BLL 211 :ACCEPTANCE
There cannot be a valid agreement unless an offer has been accepted. Acceptance is defined as
a statement of intention to be bound absolutely and unconditionally by the terms of offer. This
means that acceptance must correspond exactly and in every detail with the terms of offer. This
is known as the 'mirror image rule’.
Rules that govern acceptance
1. Acceptance must be absolute, unqualified and unconditional. It must conform to the terms of
offer, and any variation results in a counter offer which terminates the original offer. This rule
was established in the case of Hyde v Wrench, 1840, 49 ER 132. Wrench offered to sell his farm to
Hyde at £1000. Hyde instead of accepting the offer, offered to pay £950 as an alternative.
Wrench rejected this and later Hyde purported to accept the £1000, but by then Wrench was
selling to someone else, and Hyde sued
for breach of contract. It was held that there was no such breach because Hyde had made a
counter offer and therefore a rejection of the original offer. He could not turn round to accept
what he had rejected.
2. Additional terms can become part of the contract if accepted by the offeror. This was
established in the case of Jones v Daniel, 1894, 2 Ch. 332. Jones owned some land and after
negotiation, Daniel wrote to Jones' solicitors and offered £1,450 to purchase the land. Jones'
solicitors responded with an acceptance of the offer price and enclosed a contract for signature.
The enclosed contract contained the usual conditions of sale and requested a deposit of 10 per
cent of the purchase price and stipulated a completion date. The defendant wrote to Jones'
solicitors declining the purchase and returned the unsigned contract. Consequently, Jones
brought an action for specific performance and argued a contract had been formed by the letters
of correspondence.
It was held that the contract enclosed with the acceptance letter contained special conditions that
had not been previously discussed including the provision of a deposit for 10 per cent. It was
therefore a counter-offer.
3. Mere inquiries do not count as rejection.
Not everything said by the offeree during
negotiations of a contract is a counter offer. In Stevenson v Mclean, 1880, 5 QBD 346, the offeree in
response to an offer to sell iron agreed on the price and quantity but wanted to know whether
delivery could be staggered to give him time to arrange for storage. The defendant never
responded and the offeree sent a letter of acceptance. He sued on discovering that the iron had
been sold. The offeror's defence was that the offeree had made a counter offer. It was held that
this was a mere inquiry on details and the claimant was entitled to damages for breach of
contract.
4. Rules regarding communication of acceptance
(a)
The general rule is that acceptance must be communicated to the offeror by the offeree or
someone with the authority of the offeree. Until acceptance is communicated there is no
contract. This rule was established in the case of Powel v Lee, 1908, 99 LT 284. A school
advertised a vacancy of head teacher for which the claimant applied and was shortlisted
for interviews. The interviewing committee decided to appoint him but did not officially
inform him. A member of the committee excited by the decision told him that he had
been picked for the job. Later the committee changed its mind and appointed someone
else and Powell felt cheated and sued for breach of contract. Powell argued that there
was a contract following his offer of services to act as a head teacher, which had been
accepted by the committee. It was held that the communication was unauthorised and
unofficial and there was no contract in absence of acceptance.
(b)
Acceptance can be in any form. It can be oral, written or implied from conduct. But if
the offeror specifies mode of communicating acceptance, it will be a breach of contract if
the instructions are not followed. In Compagnie de Commerce et Commissions SARL v
Parkinson Stove Co, 1953, 2 Lloyd's Rep. 487, Stove made an offer to the claimant company
and stipulated that the acceptance should be made on the particular form supplied with
the offer. The company replied in writing on another paper and it was held that the
acceptance was not valid as it was departure from the prescribed mode of acceptance.
(c)
The postal rule - this rule is somehow out dated as communication by letter writing has
been overtaken by faster methods. The rule was established at the time when letter
writing was the fastest method of communication. But now the rule has been overtaken
by faster methods, but still applicable when parties choose the post office as the method
of communication. The rule states that a contract is made when the letter of acceptance
is posted; even if the letter is delayed or lost, there is a contract. This rule was established
in the case of Adams v Lindsell, 1818, 1 B & Ald 681. The parties involved in the sale of
wool were far apart and agreed that acceptance was to be communicated by post. The
prospective purchaser replied the same day he received the offer, but the letter delayed
and was received after the offeror had sold the wool. The court developed this rule to
address the injustices caused by delays in the postal system, and held that acceptance
was effective from its time of posting and that a binding contract existed at that point
even if the letter was never received.
