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Contract law

Introduction
What is a contract?
A contract is a legally binding agreement or can be considered
as a promise or set of promises which the law will enforce. This
agreement will create rights and obligations that may be
enforce in the courts of law. The natural method of enforcement
is an action for damages for breach of contract, whereby the
court may order performance by the party in the default. Poole
(2008) also confirms that contracts are enforce legally with
represents the vehicle for a plan of exchanges. However, the
purpose of the agreement must not be illegal or contrary to
public policy (notion of free contract). Contract can be done in
three forms, namely; orally, written and partly oral and written.
For a contract to be valid there must be an offer, acceptance,
consideration and an intention to create legal
relationship.
1. In the essence of a contract there must be an offer and
the offer must be accepted. An offer is classified as an
expression of willingness to contract on the specific terms
without any further negotiation and must be distinguished
from an invitation to term.
2. An acceptance is the final expression of the assent to the
form of the offer in response to that offer that have be
made. Acceptance is achieved by showing the person
making the offer that the terms of the offer are agreed to.
This may be done orally, in writing, or even implied from
conduct (usually by doing the thing required). The latter
mode is hazardous and an artist should seek or give at
least oral acceptance of an offer.
The acceptance must be communicated to the offeror; it cannot
be inferred from silence. For eg: Felthouse v. Bindley
(1862) 142 E.R. 1037.

Offer and acceptance must always be properly communicated


in so that it can be effective. An actual communication is
always required so that it can reach the person it is intended
for. However, the rule of dispatch in regards to the postal
acceptance ie postal acceptance is treated as communicated
when the item is posted.
3. Consideration is classified as the feature that
distinguished a bargain from a mere gift. It is considered
as the price and not necessarily in monetary term so that
each party asks of the other in return for entering the
agreement.
(a) For example, it may be shown that at the time of the
alleged bargain, one party offered a promise if the other party
was to do an act. For example, ``I'll pay you 500 when you
paint my portrait.'' In this example, one party gives
consideration by making a promise, and the other will provide
consideration by painting the portrait.
(b) It may be shown that at the time the bargain was reached,
each party was to give a promise in exchange for the other's
promise. For example, ``I'll give you 500 if you paint my
portrait.'' ``O.K. I'll do it!'' In this example, the consideration is
construed as a promise in return for a promise. Each is
consideration for the other. Similarly, a person might offer an
artist 500 not to paint a certain subject. The promise of 500
would be consideration from the one, and the promise to refrain
would be consideration from the other.
The exchange does not have to be even, for the law will not
inquire into the relative values of the consideration; one party
might provide an enormous sum of money, another might give
a promise, and still another might provide a proverbial
peppercorn. The important thing is that each has given the
other the required price.
It is also crucial that the consideration not be past. Thus if a
collector buys a work and then says to the artist that he enjoys

the work so much that he is going to give him an additional


500, that promise is unenforceable because the only
consideration that the artist has provided (the painting) is past.
The law does not recognise the continuing pleasure given by
the work to be of actual value. The promise to pay the extra
money would be only a promise of a gift (for the consideration
is one sided) and therefore unenforceable.

4. Intention to Create a Legal Relationship is


considered as a promise that for it to be enforceable
there must be shown that there was an intended to be a
legally binding commitment. It is assumed most
commercial contracts are intended to be legally
binding. If a party is not happy in an agreement and
tries to get the contract annulled, the onus is on them
to prove the contract has no legal standing. Some enter
clauses to the effect that the agreement would not be
binding in a court of law, instance where you find this
today would be competitions in newspapers, with the
inclusion of the clause editors decision is final". Key
case relating to the issue of creating legal intentions is
Rose & Frank Co v JR Crompton & Bros(1925)
where a honour clause was written into an agreement.
When a dispute arose the courts stated the defendants
Rose had to honour the outstanding orders placed on
them by the plaintiffs JR Crompton, as they had been
accepted but did not have to continue with the
agreement or accept any new orders.

5. Agreement is classified as the principle whereby there


must be an offer an acceptance with a definite agreement
between the parties. Hence one party must make a clear
offer, and the other party must accept it.
6. Capacity is a legal principle in the law of contract as
having the capacity, in which both parties who enters into
a contract must have the necessary mental capacity to
understand what they are doing. In other circumstances

under common law anyone has the right to enter into a


contract, however there are people who are likely to lack
the capacity to enter in a contract such as:
Individuals with mental impairment (including an
intellectual disability)
Young people (persons under the age of eighteen); and
Those under the influence of drugs or alcohol.
However, on the basis for an individual to avoid a contract
base on the grounds of their incapacity, they must be able to
show that they lacked capacity to enter into a contract and
that the other party knew or ought to have known what their
incapacity.
In addition, a contract is voidable at the option of a party
who, as a result of mental disorder or intoxication, is
unable to understand the nature of the contract being
made, as long as the other party is aware or have known
of the persons disability. The party that is seeking to
withdraw from the contract has an onus of providing the
necessary requirements that the individual/s was suffering from
such a disability and that the other party was aware of this.
7. Genuine Consent- This consist both parties agreeing
to a contract on their own free will. Genuine consent is an
essential element for a contract to be legally binding.
Genuine consent to enter into a contract can be affected
by contractual negotiations, there may have been
influenced by the following:
What makes a makes a contract invalid, see below.
Undue influence. Undue influence exists there is an
inequality of power between the contracting parties which
results in the weaker party entering into a contract with
the dominant party. Where the weaker party cannot be
said to have entered into the contract voluntarily because
of the influence of the dominant party, the influence is
said to be undue and the court may set the contract
aside.

Mistake Where a mistake has occurred which shows that


the parties have agreed to different things, or where there
are such different beliefs that the contract was never
properly understood, the contract may be declared void.
Mistake is a complex area of contract law and one where
judges have traditionally been pretty unsympathetic to
someone who argues that he or she has made a terrible
mistake. As a general rule, being mistaken about some
aspect of a contract will not provide a party with a right to
escape contractual obligations even if that mistake is
fundamental.
Misrepresentation is the giving of false information by
one party to the other before the contract is made, which
induces them to make the contract. If you make a contract
in reliance on a misrepresentation and suffer loss as a
result, you can cancel the contract or claim damages.
Duress; Duress is defined as actual or threatened
violence to an individual to obtain a contractual promise.
If it is established that consent is obtained through duress
then the weaker party may choose to avoid the
agreement.
Unconscionable conduct; Unconscionable conduct also
deals with transactions between dominant and weaker
parties; it therefore overlaps with duress and undue
influence.
6. Legality - A contract may be illegal because its subject
matter that is prohibited by statute or because it infringes a
rule/s of public policy. A contract containing illegal acts,
promises or objects would violate this condition.
For example, a contract whereby party A agrees to supply party
B with a large quantity of cocaine if B kills C will obviously be
considered fundamentally illegal. Where a contract is classified
as illegal or contrary to public policy it is generally held to be
unenforceable, but many contracts are not so obviously illegal.
As an example, a contract to sell your car to a friend without a
roadworthy certificate might be illegal because of the
restrictions placed on the sale and purchase motor vehicles by
the Transport Operations Act 1995 (Qld).

Classes of Contract
Contract by deed- A deed is classified as a formal legal
document signed, witnessed and delivered to effect a
conveyance or transfer of property or to create a legal
obligation.
Simple contract: this type of contract is informal and maybe
made in any way ie writing, orally or they maybe implied by
conduct.
Bilateral contract: this type contract is a promise by one
party in exchanged for a promise by another party (one to one
contract). For eg: Sale of goods contract, there the buyer
promises to pay the price. The seller promises to deliver the
goods. In this case there is an offeror and an offeree. An offeror
is the person who makes the offer and the other hand an
offeree is the person to whom the contract is made.
Unilateral contract: This is when a promise is made by one
party in exchanged fo ran action by another party. (A one to all
contract). For eg: X promises a reward to anyone who will find
his lost wallet. X bound himself to the promise, but no one is
bound to search of the lost wallet. However, if Y on the other
hand seen the offer, found the wallet and returns it, he is
therefore entitled to the reward. The principle: 1 OFFEROR
MANY OFFEREES.

Distinguish- Offer or invitation to treat


An offer is distinguished between an invitation to treat, as an
offer will lead to a binding contract on acceptance, while on the
other hand an invitation to treat cannot be an accepted it is
merely and invitation for offers (Poole 2008).

An offer is a statement of the terms upon which the person


makes the offer is willing to enter a contract. It can be verbal or
written. Poole (2008) also confirms that an offer is an
expression of willingness to contract on certain terms, which
must be made with the intention that it will become binding
upon acceptance. If A for example makes it clearly that he
intends to be by acceptance base on the terms of the
statement will amount to be and offer and on acceptance there
will be a binding contract. On the other hand, if there is no such
intention the statement will be part of the negotiating process,
regarded as an invitation to treat and any response to it will be
best known as an offer. In order to amount to an offer, it must
be shown that the offeror had an intention for it to be binding.

Examples of Cases of Offers


For Eg: in the case: Storer v Manchester City Council
(1974), the court of appeal found that where a binding contract
was. The Council has sent Storer a communication that they
intended would be binding upon his acceptance. All Storer had
to do to bind himself to the later sale was a sign the document
and return it.
For eg: Thornton v Shoe Lane Parking (1971): in this case
the court decided tha a contract was formed by a costumer
entering the car park, via an automatic barrier. The main that
Mr. Thornton by putting money into the machine to open the
barrier and was given a ticket. Lord Denning said the offer is
made when the proprietor of the machine holds it out as being
ready to receive the money. The acceptance takes place when
the costumer puts the money into the slot.
Another eg: Chapelton v Barry UDC (1940). This is the case
the act of taking a deckchair from a pile from a pile of
deckchairs and sitting on it formed the contract where the local

council hired deckchairs that could be taken. There would not


have been an offer if the deckchairs were secured and an
attendant had to release one to the customer who requested it.
Harvey v Facey [1893] AC 552 Privy Council
Harvey sent a Telegram to Facey which stated: "Will you sell us Bumper Hall Pen? Telegraph lowest cash priceanswer paid;"
Facey replied by telegram:"Lowest price for Bumper Hall Pen 900."
Harvey then replied:"We agree to buy Bumper Hall Pen for the sum of nine hundred
pounds asked by you. Please
send us your title deed in order that we may get early
possession."
Held:
The Privy Council held that there was no contract concluded
between the parties. Facey had not directly answered the first
question as to whether they would sell and the lowest price
stated was merely responding to a request for information not
an offer. There was thus no evidence of an intention that the
telegram sent by Facey was to be an offer.
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Court of
Appeal
A Newspaper advert placed by the defendant stated:100 reward will be paid by the Carbolic Smoke Ball Company
to any person who contracts the influenza after having used the
ball three times daily for two weeks according to the printed
directions supplied with each ball...

1000 is deposited with the Alliance Bank, shewing our


sincerity in the matter."
Mrs Carlill purchased some smoke balls and used them
according to the directions and caught flu. She sought to claim
the stated 100 reward.
The defendant raised the following arguments to demonstrate
the advertisement was a mere invitation to treat rather than an
offer:
1. The advert was a sales puff and lacked intent to be an offer.
2. It is not possible to make an offer to the world.
3. There was no notification of acceptance.
4. The wording was too vague to constitute an offer since there
was no stated time limit as to catching the flu.
5. There was no consideration provided since the 'offer' did not
specify that the user of the balls must have purchased them.
Held:
The Court of Appeal held that Mrs Carlill was entitled to the
reward as the advert constituted an offer of a unilateral
contract which she had accepted by performing the conditions
stated in the offer. The court rejected all the arguments put
forward by the defendants for the following reasons:
1. The statement referring to the deposit of 1,000
demonstrated intent and therefore it was not a mere sales puff.
2. It is quite possible to make an offer to the world.
3. In unilateral contracts there is no requirement that the
offeree communicates an intention to accept, since acceptance
is through full performance.
4. Whilst there may be some ambiguity in the wording this was
capable of being resolved by applying a reasonable time limit
or confining it to only those who caught flu whilst still using the
balls.
5. The defendants would have value in people using the balls
even if they had not been purchased by them directly.

An invitation to treat is merely an indication of a willingness


to enter negotiations. Generally, and advertisement in a
newspaper or magazine is not an offer but an invitation to
treat. An advertisements are an invitation to treat.

Examples of cases of Invitation to Treat


For example, of such case: Patridge v Crittenden (1968). This
case was a criminal case where an advertiser in a
newspaper advertised bramble finch cocks and hens 25/(1.25). It was an offence under the Protection of Birds Act
1954 to offer wild birds for sale. It was an offence under the
protection of Birds Act 1954 to offer wild birds for sale. The
defendant was found not guilty as he did not offer the birds for
sale. This was an invitation to treat.
Another example is goods in a shop window. The case of
Fisher v Bell (1961) a case where a shopkeeper in Bristol was
prosecuted because he had a flick knife in his shop window with
a price label on it. It was a criminal in his shop window with a
price label on it. It was a criminal offence under the Restriction
of Offensive Weapons Act 1959 to offer such knives for sale.
The shopkeeper was found not guilty as he was not offering the
knife for sale, it was merely an invitation.
Another eg: Pharmaceutical Society of Great Britain v
Boots Cash Chemists (Southern) Ltd (1952). This is the
case of a well-known high street shop was prosecuted for
offering medicines for sale when a pharmacist was not present.
This was an offence under the Pharmacy and Poisons Act 1933.
Boots were found not guilty as the court decided that the offer
was made by the customer at the point of sale that is, the
counter or checkout till. This reflected in the practice of the
assistants in pharmacies of seeking approval from the
pharmacist before selling some medicines.
Gibson v Manchester city council (1979) this is the case
where the councils response when asked by Mr Gibson whether

the council house was the corporation may be prepared to sell


the house to you at the purchase price 2.7525 less 20 per
cent. The court decided that this reply was not an offer but an
invitation. Even though offer times the advertisement can say
this is an offer, the words may have indicated a lack of
certainty to so there was not an offer.
The offer and acceptance requirement suggests that a
contract is an agreement. Bearing in mind that the contractual
rights and obligations are based on the partys intention in
creating legal relations and the contract is binding legally when
parties intend to enter into an agreement. For eg: I am placed
under obligations to give you a car and am given rights to the
100 from you in return. Conversely, you are placed under the
obligation to pay to me 100 and given the right to have the
car transferred to you by me. These rights and obligations arise
because the parties intend to enter into this arrangement and
agreement.
Base on the principles of contractual rights parties enter in
agreement virtually by acceptance, with an intention to create
legal relations. it is important to note that as long as the offeror
evinces an intention to be legally bound they are entering into
a contract. There can be an offeror to an offeree (bilateral
contract) for eg: the above car example, or an offer to the
whole world offeror to offerees (unilateral contract) for
example in the case of Carlill v Carbolic Smoke Ball
company (1893), in which an advertisement was place in the
newspaper which included the following words, reward, the
company have contracted to the whole world basically anyone
who performed the act, and was addressed to the whole world.
This is an example of an offer made to the whole world.
In the general rule adverts that indicates a willingness to be
automatically bound to the parties who perform the acts as
stated in the adverts. For eg: Carlill v Smoke Ball Company,
the advert indicated that 100 would be paid to anyone who
fulfilled the conditions set out in the advertisement. The weight

on this matter in accordance to the court was that 1000 had


been deposited with the bank for the purpose of paying who
fulfilled the conditions.
Display of goods for sale
The general rule in contract law recapitulates that the display
of goods in a shop window (Timothy v Simpson (1834)) or on
a shelf in the shop constitutes an invitation to treat.
Subsequently it is the customer who makes the offer to buy the
goods and the shop has a choice to accept this offer or not.
For example: In the case of Pharmaceutical Society of
Great Britain v Boots Cash Chemist (southern Ltd)
(1953), as under the pharmacy and poisons acts 1933, the sale
of poison was prohibited except where the sale was effected by
or under supervision of a registered pharmacist. The claimant
(pharmaceutical society) argued that the display of the drug on
the self in the self-service shop was an offer which was
accepted when the purchaser put the drug in his basket so the
sale was carried out without the presence of a pharmacist
which was contrary to the act. The court of appeal decision held
that the display was merely an invitation to treat. Another eg: is
the display in a shop window in the case of Fisher v Bell
(1961).

Advertisements
Advertisement in the general rules constitutes an invitation to
treat. For eg: in the case (Partridge v Crittenden (1968)).

Rewards

An advert offering a reward for doing some act, like finding my


lost dog, often is constructed as an offer. For eg: (Gibbons v
Proctor 1891)
Tenders
The general rule under tender is that if someone invites parties
to tender or bid for a particular project, which is inviting the
parties to make offers for him to consider. This is an invitation
to treat and not an offer. For eg: in the case of Spencer v
Harding (1870) where the defendant sent out a circular saying
that we are instructed to offer to the wholesale trade for sale
by tender the stock in trade of Messrs. G. Eilbeck & Co. This
was not an offer.
Auctions
Auctions are considered to be an invitation to treat, where a
reserved price is made inviting bids to be made. The bibbers
are the ones making the offers and the offer is accepted by the
auctioneer bringing down the hammer. For eg: in the case of
(British car auctions v Wright 1972and sale of Goods Act
1979, s 57 (2). The auctioneer in this case acts as agent for a
vendor so when the hammer is brought down the highest
bidder and the vendor.
Acceptance

For a contract to form there must be an acceptance of an


offer. The agreement must be based on and agreement to
each terms of the offer. Acceptance can hwever be by words or
by conduct. For example in the case Brogden v Metropolitan
Railway Company 1871 where the offeree accepted the offer
by performance.
Acceptance may be defined as an unconditional assent,
communicated by the offeree to the offeror, to all terms of the
offer, made with the intention of accepting.
In order for a contract to be legally binding, the parties involved
must come to an agreement, where one party makes an offer

the the other party accepts. Therefore offer plus acceptance


equals agreement. However before applying the rules of offer
and acceptance it is relevant to look at what is known as the
objective test . This test whether the parties involved have
come to an agreement, and involves the principle of the
resonable person, whether they understand what is said or
done, and the reasonable man understand what is said or done,
as the state of mind can interfer on the basis of reaching and
agreement.
There should be no contract unless the minds of both parties
are one. There must be what is known as meeting of the minds,
based on the latin word consensus ad idem , which is a
subjective approach, where both parties understand what they
are entering into, before a contract is actually formed. This is
inportant in the law of contract as there can be can mistake of
identity, Cindy v Linday 1878 (decided by House of Lords).

Generally the priniciple of accepatnce is one party making an


offer which is known as the offeror and the other parties
accepting the offer which is known as the offeree, the principles
of acceptance comes effective when when both parites
understood what is being communicated and ther is consensus
ad idem which is meeting of the mind, boths parties will come
to gehter and form a contract.
For example: acceptance (one party A offeror) selling 5 chairs
for 50? Yes, please offeree accepted the offer of 5 chairs for
the 50. The offeree can either accept or reject the offer.
Poole (2008) states that once a valid acceptance takes place, a binding
contract is formed. Therefore it is important whether or not there is an
acceptance in order to ascertain where there has been a valid contract or
if parties are bound by the agreement.
There are three main rules relating to acceptance:
1. The acceptance must be communicated to the offeree.

2. The terms of the acceptance must exactly match the terms of the offer.

3. The agreement must be certain.

Communication
The general rule is that the offeror must receive the acceptance before it
is effective: For example in the case below:

Entorres v Miles Far East [1955] 2 QB 327 Court of Appeal


The claimant sent a telex message from England offering to purchase 100
tons of Cathodes from the defendants in Holland. The defendant sent back
a telex from Holland to the London office accepting that offer. The
question for the court was at what point the contract came into existence.
If the acceptance was effective from the time the telex was sent the
contract was made in Holland and Dutch law would apply. If the
acceptance took place when the telex was received in London then the
contract would be governed by English law.
Held:
To amount to an effective acceptance the acceptance needed to be
communicated to the offeree. Therefore the contract was made in
England.
It is important to note that silence does not generally amount to an
acceptance, see case below:

Felthouse v Bindley [1862] EWHC CP J35 Court of Common Pleas


A nephew discussed buying a horse from his uncle. He offered to
purchase the horse and said if I don't hear from you by the weekend I will
consider him mine. The horse was then sold by mistake at auction. The
auctioneer had been asked not to sell the horse but had forgotten. The
uncle commenced proceedings against the auctioneer for conversion. The
action depended upon whether a valid contract existed between the
nephew and the uncle.

Held:
There was no contract. You cannot have silence as acceptance.
Acceptance can be through conduct, see example of case below :
Brogden v Metropolitan Railway (1877) 2 App. Cas. 666
The claimants were the suppliers of coal to the defendant railway
company. They had been dealing for some years on an informal basis with
no written contract. The parties agreed that it would be wise to have a
formal contract written. The defendant drew up a draft contract and sent
it to the claimant. The claimant made some minor amendments and filled
in some blanks and sent it back to the defendant. The defendant then
simply filed the document and never communicated their acceptance to
the contract. Throughout this period the claimants continued to supply the
coal. Subsequently a dispute arose and it was questioned whether in fact
the written agreement was valid.
Held:
The written contract was valid despite no communication of the
acceptance. The acceptance took place by performing the contract without
any objection as to the terms.
Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401
Court of Appeal
Ex-Cell-O wished to purchase a machine from Butler. Butler sent out a
quotation of 75,535 along with a copy of their standard terms of sale.
The terms included a price variation clause and a term that the seller's
terms would prevail over any terms submitted by a purchaser. The
machine would be delivered in 10 months. Ex-Cell-O put in an order for
the machine at the stated price and sent a set of their terms which did
not include the price variation clause. The order contained an
acknowledgement slip which required a signature by Butler and was to be
returned to Ex-Cell-O. This slip stated that the contract would be subject
to the terms stated overleaf. Butler duly signed the slip and returned it.
The machines were then delivered and Butler sought to enforce the price
variation clause and demanded an extra 2,893. Ex-Cell-O refused to pay.
Held:
The offer to sell the machine on terms provided by Butler was destroyed
by the counter offer made by Ex-Cell-O. Therefore the price variation
clause was not part of the contract. The contract was concluded on ExCell-O's terms since Butler signed the acknowledgement slip accepting

those terms. Where there is a battle of the forms whereby each party
submits their own terms the last shot rule applies whereby a contract is
concluded on the terms submitted by the party who is the last to
communicate those terms before performance of the contract
commences.

Communication of acceptance: acceptance can be


communicted instantaneous, face to face, or via telephone.

In the case of: Entores v Miles (1955), Lord Denning thought


that if a person words were drowned out by an aircraft passing
overhead then they would have to be repeated.
Offer needs to be communicated in such a way that
acceptance can take place. Once an offer is accepted then a
contract is formed between the persons making it, long with
the other essential elements such a consideration and legal
intention are present. The accepatnace have to be posititve for
ex: in responding to the offer such as saying Yes. And not yes
but or yes if.
For a offer to be accepted there must be meeting of the minds,
the latin word ad idem. There can be no ad idem (meeting of
the minds) if one mind is unware of the other. In other words
acceptance cannot be mirror offer if the acceptance is made
ignorance of the offer. The offer need to be communicated.
For ex: Gibbons v Proctor (1891) in which a policeman was
allowed to recover a reward when he sent information in
ignorance of the offer of reward.

The Issues Regarding Postal Rule


In the case where it is agreed that the parties will use the post as a
means of communication the postal rule will apply. The postal rule states
that where a letter is properly addressed and stamped the acceptance

takes place when the letter is placed in the post box as in the cases
below:
Adams v Lindsell (1818) 106 ER 250
The defendant wrote to the claimant offering to sell them some wool and
asking for a reply 'in the course of post'. The letter was delayed in the
post. On receiving the letter the claimant posted a letter of acceptance
the same day. However, due to the delay the defendant's had assumed
the claimant was not interested in the wool and sold it on to a third party.
The claimant sued for breach of contract.
Held:
There was a valid contract which came in to existence the moment the
letter of acceptance was placed in the post box.
This case established the postal rule. This applies where post is the
agreed form of communication between the parties and the letter of
acceptance is correctly addressed and carries the right postage stamp.
The acceptance then becomes effective when the letter is posted.
For example: Adams v. Lindsell (1818)
D posted a letter on Tuesday offering to sell wool at a certain price to C,
indicating that c should accept in due course of post.
C did not receive the letter until Friday as D had addressed the letter
incorrectly. C sent his letter of Acceptance that evening.
By Sunday
D thought that he would have received a letter if C wanted the wool, so
he sold it to somebody else.
Court of Apeal held: there was a contract between them.
The general acceptance of postal rule is that acceptance is completed
when posted.
However the court decides there are exception of communication to the
rules (which would have been that the acceptance is only good when the
letter arrives: for example: in the case of Adams v Lindsell 1818 and
Household Fire Insurance v Grant 1879
The postal rules only apply to letters of acceptance, not offers revocation
of offers or counter offers. The postal rules only apply in the case where

the post is the usual method of communication between the both


parties invovled in the contract or that it is specifically stated that this is
the only method of communication of acceptance.
Aceptance takes place when a correctly stamped and addressed letter is
posted (based on the principle that if one letter is posted it cannot be got
back).
The claimant must be able to fiirst clarified or prove the letter was posted.
This is reflected in a certificate of posting from the post office or a signed
for statement by the person putting the letter in the letter box.

Example of postal rule


Adams v Lindsell (1818)
On the 2 September: Lindsell wrote to Adams offering to sell some wool
asking for a reply in the course of post
On the 5 September:adams received the letter and sent a letter of
acceptance.
On the 8 September: Lindsell sold the wool to someone else.
On the 9 September Lindsell received Adams acceptance letter.
In the case the court set out the postal rules and decided that the offer
for the sale of the wool had been accepted by Lindsell on 5 september
when Lindsell posted his letter of acceptance and there was a contract
formed.

Explain the methods of acceptance and when they will


be effective and provide examples
For a contract to be formed there must be an acceptance of the
offer. The acceptance must be an agreement to each of the
terms of the offer. The acceptance can be by words or by
conduct. For eg: Brogden v Metropolitan Railway Company
(1871) where the offeree accepted the offer by performance.
Acceptance occurs when the offerees words or conduct give
rise to the objective inference that the offeree assents to the
offerors terms. Day Morris Associates v Voyce (2003).

To be effective an offer must be communicated, there can


be no acceptance of the offer without knowledge of the offer
without knowledge of the offer. For an offer to be accepted
there must be Ad idem, meeting of the mind, therefore there
can be no meeting of the minds. If one mind is unware of the
offer.
An acceptance is for eg: (A) makes and offers to (B) to find his
jacket, (A) will give (B) 200 to find jacket and bring to him. (B)
accepts the offer and performs the act and retrieve the jacket
and hand it over to A, then A is gives him the promise of 200.
The general rule is that acceptance not effective until it is
communicated to the offeror. This is sometimes expressed by
saying that an acceptance cannot be made through silence.
For eg: Felthouse v Bindley (1862).
Once an offer is accepted there is a contract between the
person making the offer and the person accepting it provided
the other essentials of formation of consideration and legal
intention are present.
Acceptance
If an offer has been accepted, the offeree unconditionally
agrees to the terms of the offer, and the basics of a contract
can start being drawn up. The acceptance has to be
communicated to the offeror. There are many forms of
communicating acceptances, in todays business environment
instantaneous communication methods would be phone, fax or
email, alternatively post or telegram could be used. The offeror
can stipulate in the terms of the offer the method the
acceptance should be communicated and can also indicate a
time limit for acceptances to be received. The acceptance can
be deemed invalid if communicated in a different way than
stipulated.
The person who made the offer must receive the acceptance.
Silence cannot be deemed a format of communication even if
agreed by the offeror, but acceptance by conduct is
acknowledged by the courts if the offeror deems other forms of

communication are waived, Brogdan v Metropolitan


Railway(1877), Trentham Ltd v Archital Luxfer(1993).
There is one rule when this does not apply, where post or
telegram is used as the form of communication. Known as the
postal rule. If the acceptance is communicated through post or
telegram, it is deemed the offer has been accepted once the
letter of acceptance has been posted Adams v
Lindsell(1818), the letter or telegram must be correctly
addressed and stamped and posted for this rule to be effective.
The postal rule can be overturned where the offer stipulates
that the acceptance must be received in a certain manner.

