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(BUSINESS LAW) A CONTRACT is an agreement between two or more parties, which is intended to create legal relations. Therefore, contract is privy. KEY ELEMENTS OF THIS DEFINITION: It is an agreement between two or more parties thereby giving rise to the doctrine of privity of contract. Two cases may be cited here: Case: Donoghue v Stevenson Case: Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co Ltd. 1915 P sold tyres to x on the basis that x would not resell them at less than P’s list price, and that if X resold the tyres to trade buyers X would extract a similar undertaking from them. X sold tyres to D who agreed to the undertakings, and also to pay P £5 for each tyre sold in breach. D supplied two tyres in breach of the undertaking. P sued for two sums of £ 5 as liquidated damages. P was not a party to the contract between X and D. Held: (HL) P could not recover the liquidated damages. Lord Haldane stated ‘In the law of England certain principles are fundamental .One is that only a person who is party to a contract can sue it’. NOTE: Most contracts are PAROL CONTRACTS ESSENTIAL ELEMENTS OF A LEGALLY BINDING CONTRACT ← There must be an offer followed by acceptance. ↑ There must be the intention to create legal relations. → The contract must be supported by valuable consideration i.e. the price you have to pay and the service provided. Consideration must be on both sides. Absence of any of the three above render the contract void i.e. it has no legal value. Contracts not receiving consideration are those made by deed or under seal. FACTORS AFFECTING VALIDITY OF A CONTRACT ← Some contracts (not all) must be evidenced in writing or made in a particular form e.g. Contract of Employment. ↑ A contract must be legal (i.e. it must not be tainted with illegality) and not contrary to public policy.
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→ A contract can only be enforced if it is sufficiently complete and precise in terms. Some terms which the parties do not express may be implied and some terms which the parties do express are overridden by statutory rules. ↓ Both parties must have contractual capacity. Legal Capacity: Natural Person / Legal person or company PERSONS HAVING CONTRACTUAL LIMITATIONS 1. Minor 2. Mental patient. 3. Drunkards. 4. Aliens. 5. Undischarged Bankruptcy—Undischarged because a person who is bankrupt remains so for a limited period of time. 6. Corporations have contractual limitations because it is not a natural person. ° Parties must have capacity to act (person having 18 + years) ± There must be genuineness of consent: (i)
Both parties must give consent genuinely. Contract must not be affected by mistake. If so, there is neither consensus nor consent.
There should be no misrepresentation ( not telling the truth- COYONNER )
Duress i.e. situation where a person is subject to physical or economic threats.
″ A contract must be capable of being performed at the very outset i.e. now. OFFER: DEFINITION: Offer is an expression of willingness to contract on certain terms made with the intention that it will become binding once it is accepted by the party to whom it is addressed. OFFEROR: i.e. one who makes the offer. OFFEREE: i.e. one who receives the offer. HOW CAN AN OFFER BE MADE? (i)
Orally or by word of mouth.
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Implied by conduct.
TO WHOM CAN AN OFFER BE MADE? (i)
Can be made to an individual ( in this case the individual only can accept )
To a group of people.
To the world at large e.g. Carlill v Carbolic Smoke Ball 1893 ( unilateral contract )
THE OBJECTIVE TEST OF AGREEMENT An offer must satisfy the objective test of agreement which has two conditions: (i)
The behaviour of the alleged offeror must be such as to induce the alleged offeree (reasonable person) to believe that an offer is being made to him.
The alleged offeree must actually hold the belief that the offer is being made to him.
The general rule governing offers is that it must be communicated. Case: Adams v Lindsell 1818 The defendants made an offer by letter to the plaintiff on 2 September 1817 requiring an answer ‘in course of post’. The letter of offer was misdirected and somewhat delayed in the post. It reached the plaintiffs on 5 September; they immediately posted a letter of acceptance, which reached the defendants on 9 September. If the original offer had been properly addressed, the defendants could have expected a reply by 7 September, and they assumed that the absence of a reply within the expected period indicated non-acceptance and sold to another buyer on 8 September. Held: the acceptance was made ‘ in course of post ’ (no time limit was imposed) and was effective when posted. The contract was made on 5 September, when the acceptance was posted. A person cannot accept an offer for which he is not even aware or which he is not even acting Case: Regina v Clarke 1927 (Australian case) A reward of £ 1,000 was offered for information leading to the arrest and conviction of a murderer. If the information was provided by an accomplice, he would receive a free pardon. C saw the offer and later gave the necessary information. He claimed the reward, admitting that he had acted to save his own skin and that all thought of the reward had passed out if his mind. Held: his claim failed. Although he had sent the offer, it was not present in his mind when he acted. There could not be acceptance without knowledge of the offer.
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OFFER AND INVITATION TO TREAT When parties negotiate with a view to making a contract, there are many preliminary communications between them before any definite offer is made. Examples of such situations are: (i)
A respond to a request for information.
One party may invite the other to make a formal offer. This is called an Invitation to treat.
DISTINCTION BETWEEN AN INVITATION TO TREAT & OFFER The distinction between an invitation to treat and an offer is often hard to draw as it depends on the illusive criterion of intention. At times, one may be treading on an invitation to treat believing it to be an offer and vice-versa. However, there are certain situations where the distinction is clear. These are: ← Auction sale. ↑ Display of goods for sale. → Display of goods on shelves in self-service shops. ↓ Advertisements and other displays. ° Tenders. ± Sale of shares. ← AUCTION SALES At an auction sale the general rule is that the offer is made by the bidder by the raising of the hand and accepted by the auctioneer when he signifies his acceptance in the customary (i.e. limited to auction sales) manner by the fall of the hammer (i.e. the goods are knocked down) whatever takes place before advertisement in newspapers (auction of goods by auctioneer = Invitation To Treat) Case: Payne v Cave 1789 An auctioneer’s request for bids is not a definite offer to sell to the highest bidder; it is rather an invitation to treat. The bid itself is the offer, which the auctioneer is then free to accept or reject. Similarly, advertising that an event such as an auction will take place is not an offer to sell which may be accepted; potential buyers may not sue the auctioneer for having made an offer if auction does not take place. Case: Harris v Nickerson 1873 The defendant auctioneer advertised that certain items including ‘office furniture’ were to be sold at an auction sale. The plaintiff attended the sale to buy the office furniture, but it was withdrawn from the sale. The plaintiff claimed that the advertisement amounted to an offer to sell the furniture which he accepted by attending the auction.
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Held: (Q.B.) The advertisement did not amount to a promise to sell the furniture. Case: British Car Auctions Ltd. v Wright. Where Reservation Price is mentioned, good can be sold below it. ↑ DISPLAY OF GOODS FOR SALE The display of a good in a shop window is not an offer to sell the goods but is an invitation to prospective customers to make an offer for the purchase of the good. Case: Fisher v Bell 1961 A shopkeeper was prosecuted for offering for sale an offensive weapon by exhibiting a flick knife in his window. Held: ‘according to the ordinary law of contract, the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale the acceptance of which constitutes a contract.’ → DISPLAY OF GOODS ON SHELVES IN SELF SERVICE SHOP A display of goods on the shelves in a self-service shop is merely an invitation to treat; the customer makes the offer when he carries the goods to the cash desk where the cashier may accept or reject it. Case: Pharmaceuticals Society of Great Britain v Boots Cash Chemists (Southern) 1952 Certain drugs containing poisons could only be sold ‘under the supervision of a registered pharmacist.’ The plaintiff claimed this rule had been broken by Boots who put supplies of these drugs on open shelves in a self-service shop. Boots, however, contended that there was no sale until a customer brought the goods, which he had selected to the cash desk at the exit and offered to buy them. A registered pharmacist was stationed at this point. Held: Boots were correct in their analysis of the situation. The court commented that if it were true that a customer accepted an offer to sell by removing goods from the shelf he could not then change his mind and put them back; this would constitute breach of contract. Plainly neither Boots nor their customers intended such an absurd result. ↓ ADVERTISEMENT & OTHER DISPLAYS An advertisement coupled with rewards for the return on loss of stolen property is invariably treated as offers. However, an advertisement where there is no reward is normally treated as an invitation to treat but there are situations where despite the absence of a reward it would depend upon the intention of the party placing the advertisement whether it amounts to an invitation to make the offer itself or whether it is an offer. Case: Carlill v Carbolic Smoke Ball 1893 The manufacturers of patent medicine published an advertisement by which they undertook to pay ‘£ 100 reward….to any person who contracts….influenza….after having used the smoke ball 5 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
three times daily for two weeks’. The advertisement added that £ 1,000 had been deposited at a bank ‘showing our sincerity in this matter’. The plaintiff read the advertisement, purchased the smoke ball and used it as directed. She contracted influenza and claimed her £ 100 reward. In their defence the manufacturers argued a number of defences. 1. The offer was so vague that it could not form the basis of a contract as no time limit was specified. 2. It was not an offer which could be accepted since it was offered to the whole world. 3. The plaintiff had not communicated to them her acceptance of the offer. 4. The plaintiff had not supplied any consideration. 5. The offer was mere sales ‘puff’ not intended to create legal relations Held: The smoke ball must protect the user during the period of use-the offer was not vague. Such an offer was possible, by comparison with reward cases. Communication was not necessary; again a comparison was drawn with reward cases. The act of sniffing the smoke ball was consideration (the purchase price was consideration for a contract with the retailer). The deposit of £ 1,000 indicated an intention to create legal relations. Case: Partridge v Crittenden 1968 Mr. Partridge placed an advertisement in Cage and Aviary Birds magazine’s ‘classified’ columns containing the words ‘Bramblefinch cocks, bramblefinch hens, 25s [£ 1.25] each’. One person who, in response to the advertisement, purchased a bird, reported Partridge to the RSPCA, who brought a prosecution against him for offering brambling in contravention of the Protection of Birds Act 1954. The justices, satisfied that the bird in question was a wild bird which had been trapped, convicted Partridge. He appealed to the court of Appeal. Held: the conviction was quashed. Although there had been a sale in contravention of the Act, the prosecution could not rely on the offence of ‘ offering for sale’, as the advertisement constituted an invitation to treat. ° TENDERS: The issue of a tender is an invitation to treat (Appel d’offres). The bid itself is the offer. Tenders may be of two types: 1. Specific or one time tender. 2. General or ‘As and When’ tender. A specific tender focuses on the items to be purchased or sold. Once this is over, the tender exercise is completed. A general tender, on the other hand, is one which focuses on the period of time and not on the items to be purchased. It is and as and when tender meaning that as and when required, the items may be purchased. If the items are not required, there is no liability on the purchaser. However, if he requires the goods, he must purchase them from his selected tenderer. Failure to do so will amount to a breach of the contract. If the purchaser orders goods from the supplier and the latter is not in a position to supply, the purchaser may purchase from the market. The measure of damages is the difference between the market and contract price. 6 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
E.g. Market price Rs. 1100 less Contract price Rs. 1000 =Measure of damages i.e. Rs. 100 If again, the purchaser has to purchase from the market and the contract price is higher than the market price, then there is no damages payable. Case: Spencer v Harding 1870 The defendant sent out a circular inviting tenders for the purchase of stock. The plaintiffs submitted the highest tender, but the defendant refused to sell the stock to them. Held: The circular was not an offer to sell to the highest bidder, it was merely inviting offers to buy. ± SALE OF SHARES The issue of a prospectus inviting the public to purchase shares is not an offer but an invitation to prospective subscribers to make offer for the purchase of shares. The company will then make acceptance. ACCEPTANCE Acceptance is defined as the final unqualified and unconditional assent to the terms of the offer. The acceptance must be unqualified and unconditional because otherwise it might amount to a counter offer. Case: Neale v Merrett M offered land to N at £280. N replied accepting and enclosing £80 with a promise to pay the balance by monthly instalments of £50 each. Held: No contract, as there was not an unqualified acceptance. The acceptance must be final. Otherwise it is not a valid one. Case: Powell v Lee 1908 The plaintiff applied for the post as headmaster and after a series of interviews the school management passed a resolution appointing him; however, no decision was made as to how the appointment was to be communicated. Without authorisation, the plaintiff was informed of the appointment by one of the managers. Later, it was decided to give the post to someone else. The plaintiff sued for breach of contract. Held: he failed in his action for breach of contract. Since communication of acceptance was unauthorised, there was no valid agreement and hence no contract. SITUATIONS THAT WILL NOT AMOUNT TO ACCEPTANCE ← Acknowledgement of an offer. ↑ Intention to place an order in the future. 7 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
→ If the offer contains multiple options, there would be no acceptance if a specific option were not chosen. HOW TO COMMUNICATE ACCEPTANCE? (i) (ii) (iii)
Orally or by word of mouth. In writing. Implied by conduct: Case: Carlill v Carbolic Smoke Ball 1893
The general rule governing acceptance is that it must be communicated. The wisdom behind this rule is that if there is no need to communicate acceptance, the offeror might be bound in a contract for which he is not even aware. E.g. the offeree may even show evidence of acceptance thereby binding the offeror. Cases: Adams v Lindsell 1818 The defendants made an offer by letter to the plaintiff on 2 September 1817 requiring an answer ‘in course of post’. The letter of offer was misdirected and somewhat delayed in the post. It reached the plaintiffs on 5 September; they immediately posted a letter of acceptance, which reached the defendants on 9 September. If the original offer had been properly addressed, the defendants could have expected a reply by 7 September, and they assumed the absence of a reply within the expected period indicated non-acceptance and sold goods to another buyer on 8 September. Held: the acceptance was made ‘in course of post’ (no time limit was imposed) and was effective when posted. The contract was made on 5 September, when the acceptance was posted. Case: Household Fire and Carriage Accident Insurance Co v Grant 1879 The defendant handed a letter of application for shares to the plaintiff company’s agent in Swansea with the intention that it should be posted (as it was) to the company in London. The company posted an acceptance (letter of allotment) which was lost in the post, and never arrived. The defendant was called upon to pay the amount outstanding in shares. Held: the defendant had to pay. The contract between the company and him had been formed when the letter of allotment was posted, regardless of the fact that it was lost in the post.