(d)
Modern methods of communicating acceptance
These are faster and instantaneous, rendering contract formation similar to face to face
dealing. They include the telegram, telephone, fax and internet services. They have
somewhat modified the postal rule. If the words of acceptance are ‘drowned by an
aircraft flying overhead’, or spoken into a telephone which has gone dead, there is no
contract. Lord Denning dismissed the postal rule as inapplicable in modern times by
using the following analogy, 'suppose, for instance, that I shout an offer to a man across
a river or court yard but l do not hear his reply because it is drowned by an aircraft flying
overhead. There is no contract at that moment. If he wishes to make a contract he must
wait till the aircraft is gone and then shout back his acceptance so that I can hear what he
says. Not till l have an answer, am l bound'. In other words, when parties use faster
modern methods to communicate acceptance, the contract is formed when the
acceptance is received. But this is subject to other considerations. Suppose the phone is
on the answering machine and the other party leaves a message or where an e-mail is
sent but the other party has not opened the mailbox- this may complicate Lord
Denning's rule.
(e)
Silence
Acceptance must be communicated and if the offeree is silent, this cannot be interpreted
as acceptance. In the case of Felthouse v Bindley, 1863, EWHC CP J 35, an uncle and a
nephew negotiated sale of the nephew's horse. The uncle wrote to the nephew, 'if l hear
no more from you, l consider the horse mine at £ 30' .The nephew did not reply, and his
horse was sold in an auction by mistake. The uncle tried to reclaim the horse from the
auctioneer by using the tort of conversion. He however could not prove that the horse
was his and the tort failed. He could not prove ownership of the horse because the
contract of sale with the nephew lacked acceptance due to the nephew's silence.
5. A unilateral offer requires no communication other than performance of the required act. In a
unilateral contract such as reward cases, acceptance and performance are one and the
same. Acceptance is communicated by conduct of the offeree. In Carlill v Carbolic
SmokeBall Co Ltd 1893, acceptance was communicated by sniffing the inhalant.
Acceptance is communicated in reward cases by returning a lost item.
CONSIDERATION
Consideration has been defined in different cases, for example in Currie v Misa, 1875, LR 10 Ex
153, it is some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other. A simpler definition
is found in Dunlop v Selfridge & Company Ltd. 1915, UKHL 1, where consideration is defined as the
price which buys the promise. This price may be an act, such as finding a lost dog to obtain
reward. It may be a promise by the other party or actual money as is specified by the
Employment law. Consideration is important because it renders contracts enforceable. A
contract without consideration is said to be' nudum pactum'-a naked agreement and therefore
unenforceable because English law doesn't enforce bare promises. A promise without
consideration is known as a gift. But where a contract is supported with consideration, it is
known as a bargain. In absence of consideration, the law requires that for a contract to be
enforceable, it must be executed by Deed.
Types of Consideration
There are three types of consideration:
1.
Executory consideration-here parties exchange promises to perform an act in future e.g.
Chomba promises to deliver fish and Bwalya promises to pay for it.
2.
Executed consideration-a party promises to do something in return or an act or
forbearance, e.g. giving information to obtain a reward. In this situation performance of
an act is required before any liability accrues.
3.
Past consideration-this does not constitute consideration at all. It is
an act put forward
before promise of a reward .1n Roscorla v Thomas, 1842, 3 QB 234, the plaintiff purchased
a horse from the defendant. After the sale, the defendant gave an undertaking that the
horse was not vicious, but this proved to be untrue. The plaintiff used this undertaking to
sue for breach of warranty of the soundness of the horse, but failed because his
consideration (payment) was past as it had been used to support the contract of sale, and
could not be used to support the new promise about the good behaviour of the horse.
The general rule therefore is that past consideration cannot support a contract. But there are
two exceptions to the general rule:
a.
Under S.27 of the Bills of Exchange Act 1882, past consideration will support payment
by a cheque. For example, Moonga sells his cow to ZAMBEEF Co Ltd and is paid by
cheque several days later. This creates an antecedent debt or liability on Moonga until
the cheque matures. His entitlement to the payment will be based on what he did in the
past. BB,
b.
Where a subsequent promise is made to pay for services rendered at the defendant's
request, then past consideration will support that promise. In Lampleigh v Braithwait,
1615, EWHC KB J17, the defendant killed a man and asked the plaintiff to obtain a royal
pardon on his behalf from the King, which he did. The defendant then promised to pay
him 1£00 but he never did and the plaintiff sued him and succeeded. Otherwise a mere
voluntary courtesy will have consideration to uphold an undertaking. For example
where Morgan volunteers to give a lift to Mary and afterwards demands payment. Mary
may refuse to pay because she did not supply any consideration.
Rules that govern consideration:
1.
Consideration must move from promise to promisor. The promise is the person to who
the promise is made and therefore pays for it and obtains right to sue since he has paid
the price.
2.
Consideration must be real or valuable – consideration need not be adequate as long as
something of economic value is given. The rationale for this is that courts will not
inquire into the comparative value of the defendant's promise and of the act or promise
given in exchange. This is in respect of the doctrine of freedom of contract', and courts
will not repair a bad bargain. In Mountford v Scott, 1974, 1 All ER 248, it was held that a
West Indian who signed an agreement in consideration of £1 giving the plaintiff an
option to buy his house for £ 10,000 within 6 months, was bound by that option in spite
of the fact that only £ I was given for it.