Analyse the issues organistiaon must take into account


when using instaneous methods of communication in
respect of contracts.

In respect of the postal rule which is a historical ruling, which


came about in a time where the main and quickest form of
business communication was by post. Through the decades
other forms of communication have been invented which are
now much speedier. For eg: telex, phone, fax and now instant
messaging and email. Central requisites to the forming of a
contract are those of offer and acceptance. The general rule in
law states that acceptance is communicated, and has been
received by the offeror. The ruling applies where the means of
communication are deemed instantaneous. For eg: in the case
of Entores Ltd v Miles Far East Corpn (1955).
The exception to this rule is the Postal Rule, where post is the
requested form of communication between parties or where it
is an appropriate and accepted means of communication
between parties, acceptance is complete as soon as the letter
is posted. Even if the letter was mislaid or lost and does not
reach the offeror. It is a requirement that the letter of
acceptance has been properly posted London and Northern
Bank (1900). It is found telegrams also fall under the postal
rule.
An issue that rises from the Postal rule is that there is a period
of time, where person(s) are in the dark as to whether a

contract is in existence or not. Courts have decided that the


offeror assumes all the risk, as the offer is still open during the
time the letter of acceptance is in the post Adams v
Lindsell(1818).
The decision was based on the fact that an acceptance of an
offer could go on ad infinitum, back and forth between the
parties. If one had to acknowledge the receipt and then the
acknowledgment had to be acknowledged so on and so forth.
Unless the offeror has clearly stated in the terms of the offer
that acceptance must be communicated by other means the
offer must be accepted through the terms of the postal rule.
Such a situation arose in the case Holwell securities Ltd v
Hughes (1974), where the in the terms of the offer it was
clearly indicated acceptance had to be by notice in writing".
The letter of acceptance was lost in the post; therefore Hughes
did not receive a valid acceptance as he had not received a
notice in writing".
There are further cases highlighting the method of
communication in relation to acceptance. Where a method of
communication is stipulated by the offeror. Clear wording is
required if the method of communication is to be mandatory.
In the of Yates Building Co v RJ Pulleyn (1975) the
acceptance was to be sent by registered or recorded delivery
post". The plaintiff sent his acceptance by through the standard
post service. The defendant refused to accept the bid as it was
not sent to them by the methods as they had outlined in the
offer. The courts found that there was a binding contract in
place with the receipt of the acceptance by letter. This ruling
was appealed and the court further outlined the findings by
stating the offeror did not state that the only method of
acceptance as outlined would be binding.
Another area the postal rule was rigorously tested was where
the original offer was withdrawn or revoked. When does the
revocation come into effect under the postal rule. Under the
postal rule, the letter of acceptance is relevant on posting.
Letters communicating revocation come into effect only when
the letter revoking the offer is delivered. Key case dealing with
revocation under the postal rule is Byrne v Van Tienhoven
(1880). The judges ruled in this case in favour of the plaintiff.
The judges ruled it was proven by the plaintiff they had

accepted the original offer by posting a response to the


defendant. The letter of revocation was received after their
letter of acceptance had been posted by the plaintiff.

It is relatively easy for the parties to exclude the postal rule, see case
below:
Holwell Securities v Hughes [1974] 1 WLR 155
Dr Hughes granted Holwell Securities an option to purchase his house for
45,000. The option was to be exercisable 'by notice in writing' within 6
months. Five days before the expiry, Holwell posted a letter exercising the
option. This letter was never received by Hughes. Holwell sought to
enforce the option relying on the postal rule stating the acceptance took
place before the expiry of the option.
Held:
By requiring 'notice in writing', Dr Hughes had specified that he had to
actually receive the communication and had therefore excluded the
postal rule.

Consideration and the rules of consideration and the


test of enforceability
Consideration
A requirement for all enforceable contracts with the exception
of those made under deed or seal. Consideration is recognized
as a value or price agreed between two parties that allows
them to enter into a contract. In the case Currie vs
Misa(1875) the courts defined consideration as some right,
interest, profit or benefit accruing to the one party, or some
forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other. Where the words benefit accruing and
detriment are in fact in return of a promise received or given.
Therefore, consideration has to be in every contract. If it is
proved that there is no consideration, then it is considered by
the law that there is no contract between the parties.
Consideration is the act or forbearance of one party of the
promise thereof, in the price for which the promise of the other

is bought and the promise thus given for value is enforceable.


Furthermore, each party to a contract must gives something of
some value to the other. Consideration must be present for a
contract to be valid unless the agreement is made by a deed (a
form of legal document).
Consideration
It can be ascertained as the price or value parties agree on for
a promise on offer. If it is proved there is no consideration, then
it is deemed that no contract exists. Consideration must exist
for a contract to be valid. Consideration must be either
executed or executory. Executed relates to the carrying out of a
promise or payment for that promise in the present time.
Executory relates to the carrying out of the promise or making
payment for the promise in the future. Consideration must
move from the promisee for the law to assume consideration
had taken place. It must also be taken that the consideration is
deemed sufficient that it is good and has a value. Under
consideration the courts do not consider the value. If a party
negotiates a bad deal, consideration does not have to be
adequate. The courts role is to ensure that consideration was
sufficient Chappel & Co v Nestle & Co (1960).

Consideration is the essence that makes the promise binding


with both parties to the contract. When entering into a contract
within the English court, consideration has to be one of the
elements for required for a contract to be binding. The doctrine
of consideration is crucial to English contract law and applied
some flexibility to some circumstances. The leading case:
Currie
v
Misa (1875)
a valuable consideration, in the sense of the law, may
consist either in some right, interest, profit or benefit
accruing to the one party or some forbearance, detriment,

loss or responsibility given, suffered or undertaken by the


other.
Test of enforceability is when two parties agree to the terms
of the contract and to be binding by it in line with the
agreement. In essence consideration gives the badge of
enforceability to agreement. In particularly, adding its
importance where the agreement involves a promise to act in a
particular way in the future. For eg: goods exchange for money
(from everyday shop purchases). The doctrine of consideration
is applied in this case however; this does not cause any real
problem. However, for eg: in the case where one party promise
to deliver goods by next Thursday or promises to pay 1000
pound on 1 January 2017, which involves that the promise is
supported by consideration ie that is something has been given
or promised in exchange. However, when a promise to make a
gift sometime in the future will attracts enforceability in the
English Law when there the absence of consideration s put on a
special form call deed. When a promise is made for the future
and it is not contained in a deed, consideration becomes a
normal principle of enforceability.
A requirement for all enforceable contracts with the exception
of those made under deed or seal. Consideration is recognized
as a value or price agreed between two parties that allows
them to enter into a contract. In the case Currie vs
Misa(1875) the courts defined consideration as some right,
interest, profit or benefit accruing to the one party, or some
forebearance, detriment, loss or responsibility given, suffered
or undertaken by the other, where the words benefit accruing
and detriment are in fact in return of a promise received or
given. Therefore consideration has to be in every contract. If it
is proved that there is no consideration then it is considered by
the law that there is no contract between the parties.

Types of valid consideration:


Executed consideration: this is the terminology that is used
to describe the status of a persons promise in a contract where

that part of the bargain has been performed. For eg: A agrees
with B to pay B 10 to wash As cat and b washes the cat. Bs
consideration is executed ie complete because he has
performed his side of the bargain. He can then hold A to his
promise to pay him the 10.
Executory consideration: this is used to describe the status of a
persons promise in a contract where that part of the bargain
has not yet been performed. For eg: A promise to pay B if wash
the cat, but promise to pay him in two weeks time.
Consideration must have some economic value, not matter
how small. For example, in the case of:
Chappell v Nestle (1959): Where chocolate bar wrappers
were taken as part payment for a record as part of a promotion.
It was recognised that the use of chocolate bar wrappers have
little value, however there was some value, which was all that
was needed.
Void contracts: This is when the whole transaction is regarded
as nullify, as though as there has not been no contract between
the parties. So therefore any goods or money obtained under
this agreement must be returned and wherever any of the
items have been sold to any 3rd party the good must be
recovered by the original owner/s.
Consideration
In contract law consideration is concerned with the bargain of the
contract. A contract is based on an exchange of promises. Each party to a
contract must be both a promisor and a promisee. They must
each receive a benefit and each suffer a detriment. This benefit or
detriment is referred to as consideration.
Rules of consideration
There are various rules governing the law of consideration:

1. The consideration must not be past.

2. The consideration must be sufficient but need not be adequate.


3. The consideration must move from the promisee.
4. An existing public duty will not amount to valid consideration.
5. An existing contractual duty will not amount to valid consideration.
6. Part payment of a debt is not valid consideration for a promise to
forego the balance.

Value or price does not imply payment by monies only. Money


is not the only form of value to be recognized under
consideration. Other forms of value that can be considered are,
forbearance, agreeing to a right or goods/service. With
forbearance a party gives up a specific right (waiver your right
to sue). Agreeing to a right could relate to a right of way or
access to ones property.
Consideration can be classed in two ways:
Executed relates to payment for promise in the present time.
E.G buying groceries in a shop, paying for them straight away.
Executory relates to payment for a promise in the future.
Hiring equipment, payment happens in the future once
equipment is delivered for use.
When discussing consideration there are general rules which
relate to the subject.
A ) Consideration must move from the promisee;
The person who has provided consideration to the contract on
offer can look to enforce the contract. A third party cannot
enforce the contract, albeit they have an interest in the
contract, as the agreement is between the promisee and

promissor Tweedle v Atkinson(1861;) McCoubray v


Thomson(1868). This aspect of consideration was widely
disliked as in many cases third parties had significant interests
in contracts yet could not legally challenge this aspect of
consideration as it was deemed privity of contract. There was
calls for amendment to this rule and in 1999 the Contracts
(Rights of Third parties) Act was brought into law. In effect gave
right to third parties to enforce contracts where they had a
benefit, despite lack of consideration.
B) Past Consideration
Where a consideration relates to an action conducted in the
past , before a promise was made. The law cannot enforce such
a promise McArdle(1951) Roscorla v Thomas(1842).
Exceptions to the rule of past consideration, is when action or
deed was done at the request of the promissor Lampleigh v
Braithwaite(1616) , where Lampleigh sued Braithwaite for
monies owed. The court held that Lampleigh was due the
monies as he had carried out work at the request of
Braithwaite. Other exceptions are under Section 27 Bills of
exchange Act 1882 and the Limitation Act 1957.
C) Consideration must be legal.
If an act was illegal and a person had full knowledge of this,
costs cannot be recovered. Pearce v Brooks (1866)
D.) Consideration must be sufficient but does is not required to
be adequate.
Adequate consideration relates to the approximate value of the
consideration; the law will not assist because someone
negotiated a bad deal. Sufficiency relates to whether the
consideration is recognised by law as good and with value.
Under this rule if two parties negotiate a deal and are in
agreement to the value, but others may deem the valuation not
adequate, due consideration was given and can be proved to
be sufficient.
Key case law was Chappel & Co v Nestle & Co (1960).
Nestle ran a promotion. To get a record the public had to submit
three wrappers of a Nestle bar and a sum of money. Royalties
are paid out on the ordinary retail price of the record. The
plaintiff argued that the cost of the bars should be recognised
as consideration. The court held for the plaintiff, where they

deemed the wrappers were part of the consideration, persons


had to purchase three bars at a monetary value, even though
when they had no value to Nestle. Nestle dumped them on
return.
Consideration cannot be considered sufficient in the eyes of the
law if obliged by law to carry out a duty. Glasbrook Brothers
Ltd v Glamorgan CC(1925) a pre-existing contract is in
place . Stilk v Myrick (1809) part payment of a outstanding
debt. Pinnels Case.
Consideration must be something of value in the eyes of the law. For
example, in the case of (Thomas v Thomas) (1842) 2 QB 851. This
excludes promises of love and affection, gaming and betting etc. A one
sided promise which is not supported by consideration is a gift. The law
does not enforce gifts unless they are made by deed.Whilst the common
law strictly adheres to the requirement of consideration (although in
some instances the courts seem to go to some lengths to invent
consideration for example in the cases of Ward v Byham [1956] 1 WLR
496, Williams v Roffey Bros [1990] 2 WLR 1153) equity will, in some
instances, uphold promises which are not supported by consideration
through the doctrine of promissory estoppel.

(a)

Consideration must not be past, for example in the cases


below:

Re McArdle (1951) Ch 669 Court of Appeal


Majorie McArdle carried out certain improvements and repairs on a
bungalow. The bungalow formed part of the estate of her husband's
father who had died leaving the property to his wife for life and then on
trust for Majorie's husband and his four siblings. After the work had been
carried out the brothers and sisters signed a document stating in
consideration of you carrying out the repairs we agree that the executors
pay you 480 from the proceeds of sale. However, the payment was never
made.
Held:

The promise to make payment came after the consideration had been
performed therefore the promise to make payment was not binding. Past
consideration is not valid.
Past consideration may be valid where it was preceded by a
request, see case below:
Lampleigh v Braithwaite [1615] EWHC KB J17
The defendant had killed a man and was due to be hung for murder. He
asked the claimant to do everything in his power to obtain a pardon from
the King. The claimant went to great efforts and managed to get the
pardon requested. The defendant then promised to pay him 100 for his
efforts but never paid up.
Held:
Whilst the promise to make payment came after the performance and was
thus past consideration, the consideration was proceeded by a request
from the defendant which meant the consideration was valid. The
defendant was obliged to pay the claimant 100.
(b) Consideration must be sufficient but need not be
adequate, see case below:
There is no requirement that the consideration must be market
value, providing something of value is given eg 1 given in
exchange for a house would be valid. The courts are not
concerned with whether the parties have made a good or bad
bargain:
Chappel v Nestle [1960] AC 87 House of Lords
Nestle ran a sales promotion whereby if persons sent in 3 chocolate bar
wrappers and a postal order for 1 shilling 6d they would be sent a record.
Chappel owned the copyright in one of the records offered and disputed
the right of Nestle to offer the records and sought an injunction to prevent
the sales of the records which normally retailed at 6 shillings 8d. Under
s.8 of the Copyright Act 1956 retailers were protected from breach of
copyright if they gave notice to the copyright holders of the ordinary retail
selling price and paid them 6.25% of this. Nestle gave notice stating the
ordinary selling price was the 1 shilling 6d and three chocolate bar
wrappers. The question for the court was whether the chocolate bar

wrappers formed part of the consideration. If they did it was impossible to


ascertain the value they represented and therefore Nestle would not have
complied with their obligation to give notice of the ordinary retail selling
price. If the wrappers were a mere token or condition of sale rather than
constituting consideration, then the notice would be valid and Nestle could
sell the records.
Held:
The wrappers did form part of the consideration as the object was to
increase sales and therefore provided value. The fact that the wrappers
were simply to be thrown away did not detract from this. Therefore
Chappel were granted the injunction and Nestle could not sell the records
as they had not complied with the notice requirements under s.8.
(c)

Consideration must move from the promisee

If a person other than the promisee is to provide the consideration,


the promisee cannot enforce the agreement, see example:

Tweddle v Atkinson [1861] EWHC QB J57 Queen's Bench Division


A couple were getting married. The father of the bride entered an
agreement with the father of the groom that they would each pay the
couple a sum of money. The father of the bride died without having paid.
The father of the son also died so was unable to sue on the agreement.
The groom made a claim against the executor of the will.
Held:
The claim failed: The groom was not party to the agreement and the
consideration did not move from him. Therefore he was not entitled to
enforce the contract.

(d)An existing public duty will not amount to valid consideration


in the case where a party has a public duty to act, this cannot be used as
consideration for a new promise, see example:
Collins v Godefrey (1831) 1 B & Ad 950 King's Bench Division
The claimant, Collins, had been subpoenaed to attend court as a witness

in separate court case involving the defendant, Godefrey. Godefrey had


sued his attorney for malpractice and Collins was required by the court to
attend as an expert witness. In fact Collins never gave evidence but was
required to be on standby for six days in case he was called. After the trial
Collins gave Godefrey an invoice to cover his time spent at court and
demanded payment by the next day. Without giving him the full day to
pay, Collins commenced an action to enforce payment.
Held:
Collins was under a public duty to attend court due to the subpoena.
Where there exists an existing public duty this can not be used as
consideration for a new promise. Godefrey was not required to pay him.

(e) Unless the promisor goes beyond their duty, see example of
case below:

Glasbrook Bros v Glamorgan County Council [1925] AC 270 House


of Lords
The defendant owners of a colliery asked the police to provide protection
during a miner's strike. The police provided the protection as requested
and provided the man power as directed by the defendants although they
disputed the level of protection required to keep the peace. At the end of
the strike the police submitted an invoice to cover the extra costs of
providing the protection. The defendants refused to pay arguing that the
police were under an existing public duty to provide protection and keep
the peace.
Held 3:2 decision:
In providing additional officers to that required, the police had gone
beyond their existing duty. They were therefore entitled to payment. See
case below:
Ward v Byham [1956] 1 WLR 496 Court of Appeal
An unmarried couple had a child together and lived together for five
years. The father then turned the mother out of the house and sent the
child to live with a neighbour and the father paid the neighbour 1 per
week. The mother then got a job as a live in house keeper and wished to
have the daughter live with her. The father agreed to allow the daughter
live with the mother and agreed to pay her 1 per week provided she

ensured the child was well looked after and happy. The father made
payments but then when the mother remarried he stopped making
payments. The mother brought an action to enforce the agreement. The
father argued that the Mother was under an existing legal duty to look
after and maintain the child and therefore was not providing any
consideration for the promise to make payment.
Held:
By promising to ensure the child was well looked after and happy she had
gone beyond her existing legal duty and therefore had provided
consideration. She was entitled to the payment.

(f) An existing contractual duty will not amount to valid


consideration.
If a party has an existing contractual duty to do an act, this act cannot be
used as consideration for a new promise, see case below:
Stilk v Myrick [1809] EWHC KB J58 King's Bench Division
The claimant was a seaman on a voyage from London to the Baltic and
back. He was to be paid 5 per month. During the voyage two of the 12
crew deserted. The captain promised the remaining crew members that if
they worked the ship undermanned as it was back to London he would
divide the wages due to the deserters between them. The claimant
agreed. The captain never made the extra payment promised.
Held:
The claimant was under an existing duty to work the ship back to London
and undertook to submit to all the emergencies that entailed. Therefore
he had not provided any consideration for the promise for extra money.
Consequently he was entitled to nothing.

(g) Unless the party goes beyond their existing duty, see case
below:
Hartley v Ponsonby [1857] 7 EB 872
Half of a ship's crew deserted on a voyage. The captain promised the
remaining crew members extra money if they worked the ship and

completed the voyage. The captain then refused to pay up.


Held:
The crew were entitled to the extra payment promised on the grounds
that either they had gone beyond their existing contractual duty or that
the voyage had become too dangerous frustrating the original contract
and leaving the crew free to negotiate a new contract.

(h) or if they confer a practical advantage, see case example:

Williams v Roffey Bros [1990] 2 WLR 1153


The defendants were building contractors who entered an agreement with
Shepherds Bush Housing Association to refurbish a block of 27 flats. This
contract was subject to a liquidated damages clause if they did not
complete the contract on time. The defendants engaged the claimant to
do the carpentry work for an agreed price of 20,000. 6 months after
commencing the work, the claimant realised he had priced the job too low
and would be unable to complete at the originally agreed price. He
approached the defendant who had recognised that the price was
particularly low and was concerned about completing the contract on
time. The defendant agreed to pay the claimant an additional 575 per
flat. The claimant continued work on the flats for a further 6 weeks but
only received an additional 500. He then ran out of money and refused
to continue unless payment was made. The defendant engaged another
carpenter to complete the contract and refused to pay the claimant the
further sums promised arguing that the claimant had not provided any
consideration as he was already under an existing contractual duty to
complete the work.
Held:
Consideration was provided by the claimant conferring a benefit on the
defendant by helping them to avoid the penalty clause. Therefore the
defendant was liable to make the extra payments promised.
(i)

If the existing contractual duty is owed to a 3rd party this


may be used as valid consideration for a new promise:

New Zealand Shipping v Satterthwaite [1975] AC 154 Privy Council


A contract for the carriage of a machine by ship to New Zealand provided
that the owners of the goods could not sue the carriers or stevedores
unless any claim was brought within one year of the action giving rise to
the cause of action. The stevedores were independent contractors who
were engaged to load and unload the ship by the ship owner. A stevedore
damaged the machine whilst unloading it. The owner of the machine
brought an action against the stevedore after the limitation period
specified in the contract. The stevedore sought to rely upon the clause in
order to escape liability. The owner of the machine argued that the
stevedores could not rely on the clause as they were not privy to the
contract and had not provided them with any consideration.
Held:
The stevedores had provided consideration in the form of services of
unloading the machine. Relying on the case of Scotson v Pegg, there is
nothing to prevent consideration owed to a 3rd party being valid
consideration for a new promise to another party. Therefore the
stevedores had protection from the limitation clause. The claimant's
action was unsuccessful.
Case example:
Scotson v Pegg [1861] EWHC Exch J2
A purchaser of some coal paid the defendant to carry and to unload the
coal. The claimant was the supplier of the coal who had also paid the
defendant to carry and unload the coal. The claimant brought an action to
recover the money paid arguing the defendant was already under an
existing duty to carry and unload the coal and thus provided no
consideration.
Held:
An existing contractual duty owed to a 3rd party to the contract can
amount to valid consideration for a new promise. Consequently the
claimant could not recover the sums paid and the defendant was entitled
to get paid twice for doing the same thing.
(J) Part payment of a Debt: Part payment of a debt is not valid
consideration for a promise to release the debt in full, See case below:

Pinnel's Case 1602 5 Rep, 117 Court of Common Pleas


The claimant was owed 8 10 shillings. The defendant paid 5 2 shillings
and 2p. The claimant sued for the amount outstanding.
Held:
The claimant was entitled to the full amount even if they agreed to accept
less. Part payment of a debt is not valid consideration for a promise to
forebear the balance unless at the promisor's request part payment is
made either:
a). before the due date or
b). with a chattel or
c). to a different destination
Part payment of a debt is not valid consideration for a promise to forebear
the balance unless at the promisor's request part payment is made:
a). before the due date
b). with a chattel
c). to a different destination
This rule from Pinnel's case was affirmed by the House of Lords in, the
case of Foakes v Beer, see below:

Foakes v Beer (1883-84) LR 9 App Cas 605 House of Lords


Dr Foakes owed Mrs Beer 2,000 after she had obtained judgment against
him in an earlier case. Dr Foakes offered to pay 500 immediately and the
rest by instalments. Mrs Beer agreed to this and agreed she would not
seek enforcement of the payment provided he kept up the instalments.
No mention was made in this agreement of interest although judgment
debts generally incurred interest. Dr Foakes paid all the instalments as
agreed and Mrs Beer then brought an action for the interest.
Held:
Dr Foakes was liable to pay the interest. The agreement reached
amounted to part payment of a debt and under the rule in Pinnel's case
this was not good consideration for a promise not to enforce the full
amount due.

Further exceptions to the rule in Pinnel's case:

Foakes v Beer (1883-84) LR 9 App Cas 605 House of Lords


Dr Foakes owed Mrs Beer 2,000 after she had obtained judgment against
him in an earlier case. Dr Foakes offered to pay 500 immediately and the
rest by instalments, Mrs Beer agreed to this and agreed she would not
seek enforcement of the payment provided he kept up the instalments.
No mention was made in this agreement of interest although judgment
debts generally incurred interest. Dr Foakes paid all the instalments as
agreed and Mrs Beer then brought an action for the interest.
Held:
Dr Foakes was liable to pay the interest. The agreement reached
amounted to part payment of a debt and under the rule in Pinnel's case
this was not good consideration for a promise not to enforce the full
amount due.
(K) Where part payment is made by a third party. See example
below:
Hirachand Punamchand v Temple [1911] 2 KB 330 Court of Appeal
The claimants were money lenders in India. They lent money to the
defendant Lieutenant Temple who was an army officer serving in India.
The claimants sought return of the money from the claimant but were
unable to get any response so they contacted his father. Some
correspondence went between the claimant and the father's solicitors. The
claimants asked how much the father would be prepared to pay to settle
the son's accounts. An amount was agreed which was a substantial,
amount although not the full amount due. The claimant promised to send
the promissory note relating to the son's debt to the father once they
received payment. The father paid, but the claimant retained the
promissory note and sued the son to enforce the balance.
Held:
The payment made by the father was sufficient to discharge the full
balance. Where the person making payment in return for discharging the
debt owed by another this will amount to good consideration as the
existing duty to make payment was not owed by them but a third party.

Categories of Contract Law

English contract law recognises three types of mistake:

Common mistake - Where both parties make the same


mistake.

Mutual mistake - Where the parties are at cross purposes.

Unilateral mistake - Where only one party is mistaken.

In the case where the courts make a finding of mistake this will generally
render the contract void ab initio (from the beginning) so it is as if
the contract never existed. This represents an important distinction from
voidable contracts. Where a contract is voidable, the contract exists and is
valid until such time as the innocent party takes action to set the contract
aside. Thus where there is a voidable contract a person acquiring goods
under a contract will obtain good title to those goods. If a contract is void,
no title passes. This distinction is most relevant where the goods have
been sold on to a third party. A purchaser of the goods will acquire good
title if the original contract was voidable, but will not obtain title if the
contract is void.

1. Common mistake
Common mistakes exist where both parties to the contract make the
same mistake. Three categories have emerged as giving rise to a cause of
action:

Res extincta - the subject matter of the contract no longer exists.

Res sua - where the goods already belong to the purchaser.

Mistake as to quality - only available in very narrow limits.

Res extincta
Res extincta will apply where both parties enter a contract with the belief
that the subject matter exists when in fact it does not exist. The contract
will be held to be void for mistake, see example below:

Scott v Coulson [1903] 2 Ch 439


At the time of entering a contract for life insurance both parties believed
the person whose life was to be insured was living. When in fact he was
dead.
The contract was void for mistake as it was a common mistake as to the
existence of the subject matter (Res extincta. See example below:

Couturier v Hastie (1856) 5 HLC 673


A cargo of corn was in transit being shipped from the Mediterranean to
England. The owner of the cargo sold the corn to a buyer in London. The
cargo had however, perished and been disposed of before the contract
was made. The seller sought to enforce payment for the goods on the
grounds that the purchaser had attained title to the goods and therefore
bore the risk of the goods being damaged, lost or stolen.
The court held that the contract was void because the subject matter of
the contract did not exist at the time the contract was made.