EXCEPTIONS TO GENERAL RULE OF OFFER AND ACCEPTANCE 1) Where acceptance is communicated, the offeror’s agent e.g. stockbroker (an agent is a person who is employed to bring his principal into contractual relationship to third parties. Communication of acceptance to the offeror’s agent would therefore amount to an effective communication of acceptance to the offeror himself.
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2) Acceptance by conduct: At times, the offer does not require the communication of acceptance but on the contrary, the offeree must perform an act of acceptance. 3) At times, the offeror may be precluded from denying that he has received acceptance if it is due to his own behaviour that he did not receive acceptance. For e.g. where acceptance is being communicated by phone and the offeror does not catch the words of acceptance but fails to request the offeree to repeat them. 4) Where acceptance is being communicated by fax or telex during the official business hours of the offeror, there would be a valid acceptance communicated even though it is not read by the offeror. The reason behind this exception is because a fax or telex is an open communication and there is a connotation of urgency attached. 5) POSTAL RULE (Very Important) The postal rule stipulates that once the letter of acceptance is posted, acceptance is valid even if it is lost or destroyed in the post so that it never reaches its destination. Case: Henthorn v Fraser F handed to H a written option on some property at £750. The next day, F posted a withdrawal of the offer. This was posted between 12 hrs and 1 and did not reach H until after 5 p.m. In the mean time H at 3.50 p.m. had posted and acceptance Held: (1) Although the offer was not made by post, yet the parties must have contemplated the post as a mode of communicating acceptance. (2) F’s revocation was of no effect until it actually reached H, and did not operate from the time of posting it. (3) A binding contract was made on the posting of H’s acceptance Case: Holwell Securities Ltd v Hughes 1974 Hughes granted to the plaintiff an option to purchase land to be exercised " by notice in writing". A letter giving notice of the exercise of the option was lost in the post. Held: the words ‘ notice in writing’ must mean notice actually received by the vendor; hence notice had not been given to accept the offer (the option) Case: Household Fire and Carriage Accident Insurance Co v Grant 1879 The defendant handed a letter of application for shares to the plaintiff company’s agent in Swansea with the intention that it should be posted (as it was) to the company in London. The company posted an acceptance (letter of allotment) which was lost in the post, and never arrived. The defendant was called upon to pay the amount outstanding in shares. Held: the defendant had to pay. The contract between the company and him had been formed when the letter of allotment was posted, regardless of the fact that it was lost in the post. However, there are two conditions that must be satisfied concerning postal rule, viz.: 9 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
1. The letter of acceptance must be properly addressed. 2. It must come under the control of an officer of the postal services who is authorised to receive letters. For that purpose, a postman is not an authorised officer. He is employed to deliver and not to receive letters. REASONABILITY OF USING THE POST Using the post as a means of communicating acceptance will be considered as reasonable in the following circumstances, viz.: 1) Where the offer is made by post. 2) Where the terms of the offer indicate that acceptance must be communicated by post. (Note however if the offeror acquiesces the receipt of the acceptance through a different mode of communication, acceptance would be valid.) Case: Smith v Hughes 1871 The plaintiff bought oats from the defendant, believing them to be old oats, which are more valuable than new oats. They were new oats. The plaintiffs refused to complete the sale. The court had to ascertain whether the vendor had described them as ‘good’ oats or ‘good old oats’. Held: the contract was for the sale of ‘ good oats’ and the buyer’s mistake did not render the contract void. 3) It will not be reasonable to use the post if it is known that the postal services are disrupted. Case: Bal v Van Straden. 4) If there has been communication of the offer by post, it is reasonable to use the post as a method of communicating acceptance. However, the offeree is entitled in law to use a quicker method of communicating acceptance. E.g. telex, telephone, faxes. 5) The postal rule may be waived by the terms of the offer e.g. it may be provided in the offer that acceptance would be valid not when it is posted but when it is received. Case: Holwell Securities v Hughes Hughes granted to the plaintiff an option to purchase land to be exercised " by notice in writing". A letter giving notice of the exercise of the option was lost in the post. Held: the words ‘notice in writing’ must mean notice actually received by the vendor; hence notice had not been given to accept the offer (the option) THE POSTAL AND INSTANTANEOUS MODE OF COMMUNICATION (FAX & TELEX ONLY) The question that must be answered in this particular situation is whether the postal rule applies to instantaneous modes of communication. The answer is NO because that in a postal acceptance 10 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
it will be only well after that it would be known that the letter was delayed. Whereas in the cases of fax, telex or telephone, the acceptor will often know at once that his attempt to communicate was unsuccessful so that it is up to him to make a proper communication.
Case: Entores v Miles Far Eastern Corporation 1955 The plaintiff sent an offer by telex to the defendants’ agent in Amsterdam and the latter sent an acceptance by fax. The plaintiffs alleged breach of contract and wished to serve a writ. The legal issue was whether a contract had been made in London (within the jurisdiction of the English court) or abroad (outside it) Held: the acceptance took effect (and the contract was made) when the telex message was printed out on the plaintiff’s terminal in London. A writ could therefore be issued. GARBLED TELEGRAPHIC MESSAGES Case: Henkell v Pape X by telegram ordered three rifles. Owing to the telegraph clerk’s mistake, the message was transmitted as ‘the rifles’, and that number was dispatched. Held: there was no contract between the parties. There is no clear - cut authority in the English Law to cover situations of garbled telegraphic messages but based on the facts of Henkell v Pape, it is generally agreed that there would be no valid acceptance. SILENCE AND ACCEPTANCE Case: Felthouse v Bindley 1862 (tutor’s note: this has been a wrongly judged case) The plaintiff wrote to his nephew offering to buy the nephew’s horse for £ 30.15s [£ 30.75], adding ‘If I hear no more about him, I consider the horse mine at that price’. The nephew intended to accept his uncle’s offer but did not reply. He instructed the defendant, an auctioneer, in whose possession the horse was at the time, not to sell the horse by auction. Owing to a misunderstanding the horse was sold to someone else. The uncle sued the auctioneer in conversion (a tort alleging wrongful disposal of another’s property). Held: the action failed. There could be no acceptance by silence in these circumstances- the offeror cannot impose acceptance because the offeree does not reject the offer. The plaintiff had no title to the horse and could not sue in conversion. The general rule is that silence does not amount to acceptance because when there is acceptance, it must be communicated and when there is no acceptance, the person remains silent. MEANINGLESS TERMS IN THE ACCEPTANCE
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Whenever there are meaningless terms in acceptance, it is valid and the meaningless terms must be disregarded. Case: Nicolene Ltd. V Simonds 1953 The plaintiff offered to buy steel bars from the defendant. A contract was made by correspondence, in which the defendant provided that ‘ the usual conditions of acceptance apply’. The defendant failed to deliver the goods and argued that there had been no explicit agreement. Held: the words should be disregarded. The contract was complete without these words; there were no usual conditions of acceptance. VAGUE TERMS AND ACCEPTANCE Whenever there are vague terms in acceptance, it is not valid. Case: Scammell (G.) and Nephew v Ouston 1941 The plaintiff ordered a van from the defendant. The balance of the purchase price was to be paid on ‘hire-purchase terms’ over two years. The defendant then refused to supply the van. Held: (HL) There was no contract because the language was not capable of any definite meaning as there were many kinds of hire purchase agreement, and so the agreement was incomplete. CONDITIONAL ACCEPTANCE (OR ACCEPTANCE SUBJECT TO CONTRACT) At times, the parties agree to come into a contract subject to valid contract being prepared and signed. If it is not signed by both parties, the acceptance will not be valid. Case: Eccles v Bryant B sold a house to E ‘ subject to contract’. The contract was agreed between the solicitors and the parties were ready to exchange the counterparts. E signed his part and posted it to B, but B did not post his part. Held: there was no contract. Case: Chillingworth v Esche C and D signed an agreement for the purchase of a house by D ‘ subject to a proper contract’ to be prepared by C’s solicitors. A contract was prepared by C’s solicitors and approved by D’s solicitors, but D refused to sign it. Held: there was no contract as the agreement was conditional. REVOCATION OF AN OFFER Case: Payne v Cave An offer may be revoked or terminated in the following ways: 12 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
← By outright rejection. ↑ By lapse of time. → By counter offer. ↓ By occurrence / non-occurrence of a condition. ° Death of either the offeror/offeree before acceptance. ± By withdrawal before acceptance has taken place. ← Outright Rejection An offer will be terminated if it is rejected as soon as it is made by the offeror ↑ Lapse of time If there is a time prescribed for an offer to be accepted, the offer will lapse if it is not accepted within that time. If there is no time prescribed, it must be accepted within reasonable time (Reasonable time is a matter of fact for the court to decide) Case: Ramsgate Victoria Hotel v Montefiore 1866 The defendant applied to the company in June for shares and paid a deposit to the company’s bank. At the end of November the company sent him an acceptance by issue of a letter of allotment and requested payment of the balance due. The defendant contended that his offer had expired and could no longer be accepted. Held: the offer was for a reasonable time only and five months was much more than that. It was an excessive interval. The offer had lapsed. → Counter-Offer Case Study On 01/01/00, A offers to sell his house to B for £ 1,000. B replies that he cannot pay but instead is willing to pay £ 950. A refuses £ 950. B writes back to A informing him that he now accepts to pay £ 1,000 as originally claimed. B now wishes to sue A for breach of contract and seeks your advice as to his legal rights. Advise B. Solution A counter-offer has the effect of destroying the original offer so that it is no more open for acceptance. A counter-offer therefore terminates the original offer. Case: Hyde v Wrench 1840 (tutor’s note: use this case here)
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The defendant offered to sell property to the plaintiff for £ 1,000 on 6 June. Two days later, the plaintiff made a counter – offer of £ 950 which the defendant rejected on 27 June. The plaintiff then informed the defendant on 29 June that he accepted the original offer of £ 1,000. Held: the original offer of £ 1,000 had been terminated by the counter-offer of £ 950 made on 8 June; it could not therefore be revised by the plaintiff changing his mind and tendering a subsequent acceptance. Case: Neale v Merret However, a counter offer must not be confused with a mere request for information. Case: Stevenson v McLean 1880 The defendant offered to sell iron at ‘40s [£2] nett cash per ton, open till Monday’. The plaintiff enquired whether he would agree to a contract, at the same price, by which delivery would be spread over two months. The defendant did not reply and (within the time limit fixed the offer); the plaintiff then accepted the offer as made originally. Meanwhile the defendant had sold the iron to a third party. Held: there was a contract since the plaintiff had merely enquired as to variation of terms which was not rejection. The difference between a counter offer and mere request for information is that in a counter offer, there is a deliberate attempt to alter the terms of the offer whereas a mere request for information doesn’t attempt to do so. Additionally, the onus is still on the offeror and not on the offerree. ↓ Occurrence or Non Occurrence of a condition. At times, an offer will lapse if one or more of the conditions under which it was made is not present. Case: Financings Ltd. v Stimson 1962 The defendant wished to purchase a car, and on 16 March signed a hire-purchase form. The form, issued by the plaintiffs, stated that the agreement would be binding only upon signature by them. On 20 March the defendant, not satisfied with the car, returned it to the motor dealer. On 24 March the car was stolen from the premises of the dealer, and was recovered badly damaged. On 25 March the plaintiffs signed the form. They sued the defendant for breach of contract. Held: the defendant was not bound to take the car. His signing of the agreement was actually an offer to contract with the plaintiff. There was an implied condition in this offer that the car would be in substantially the same condition when the offer was accepted as when it was made. ° Death of either offeror/offeree before acceptance has taken place. Previously, it was believed that the death of either offeror / offeree before acceptance would terminate the offer. However, it is now agreed that this applies to offers concerning personal 14 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
services only. As regards offers which are not of a personal nature, there is still two school of thoughts one believing it to be terminated whereas the other considers it as still open for acceptance. Case: Bradbury v Morgan 1862 X offered to guarantee payment (up to £ 100) by Y in respect of goods to be supplied by the plaintiff on credit to Y. X died and the plaintiff, in ignorance of death, continued to supply goods to Y. The plaintiff then sued X’s executors on the guarantee. Held: X’s offer was a continuing commercial offer which the plaintiff had accepted by supply of goods after X’s death. The guarantee stood. ± An offer may be withdrawn at any time before acceptance has taken place. Case: Payne v Cave 1789 Case: Byrne v Leon Van Tienhoven 1880 The defendants were in Cardiff; the plaintiffs in New York. The sequence of events was as follows. 1 October Letter posted in Cardiff, offering to sell 1,000 boxes of tinplates. 8 October Letter of revocation of offer posted in Cardiff. 11 October Letter of offer received in New York and telegram of acceptance sent. 15 October Letter confirming acceptance posted in New York. 20 October Letter of revocation received in New York. The offeree had meanwhile resold the contract goods. Held: the letter of revocation could not take effect until received (20 October); it could not revoke the contract made by the telegram acceptance of the offer on 11 October. Simply posting a letter does not revoke the offer until it is received. POSTAL RULE APPLIES TO ACCEPTANCE AND NOT TO REVOCATION OF OFFERS The general rule governing revocation of an offer is that it must be communicated i.e. it must come to the knowledge of the offeree. There is no obligation for the revocation to be communicated by the offeree himself. A third party who is reliable and known to both of them may communicate the revocation of the offer. Case: Dickinson v Dodds 1876 The defendant, on 10 June, wrote to the plaintiff to offer property for sale at £ 800, adding ‘ this offer to be left open until Friday 12 June, 9.00 am.’ On 11 June the defendant sold the property to another buyer, A. B, who had been an intermediary between Dickinson and Dodds, informed Dickinson that the defendant had sold to someone else. On Friday 12 June, before 9.00 am, the plaintiff handed to the defendant a formal letter of acceptance.