3.
Consideration must not be illegal.
4.
Consideration must not be past, but there are exceptions s shown above.
5.
Sufficiency of consideration: Although consideration need not be adequate, it must
however be sufficient in law, and this depends on circumstances of each case. For
instance:
a.
Performance of a public duty
A public duty is one imposed by law, such as giving evidence in court or reporting crime
to the law enforcement agencies. It is a civic responsibility that does not require someone
to be paid for his services. If one has performed a public duty, there is insufficient
consideration to be paid at all. For example, in Collins v Godefroy, 1831, 1 B & Ad 950,
Collins, had been subpoenaed to attend court as a witness in separate court case
involving the defendant, Godefroy. Godefroy had sued his attorney for malpractice and
Collins was required by the court to attend as an expert witness. In fact Collins never
gave evidence but was required to be on standby for six days in case he was called. After
the trial Collins gave Godefroy an invoice to cover his time spent at court and demanded
payment by the next day. Without giving him the full day to pay, Collins commenced an
action to enforce payment.
It was held that Collins was under a public duty to attend court due to the subpoena, and
there was insufficient consideration for him to be paid. Where there exists an existing
public duty this cannot be used as •consideration for a new promise. A promise to pay
him for loss of time was a promise without consideration.
b.
Performance of a contractual duty
If someone is performing a contractual duty, he is entitled to the contract price alone and
there is insufficient consideration to be paid extra, unless one has exceeded his
contractual obligations. In Harris v
Sheffield United FC, 1987, QB 77, the defendant
football club was held liable to pay police costs for controlling crowds at their matches.
But in Stilk v Myric, 1809, EWHC KB J58, it was held that sailors who had been promised
to share wages of two sailors who had deserted the ship, were not entitled to this pay as
they had not exceeded their contractual duty. They were merely carrying out their
obligation to sail the ship home and this entailed normal emergences like shortage of
man power. In Hartley v Ponsonby, 1857, 7 EL BL 872, however, it was held that where the
ship was faced by a greater number of deserters, the remaining crew were entitled to
extra pay because by sailing an unseaworthy ship home, they exceeded their contractual
obligations. They had not been contracted to sail a ship with a critical shortage of
manpower. Having sailed from Liverpool to Australia, the captain of the ship discovered
that the crew was so depleted and he could not recruit any new crew. He therefore
promised the remaining crew an additional £40 each if they could take the ship to
Bombay which he did not pay.
c.
Promise of extra pay to the contractor to hurry up
Where a contractor is promised extra pay to speed up his work, he is entitled to both the
contract price and the extra pay, unless the promise to pay extra was obtained by duress.
The rationale is that the contractor's promise to perform the existing task on time confers
a benefit on the defendant which is capable of being interpreted as consideration for the
defendant's promise to make additional payments. This was established in the case of
Williams v Roffey Brothers & Nicholl (ContractorsLtd), 1 9 9 0, 1 QB 1. The defendant had
been engaged to rehabilitate flats and sub-contracted Williams to do the carpentry.
Williams run short of money and a threat of a penalty loomed if the handover was not
done on time. The defendants therefore promised additional payments if William could
speedup his work.
d.
Part-payment of a debt —the rule in Pinnel’s Case
The general rule is that part payment of a smaller sum than the debt on due date can
never relieve the debtor from the liability to pay the whole debt. The creditor can sue for
the balance because of insufficient consideration. But payment of a smaller sum before
the due date at the creditor's request is sufficient consideration for the creditor to forego
the balance as he will enjoy the benefit of being paid early. The debtor will suffer a
detriment of paying early.
The equitable doctrine of promissory estoppel can be relied upon to prevent promisors
from going back on their promises. The creditor will therefore be estopped (prevented in
equity) from going back on his promise and demanding the balance. This is known as the
rule in Pinnel's case, 1602, 5 Co. Rep. 117a. Pinnel sued Cole for £8 due on 11 November
1600. Cole alleged that at Pinnel's request, he had paid Pinnel £5 pounds on 1st October
and that Pinnel had accepted this payment in full satisfaction of the original debt. Pinnel
won the case on a technicality but the court used this opportunity to lay down the rule
regarding part-payment of a debt.
INTENTION TO CREATE LEGAL RELATIONS
This may be defined as seriousness with which parties agree. During negotiations, they may ask
such questions as: ‘Do you mean business? Are you sure? Whether parties mean business or not
will depend on the nature of the arrangement, that is, if the arrangement is domestic or
commercial. The general rule stated in the of Balfour v Balfour, 1919, 2 KB 571, is that there is no
intention to create legal relations in domestic arrangements. In that case, the defendant was a
civil servant in Ceylon (Sri Lanka) and while on leave in UK, the wife fell sick and was unable to
accompany him to Ceylon. He promised to pay her £30 a month as maintenance for the period
they were forced to live apart. He never paid and the wife sued him for breach of contract. It was
held that this was a social and domestic affair and the parties did not intend to be legally bound.