Statutory provision is also available in contracts for the sale of goods


where the goods have perished:
Sale of Goods Act 1979

Res sua
This applies where a party contracts to buy something which in fact
belongs to him. This will generally render the contract void. Although if
the action is based in equity this will render the contract voidable:

Cooper v Phibbs (1867) LR 2 HL 149


A nephew leased a fishery from his uncle. His uncle died. When the lease
came up for renewal the nephew renewed the lease from his aunt. It later
transpired that the uncle had given the nephew a life tenancy in his will.
The lease was held to be voidable for mistake as the nephew was already
had a beneficial ownership right in the fishery.
This is an instance of res sua. Normally where a contract is found to have
been entered under a common mistake the contract will be rendered void
as oppose to voidable. The lease was held to be voidable rather than void
as the claim was based in equity as it related to beneficial ownership as
oppose to legal ownership.
This caused some uncertainty as to whether there was equitable relief for
mistake which was wider than that which existed at common law. In
particular Lord Denning argued that such a position of the law existed
in Solle v Butcher.
Mistake as to quality
A mistake as to quality is only capable of rendering a contract void where
the mistake is as to the existence of some quality which renders the
subject matter of the contract essentially different to that what it was
believed to be:

Bell v Lever bros [1932] AC 161 House of Lords


Lever bros appointed Mr Bell and Mr Snelling (the two defendants) as
Chairman and Vice Chairman to run a subsidiary company called Niger.
Under the contract of employment the appointments were to run 5 years.
However, due to poor performance of the Niger company, Lever bros
decided to merge Niger with another subsidiary and make the defendants
redundant. Lever bros drew up a contract providing for substantial
payments to each if they agreed to terminate their employment. The
defendants accepted the offer and received the payments. However, it
later transpired that the two defendants had committed serious breaches
of duty which would have entitled Lever bros to end their employment
without notice and without compensation. Lever bros brought an action
based on mistake in that they entered the agreement thinking they were
under a legal obligation to pay compensation.
The House of Lords held that this was only a mistake as to quality and did
not render the contract essentially different from that which it was
believed to be. The action therefore failed.

Leaf v International Galleries [1950] 2 KB 86


The claimant purchased a painting from the defendant. Both parties
believed that the painting was by the artist Constable. In fact 5 years
later the claimant discovered the painting was not a Constable. The
claimant brought an action based both on misrepresentation and mistake.
The claim based on misrepresentation was successful however, since it
was an innocent misrepresentation, the claimant had lost the right to
rescind the contract through lapse of time. With innocent misrep the time
starts to run from the date of the contract not the date of discovery.
The claim based on mistake was unsuccessful as the mistake related to
the quality and did not render the subject matter something essentially
different from that which it was believed to be. He believed he was buying
a painting and he got a painting

Great Peace Shipping v Tsavliris International [2003] QB


679 Court of Appeal

A ship, The Cape Providence, suffered structural damage in the South


Indian Ocean. The defendants offered a salvage service which was
accepted by the ship owners. The defendants made inquiries as to the
nearest salvage ship and were informed that The Great Peace was 35
miles away. They then entered a contract with Great Peace Shipping
(GPS) to engage The Great Peace to do the salvage work. In fact The
Great Peace was 410 miles away at the time. When the defendants learnt
of the actual distance they searched for a closer ship as they believed the
Cape Providence was close to sinking and needed to rescue the crew.
They found a closer ship and tried cancelled the contract GPS. However,
GPS refused to cancel the contract and brought an action for breach. The
defendants sought to argue that the contract was void for mistake at
common law, alternatively that it was voidable for mistake in equity.
The Court of Appeal held that both claims failed. Equity does not provide
relief from mistakes where the common law does not provide relief. At
common law the mistake did not render the contract essentially different
from that which it was believed to be.

2. Mutual mistake
A mutual mistake is one where the parties are at cross purposes. The
courts apply an objective test to see if the contract can be saved. Ie
would a reasonable person looking at the correspondence between the
parties have understood the contract to have a single meaning. If yes the
contract is valid on that meaning. If a reasonable person could not
determine the meaning then the contract will be void for mistake:

Raffles v Wichelhaus (1864) 2 H & C 906 Court of Exchequer


The parties entered a contract for the sale of some cotton to be shipped
by 'The Peerless' from Bombay. The Peerless had a sailing from Bombay in
October and in December. The defendant thought that it was the October
sailing and the claimant believed it was the December sailing which had
been agreed.
The court applied an objective test and stated that a reasonable person
would not have been able to state with certainty which sailing had been

agreed. Therefore the contract was void as there was no consensus ad


idem
3. Unilateral mistake
In unilateral mistakes only one of the parties is mistaken. There are two
categories within unilateral mistakes: mistakes relating to the terms of
the contract and mistakes as to identity.
Mistake as to the terms of the contract

Hartog v Colin & Shields [1939] 3 All ER 566


The defendants mistakenly offered a large quantity of hare skins at a
certain price per pound whereas they meant to offer them at that price
per piece. This meant that the price was roughly one third of what it
should have been. The claimant accepted the offer.
The court held that the contract was void for mistake. Hare skins were
generally sold per piece and given the price the claimant must have
realised the mistake.

Smith v Hughes (1871) LR 6 QB 597


The claimant had purchased a quantity of what he thought was old oats
having been shown a sample. In fact the oats were new oats. The
claimant wanted the oats for horse feed and new oats were of no use to
him. The seller was aware of the mistake of the claimant but said nothing.
The claimant brought an action against the seller based on mistake and
misrepresentation.
Held: both actions failed. The action based on misrepresentation failed as
you cannot have silence as a misrepresentation. The defendant had not
mislead the claimant to believe they were old oats. The action based on
mistake failed as the mistake was not as to the fundamental terms of the
contract but only a mistake as to quality.
Mistake as to identity

Mistakes as to identity are generally induced by fraud in that one of the


parties is claiming to be someone who they are not. There is thus an
overlap with misrepresentation. A claim based in mistake is more
favourable to one based in misrepresentation as the affect of a finding of
mistake is that the contract is void as oppose to voidable. This is
important where a rogue has acquired goods and sold them on to a third
party. If the contract is void the rogue will never receive title to goods and
will not be able to pass title when selling the goods. However, if the
contract is voidable the contract exists and title passes. If the goods are
sold before the innocent party rescinds the contract, the purchaser
acquires good title to the goods. In determining whether a contract will be
held void for mistake the courts draw a distinction between contracts
made inter absentes(at a distance) and contracts made inter
praesentes (face to face transactions).

Inter absentes
Where the parties are not physically present when the contract is made,
eg where the contract is made through dealings through the post,
telephone or over the internet, the courts will only make a finding of
mistake if the claimant can demonstrate an identifiable person or business
with whom they intended to deal with. A mistake as to their attributes will
not suffice:

Cundy v Lindsey (1878) 3 App Cas 459


A rogue, Blenkarn, hired a room at 37 Wood street, Cheapside. This was
in the same street that a highly reputable firm called Blenkiron & Son
traded. The rogue ordered a quantity of handkerchiefs from claimant
disguising the signature to appear as Blenkiron. The goods were
dispatched to Blenkiron & co 37, Wood street but payment failed.
Blenkarn sold a quantity the handkerchiefs on to the defendant who
purchased them in good faith and sold them on in the course of their
trade. The claimants brought an action based in the tort of conversion to
recover the value of the handkerchiefs. The success of the action
depended upon the contract between the Blenkarn and the claimant being
void for mistake. If the contract was void, title in the goods would not
pass to the rogue so he would have no title to pass onto the defendants.
Ownership of the goods would remain with the claimant.

Held: The contract was void for unilateral mistake as the claimant was
able to demonstrate an identifiable existing business with whom they
intended to contract with.

Kings Norton Metal co ltd v Edridge, Merrett & co ltd (1897) 14


TLR 98
A rogue ordered goods from the claimant using a printed letter head a
claiming to be a company called Hallum & Co with offices in Belfast Lile
and Ghent. In fact no such company existed. The claimant sent out the
goods on credit. The rogue sold the goods on to the defendants who
purchased them in good faith. The rogue then disappeared without paying
for the goods. The claimants brought an action for conversion of the
goods based on their unilateral mistake as to identity.
Held: The contract was not void for mistake as they could not identify an
existing company called Hallum & Co with whom they intended to
contract. The mistake was only as to the attributes of the company. The
contract was voidable for misrepresentation but that would not stop title
passing to the rogue and the defendants therefore acquired good title to
the goods.

Shogan Finance v Hudson [2003] 3 WLR 1371 House of Lords


A rogue purchased a car on HP terms from a car dealer. He had produced
a false driving licence in the name of Durlabh Patel. The car dealer faxed
the driving licence to the claimant finance company and phoned through
the details on the application form. The claimant then did a credit search
on Durlabh Patel and then told the dealer to let the rogue have the car.
The Rogue paid 10% deposit and drove off with the car. He then sold it on
to the defendant and reneged on the finance agreement. The claimant
brought an action against the defendant claiming to be the owner of the
car as the contract was void for mistake.
Held: 3:2 The contract was void for mistake. The contract concluded
between the finance company and the rogue was made inter absentes.
The identity of the person was crucial to the contract as that it was
Durlabh Patel that the credit check was carried out on and the claimant
would not have allowed the car to go without the credit check. The two
dissenting judges were highly critical of the result. Lord Millet and Lord
Nicholls were of the opinion that there should be no distinction between
contracts made inter absentes and contracts inter praesentes and that
Cundy v Linsey should be overruled.

Inter praesentes
Where the parties contract in a face to face transaction the law raises a
presumption that the parties intend to deal with the person in front of
them:

Phillips v Brooks [1919] 2 KB 243


A rogue purchased some items from the claimant's jewellers shop
claiming to be Sir George Bullogh. He paid by cheque and persuaded the
jewellers to allow him to take a ring immediately as he claimed it was his
wive's birthday the following day. He gave the address of Sir George
Bullogh and the jewellers checked the name matched the address in a
directory. The rogue then pawned the ring at the defendant pawn brokers
in the name of Mr. Firth and received 350. He then disappeared without
a trace. The claimant brought an action based on unilateral mistake as to
identity.
Held: The contract was not void for mistake. Where the parties transact
face to face the law presumes they intend to deal with the person in front
of them not the person they claim to be. The jewellers were unable to
demonstrate that they would only have sold the ring to Sir George
Bullogh.
Ingram v Little [1961] 1 QB 31

Court of Appeal

Two sisters Hilda and Elsie Ingram sold their car to a rogue calling himself
Mr. Hutchinson. They agreed a price for cash, but when the rogue offered
a cheque Elsie said the deal was off. She wanted cash or no sale. The
rogue then gave them his full name and address and Hilda went to the
post office, which was two minutes down the road, to check the details
out. When she returned she informed Elsie that the details checked out
and the sisters agreed to let Mr. Hutchinson take the car. The cheque was
dishonoured and the car was sold on to Mr. Little. The sisters brought an
action to recover the car.
Held: The contract was void for mistake. The Court of Appeal held that
the sisters only intended to deal with Mr. Hutchinson at the address given
because they were not willing to offer a sale for payment by cheque from
anyone else. This case has received widespread criticism and has not

been followed since.

Lewis v Avery [1971] 3 WLR 603 Court of Appeal


The claimant sold his mini cooper to a rogue claiming to be the actor
Richard Greene (who played Robin Hood in a series at the time). The
rogue showed the claimant a Pinewood studio pass which had Richard
Greene's name and an address on it. The claimant then let him take the
car with the log book in exchange for a cheque for 430 which was later
dishonoured. The rogue sold the car on to Mr Avery for 200 claiming to
be the claimant. The claimant sought return of the car on the grounds
that the contract was void for mistake.
Held: The contract was not void for mistake. The case of Ingram v Little
was criticised by all of the judges although not formally overruled. The
presumption that the parties intend to deal with the person in front of
them was not displaced.
Mistakes relating to signed documents - non est factum
If one of the parties signs a document under the complete
misapprehension as to its affects a plea of non est factum (it is not my
deed) may be raised. However, this is rarely successful. It applies only
where the document signed is fundamentally different to what was
believed to be signed and only where the party was not careless in
signing.

Saunders v Anglia Building Society (Gallie v Lee) [1970] AC 1004House of Lords


Mrs Gallie, a woman of 78 years, signed a document which stated it was
the sale of her interest in her home to Mr Lee. Mr Lee then used that
document to obtain a mortgage on the property for 2,000. He failed to
keep up repayments on the mortgage and the building society sought
possession of the property mortgaged. Mr Lee was a friend of Mr Parkin
who was Mrs Gallie's nephew. Mrs Gallie knew that they wished to raise
some money and she had agreed to help them. She had told them she
would assign her house to the nephew as a gift on condition that he
allowed her to remain there rent free for life. She had been told by the
two men that the document she signed gave effect to that agreement.

She signed the document in both their presence but could not find her
glasses so had not been able to read it. The agreement between Mr Lee
and Mrs Gallie had been held to be voidable for misrepresentation.
However, in the action against the building society Mrs Gallie raised the
plea of non est factum (its not my deed).
Held: The House of Lords found against Mrs Gallie. The document was not
radically different to that which she believed it to be in that she believed
that she was relinquishing her rights to the property in any event.
Furthermore the House of Lords stated that the plea of non est
factum should not be too widely applied and reserved for those who
through no fault of their own are unable to read the document eg blind,
illiterate or incapacitated through age.

3.1 Analyse the difference between a condition and a


warranty, using cases to exemplify the analysis
A term in a contract is known as either a condition or a warranty and
depending on the nature of the failure can be known as innominate term,
which is the right of the innocent party to repudiate the contract (in
addition to claiming damages), Duxbury (2008) confirms that this will be
depending on the very nature and consequences of the actual breach of
contract.
An example of innomiate term is the famous case in: Hong Kong Fir
Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd. This case the case where
the defendants charted a ship forms the claimant owners for a period of
two years from February 1957. The term of this contract states that the
ship should be in every way fitted for ordinary cargo service. However
the engines were old and the engine room crew we incompetent with the
result that repairs were needed, this took five out of the first six months
of the charter period.

Condition and warranty are terms of a contract. For a contract to be valid


there must be an offeror and offeree, acceptance, consideration equalling
an agreement. A condition is a major term of the contract which goes to
the root of the contract. If a condition is breached the innocent party is
entitled to repudiate (end) the contract and claim damages. For example,
in the case of Poussard v Spiers (1876) 1 QBD 410.

Poussard v Spiers (1876) 1 QBD 410


Madame Poussard entered a contract to perform as an opera
singer for three months. She became ill five days before the
opening night and was not able to perform the first four nights.
Spiers then replaced her with another opera singer.
Held:
Madame Poussard was in breach of condition and Spiers were
entitled to end the contract. She missed the opening night
which was the most important performance as all the critics
and publicity would be based on this night.
http://e-lawresources.co.uk/Poussard-v-Spiers.php

Warranties are minor terms of a contract which are not central


to the existence of the contract. If a warranty is breached the
innocent party may claim damages but cannot end the
contract. For example, in the case of Bettini v Gye 1876 QBD
183
Even where the parties have themselves classified the term as
a condition the courts can hold that it was in fact only a minor
term and therefore a breach of that term would not give rise to
the right to repudiate the contract.
Bettini v Gye (1876) QBD 183
Bettini agreed by contract to perform as an opera singer for a
three month period. He became ill and missed 6 days of
rehearsals. The employer sacked him and replaced him with
another opera singer.
Held:
Bettini was in breach of warranty and therefore the employer

was not entitled to end the contract. Missing the rehearsals did
not go to the root of the contract.
http://e-lawresources.co.uk/Bettini-v-Gye.php
Bettini v Gye: In this case the claimant was contracted to the
defendant to sing for a whole season. He agreed to be in
London for the rehearsals for six days before the rehearsal
starts. Due to ill-health he arrived in London two days before
the first performance, therefore the defendant repudiated the
contract. In the course of action by the claimant for breach of
contract, this was held that the missing days of rehearsals was
not a breach of an obligation which went to the route of the
contract and there was no right to repudiate. In this case
damages for breach of warranty were the only option which
was available to the promoters of the opera performances.

In this case the breach in Bettini v Gye was perceived to be


less serious as was classified as a breach of warranty, and does
not have the right to end the contract. However, the breach in
the other case of Poussard v Spiers was classified as a
breach of condition as this goes to the root of the contract,
missing the first night of the contract which was the most
important night, and the promoter in breach of condition have a
right to end the contract.

Other cases examples


In the case of Schuler AG v Wickman Machine Tool Sales Ltd.
This is the case of the claimants, a German company who
entered into an agreement with the defendants to give the
defendants sole selling rights of the claimants products in the
United Kingdom. For the sales to be promoted clause 7 of the
contract that was written stated that it was a condition of this
agreement, that the defendants should make 1400 visits to 6
named car companies over a four and a half year period. The

11 Clause of the contract set out procedure whereby this


contract could be terminated if material breach. The
defendant failed to carry out all of the visits that was specified
in cause 7.
The claimant agreed that because the term was in
questioned was labelled as a condition, any breach would
justify termination. For eg: failure to make just one visit.
The decision by the House of Lords concluded that this
case was a breach of warranty and not condition even
though the word condition was mention in clause 7. Lord
Wilberforce felt that the word condition was used in its
technical sense. Therefore, this case was concluded to be
a breach of warranty.

Schuler v Wickman Tools [1974] AC 235 House of Lords


Schuler were manufacturers of certain tools and Wickman were
a sales company granted the sole right to sell certain tools
manufactured by Schuler. A term of the contract between the
parties was described in the contract as being a condition and
provided that Wickman would send a sales person to each
named company once a week to solicit sales. This imposed an
obligation to make 1,400 visits in total. Wickman failed to make
some of the visits and Schuler terminated the contract for
breach of condition.
Held:
Despite the fact the contract had expressly stated the term was
a condition, the House of Lords held that it was only a warranty.

Lombard North Central v Butterworth [1987] QB 527


The defendant leased a computer from the claimant. The

claimant was to pay 584 by 20 instalments every 3 months. A


term of the lease agreement provided that punctual payment
was required and breach of this term would entitle the lessor to
terminate the agreement. The defendant got into arrears with
the instalments and the claimant took possession of the
computer and sold it on for 175. The claimant sued the
defendant claiming arrears and all future payments amounting
to 6,869 in total.
Held: The term relating to prompt payment was a condition.
The parties by their agreement had demonstrated that prompt
payment was an essential term and the consequence of breach
was clearly set out. Nicholls LJ stated that even one late
payment would entitle the lessor to terminate irrespective of
the effect of the breach.

In case of Rice v Yarmouth Borough Council, states that if


the clause in a loner term leisure management agreement
states that if the contractor committed a breach of any
obligations under the contract, the council, may have the right
to terminate the contract. The agreement put forward, by the
Court of Appeal held that the clause could not have been
intended by both parties to apply to minor breaches, but by
giving rise to a rise to the right to terminate the contract.
However, if the labelling of a term as a condition, is not
conclusive as to its status. If the parties wish to make this term
fundamental, they should specifically state the consequence of
the breach of a particular term so that it will entitle the other
party repudiate the contract.
In the case of Lombard North Central Plc v Butterworth,
the decision held that this case was a breach of condition,
because of the fact that the clause was sufficiently explicit. On
the other hand, in the case of Rice v Yarmourth Borough
Council the clause was too wide, referring to the breach of any
obligation under the contract.

All contract consist of contractual terms theses


terms may take the form of statement, promises
or stipulations. Which may either be expressed
or implied? Whether a term of a contract is
expressed or implied will depend on the intention
of the parties and it will determine the extent of
the contractual rights and duties.
In term if there is a breach of contract the
remedies (What is a remedies) available will
determine upon the type of term which has been
broken in a contract ie whether the term is a
condition or warranty of the contract. A condition
is a fundamental term of a contract which if
breach will give the innocent party the right to
bring the contract to an end and to claim
damages. On other hand if it is a breach of
warranty, the innocent party can only claim
damages but cannot bring the contract to an
end.
A term of a contract maybe an expressed term
meaning that theses have being specially agreed
between the parties. Once these expressed term
have being breached it will entitled the innocent
party to bring the contract to an end and to claim
damages. It will be the consideration of the court
to determine whether the term is expressed or
not. This is in especially in cases where contract

has been an oral one. However if the contract


had been written it would be a matter of
construction for the court to decide to establish
the meaning of the word use by the parties.
On the other some cases may be party written
and partly oral. In this a case parole evidence
rule may come into play. This rule provides the
basis that where a contract is embodied in a
written document, then the extrinsic evidence is
not admissible to add to, vary, and subtract or
contradict the terms of the written document.
Terms can also be inco-operated in collateral
contract where the extrinsic evidence of a
collateral contract is admissible, whereby the
party enters into a written contract on the faith of
an oral promise by the other, and the court may
provide consideration for a secondary or
collateral which circumvents the parole evidence
rule.
Example of collateral contract: City of
Westminster properties (1934) ltd v Mudd.
In the case the defendant rented a shop form the
claimants who knew that the defendant often
slept there. When a new lease came up for
negotiation, the claimants told the defendant
that he could still sleep on the premises after
signing the lease. In the written document there

was a clause restricting the use of the premises


to showrooms workrooms and offices only. In
reliance on the oral assurance/promise, the
defendant signed the lease. The defendant
continues to live there and the claimants brought
an action for forfeiture of the lease alleging a
breach of covenant not to use the premises other
than business purposes. Harman J. held that this
case could fall on the terms of collateral contract.
In summary this was based on the
assurance/promise that was given to the
claimant by the defendant.

Relative significance of terms


(1) Three types of contractual terms, each of
which has normative importance relative to
the others:
1. Conditions
2. Warranties
3. Innominate terms

Conditions
These are the most important terms of contract. Serious
consequences if

breeched. Innocent party can treat contract as repudiated (and


thus is
freed from rendering further performance of contract) and can
sue for
damages.
Description in contract of term as condition is not
necessarily
determinative of question whether term is condition. Courts
tend to
search for evidence that parties really intended term to be
such. See e.g.
Schuler AG v. Wickman Machine Tool Sales Ltd. (1974).

Relative significance of terms


(2)
Conditions (cont.)
Statute may determine that certain terms are to be treated as
conditions.
E.g. Sale of Goods Act 1979 provides that certain terms
relating to title to
goods and quality of goods are not just to be implied into
consumer

contracts but also to be conditions.


Case law also determines that certain terms typically
standard terms in
commercial contracts are to be treated as such. See, e.g. The
Mihalis
Angelos (1970) per Court of Appeal: expected readiness
clauses in
charterparties are usually to be regarded as conditions.

Warranties
Of lesser importance than conditions, and can be breached
without such
serious consequences. Innocent party can sue for damages but
is not able
to terminate the contract.

Relative significance of terms


(3)
Innominate terms
Can be either conditions or warranties. Breach of them can
be serious or

trivial depending on particular fact situation. If effects serious,


they are
conditions and vice versa.
Notion of such terms first emerged in Hong Kong Fir
Shipping Co. Ltd.
v. Kawasaki Ltd. (1962).
Introduction or recognition of this category of terms has
given more
flexibility to law, but also created more potential for
uncertainty. Hence,
courts have subsequently been inclined to hold that certain
terms will
usually be conditions to give commercial actors in a particular
market
certainty. Hence (as seen above) term in shipping contract
stipulating
that the ship will be ready within certain number of days will
often be
held as condition, breach of which enables discharge of
contract even in
cases when there is only slight delay with trivial or no harm.
See The
Mihalis Angelos case. See, too, follow-up cases such as
Bunge Corp. V.

Tradax Export SA (1981) and The Naxos (1990).

Relative significance of terms


(4)
Innominate terms (cont.)
However, Hong Kong Fir approach is far from dead. See
e.g. Torvald
Klaveness A/S v. Arni Maritime Corporation, The Gregos
(1994). It
may even apply in cases involving contracts for sale of goods.
See e.g.
Cehave v. Bremer (The Hansa Nord) (1975).
Poole (2008) argues that instead of operating with 3 classes
of terms, one should just operate with 2 classes: conditions
and non-conditions.

Explain how terms are implied into a contract


Implied terms, these are terms which are expressly agreed
between the parties that are entering into the contract. For
example, in cased where parties contract against the
background of the trade custom and usage and matters upon
which the contract is silent may be implied into the contract,
this done in accordance to the customs base on a particular

trade, business or locality. Also in the case where both parties


may not have considered every eventuality that may arise as a
result of the contract once executed or could have considered
that the information are too obvious to be the subject matter of
an express term, therefore the court may have prepared to
implied terms in the contract based upon the matters for which
the contract does not expressly provide. In addition, the
provision of statute may imply terms into a contract. For
example: Sale of Goods Act 1979 which implies various terms
into contract for the sale of goods. This is therefore an implied
term of a contract, inter alia, that is the seller shall be the
owner and where the sales are in the course of a business that
the goods that are supplied must be of a satisfactory standard.

There are three ways in which terms maybe implied into


a contract:
By custom
By the court (this is where the terms are implied in fact or
in law)
By the provisions of a statute

Terms Implied by Custom: A term maybe implied into a


contract according to local custom. There may be certain terms
that are customary to a particular trade profession or locality. If
the contract falls within one of these categories and certain
customary terms have not been expressly stated, then they
may be implied.
For example in the case of:
Hutton v Warren. This is the case of a lease of a firm was
lawfully determined by the landlord and the tenant sought a
reasonable sum in respect of tillage, sowing and cultivation (ie
crops that had been sow but not harvested). The lease was
silent on these matters on the agricultural custom, however
payment was still required. The court held that the custom
would be implied into the lease and found for the tenant.

Terms implied by courts: there are two terms where a court


may imply a term into a contract by (i) implied in facts and (ii)
terms implied in law.
Terms implied in law
There are many types of contracts which are used on a daily
basis that have developed a standard set of terms that can be
implied in any contract of the same sort. These will include
contracts such as those establishing the lease of a furnished
house, contracts of employment and contracts between banker
and consumer.
Terms implied by facts: this is where court is satisfied that
the parties, having omitted to insert a provision in their
contract to deal with a particular eventuality, and must
therefore have intended it as a matter of fact to be part of the
agreement.
For example in the case of:
The Moorcock: this the case where the defendants agreed to let
the claimants use their wharf and jetty, when was extended
into the Thames River, in order to discharge and store cargo
form their steamship, The Moorcock, the ship would be moored
alongside where it would be grounded at low tide. So in fact
when the ship having moored, in the low tide, she was
damaged owing to a ridge of hard ground beneath the mud.
Therefore, the defendants had done nothing in order to
ascertain whether the river bed adjacent to their jetty was a
safe place for mooring and there was no express term as to its
suitability for such purpose. The claimant sought damages from
the defendants who denied liability. The court of appeal held
that the defendants were liable, therefore a warranty must be
implied into the contract that the defendants had taken
reasonable care in order to ensure that the vessel could safely
moor as
Contract Terms Implied by a Statute

Traditionally legal statutes had little impact on a contract freely


entered into. However, increasingly, terms are implied by
statute which may take precedence to the express terms of the
contract. For example, a landlord and tenant may agree that,
by way of a deposit, the tenant will give the landlord a painting.
The tenancy agreement may include an express term stating
this. However, according to the Housing Act 2004 a deposit in
relation to a shorthold residential tenancy must be in monetary
form. This law may override the express term in the contract.

