the fishery during his period of occupation, the order was tempered by a requirement that those improvements should be paid for by allowing a lien to be exercised over the fishery by way of security. Misrepresentation
It has been seen already that a misrepresentation can cause a person to enter into a contract he would not otherwise have made. Apart from the remedy of damages considered elsewhere, the standard remedy for misrepresentation is that of rescission of the contract, at the instance of the party misled, so as to restore the parties to the positions they occupied before the misrepresentation
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Restitution for breach of contract
Generally, where there is a breach of a valid contract, the appropriate monetary remedy is an award of damages to protect the claimant’s expectation or status quo interest. However, the claimant may find himself in the position whereby he may terminate his performance obligations due to a breach of the contract by the other party. In these circumstances, the claimant
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PRIVITY OF CONTRACT – THE RANGE OF LIABILITY FOR BREACH OF CONTRACT
In an action for breach of contract, the doctrine of privity of contract provides that only the parties to the contract can sue or be sued on it. The difficulty is to determine who is a party to the contract. A strict application of the doctrine
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A number of these collateral contract cases may well be covered by the provisions of the Contracts (Rights of Third Parties) Act 1999, since in many such cases there will be an express or implied intention to confer a contractual right on a third party. For example, in Charnock v Liverpool Corpn, the
As the doctrine of privity of contract and the rule that consideration should move from the promisee appear to achieve the same result, it has been argued that they amount to the same rule since if a contract involves a bargain, a person who is not a party to the bargain is not a party to the contract. This presents two reasons for denying the third party action. First, there is a lack of
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An illustration that the doctrines of consideration and privity are separate can be found in cases in which a person is a contracting party, but has provided no consideration. This may be the case where consideration is provided by one person on his own and a third party’s behalf. The operation of the doctrine of privity The promisee’s action to compel performance
The general effect of the doctrine is that a third party acquires neither the benefit nor is subject to the burden of a contract to which he is not a party even if it is made for his benefit. But this does not affect the position of the promisor and the promisee. Some of the promisee’s remedies may serve to assist the third party for whose benefit the contract is made. This means that
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incompleteness of the building work gave rise to difficulties. Normally, the rule is that an assignee will not be allowed to recover any more than the assignor could have done. As a result, it was argued on behalf of the builders that the council could not sue in respect of incompleteness since the bank was not liable for any incompleteness. The Court of Appeal, however, rejected this argument holding that the bank could have recovered substantial damages from the defendants, apparently on the basis that this case was covered by the principle established in Lenesta. However, it would appear that there are differences between Darlington Borough Council v Wiltshier and Lenesta since, in the earlier case, it was assumed to be a requirement that the original contracting parties always envisaged a transfer of property in the thing which was the main subject matter of the contract. In contrast, in the Darlington case, ownership of the land remained with the council throughout. Steyn LJ’s reasoning in this case seems to be based more on pragmatic grounds than on a strict application of legal principle, since he makes the point that, but for an application of the principle in Lenesta, an otherwise meritorious claim would have disappeared down a legal black hole, but this was a black hole created by the parties themselves due to the clause relieving the bank of any liability for incompleteness. In any case, it has been established by the House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd that if a party has a valid claim under some other rule of law, the Lenesta exception will not apply. The relations between third party and promisee
It is clear that the promisee may be able to enforce the contract on behalf of the third party or possibly recover damages in respect of the third party’s loss. Accordingly, the relations between the two are important. No problem arose in Beswick v Beswick, since the promisee and the third party were the same person. However, the issue may arise whether the third party can require the
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CIRCUMVENTING THE DOCTRINE OF PRIVITY
The doctrine of privity merely indicates that someone who is not a contracting party is unable to enforce the benefits created by or be subject to the burdens imposed under a contract made between two other people. Accordingly, rights may be conferred on a third party, and to a lesser extent, burdens may be imposed otherwise than under a contract. For example, such rights and
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burden of a contract made between others. The general rule is that the burden of an exclusion clause in a contract between the seller of goods and a shipper does not bind a third party, such as the buyer of goods under shipment. However, there are some exceptions. In Pyrene Co Ltd v Scindia Steam Navigation Co Ltd, a contract for the sale of goods provided that the buyer
A person who owns a contractual right, such as a debt, can assign that right to a third party, subject to certain conditions. As a consequence, the person to whom the right has been assigned may then sue the debtor. At common law, assignments were generally not recognised, unless there was a novation under which the debtor agreed to the assignment. In these circumstances, the
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Negotiability Agency
A negotiable instrument such as a bill of exchange, a cheque or a promissory note may be negotiated to another person. The holder of the bill of exchange is treated as a holder for value if consideration for the bill has, at any time, been given. Accordingly, the holder can enforce the bill against the person responsible to make payment.
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is, where the third party is unaware of the fact that the agent is a representative at all. The right of the undisclosed principal to sue is independent of the right of the agent to sue. The principal is also liable on a contract made by his agent, except where circumstances show that the agent has accepted personal responsibility. Trusts
A trust is an equitable device which allows a person to pass property to a trustee subject to a requirement that he should hold that property for the benefit of a third person, the beneficiary. The beneficiary is able to enforce the terms of the trust for his benefit, provided that it can be shown that there was an intention on the part of the donor to create a trust.
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EXCEPTIONS TO THE DOCTRINE OF PRIVITY
Property interests The vendor of land may subject the land he sells to restrictive conditions as to future use. The effect of these restrictive covenants, according to the rule in passes with the land so that a subsequent purchaser of the protected property is entitled to the benefit of the covenant and the purchaser
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BIBLIOGRAPHY
Adams, J, ‘The battle of the forms’ (1979) 95 LQR 481. Adams, J, ‘The battle of the forms’ [1983] JBL 297. Adams, J and Brownsword, R, ‘Double indemnity: contractual indemnity clauses revisited’ (1988a) [1988] JBL 146. Adams, J and Brownsword, R, ‘The Unfair Contract Terms Act: a decade of