The husband was not obliged to pay. However there are exceptions to the general rule in which
domestic arrangements may amount to intention to create legal relations. For instance:
a.
If a husband and a wife are not living together in peace, or are separated or about
to be separated, there may be intention to create legal relations in their domestic
arrangement. In Merrit v Merrit, 1970, 1 WLR 1211, a husband abandoned his wife
and went to live with another woman. He agreed to pay the wife £40 a month
and signed a document that in consideration of the wife's paying off the mortgage
on their jointly owned house, he would transfer it to her sole owner ship. The
wife paid off the mortgage but the husband refused to transfer title, and the wife
sued. It was held that she was entitled as a sole owner
b.
Where adult members of a family jointly own property, they may make financial
arrangements intended to create legal relations. In Parker v Clark, 1960, 1 WLR
286, a young couple were induced to sell their house and moved in with an
elderly relation who had promised to leave them a share of the home. It was held
that legal effect was intended otherwise the couple would not have taken the
drastic and irreversible step of selling their house
c.
An arrangement between housemates which has nothing to do with the routine
management of the house may be of legal effect. In Simpkins v Pays, 1955, 1 WLR
975, three ladies, a grandmother, grand daughter and a lodger shared an
apartment and took part in a weekly competition run by a local newspaper. They
agreed to fill in one coupon but sent the entry in one name on the understanding
that whoever won they would share the money. The grandmother won but
refused to share the prize money, and the others sued. It was held that legal effect
was intended and the winner was compelled to share the money with others.
Commercial arrangements
The presumption is that in commercial arrangements, legal effect is intended. This can be
illustrated by looking at three situations:
a.
Advertisements- it is common to advertise goods by flamboyant reports of their efficacy
and vague promises. If a plaintiff is induced to buy, the advertiser cannot plead that there
was no intention to create legal relations: [Refer to Carlill v Carbolic Smokeball]
b.
Clauses that out-law agreement: Parties may indicate that until a formal document is
executed, there is no contract. This is known as agreement 'subject to contract'. If there is
unambiguous expression of lack of intention to create legal relations, this will be
accepted by the courts. In Jones v Vernon Pools Ltd, 1938, 2 All ER 626, it was held that a
clause on a football coupon which stated that the transaction of using coupons or draws
and win a reward should not give rise to any legal relations but be binding in honour
only, barred any action in court.
c.
Comfort letter-this is a letter of recommendation to the lender, encouraging him to
extend credit to a person who has applied. It may give rise to a binding guarantee on a
loan or it may give rise to no agreement at all. In Kleinwort Benson v Malaysia Mining
Corporation Berhad, 1989, 1 WLR 379 the defendant was a holding company who refused
to guarantee a new loan by the plaintiff to one of its subsidiary companies. Instead, the
defendant wrote, “it is our policy to ensure that the business (subsidiary) is at all times in
a position to meet its liabilities”. The subsidiary company became insolvent and failed to
repay the loan. It was held that since the defendant refused to guarantee the loan, the
comfort letter did not amount to a contract but a statement of the defendant's policy.
CONTENTS OF A CONTRACT
A contract contains statements (contract terms) made by parties and these fall into three
categories, namely Express terms, Implied terms and Exclusion or Exemption terms.
Express terms (Pre-contractual and Contractual Terms)
Express terms are statements made and agreed to orally or in writing by the parties. An oral
statement is difficult to prove in court and the parole-evidence rule bars word of the mouth from
altering a written document. Extrinsic evidence cannot be admitted to add, vary or contradict a
deed or other written instrument, except in the following situations:
a.
to prove a custom
b.
to rectify a common mistake
c.
to show that in a conditional contract the event on which the contract depended has not
occurred.
d.
to show that a written agreement represents only a part of a larger agreement.
e.
to show that a contract is invalid on grounds of a mistake, misrepresentation or fraud.
Where a contract is partly oral and partly written, it should be read as one, the reason being that
the oral part could be an inducement.
Express terms can be either pre-contractual statements (representations) or Contractual Terms. A
pre-contractual term or representation is a statement made so as to induce the other party to
agree. If it is true, it remains outside the agreement. But if it turns out to be untrue, it becomes a
misrepresentation and the injured party may claim damages for misrepresentation. A contractual
term is a statement made and intended to be part of the contract. It is important to determine
whether a statement made is a representation or a contractual term and whether it is part of the
agreement or not.
There are tests for distinguishing a contractual term from a mere representation, namely:
1.