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Held: the defendant was free to revoke his offer and had done so by sale to a third party; the plaintiff could not accept the offer after he had learnt from a reliable informant of the revocation of the offer to him. His purported acceptance was too late. One of the confusing or grey areas is where a person has to perform an act over time to complete acceptance. The question is ‘ Can the offeror withdraw the acceptance?’ The courts now agree that once the person has begun to perform the act of acceptance, no revocation is possible. Case: Daulia Ltd. v FourMillbank Ltd. The Court of Appeal considered that a unilateral offer could not be withdrawn once performance has started. EXCEPTION TO THE RULE THAT REVOCATION MUST BE COMMUNICATED ← When the offer is made to the world at large e.g. through the newspapers, that offer may be revoked by a similar notice being placed in the same newspaper. While the notice of revocation may not catch the attention of all those who had previously read the offer, the court will be satisfied that sufficient measures have been taken to bring the notice of revocation to those who had previously read the offer. Case: Shuey v United States (American Case) ↑ Where the revocation is sent to the offeree’s last known address and the latter has moved premises without informing the offeror. → Where the revocation is sent by fax or telex to the offeree during his official business hours. ↓ When a revocation is sent to a company, the question is when will that revocation be valid: (i) (ii) (iii)
When the letter of revocation is received in the company. When the letter of revocation is opened in the ordinary course of business or would have been so opened had the ordinary course of business been followed. When it is read by the offeree.
Answer: No. (ii) INTENTION TO CREATE LEGAL RELATIONS The second element which must be present to constitute a valid contract is the intention to create legal relations. The court will normally base itself on two presumptions: When assessing whether the intention to create legal relations is present. All business agreements have the intention to create legal relations unless otherwise expressly stated. All domestic agreements do not have the intention to create legal relations unless otherwise expressly stated.
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Note: There are agreements made between members of the same family but which are of a business nature. These must be treated as a business agreement. HONOUR CLAUSE At times, the parties to a contract do not intend the agreement to be legally binding. Instead, they base the enforcement of the agreement on their honour. When such a clause is found in a contract, it is called an honour clause and the contract is not legally enforceable. Case: Jones v Vernon Pools Ltd. 1938 The plaintiff argued that he had sent to the defendant a football pools coupon on which his predictions entitled him to a dividend. The defendants denied having received the coupon. A clause on the coupon stated that the transaction should not ‘ give rise to any legal relationship… but… be binding only’. Held: this clause was a bar to an action in court. Case: Appleson v Littlewoods A sued the promoters of a football pool for £4335 which he claimed to have won. The pool was subject to a condition that it was not to be legally enforceable. Held: the claim failed. DOMESTIC AGREEMENT ← Relationship between husband and wife. ↑ Relationship between husband and wife who are living together. ← When husband and wife are living together, any agreement made between them is of a domestic nature and therefore are not legally enforceable. Case: Balfour v Balfour 1919 The defendant was employed in Ceylon. He and his wife returned to the UK on leave but it was agreed that for health reasons she would not return to Ceylon to him. He promised to pay her £ 30 a month as maintenance. Later the marriage ended in divorce and the wife sued for the monthly allowance which the husband no longer paid. Held: an informal agreement of indefinite duration made between husband and wife whose marriage had not at the time broken was not intended to be legally binding. ↑ When husband and wife are living under separate roof, the intention to create legal relations is present in any agreement made between them the more so when that agreement is for settlement of a marriage break up. Case: Meritt v Meritt 1970 The husband had left the matrimonial home, which was owned in the joint names of husband and wife, to live with another woman. The spouses met and held a discussion in the husband’s car, in 17 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
the course of which he agreed to pay her £ 40 a month out of which she agreed to keep up the mortgage payments on the house. The wife refused to leave the car until the husband signed a note of these agreed terms and an undertaking to transfer the house into her sole name when the mortgage had been paid off. The wife paid off the mortgage but the husband refused to transfer the house to her. Held: in the circumstances, an intention to create legal relations was to be inferred and the wife could sue for breach of contract. → When the agreement between husband and wife is made under vague terms, there is no intention to create legal relations. Case: Gould v Gould A husband who had left his wife agreed to pay her £15 a week ‘as long as he had it’ Held: although husband and wife could enter into a legally binding agreement, the vague terms which were used indicated an intention not to create legal relations. OTHER FAMILY RELATIONS In other family agreements, the court is more likely and willing to find the intention to create legal relations. Case: Simpkins v Pays 1955 The defendant, her granddaughter and the plaintiff, a paying border, took part together each week in a competition organised by a Sunday newspaper. The arrangements over postage and other expenses were informal and the entries were made in the grandmother’s name. One week they won £ 750; the paying border claimed a third share, but the defendant refused to pay on the grounds that there was no intention to create legal relations. Held: there was a ‘ mutuality in the arrangements between the parties’, amounting to a joint enterprise. As such it was not a ‘ friendly adventure’, as the defendant claimed but a contract. Case: Jones v Padavatton 1969 The plaintiff wanted her (divorced) daughter to move from the USA to England in order to train as a barrister and offered to pay her a monthly allowance while she read for the Bar. The daughter did so in 1962. In 1964 the plaintiff bought a house in London; part of the house was occupied by the daughter and part let to tenants whose rent covered the daughter’s maintenance. In 1967 the plaintiff and her daughter quarrelled and the plaintiff issued a summons claiming possession of the house. Held: there were two arrangements to consider: the daughter’s agreement to read for the bar in exchange for a monthly allowance, and the agreement by which the daughter lived in her mother’s house and the rent from tenants covered by maintenance. Neither agreement was intended to create legal relations. They were family arrangements which depended on the good faith of the promises made, and were not intended to be rigid, binding arrangements.
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EX GRATIA PAYMENTS The presence of an exgratia payments does not in any way create the presumption that no intention to create legal relations is present. Ex gratia clauses are enforceable in a court of law and words such as ex-gratia payments ‘approximating to’ were not considered as too vague by the court. Case: Edwards V Skyways Ltd. 1964 In negotiations over the terms for making the plaintiff redundant, the defendants gave him the choice either of withdrawing his total contribution from their contributory pension fund or of receiving a paid-up pension. It was agreed that if he chose the first option, the defendants would make an ex gratia payment to him. He chose the first option; his contributions were refunded but the ex gratia payment was not made. He sued for breach of contract. Held: although the defendants argued that the use of the phrase ex gratia showed no intention to create legal relations, this was a commercial arrangement and the burden of rebutting the presumption of legal relations had not been discharged by the defendants. COLLECTIVE BARGAINING AGREEMENT This is an agreement between a union and the employer and is not normally enforceable in a court of law unless otherwise expressly stated in writing and also that the agreement contains a statement that the parties intend it to be a legally enforceable contract. However, whether or not the terms are legally enforceable, they will have legally binding effect if they are expressly incorporated in the individual contract of employees. CONSIDERATION Price at which the promise of the other person is bought Case: Dunlop v Selfridge. It means the price at which the promise of the other party is bought. A more elaborate definition was given in the case of Currie v Misa 1875 and consideration was defined as some right, profit, benefit, interest accruing to one party or some forbearance, loss, responsibility or detriment suffered given or undertaken by the other. For a valid contract to be created, both parties to the contract must provide consideration. Absence of consideration will render the contract void. TYPES OF CONSIDERATION (i) (ii) (iii)
Executed consideration. Executory consideration. Past consideration.
Executed Consideration i.e. which has already been performed by one or both parties such that nothing is left to be done under the contract.
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Executory Consideration is where one or both parties have not yet completed their obligations under the contract. E.g. Credit Sale/Agreement to sell in the future.
Past Consideration is a situation where one party is attempting to use consideration which has already been performed in the past to support a new transaction on a new promise. It is different from executed consideration in the sense that when there is past consideration, there are more than one promise/agreement/contract. Whereas for executed consideration, there is only one single contract.
Case: Re McArdle 1951 Under a will the testator’s children were entitled a house after their mother’s death. In the mother’s lifetime one of the children and his wife lived in the house with the mother. The wife made improvements to the house. The children later agreed in writing to pay to the wife sum of £ 488 ‘in consideration of your carrying out certain alterations and improvement’ to the property .in settlement of the amount spent on such improvements. But at the mother’s death they refused to do so. Held: the work on the house had all been completed before the documents were signed. At the time of the promise the improvements were past consideration and so the promise was not binding. Case: Roscorla v Thomas 1842 The plaintiff agreed to buy a horse from the defendant at a given price. When negotiations were over and the contract was formed, the defendant told the plaintiff that the horse was ‘sound and free of vice’. The horse turned out to be vicious and the plaintiff brought an action on the warranty. Held: the express promise was made after the sale was over and was unsupported by fresh consideration. The plaintiff could show nothing but ‘past’ consideration and his action failed. RULES GOVERNING CONSIDERATION 1) It must be legal i.e. an illegal consideration will make the whole contract void. (No Case). 2) All simple contracts must be supported by valuable consideration. 3) Consideration must have some economic value i.e. it must be possible to place some monetary worth on the consideration. Case: White v Bluett 1853 In a dispute with his father’s executors, the plaintiff said that he had given consideration to his father for a promise of benefits under his will by promising not to complain continually that his father had disinherited him. Held: no consideration had been given for the promise, which the plaintiff said he had obtained from his father.