Implied term of contracts


Terms implied in law are not based on the intention of the
parties. Some provisions or terms of a contract of a defined
type are to be automatically implied if not expressly implied
unless other terms of the contract will expressly state they are
not to be implied in the contract.
Terms are implied into contract by:
1. by fact
2. by law
3. by custom
4. by trade usage
1.Terms implied by fact: These are terms that courts
assume both parties would have intended to include in the
contract had they thought about the issue. They are implied on
a one-off basis. Two overlapping tests have been trad. used
to ascertain parties intention: Officious bystander test: if,
while the parties were making the bargain, an officious
bystander were to suggest some express provision for it in the
agreement, they would testily suppress him with a common.
(Shirlaw v. Southern Foundries (1926) per MacKinnon LJ).
Business efficacy test: terms must be implied to make
contract work. Leading case is The Moorcock (1889). Later

case law (see e.g. Trollope and Colls Ltd. V. North West
Regional Hospital Board (1973) makes clear that term only
implied if contract cannot work without it;
Implied Terms (2)
1. Terms implied by fact (cont.): Both tests are subjective in
the sense that they ask what parties in the case at hand would
have agreed, not what a reasonable person in their position
would have agreed. So the term cannot be implied if one of the
parties was unaware of the subject matter of the term or facts
on which it is based. See e.g. Spring v. National
Amalgamated Stevedores and Dockers Society (1956).
Terms implied in fact
Terms implied as fact are based on the imputed intention of the parties.
Two tests have developed:
1. The business efficacy test:
This asks whether the term was necessary to give the contract business
efficacy ie would the contract make business sense without it? - The
courts will only imply a term where it is necessary to do so.

The Moorcock (1889) 14 PD 64


The claimant moored his ship at the defendant's wharf on the
river Thames. The river Thames is a tidal river and at times when
the tide went out the ship would come into contact with the river
bed. The ship became damaged due to uneven surfaces and rocks
on the river bed. The claimant sought to claim damages from the
defendant and the defendant argued that there was no provision
in the contract warranting the condition of the river bed.
Held:
The court implied a term in fact, that the river bed would be safe
for mooring. The court introduced the business efficacy test ie the
term must be necessary to give the contract business effect. If

the contract makes business sense without the term, the courts
will not imply a term.

2. The officious bystander test:


Had an officious bystander been present at the time the contract was
made and had suggested that such a term should be included, it must be
obvious that both parties would have agreed to it.

Shirlaw v Southern Foundries [1939] 2 KB 206 Court of Appeal


The claimant had been employed as a managing director of Southern
Foundries the office of employment was to last for 10 years. Federated
Foundries then purchased a controlling share in the company and altered
the company's Articles of Association giving them the power to remove
directors. They then dismissed the claimant as a director who brought an
action for wrongful dismissal. There was no breach of contract for his
dismissal based on the employment contract as they had not dismissed
him from being a managing director but only as a director. However, if he
was not a director he was not able to be a managing director. The
claimant asked the court to imply a term that the defendant would not
act in a way making it incapable for him to perform his contract.
Held:
The Court of Appeal applied the officious bystander test and did imply
the term.
The officious bystander test:
If a third party was with the parties at the time the contract was made
and had they suggested the term should be implied it would be obvious
that both parties would reply with a hearty 'oh of course'.
It must be obvious that both parties would agree to the term at the time
the contract was made.

Now, however, application of the two tests has been supplanted


by an objective construction approach stipulated by Privy
Council in Attorney-General of Belize v. Belize Telecom
Ltd. (2009). This approach involves arriving at a proper
construction or interpretation of the contract:
[I]n every case in which it is said that some provision ought
to be implied in an instrument, the question for the court is
whether such a provision would spell out in express words what
the instrument, read against the relevant background, would
reasonably be understood to mean (per Lord Hoffmann at
[21]).

Implied Terms (3)


2. Terms implied in law: These are terms which the law
requires present in certain types of contracts (i.e. not just on
one-off basis and sometimes irrespective of the wishes of the
parties). E.g. tenancy agreements will include implied term that
the landlord must take reasonable care to keep common parts
of
property in good repair (Liverpool City Council v. Irwin
(1977)); contracts of employment will include implied term that
employer will give departing employee a job reference (Spring
v. Guardian Assurance plc (1994)) and implied term that
employer and employee will not act in ways likely to
undermine the trust and confidence required if the employment
relationship is to continue (Malik v. Bank of Credit and
Commerce International SA (1997)). Cf. Crossley v.
Faithful & Gould Holdings Ltd. (2000).
Statutes will also imply terms: e.g. sale of goods to consumers
will have implied term that goods are of satisfactory quality
(see Sale of Goods Act 1979 s. 14(2) and Unfair Contract Terms
Act 1977).
Terms implied in law

The courts may imply a term in law in contracts of a defined type eg


Landlord/tenant, retailer/customer where the law generally offers some
protection to the weaker party:

Liverpool City Council v Irwin [1977] AC 239 House of Lords


Liverpool city council owned a block of flats in which the
defendant was a tenant. The common parts of the flats, the lifts,
stair cases, rubbish chutes etc, had fallen into disrepair. A rent
strike was implemented by many of the tenants including the
defendant. The council sought to evict the defendant for non
payment of rent and she counter claimed for breach of an
obligation to repair. However, the tenancy agreement did not
mention any obligation to repair. In fact the tenancy agreement
only imposed obligations on the tenant with no mention of the
obligations of the landlord. The defendant asked the court to
imply a term that the council had an obligation to repair the
common parts of the block of flats.
Held:
The courts did imply a term. The implied term arose as a legal
incident in contracts of a defined type between landlord and
tenant that the landlord was to take reasonable care to maintain
the common parts. However, there was no breach of this duty.

In addition to being a contract of a defined type, the term must be a


reasonable one to include:

Wilson v Best Travel [1993] 1 All ER 353


The claimant was injured when he fell through some glass patio doors
whilst on holiday in Greece. The glass conformed to Greek safety
standards but did not conform to British safety standards. The claimant
brought an action against the travel agent asking for a term to be implied
as a matter of law, that all accommodation offered by the defendant
should conform to British safety standards.

Held:
The courts did not imply a term. Whilst this was a contract of a defined
type, it was reasonable for the travel agency to ensure that all
accommodation offered, no matter where in the world, conformed with
British safety standards.
The term must also be sufficiently certain:

Shell UK v Lostock Garage Limited [1976] 1 WLR 1187 Court


of Appeal
Lostock Garage entered a solus agreement with Shell by which
they would only buy and sell petrol from Shell for 20 years. For
agreeing to being tied in to Shell they received a discount.
However, after entering this agreement, Shell began supplying
petrol to Lostocks neighbouring garages at an even lower price.
Lostock were unable to compete with these prices and began
obtaining petrol from a third party. Shell brought an action for
breach of contract and Lostock asked the court to imply a term
that Shell would not abnormally discriminate against them in
supplying other garages in the locality.
Held:
The court refused to imply a term in fact as it was not a
necessary term to imply as the contract made business sense
without it, nor was it obvious that Shell would have agreed to it.
They also refused to imply a term in law. Whilst the term may be
a reasonable one to include it lacked sufficient certainty.
Lord Denning MR:
If Shell had been asked at the beginning: 'Will you agree not to
discriminate abnormally against the buyer?' I think they would
have declined. It might be a reasonable term, but it is not a
necessary term. Nor can it be formulated with sufficient
precision.

Implied Terms (4)

3. Terms implied by custom: Terms can be implied if there is


evidence that under local custom they would usually be
present. See e.g. Smith v. Wilson
4. Terms implied by trade usage: Terms routinely used in
contracts within a particular trade or business may be implied
into other such contracts. See e.g. British Crane Hire Corp.
Ltd. v. Ipswich Plant Hire Ltd. (1975).
Where a particular term is prevalent in a trade the courts may imply a term in a
contract of the same type in that trade.

Hutton v Warren [1836] EWHC Exch J61

The claimant was a farmer who had a tenancy on the


defendant's fields. The claimant had planted corn and Barley on
the fields and worked the fields to ensure the crops would grow.
Before the field was due to be harvested the tenancy was
terminated. The claimant then submitted a bill to the defendant
for the work and cost of seed spent on the field as was
customary in farming tenancies. The defendant refused to pay
stating there was nothing in the tenancy agreement stating
that such compensation was payable.
Held:
The court implied a term into the tenancy providing for
compensation for the work and expenses undertaken in
growing the crops. The term was implied as it was common
practice for farming tenancies to contain such a clause.

Terms of contract set out duties of each party under that


agreement.
The terms will be of two kinds:
1) Express terms: these are laid down by the parties
themselves;

2) Implied terms: these are read into the contract by the court
on the basis
of the nature of the agreement and the parties apparent
intentions, or on
the basis of law on certain types of contract.

Generally, the terms of a contract may be either:


Wholly oral
Wholly written
Partly oral and partly written.

Terms are to be distinguished from statements made


prior to the
contract being made. Two main types of statement:
A representation about a state of affairs, or
A promise that something will or will not occur in the
future.

Either type of statement can become a term of the


contract, whether or
not they are oral or written, or partly oral and partly
written.

Express Terms (1)


Oral statements
Key issue is whether oral statement made during
negotiations prior to
conclusion of contract becomes a term of the contract or
remains mere
representation/promise. This is a question of fact. Courts look
at wide range
of factors:
Importance of statement
If statement is so important that a party would not otherwise
have
entered into the contract, the statement is likely to be viewed
as a
term, see e.g. Bannerman v. White (1861).
Timing of statement
Generally, the more time between statement and conclusion
of
contract, the less likely is statement to be held a term of
contract.
See e.g. Routledge v. McKay (1954). Timing factor is point of

departure only. If statement is otherwise strong and important


then
this may override significant delay between when it was made
and
when contract made. See e.g., Schawel v. Reade (1913).

Express Terms (2)


Oral statements (cont.)
Strength of statement
The more emphatic the statement is, the more likely it is to
be
viewed as a term. See Schawel v. Reade above. Cf. Ecay v.
Godfrey (1947).
Special knowledge and skill of parties
If statement made by party with special knowledge and
expertise on
matter, courts more likely to deem statement a term than if
statement made by someone without such expertise. See e.g.
Dick
Bentley Productions Ltd. v. Harold Smith (Motors) Ltd.
(1965).
Cf. Oscar Chess v. Williams (1957).

Cf notion of collateral warranty see Poole, pp. 208-209.

Express Terms (3)


Oral statements (cont.)
Written contract
If contract is put down in writing, any statement
appearing in
that written agreement will usually be regarded as a
term,
and any prior oral statement that is not repeated in the
written
agreement will usually be regarded as a representation,
due
to the assumption that if a statement is left out of a
written
agreement, the parties did not view the statement as
important. See e.g. Routledge v. McKay (above); Duffy
&
Ors v. Newcastle United Football Co. Ltd. (2000).

Signature will usually make it difficult for the


signatory to
successfully argue that the written terms of the
agreement do
not represent what they have agreed: see e.g
LEstrange v.
Graucob Ltd. (1934).

Express Terms (4)


Oral contracts: Incorporation of written
terms
Q.: When may written text be regarded as forming part of
terms of an
otherwise oral contract?
Incorporation must occur before contract is concluded. See
e.g.
Chapleton v. Barry Urban District Council (1940).
Incorporation can take place on basis of signature,
reasonable notice,
consistent course of dealing, and/or shared understanding of
parties.

Generally speaking, it is harder to show incorporation the


more onerous
or unusual is the written clause. See e.g. Thornton v. Shoe
Lane
Parking Ltd. (1971).
In assessing the extent to which clause is onerous or
unusual, one focuses
on meaning and effect of the clause in question, not the kind
or type of
clause: Ocean Chemical Transport Inc. v. Exnor Craggs Ltd.
(2000).
See further Poole, pp. 219-221.

Express Terms (5)


Interpretation of express terms
When construing meaning of contractual terms, courts
attempt to
ascertain the intention of parties on an objective basis.
In
Investors Compensation Scheme Ltd. v. West
Bromwich
Building Society (1998), Lord Hoffmann stated that
courts must

look for the meaning which the document would


convey to a
reasonable person having all the background knowledge
which
would reasonably have been available to the parties in
the
situation in which they were at the time of the contract.
Ongoing debate about the extent to which background
knowledge
(often termed factual matrix) is to be taken into
account.
Traditionally, courts have been reluctant to taken
account of
background material.

Express Terms (6)


Parol evidence rule
Where a contract is reduced to writing, neither party
can submit

evidence extrinsic to (falling outside) the contractual


document
alleging terms agreed upon but not contained in the
document.
E.g. of rule in practice: Henderson v. Arthur (1907).
Many exceptions to rule, e.g.:
Intention that agreement be only partially written:
If
written document was not intended to set out all of the
terms
agreed between the parties, extrinsic evidence of other
terms
is admissible. There is tendency nowadays for courts to
infer,
if possible, such an intention.
Rectification: If the document is intended to record
previous
oral agreement but does not do so accurately, evidence
of oral
agreement is admissible.

Express Terms (7)


Parol evidence rule (cont.)
Exceptions (cont.):
Proof of custom or trade usage: Evidence may be admitted
to prove
a custom or trade usage that would cast light on how a term in
the
contract should be construed. See e.g. Smith v. Wilson
(1832) .
Clarify ambiguity: Extrinsic evidence admissible to clarify
ambiguity in express terms.
Show capacity of parties: Extrinsic evidence admissible to
show in
what capacity the parties were acting when they entered
agreement
(e.g. as principal or agent).
Show how contract operates: Parol evidence admissible to
show
under what circumstance(s) the written contract was intended
to
commence or cease. See e.g. Pym v. Campbell (1856).

Support or rebut implied terms: Parol evidence


admissible to
support or rebut any terms implied by law.

Express Terms (8)


Collateral contracts
An oral statement can be deemed binding even when it is
not a term of a
written contract, if it gives rise to a collateral contract. If one
party says
that he will sign the written agreement if he is assured that it
is to be
construed in a certain way, two contracts may arise: the
written
agreement and a collateral contract based on the oral
statement. Classic
exposition is the judgment of Lord Moulton in Heilbut
Symons & Co. v.
Buckleton [1913] AC 30 at 47.
Good example of device in operation: City and
Westminister Properties
Ltd. v. Mudd (1959).

Device of collateral contracts is a way of avoiding parol


evidence rule.
But device requires provision of consideration, which will
usually be
entry into main contract. Remember rule on past
consideration!

Express Terms (9)


Entire agreement clauses
These clauses state that the written contract contains the
entire
agreement. They are aimed at preventing one party
subsequently
claiming that an earlier statement is also part of the written
agreement.
These will be upheld by the courts but do not exclude liability
for
misrepresentation (dealt with in later lecture).

Significance of wording
Where possible, words are to be given their natural and
ordinary
meaning. This may be departed from where this would lead to
absurdity

or inconsistency with the rest of contract. See e.g. Sinochem


International Oil (London) Co. Ltd. v. Mobil Sales and
Supply (2000)
per Court of Appeal.

Implied Terms (1)


Four categories of implied terms:
1. Implied by fact
2. Implied by law
3. Implied by custom
4. Implied by trade usage

1. Terms implied by fact:


These are terms that courts assume both parties would have
intended to
include in the contract had they thought about the issue. They
are implied
on a one-off basis.
Two overlapping tests have been trad. used to ascertain
parties intention:
Officious bystander test: if, while the parties were making
the bargain,

an officious bystander were to suggest some express provision


for it in
the agreement, they would testily suppress him with a
common Oh, of
course! (Shirlaw v. Southern Foundries (1926) per
MacKinnon LJ).
Business efficacy test: terms must be implied to make
contract work.
Leading case is The Moorcock (1889). Later case law (see
e.g.
Trollope and Colls Ltd. V. North West Regional Hospital
Board (1973)
makes clear that term only implied if contract cannot work
without it;

Implied Terms (2)


1. Terms implied by fact (cont.):
Both tests are subjective in the sense that they ask what
parties in the case
at hand would have agreed, not what a reasonable person in
their position
would have agreed. So the term cannot be implied if one of
the parties was

unaware of the subject matter of the term or facts on which it


is based. See
e.g. Spring v. National Amalgamated Stevedores and
Dockers Society
(1956).
Now, however, application of the two tests has been
supplanted by an
objective construction approach stipulated by Privy Council
in AttorneyGeneral of Belize v. Belize Telecom Ltd. (2009). This
approach involves
arriving at a proper construction or interpretation of the
contract:
[I]n every case in which it is said that some provision ought
to be
implied in an instrument, the question for the court is whether
such a
provision would spell out in express words what the
instrument, read
against the relevant background, would reasonably be
understood to
mean (per Lord Hoffmann at [21]).

Implied Terms (3)


2. Terms implied in law:
These are terms which the law requires present in certain
types of
contracts (i.e. not just on one-off basis and sometimes
irrespective of the
wishes of the parties). E.g. tenancy agreements will include
implied term
that the landlord must take reasonable care to keep common
parts of
property in good repair (Liverpool City Council v. Irwin
(1977));
contracts of employment will include implied term that
employer will give
departing employee a job reference (Spring v. Guardian
Assurance plc
(1994)) and implied term that employer and employee will not
act in ways
likely to undermine the trust and confidence required if the
employment
relationship is to continue (Malik v. Bank of Credit and
Commerce

International SA (1997)). Cf. Crossley v. Faithful & Gould


Holdings
Ltd. (2000).
Statutes will also imply terms: e.g. sale of goods to
consumers will have
implied term that goods are of satisfactory quality (see Sale
of Goods
Act 1979 s. 14(2) and Unfair Contract Terms Act 1977).

Implied Terms (4)


3. Terms implied by custom
Terms can be implied if there is evidence that under local
custom they
would usually be present. See e.g. Smith v. Wilson (above).

4. Terms implied by trade usage


Terms routinely used in contracts within a particular trade or
business
may be implied into other such contracts. See e.g. British
Crane Hire
Corp. Ltd. v. Ipswich Plant Hire Ltd. (1975).

The relationship between express and implied terms


Generally, an implied term cannot override an express
contractual term. However, in some cases the courts have
implied a term which does so, eg:
an implied term that restricts or qualifies an express term
giving an employer a particular discretion (eg a discretion
to award a bonus based on individual performance must
not be exercised perversely or irrationally)
an implied term that relates to something that the parties
must have overlooked when drafting the contract (eg the
implied clause mentioned above which prevents dismissal
without cause of an employee benefiting under a
permanent health insurance scheme).
An express entire agreement clause (stating that the express
contract sets out all the terms agreed between the parties) may
stop other terms being implied into the contract. However, it
has been suggested that this will only apply to terms that
would otherwise be implied by custom and practice.
Where a term is implied by statute, the statute will usually
state explicitly that the prescribed term will override any
conflicting express term.

References
Contract, tort and restitution by Graham Stephenson, Palgrave Mac Millan 2007
Book Contract, Tort, and Remedies by: D G Cracknell 4 th edition2005 old bailey
press Holborn college London,

Duxbury, R (2008) Contract Law


The Law of Contract 11th Edition G.H. Treitel 2003 sweet and Maxwell Limited,
London

The importance implied terms and the methods of incorporation


The duty to maintain mutual trust and confidence
The duty to maintain mutual trust and confidence is probably the most commonly relied upon

implied term, and is often cited by employees who claim to have been constructively
dismissed. It implies a duty on the part of an employer not, without reasonable and proper
cause, to conduct itself in a manner calculated or likely to destroy or seriously damage the
relationship of trust and confidence between the parties (Courtaulds Northern Textiles
Limited v Andrew [1979] IRLR 84, EAT).
It is important to note that the duty to maintain mutual trust and confidence is not a duty to
act reasonably. Rather, it is a duty to act rationally and not so perversely as to constitute a
manner in which no reasonable employer would act. No malice is necessary (although this
may well be helpful in showing that the implied duty has been breached), and an honest
mistake can result in the duty being breached.
The duty to maintain trust and confidence is often relied upon in the context of bonus
disputes. In such disputes, the wording of the express bonus clause (if there is one) is key as
this forms a contractual straitjacket in which an employer must exercise its discretion in a
way which does not destroy mutual trust and confidence by being irrational or perverse. For
example, in Clark v Nomura International plc [2000] IRLR 766, the relevant express clause
stated that there was a discretionary bonus scheme which is not guaranteed in any way and
is dependent upon individual performance. The court found that this meant that the
employer was required to base the bonus on individual performance and not on other factors
such as the overall performance of the business. However, there was a further implied
requirement that it exercise discretion in a way that was rational. In Midland Bank plc v
McCann EAT/1041/97 the bonus clause stated that the bonus was intended to attract,
motivate and retain managers, and the EAT found that the employer was not acting
irrationally in not awarding a bonus to a manager who was shortly to leave its employment.
While the duty to maintain mutual trust and confidence is, in theory, binding on both
employer and employee, it has typically been relied upon by employees, as an employer who
is trying to identify a contractual term that has been breached is more likely to be in a
position to rely upon an express term (as employers typically dictate the content of the
employment contract) or another implied obligation on the employee such as the duty of
fidelity. However, there are cases in which the employee's breach of the implied duty to
maintain mutual trust and confidence has been found to justify dismissal, eg in the case of an
employee who provided a reference for a former colleague on a false basis. However,
employers should be fairly cautious in seeking to rely on a breach of this implied duty in
seeking to terminate an employee's employment, and should ensure that the employee's
misconduct is serious enough to be held to have undermined trust and confidence.

The duty of fidelity


A term requiring the employee faithfully to serve the employer is implied into all
employment contracts and means that an employee may not act against the interests of the
employer. It is particularly relevant if the employee is contemplating leaving the employer
and working for a competitor, or setting up a competing business.
The duty may also be breached in circumstances where an employee derives undisclosed
profits from the employer's business or misuses the employer's property (eg by borrowing
money without permission).

The duty to provide work


While there is generally no duty for an employer to provide work for its employees, such an
obligation does arise if the employee must be allowed to work to maintain his or her skills or
public profile. Traditionally, this was found to apply predominantly in the field of the
performing arts, but more recently it has been identified in other, highly-skilled sectors, eg in
William Hill Ltd v Tucker [1998] IRLR 313 where, in the absence of an express garden leave
clause, the employer was in found to be in breach of the duty to provide work by placing a
senior dealer working in spread betting on garden leave, even though he suffered no financial
loss as a result.
The duty may also arise if the employee is deprived the opportunity to earn if he or she is not
provided with work, eg if his or her pay includes commission.

Giving references
There is no general implied duty for an employer to provide a reference for either a current or
a former employee. However, if an employer does decide to provide a reference, it must
exercise reasonable care and skill in doing so to ensure the accuracy of any facts that are
contained in it. This implied duty exists even if the employment has ended. An individual
who loses out on a job because of a careless reference from a current or ex employer can
recover damages for a breach of this implied term if he or she can show that he or she has lost
a reasonable chance of employment and therefore sustained financial loss.

remembering whats not written: implied terms


When interpreting a contract, its not just the express terms of
the contract that are important. Careful consideration should
also be given to implied terms.

It is important to know when terms will be implied, how they


will work alongside the express terms in the contract and when
they can be excluded. Terms might be implied into a contract
for a number of reasons, including to reflect the intentions of
the parties at the time the contract was entered into, to
achieve fairness between the parties or to fill a gap in a
contract so that the contract works in practice

Implied terms are rarely thought about when contracts are


formed, but they may have a significant effect on the parties'
rights and obligations.

Some of these may be familiar for example the Housing


Grants Construction and Regeneration Act 1996 imposes some
minimum requirements for construction contracts which cannot
be excluded. These include a right to adjudicate, the right to
payment by instalments, notices of payment and suspension
for non-payment, and making "pay when paid" clauses
unenforceable except on insolvency.
Terms implied at common law include that the building owner
will give possession of a site within a reasonable amount of
time2. Likewise the employer will co-operate to allow the
contractor to carry out the works in a regular and orderly way
and must not hinder or prevent the contractor from doing so3.
Also, the contractor will carry out work in a 'good and
workmanlike manner'4 (this is now reflected in the requirement
in the Sale of Goods and Services Act 1983 that services are to
be provided with 'reasonable skill and care').
Others may be more of a surprise, particularly in the case of
those which are not implied but which one might expect to be.
For example, is it an implied term of a construction subcontract
that the sub-contractor will execute the works so as to meet the
contractor's programme? Yes? Well actually, no5. It is the subcontractor's obligation to finish by the completion date and it is
up to him to organise his work as he sees fit. If the subcontractor feels that he can leave all the work to the last month
and complete on time then, despite the concern of the
anxiously watching contractor, he may do so. If the contractor
wants to impose some other obligation, there needs to be an
express term.

How about the site conditions does the employer have to


ensure that the site is free from rubbish and debris so that the
works can proceed? Again, no.6 How about the right to extend
the time for completion of later phases where an earlier phase
was delayed and an extension granted? Yet again, no.7 Well,
surely a builder of a school should have uninterrupted
possession of and access to the site? You've guessed it, no8.
To top it all, in a contract for construction to a given
specification, the contractor does not have to warrant that the
works will be fit for purpose upon completion9.
The courts may imply terms into a contract when the parties
have not expressed every material term, either in writing or
orally. However, it is difficult to persuade a court that a term
should be implied. Evidence is needed both that a term should
be implied, and also the precise content of the term.
Additionally where a contract has been expressly drafted it is
difficult to imply a term as the contract is more likely to be
exhaustive of the parties' agreement. A term may not be
implied which conflicts with any of the express terms of the
contract, although it is not impossible for such a term to deal
with the same subject matter as the express term.10
Nevertheless, the courts are willing to imply terms when
necessary to give business efficacy to the contract and where it
would be so obvious that it 'goes without saying', provided the
term is reasonable and equitable, capable of clear expression
and does not contradict any express term.11 But it must be
necessary, not just commercially reasonable. More recently the
courts have taken a more purposive approach to implying

terms, asking what the instrument, when read as a whole


against the background, would reasonably be understood to
mean12 and whether the proposed implied term is necessary to
make to contract work.13
http://www.osborneclarke.com/media/filer_public/cc/ae/ccae3f8
1-8395-4575-8fc0-3c360ac9afae/implied-terms-in-constructioncontracts.pdf

Conditions for using Implied Terms for Interpretation


Lord Simon in BP Refinery (Westernport) Pty Ltd vs. The Shire of Hastings
[1978] 52 AJLR 20 held that- for a term to be implied, the following conditions
(which may overlap) must be satisfied:
1. it must be reasonable and equitable;

2. it must be necessary to give business efficacy to the contract, so that no term


will be implied if the contract is effective without it;
3. it must be so obvious that it goes without saying;
4. it must be capable of clear expression;
5. it must not contradict any express term of the contract.
Distinguish between a term and a representation
A representation is considered to be statement made which have no
legal liability ie mere puff and secondly can be classified as statement of
facts made during the process of negotiations that may have the effect of
inducing the other party to enter into a contract, but do not form part of
the contract itself. A term on the other hand, constitutes a binding
promise by which the party commits to in fulfilling an obligation. The most
obvious difference between the two statements depends on the remedies
available. Duxbury (2008) states that the disquisition between a
representation and a term is that the former is merely a statement of fact
which my either be true or false, a statement is a terms of the contract.
A term is any provision forming part of a contract and a representation
is a statement of fact which does not amount to a term of the contract but
it is one that the maker of the statement does not guarantee its truth.
A term and representations are statements in a contract, or statement
said in the creation or leading up to the creation of a contract. However
some terms is a condition of the contract, whilst other terms are mere
representations.
A representation is a statement of fact which may or may not be true.
However a term is a binding promise to fulfil an obligation. The ultimate
difference between the two would be available remedies they attract.
In deciding whether a statement amounts to a term or representation the
courts look at four factors:
1.