Where the statement made is of such major importance that the promisee would
not have entered into the agreement without it, it will be construed as a term. In
Bannerman v White (1861), 10 CB NS 844, the defendant wanted to buy hops for brewing
purposes and he asked the plaintiff if they had been treated with sulphur. On the basis of
the plaintiff’s false statement that they had not been so treated, he agreed to buy
the hops. When he discovered later that they had been treated with sulphur, he
refused to accept them. It was held that the plaintiff’s statement about the sulphur was a
fundamental term (the contract would not have been made but for the statement)
of the contract and, since it was not true, the defendant was entitled to repudiate the
contract
2.
Where there is a time gap between the statement and the making of the contract,
the statement will be treated as a representation. In Routledge v McKay (1954), 1 WLR 615,
the defendant told the plaintiff on the 23rd October that the motorcycle was a 1942
model. On the 30th October, a written contract for the sale of the bike was made, without
reference to its age. The bike was actually a 1930 model. It was held that the statement
about the date was a pre-contractual representation and the plaintiff could not sue
for damages for breach of contract. However, this rule is not a hard and fast one. In
Schawel v Reade (1913), 2 IR 81, the court held that a statement made three months before
the final agreement was part of the contract.
3.
Where the statement is oral and the agreement is subsequently drawn up in
written form, its exclusion from the written document will suggest that the
statement was not meant to be a contractual term. Routledge v McKay (1954) may
also be cited as authority for this proposition.
4.
If the maker of the statement has special knowledge or skill, then statements made by
them are contractual terms, but statements made to them are not contractual terms. In
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd(1965), 1 WLR 623, the
plaintiff bought a Bentley car from the defendant after being assured that it had
only travelled 20,000 miles since its engine and gearbox were replaced. When this
statement turned out to be untrue, the plaintiff sued for breach of contract. It was held
that the statement was a term of the contract and the plaintiff was entitled to damages. In
Oscar Chess Ltd v Williams(1957), 1 WLR 370, Williams traded in one car when
buying another from the plaintiffs. He told them that his trade-in was a 1948 model,
whereas it was actually a 1939 model. The company unsuccessfully sued for breach of
contract. The statement as to the age of the car was merely a representation, and the
right to sue for misrepresentation had been lost, due to delay.
5.
If the statement made is oral, it is most likely to be a representation and if it is written,
then it is likely to be a contractual term.
Contractual Terms
As noted, these are statements intended to be part of the contract. There are three types of
contractual types of contractual terms, namely
a.
Condition –a very serious statement without which a contract cannot stand. If a
condition is breached, the contract is repudiated (falls away). A condition is a
fundamental part of the agreement and is something which goes to the root of the
contract. Breach of a condition gives the innocent party the right either to terminate the
contract and refuse to perform their part of it or to go through with the agreement and
sue for damages. In Poussard v Spiers and Pond (1876), LR 1 QBD 410, the plaintiff had
contracted with the defendants to sing in an opera that they were producing. Due to
illness, she was unable to appear on the first night and for some nights thereafter. When
Madame Poussard recovered, the defendants refused her services, as they had hired a
replacement for the whole run of the opera. It was held that her failure to appear on the
opening night had been a breach of a condition and the defendants were at liberty to
treat the contract as discharged.
b.
Warranty- a less serious statement which if breached entitles the injured party to
damages, but the contract must be performed. A warranty is a subsidiary obligation
which is not vital to the overall agreement and does not totally destroy its efficacy.
Breach of a warranty does not give the right to terminate the agreement. The innocent
party has to complete their part of the agreement to be entitled to damages. In Bettini v
Gye (1876), LR 1 QBD, the plaintiff had contracted with the defendants to complete a
number of engagements. He had also agreed to be in London for rehearsals six days
before his opening performance. Due to illness, he only arrived three days before the
opening night and the defendants refused his services. On this occasion, it was held that
there was only a breach of warranty. The defendants were entitled to damages but could
not treat the contract as discharged.
c.
Innominate term –this is an unclassified statement in the sense that it is neither a
condition nor a warranty. The statement becomes classified after the breach has
occurred. If the breach is very serious, the unclassified statement is a condition. If the
breach is not so serious, the unclassified statement is a warranty. In Cehave v Bremer (The
Hansa Nord) (1976), QB 44, a contract for the sale of a cargo of citrus pulp pellets, to be
used as animal feed, provided that they were to be delivered in good condition. On
delivery, the buyers rejected the cargo as not complying with this provision and claimed
back the price paid from the sellers. The buyers eventually obtained the pellets when the
cargo was sold off and used them for their original purpose. It was held that, since the
breach had not been serious, the buyers had not been free to reject the cargo and the
sellers had acted lawfully in retaining the money paid.
Implied terms
These are issues parties forget to consider before they agree and can be implied into the contract
to make the contract sensible (business efficacy). Term may be implied into the contract in three
ways, by statutes, custom and courts.
Terms implied by statute
There are several statutes which may imply terms into the agreement even if the parties did not
expressly refer to them. For example in Zambia, terms relating to description, quality and fitness
for purpose are all implied into sale of goods contracts by the Sale of Goods Act of England,
1893. The Employment Code Act of the laws of Zambia, implies common law duties of the
parties even if they may not have expressly included them in the contract. These include duties
by the employee to obey the employer, to conduct oneself in a proper way; the employer has a
duty to pay the employee and treat him with respect.