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There is however argument that the concept of economic benefit on detriment is an outdated one. What is now important is that a person has asked for a promise or an act and that act or promise has been performed. 4) Consideration must be sufficient. It need not be adequate. This implies that it is sufficient for one person to provide consideration. The adequacy of that consideration is of no importance. Case: Mountford v Scott Case: Haigh v Brookes A promised to pay certain bills if B could hand over a guarantee to him. B handed the guarantee over and it turned out to be unenforceable. Held: as A had received what he asked for, there was consideration for his promise, although the guarantee was of smaller value than he had supposed. Case: Thomas V Thomas 1842 By his will the plaintiff’s husband expressed the wish that his widow should have the use of his house during her life. The decedents, his executors, allowed the widow to occupy the house (a) in accordance with her husband’s wishes and (b) in return for her undertaking to pay a rent of £ 1 per annum. They later said that their promise to let her occupy the house was not sufficient consideration, even though inadequate as a rent. Held: compliance with the husband’s wishes was not valuable consideration (no economic value attached to it), but the nominal rent was sufficient consideration, even though inadequate as a rent. 5) Consideration must move from the promisee. This gives rise to two principles. (i)
It is the one who has received the promise who must provide the consideration.
Only one who has provided consideration may sue under the contract. This is called the principle of the doctrine of privity of contract. Case: Dunlop v Selfridge.
6) Performance of our existing legal obligation does not require the support of additional consideration. However, the promise to do something different or above one’s legal obligation must be supported by fresh consideration. Case: Glassbrook Bros v Glamorgan County Council 1925 At a time of industrial unrest, colliery owners, rejecting the view of the police that a mobile force was enough, asked for and agreed to pay for a special stationary guard on the mine. Later they repudiated liability saying that the police had done no more than perform their public duty of maintaining order and that no consideration was given.
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Held: the police had done more than perform their general duties. The extra services given, beyond what the police in their discretion deemed necessary, were consideration for the promise to pay. If the judgment of the police authorities had been that a stationary guard was necessary, they would not have been entitled to charge for it. Case: Collins v Godefroy 1831 The plaintiff had been subpoena’d to give evidence on behalf of the defendant in another case. He alleged that the defendant had promised to pay him six guineas [£6.30] for appearing. Held: there was no consideration for that promise. Case: Stilk v Myrick 1809 Two members of the crew of a ship deserted in a foreign port. The master was unable to recruit substitutes and promised the rest of the crew that they should share wages of the deserters if they would complete the voyage home short-handed. The shipowners however repudiated the promise. Held: in performing their existing contractual duties the crew gave no consideration for the promise of extra pay and the promise was not binding. Case: Hartley v Ponsonby 1857 (Tutor’s note: Read this case with Stilk v Myrick 1809) 17 men out of a crew of 36 deserted. The remainder were promised an extra £ 40 each to work the ship to Bombay. The plaintiff, one of the remaining crewmembers, sued to recover this amount. Held: the large number of desertions made the voyage exceptionally hazardous, and this had an effect of discharging the original contract. The plaintiff had therefore been left free to enter into a new contract, under which his promise to complete the voyage formed consideration for the promise to pay an additional £40. DOCTRINE OF ACCORD AND SATISFACTION It was developed in Pinnel’s case. At common law, if A owes B £ 10 and wishes to discharge his debt by paying B £ 9, he must: ← Obtain the agreement of B (the Accord) ↑ Provide him with fresh consideration (the satisfaction) Pinnel’s Case Cole owed Pinnel £ 8.50 which was due to be paid on November 11,1600. At Pinnel’s request, Cole paid £ 5.11(a less amount) on October 1,1600,in full satisfaction of the debt. Held: In principle, payment of a lesser sum before the date due is good satisfaction. POINTS TO NOTE REGARDING DOCTRINE OF ACCORD AND SATISFACTION ← Payment of a smaller sum on the due date is not a satisfaction for the whole sum. However, payment of a smaller sum before the due date at the creditor’s request is a good discharge for the 22 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
person. It is a benefit to the creditor to be paid earlier and a corresponding detriment to the debtor to pay in advance. ↑ Payment of a lesser sum by cheque is not a good discharge for the whole sum. Payment by cheque is not payment in kinds and the creditor already knows the amount that will be received. (Case: D & C Builder’s v Rees 1966) EXCEPTIONS TO THE RULES OF ACCORD AND SATISFACTION ← Where there is compounding of debt, the payment of a lesser sum will represent a satisfaction for the whole debt. E.g. in the case of company winding up where a lesser sum may be paid for the compounded debts. ↑ Where there is a dispute as regards the amount owed, and the creditor accepts a lesser sum, it will represent a good satisfaction for the whole sum. → Where payment is made in kind and the proceeds are less than the amount owed. ↓ Where payment of a lesser sum by a third party it is a good discharge for the whole sum. Case: D and C Builders v Rees 1966 The defendants owed £482 to the plaintiffs (a small firm of builders). The plaintiffs, who were in acute financial difficulties, reluctantly agreed to accept £300 in full settlement (in order to obtain the money quickly). They later claimed the balance. Held: the debt must be paid in full. Promissory estoppel only applies to a promise voluntarily given. The defendants had been aware of and had exploited the plaintiffs’ difficulties (‘e was held to ransom’ said Lord Denning). In this important case it was also held that payment by cheque (instead of cash) is normal and gives no extra advantage which could be treated as consideration for the waiver under the rule in Pinnel’s Case. Case: Foakes v Beer 1884 The defendants had obtained judgment against the plaintiff for the sum of £2,091. Judgment debts bear interest from the date of the judgment. By a written agreement the defendant agreed to accept payment by instalments of the sum of £2,091, no mention being made of the interest. Once the plaintiff had paid the amount of the debt in full, the defendant claimed interest, claiming that the agreement was not supported by consideration. Held: she was entitled to the debt with interest. No consideration had been given by the plaintiff for waiver of any part of her rights against him. Case: Welby v Drake 1825 If a third party (Z) offers part payment and Y agrees to release X from Y’s claim to the balance, Y has received consideration from Z against whom he had no previous claim. THE DOCTRINE OF PROMISSORY ESTOPPEL (This is an equitable doctrine)
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Above doctrine was developed in the case of Central London Property Trust Ltd. (CLPTL) v Hightrees House Ltd. Under this doctrine, it is agreed that where a party (promissor) makes a promise with a view that it will be acted upon by the other party (the promissee) and it is in fact acted upon, then the promissor will be estopped from going back on his promise as this would cause hardship to the promissee. Case: Central London Property Trust v High Trees House 1947 In September 1939, the plaintiffs let a block of flats to the defendants at an annual rent of £2,500 p.a. It was difficult to let the individual flats in wartime, so in January 1940, the plaintiffs agreed in writing to accept a reduced rent of £1,250 p.a. No time limit was set on the arrangement but it was clearly related to wartime conditions. The reduced rent was paid from 1940 to 1945 and the defendants sublet flats during the period on the basis of their expected liability to pay rent under the head lease at £ 1,250 only. In 1945 the flats were fully let. The plaintiffs demanded a full rent of £2,500 p.a., both retrospectively and for the future. They tested this claim by suing for rent at the full rate for the last two quarters of 1945. Held: the agreement of January 1940 was a temporary expedient only and had ceased to operate early in 1945. The claim was upheld. However, had the plaintiffs sued for arrears for the period 1940-1945, the 1940 agreement would have served to defeat the claim. POINTS TO NOTE REGARDING DOCTRINE OF PROMISSORY ESTOPPEL ← This is a clear case where the court is not willing to listen to the truth which is that the promissee does not provide any consideration to support the promissee (High Trees did not provide any consideration) ↑ It does not abolish the requirement of consideration for the formation of contracts. It merely alters it while the contract is on. → It does not destroy the rights of the promissor. It merely suspends those rights. ↓ The doctrine of promissory estoppel is not a sword, it is a shield. I.e. it acts as a defence only. EXCEPTIONS TO THE RULE OF PRIVITY OF CONTRACT The rule in consideration is that consideration must move from the promisee i.e. only one who has provided consideration may sue under the contract. However, there are various exceptions to this rule, namely: ← The doctrine or concept of trust. ↑ The law of agency. → Contracts of Insurance. ↓ Land covenants. ° Legal assignment. In the Law of Agency there are three types of principals. ← Named principals – where the agent discloses the name of his principal. 24 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
↑ Unnamed principal – where agent discloses that he is acting on behalf of a principal but does not name him. → Undisclosed principal – where the agent contracts as if he is the principal but when problem occurs the undisclosed principal comes forward. When this is so the third party may opt to sue either the agent or the disclosed principal. However he must exercise the option of either suing the agent or the principal but he cannot sue both. Commencement of proceedings is conclusive evidence of the exercise of the option. Legal Assignments. At times a party may require the rights of a third party to be transferred to him so that he may take actions against a debtor. The assignment of rights under a contract may be done by the following ways: 1) By Legal Assignments. 2) By Equitable Assignments. 3) By Operation of Law. For a legal assignment to operate the assignment must be: 1) In writing signed by the assignor. 2) Absolute and not purporting to be by way of charge only nor should it be a portion of it 3) Must be followed by express notice given to the debtor. TERMS OF A CONTRACT Terms must be differentiated from representations. A representation is an inducement made before the contract is entered into with a view to inducing the other party to enter into the contract. A term, on the other, hand is an item/element which the parties believe must be part of their contractual agreement. However, representations may also be included in a contract where they become the term of the contract. Terms can be of two types: 1) Implied terms. 2) Express terms. 1) Implied terms: These are terms which the parties consider to be so obvious that they need not be expressly reflected in the contracted agreement. However, the difficulty with the implied terms is to ascertain their contract and this is where contention arise between parties and the court must then intervene to provide the correct interpretation. Case: The Moorcock 1889
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The owners of a wharf agreed that a ship should be moored alongside to unload its cargo. It was well known to both wharfingers and shipowners that at low water the ship would ground on the mud at the bottom. At ebb tide the ship settled on a ridge concealed beneath the mud and suffered damage. Held: it was an implied term, though not expressed, that the ground alongside the wharf (which did not belong to the wharfingers) was safe at low tide since both parties knew that the ship must rest on it. 2) Expressed terms: these are terms which the parties consider to be of such material importance that they must expressly be reflected in their contracted Agreement. The main advantage of an expressed term is that there is very little difficulty to ascertain its content. Expressed terms may be of three types: 1) A condition. 2) A warranty. 3) An innominate term 1) A condition is a vital term of the contract. It was defined by Lord Moulton Fletcher in the case of Walis v Pratt as an obligation which goes to the very root of the contract that its none performance may be considered as a substantial failure to perform the contract and the aggrieved party, if he is so minded may rescind the contract and claim damages. Case: Poussard v Spiers 1876 Mme Poussard agreed to sing in an opera throughout a series of performances. Owing to illness she was unable to appear on the opening night and the next few days. The producer engaged a substitute who insisted that she should be engaged for the whole run. When Mme Poussard recovered, the producer declined to accept her services for the remaining performances. Held: failure to sing on the opening night was a breach of condition which entitled the producer to treat the contract for the remaining performances as discharged. Case: The Mihalis Angelos 1971 The parties entered into an agreement for the charter of a ship to be ‘ready to load at Haiphong’ (in Vietnam) on 1 July 1965. The charterers had the option to cancel if the ship was not ready to load by 20 July. On 17 July the charterers repudiated the contract believing (wrongly) that they were entitled to do so. The shipowners accepted the repudiation and claimed damages. On 17 July the ship was still in Hong Kong and could not have reached Haiphong by 20 July. Held: the shipowners were entitled only to nominal damages since they would have been unable to perform the contract and the characters could have cancelled it without liability on 20 July 2) A warranty is a subsidiary clause of a contract which though it must be performed yet failure to do so will not lead to a substantial failure to perform the contract. When there is a breach of warranty the contract continues i.e. upheld or is on going but the injured or aggrieved party may sue for damages only.