The parole evidence rule

2.

Relative expertise of the parties

3.

Importance of the statement

4.

Time

1. The parole evidence rule:


This is where the contract has been put into writing only the terms
included in the written document are terms any verbal statements will
be representations.

2. Relative expertise:

If the representor has the greater knowledge, it is more likely to be a


contractual term. Conversely if the representee has the greater
knowledge it is more likely to be a representation, see example of case
below:

Oscar Chess Ltd v Williams [1957] 1 WLR 370 Court of Appeal


Mrs Williams purchased a second hand Morris car on the basis that it was
a 1948 model. The registration document stated it was first registered in
1948. The following year her son used the car as a trade in for a brand
new Hillman Minx which he was purchasing from Oscar Chess. The son
stated the car was a 1948 model and on that basis the Oscar Chess
offered 290 off the purchase price of the Hillman. Without this discount
Williams would not have been able to go through with the purchase. 8
months later Oscar Chess ltd found out that the car was in fact a 1939
model and worth much less than thought. They brought an action for
breach of contract arguing that the date of the vehicle was a fundamental
term of the contract thus giving grounds to repudiate the contract and
claim damages.
Held:
The statement relating to the age of the car was not a term but a
representation. The representee, Oscar Chess ltd as a car dealer, had the
greater knowledge and would be in a better position to know the age of
the manufacture than the defendant.

http://e-lawresources.co.uk/Oscar-Chess-Ltd-v-Williams.php

Dick Bentley Productions v Harold Smith Motors [1965] 1 WLR


623 Court of Appeal
Dick Bentley knew the defendant, who was a car trader specializing in
the prestige market, for some time. He had asked him to look out for a
well vetted Bentley car. The defendant obtained a Bentley and
recommended it to the claimant. He told him that the car had been
owned by a German Baron and had been fitted with a replacement
engine and gearbox and had only done 20,000 miles since the
replacement. Mr Bentley Purchased the car but it developed faults. The
defendant had done some work under the warranty but then more
faults developed. It transpired that the car had done nearer 100,000
miles since the refit. The question for the court was whether the
statement amounted to a term in which case damages would payable
for breach of contract, or whether the statement was a representation,
in which case no damages would be payable since it was an innocent
misrepresentation and the claimant has also lost his right to rescind
due to lapse of time.
Held:
The statement was a term. Mr Smith as a car dealer had greater expertise
and the claimant relied upon that expertise.
http://e-lawresources.co.uk/Dick-Bentley-Productions-v-HaroldSmith-Motors.php

3. The importance of the statement and reliance:


Where the representee indicates to the representor the importance of
the statement, this is likely to be held to be a term: see example below
in case law:
Bannerman v White (1861) 10 CBNS 844
The claimant agreed by contract to purchase some hops to be used for

making beer. He asked the seller if the hops had been treated with
sulphur and told him if they had he wouldn't buy them as he would not be
able to use them for making beer if they had. The seller assured him that
the hops had not been treated with sulphur. In fact they had been treated
with sulphur.
Held:
The statement that the hops had not been treated with sulphur was a
term of the contract rather than a representation as the claimant had
communicated the importance of the term and relied on the statement.
His action for breach of contract was successful.
http://e-lawresources.co.uk/Bannerman-v-White.php
Ecay v Godfrey [1947] 80 Lloyds Rep 286
The defendant sold a boat to the claimant. He stated that as far as he was
aware the boat was sound and free from vice but advised the claimant to
have it surveyed. The boat turned out to be defective.
Held:
The statement that the boat was sound was merely a representation. The
statement was not sufficiently emphatic to amount to a term and the
advice to have the boat surveyed demonstrated the defendant did not
wish the claimant to rely on the statement.
http://e-lawresources.co.uk/cases/Ecay-v-Godfrey.php
Schawel v Reade [1913] 2 IR 81
The claimant purchased a horse from the defendant. The claimant went to
see the horse and had told the defendant that he wished to use the horse
for stud purposes. Whilst he was examining the horse, the defendant told
him that the horse was sound. He stated that if there was anything wrong
with the horse he would tell him and told him there was no need to get a
vet to check him out. In reliance of these statements the claimant
purchased the horse which turned out to have a hereditary eye disease
and was therefore not able to be used as a stud.
Held:
The statement was a contractual term. The defendant had assured him he
could rely on his word and the claimant had communicated the purpose

for which the horse was to be used. The defendant was thus in breach of
contract.
http://e-lawresources.co.uk/cases/Schawel-v-Reade.php
4. Timing

The longer the time lapse between making the statement and entering
the contract the more likely it will be a representation:

Routledge v Mckay [1954] 1 WLR 615 Court of Appeal


The claimant acquired a Douglas BSA motorcycle and sidecar by
exchanging another motorcycle and paying 30. The registration
documents stated that it was a 1942 model and this is what the
defendant stated the year of the motorcycle to be when the claimant
came to look at it. The motorcycle was in fact a 1936 model but had
been modified and re-registered by a previous owner. The purchaser
went away to think about it and then returned a few days later a
written agreement was produced to the effect of the exchange which
ended with the words "It is understood that when the 30 is paid over
that this transaction is closed".
Held:
The statement was a representation and not a contractual term. The
registration document was not prima facie evidence of a contractual
term. Neither party was an expert, nor there was a lapse of time
between the making of the statement and entering the contract giving
the claimant the opportunity to check the statement. Furthermore
there was no mention of the date in the written agreement and the
words of the agreement stating the transaction is considered closed
excluded any possible collateral warranty.

Distinguish between the terms of a contract from a


misrepresentation

Statements that are made during the course of negotiations could amount
to the terms of a contract or a representation. It is important to know
whether a particular statement is a term of contract or if it is a
representation as this will determine the appropriate cause of action
and remedy available. If the statement amounts to a term of the
contract which is not fulfilled, the innocent party may sue for breach of
contract. If the statement is merely a representation which turns out to
be untrue, the innocent party may bring an action for
misrepresentation.

A misrepresentation is a false statement of fact made by one party to


another, which, whilst not being a term of the contract, induces the other
party to enter the contract (Poole 2008).

A misrepresentation is a false statement of fact or law which induces the


representee to enter a contract. Where a statement made during the course of
negotiations is classed as a representation rather than a term an action for
misrepresentation may be available where the statement turns out to be
untrue. There are three types of misrepresentation: innocent
misrepresentation, negligent misrepresentation and fraudulent
misrepresentation.

The affect of a finding of misrepresentation is the contract is voidable ie the


contract exists but may be set aside by the representee. The remedy available
depends on the type of misrepresentation, but generally consists of rescission
and or damages. The right to rescind the contract may be lost in some
circumstances. The law relating to misrepresentation is mainly found in common
law with the Misrepresentation Act 1967 providing some further details.
In order to amount to an actionable misrepresentation certain criteria must be
satisfied:
False statement
There must be a false statement of fact or law as oppose to opinion or estimate
of future events:

Bisset v Wilkinson [1927] AC 177 Privy Council

The claimant purchased a piece of farm land to use as a sheep farm. He


asked the seller how many sheep the land would hold. The seller had not
used it as a sheep farm but estimated that it would carry 2,000 sheep. In
reliance of this statement the claimant purchased the land. The estimate
turned out to be wrong and the claimant brought an action for
misrepresentation.
The Privy Council held that the statement was only a statement of
opinion and not a statement of fact and therefore not an actionable
misrepresentation. The claimant's action was therefore unsuccessful.

Esso Petroleum v Mardon [1976] QB 801 Court of Appeal

Mr Mardon entered a tenancy agreement with Esso Petroleum in


respect of a new Petrol station. Esso's experts had estimated that
the petrol station would sell 200,000 gallons of petrol. This
estimate was based on figures which were prepared prior to
planning application. The planning permission changed the
prominence of the petrol station which would have an adverse
affect on the sales rate. Esso made no amendments to the
estimate. The rent under the tenancy was also based on the
erroneous estimate. Consequently it became impossible for Mr
Mardon to run the petrol station profitably. In fact, despite his
best endeavours the petrol station only sold 78,000 gallons in the
first year and made a loss of 5,800.
The Court of Appeal held that there was no action for
misrepresentation as the statement was an estimate of future
sales rather than a statement of fact. However, the claimant was
entitled to damages based on either negligent misstatement at
common law or breach of warranty of a collateral contract.

A statement of opinion may amount to an actionable


misrepresentaion where the representor was in a position to know
the facts, see example:

Smith v Land and House Property Corp (1884) 28 Ch D 7


The claimant purchased a hotel. The seller described one of the tenants
as being 'most desirable'. In fact, as the seller knew, the tenant was in
arrears and on the verge of bankruptcy. This was held to be a statement
of fact rather than opinion as the seller was in a position to know the
facts.

A statement as to future intent cannot amount to a


misrepresentation unless the representor had no intention of
carrying out the stated intent, see example below:

Edgington v Fitzmaurice (1885) 29 Ch D 459


The claimant purchased some shares in the defendant company. The
company prospectus stated the shares were being offered in order to
raise money to expand the company. In fact the company was
experiencing financial difficulty and the money raised from the sale of
the shares was going to be used to pay the company debts.
Held: Despite the fact that the statement related to a statement of
future intent, it was an actionable misrepresentation as the defendant
had no intention of using the money to expand the company.
False statement of law will now amount to an actionable misrepresentation:

Pankhania v LB Hackney [2002] EWHC 2441


The claimants purchased property induced by a representation that the
current occupiers of the property were contractual licensees, whose
occupation could be terminated on giving 3 months notice. In fact the

current occupant was in fact a tenant protected under the Landlord and
Tenant Act 1954. This was a misrepresentation as to law which had
previously been assumed not to be an actionable misrepresentation
through analogy with case law based on restitutionary claims for mistake
of law. The rule barring recovery for mistake of law was abolished by the
House of Lords in Kleinwort Benson v Lincoln County council. The High
court held that actions based on misrepresentation of law could now be
actionable based upon that change of law. The claimant's action was
therefore successful.

Silence will not generally amount to a misrepresentation:

Smith v Hughes (1871) LR 6 QB 597


The claimant had purchased a quantity of what he thought was old oats
having been shown a sample. In fact the oats were new oats. The
claimant wanted the oats for horse feed and new oats were of no use to
him. The seller was aware of the mistake of the claimant but said
nothing. The claimant brought an action against the seller based on
mistake and misrepresentation.
Held: both actions failed. The action based on misrepresentation failed as
you cannot have silence as a misrepresentation. The defendant had not
mislead the claimant to believe they were old oats. The action based on
mistake failed as the mistake was not as to the fundamental terms of the
contract but only a mistake as to quality.
Walters v Morgan (1861) 3 DF & J 718
The defendant purchased some land. The claimant wished to mine the
land and produced a draft lease and pressured the defendant into signing
the lease before he realised the value of the land. Once the defendant had
discovered the true value, he refused to allow the defendant to mine the
land. The claimant sued for breach of contract and sought specific
performance. The defendant sought to have the contract rescinded for
misrepresentation.
Held:

There was no misrepresentation since the claimant had not said anything
to mislead the defendant as to the value of the land. Silence can not
amount to misrepresentation. However, the court refused an order of
specific performance as the claimant had sought to take advantage of the
defendants ignorance by rushing him into signing the lease.

Unless it is a contract of uberrimae fidei. ie one of utmost good faith such as an


insurance contract or where the representor is in a fiduciary position. In such
contracts a duty exists to disclose all material facts and a failure to do so
may give rise to an action for misrepresentation.

HIH Casualty and General Insurance Ltd v Chase


Manhattan Bank [2003] UKHL 6 House of Lords
Chase Manhattan advanced substantial sums to finance the
production of a film syndicate. HIH provided insurance for the
event that the film did not make enough revenue to repay the
loan. Chase Manhattan made the insurance a condition of getting
the loan and also specified the agent, Heath North America
(HNA), that must be used to obtain the insurance. HNA obtained
the insurance policies but in doing so made certain fraudulent
misrepresentations and failed to disclose a report that suggested
the films were unlikely to make a profit. The films did not
generate sufficient revenue to cover the loan and Chase sought to
claim under the insurance policy. The insurance company refused
to pay out claiming to rescind the contract for misrepresentation
and a failure to disclose a material factor as required under s.19
& 20 of the Marine Insurance Act 1906 (applicable to all insurance
contracts not just marine insurance). S.18(3) (c) of the Act
provides that the insured need not disclose information which has
been waived by the insurer. The contract of insurance contained a
truth of statement clause which provided:

"[6] the Insured will not have any duty or obligation to make any
representation, warranty or disclosure of any nature, express or
implied (such duty and obligation being expressly waived by the
insurers
[7] and shall have no liability of any nature to the insurers for any
information provided by any other parties
[8] and any such information provided by or nondisclosure by
other parties including, but not limited to, Heath North America &
Special Risks Ltd (other than section I of the questionnaire) shall
not be a ground or grounds for avoidance of the insurers'
obligations under the policy or the cancellation thereof."
Chase sought to rely on this clause to argue that the insurance
company could not rescind the contract.
Held:
The clause was ineffective. The insurers were entitled to rescind
the contract of insurance through both the misrepresentation and
the non-disclosure.

If a statement made becomes false because of a later change of circumstances,


there is an obligation to disclose the change of circumstances:

With v O'Flanagan [1936] Ch 575 Court of Appeal


The claimant purchased a medical practice from the defendant.
The claimant was induced to buy the practice by the defendant's
statement that the practice took 2,000 per annum. This
statement was true at the time it was made. However,
subsequently the defendant became ill and many patients went
elsewhere. By time the sale was completed the practice was
virtually worthless.

Held:
Where a statement is rendered false by a change in
circumstances there is a duty to disclose the change. A failure to
do so will result in an actionable misrepresentation.

Inducement/reliance

Once it has been established that a false statement has been made it is then
necessary for the representee to demonstrate that the false statement induced
them to enter the contract. There can be no inducement or reliance if
the representee was unaware of the false statement:

Horsfall v Thomas [1862] 1 H&C 90


The claimant purchased a gun which had a concealed defect. His
action for misrepresentation failed as he hadn't inspected the gun
before purchasing it. Therefore the misrepresentation did not
induce him to enter the contract as he was unaware of it.

If the representee or their agent checks out the validity of the statement they
have not relied on the statement:

Attwood v Small [1838] UKHL J60


The claimants purchased Corngreaves estate from the defendant

for 600,000. Corngreaves estate consisted of mining land, iron


works and various properties including a mansion house. Many of
the properties were subject to leasehold and generated income.
The mines were to be worked by and profit to go to the claimant.
A preliminary agreement was made between the parties whereby
the claimant agreed to purchase subject to being satisfied that
the reports and accounts given by the defendant were accurate.
The claimant then had his accountants and directors check out
the accounts and reports who were satisfied they were accurate.
The claimant then proceeded with the purchase. It then
transpired that the accounts had greatly exaggerated the income
generated by the estate and the claimant sought to rescind the
contract based on the misrepresentations contained in the reports
and accounts.
Held:
The claimant was unsuccessful. By getting his own experts to
check out the reports he had not relied on the accounts but his
own judgment.
If the representee is given the opportunity to check out the
statement but does not in fact check it out, they are still able to
demonstrate reliance:

Redgrave v Hurd (1881) 20 Ch D 1


A solicitor purchased into the partnership in the solicitors' firm. He was
told the partnership had an income of 300 per year and was given the
opportunity to look at the accounts. He declined the offer to check the
accounts and took them at their word. In fact the income was only 200
per year.
Held:

He was entitled to rescind the contract as he relied on the statement.


The fact that he had declined the offer to check the books reinforced
rather than negated that reliance.

Differentiate between the different types of


Misrepresentation
Types of misrepresentation

Once it has been established that a false statement was made and that it
induced the contract, it is necessary to determine the type of misrepresentation
in order to determine the available remedy.

A misrepresentation can be classed as either:

Fraudulent misrepresentation

Negligent misrepresentation under s.2 (1) Misrepresentation Act 1967

Negligent misstatement at common law.

Wholly innocent misrepresentation

Fraudulent misrepresentation

Lord Herschell defined fraudulent misrepresentation in Derry v Peek as a


statement which is made either:

i) knowing it to be false,
ii) without belief in its truth, or
iii) recklessly, careless as to whether it be true or false

The burden of proof lies on the claimant:

Derry v Peek (1889) 5 T.L.R. 625


In a company prospectus the defendant stated the company had the right
to use steam powered trams as oppose to horse powered trams. However,
at the time the right to use steam powered trams was subject of approval
of the Board of Trade, which was later refused. The claimant purchased
shares in the company in reliance of the statement made and brought a
claim based on the alleged fraudulent representation of the defendant.
Held:
The statement was not fraudulent but made in the honest belief that
approval was forthcoming.
Lord Herschell defined fraudulent misrepresentation as a statement
which is made either:
i) knowing it to be false,
ii) without belief in its truth, or
iii) recklessly, careless as to whether it be true or false.

Negligent Misrepresentation under the


Misrepresentation Act 1967

Under s.2(1) Misrepresentation Act 1967, a negligent


misrepresentation is a statement made without reasonable
grounds for belief in its truth. The burden of proof being on the
representor to demonstrate they had reasonable grounds for
believing the statement to be true.

This burden of proof is difficult to discharge:


Howard Marine v Ogden [1978] QB 574
The claimant, Ogden, hired two dredging barges from the
defendant, Howard Marine (HM), for 1,800 per week to carry out
certain excavation works for Northumbrian Water Authority. In
order to make an accurate estimate for tender of the work to be
completed, Ogden asked HM the capacity of the barge. HM
checked Lloyds Register and stated 850 cubic metres. In fact the
entry in Lloyds register was wrong. The capacity was in fact much
lower. Consequently the work carried out by Ogden took much
longer and cost a great deal more to perform. The claimant
brought an action for negligent misrepresentation. HM argued
that they had reasonable grounds for believing the statement to
be true as they had checked Lloyds register.
Held:
The defendant had not discharged the burden of proof by
demonstrating they had reasonable grounds for believing it to be
true as they had the registration document which contained the
correct capacity and there was no reason why they would have
chosen Lloyds register over the registration document.

Wholly innocent Misrepresentation

An innocent Misrepresentation exists where the representor can demonstrate


reasonable grounds for belief in the truth of the statement. See s.2(1) MA 1967

Misrepresentation and Inducement to Enter a Contract


A misrepresentation may be made with the intention that it will induce the other party to enter
into a contract. If it does induce the other party to enter into the contract it may then be an
actionable misrepresentation. The party who was induced by the misrepresentation may
then be entitled to a legal remedy.
Remedies

Remedies available for misrepresentation are dependent on the type of


misrepresentation. For all types the remedy of rescission is available. This is
putting the parties back in their pre-contractual position. Each party gives back
the benefit which they have received under the contract. However, it is not
always possible to rescind the contract and in some circumstances the right to
rescind may be lost.

Remedies for fraudulent misrepresentation

Where there has been a fraudulent misrepresentation, the innocent party is


entitled to rescind the contract and claim damages. The damages that are
awarded are not based on contractual principles but the damages available in
the tort of deceit. There is thus no requirement that the damages are
foreseeable:

Doyle v Olby [1969] 2 QB 158


The claimant, Doyle, purchased a business from the defendant, Olby, as a
result of a several fraudulent misrepresentations relating to the
profitability and operations of the business. The trial judge assessed

damages on contractual principles as to what position the claimant would


have been in had the statements been true and awarded a sum of 1,500.
However, the claimant had suffered loss to the extent of 5,500 as a
result of entering the contract. The claimant appealed on the assessment
of damages.
Held:
Contractual damages are not applicable to misrepresentation since a
representation is not a term of a contract. Where there has been a
fraudulent misrepresentation damages should be assessed in the tort of
deceit.

Lord Denning MR stated:


"On principle the distinction seems to be this: in contract, the defendant
has made a promise and broken it. The object of damages is to put the
plaintiff in as good a position, as far as money can do it, as if the promise
had been performed. In fraud, the defendant has been guilty of a
deliberate wrong by inducing the plaintiff to act to his detriment. The
object of damages is to compensate the plaintiff for all the loss he has
suffered, so far, again, as money can do it. In contract, the damages are
limited to what may reasonably be supposed to have been in the
contemplation of the parties. In fraud, they are not so limited. The
defendant is bound to make reparation for all the actual damages directly
flowing from the fraudulent inducement"

Smith New Court Securities v Scrimgeour Vickers [1996] 3 WLR


1051

Citibank loaned 23M to Parent Industries Incorporated (PII). PII secured


the loan on shares they held in Ferranti International Signal (FIS) valued
at 28M. PII then defaulted on the loan. In July 1989 Citibank sold the
shares in FIS to the claimant (Smith New Court Securities) for 23M (82p

per share) through a broker, the defendant (Scrimgeour Vickers). Mr


Roberts was a senior employee of citibank and a director of the
defendant company arranged the sale. He told the claimant that there
had been two other bids on the shares when in fact no other bids had
been made. The market value of the shares was stated as 78-82p per
share, however, a massive fraud had been perpetrated on FIS which
meant the market value was fictitious. This came to light in Sept 1989.
Smith subsequently sold the shares in small parcels between Nov 1989
and April 1990 for prices between 30-49p per share making a loss of
11.3M.

Lord Browne Wilkinson gave the following guidance in assessing damages


for fraudulant misrep:
1. The defendant is bound to make reparation for all the damage directly
flowing from the transaction;
2. Although such damage need not have been foreseeable, it must have
been directly caused by the transaction;
3. In assessing such damage, the plaintiff is entitled to recover by way of
damages the full price paid by him, but he must give credit for any
benefits which he has received as a result of the transaction;
4. As a general rule, the benefits received by him include the market
value of the property acquired as at the date of acquisition; but such
general rule is not to be inflexibly applied where to do so would prevent
him obtaining full compensation for the wrong suffered;
5. Although the circumstances in which the general rule should not apply
cannot be comprehensively stated, it will normally not apply where
either (a) the misrepresentation has continued to operate after the date
of the acquisition of the asset so as to induce the plaintiff to retain the
asset or (b) the circumstances of the case are such that the plaintiff is,
by reason of the fraud, locked into the property.
6. In addition, the plaintiff is entitled to recover consequential losses

caused by the transaction;


7. The plaintiff must take all reasonable steps to mitigate his loss once he
has discovered the fraud.

Remedies for negligent misrepresentation

S.2(1) Misrepresentation Act 1967 states that the same remedies


are available where the statement was made negligently as if it
were made fraudulently. Royscott v Rogerson confirmed that the
principle in fraudulent misrep relating to tortious damages applied
also in negligent misrep:

Royscott Trust v Rogerson [1991] 2 QB 297 Court of Appeal


The defendant, a car dealer, mis-stated the particulars of a sale by hire
purchase to the finance company, the claimant. The finance company
operated a rule whereby they would only advance money if a 20% deposit
was paid by the company. The defendant stated the price of the car was
8,000 and the deposit paid was 1,600 leaving the loan advanced of
6,400. This was the amount the customer needed to borrow, although
the price and deposit values stated were false. The customer later
defaulted on the hire purchase agreement and sold the car on. The
claimant brought an action against the defendant seeking damages of
3,625 representing the difference between 6,400 paid to the defendant
minus the sum of 2,774 paid by the customer before defaulting. The
defendant argued that there was no loss since the defendant acquired

title to the car which was worth 6,400. The trial judge accepted neither
submission. He held that if the figures on the hire-purchase agreement
had shown a deposit of 1200 and a cash price of 6,000, then the
Finance Company would have paid 4,800 to the Dealer and would have
had no recourse against it since the deposit would have been correctly
shown as 1200. Because the Finance Company were induced to pay an
extra 1600, that was the relevant loss suffered by the Finance Company.
Both parties appealed.
Held:
Damages under s. 2(1) Misrepresentation Act 1967 should be assessed on
the basis of damages available in the tort of deceit not general
contractual principles. This applies in the absence of fraud. The wording
of s.2(1) was clear and not capable of an alternative construction.

Remedies for innocent misrepresentation

Under s.2(2) Misrepresentation Act 1967 the remedies for an


innocent misrep are rescission or damages in lieu of rescission.
The claimant cannot claim both. Damages are assessed on
normal contractual principles.

Bars to rescission

The right to rescind the contract may be lost where a third party
acquires rights, where the representee affirms the contract,
through lapse of time or where restitution in integrum impossible.

3rd party acquires rights

If a third party acquires rights in the goods, eg where they have


been sold on or subject to a charge or mortgage, rescission will
not generally be granted as it will prejudice the third party. If
however, the representee does an act to rescind the contract
before a sale has taken place the 3rd party has not acquired any
rights:

Car & Universal Credit v Caldwell [1964] 2 WLR 600

Mr Caldwell sold his Jaguar car on 12th Jan to a


rogue, Norris, who had paid 10 cash deposit
and left another car as security and gave a
cheque for 965. The following day Mr Caldwell
went to cash the cheque and discovered it was
fraudulent and the car left as deposit turned out
to be stolen. Mr Caldwell reported the incident to
the police and used his best endeavours to cooperate with the police to find Norris in order to
rescind the contract of sale. He also contacted

the Automobile Association to try to locate the


car. Norris had acquired a voidable title to the car
as the contract was induced by fraudulent
misrepresentation. Norris sold the car on to a
third party on 15th Jan. The question for the
court was whether the actions taken by Mr
Caldwell were sufficient to avoid the contract.
Held:
Mr Caldwell had successfully rescinded the
contract. He had taken all steps possible to
demonstrate that he no longer wished to be
bound by the contract. He should not be
prejudiced by the fact that his endeavours failed
to locate Norris.
Affirmation
If the representee does an act to adopt the contract,
or demonstrate a willingness to continue with the contract after
becoming aware of the misrepresentation they will lose the right
to rescind:

Long v Lloyd [1958] 1 WLR 753

Long v Lloyd [1958] 1 WLR 753

(Case summary)

The claimant purchased a lorry from the


defendant. The lorry was advertised in a
newspaper which described the lorry as being in
exceptional condition. The claimant phoned the
defendant to arrange a viewing and was told it
was in first class condition. He went to view it the
following day and was told it was capable of
doing 40 mph and 11 miles to the gallon. The
claimant test drove it and found that the
speedometre was not working and he had to pull
a wire for the accelerator as this was not working
also. The claimant still decided to purchase the
lorry. On the first journey the claimant noted
certain faults with the lorry and contacted the
defendant who offered to pay half the repairs.
The claimant accepted this. However, on a
further journey the lorry broke down completely
and the claimant wished to rescind the contract
and brought an action against the defendant for
innocent misrepresentation.
Held:
By accepting the offer of payment for half the
repairs when he became aware of the defects,
the defendant had lost his right to rescind as he
had affirmed the contract.