Terms implied by custom
An agreement may be subject to customary terms not actually specified by the parties. For
example, in Hutton v Warren (1836), 1 M & W 466, it was held that customary usage permitted a
farm tenant to claim an allowance for seed and labour on quitting his tenancy. It should be
noted, however, that custom cannot override the express terms of an agreement (Les Affréteurs
Réunis v Walford (1919), AC 801.
Terms implied by the courts
Courts will imply law and fact into the contract to give it business efficacy. The court uses the
“officious bystander test” to determine what to include in the contract. If parties had applied
their mind to the matter at hand, what would they have naturally included into the contract?
That is what the court may include into the contract though it was not expressly stated. In The
Moorcock (1889), 14 PD 64, the appellants, the owners of a wharf, contracted with the respondents
to permit them to discharge their ship at the wharf. It was apparent to both parties that, when the
tide was out, the ship would rest on the river bed. When the tide was out, the ship sustained
damage by settling on a ridge. It was held that there was an implied warranty in the contract that
the place of anchorage should be safe for the ship. As a consequence, the ship owner was entitled
to damages for breach of that term.
Exclusion/ Exemption clauses
An exclusion clause is an additional term to the contract by one party seeking to limit or exclude
liability for damage or loss incurred during the execution of the contract. Exclusion clauses have
a role to play in business, to apportion risk of loss or damage. If one is constantly compensating
others for the loss they have suffered, the business will collapse. It is imperative to allocate risk
and insure against loss. But the courts are keen to ensure that the party that relies on the
exclusion clause did not act unilaterally and the other party is aware of the clause. Otherwise the
court will aim at preventing incorporation of the exclusion clause using the following rules of
construction ( interpretation) of the contract:
a.
Contra proferentem rule –in case of ambiguity or uncertainty, courts will construe the
clause in such a way that it does not favour the party that inserted it in the contract
b.
The Repugnancy rule – If the exclusion clause is contrary to the main objective of the
contract, then it must be struck out of the agreement. For example where goods are
delivered to a warehouse for safekeeping but there is a notice to the effect that owners of
the warehouse are not liable if the goods are damaged, the notice will be struck out of the
agreement by the courts.
c.
The doctrine of fundamental breach –where a party has done something different from
what he agreed to do, he cannot be protected by the exclusion clause and the courts will
strike it out of the main agreement. For example in Photo Production Ltd v Securicor
Transport Ltd, 1980, AC 827, the defendant had a contract for the provision of security
services to the plaintiff’s factory. One Securicor’s staff, Mr. Musgrove, decided to warm
himself while providing these security services to the factory, and he did so by starting a
fire. The fire spread and burned down the factory, causing them damage amounting to
£615,000. Photo Production sued Securicor, who however defended by pointing to an
exclusion clause in the contract which stated that Securicor would “under no
circumstances be responsible for any injurious act or default by any employee. . . unless
such act or default could have been foreseen and avoided by the exercise of due diligence
on the part of [Securicor].” On those grounds, Securicor asserted that they were not
liable for the damage caused. Photo Production in turn asserted that Mr. Musgrove’s
actions as agent of Securicor constituted a fundamental breach of the contract, and
therefore invalidated it along with the exclusion clause. In the Court of Appeal it was
held that, the doctrine of fundamental breach did apply in this case and that Securicor
was therefore liable. Securicor appealed to the House of Lords. The issue in this case was
whether the doctrine of fundamental breach applied and was relevant, and whether an
exclusion clause could be effective on the facts of this case. The House of Lords held that
the doctrine of fundamental breach was not relevant here, and that the case was a matter
of construction of the contract. The exclusion clause did on the facts, cover the damage
in question and therefore Securicor were not liable for the damage.
Incorporation of exclusion clauses in the contract
Exclusion clauses may be included in the main contract in three ways, by signature, notice and
custom.
Incorporation of an exclusion clause by signature
The general rule is that an exclusion clause may be included in the contract by signature, unless
the signature is procured by fraud, mistake or misrepresentation or non est factum1. In L’Estrange v
Graucob, 1934, 2 KB 394, the plaintiff owned a café and bought a cigarette vending machine. She
1
Non est factum (Latin word which means that "it is not my deed") is a defence in contract law that allows a
signing party to escape performance of an agreement "which is fundamentally different from what he or she
intended to execute or sign." A claim of non est factum means that the signature on the contract was signed by
mistake, without knowledge of its meaning. A successful plea would make the contract void ab initio.
signed a sales agreement without reading it. It contained an exclusion clause that stated that the
vendor would not be responsible if the machine proved defective. The machine jammed and
refused to work.