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Case: Bettini v Gye 1876 An opera singer was engaged for a series of performances under a contract by which he had to be in London for rehearsals six days before the opening performance. Owing to illness he did not arrive until the third day before the opening. The defendant refused to accept his services, treating the contract as discharged. Held: the rehearsal clause was subsidiary to the main purpose of the contract. Breach of the clause must be treated as breach of warranty, so the defendant had no right to treat the contract as discharged and must compensate the plaintiff. He could however claim damaged (if could prove any loss) for failure to arrive in time six days’ rehearsals 3) Innominate terms. This is neither a condition nor a warranty though it contains the elements of both. In fact when there is a breach of an innominate term it will be for the court to decide whether the breach is one of condition or one of warranty. This being so will depend upon the seriousness or gravity of the breach and its consequences. Case: CehaveII v Bremer, The Hansa Nord 1975 The defendant seller entered into a contract for the supply of 12,000 tons of citrus pulp pellets (a raw material used in making animal feedstuffs). On arrival at the port of destination, part of the cargo had deteriorated and the plaintiffs rejected the entire cargo claiming against the sellers for return of the purchase price. The cargo was offered for sale and was purchased (at a much lower price) by a third party, who then sold it to the plaintiffs, who used it for its intended original purpose. They had therefore acquired for £32,000 goods which they had originally agreed to buy for £ 100,000. The sellers denied that the buyers had been entitled to reject the cargo as not being of merchantable quality. Held: the fact that the cargo could only be sold on the market at a lower price than the contract provided was not conclusive that it was not of merchantable quality. It could be and was – used for its purpose, that is making cattle food, and so by that test it was of merchantable quality. EXCLUSION CLAUSES OR EXEMPTION CLAUSES Exclusion clauses are normally used in contracts by one or both parties who attempt to limit or exempt their liability under the contract. These types of terms are subject to qualifications required by public policy or statute law. Thus a term exempting a party from liability in the event of his committing a fraud against another party is void. The application of exemption clauses is subject to a contract proferentem rule which provides that an exemption clause will normally be construed against the person wishing to rely upon it. If still he can benefit from it, then the exemption clause will apply. UCTA The use of exemption clauses became so proliferated that parliament in 1977 enacted the unfair contract terms act which prohibits or restricts the use of certain exemption clauses. Since the 27 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
application of the Unfair Contract Terms Act (UCTA), most of the common law rules governing exclusion clauses have become obsolete. However, there are still some rules which require attention: 1) An attempt to include an exclusion clause unilaterally after it has been made will not make it part of that contract. Case: Olley v Marlborough Court 1949 A husband and a wife arrived at a hotel and paid for a room in advance. On reaching their bedroom they saw a notice on the wall by which the hotel disclaimed liability for loss of valuables unless handed to the management for safe keeping. The wife locked the room and handed the key in at the reception desk. A thief obtained the key and stole the wife’s furs from the bedroom. Held: the hotel could not rely on the notice disclaiming liability since the contract had been made previously (when the room was booked and paid for) and the disclaimer was too late. 2) An exclusion clause included on a receipt given after a contract has been made will not make it part of that contract. A receipt is evidence of a contract but not the contract itself. Case: Chapelton v Barry UDC 1940 There was a pile of deck chairs and a notice stating ‘Hire of chairs 2d [1p] per session of three hours’. The plaintiff took two chairs, paid for them and received two tickets which he put in his pocket. One of the chairs collapsed and he was injured. The defendant council relied on a notice on the back of the tickets by which it disclaimed liability for injury. Held: the notice advertising chairs for hire gave no warning of limiting conditions and it was not reasonable to communicate them on a receipt. The disclaimer of liability was not binding on the plaintiff. Case: Thornton v Shoe Lane Parking Ltd 1971 The plaintiff wished to park his car in the defendant’s automatic car park. He drove up to the unattended machine and was automatically dispensed with a ticket. He had seen a sign saying ‘ All cars parked at owner’s risk’ outside the car park, before obtaining the ticket, and when he received the ticket he saw it contained words which he did not read. In fact these made the contract subject to conditions displayed on the premises. Had he looked hard enough in the car park he would have seen that these not only disclaimed liability for damage but also excluded liability for injury. When he returned to collect his car (which had been stacked in a special machine) there was an accident in which he was badly injured. Held: the contract was formed before the plaintiff got the ticket (acceptance was his putting money in the machine to receive a ticket); so the reference on the ticket to conditions was received too late for the conditions to be included as contractual terms. At any rate, it was unreasonable for a term disclaiming liability for personal injury to be presented so obscurely. (Note that since the Unfair Contracts Terms Act 1977 the personal injury clause would be unenforceable anyway.)
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Case: Henderson v Stevenson. 3) A contractual document is signed as a result of the offerees’ oral representation of one of its terms; the offeree will not be able to rely on that term. Case: Curtis v Chemical Cleaning and Dyeing Co 1955 The plaintiff took her wedding dress to be cleaned. She was asked to sign a receipt on which there were conditions. Before signing she enquired what was the effect of the document and was told that it restricted the cleaner’s liability in certain ways and in particular placed on the plaintiff the risk of damage to beads and sequins on the dress. The document in facts contained a clause ‘ that the company was not liable for any damage however caused’. The dress was badly stained in the course of cleaning. Held: the cleaners could not rely on their disclaimer since they had misled the plaintiff as to the effect of the document which she signed. She was entitled to assume that she was running the risk of damage to beads and sequins only. 4) If at the time when the contract is made, a person gives an oral promise which cannot be reconciled with a term in the printed contract, the oral promise takes precedence over the printed clause. Case: Mendelsohn v Norman Ltd M left his car in N’s garage. Contrary to the rules of the garage, the car attendant who took the car over told M that he must lock the car. M informed the attendant that there was valuable property in the car and the attendant promised to lock the car after he had moved it. By the terms of the ticket which the attendant gave M, N excluded responsibility for the loss of contents of the car. A suitcase containing valuables was stolen from the car. Held: N was liable. Though the attendant had no actual authority to promise to lock the car, he had ostensible authority to make a statement concerning the safety of the car and its contents. The printed exclusion clause was repugnant to the express oral promise and could not be relied upon by N. Where the offeree has signified his acceptance by signing a document presented to him by the offeror, the offeree cannot plead ignorance of the terms of the offer and in the absence of fraud or misrepresentation he would be bound by the terms of the document. Case: L’Estrange v Graucob 1934 The defendant sold to the plaintiff, a shopkeeper, a slot machine under conditions which excluded the plaintiff’s normal rights under the sale of Goods Act 1893. The plaintiff signed the document described as a ‘Sales Agreement’ and including clauses in ‘legible, but regrettably small print,’ without reading the relevant condition. Held: the conditions were binding on the plaintiff since she had signed them. It was not material that the defendant had given her no information of their terms nor called her attention to them. ( Under the law as it now stands some rights under the Sale of Goods Act 1979, which replaced the 1893 Act, may not be excluded.) 29 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
5) Where there is a business document given by one party and received by the other as the document containing the terms of the contract, the offeror is under no obligation to call the offeree’s attention to all the terms of the document unless they are written or printed in such a manner or in such a position as to mislead or escape the attention of a careful businessman. Case: Roe v Naylor Ltd R ordered four lots of timber from N’s traveller. The traveller left a sold note setting out the sale and containing a clause ‘Goods are sold subject to their being on hand and at liberty when the order reaches the head office’. N did not deliver the timber and on being sued by R pleaded the cause set out above. R did not know of the clause and had not read it. Held: R was bound by the clause unless it was so printed that from its position in the document and the size of the type an ordinary careful businessman, reading the document with reasonable care, might miss it. The UCTA applies to the following types of contracts: 1) Contract for the sale of goods ( Sale of goods Act 1979 ) 2) Contracts of hire purchase. 3) Other contracts under which possession or ownership of goods passes.(The Act does not apply to other types of contract e.g. Contracts of Insurance) The prohibitions and qualifications which the act provides apply only to business liability i.e. liability arising in the course of a business. Any contract excluding or restricting liability for death or personal injury resulting from negligence is void i.e. the party willing to restrict its liability cannot rely on an exclusion clause if the death or personal injury is caused by his negligence. In the case of other loss or damage, any contract term aimed at excluding or restricting liability will be considered as void unless it satisfies the requirements of reasonableness. This can only be satisfied if the term is a fair and reasonable one having regard to the circumstances which were or ought reasonably to have been known or in the contemplation of the parties when the contract was made.
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MISREPRESENTATION A Representation is an inducement made with a view to inducing another party to enter into a contract. A representation is always made before the contract is entered into. The characteristics of a representation are: 1. It must be a statement of material fact. 2. It must be a verifiable existing one or a passed event. It does not include the following: 1. A statement of opinion. However, if that opinion is given by a person who has an expertise in the field, then that could be considered as a statement of material fact. Case: Esso Petroleum Co v Mardon 1976 The plaintiffs had granted to the defendants a three-year lease of a filling station on a newly developed site. They told the defendants during negotiations for the lease that the annual throughput would be in the region of 200,000 gallons. The defendants suggested that 100,000 gallons might be more realistic but their doubts were quelled by the plaintiffs' expertise and experience. Throughput was only 86,500 gallons. The defendants gave up the tenancy. Held: the plaintiffs owed the defendants a duty of care in making pre-contract statements, as they knew that the defendants were relying on their knowledge and expertise. They were in breach of the duty. 2. A statement of the law ( Ignorance of the law is no defence ) 3. Mere Sales Puffin: i.e. where a person is boasting the qualities of a product, there is no misrepresentation. 4. Statement as to future conduct. 5. Silence does not amount to misrepresentation except in three situations: •
Where the statement is half-truth - remaining silent on the other half is a misrepresentation.
Where the statement was true and made but turns out to be false at the time of contracting.
Case: With v O ' Flannagan 1936 At the start of negotiations in January a doctor, who wished to sell his practice, stated that it was worth £2,000 per year. Shortly afterwards he fell ill and as a result the practice was almost worthless by the time the sale was completed in May.
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Held: his illness and inability to sustain the practice's value falsified the January representation; his silence when he should have corrected the earlier impression constituted misrepresentation. The sale was set aside. •
Contracts made Uberimae Fidei i.e. Contracts made in utmost good faith.
REQUIREMENTS OF MISREPRESENTATION 1. It must be a statement of material fact. 2. It must have been made before the contract was entered into with a view to inducing the other party to enter into that contract. 3. It must have been made with a view that it would be acted upon by the party to whom it has been addressed. 4. It must have induced the contract and has actually been acted upon by the party to whom it is addressed. 5. It must have been false either to the knowledge of the party making it or without his knowledge. ← It must be a statement of material fact (a) This car is the best ever model produced. ( Statement of Sales Puff ) (b) This car has run only 6,000 kms. ( Statement of Material Fact ) (c) This S/H car is of good value. ( Statement of Opinion ) If statement (b) is true, the first requirement for misrepresentation is proved. ↑ It must have been made before the contract was entered into with a view to inducing the other party to enter into that contract Under this aspect, one must differentiate between a term in a contract and a representation. At times, a representation can also be included in a contract as a term. → It must have been made with a view that it would be acted upon by the party to whom it has been addressed. The party suing for misrepresentation must have acted on the misrepresentation made by the misrepresentor. There must be a contractual relationship between misrepresentor and misrepresentee for the misrepresentation to become actionable. Case: Peek v Gurney Z, on the faith of statements appearing in the prospectus of a company, bought some shares in a company from a holder of them. Some of the statements were false, and Z thereupon sued the directors. Held: the statements were only intended to mislead the public into being original subscribers of the shares from the company. As Z was not an original subscriber, but had purchased the shares
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later from a subscriber, he was not within the class intended to be mislead, and therefore could not maintain the action. Case: Andrew v Mockford ↓ It must have induced the contract and has actually been acted upon by the party to whom it is addressed. It is immaterial whether the misrepresentee has the skills or not to verify the statements made. He was entitled to rely on the representations. However, if he did not rely on the statements and used his own skills to check the information, then he cannot plead misrepresentation.