Lapse of time

The right to rescind will be lost after a lapse of time. If the misrep is negligent or
fraudulent, time only starts to run from discovery. If a wholly innocent misrep
time runs from the entering of the contract:

Long v Lloyd [1958] 1 WLR 753


The claimant purchased a lorry from the
defendant. The lorry was advertised in a
newspaper which described the lorry as being in
exceptional condition. The claimant phoned the
defendant to arrange a viewing and was told it
was in first class condition. He went to view it the
following day and was told it was capable of
doing 40 mph and 11 miles to the gallon. The
claimant test drove it and found that the
speedometre was not working and he had to pull
a wire for the accelerator as this was not working
also. The claimant still decided to purchase the
lorry. On the first journey the claimant noted
certain faults with the lorry and contacted the
defendant who offered to pay half the repairs.
The claimant accepted this. However, on a
further journey the lorry broke down completely
and the claimant wished to rescind the contract
and brought an action against the defendant for
innocent misrepresentation.
Held:

By accepting the offer of payment for half the


repairs when he became aware of the defects,
the defendant had lost his right to rescind as he
had affirmed the contract.

Restitution in integrum impossible

Where it is impossible to restore the parties to their precontractual position, eg


where the goods have perished or have been consumed, the right to rescind will
be lost.

Damages as a remedy for misrepresentation


If the representee suffered loss as a result of having been induced to enter into the contract by
the misrepresentation, he may have a claim for damages:
1.
where the misrepresentation was fraudulent
2.
where the misrepresentation was not fraudulent, but the representor is unable to show
that he had reasonable grounds to believe the facts stated were true
3.
where the misrepresentation was not fraudulent, but the court decides in its discretion
to award damages in lieu of rescission
Damages may be also awarded in lieu of rescission whether or not the representee was
entitled to damages in any event.
There are anomalies between the recovery of damages in the similar claims of breach of
contract and negligent misstatement.

The defendant in a misrepresentation claim is liable for all losses flowing from the
inducement whether or not they were foreseeable at the time. This can give rise to difficult
questions in assessing loss in misrepresentation claims and the early instruction of expert
evidence may be required.
What is a misrepresentation and comparison with similar claims

A claim for misrepresentation arises where one party to a contract (the representor) made an
untrue statement of fact that induced the other (the representee) to enter into the contract.
Claims for misrepresentation are governed by both the common law and the
Misrepresentation Act 1967 (MA 1967).
The false statement may be made innocently, negligently or fraudulently.

An actionable misrepresentation entitles the innocent party to rescind the contract


unless the court determines otherwise, though it may award damages in lieu of rescission.
Damages are also available where the misrepresentation has caused the innocent party loss.
Misrepresentation claims can be difficult to prove and a prospective defendant will have a
number of possible defences to such a claim, eg, that the statement in question was not
intended to be relied on or that the representee would have entered into the contract in any
event.
A claim for misrepresentation has similarities to, but can be distinguished from, claims for
breach of contract, mistake, negligent misstatement and deceit.
For more detail see What is misrepresentation and comparison with similar claims.
Required element of a misrepresentation claimstatements

Amongst the key elements of an actionable misrepresentation is the requirement for a


statement to have been made by/on behalf of the representor to the representee.
For a pre-contractual statement to be an actionable representation it must have been a
statement of fact. Such a statement can be made expressly in writing or orally or may be
implied from words or conduct. In the case of implied representations, care must be taken to
test the credibility of the claimant's assertions as to an implied representation when bringing
such a claim since the more difficult it is to formulate the terms of the implied representation,
the more reluctant the court will be to accept that it should be implied.
Where damages are claimed (in addition or alternatively to rescission), that the
misrepresentation caused the representee to suffer loss.

Statements of intention, opinion and promises whilst not actionable misrepresentations, may
carry with them implied representations of fact. There are also occasions where silence can
give rise to an actionable misrepresentation.
When considering whether a misrepresentation is actionable the context in which it was made
is key.
For more detail see Practice Note: What statements will establish a misrepresentation claim?.
Required element of a misrepresentation claiminducement

For a misrepresentation claim to succeed, the claimant must show that he was induced by the
representation to enter into the contract.
This will involve analysis of the context and application of the 'but for test', namely, that 'but
for' the misrepresentation, the claimant would not have entered into the contractthat is that
the representation played a real and substantial part in the claimant's decision to enter into the
contract.
Inducement alone, however, is not enough and it must be shown that the defendant intended
for the representee to be induced by his misrepresentation. Whilst this requirement is less
easy to apply where the representation is implied, nonetheless if the representor intended
what he said to be relied on by the representee, he will be taken to have intended that the
representee should rely on the objective meaning of what he said.
For more detail see Practice Note: What is inducement for the purposes of a
misrepresentation claim?.
Required element of a misrepresentation claimfalsity and fraudulent and
innocent misrepresentations

For a misrepresentation claim to succeed, the representation relied on must have been false.
This is so whether the representor made the untrue statement innocently, carelessly or
deliberately and fraudulently.
It may sometimes be necessary or important to plead fraudulent misrepresentation. In such
case, it is the lack of an honest belief in a statements truth that makes it fraudulent. However,
claims for fraudulent misrepresentation must be supported by robust evidence.
Where the misrepresentation was not made fraudulently, damages are not available if the
maker of the statement had reasonable grounds for believing that the representation was true.
Damages may be awarded in lieu of rescission. Damages awarded for loss will be adjusted to
reflect any damages awarded in lieu of rescission.
For more detail see Practice Note: Nature of an actionable representationfalsity and
fraudulent and innocent misrepresentations.

Damages as a remedy for misrepresentation

If the representee suffered loss as a result of having been induced to enter into the contract by
the misrepresentation, he may have a claim for damages:
1.

where the misrepresentation was fraudulent


2.

where the misrepresentation was not fraudulent, but the representor is unable to show
that he had reasonable grounds to believe the facts stated were true
3.

where the misrepresentation was not fraudulent, but the court decides in its discretion
to award damages in lieu of rescission
Damages may be also awarded in lieu of rescission whether or not the representee was
entitled to damages in any event.
There are anomalies between the recovery of damages in the similar claims of breach of
contract and negligent misstatement.
The defendant in a misrepresentation claim is liable for all losses flowing from the
inducement whether or not they were foreseeable at the time. This can give rise to difficult
questions in assessing loss in misrepresentation claims and the early instruction of expert
evidence may be required.

A contract may be discharged by frustration. A contract may be frustrated


where there exists a change in circumstances, after the contract was
made, which is not the fault of either of the parties, which renders the contract
either impossible to perform or deprives the contract of its commercial purpose.
Where a contract is found to be frustrated, each party is discharged from future
obligations under the contract and neither party may sue for breach. The
allocation of loss is decided by the Law Reform (Frustrated Contracts)
Act 1943.

Examples of frustrating events

Destruction of the subject matter:

Taylor v Caldwell (1863) 3 B & S 826


The claimant hired out a music hall in Surrey for the purpose of
holding four grand concerts. The claimant went to great expense
and effort in organising the concerts. However, a week before the
first concert was due to take place the music hall was destroyed
by an accidental fire. The claimant sought to bring an action for
breach of contract for failing to provide the hall and claiming
damages for the expenses incurred.
Held:
The claimant's action for breach of contract failed. The contract
had been frustrated as the fire meant the contract was impossible
to perform.
Personal incapacity will generally render the contract frustrated:

Condor v Baron Knights [1966] 1 WLR 87

(case summary)

Condor v Baron Knights [1966] 1 WLR 87


A 16 year old agreed by contract to play the drums for the
defendant band for 7 nights per week for 5 years. The claimant
suffered a mental breakdown and was told by his doctor that he
should not perform more than 4 nights per week. The band

dismissed him. He brought a claim for wrongful dismissal.


Held:
The claimant's action was unsuccessful as his medical condition
made it impossible for him to perform his contractual obligations
and the contract was thus frustrated.

Where the contract becomes illegal to perform it will frustrate the contract:

Fibrosa Spolka v Fairbairn [1943] AC 32

(case summary)

Fibrosa Spolka v Fairbairn [1943] AC 32


An English company which manufactured textile machinery
agreed by contract dated 12th July 1939 to supply some
machines to a Polish company. The machines were to be delivered
in 3-4 months. 1,600 was payable up front and the balance of
3,200 payable on delivery. The Polish company paid 1000 on
18th of July on account of the initial payment due. On 1st Sept
Germany invaded Poland and on 3rd Sept Great Britain declared
war on Germany. On 23rd of September Orders in Council made
Poland an enemy territory making it illegal for British companies
to trade with Poland.
Held: the contract was frustrated as it was no longer possible to
perform the contract because of the supervening illegality.

Where a contract can not be performed in the specified manner:

Nicholl and Knight v Ashton, Eldridge & Co [1901] 2 KB 126


summary)

(case

Nicholl and Knight v Ashton, Eldridge & Co [1901] 2 KB


126
By contract the parties agreed that a cargo of cotton seed was to
be shipped from Egypt to England. The contract specified the
ship, The Orlando, which was to carry the cargo. This ship
became damaged and was in for repairs when the contract was
due to be performed.
Held: By naming the exact ship which was to carry the cargo, the
contract was frustrated as it was impossible for this ship to carry
the cargo within the contractually agreed period.

A contract may also be frustrated where it is deprived of its commercial purpose:

Krell v Henry [1903] 2 KB 740

(case summary)

Krell v Henry [1903] 2 KB 740


The defendant hired a flat on Pall Mall for the sole purpose of
viewing King Edward VII's coronation procession. The price
agreed was 75 for two days. The defendant paid 25 deposit.
Due to illness of the King the coronation was cancelled.
Consequently, the defendant did not use the flat. The claimant
sought to claim the outstanding 50.
Held:

The contract was frustrated as cancellation of the procession


deprived it of its commercial purpose. The claimant's action for
breach of contract was thus unsuccessful.

However, the contract must be deprived of the whole commercial purpose to


amount to frustration:

Herne Bay Steam Boat v Hutton [1903] 2 KB 683

(case summary)

Herne Bay Steam Boat v Hutton [1903] 2 KB 683


The defendant hired out the claimant's steamship. The purpose of
the contract was to take paying passengers to view the Naval
Review which was part of King Edward VII's coronation
celebrations. The defendants were also offering a days cruise for
the passengers. The Naval Review was cancelled as the King was
ill. The defendant did not use the steamship and the claimant
brought an action for the agreed contract price. The defendant
argued the contract had become frustrated due to the
cancellation of the Naval Review.
Held:
The contract was not frustrated. The contract had not been
deprived of its sole commercial purpose as it was still possible to
perform the days cruise. The Naval Review was not the only
commercial purpose of the contract.

No frustration

A contract will not be frustrated where:

1.

It is more difficult or expensive to perform

2.

Impossibility of performance is the fault of either of the parties

3.

Where there is a force majeure clause

4.

Where the frustrating event could be foreseen

1. A contract will not be frustrated merely because it becomes more difficult or


expensive to perform:

Davis Contractors v Fareham UDC [1956] AC 696

(Case summary)

Davis Contractors v Fareham UDC [1956] AC 696


Davis Contractors agreed to build 78 houses for Fareham Council
within 8 months for an agreed price of 85,000. Due to a
shortage in skilled labour and material the contract took 22
months to complete and was much more expensive than
anticipated. Davis Contractors were paid the contractually agreed
price but bought an action arguing for more money based on the
fact that the contract had become frustrated and therefore they
were entitled to further payment based on a quantum meruit
basis.

Held:
The contract was not frustrated. The fact that a contract becomes
more difficult to perform or not so profitable is not sufficient to
amount to frustration. It was still possible to perform the
contract.

Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93

(case

summary)

Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93


The defendant agreed to ship some Sudanese peanuts during
November or December 1956 to Hamburg for a certain price. On
2nd of Nov the Suez canal was closed to shipping. The defendant
could still have transported the peanuts within the contractually
agreed time but this would mean going via the Cape of Good
Hope which would have taken four times as long and increased
the cost of transport considerably. The defendant did not carry
the goods and argued that the contract had been frustrated.
Held:
The contract was not frustrated. It was still possible to perform
the contract without any damage to the peanuts. The fact that it
was more difficult or costly to perform is not sufficient to amount
to frustration.

2. A contract will not be frustrated if the impossibility is the fault of either of the
parties:

Maritime National Fish v Ocean Trawlers [1935] AC 524

(case

summary)
Maritime National Fish v Ocean Trawlers [1935] AC 524
The claimant owned five fishing vessels one of which was
chartered to the defendants. The fishing vessels were all fitted
with otter trawler nets. New legislation was introduced requiring
licences to be held by those using otter trawl nets. The claimant
applied for five licences but was only granted three. He had to
name which vessels the licence would be used on. He named his
own vessels and excluded the vessel which the defendant was
using. This meant that the defendant was unable to use the
vessel for fishing. The claimant sued the defendant for the price
of hire and the defendant in his defence stated the defendant had
committed a breach in not providing a licence so he was not
obliged to pay for the cost of hire. The claimant argued there was
no breach as the failure to provide a licence was a frustrating
event in that the decision to grant licences rested with the
secretary of state.
Held:
The contract was not frustrated since the claimant had chosen to
keep the three licences granted for himself rather than using one
to fulfil his contractual obligation. He had therefore induced the
frustrating event and was therefore in breach of contract.

3. Where there exists a force majeure clause this will apply rather than the law
of frustration. The clause must actually cover the event which occurred:

Jackson v The Union Marine Insurance Co Ltd (1874) LR 10 CP 125


summary)

(case

4. Frustration will also not exist where the frustrating event should have been
foreseen:

Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274


summary)

(case

Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch


274
A hotel owner entered a contract with an advertising agency
enabling them to put illuminated adverts on the roof of their
hotel. The hotel was then compulsorily purchased by the Local
Authority and demolished. The advertising agency sued for
breach of contract and the hotel argued the contract had become
frustrated.
Held:
The contract was not frustrated as the hotel owners were aware
that the Local Authority were looking to purchase the hotel at the
time they entered the contract. They should have foreseen the
fact that this could happen in the life time of the contract and

made provision in the contract for such an eventuality. They were


therefore liable to pay damages for breach of contract.

Peter Cassidy Seed Co Ltd v Osuustukkuk-Auppa Ltd [1957] 1 WLR 273


summary)

(case

Peter Cassidy Seed Co Ltd v Osuustukkuk-Auppa Ltd


[1957] 1 WLR 273

The claimant, an English company, purchased some ants eggs


from the defendant in Finland. The ants eggs required an export
licence. The after agreeing to the sale, the defendant was refused
the licence. The claimant brought an action for breach of contract.
The defendant argued the contract was frustrated so they were
not liable for breach.
Held:
The defendant should have foreseen the possibility of the licence
being refused and therefore the contract was not frustrated.

Affect of frustration of a contract

Where a contract is found to be frustrated, both parties are released from their
obligations under the contract and neither party may sue for breach.

The allocation of loss is decided by the Law Reform (Frustrated Contracts)


Act 1943. This provides:

s.1(2) All money payable under the contract ceases to be payable and
any money already paid may be recovered. Where expenses have been incurred
this may be deducted from the amounts payable or paid. This is at the discretion
of the court and is subject to what is just and equitable in the circumstances of
the case. There is no provision allowing expenses to be recovered which exceed
the amounts paid or payable.

S. 1(3) - Where a valuable benefit has been conferred this must be paid for.

Remoteness of damage relates to the requirement that the damage must be


of a foreseeable type. In negligence claims, once the claimant has established
that the defendant owes them a duty of care and is in breach of that duty which
has caused damage, they must also demonstrate that the damage was not too
remote. Remoteness of damage must also be applied to claims under the
Occupiers Liability Acts and also to nuisance claims.

Remoteness of damage is often viewed as an additional


mechanism of controlling tortious liability. Not every loss will be
recoverable in tort law. Originally a defendant was liable for all
losses which were a direct consequence of the defendant's breach
of duty:

Re Polemis & Furness Withy & Company ltd. [1921]3 KB


560
Case summary

Re Polemis & Furness Withy & Company Ltd. [1921] 3 KB 560


Some Stevedores carelessly dropped a plank of wood into the hold of a
ship. The plank struck something as it was falling which caused a spark.
The spark was ignited by petrol vapours resulting in the destruction of the
ship. The arbitrator held that the causing of the spark could not have
been anticipated and therefore no liability arose. The claimant appealed.

Held:
There was no requirement that the damage was foreseeable. The
defendant was liable for all the direct consequences of their action.

NB This was overruled in Wagon Mound No 1

The Wagon Mound no 1 [1961] AC 388 House of Lords


The defendant's vessel, The Wagon Mound, leaked furnace oil at a
Wharf in Sydney Harbour. Some cotton debris became embroiled
in the oil and sparks from some welding works ignited the oil. The
fire spread rapidly causing destruction of some boats and the
wharf.
Held:
Re Polemis should no longer be regarded as good law. A test of
remoteness of damage was substituted for the direct
consequence test. The test is whether the damage is of a kind
that was foreseeable. If a foreseeable type of damage is present,
the defendant is liable for the full extent of the damage, no
matter whether the extent of damage was foreseeable.

This was largely considered unfair as a defendant could be liable


for damage which was not foreseeable and therefore could not
take steps to prevent it. The direct consequence test was
overruled in the Wagon Mound no 1 and replaced with a new test
for deciding if damages are too remote:

The Wagon Mound no 1 [1961] AC 388


summary

Case

The Wagon Mound no 1 [1961] AC 388 House of Lords


The defendant's vessel, The Wagon Mound, leaked furnace oil at a
Wharf in Sydney Harbour. Some cotton debris became embroiled
in the oil and sparks from some welding works ignited the oil. The
fire spread rapidly causing destruction of some boats and the
wharf.
Held:
Re Polemis should no longer be regarded as good law. A test of
remoteness of damage was substituted for the direct
consequence test. The test is whether the damage is of a kind
that was foreseeable. If a foreseeable type of damage is present,
the defendant is liable for the full extent of the damage, no
matter whether the extent of damage was foreseeable.

Following the Wagon Mound no 1 the test for remoteness of damage is that
damage must be of a kind which was foreseeable. Once damage is of a
kind that is foreseeable the defendant is liable for the full extent of the damage
no matter whether the extent of the damage is foreseeable
The Wagon Mound test was considered and applied in:

Hughes v Lord Advocate [1963] AC 837


summary

Case

Hughes v Lord Advocate [1963] AC 837 House of Lords


Two boys aged 8 and 10 went exploring an unattended man hole.
The man hole had been left by workmen taking a break. It was
surrounded by a tent and some paraffin lamps were left to warn

road users of the danger. The boys took a lamp down the hole.
One of them dropped the lamp and an unforeseeable explosion
occurred resulting in extensive burns.
Held:
The damage was not too remote it was foreseeable that the boys
may suffer a burn from the lamp. The fact that the burn resulted
from an unforeseeable explosion did not prevent the type of
damage being foreseeable.

Doughty v Turner Manufacturing Company [1964] 1 QB 518


Case summary
Doughty v Turner Manufacturing Company [1964] 1 QB 518
An asbestos lid was accidentally knocked into a cauldron of molten liquid.
A few moments later an explosion occurred. The claimant was standing
close by and suffered burns from the explosion. The explosion occurred as
a result of the asbestos reacting with the chemicals in the liquid in the
high temperature. At the time of the incident it was not known that the
asbestos could react in that way.
Held:
The damage was too remote. It was not foreseeable that an explosion
would occur. Whilst it may be foreseeable the lid may have caused a
splash resulting in a scold, it was not foreseeable that an explosion would
occur resulting in burns.

There has been some confusion as to whether for remoteness of


damage, in addition to being damage of a type which is
foreseeable, the damage must occur in a foreseeable manner.
Hughes v Lord Advocate suggests not but see:

Hughes v Lord Advocate [1963] AC 837 House of Lords


Two boys aged 8 and 10 went exploring an unattended man hole.
The man hole had been left by workmen taking a break. It was
surrounded by a tent and some paraffin lamps were left to warn
road users of the danger. The boys took a lamp down the hole.
One of them dropped the lamp and an unforeseeable explosion
occurred resulting in extensive burns.
Held:
The damage was not too remote it was foreseeable that the boys
may suffer a burn from the lamp. The fact that the burn resulted
from an unforeseeable explosion did not prevent the type of
damage being foreseeable.

Tremain v Pike [1969] 1 WLR 1556


summary

Case

Tremain v Pike [1969] 1 WLR 1556


The farm labourer contracted leptosporosis from handling materials on
which rats had urinated.
Held:
The defendant was not liable. It was not known at the time that
leptosporosis could be transmitted in this way. Whilst it was foreseeable
he may contract the disease by a rat bite the way he contracted the
disease was not foreseeable.

Jebson v Ministry of Defence [2000] EWCA Civ 198


summary

Case

Jebson v Ministry of Defence [2000] EWCA Civ 198 Court of


Appeal
The claimant, a soldier, suffered severe injuries after a night out
drinking organised by the MOD. The claimant was transported
with 19 other soldiers in the back of an army vehicle with a
canvass roof. On the return journey the claimant and other
soldiers were very drunk. The senior officer travelled in the front
of the vehicle and was unable to see what was going on in the
back of the vehicle. The claimant climbed on to the tailgate and
attempted to climb on to the roof. He fell and was struck by a
lorry. The trial judge held that whilst it was foreseeable that an
injury may occur by high spirits and stumbling inside the vehicle
it was not foreseeable the claimant would attempt to climb on the
roof and therefore the damage was too remote as it had not
occurred in a foreseeable manner.
Held:
It was foreseeable that injury (whether slight or serious) would
occur as a result of the drunken and rowdy behaviour of the
passengers, including the danger that someone would fall from
the vehicle as a result, such wider risk being apt to include within
its description the accident which actually happened.

Jolley v Sutton [2000] 1 WLR 1082


summary

Case

Jolley v Sutton [2000] 1 WLR 1082


Two 14 year old boys found an abandoned boat on land owned by
the council and decided to do it up. The boat was in a thoroughly
rotten condition and represented a danger. The council had stuck
a notice on the boat warning not to touch the boat and that if the
owner did not claim the boat within 7 days it would be taken

away. The council never took it away. The boys had been working
on the boat for 6-7 weeks when one of them suffered severe
spinal injuries, resulting in paraplegia, when the boat fell on top
of him. The boys had jacked the boat up to work on the underside
and the jack went through the rotten wood. The claimant brought
an action under the Occupiers Liability Act 1984. The trial judge
found for the claimant. The Court of Appeal reversed the decision,
holding that whilst it was foreseeable that younger children may
play on the boat and suffer an injury by falling through the rotten
wood, it was not foreseeable that older boys would try to do the
boat up. The claimant appealed.
House of Lords held:
The claimant's appeal was allowed. The risk was that children
would "meddle with the boat at the risk of some physical injury"
The actual injury fell within that description.
Lord Steyn:
"The scope of the two modifiers - the precise manner in which the
injury came about and its extent - is not definitively answered by
either The Wagon Mound (No. 1) or Hughes v. Lord Advocate. It
requires determination in the context of an intense focus on the
circumstances of each case."

The Egg shell skull rule

A final aspect of remoteness of damage is the egg shell (or thin)


skull rule. This means a defendant must take their victim as
they find them. Ie if the victim is particularly vulnerable or has a
pre-existing condition resulting in them suffering greater injury

than would be expected in an ordinary person, the defendant


remains responsible for the full extent of the injury:

Smith v Leech Brain [1962] 2 QB 405


summary

Case

Smith v Leech Brain [1962] 2 QB 405


A widow brought a claim against the defendant under the Fatal Accidents
Act for the death of her husband. The defendant employed the husband.
As a result of their negligence he incurred a burn to his lip. The lip
contained pre-cancerous cells which were triggered by the injury
sustained. He died three years later from cancer.
Held:
The burn was a foreseeable consequence of the defendant's negligence
and this resulted in the death. The defendant was liable for his death. It
was not necessary to show that death by cancer was foreseeable, nor that
an ordinary person would not have died from the injury. The egg shell
skull rule applies and the defendant must take his victim as he finds him.

Page v Smith [1996] 1 AC 155


Page v Smith [1996] 1 AC 155 House of Lords

The claimant had suffered from ME over a period of time and was in
recovery when he was involved in a minor car accident due to the
defendant's negligence. The claimant was not physically injured in the
collision but the incident triggered his ME and had become chronic and
permanent so that he was unable to return to his job as a teacher. He was
successful at his trial and awarded 162,000 in damages.
Held:

Provided some kind of personal injury was foreseeable it did not matter
whether the injury was physical or psychiatric. There was thus no need to
establish that psychiatric injury was foreseeable. Also the fact that an
ordinary person would not have suffered the injury incurred by the
claimant was irrelevant as the defendant must take his victim as he finds
him under the thin skull rule.

Case summary

Corr v IBC Vehicles Ltd [2008] 2WLR 499


summary

Case

Corr v IBC Vehicles Ltd; HL 27 Feb 2008


Augu st 29, 2016 d ls 0 D amag es , Perso n al Inju r y ,

References: [2008] UKHL 13, [2008] 2 WLR 499, [2008] 2 All ER 943, [2008] ICR 372, [2008]
AC 884, [2008] PIQR P11
Links: Bailii
Coram: Lord Bingham of Cornhill, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord
Mance, Lord Neuberger of Abbotsbury
Ratio: The claimants husband had committed suicide. She sought damages for financial loss
from his former employers under the 1976 Act. He had suffered a severe and debilitating injury
working for them leading to his depression and suicide. The employers said that these damages
were too remote.
Held: The employers appeal was dismissed.
Lord Bingham said: Mr Corrs suicide was not a voluntary, informed decision taken by him as an
adult of sound mind making and giving effect to a personal decision about his future. It was the
response of a man suffering from a severely depressive illness which impaired his capacity to
make reasoned and informed judgments about his future, such illness being, as is accepted, a
consequence of the employers tort. It is in no way unfair to hold the employer responsible for this
dire consequence of its breach of duty, although it could well be thought unfair to the victim not to
do so. and The law does not generally treat us as our brothers keeper, responsible for what he
may choose to do to his own disadvantage. It is his choice. But I do not think that the submission
addresses the particular features of this case. The employer owed the deceased the duty already

noted, embracing psychological as well as physical injury. Its breach caused him injury of both
kinds. While he was not, at the time of his death, insane in MNaghtens terms, nor was he fully
responsible. He acted in a way which he would not have done but for the injury from which the
employers breach caused him to suffer. This being so, I do not think his conduct in taking his
own life can be said to fall outside the scope of the duty which his employer owed him.
Lord Hoffmann said: On a but for test, his jump from the top of the multi-storey carpark can be
said to have been caused by his employers negligence. But the developing case law has placed
limits on the extent of the but for consequences of actionable negligence for which the negligent
actor can be held liable. This case engages and questions the extent of those limits . . The
question in this case, therefore, is whether Mr Corrs deliberate act of jumping from a high
building in order to kill himself, an apparent novus actus, albeit one that was causally connected,
on a but-for basis, to the original negligence, broke the claim of causative consequences for
which Mr Corrs negligent employers must accept responsibility.
Statutes: Fatal Accidents Act 1976 1, Law Reform (Miscellaneous Provisions) Act 1934
This case cites:

Appeal from Corr v IBC Vehicles Ltd CA (Bailii, [2006] EWCA Civ 331, Times 21-Apr06, [2006] ICR 1138, [2007] QB 46, [2006] 2 All ER 929, [2006] 3 WLR 395)
The deceased had suffered a head injury whilst working for the defendant. In addition to
severe physical consequences he suffered post-traumatic stress, became more and more
depressed, and then committed suicide six years later. The claimant . .