However if the signature is procured by any of the above vitiating factors, the signor may not be
bound. In Curtis v Chemical Cleaning Co. Ltd, 1951, 1 KB 805, the plaintiff took a white wedding
dress trimmed with beads and sequins to a cleaning company. The attendant gave the customer a
form to sign and when the customer inquired of the contents of the form, she was told that the
form excluded liability for damage to beads and sequins, when in actual fact it excluded liability
for any damage to the dress. When the dress was returned, it was badly stained and the plaintiff
sued the company. The company’s defence could not rely on the exclusion clause because it was
misrepresented.
Incorporation of an exclusion clause by notice
An exclusion clause will not become part of the contract until the other party is sufficiently
notified of the existence of the clause. Notice must be given at the time the contract is made, and
the document bearing the notice must be an integral part of the contract. In Interfoto Picture
Library Ltd v Stiletto Visual Programmes Ltd ,1989, QB 433, Stiletto Visual Programmes (SVP)
ordered 47 photographic transparencies from Interfoto Picture Library (IPL). On the delivery
note was a clause stating that transparencies should be returned within 14 days of delivery. If
they were not so returned, a holding fee of £5 per transparency per day would be charged. SVP
returned the transparencies four weeks later and received a bill for over £3,700. SVP refused to
pay and IPL successfully received judgement for payment. SVP appealed.
SVP contended they had never dealt with IPL before, were unaware of their standard conditions
and they had not been sent a copy of their conditions prior to their having returned the
transparencies. Even if they had been sent a copy of the terms, IPL had not taken sufficient steps
to communicate their onerous terms, namely, that the fees were more than ten times higher than
other lending libraries. SVP argued the contract was formed when they requested the
transparencies, and IPL agreed to send them. IPL argued the delivery note was included with the
transparencies and was clear and unambiguous in its terms and, accordingly, they could rely on
the clause and claim the funds due. They claimed the contract was formed when SVP took
delivery of the transparencies.
It was held that the clause had not been successfully incorporated into the contract. Where a
clause is particularly onerous, as in this case, and the fees are exorbitant at ten times the level of
other photographic libraries, the party seeking to rely on the clause must show they have taken
reasonable steps to bring the clause to the other party’s attention. IPL had failed to do this and
they could, therefore, only recover fees assessed on a quantum meruit basis.
In Chapelton v Barry Urban District Council, 1940, 1 KB 532, Chapelton wished to hire a deck chair
and approached a pile of chairs owned by Barry Urban District Council (BUDC). A notice
adjacent to the chairs detailed the cost of hire and advised customers to obtain tickets and retain
them for inspection. Chapelton purchased tickets and placed them in his pocket. On one side of
the tickets, the council purported to exclude liability for any accidents caused by hiring the
chairs. Chapelton sat down and the canvas gave way. He sought damages from BUDC and it
was held they had effectively excluded liability. Chapelton appealed.
Chapelton argued he had not been given sufficient notice of the clauses printed on the ticket and,
therefore, he should not be bound by them. There was nothing on the notice adjacent to the
chairs, or on the face of the ticket to alert customers’ attention to the clauses on the back. The
ticket should be regarded as a receipt provided after the formation of the contract. BUDC
contended Chapelton did have notice of the terms because the exclusion clause was clearly
printed on the ticket. The notice adjacent to the deck chairs was merely an invitation to treat.
The ticket was not merely a receipt but it amounted to a written contract detailing the terms by
which the parties agreed to be bound.
Chapelton’s appeal was successful. The ticket was held to be a receipt and the conditions by
which BUDC were held to have offered the chairs for hire were those contained in the notice,
and the notice did not contain any exclusion clause. BUDC had not, therefore, brought
Chapelton’s attention to the clause and they could not rely on it.
If the notice is not given in time it is ineffective. In Olley v Marlborough Court Ltd, 1949, 1 KB 532.,
Olley was a guest in the defendant hotel. On arrival, she paid for a week’s lodging in advance
and then went to the room. In the room, a notice was displayed stating the proprietors would not
be responsible for any items lost or stolen, unless handed to them for safe keeping. Olley left the
room and deposited her key on the board in reception before leaving the hotel. The key was
taken and several items were stolen from her room. Olley sought damages in negligence.
She contended that the hotel were negligent in failing to appropriately safeguard the keys to guest
rooms. She further claimed there was an implied term within the contract between herself and
the hotel that they would take reasonable care of her property in her bedroom. Olley asserted the
failure to supervise the keys amounted to a breach of that contract. The hotel argued that the
guests were bound by the terms displayed on the notice in the bedrooms, and therefore, the hotel
had effectively excluded liability even if they had been negligent. The notice was clearly visible in
the bedrooms and the exclusion clause unambiguously absolved the hotel of any liability for
stolen items. The hotel also argued that Olley had been contributorily negligent by depositing her
key on the board in reception.