Case: Redgrave v Hurd 1881 The plaintiff told the defendant that the income of his business was £300 per annum and produced papers which disclosed an income of £200 per annum. The defendant queried the figure of £300 and the plaintiff produced additional papers which he stated showed how the additional £100 was obtained. The defendant did not examine these papers which in fact showed only a very small amount of additional income. He entered into the contract but later discovered the true facts and he refused to complete the contract. Held: the defendant relied on the plaintiff 's statement and not on his own investigation. He had no duty to investigate the accuracy of the statement and might rescind the contract. There are three forms of misrepresentation: (i) (ii) (iii)
Innocent Misrepresentation Negligent misrepresentation Fraudulent misrepresentation
← Innocent Misrepresentation A false statement of material fact made by one party who had reasonable grounds to believe and in fact did believe until the time the contract was made that it was true. ↑ Negligent misrepresentation Who had no reasonable grounds to believe in its truth. In fact, the statement was made negligently. → Fraudulent misrepresentation It is a false statement of material fact made by one person who knew it to be false. It was made recklessly and carelessly with a view to deceiving the other party. Case: Derry v Peek 1889 The plaintiff and other directors of a company published a prospectus inviting the public to apply for shares. The prospectus stated that the company (formed under a special Act of Parliament) had statutory powers to operate trams in Plymouth, drawn by horses or driven by steam power. 33 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
The Act required that the company should obtain a licence from the Board of Trade for the operation of steam trams. The directors assumed that the licence would be granted whenever they might apply for it. But it was later refused. Held: the directors honestly believed that the statement made was true and so this was not a fraudulent misrepresentation. The false representation was not made knowingly, without belief in its truth or recklessly, and so the directors escaped liability. REMEDIES FOR MISREPRESENTATION ← INNOCENT MISREPRESENTATION ← Remedy is rescission or discretionary damages awarded in lieue of rescission. ↑ NEGLIGENT MISREPRESENTATION ← Remedy is rescission or discretionary damages awarded in lieue of rescission. ↑ Statutory damages as a result as a result of the Misrepresentation Act 1967 → FRAUDULENT MISREPRESENTATION ← Rescission ↑ Common law damages for the tort of deceit. Over and above the remedies provided, an aggrieved party may: ← Refuse any further performance of the contract and set up the misrepresentation as his defence when sued in a court of law. ↑ Affirm the contract. (Note: Affirmation and Rescission (or termination) are mutually exclusive and once the person has affirmed the contract, he cannot rescind it. Rescission is an equitable remedy the purpose of which is to terminate the contract the contract and to restore the parties to their original position as if no contract had been entered into. WHEN WILL A PERSON LOSE HIS RIGHT FOR RESCISSION? In the following circumstances: ← Where Restitutio in Integrum is not possible i.e. the parties cannot be restored back to their original position. Case:Lagunas Nitrate v Lagunas Syndicate 34 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
↑ Where under a case of innocent misrepresentation, the aggrieved party affirms the contract. → Where under a contract which is not severable (i.e. broken into several pieces), the aggrieved party accepts part of it and loses his right of rescission and must accept the whole. ↓ Where a party has acquired for value rights under the contract. Case: Phillips v Brooks Ltd 1918-1919 P sold a ring to X thinking that he was Sir George Bullough. X pawned the ring to D. Held: the contract was voidable for fraud, but not void for mistake. An innocent third party (D) acquired the jewellery in good faith for valuable consideration. The contract between P and X could not be rescinded. Case: Philips v Brooks A rogue entered a jeweller’s shop, selected various items which he wished to buy and proposed to pay by cheque. The jeweller replied that delivery must be delayed until the cheque had been cleared. The rogue then said that he was Sir Georges Bullough, a well-known person and the jeweller checked that the real Sir Georges Bullough lived at the address given by the rogue. The rogue then asked to take a ring away with him and the jeweller accepted his cheque and allowed him to have it. The rogue pledged the ring to the defendant, a pawnbroker, who was sued by the jeweller to recover the ring. Held: the action must fail. There was no mistake of identity which made the contract void but only a mistake as to the creditworthiness of the buyer. Good title had passed to the rogue until the contract was avoided. DISCHARGE OF CONTRACT A contract may be discharged in the following ways: ← By frustration ↑ By breach → By performance ↓ By agreement ° By operation of law ← DISCHARGE OF CONTRACT BY FRUSTRATION For a contract to be discharged by frustration, the following two conditions must be present: ← There must be some extraneous or outsight change of circumstances which makes the contract either impossible of being performed or if it can be performed, it will make it substantially different from what the parties had contemplated at the time of the making of the contract.
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↑ None of the parties to the contract must be responsible for the happening of the extraneous or outsight event. ° Where a contract becomes more expensive to perform, there is no frustration. Case: Davis Contractors Ltd. v Fareham UDC 1956 The plaintiffs agreed o build 78 houses at a price of £94,000 in eight months. Labour shortages caused the work to take 22 months and cost £115,000. They wished to claim frustration so that they could then claim for their work on a quantum meruit basis. Held: hardship, material loss or inconvenience did not amount to frustration; the obligation must change such that the thing undertaken would, if performed, be a different thing from that contracted for. ± Where a contract takes more time to be performed, there is no frustration. Case:Tsakiroglu v Noblee Thorl Gmbh 1962 (Note: Gmbh stands for Company Limited ) In October 1956 the sellers contracted to sell 300 tons of Sudanese groundnuts c.i.f. Hamburg. The normal and intended method of shipment from Port Sudan (on the Red Sea coast) was by a ship routed through the Suez Canal to Hamburg. Before shipment the Suez Canal was closed; the sellers refused to ship the cargo arguing that it was an implied term that the shipment should be via Suez or alternatively that shipment via the Cape of Good Hope would make the contract 'commercially and fundamentally' different, so that it was discharged by frustration. Held: both arguments failed. There was no evidence to support the implied term argument nor was the use of a different (and more expensive) route an alteration of the fundamental nature of the contract sufficient to discharge it by frustration. ″ Where a person takes an absolute undertaking which can normally be performed but which he is not successful to do, there is no frustration. Case: Cassidy (Peter) Seeds Ltd. v Osuustukkauppa Finnish exporters sold a quantity of ant eggs to English buyers ‘ delivery: prompt, as soon as export licence granted’. The sellers were unable to obtain the export licence and failed to ship the goods. Held: the sellers were liable for breach of contract; they had undertaken absolutely that they would obtain the export licence. SITUATIONS THAT WILL CAUSE FRUSTRATION ← Destruction of the subject matter of the contract. Case: Taylor v Carldwell 1863
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A hall was let to the plaintiff for a series of concerts on specified dates. Before the date of the first concert the hall was accidentally destroyed by fire. The plaintiff sued the owner of the hall for damages for failure to let him have the use of the hall as agreed. Held: destruction of the subject matter rendered the contract impossible to perform and discharged the defendant from his obligations under the contract. Case: Couturier v Hastie 1852 (Tutor’s Note: will also be used in Mistake) A contract was made in London for the sale of a cargo of corn shipped from Salonika. Unknown to the parties the cargo had meanwhile been sold by the master of the ship at Tunis since it had begun to rot. The London purchaser repudiated the contract and the agent who had sold the corn to him was sued (as a del credere agent he had indemnified his principal against any losses arising from such a repudiation) Held: the claim against the agent failed. The corn was not really in existence when the contract was made. The contract presupposed that it was; as it related to non-existent subject matter, it was void. ↑ Where there is personal incapacity or death Case: Condor v Barron Knights 1966 The plaintiff aged 16, contracted to perform as drummer in a pop group. His duties, when the group had work, were to play on every night of the week. He fell ill and his doctor advised that he should restrict his performances to four nights per week. The group terminated his contract. Held: a contract of personal service is based on the assumption that the employee's health will permit him to perform his duties. If that is not so the contract is discharged by frustration. Case: Robinson v Davison → Where the contract is conditional to the happening of an event. If that event does not occur, the contract is frustrated. Case: Krell v Henry 1903 A room belonging to the plaintiff and overlooking the route of the coronation procession of Edward VII was let for the day of the coronation for the purpose of viewing the procession. The coronation was postponed owing to the illness of the King. The owner of the rooms sued for the agreed fee, which was payable on the day of the coronation. Held: the contract was made for the sole purpose of viewing the procession. As that event did not occur the contract was frustrated. Case: Chandler v Webster 1904 The defendant agreed to let the plaintiff have a room for £141.15s[£141.75] for the purpose of viewing the coronation procession of Edward VII. The contract provided that the money was payable immediately. The coronation was postponed owing to the illness of the King. The
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plaintiff sued for the return of his £100 and the defendant counterclaimed for the unpaid amount of £41.15s. Held: the obligation to pay rent had fallen due before the frustrating event. The plaintiff's action failed and the defendant's claim was upheld. Case: Herne Bay Steamboat Co v Hutton 1903 A steamboat was hired for two days to carry passengers, for the purpose of viewing the naval review (at Spithead) and for a day's cruise round the fleet. The review had been arranged as part of the coronation celebrations. The naval review was cancelled owing to the King's illness but the steamboat could have taken passengers for a trip round the assembled fleet, which remained at Spithead. Held: the royal review of the fleet was not the sole occasion of the contract, and the contract was not discharged. The owner of the steamboat was entitled to the agreed hire charge less what he had earned from the normal use of the vessel over the two day period. ↓ Where there is subsequent impossibility of performance. Case: Metropolitan Waterboard v Dick, Kerr & Co 1918 The defendant contracted in July 1914 to build a reservoir for the plaintiffs within six years, subject to a proviso that the time should be extended if delays were caused by difficulties, impediments or obstructions. In February 1916 the Minister of Munitions ordered the defendants to cease work and sell all their plant. Held: the proviso in the contract did not cover such a substantial interference with the contract. The interruption was likely to cause the contract, if resumed, to be radically different from that contemplated by the parties. The contract was discharged. ° Where there is statutory interference e.g. where the law is changed making it illegal to employ people below the age of 21 years. Case: Baily v De Crespigny D leased some land to B, and covenanted that he would not erect any but ornamental buildings upon the adjoining land. A railway company, under statutory powers took this adjoining land and built a railway station on it. Held: D was excused from performance of his covenant because the railway company’s statutory powers had rendered it impossible. OUTCOME OF FRUSTRATION Frustration does not create any remedy. In general, whenever a contract is frustrated, the outcome is that it would lay where it fell. Additionally, the courts were very much reluctant to adjudicate (arbitrate) in cases of frustration arguing that it was the responsibility of contractual parties to 38 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
provide for the outcome of frustration in their contractual agreement. This was a case of hardship and in 1943, the Parliament in England enacted the Law Reform (Frustrated Contracts) Act which provides as follows: 1. 2. 3. 4.
All sums payable stops to be payable. All sum paid may be recovered. Any expense inccurred could be recovered or claimed back or retained. Any benefit other than money may be conferred, may be quantified and a reasonable amount claimed.
This legislation, however, does not apply to the following types of contract: 1. 2. 3. 4.
A contract which already provide for the outcome of frustration. A contract where the parties have waived their rights to have any action in case of frustration. A contract which is outside the jurisdiction of the English court. A contract for the carriage of goods by sea (Freight is not payable on a Pro-Rata basis). Freight is payable in terms of volume. 5. Contracts of Insurance.
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↑ DISCHARGE OF CONTRACT BY BREACH (BREACH OF CONTRACT) A contract may be discharged by breach. Breach is the only form of discharge that will create a remedy for the injured party. Breach may take one of the following three forms: (i)
Where one of the parties disables himself from performance of the contract or from being able to perform the contract.
