CONTRACT LAW
SUMMARY
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UK CONTRACT LAW
TABLE OF CONTENTS
INTRODUCTION TO CONTRACT LAW .......................6
DEFINITION OF CONTRACT LAW..............................................................6
The Classical Model of Contract Law...............................................................................................6
INTENTION TO CREATE LEGAL RELATIONS ...........8
INTRODUCTION TO INTENTION TO CREATE LEGAL RELATIONS.........8
Intention to Create Legal Relations between Family and Friends ....................................................8
Intention to Create Legal Relations in Commerce............................................................................9
FORMATION OF A CONTRACT ................................11
INTRODUCTION TO OFFER AND ACCEPTANCE ...................................11
The Objective Approach.................................................................................................................11
OFFERS AND INVITATIONS TO TREAT ..................................................12
Invitation to Treat ...........................................................................................................................12
Auction Sales .................................................................................................................................13
Tenders ..........................................................................................................................................14
ACCEPTANCE OF AN OFFER ..................................................................15
Acceptance of Bilateral Contracts ..................................................................................................15
Acceptance of Unilateral Contracts ................................................................................................17
TERMINATION OF AN OFFER..................................................................17
CERTAINTY AND COMPLETENESS OF AGREEMENTS ........................18
Uncertainty .....................................................................................................................................19
Incompleteness ..............................................................................................................................20
Preliminary Agreements .................................................................................................................20
CONSIDERATION.......................................................22
INTRODUCTION TO CONSIDERATION ...................................................22
VALUE OF CONSIDERATION ...................................................................23
INSUFFICIENT CONSIDERATION ............................................................26
Past Consideration.........................................................................................................................26
Performance of Duty by Law ..........................................................................................................27
Performance of a Duty Imposed by a Contract with a Third Party..................................................28
Changes in Existing Contractual Obligations .................................................................................29
PART PAYMENT OF A DEBT....................................................................30
PROMISSORY ESTOPPEL .......................................................................31
CONTENTS OF THE CONTRACT ..............................33
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TERMS, REPRESENTATIONS AND PUFFS.............................................33
The Parol Evidence Rule................................................................................................................34
TERMS IMPLIED INTO CONTRACTS .......................................................35
Implication by Statute Law .............................................................................................................35
Implication by Common Law ..........................................................................................................36
Implication by Fact .........................................................................................................................37
TERMS INCORPORATED INTO CONTRACTS ........................................37
Incorporation by Signature .............................................................................................................38
Incorporation of Written Terms by Notice .......................................................................................39
Incorporation by Course of Dealing................................................................................................39
CLASSIFICATION OF CONTRACTUAL TERMS.......................................40
Statutory Classification...................................................................................................................41
Common Law Classification ...........................................................................................................41
Parties’ Own Classification.............................................................................................................41
EXCLUSION CLAUSES AND UNFAIR TERMS .........43
INTRODUCTION TO EXCLUSION CLAUSES AND UNFAIR TERMS ......43
COMMON LAW REGULATION OF EXCLUSION CLAUSES.....................43
Incorporation of an Exclusion Clause .............................................................................................43
Construction of an Exclusion Clause..............................................................................................44
Fundamental Breach ......................................................................................................................44
The Effect of Exclusion Clauses on Third Parties ..........................................................................46
STATUTORY CONTROL OF EXCLUSION CLAUSES ..............................47
Introduction to Statutory Control of Exclusion Clauses...................................................................47
The Framework of UCTA ...............................................................................................................47
UCTA Reasonableness Test..........................................................................................................50
Criticisms of UCTA .........................................................................................................................51
MISREPRESENTATION .............................................52
DEFINITION OF MISREPRESENTATION .................................................52
TYPES OF MISREPRESENTATION..........................................................52
Fraudulent Misrepresentation.........................................................................................................52
Negligent Misrepresentation...........................................................................................................53
Innocent Misrepresentation ............................................................................................................54
REMEDIES FOR MISREPRESENTATION ................................................55
Remedies for Fraudulent Misrepresentation ..................................................................................55
Remedies for Negligent Misrepresentation ....................................................................................55
Remedies for Innocent Misrepresentation......................................................................................56
DURESS......................................................................57
DEFINITION OF DURESS .........................................................................57
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ECONOMIC DURESS ................................................................................57
Illegitimate Pressure.......................................................................................................................58
Inducement or Coercion by Pressure .............................................................................................59