Cited Page v Smith HL (Gazette 14-Jun-95, Independent 12-May-95, Times 12-May-95,


(1995) 92 LSG 33, [1995] RTR 210, [1996] AC 155, [1995] 2 All ER 736, Bailii, [1995]
UKHL 7, [1995] PIQR P329, [1995] 2 WLR 644, [1995] 2 Lloyds Rep 95)
The plaintiff was driving his car when the defendant turned into his path. Both cars
suffered considerable damage but the drivers escaped physical injury. The Plaintiff had a
pre-existing chronic fatigue syndrome, which manifested itself from time . .

Approved Wright v Davidson ((1992) 88 DLR (4th) 698, Canlii, 1992 CanLII 1020 (BC
BA), [1992] 3 WWR 611, (1992), 64 BCLR (2d) 113)
(British Columbia Court of Appeal) The court rejected a claim for damages for a suicide
after the deceased claimant had suffered injury in a road collision because the conscious
decision of the deceased to take her own life had occurred without any . .

Cited St Georges Healthcare National Health Service Trust v S (No 2); Regina v Collins
and Others ex parte S (No 2) CA (Times 03-Aug-98, Bailii, [1998] EWCA Civ 1349, [1999]
Fam 26)
The patient came to hospital pregnant. The doctors advised a caesarian section but she
refused it. The doctors said that she lacked capacity and applied to the court for leave to
proceed.
Held: It was wrong to apply to the court to override . .

Cited Commissioner of Police for the Metropolis v Reeves (Joint Administratix of The
Estate of Martin Lynch, Deceased) HL (Times 16-Jul-99, Gazette 11-Aug-99, House of
Lords, Bailii, [1999] 3 WLR 363, [1999] UKHL 35, [2000] 1 AC 360, [1999] 3 All ER 897)
The deceased was a prisoner known to be at risk of committing suicide. Whilst in police
custody he hanged himself in his prison cell. The Commissioner accepted that he was in
breach of his duty of care to the deceased, but not that that breach was . .

Cited Daniel MNaghtens Case HL ((1843) 10 Cl & Fin 200, [1843] 8 ER 718, Bailii,
[1843] UKHL J16, [1843] EngR 875, Commonlii)
Daniel MNaghten suffered from a mental disorder under which he believed that he was
being persecuted by various bodies in authority, including the Tory Party. He sought to kill
the Tory Prime Minister Sir Robert Peel, but shot and killed instead . .

Cited Stapley v Gypsum Mines Ltd HL ([1953] AC 663, Bailii, [1953] UKHL 4, [1953] 2
All ER 478, [1953] 3 WLR 279)
The question was whether the fault of the deceaseds fellow workman, they both having
disobeyed their foremans instructions, was to be regarded as having contributed to the
accident.
Held: A plaintiff must share in the responsibility for the . .

Cited Regina v Kennedy HL (Bailii, [2007] UKHL 38, Times 19-Oct-07, [2007] 4 All ER
1083, [2007] 3 WLR 612, [2007] Inquest LR 234, [2008] 1 Cr App Rep 19, [2008] Crim
LR 222, [2008] AC 269)
The defendant had been convicted of manslaughter. He had supplied a class A drug to a
friend who then died taking it.
Held: The House was asked When is it appropriate to find someone guilty of
manslaughter where that person has been involved . .

Cited Smith v Leech Brain & Co Ltd CA ([1962] 2 QB 405)


The reasoning in The Wagon Mound did not affect the rule that a tortfeasor takes his
victim as he finds him.
Lord Parker CJ said: The test is not whether these employers could reasonably have
foreseen that a burn would cause cancer and that . .

Cited Kirkham v Anderton, The Chief Constable of the Greater Manchester police CA
([1989] 2 QB 283, [1990] 3 All ER 246, Bailii, [1989] EWCA Civ 3)
The claimants husband hanged himself in Risley Remand Centre after the police had
failed to warn the prison authorities that he was (as the police knew) a suicide risk. He
was suffering from clinical depression and had previously attempted suicide . .

Cited AMP General Insurance Ltd v Roads & Traffic Authority of New South Wales
([2001] Aust Torts Reports 81, [2001] NSWCA 186, Austlii)
(Supreme Court of New South Wales) Spigelman CJ said: There was no duty upon the
employer . . to protect the deceased from self harm. . .

Cited Simmons v British Steel plc HL (House of Lords, [2004] UKHL 20, Bailii, Times
04-May-04, [2004] ICR 585, 2004 GWD 14-315, [2004] PIQR P33, 2004 SLT 595)
The claimant was injured at work as a consequence of the defenders negligence. His
injuries became more severe, and he came to suffer a disabling depression.
Held: the Inner House had been wrong to characterise the Outer House decision as . .

At first Instance Corr v IBC Vehicles Ltd QBD (Bailii, [2005] EWHC 895 (QB), [2006]
PIQR P11)
The claimants husband had been employed by the defendant and had suffered severe
head injuries because of malfunctioning machinery. He suffered post-traumatic stress
disorder and that led to depression. He ultimately committed suicide. His widow . .

(This list may be incomplete)


This case is cited by:

Cited Gray v Thames Trains Ltd and Another CA (Bailii, [2008] EWCA Civ 713, Times
09-Jul-08, [2009] 2 WLR 351)
The claimant was a victim of the Ladbroke Grove rail crash. He later committed and was
convicted of a manslaughter and detained under the 1983 Act. He said that the accident
had caused a major personality change. The defendant relied on the defence . .

Cited St George v The Home Office CA (B3/2007/2778, Bailii, [2008] EWCA Civ 1068,
Times 22-Oct-08)
The claimant was taken into prison. He was known to be subject to epilepsy, with high
risks on withdrawal from drugs, but was allocated a high bunk. He had a seizure and fell,
suffering head injuries. He sought damages in negligence. The defendant . .

Cited Environment Agency v Ellis CA (Bailii, [2008] EWCA Civ 1117)


The claimant was injured working for the appellants. The appellants now appealed the
finding that they were responsible saying that other factors contributed to the injury, and
in particular that he had fallen at home. The claimant said that that . .

Cited Chubb Fire Ltd v The Vicar of Spalding & Churchwardens and Church Council of
The Church of St Mary & St Nicholas, Spalding CA (Bailii, [2010] EWCA Civ 981)
The appellants had supplied a dry powder extinguisher to the church. Vandals discharged
the extinguisher, requiring substantial sums to be spent cleaning the dust. The churchs
insurers sought to recover the costs saying that the appellant should . .

Cited Gnango, Regina v SC ([2012] 2 All ER 129, [2012] 2 WLR 17, [2012] 1 Cr App R
18, [2012] 1 AC 827, Bailii, [2011] UKSC 59, SC Summary, SC, UKSC 2010/0165, Bailii
Summary)
The prosecutor appealed against a successful appeal by the defendant against his
conviction for murder. He and an opponent had engaged in a street battle using guns. His
opponent had shot an innocent passer by. The court was now asked as to whether . .

Analyze the impact of duress and undue influence


Duress at common law occurs where a party enters a
contract under violence threaten violence to himself or
to his immediate family or where he is threaten with
false imprisonment; or where he is threaten with the
dishonor of a member of his family. Coercion of this
kind is legal duress when it is exercise by the other party
to the contract, or by the agent of another party, or by a
person to the knowledge of another party.
Legal effects of duress: a person who has entered into a
contract under duress may either affirm or avoid the
contract after the duress has ceased: affirmation maybe
implied where a party makes no attempt to set the
contract aside within a reasonable period of the
cessation of the duress. Example in the cases below:
North Ocean Shipping Co. v Hyundai Construction Co.
(1979).
Cumming v Ince (1847): an inmate of a private lunatic
asylum agreed to make certain arrangement as to her
property in the return for the suspension of the
commission of lunacy which was being held on her:
HELD: the agreement was not binding as the consent was
not freely given. As in the case of Cumming v Ince (1847)
Kaufman v. Gerson (1904): G had taken money which K
has entrusted with him. K threatened to prosecute G,
unless Gs wife made good the loss out of her own
property. Gs wife agreed to do so, in order to save her

husbands honour. HELD: Gs wife was not bound by her


promise. She was entitled to avoid the contract she had
entered under duress.
Undue influence
Undue influence in equity occurs where a party enters a
contract under any kind of influence which prevents him
from exercising a free and independent judgment. The
courts have always taken care not to define undue
influence, for a definition would cramp their equitable
jurisdiction in this connection. As no court has ever
attempted to define fraud, so no count ahs ever attempted
to define undue influence, which includes one of the many
varieties: per Lindley L. J. in Allcard v Skinner (1887).
Where undue influence is alleged, the court regards itself
as a court of conscience with full discretion to make its
finding accordingly. There is a rebuttable presumption of
undue influence where a fiduciary or confidencetial
relationship exist between contracting parties in all other
cases, the onus is on the party alleging undue influence to
prove it.
Legal effect of undue influence. A contract (or gift under
seal) may be set aside at the suit of a party who contracted
under influence. This relief is equitable and, therefore,
discretionary. It may be disallowed where the plaintiff ahs
delay making his claim, for delay defeats the equities:
Allcard v. Skinner. Also, it may be disallowed where the
plaintiffs conduct has been tricky, for he who comes to
equity must come with clean hands.
Major, W., T., (1983) The Law of Contract Macdonald &
Evans Ltd. Great Britain , Richard Clay (The Caucer
Press) Ltd.

Duress
In order for a party to establish that they have suffered from duress during the formation of a
contract they must be able to show that there has been some illegitimate pressure as in Barton
v Armstrong [1976] AC 104. Nevertheless, as put by Smith (1997: 56) one must distinguish
between wrongdoing and lack of consent before a contract can be rescinded on the grounds
of duress. Duress is a defence under the common law and is concerned largely with
threatening behaviour. Therefore, unless there has been a serious threat to the party
concerned, they will be less likely to establish a claim of duress and may have to rely on
undue influence if they have merely been pressured into entering into the contract. In effect,
duress is more serious and will be evident on the facts of the case. Thus, as argued by
Beatson (1991: 113); in order for duress to be established it must be shown that there was a
very high degree of interference with the victims decision making process. Essentially,
duress will be demonstrated if there is evidence of pressure that is extremely grave. Once it
has been established that there exists some illegitimate pressure it must then be shown that
the pressure induced a coercion of the will, which vitiates consent as in Pao On v Lau Yiu
Long [1980] AC 614 and but for that illegitimate economic pressure, the claimant would not
have entered the relevant contract or made a payment; SL Huyton SA v Peter Cremer GmbH
& Co [1999] 1 Lloyds Rep 620. Effectively, duress on its own will not render the contract
voidable, it will need to be shown that the party would not have entered into the contract had
it not been for the duress in which the party suffered. Consequently, if one party has entered
into the contract under duress then the contract is voidable by the injured party.

Undue Influence
Undue influence occurs when one party exerts on another party any pressure or influence,
which subsequently induced that party to enter into the contract. There are two different types
of undue influence which exist, namely; actual and presumed. Actual undue influence
happens when one party to a contract inflicts illegitimate pressure onto the other party in
order to take advantage of that party. Presumed undue influence, on the other hand, happens
when one party takes advantage of a relationship involving trust and confidence with the
other party. In Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773, it was held by the
court that; undue influence includes cases of coercion, domination, victimisation and all the
insidious techniques of persuasion. Consequently, if there has been some illegitimate
pressure placed upon a party in order to enter into a contract then undue influence will be
established if that pressure does not involve a serious threat. This was a significant decision
as it illustrated that undue influence will depend entirely upon the circumstances of the case
(Adkinson, 2008: 7341). Nevertheless, in demonstrating that undue influence has occurred
one must demonstrate that the transaction entered into was manifestly disadvantageous in
order for the innocent party to succeed because as said by Birks (2004: 34); not all cases of
undue influence can be regarded as cases of wrongs. This was highlighted in Macklin v
Dowsett [2004] EWCA Civ 50 where it was held that; a transaction that is so manifestly
unfair to the transferor can itself be evidence of a relationship of ascendency/dependency.
This decision provides an example of how the court will intervene in order to protect the
vulnerable from exploitation (Walden-Smith, 2005: 4). A contract will thus be rendered
voidable if undue influence is established as shown in Dunbar Bank Plc v Nadeeem [1997] 2
All ER 253.

Duress and Undue Influence


This means that a person or party has been forced into a contract. The contract cannot be
considered to be a valid agreement under these circumstances. Under common law, there
are two doctrines to consider, duress and undue influence.

Duress
This means when a contract is made using threat of violence or unlawful constraint.
However, in the case of Cummings v Ince, the use of threat was directed towards someone
close to the person who engaged in the contract. In this case, the court decided that the
contract with an elderly lady would be unenforceable because the agreement was made
when she had been threatened to reside in a mental hospital.
In the case of Skeate v Beale (1840), the court had decided that since the threat had been
directed towards property, this did not constitute duress.
However, in the case of The Siboen and the Sibotre (1976), the court decided that serious
threats that constituted burning a house or damaging expensive paintings should be
considered as duress.
Therefore, this meant that duress also covered property in the most serious circumstances.
In the case of Atlas Express v Kafco (1989), the court had decided that because there was a
threat made to a small business for them to breach the rules of a contract that was made;
this would be considered as duress, known as economic duress.
However, in the case of CTN Cash and Carry v Gallagher (1994), the court decided that there
was no economic duress present.
In the case of Universe Tankships of Monravia v ITWF (1982), it was decided that the threat
made by the union in the matter of a ship, because workers demanded a change in
circumstances was seen as economic duress. Furthermore, in the case of North Ocean
Shipping v Hyundai Construction (1979), it was decided that the economic duress was
present in the contract, due to unfair pressure.
In another case of Pao On v Lau Yiu Long (1980), this was where the court decided that a
threat of breach of contract due to business circumstances was seen as acceptable.
Therefore, a case where economic duress has been present is considered by the courts
based on individual circumstances.

Undue Influence
Undue influence had been introduced to deal with cases where duress does not apply. This
is where the influence is considered as unnecessary.
A circumstance where undue influence applies is when there in no relationship present
between the parties, therefore, it becomes the responsibility of the party who is claiming
that there is undue influence to be able to prove that it exists.
Another circumstance where undue influence can apply is when there is a relationship
present where one party puts their trust in another party. In the case of Allcard v Skinner
(1887), there was a presumption of undue influence.
Where there is trust involved, such as between family members, undue influence may be
presumed, evidence would be required in order to show that what is assumed in untrue.
In the case of Re Brocklehurst (1978), there was evidence to suggest the presence of
independence when deciding whether to enter into the contract; on this occasion there was
evidence to show that the presumption was untrue.

Undue Influence in Financial Situation


In the case of National Westminster v Morgan (1985), this was between a bank manager and
a customer, who was the wife of M. In this case M had asked his wife to arrange finance. The
bank manager had helped the customer, the wife, to secure a loan to avoid the
repossession of her house. The bank manager had arrived at the ladys home for her
signature. The circumstances at the time of signing were described as stressful and the lady
claimed that she had signed it while she was still concerned about the charges of the loan.
M had failed to make repayments on the loan and proceedings began for the house to be
repossessed. The lady had claimed that the signature was obtained under undue influence
by the bank manager. The court had decided that when signing the agreement, the
manager had not put pressure on the lady, and that the agreement was beneficial to the
lady and that she did not want to lose her house. The court also decided that there was not
any need for the manager to have advised the lady to seek legal advice before signing the
contract, and decided that there was not any other relationship between the manager and
the lady to suggest undue influence. The court ordered the repossession. On appeal, it was
decided that it must be proven that the contract had to be wrongful and disadvantage the
lady before the court can decide whether undue influence was present. The court concluded
that there was no other relationship between the manager and the wife of M and that the
contract did not disadvantage the wife.

However, in the case of Lloyds Bank v Bundy (1975), it was decided that the relationship
between a bank worker and a customer may be considered as such a relationship where
one party puts trust within the other, only if the bank is given that trust.
In the case of TSB v Camfield (1994), husband and wife had secured a loan against their
house for purposes of a business venture. The wife had acted as surety for the finance and
had thought that the liability for which she was responsible had been limited, however this
was unlimited. The bank had failed to ensure that the wife received independent and
separate legal advice. The business failed and the husband and wife were liable to pay the
bank. On appeal from the wife, the court decided that the wife would not be liable to pay. It
would have been the responsibility of the bank under the doctrine of notice to be aware of
the rights of a weaker party.

Duress in contract law relates to where a person enters an


agreement as a result of threats. Where a party enters a contract
because of duress they may have the contract set aside.
Originally, the common law only recognised threats of unlawful
physical violence, however, in more recent times the courts have
recognised economic duress as giving rise to a valid claim.
Where the threat is to goods, the courts have been less willing to
intervene, although analogous claims in restitution suggest
that this position of the law may change. The basis of
the duress as a vitiating factor in contract law is that there is
an absence of free consent. Duress operates at common law.
Pressure not amounting to duress may give rise to an action
for undue influence in equity. The effect of a finding of duress and
undue influence is that the contract is voidable. The innocent
party may rescind the contract and claim damages. The normal
bars to rescission operate (see misrep lecture).

Duress to the person


Where a person enters a contract as a result of threats of physical
violence, the contract may be set aside providing the threat
was a cause of entering the contract. There is no need to
establish that they would not have entered the contract but for
the threat:
Barton v Armstrong [1976] AC 104 Case summary

Barton v Armstrong

[1976] AC 104 Privy Council

Armstrong was the chairman and held the largest sharing holding
in Landmark Corporation Ltd a public company. Barton was the
managing director and also had a substantial shareholding in.
There were two other directors Bovil and Cottrel. There had been
a long history of ill will between the parties and a struggle over
who should have controlling power with Armstrong being the
most aggressive. The other directors in the company were also
unhappy with Armstrong and wanted him to be removed for
abusing certain privileges and they disagreed with the way he ran
the company believing him to be putting the company at risk of
insolvency. However, Armstrong refused to resign. The three
managed to take control of subsidiary companies and removed all
credit facilities from Landmark Corp. When Armstrong discovered
the credit had been removed he made a number of death threats
to Barton to pressure him into signing an agreement which
contained various elements including the purchase by Barton of
Armstrong's shares in the company at a substantial over value.
Barton agreed to this partly due to the threats but also due to the
fact that it would mean that Armstrong would no longer have
controlling interest and he believed he would be able to turn the
company around without Armstrong's dealings. However, the
company became insolvent shortly after and Barton sought to
have the contract set aside.
Held: The contract could be set aside. Where there is duress to
the person there was no obligation to show that he would not
have entered the agreement but for the threat, it simply being
sufficient that the death threats were a cause.
Duress to goods
Duress to goods is not recognised as giving rise to grounds for
having the contract set aside:
Skeate v Beale [1840] 11 Ad & El 983
Skeate v Beale

Case summary

[1840] 11 Ad & El 983

A landlord was owed money by a tenant. He seized goods owned


by the tenant and threatened to sell them immediately unless the

tenant entered an agreement for repayment of the sums owned.


The tenant agreed to the repayment terms but then sought to
have the agreement set aside for duress.
Held: Duress to goods will not suffice to render a contract
voidable.
However, this decision has received widespread criticism and is
out of line with restitutionary claims:
Maskell v Horner [1915] 3 KB 106

Case summary

Maskell v Horner [1915] 3 KB 106


The defendant demanded money from the claimant by way of a
'toll fee' for his market stall. The defendant had no legal basis for
demanding this money. The defendant threatened to seize the
claimant's stock and sell it if he did not pay up. The claimant paid
the toll fee for a considerable period of time and then brought an
action for money had and received to recover the money paid
under duress.
Held: The claimant was entitled to recover the sums paid in the
law of restitution. This decision is out of line with the law on
duress of goods in contract law and is considered by some as
demonstrating that the position taken in contract law should be
revised.
It is thought that the position in relation to duress to goods is
unlikely to survive if it is tested in the higher courts, particularly
given the more liberal position that has taken hold in response to
claims for economic duress.

Economic duress
The doctrine of economic duress was first canvassed by Kerr J
in The Sibeon and the Sibotre. Whilst the contract was not held to
be voidable for duress, Kerr J did state that where there exists
coercion of the will so as to vitiate consent, it should be possible
to set the contract aside. However, commercial pressure was not
enough.

Occidental Worldwide Investment Corporation v Skibs (The


Sibeon & The Sibotre) [1976] 1 Lloyds Rep 293 Case summary
Occidental Worldwide Investment v Skibs (The Sibeon &
The Sibotre) [1976] 1 Lloyds Rep 293
The defendants chartered two vessels from the claimant. The
defendants told the claimants that they would go bankrupt if they
did not lower the cost of charter. This was completely untrue. The
claimants feared that they would lose valuable customers and
they were also were owed substantial amounts of money by the
defendant which they feared they would lose if the defendants did
become insolvent. The claimants therefore agreed to renegotiate
the contract to lower the cost of charter. They later sought to
have the renegotiated contract set aside.
Held: Whilst recognising that it would be possible to render a
contract voidable for economic duress, it was not established in
this case. To amount to economic duress there had to be a

coercion of the will so as to vitiate consent. Commercial pressure


was not sufficient.
Note: This was the first case where economic duress was
recognised as giving rise to a cause of action. More recent cases
look to absence of choice rather than coercion of the will vitiating
consent. See: The Universe Sentinel
Following Kerr J's line of reasoning, economic duress was found to
exist in The Atlantic Baron, however, the claimant lost their right
to rescind:
North Ocean Shipping v Hyundai Construction (The Atlantic
Baron) [1979] QB 705 Case summary
North Ocean Shipping v Hyundai Construction (The Atlantic
Baron) [1979] QB 705

The defendants agreed to build a ship for the claimants for a


certain price specified in US dollars. After entering the contract
the US dollar was devalued by 10%. The defendants threatened
not to complete unless the claimants paid an additional 10% on
the contractually agreed price. The claimants had a valuable
charter lined up so agreed to pay the additional sums and did pay
them without protest. 8 months after delivery of the ship the
claimants brought an action to recover the additional sums paid.
Held: The contract was voidable for duress, however, since the
claimants had left it so long in bringing their claim they had
affirmed the contract and lost their right to rescind
Pao on v Lau yiu Long [1979] 3 All ER 65

Case summary

Pao on v Lau Yiu Long [1979] 3 All ER 65 Privy Council


The claimant had threatened not to complete the main contract
for the purchase of shares unless subsidiary agreements were
met including a guarantee and an indemnity. The defendant was
anxious to complete the main contract as there had been a public
announcement of the aquisition of shares and did not want to
undermine public confidence in the company and the consequent

affect on share prices. The defendant could have sued for specific
performance of the agreement but this would have delayed
matters and damaged the company's reputation. The defendant
had taken legal advice on all these matters before agreeing to the
guarantee and indemnity. The claimant then sought to enforce
the guarantee and the defendant sought to have the agreement
set aside for economic duress.
Held: There was no economic duress. The Privy Council identified
4 factors to consider in assessing whether economic duress was
present:
Did the person claiming to be coerced protest?
Did that person have any other available course of action?
Were they independently advised?
After entering into the contract, did they take steps to avoid it?
In the present case the defendant did not protest at the time. He
also could have enforced the contract of sale through specific
performance and thus had another avenue of redress available to
him. He had taken legal advice and took no steps to avoid the
agreement prior to the claimant seeking to enforce the
guarantee. Therefore no economic duress could be established. It
was simply commercial pressure far short of duress.
The Privy Council identified 4 factors to consider in assessing whether
economic duress was present:
1.

Did the person claiming to be coerced protest?

2.

Did that person have any other available course of action?

3.

Were they independently advised?

4.

After entering into the contract, did they take steps to avoid
it?

The requirement of vitiation of consent was replaced in The Universe


Sentinel with the absence of choice:

The Universe Sentinel [1983] 1AC 366

Case summary

Universe Tankships v International Transport Workers Federation, The


Universe Sentinel [1983] 1AC 366 House of Lords

The ITWF blacked a ship, The Universe Sentinel, to prevent it


from leaving port. They made several demands in relation to pay
and conditions and also demanded the ship owners pay a large
sum of money to the Seafarers International Welfare Fund. The
ship owners agreed in order that the ship could leave port and
then sought to recover the sum paid to the welfare fund.
Held: The money had been extracted under economic duress and
could be recovered. The House of Lords held that earlier case law
had been wrong to look at coercion of the will so as to vitiate
consent. During an analogy with the defence in criminal law
where it is recognised that a defendant acting under duress has
the intention to commit the offence but is excused from the crime
because they had no choice but to submit.
Accordingly two elements of duress were identified:
1. Compulsion of the will - absence of choice
2. Illegitimacy of the pressure
Lord Scarman
"The classic case of duress is, however, not the lack of will to submit but
the victim's intentional submission arising from the realisation that there
is no other practical choice open to him."
Accordingly two elements of duress were identified:
1. Compulsion of the will - absence of choice
2. Illegitimacy of the pressure
Illegitimacy of the pressure
Initially it was thought that the threat must be unlawful:
Dimskal Shipping v International Transport Workers Federation (The Evia
Luck) [1991]4 All ER 871
Case summary
Dimskal Shipping v ITWF (The Evia Luck)

of Appeal

[1991]4 All ER 871 Court

The ITWF threatened strike action unless certain demands were


met. The cost of strike action would be astronomical for Dimskal
and therefore they agreed to the demands. They later sought to
have the agreement set aside as being procured by duress. There
was clearly present a coercion of the will and absence of choice
the main question for the court was the legitimacy of the
pressure. At the time of the threatened strike the Evia Luck was
in Sweden. The court had to determine whether English law
applied or Swedish law applied to the threatened strike action as
under Swedish law the threatened strike would be lawful so there
would be no illegitimate pressure applied, however, under English
law the strike would be unlawful and the threat would be
regarded as illegitimate.
Held:
English law applied and the threat was therefore unlawful and
illegitimate.
CTN Cash & Carry v Gallagher [1994] 4 All ER 714

Case

summary

CTN Cash & Carry v Gallagher [1994] 4 All ER 714 Court of


Appeal
The defendants sent a consignment of cigarettes to the wrong
address. The cigarettes were then stolen. The defendant
mistakenly believed that the cigarettes were at the claimant's risk
and sent them an invoice. The defendant threatened to withdraw
the claimant's credit facility unless the invoice was paid. The
claimants needed the credit facilities and so paid the invoice and
then sought to reclaim the money on the grounds of economic
duress.
Held: The threat to withdraw credit facility was lawful since under
the terms of the credit agreement credit could be withdrawn at
anytime. Therefore the threat was legitimate and
consequently, economic duress could not be established.

However, dicta form Lord Hoffman in the Privy Council case of R


v Attorney General for England and Wales [2003] UKPC
22 suggests a different approach:
"The legitimacy of the pressure must be examined from two aspects: first, the nature of the pressure and secondly, the nature of the demand which the pressure
is applied to support: see Lord Scarman in the Universe Tankships case, at p 401. Generally speaking, the threat of any form of unlawful action will be regarded
as illegitimate. On the other hand, that fact that the threat is lawful does not necessarily make the pressure legitimate. As Lord Atkin said in Thorne v Motor
Trade Association [1937] AC 797, 806:

"The ordinary blackmailer normally threatens to do what he has a perfect right to do - namely, communicate some compromising conduct to a person whose
knowledge is likely to affect the person threatened ... What he has to justify is not the threat, but the demand of money.""