DISABILITY One of the parties to a contract may disable himself from any further performance due to his own disability. Case: Synge v Synge 1894 Where a party, by his own act or default, prevents himself from performing his contractual obligations he is treated as if he refused to perform them. For instance, where A sells a thing to C even though he promised to sell it to B he is in repudiatory breach of his contract with B. Once the contract is operational, one of the two parties may breach the contract or even rescind it. Under such circumstances, there would be two types of breach: RESCISSION 1. Breach of Condition – lead to Rescission Case: Poussard v Spiers 1876 Mme Poussard agreed to sing in an opera throughout a series of performances. Owing to illness she was unable to appear on the opening night and the next few days. The producer engaged a substitute who insisted that she should be engaged for the whole run. When Mme Poussard recovered, the producer declined to accept her services for the remaining performances. Held: failure to sing on the opening night was a breach of condition which entitled the producer to treat the contract for the remaining performances as discharged. 2. Breach of Warranty – lead to damages Case: Bettiny v Gye 1876 An opera singer was engaged for a series of performances under a contract by which he had to be in London for rehearsals six days before the opening performance. Owing to illness he did not arrive until the third day before the opening. The defendant refused to accept his services, treating the contract as discharged. 40 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
Held: the rehearsal clause was subsidiary to the main purpose of the contract. Breach of the clause must be treated as breach of warranty, so the defendant had no right to treat the contract as discharged and must compensate the plaintiff. He could however claim damaged (if could prove any loss) for failure to arrive in time six days’ rehearsals REPUDIATION This takes place where a party commits the breach before the contract comes into operation. However, for repudiation to take place, the party who is aggrieved must accept the breach, Now, acceptance of the breach will not affect the contract. (i)
Case: White & Carter (Councils) v Mcgregor 1961
The plaintiffs supplied litter bins to local councils, and were paid not by the councils but by traders who hired advertising space on the bins. The defendant contracted with them for advertising of his business. He then wrote to cancel the contract but the plaintiffs elected to advertise as agreed, even though they had at the time of cancellation taken no steps to perform the contract. They performed the contract and claimed the agreed payment. Held: the contract continued in force and they were entitled to recover the agreed price for their services. Repudiation does not, of itself, bring the contract to an end. It gives the innocent party the choice of affirmation or rejection. (ii)
Case: Vitol SA v Norelf Ltd (The Santa Clara) 1996
P agreed to purchase a cargo of propane from D. The propane was to be loaded on a ship between March 1 and 7, 1991. On March 8, P sent D a telex repudiating the contract because loading was not going to be completed until March 9. The telex was treated as an anticipatory breach. D completed the loading, informed P that it had done so, so the ship sailed away, and D sold the propane to a third party but for less than half the contract price. D claimed the difference between the two prices. Held: (HL) D, by neither affirming nor performing the contract, accepted P’s repudiatory breach and were, therefore, entitled to recover damages from P. At times, there may in practice be no option but to accept the repudiation e.g. the dismissal of an employee from his job. Whenever there is anticipatory breach, the aggrieved party has two options: 1. To accept the breach and sue immediately or 2. To consider the contract as ongoing and to wait until the time of performance is due before taking action. In such a case, the defaulting party may avail himself of any supervening event which might relieve him of any obligation under the contract.
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Case: Hochster v De La Tour 1853 The defendant engaged the plaintiff as a courier to accompany him on a European tour commencing on 1 June. On 11 May he wrote to the plaintiff to say that he no longer required his services. On 22 May the plaintiff commenced legal proceedings for anticipatory breach of contract. The defendant objected that there was no actionable breach until 1 June. Held: the plaintiff was entitled to sue as soon as the anticipatory breach occurred on 11 May. Case: Avery v Bowden 1855 The defendant entered into a contract to charter a ship from the plaintiff to load grain at Odessa within a period of 45 days. The ship arrived at Odessa and the charterer told the plaintiff that he did not purpose to load a cargo. The master remained at Odessa hoping the charterer would change his mind- that is, he did not here and then treat the contract as discharged by the charterer’s anticipatory approach. Before the 45 days (for loading cargo) had expired, the outbreak of the Crimean war discharged the contract by frustration. Held: the shipowner, through the master, had waived his right to sue for anticipatory breach (with a claim for damages). The contract continued and had been discharged later by frustration (the outbreak of war) without liability for either party. Whenever there is breach, the following remedies are available: ← Damages ↑ Quantum Meruit → Injunction ↓ Decree of specific performance ° Rescission ± The right to retain liquidated damages when paying the contract price. → DISCHARGE OF CONTRACT BY PERFORMANCE A contract may be discharged by performance. When discharge by performance takes place, the consideration is executed i.e. both parties have fully performed whatever obligations they had under the contract. Whenever performance of a contract is being considered, one must have regard to the time of delivery. If time is the essence of the contract, then performance beyond the time prescribed will result into a breach of condition. Case: Rickards v Oppenheim 1950 In July 1947 D agreed to take delivery of a new Rolls Royce car from P within ‘six months or, at the most, seven months’. The car was not ready in time and D agreed to wait another three months. When it was still not ready then D gave notice that if the car was not ready within four weeks he would cancel the order, which he did. Held: (CA) D was entitled to refuse to take delivery of the car. Although he had waived his right to take delivery of the car by a particular date, he had reasserted this right when requiring the car to be ready within four weeks.
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Performance of a contract must also consider tender performance. It means attempted performance. If a person has attempted performance of a contract but has been prevented from doing so by the other party, then that person will be discharged from any liability under the contract. ↓ DISCHARGE OF CONTRACT BY AGREEMENT If the parties have agreed to enter into a contract, it is logical to assume that they can also discharge their contract by agreement. Discharge by agreement normally takes place in the following ways: ← Release ↑ New Agreement → Accord and Satisfaction ↓ Provision for discharge contained in the contract itself ← Release At any time before performance of the contract is due or after a breach of the contract has taken place, a release of the obligations under the contract may be granted by deed. ↑ New Agreement A contract may be rescinded by a new agreement between the parties at any time before it is discharged by performance. (Discharge by Agreement is also known as Discharge by Waiver) → Accord and Satisfaction This will occur as a form of release by agreement when one of the parties has executed his consideration while the other has still executory consideration. The discharge will then take place by obtaining the agreement of the party who has executed his consideration while the latter will also have to provide him with fresh consideration. Case: British Russian Gazette v Associated Newspapers ↓ Provision for discharge contained in the contract itself The contract may contain a term providing for its termination on the non-fulfillment of a condition or the happening of an event. The non-fulfillment of a condition precedent gives a right to the party whose interest the condition was imposed to terminate the contract. Case: Head v Tattersall 1871 The plaintiff bought a horse guaranteed ‘to have been hunted with the Bicester Hounds’, on the understanding that it could be returned within a time limit if it did not answer the description. The horse was injured and the plaintiff discovered that it had never hunted with the Bicester hounds. The plaintiff returned it and sued for the return of the price
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Held: a contract had come into existence, but the option to return the horse was a condition subsequent. The plaintiff was entitled to cancel the contract, return the horse and recover the price. ° DISCHARGE OF CONTRACT BY OPERATION OF LAW A contract may be discharged by operation of law. This may take various forms e.g. ← BANKRUPTCY An undischarged bankruptcy do not normally carry contractual capacity. Therefore, if a party to a contract becomes bankrupt, the contract is automatically discharged. ↑ MERGER An existing contract may at times be merged into a bigger one which incorporates all the rights and obligations of the existing contract. When this so happens, the existing contract is discharged and actions will lay only on the new enlarged contract. → CONTRACTS WITH ALIEN ENEMIES A contract with an alien enemy is void unless it has been entered by a licence granted by the crown. An alien enemy is one who voluntarily resides in enemy territory. If the contract was ongoing, it is terminated immediately with the outbreak of war. However, ex-propriation is not allowed. The proceeds of the contract belonging to the alien is kept in suspense and must be returned to him once the war is over. Case: Arab Bank v Barclays Bank Ltd. ↓ If there is a change in the law which makes the contract illegal, the contract is terminated. REMEDIES FOR BREACH OF CONTRACT ← Damages. ↑ Quantum Meruit. → Rescission. ↓ Injunction. ° Specific Performance Order. ± Right to retain liquidated damages when paying the contract price. ″ Right to refuse any further performance.
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Damages are always paid in monetary terms and are always the first remedy. If not the appropriate one, then we may shift to some other remedy. Its purpose is not to punish the defaulting party but to compensate the aggrieved party. It is intended to bring the parties to the same financial position as they would have been had the contract been performed. Damages in fact serve three purposes: ← Restitutionary interest of the aggrieved party. ↑ It seeks to compensate the aggrieved party for loss of his positive or expectation interest. → It seeks to protect the aggrieved parties negative interest. The restitutionary interest of the aggrieved party is not meant to compensate the party for a loss but to deprive the defendant or defaulting party of the benefit he gained from the breach e.g. where a person fails to pay for goods which he has purchased and as a result of his using the goods, he has made some profits. The positive interest is to put the aggrieved party in the same financial position as he would have been had the contract been performed. The negative interest: Under this aspect the purpose of damage is to protect interest of the aggrieved party. If he is unable to establish the value of the loss sustained as a result of the breach, he may seek compensation for his reliance losses.
TYPES OF DAMAGES (CONTRACTUAL DAMAGES) RESULTING AS A BREACH OF THE CONTRACT) ← Liquidated. ↑ Unliquidated. → Nominal. ← Liquidated damages the amount of which has already been agreed by the parties in their contractual agreement e.g. in construction contracts, it is normally provided that for each day of delay on the delivery date, a certain amount is payable. ↑ Unliquidated damages i.e. the amount of which has not been agreed upon and by the parties but is left for the court to decide on the reasonable amount payable should there be breach. → Nominal: At times, when there is a breach of the contract but no damages has been sustained, the court may grant nominal damages just to give efficacy to its decision. Case: Bruce v Calder REMOTENESS OF DAMAGES
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Whenever payment of the damages is being considered, the following must be taken into consideration: Damages will be payable only if they are caused by a proximate (in one’s mind) cause and not by a remote cause. Proximity will be present only if the likely consequences of the breach are within the contemplation of both parties at the time of contracting. Case: Hadley v Baxendale 1854 (Seminal Case) The plaintiffs owned a mill at Gloucester which came to a standstill because the main crank shaft had broken. They made a contract with the defendant, a carrier, for the transport of the broken shaft to the makers at Greenwich to serve as a pattern for making a new shaft. Delivery of the new shaft was to be made at Greenwich the following day. Owing to neglect by the defendant delivery was delayed and the mill was out of action for a longer period than would have resulted if there had been no delay. The defendant did not know that the mill would be idle during this interval. He was merely aware that he had to transport a broken millshaft from the plaintiff’s mill. The plaintiffs claimed for loss of profits of the mill during the period of delay. Held: although the failure of the carrier to perform the contract promptly was the direct cause of the stoppage of the mill for an unnecessarily long time, the claim must fail since the defendant did not know that the mill would be idle until the new shaft was delivered (part (b) of the rule did not apply). Moreover it was not a natural consequence of delay in transport of a broken shaft that the mill would be out of action meanwhile (part (a) of the rule did not apply). The importance of the shaft was not obvious; the miller might have a spare. Case: Victoria Laundry (Windsor) v Newman Industries 1949 The defendants contracted to sell a large boiler to the plaintiffs ‘for immediate use’ in their business of launderers and dyers. Owing to an accident in dismantling the boiler at its previous site delivery, due on 5 June, was delayed until 8 November. The defendants were aware of the nature of the plaintiff’s business and had been informed that the plaintiffs were most anxious to put the boiler into use in the shortest possible space of time. The plaintiffs claimed damages for normal loss of profits of £16 per week for the period of delay and for loss of abnormal profits, assessed at £262 per week, from losing ‘highly lucrative’ dyeing contracts to be undertaken if the boiler had been delivered on time. Held: damages for loss of normal profits were recoverable since in the circumstances failure to deliver major industrial equipment ordered for immediate use would be expected to prevent operation of the plant – it was a natural consequence covered by the first head of the rule. The claim for loss of special profits fell under the second head of the rule; it failed because the defendants had no knowledge of the dyeing contracts and the abnormal profits which they would yield. Where there are special circumstances arising out of the contract which is known to one party only, no damages would be payable if those special circumstances are no brought to the attention of the other contracting party. In fact, he must be made aware of it so that be contracts subject to this prospective liability. Case: Pinnock Brothers v Lewis & Lamber 46 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
PENALTY & LIQUIDATED DAMAGES A penalty as compared to liquidated damages is a sum which is grossly exaggerated as compared to the heaviest loss that could be sustained. The distinction between penalty and liquidated damages is of vital importance because if it is a penalty then only the actual damage suffered can be claimed. If it is liquidated damages, then the whole sum agreed upon can be recovered. The criteria for distinguishing liquidated damages from penalty are: 1. The use of words penalty or liquidated damages in the contract is not conclusive Case: Alder v Moore 2. The essence of a penalty is the payment of money stipulated as In terrorem (with a view to terrorising) the offending party. It is meant to compel performance by providing something by way of punishment in the contract. 3. It will be a penalty if it is an amount which is grossly exaggerated and extravagant as compared to the heaviest loss that can be sustained. Case: Lamdon Trust v Hurrell 4. It will be a penalty if the breach consists of not paying a sum of money by a certain time and the sum fixed is greater than the sum to be paid. 5. When a single sum is made payable on the occurrence of one or more of several events, some of which may occasion and others triffling damage, there is a presumption (but no more) that the sum is a penalty. REMEDIES FOR BREACH OF CONTRACT: ↑ QUANTUM MERUIT Where there is a breach of contract, the injured party may claim damages. However, there are situations where there is no contract itself and the right to payment to a person does not arise out of the original contract but is based on a promise made by the other party as a result of the aggrieved person executing some work. This is called quantum meruit. This type of claim falls under the category of Quasi contracts i.e. not contracts in themselves but almost a contract. A claim in Quantum Meruit normally arises out of two situations: 1. Where one party abandons or refuses to perform the contract Case: Planche v Colburn 1831
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The plaintiff had agreed to write a book on costumes and armour for the defendants’ ‘Juvenile Library ‘series. He was to receive £100 on completion. He did some research and wrote part of the book. The defendants then abandoned the series. Held: the defendant was entitled to 50 guineas as reasonable remuneration on a quantum meruit basis. 2. Where work has been done and accepted under a void contract. Case: Craven-Ellis v Cannons Ltd A Managing Director claiming remuneration for services performed under his service contract was void since the directors who approved it were not qualified to do so. The reason why the law admits a claim for Quantum Meruit is that otherwise the recipient of the benefit will unjustly enrich himself at the expense of the supplier of goods and services. REMEDIES FOR BREACH OF CONTRACT: → SPECIFIC PERFORMANCE ORDER (DECREE OF SPECIFIC PERFORMANCE) A specific performance order (its origin is in equity) is an equitable order which provides that a person who is in breach will be compelled to perform his obligations under the contract. It is discretionary in nature and will be granted in the following circumstances: (i) (ii) (iii) (iv) (v)
Where damages is the appropriate remedy. Where the contract to be enforced is against a minor. Where the court cannot supervise the execution of the works e.g. construction contracts. Where the contract is for the provision of goods and services. Where the contract is for lending of money.