No Practical Alternative ..................................................................................................................59
UNDUE INFLUENCE...................................................61
INTRODUCTION TO UNDUE INFLUENCE ...............................................61
ACTUAL UNDUE INFLUENCE ..................................................................62
PRESUMED UNDUE INFLUENCE ............................................................63
ILLEGALITY................................................................65
INTRODUCTION TO ILLEGALITY .............................................................65
STATUTORY ILLEGALITY.........................................................................65
COMMON LAW ILLEGALITY .....................................................................66
CAPACITY ..................................................................67
INTRODUCTION TO CAPACITY ...............................................................67
MINORS .....................................................................................................67
Valid and Enforceable Contracts ....................................................................................................67
Voidable Contracts .........................................................................................................................68
Unenforceable Contracts................................................................................................................69
SUFFERERS OF MENTAL ILLNESS.........................................................69
DRUNKEN PERSONS ...............................................................................69
CORPORATIONS ......................................................................................69
MISTAKE.....................................................................71
INTRODUCTION TO MISTAKE .................................................................71
AGREEMENT MISTAKE ............................................................................71
UNILATERAL MISTAKE.............................................................................72
COMMON MISTAKE ..................................................................................73
FRUSTRATION ...........................................................75
INTRODUCTION TO FRUSTRATION........................................................75
CIRCUMSTANCES IN WHICH FRUSTRATION CAN BE INVOKED.........76
THE SCOPE OF FRUSTRATION ..............................................................77
THE EFFECTS OF FRUSTRATION...........................................................77
Financial Losses ............................................................................................................................78
Recovering the Value of Goods or Services Supplied....................................................................78
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BREACH OF CONTRACT ..........................................80
INTRODUCTION TO BREACH OF CONTRACT .......................................80
CONSEQUENCES OF BREACH OF CONTRACT ....................................81
Anticipatory Breach of Contract......................................................................................................81
Fundamental Breach of Contract ...................................................................................................82
The Effect of a Repudiation or Fundamental Breach......................................................................82
REMEDIES FOR BREACH OF CONTRACT ..............83
INTRODUCTION TO REMEDIES ..............................................................83
DAMAGES..................................................................................................83
The Expectation Measure ..............................................................................................................84
The Reliance Measure ...................................................................................................................85
Causation .......................................................................................................................................85
Remoteness of Damage.................................................................................................................86
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INTRODUCTION TO CONTRACT LAW
DEFINITION OF CONTRACT LAW
Contract law is one limb of the ‘law of obligations’. The law of obligations consists of
tort, restitution and contract. Tort is where a duty of care is owed in law by one party
towards another and restitution provides a remedy in situations where one party has
been unjustly enriched. In contract law, obligations arise because one party has
made an agreement with another intending that it should be legally binding. Most
contracts arise in the context of commercial relationships (e.g. sale of goods or
insurance) but other types of agreement can also give rise to a contract as can be
seen in intention to create legal relations (p8).
The Classical Model of Contract Law
This 19th century doctrine is the starting point in understanding the main elements of
a contract. More importantly, the factors of the doctrine are considered by the courts
when deciding whether a legally binding contract exists. The basis for the classical
model was to retain freedom of contract as much as possible, whilst protecting
reliance on promises. The factors of the model are:
•
Intention to create legal relations
•
An offer of a promise and a matching acceptance of that promise (an
agreement)
•
Legal consideration for the agreement; i.e. something must be given in return
for the promise so that it is more than just a gift or gratuitous promise
•
The privity rule which states that only an individual who was a party to the
original contract will be able to enforce it
•
The terms of the contract must be certain and unambiguous
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A traditional application of the five factors can be seen in:
Carlill v. Carbolic Smoke Ball1
FACTS: Carbolic Smoke Ball was a company which provided a ‘smoke ball’ remedy
for influenza. In advertisements it stated that if used in accordance with their
instructions, the user still contracted influenza, that the company would offer a
payment of £100 to that individual. The company stated in the advertisement that it
had deposited £1,000 in a bank account to illustrate its good faith in the matter. The
claimant contracted influenza despite using the smoke ball in accordance with the
instructions. She claimed the payment of £100 from the defendants. The defendants
refused to pay the claimant on the basis that the words in the advertisement were
‘mere puff’ and thus, no intention to create legal relations existed, which in turn
meant that no contract existed.
DECISION: The court’s approach was that the language in the advertisement was
clear and unequivocal and thus, amounted to a unilateral offer; an offer to anyone in
the world who read the advertisement. In complying with the instructions the claimant
had accepted the offer and provided consideration for the £100. The court held for
the claimant on the basis that all five factors had been satisfied which meant that a
valid, legally enforceable contract existed.
Failure to meet just one of the five conditions can mean that the court will decide that
no contract exists. However, whilst this doctrine provides the basis of contract law,
developments in the 20th century dictated the need for a change of approach from the
courts. For example:
•
Standard form contracts where freedom of contract conflicted with fairness
•
Contents of contracts could no longer be left to private regulation; they
became subject to new public policies laid down by the government
•
Maintaining a rigid adherence to the conditions was found to cause manifest
unfairness which was deemed unacceptable in a modern society
As a result, the courts still apply the five factors but there has been a relaxation of the
strict approach where fairness and good faith dictate the need for it, as can be seen
from many post-19th century cases.