Olley was successful in her claim and recovered the cost of the stolen items in their entirety. The
exclusion clause had not been successfully incorporated into the contract because the contract
was concluded at reception, and the notice purporting to exclude liability was not visible until
after the contract was formed, when the guest entered the bedroom.
Incorporation of an exclusion clause by custom
An exclusion clause may be incorporated by way of previous dealings. Previous dealings may
not amount to a custom where parties have transacted on a few occasion over a long period of
time. In Hollier v Rambler Motors, 1972, 2 QB 71 the plaintiff had his car repaired at the defendant’s
garage five times in five years. On each occasion, the plaintiff signed a form which excluded the
defendant’s liability for damage caused by fire to the plaintiff’s car. On the latest occasion, the
plaintiff did not sign the form and his car was damaged by fire caused by the defendant’s
negligence. When sued by the plaintiff for compensation, the garage wished to rely on the
exclusion clause arguing that although the plaintiff had not signed the form containing the
exclusion clause, it had become established by custom. It was held that the clause had not been
incorporated in the main contract as there were a few transactions spread over a long period of
time. Custom meant several repairs or repeated dealing for some reasonable period of time.
Therefore the defendant was liable to compensate the plaintiff.
PRIVITY OF CONTRACT
This is a common law doctrine that no one can sue or be sued on a contract to which he is not a
party. This rule was established in Price v Easton, 1833, 4 B&Ad 433, where the court held that no
one could be bound by the terms of a contract to which he was not an original party. In Tweddle
v Atkinson, 1861, 1 B&S 393, the court went further to say that even if the contract was made for
the benefit of a third party, the beneficially did not have a right to sue upon that contract.
William Tweddle was engaged to Miss Guy. The groom's father entered into an agreement with
the bride's father, William Guy, to pay the groom, William Tweddle, £200 if he paid the groom
£100, all of which was recorded in a written contract. However, William Guy subsequently
died, and the estate would not pay. The groom, for whose benefit the contract had been made,
then sued William Guy's estate for the promised £200, namely the estate executor Mr Atkinson.
His suit was not successful as it was held that no stranger to the consideration can take
advantage of a contract, although made for his benefit.
In Dunlop v Selfridge & Co. Ltd,1915, UKHL 1, manufacturers of tyres, Dunlop sold car-tyres to a
wholesaler Dew & Co. which in turn sold tyres to retailers on the understanding that retailers
would not sell below Dunlop’s list price. Selfridge, one of the retailers sold below the list price
and the manufacturers tried to obtain an injunction to restrain him. It was held that the contract
containing the relevant term was between the manufacturer and the wholesaler, and therefore
the retailer was a stranger to it and not bound by it.
In Beswick v Beswick, 1967, AC 58, an Uncle entered into an agreement with a nephew, whereby
the nephew would take over the Uncle's business in return for payment of £6 per week while the
Uncle lived, and £5 per week after he died. When the Uncle died, the nephew stopped
payments and the widow to his dead Uncle sued him in her personal capacity as widow and as
administratix of the estate of the uncle. She failed in her personal capacity because she was not
party to the contract.
But there are exceptions to the above general rule, in which those who are not parties to the
contract may sue on the contract:
i.
By statutory exception - for example the Bill of Exchange Act 1882 provides that
some people who come into contact with the cheque may sue the drawer.
ii.
In situations which involve a collateral contract, for example the third-party may
instead of claiming from insured party claim directly from the insurer in case of
accidents.
iii.
Express appointment may empower an individual not originally party to a particular
contract to acquire the power to enforce it. For example where one is legally
appointed to administer the affairs of a deceased party, as was the case in Beswick v
Beswick.
iv.
Trusts - The law of trusts can enable a third party beneficiary to initiate action that
will enforce the promisor’s obligation.
v.
By Estoppel - a third party may be able to seek relief against a promisor on the basis
of promissory estoppel principles. To succeed the third party would need to establish
the elements of promissory estoppel
vi.
Where it is foreseeable that damage caused by any breach of contract will cause
a loss to a third party. In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1994,
UKHL 4, the House of Lords held that, under such circumstances and within a
commercial context, the original promisee should be able to claim full damages on
behalf of the third party for the breach of contract. The original parties had entered
into a contract for work to be carried out on a property, with knowledge that the
property was likely to subsequently be transferred to a third party. The defendants’
poor work, amounting to a breach of contract, only became apparent after the
property had been transferred. There had been no assignment of the original
contract and, normally, under the doctrine of privity, the new owners would have
no contractual rights against the defendants and the original owners of the property
would have suffered only a nominal breach, as they had sold it at no loss to
themselves.
vii.
Agency – an agent may sue on the contract which he helps to bring about between the
principal and the third party. The rule here is that if one of the contracting parties
contracts as an agent, then either the agent or the principal, but not both, can sue to
enforce the contract. For instance, if B is C’s agent then either B or C can enforce the
contract against A. In these cases it is immaterial as to whether A knew that B was C’s
agent.