REMEDIES FOR BREACH OF CONTRACT: ↓ INJUNCTION An injunction is an equitable remedy granted at the discretion of the court and its purpose is to restrain a party from doing an act. An injunction is normally interlocutory (temporary) in nature but it can be made permanent. An injunction may be granted ex –parte (in the absence of the party). There are two types of injunction: (i)
MAREVA INJUNCTION ( Saisie Rogatoire )
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The Mareva injunction was granted in the case of Mareva Compania Naviera v International Bulk Carriers (commonly called the Mareva). It is normally granted in cases where the English courts have jurisdiction over a dispute. It may be applied for by a person who wants to obtain an injunction against the defendant ordering him not to remove specified assets from the jurisdiction of the court. The purpose of this injunction is to prevent the defendant from nullifying the effect of a judgement which the plaintiff is likely to obtain against him. The Mavera injunction is an interlocutory injunction i.e. a temporary one. An injunction is granted while the main case is pending in court. It is for the plaintiff to indicate which assets must be placed under seal. The Mavera injunction will be granted only if: 1. The plaintiff is likely to obtain judgement against the defendant. 2. There are reasons to believe that the defendant has assets in the jurisdiction to meet the judgement but may take two steps designed to ensure that they are no longer available when judgement is given against him. Mavera injunction is normally applied for ex-parte. (ii)
ANTON PILLER INJUNCTION
The Anton Piller order was granted in the case of Anton Piller v K.G Manufacturing Processes Ltd. This is an ex-parte injunction which authorises the inspection, photographing, custody or taking away of documents or other property held by a person other than the applicant. An Antom Pillar order will be granted only in very exceptional circumstances. Where such an order is granted, it will be executed normally by the applicants’ sollicitor and if necessary by a police officer or an officer of the court. REMEDIES FOR BREACH OF CONTRACT: ° RIGHT TO RETAIN LIQUIDATED DAMAGES WHEN PAYING THE CONTRACT PRICE If liquidated damages are applicable, then the aggrieved party may retain the liquidated damages payable when paying the contract price. RIGHTS FOR BREACH OF CONTRACT: ± RIGHT TO REFUSE ANY FURTHER PERFORMANCE At times, a party to a contract may refuse any further performance on the grounds that the contract has been breached. He may then be sued in a court of law by the other party but he may set up the alleged breach as his defence. It will be for the court to decide then whether in fact there has been breach or not. LEGALITY OF A CONTRACT
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A contract must be legal in all aspects. A contract which is illegal is void. Illegality may be present: PRESENCE OF ILLEGALITY ← In the formation of a contract e.g. if a contract is made in England and is against public policy, it is illegal. ↑ In the performance of a contract e.g. a contract to commit a crime. → In the consideration of a contract. ↓ In the purpose for which the contract is made. E.g. a taxi trip for the purchase of drugs will be illegal if it is known to the driver that the purpose of the trip is to purchase drugs. CATEGORIES OF ILLEGAL CONTRACTS Contracts are illegal because they are forbidden by statute or because they are contrary to public policy. A contract is contrary to public policy when it is not in the interest of the public that it should be enforced. Broadly speaking, there are two categories of illegal contracts: 1. An illegal contract which contain an element of obvious, moral turpitude e.g. a contract to commit a crime. 2. Illegal contract where there is no moral turpitude e.g. a contract in restraint of trade. The court treats the second category of illegality of contract in a more lenient manner than the former one. TYPES OF CONTRACT WHICH ARE ILLEGAL 1. Contract tending to injure the public service. Case: Parkinson v College of Ambulance The secretary of college of Ambulance Ltd promised Colonel Parkinson that if he made a large donation to the college which was a charitable institution, he would receive a knighthood (a little rank of knight). The colonel made a large donation, and, not receiving his knighthood, sued for the return of his money. Held: the action failed because the contract was against public policy and illegal. 2. Contract tending to impede the administration of justice e.g. a contract tending to defeat the bankruptcy law. Case: John v Mendoza Mendoza owed John £ 852 and promised that if J would tell M’s trustee in bankruptcy that the money was a present, M would, not withstanding, still be J’s debtor. 50 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
Held: The agreement was void. 3. Contracts of trading with the enemy. According to the ‘ Trading with the enemy Act 1939. A contract made with a person who voluntarily resides in enemy territory is void unless made with a licence granted by the crown. 4. Contracts to commit a criminal offence or a civil wrong. Case: Alexander v Rayson 5
Immoral Contract i.e. contracts relating to sexual immorality. Case: Pearce v Brookes 1866 The plaintiffs, who were coachbuilders, let a carriage described as’of somewhat intriguing nature’ to a prostitute. They knew that she was a prostitute and the jury found (although the plaintiffs denied it) that they also knew that she intended to parade along the streets in the carriage as a means of soliciting clients and would pay for the carriage out of her immoral earnings. She failed to pay the agreed amount and they sued to recover it. Held: although the letting of a carriage is not obviously unlawful, to do so to facilitate known immoral purposes is an illegal and void contract which will not be enforced.
6. Contract affecting the freedom of marriage. A contract made with a view from preventing a person from getting married at all is void. However, a contract made with a view from preventing a person from getting married with a particular person is valid. 7. Contract in restraint of trade. CONTRACTS IN RESTRAINT OF TRADE A contract in restraint of trade is one which prevents a person from practicing his trade. This type of contract is prima facie void. This position of the court prompted masters to refuse to train apprentices if they could not after the training prevent them from competing with the masters. The position remained alike until the year 1715 where it was held in the case of Reynolds v Mitchell that a restraint of trade clause could be enforced provided it satisfied the following three conditions: 1. The restraint must be reasonable. 2. The person must be provided with adequate consideration. 3. The restraint must not be unlimited temporarily and spatially. Since then, there has been an alteration and a restraint of trade clause is now prima facie void unless proved to be reasonable. The adequacy of consideration is no more essential though important and the restraint can now be worldwide. Case: Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co. Ltd 1984 51 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
The plaintiff had developed a new firing mechanism for guns and carried on, among other things, a business manufacturing these guns and their ammunition. When he sold the assets and goodwill of the business he entered into an agreement, later duplicated when the business merged with another, that he would not engage directly or indirectly in a wide number of gun-related activities or any other competing business for 25 years except on its behalf. Held: the covenant as it related to guns and the business sold was valid because the business connection was worldwide and it was possible to sever this undertaking from the e rest of the agreement. The term as to competition was void since it went much further than could reasonably be required to protect the business. A restraint of trade clause can be divided into two classes: 1. Those protecting a proprietory interest e.g. a trade formulae will be enforced if it is: (i)
reasonable with reference to the party against whom it is being made.
Reasonable with reference to the public e.g. if it is in public interest Case: Wyatt v Kreglinger & Fernau 1933 P was a wool broker. When he retired D, his employers offered him a pension which was conditional upon him not unfairly competing with his former employers. Subsequently, he sued to recover arrears of pension. Held: the agreement to pay P was in restraint of trade. The clause was unreasonable because it deprived the community of P’s services, which might be of benefit to the community
2. Contract in restraint of trade purely preventing competition is void and will not be enforced. Case: Morris v Saxelby 1916 On leaving school the defendant entered the drawing office of the plaintiff (a manufacturer of cranes and lifting gear) as an apprentice and rose to become head of a department. He had some limited knowledge of the employer’s technical secrets but essentially he became a skilled draftsman in engineering design work. He undertook that for seven years after leaving his employment he would not engage in a similar business in the U.K. Held: this was a restraint on the use by the defendant of technical skill and knowledge acquired in the service of the plaintiff. He should not be prevented from earning his living by the use of it and the plaintiff had no right to be protected from the competition of a former employee using his own skills. The restriction was also unreasonably wide and was void Case: Attwood v Lamont 1920 The plaintiff employed the defendant as cutter and head of the tailoring department in his business of a general outfitter (clothing shop) at Kidderminster. The contract of service imposed a lifelong prohibition against engaging (within ten miles of Kidderminster) in a 52 CONTRACT LAW (TYPED BY MAUBARAK BOODHUN ) 2/1/12 9:44 A2/P2
specified list of activities which correspond with the entire range of the business- the sale of clothing of any kind. The plaintiff refused to take the defendant into partnership and the defendant set up on his own account at Worcester. This was outside the ten mile radius of Kidderminster but he came over to Kidderminster and took orders from former customers who valued his personal skill as a tailor and cutter. The plaintiff did not attempt to enforce the entire restriction but sued to restrain the defendant from engaging in the trade of a tailor only within ten miles of Kidderminster. Held: the restraint was void. It was excessive in extent since it prohibited the defendant from engaging in many things besides tailoring and customers had deserted the plaintiff because of the defendant’s personal skill, not because his duties in the plaintiff’s service had given him any influence or special knowledge of their requirements. As the restraint was too wide, it was void in its entirety. Case: Fitch v Dewes 1921 D was a solicitor’s managing clerk. In his contract of employment there was a lifelong restraint not to practise within seven miles of P’s office in Tamworth Town Hall. Held: The clause was valid because of the contract D had with P’s clients. NOTE: 1. Where a contract has illegal as well as legal clauses, the illegal clauses may be removed and the legal one applied as long as it does not affect the contract in substance i.e. if the illegal clauses can be severed from the legal one. 2. If the restraint is much wider than what is required to protect a proprietory interest, the court will not reduce it to what is considered as a reasonable one.
END OF CONTRACT LAW
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