1
[1893] 1 QB 256
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INTENTION TO CREATE LEGAL RELATIONS
INTRODUCTION TO INTENTION TO CREATE LEGAL RELATIONS
It is necessary for an intention to create legal relations to exist for the courts to then
consider other factors in deciding whether a contract exists. In commercial
agreements the courts will presume that an intention to create legal relations exists,
as in most cases there will be an unequivocal intention. However, where agreements
are social or between family members, the courts will presume that there was no
intention to create legal relations. These presumptions can, in certain circumstances,
be rebutted by the courts.
Intention to Create Legal Relations between Family and Friends
Balfour v. Balfour2
FACTS: In this case, a man went abroad leaving his wife in England. It was alleged
that he had promised to pay his wife £30 a month. Subsequently, the husband and
wife became estranged and the wife sued to enforce the husband’s promise.
DECISION: The court held that the promise was not enforceable because it was a
domestic agreement between the two parties and there had been no intention to
create legal relations.
Merritt v. Merritt3
FACTS: The relationship between the husband and wife had broken down and the
couple separated. The husband agreed to make payments to his wife every month
and agreed that if she kept up the mortgage payments, he would eventually transfer
the title of the house to her. Once the mortgage had been repaid, Mr. Merritt refused
to transfer the title to his wife. As it appeared to be a domestic agreement between
the two parties, the court had to consider whether the agreement was legally
enforceable.
DECISION: The court rebutted the presumption that there would be no intention to
create legal relations in domestic agreements. Balfour was distinguished on the basis
2
[1919] 2 KB 571
3
[1970] 2 All ER 760
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that when an agreement is made upon the breakdown of marriage and not prior to it,
it indicates that there is a contract rather than a domestic agreement.
Jones v. Padavatton4
FACTS: A mother paid for her daughter to leave the USA to pursue studies in
England to become a barrister. The mother paid for a house which the daughter lived
in and received maintenance from the rent paid by the other tenants. The daughter
failed to pass the examinations on a number of occasions and the relationship
between mother and daughter broke down. As a result of this, the mother sought to
evict her daughter from the house.
DECISION: It was held by the Court of Appeal that the presumption against creation
of legal relations in domestic arrangement had not been rebutted. As there was no
contract between mother and daughter, the mother could evict her daughter.
Parker v. Clark5
FACTS: The defendants, an elderly couple, agreed with their niece and her husband,
that if the younger couple would sell their property and live with them, they would
leave the house to the niece, as well as her sister and daughter. The younger couple
sold their property and moved in with the elderly couple. Later, the two couples
argued and the younger couple were told to leave. The claimants sought damages
for breach of contract.
DECISION: It was held that the arrangement (in particular, the younger couple selling
their home in reliance on the defendants’ promise), the surrounding circumstances
and the language of the correspondence between the two couples indicated that they
had intended to create legal relations and thus, the presumption had been rebutted.
Intention to Create Legal Relations in Commerce
Edwards v. Skyways Ltd6
FACTS: An airline company promised to make ex-gratia payments to pilots that the
company had made redundant. The company changed its mind about making the
payments and claimed that as ex-gratia payments, they were not legally enforceable.
4
[1969] 2 All ER 616
5
[1960] 1 WLR 286
6
[1964] 1 WLR 349
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DECISION: The court held for the claimants on the basis that the use of ‘ex-gratia’
was not significant because the wording was often used in settlement or compromise
agreements with the intention that the promise of payment should be legally binding.
Esso Petroleum Ltd v. Commissioners of Customs and Excise7
FACTS: The claimant had organised a promotion which enabled purchasers of four
or more gallons of petrol to claim a free ‘World Cup Coin’. The coins had no value but
the Commissioners of Customs and Excise claimed purchase tax on the coins on the
basis that they had been produced for the purpose of being sold.
DECISION: It was held that the coins would only be for sale if there was an intention
to create legal relations between the company and the customers who purchased the
petrol. Because of the trivial value of the coins, the language of the offer and the fact
that there was no intention to create legal relations between garage proprietors and
customers, Customs and Excise could not claim the tax.
Evans and Son (Portsmouth) Ltd v. Andrea Merzario Ltd8
FACTS: The defendant shipped equipment for the claimant on a regular basis and
did this on the standard forms of the defendant. It was agreed between the two
parties that the equipment would be carried below deck to prevent rust. The
defendant began using containers for the equipment, which would usually be stored
above deck, but assured the claimant that the equipment would be stored below
deck. One of the claimant’s items was stored above deck in error and subsequently
fell overboard. The defendant argued that the agreement to store items above deck
was not legally enforceable, especially in light of the standard form contract.
DECISION: It was held that that the standard form did not represent the whole of the
agreement between the parties. The defendant’s oral assurance was intended to
have legal effect which meant that the defendant was liable.
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7
[1976] 1 All ER 117
8
[1976] 2 All ER 930
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