R v Attorney-General for England & Wales

[2003] UKPC

22 Privy Council
R was a member of the SAS. He was a member of the patrol
Bravo Two Zero which became infamous after other members of
the patrol had published books on the activities and a film was
made based on the books. The publicity lead to controversy
amongst the patrol as it was motivated by commercial gain and
distorted the truth placing blame on some of the dead and
surviving members of the patrol. In response to this the Ministry
of Defence introduced confidentiality agreements to prevent
future publications. R was told that he must sign the
confidentiality agreement if he wished to continue in the regiment
or be Returned to Unit which would be a considerable demotion
for the claimant and was generally given as a form of
punishment. R asked if he could take legal advice on the
agreement and was told that he could not. He signed the
agreement in Oct 1996 and in March 1997 took the decision to
leave the Army. The following year he wished to put his side of
the events of Bravo Two Zero to correct the earlier errors and
save the memories of his lost colleagues. He entered a contract
with a publisher and the Attorney- General brought a claim
seeking an injunction to prevent publication. R sought to have the
confidentiality agreement set aside as it was signed under
military orders he raised both duress and undue influence in his
defence.
Held: A lawful demand may constitute illegitimate pressure where
the demand is not justified. However, there must still be absence
of choice. R was not acting under military orders to sign the
agreement. He may have been faced with overwhelming
pressure, but he still had choice. The MOD were justified in
introducing the confidentiality agreement therefore the demand
was both lawful and justified and thus did not amount to

illegitimate
pressure.

Effect of a finding of duress


Since duress operates to deflect the will of the party rather than vitiate
consent, the effect of a finding of duress is always to make the contract
voidable not void:
IFR Ltd v Federal Trade Spa [2001] EWHC
519
Case summary

IFR ltd v Federal Trade Spa

[2001] EWHC 519 Queens Bench

Division
In 1998 an agreement was entered in to between IFR (English
company) and Federal (Italian company) whereby IFR were to
distribute and give sole right of resale of certain specified items
including radio, electronic and telecommunication equipment. The
agreement was to last for 2 years. This succeeded an earlier
agreement and contained a jurisdiction clause (stating the
agreement would be governed by English law) and an arbitration
clause which were not in the earlier agreement. Three months
before the contract was due to expire IFR gave notice in writing
that they would not be renewing the contract when it expired.
Under Italian law this termination would give rise to
compensation. However, no such compensation was payable
under English law. Federal sought to raise duress to render the
1998 agreement void so as to take advantage of the Italian right
to compensation.
The affect of a finding of duress has always been to render a
contract voidable as oppose to void, however, a voidable contract
would not have aided Federal as they had acted on the contract
without protest for nearly 2 years so would most certainly have
lost their right to rescind. In their argument they raised the
earlier case law relating to vitiating consent (The Sibeon &
Sibotre, The Atlantic Baron and Pao On) and stated that where there is
no consent the contract must be void ab initio as oppose to

voidable.
Held: Following later case law (Universe Sentinel etc) the basis of
duress is not the absence of consent; when acting under duress
the actor will give consent for the contract. The contract is
therefore initially valid. It is the absence of choice that renders
the contract voidable.
Undue influence exists where a contract has been entered as a result of pressure which falls
short of amounting to duress, the party subject to the pressure may have a cause of action in
equity to have the contract set aside on the grounds of undue influence. Undue
influence operates where there exists a relationship between the parties which has been
exploited by one party to gain an unfair advantage. Undue influence is divided into actual
undue influence and presumed undue influence. Where a contract is found to be entered
into as a result of undue influence, this will render the contract voidable. This will enable the
person influenced to have the contract set aside as against a party who subjected the other to
such influence. In addition, in some instances the party influenced may be able to have a
contract set aside as against a party who was not the person inflicting the influence or
pressure.

Classes of undue influence:

There are three classes of undue influence which were set out in the case of Bank
of Credit & Commerce International v Aboody [1990] 1 QB 923 (Case summary)
Bank of Credit and Commerce International v Aboody [1990] 1 QB 923

Court

of Appeal
A husband exerted actual undue influence over his wife in order to get
her to sign a charge securing the family home on the debts owed by the
company in which the husband and wife owned shares. The couple were
unable to repay the mortgage and the bank sought to repossess the home.
The wife sought to have the mortgage set aside on the grounds that it
was procured by actual undue influence of the husband.
Held:
The husband had exerted actual undue influence on the wife. However,

the transaction was not to the manifest disadvantage of the wife since
she owned shares in the company. In considering whether a transaction
was to the manifest disadvantage the court was to have regard to any
benefits received in addition to the risks undertaken. Therefore the bank
were granted possession.
NB - it is no longer necessary to establish manifest disadvantage in cases
involving actual undue influence.
The Court of Appeal set out the classes of undue influence:
Class 1 - Actual undue influence (requires proof of the influence)
Class 2 a - presumed undue influence (relationship as a matter of law
gives rise to presumption that influence was exerted)
Class 2 b - presumed undue influence (requires proof of relationship of
trust and confidence if established the presumption of influence arises)
Class 1 - Actual undue influence
Class 2a - Presumed undue influence
Class 2b - Presumed undue influence

Class 1 - Actual undue influence


Actual undue influence, as the name suggests, requires proof that the contract was
entered into as a result of actual influence exerted. The claimant must plead and
prove the acts which they assert amounted to undue influence.
This may include such acts as threats to end a relationship, continuing to badger
the party where they have refused consent until they eventually give in. There is no
precise definition of undue influence. Lord Nicholls, in RBS v Etridge described
the concept as:

"Undue influence is one of the grounds of relief developed by the courts of equity as a court of conscience. The
objective is to ensure that the influence of one person over another is not abused. In everyday life people
constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to
enter into transactions, whether great or small. The law has set limits to the means properly employable for this
purpose. The law will investigate the manner in which the intention to enter into the transaction was secured: If
the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The
means used is regarded as an exercise of improper or 'undue' influence, and hence unacceptable, whenever the
consent thus procured ought not fairly to be treated as the expression of a person's free will. It is impossible to
be more precise or definitive. The circumstances in which one person acquires influence over another, and the
manner in which influence may be exercised, vary too widely to permit of any more specific criterion."

Manifest disadvantage?
Originally it was a requirement that the claimant seeking to find relief through
actual undue influence must also establish that they had suffered a manifest
disadvantage (See BCCI v Aboody above).
However, it was held in CIBC Mortgages v Pitt [1994] 1 AC 200 (case summary)
that manifest disadvantage was not required in cases of actual undue influence.

CIBC Mortgages v Pitt [1994] 1 AC 200 House of Lords


Mr Pitt wished to purchase some shares on the stock market. He pressured his wife into signing a
mortgage of 150,000 securing the family home. The stated purpose of the loan was to purchase a
holiday home and pay off the existing mortgage. The husband used the money to purchase shares
and then used those shares as collateral to purchase further shares. For a time the shares did very
well and he was a millionaire on paper. The wife saw no benefit from these shares as any income
was always used to purchase more shares. In 1987 the stock market crashed. The bank sought to
enforce the security under the mortgage which at the time exceeded the value of the home. The
wife raised actual undue influence in defence.
Held:
Overruling BBCI v Aboody - it is not necessary for a claimant to demonstrate manifest disadvantage
where a defence is based on actual undue influence. However, as the transaction on its face did not
seem to the manifest disadvantage of the wife, because the stated purpose was to purchase a
holiday home, the bank was not put on enquiry and therefore could not be fixed with constructive
notice.

Class 2 a - Presumed undue influence

Establishing the presumption

Under class 2a there is no requirement to prove that improper influence was


actually exerted. Instead it must be established:
1. There was a relationship which as a matter of law gives rise to a presumption of
undue influence
2. The transaction is one which can not readily be explained by the relationship of
the parties.

1. Relationships capable of giving rise to an automatic presumption of undue


influence are those of a fiduciary nature and include:
Parent: child
Solicitor: Client
Religious advisor: disciple
Doctor: Patient
Trustee: beneficiary

2. The transaction is one which can not readily be explained by the


relationship of the parties.
Where the transaction is obviously not to the benefit of the vulnerable party but
confers a great advantage to the party in a fiduciary position, the law will raise a
presumption that the transaction was entered as a result of some sort of abuse of
the relationship. This requirement used to be expressed in terms of manifest
disadvantage. However, this lead to confusion particularly where a wife had an
interest in the husband's business see:

National Westminster Bank v Morgan [1985] 1 AC 686

Case summary

Natwest Bank v Morgan

[1985] AC 686 House of Lords

The family home was subject to a mortgage for the purchase


price (with Abbey National) and a second charge securing a loan
of the husband's business. The couple were unable to meet the
payments and got into arrears. Abbey obtained a possession
order. Natwest offered a rescue package to help the couple save
the home whereby they would pay off the existing mortgages and
give a bridging loan which was to last 5 weeks for the purposes of
aiding the husbands business.
The manager called at the couples' home in order to explain the
effect of the charge and to obtain the signatures of both parties.
He was at the house for 20 minutes and spent 5 minutes alone
with the wife. The husband was reluctant to leave them alone and
was said to be hanging around close by at all times. The manager
told the wife the charge was to pay off the existing debt and to
provide a bridging loan for a period of 5 weeks which was what
the bank had intended to provide, however, the actual document
did not limited the amount or time. Mrs Morgan had told the
manager that she did not want to be exposed to any extra risks
of her husbands business as she had no faith in his ability as a
business man. The manager assured her that the risks were
limited in the way he had described. At no time did the manager
advise her to get independent legal advice. She signed the
charge. The bank later called in the charge. In her defence the
wife stated that the bank manager had exercised undue influence
over her in procuring her signature.
Held:
The normal relationship between a customer and banker was not
one so as to give rise to a relationship of trust and confidence.
Lloyds Bank v Bundy was confined to its facts but not expressly
overruled. The wife had not established a relationship of trust and
confidence and therefore no presumption of undue influence
could arise
Bank of Credit & Commerce International v Aboody [1990] 1 QB 923 (in relation
to actual undue influence)
Case summary
Bank of Credit and Commerce International v Aboody [1990] 1 QB 923

of Appeal

Court

A husband exerted actual undue influence over his wife in order to get
her to sign a charge securing the family home on the debts owed by the
company in which the husband and wife owned shares. The couple were
unable to repay the mortgage and the bank sought to repossess the home.
The wife sought to have the mortgage set aside on the grounds that it
was procured by actual undue influence of the husband.
Held:
The husband had exerted actual undue influence on the wife. However,
the transaction was not to the manifest disadvantage of the wife since
she owned shares in the company. In considering whether a transaction
was to the manifest disadvantage the court was to have regard to any
benefits received in addition to the risks undertaken. Therefore the bank
were granted possession.
NB - it is no longer necessary to establish manifest disadvantage in cases
involving actual undue influence.
The Court of Appeal set out the classes of undue influence:
Class 1 - Actual undue influence (requires proof of the influence)
Class 2 a - presumed undue influence (relationship as a matter of law
gives rise to presumption that influence was exerted)
Class 2 b - presumed undue influence (requires proof of relationship of
trust and confidence if established the presumption of influence arises)
CIBC Mortgages v Pitt [1994] 1 AC 200 (also actual undue
influence)
Case summary

CIBC Mortgages v Pitt [1994] 1 AC 200 House of Lords


Mr Pitt wished to purchase some shares on the stock market. He pressured his wife into signing a mortgage of 150,000 securing the family home. The stated purpose
of the loan was to purchase a holiday home and pay off the existing mortgage. The husband used the money to purchase shares and then used those shares as
collateral to purchase further shares. For a time the shares did very well and he was a millionaire on paper. The wife saw no benefit from these shares as any income
was always used to purchase more shares. In 1987 the stock market crashed. The bank sought to enforce the security under the mortgage which at the time exceeded
the value of the home. The wife raised actual undue influence in defence.
Held:
Overruling BBCI v Aboody - it is not necessary for a claimant to demonstrate manifest disadvantage where a defence is based on actual undue influence. However, as
the transaction on its face did not seem to the manifest disadvantage of the wife, because the stated purpose was to purchase a holiday home, the bank was not put
on enquiry and therefore could not be fixed with constructive notice.

Given the difficulties in relation to manifest disadvantage, the House of Lords


in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021 (case summary) held that
the term should no longer be used and replaced with the requirement that the
transaction must be one which can not be readily explained by the relationship of
the parties. This is intended to exclude trivial gifts but bring within its realm

substantial benefits even where the vulnerable party also receives a benefit. The
court should consider the transaction as a whole.
Royal Bank of Scotland v Etridge

[1998] 4 All ER 705 House of Lords

The case concerned a number of conjoined appeals concerning banks


seeking possession of homes where a wife had signed a charge or
mortgage agreeing to secure the debts of the husband on the family
home. The House of Lords reviewed the current authorities and restated
some of the principles. The main changes:
1. Manifest disadvantage
This term should no longer be used as it is ambiguous and leads to many
misunderstandings and is often misapplied. Instead the transaction must
be one which can not readily be explained on ground of friendship,
relationship or charity.
2. Constructive notice
A bank will be put on enquiry whenever a wife offers to stand surety for
her husband's debts.
There is no need to show that the bank was aware of the relationship
capable of giving rise to a presumption of influence.
There is no absolute obligation on a bank to have a private meeting with
the wife provided they take other steps to satisfy themselves that the
wife has been appropriately advised. This may be achieved through
confirmation from a solicitor that she has been advised.
The steps a solicitor should take as a core minimum:
(1) He will need to explain the nature of the documents and the practical
consequences these will have for the wife if she signs them. She could
lose her home if her husband's business does not prosper. Her home may
be her only substantial asset, as well as the family's home. She could be
made bankrupt.
(2) He will need to point out the seriousness of the risks involved. The
wife should be told the purpose of the proposed new facility, the amount
and principal terms of the new facility, and that the bank might increase
the amount of the facility, or change its terms, or grant a new facility,
without reference to her. She should be told the amount of her liability

under her guarantee. The solicitor should discuss the wife's financial
means, including her understanding of the value of the property being
charged. The solicitor should discuss whether the wife or her husband has
any other assets out of which repayment could be made if the husband's
business should fail. These matters are relevant to the seriousness of the
risks involved.
(3) The solicitor will need to state clearly that the wife has a choice. The
decision is hers and hers alone. Explanation of the choice facing the wife
will call for some discussion of the present financial position, including
the amount of the husband's present indebtedness, and the amount of his
current overdraft facility.
(4) The solicitor should check whether the wife wishes to proceed. She
should be asked whether she is content that the solicitor should write to
the bank confirming he has explained to her the nature of the documents
and the practical implications they may have for her, or whether, for
instance, she would prefer him to negotiate with the bank on the terms
of the transaction. Matters for negotiation could include the sequence in
which the various securities will be called upon or a specific or lower
limit to her liabilities. The solicitor should not give any confirmation to
the bank without the wife's authority.
The solicitor's discussion with the wife should take place at a face-to-face
meeting, in the absence of the husband. The solicitor's explanations
should use non-technical language.
The solicitor should obtain from the bank any information he needs. If the
bank fails for any reason to provide information requested by the
solicitor, the solicitor should decline to provide the confirmation sought
by the bank.
Class 2b - Presumed undue influence
Establishing the presumption
Under class 2b there is no automatic presumption arising as a matter of law. Here it
must be established that there is a relationship of such a kind that one party in fact
placed their trust and confidence in the other to safeguard their interest. Any
relationship is capable of amounting to this examples include husband and wife,
cohabitees, employer and employee. The important distinction between class 2 a
and 2b is the fact that the trust and confidence relationship must be proved. In
modern times it is no longer the case that wives will generally place all their trust

in their husbands to deal with the financial matters although in some marriages this
may be the case. If the wife exercises independence of mind in financial matters
then no presumption will be established.

Barclays Bank v O'Brien [1993] QB 109

Barclays Bank v O Brien

Case summary

[1994] 1 AC 180 House of Lords

Mr O'Brien was a chartered accountant and he also had a shareholding in


a company in which he was an auditor. The company was experiencing
financial difficulty and the bank wished to find security for the company
debts. Mr O'Brien offered the matrimonial home as security. He told his
wife that the charge was limited to 60,000 and that it was only to last
for a few weeks. Initially the wife refused to sign but was later persuaded
to sign as the husband told her that the company would fail if she did not
and that her son, who also had an interest in the company, would lose his
home. In fact the charge was not limited in the amount or time. The wife
agreed to sign the charge. The manager of the bank had left sent the
documents to their local branch with instructions that the wife was to be
advised of the full extent of the liability and that the wife should be
advised to take independent advice before signing. However, the bank
clerk got the wife to sign and failed to carry out the instructions. The
bank sought to enforce the charge and the wife raised undue influence
and misrepresentation in her defence to have the charge set aside.
Held:
The defence based on undue influence failed because the wife was held
to exercise independence of thought on financial matters and was used to
dealing with the family finances whilst her husband was working away.
The wife was successful with regards to misrepresentation. The charge
was set aside as the bank had constructive notice of the
misrepresentation and failed to take reasonable steps to ensure that the
charge had been obtained without influence or that Mrs O'Brien was
aware of the full extent of liability.
Lord Brown Wilkinson introduced the concept of constructive notice and
set out the steps required to be taken by banks to avoid being fixed with
constructive notice:
"Therefore in my judgment a creditor is put on inquiry when a wife offers

to stand surety for her husband's debts by the combination of two factors:
(a) the transaction is on its face not to the financial advantage of the
wife; and (b) there is a substantial risk in transactions of that kind that,
in procuring the wife to act as surety, the husband has committed a legal
or equitable wrong that entitles the wife to set aside the transaction.
It follows that unless the creditor who is put on inquiry takes reasonable
steps to satisfy himself that the wife's agreement to stand surety has
been properly obtained, the creditor will have constructive notice of the
wife's rights.
What, then are the reasonable steps which the creditor should take to
ensure that it does not have constructive notice of the wife's rights, if
any? Normally the reasonable steps necessary to avoid being fixed with
constructive notice consist of making inquiry of the person who may have
the earlier right (i.e. the wife) to see whether such right is asserted. It is
plainly impossible to require of banks and other financial institutions that
they should inquire of one spouse whether he or she has been unduly
influenced or misled by the other. But in my judgment the creditor, in
order to avoid being fixed with constructive notice, can reasonably be
expected to take steps to bring home to the wife the risk she is running
by standing as surety and to advise her to take independent advice. As to
past transactions, it will depend on the facts of each case whether the
steps taken by the creditor satisfy this test. However for the future in my
judgment a creditor will have satisfied these requirements if it insists
that the wife attend a private meeting (in the absence of the husband)
with a representative of the creditor at which she is told of the extent of
her liability as surety, warned of the risk she is running and urged to take
independent legal advice. If these steps are taken in my judgment the
creditor will have taken such reasonable steps as are necessary to
preclude a subsequent claim that it had constructive notice of the wife's
rights. I should make it clear that I have been considering the ordinary
case where the creditor knows only that the wife is to stand surety for
her husband's debts. I would not exclude exceptional cases where a
creditor has knowledge of further facts which render the presence of
undue influence not only possible but probable. In such cases, the
creditor to be safe will have to insist that the wife is separately advised."
Exceptionally, it has been held that a relationship of trust and confidence existed
between a bank manager and his client:

Lloyds Bank v Bundy [1975] QB 326

Case summary

Lloyds Bank v Bundy

[1975] QB 326 Court of Appeal

A father secured the debts of his son's business on his farm which
had been in the family for generations. The father and son had
both banked at the branch for many years and relied on advice
given. The son's company also banked at the same branch and
the bank manager was aware of the dire financial position of the
company. The bank had allowed the son to run up an overdraft
exceeding security given thus far and was fearful that the
company would go under leaving them with an unsecured debt.
The bank manager and the son called at the farm with the forms
already filled in. The father was told of the amount of the charge
which was 11,000 and exceeded the value of the farm and he
was also required to give a guarantee. The father agreed to sign
in order to help his son. He was not given the opportunity to think
it over or to obtain legal advice.
Held:
There was a relationship of trust and confidence between the
father and the bank manager giving rise to a presumption of
undue influence under class 2 b. The charge and guarantee were
therefore set aside.
NB the normal relationship between a banker and customer is not
one of trust and confidence but a business relationship whereby
the bank is looking out for its own interest (See Natwest v
Morgan) however, the bank manager in giving evidence admitted
that the father relied implicitly and solely on the advice given by
him and the father stated that he had trusted the bank and had a
long relationship with the bank and generally acted on advice
given.
However, it has been held that the normal relationship between banker and client is
not one of trust and confidence:

National Westminster Bank v Morgan [1985] 1 AC 686


summary
Natwest Bank v Morgan

[1985] AC 686 House of Lords

The family home was subject to a mortgage for the purchase

Case

price (with Abbey National) and a second charge securing a loan


of the husband's business. The couple were unable to meet the
payments and got into arrears. Abbey obtained a possession
order. Natwest offered a rescue package to help the couple save
the home whereby they would pay off the existing mortgages and
give a bridging loan which was to last 5 weeks for the purposes of
aiding the husbands business.
The manager called at the couples' home in order to explain the
effect of the charge and to obtain the signatures of both parties.
He was at the house for 20 minutes and spent 5 minutes alone
with the wife. The husband was reluctant to leave them alone and
was said to be hanging around close by at all times. The manager
told the wife the charge was to pay off the existing debt and to
provide a bridging loan for a period of 5 weeks which was what
the bank had intended to provide, however, the actual document
did not limited the amount or time. Mrs Morgan had told the
manager that she did not want to be exposed to any extra risks
of her husbands business as she had no faith in his ability as a
business man. The manager assured her that the risks were
limited in the way he had described. At no time did the manager
advise her to get independent legal advice. She signed the
charge. The bank later called in the charge. In her defence the
wife stated that the bank manager had exercised undue influence
over her in procuring her signature.
Held:
The normal relationship between a customer and banker was not
one so as to give rise to a relationship of trust and confidence.
Lloyds Bank v Bundy was confined to its facts but not expressly
overruled. The wife had not established a relationship of trust and
confidence and therefore no presumption of undue influence
could arise.
A relationship of trust and confidence has also been seen in employer and employee
relationship:

Credit Lyonnaise Bank Nederland v Burch [1997] 1 All ER


144
Case summary

Credit Lyonnais Bank Nederland NV v Burch [1997] 1


All ER 144 Court of Appeal
Miss Burch started working for her employer at the age
of 18. She became close to the director, Mr Pelosi, who
was an Italian business man 10 years older and trusted
him implicitly. She often visited his home to do
babysitting and went on holiday with the family to
Italy. At the age of 21 she purchased a flat. 5 years
later, she was still working for him but the company
was experiencing financial difficulty. Mr Pelosi asked
her to put her flat up as security for a loan taken out
by the company. He told her that his home and villa in
Italy were also secured on the debt but they would not
accept 100% mortgage on these properties and needed
another 20,000. She agreed to allow her home to be
used as security believing that it was only 20,000 and
that Mr Pelosi's properties would first be sold which
would release the debt so that there was no risk to her.
The bank had written to her and informed her that the
charge was unlimited in amount and time and advised
her to seek independent advice. She at no time was
told of the extent of the company's borrowings which
stood at 270,000 neither did the bank satisfy
themselves that she had in fact received independent
advice.
Held:
The agreement of Miss Burch had been obtained by
undue influence and the bank had notice of this as the

transaction was so obviously to her disadvantage. The


bank had taken insufficient steps to avoid constructive
notice. Therefore the transaction could be set aside.
There is no need to establish that the party subject to the influence would not have entered
into the contract but for the influence. There is also no need to establish a causal link in
relation to misrepresentation beyond reliance:

UCB Corporate Services Ltd. v Williams [2002] EWCA Civ


555
Case summary

UCB v Williams [2002] EWCA Civ 555 Court of Appeal


The Williams family (Mr & Mrs Jack Williams and their three
grown up children) ran a garage business as a partnership with
the benefit of a franchise from Toyota. Toyota threatened to
withdraw the franchise unless the showrooms were extended and
improved. The cost for this was 500,000. The Williams
approached the bank for a loan which asked for security by way
of a charge on the three showrooms in addition to a charge on
each of the partners' homes.
The defendant, Mrs Williams, was the wife of one of the sons. She
had signed the charge without having been told the full extent of
the liability. The signature was executed in the presence of all the
other partners and witnessed by Mr.Howells, the solicitor of the
partnership. The charge secured all debts present and future of
the partnership and provided for joint and several liability of all
the partners. The business was unable to repay the loan and
became bankrupt. UCB sought to enforce the charge and Mrs
Williams raised undue influence and misrepresentation in her
defence. The trial judge, HHJ Hickinbottom, held that undue
influence and misrepresentation were established. However, he
held that Mrs Williams would have signed the charge in any event
had she known the full facts and also that UCB were not fixed
with constructive notice as a solicitor had witnessed the signature
therefore they could assume Mrs Williams had been advised
accordingly. Mrs Williams appealed to the Court of Appeal.

Held:
Mrs Williams was successful on both grounds.
For both undue influence and misrepresentation there is no
requirement to establish that a person would not have entered
the contract but for the influence or misrepresentation. It was
sufficient for undue influence, that an equitable wrong has been
committed. For misrepresentation it is sufficient to demonstrate
the party relied on the false statement.
UCB were fixed with constructive notice. The fact that the
signature was witnessed by a solicitor does not necessarily mean
that they would have advised her. The role of a solicitor will
depend upon what they had been instructed to do. If there were
no instructions to advise Mrs Williams they would not be expected
to do so and it was wrong of UCB to assume this had taken place.
They were under a duty to check if she had in fact been advised.
Rebutting the presumption in class 2a and class 2b
The party accused of exercising undue influence may rebut the presumption by
demonstrating that the vulnerable party exercised free will in entering the
transaction. This is most commonly established by demonstrating that they were
fully aware of the risks involved and had received legal advice before agreeing to
the transaction.

Undue influence and third parties


Generally the undue influence is exercised between a husband and wife. Where a
wife establishes undue influence it will entitle her to have the transaction set aside
as against her husband, however, the transaction is generally with a bank who was
not a party to the influence. Following the decision in Natwest v Morgan, it
became clear that banks were not acting in a fiduciary capacity so as to give rise to
a presumption of undue influence. There had to exist another factor in order to
have the contract set aside as against a bank. Barclays Bank v O'Brien [1993] QB
109 (Case summary) introduced the concept of constructive notice.

Constructive notice
Constructive notice arises where the bank is
1. put on enquiry and
2. fails to take reasonable steps to ensure that the transaction was entered freely
without the exercise of undue influence.
Enquiry
Consideration of factors which put the bank on enquiry:
Bank Of Scotland v Bennett & Anor [1998] EWCA Civ 1965

Case summary

Bank of Scotland v Bennett 1998 Court of Appeal


The bank held a guarantee and charge on the Bennett family
home securing the debts of a business in which the husband was
the director and 47% shareholder. The wife also held shares
(11%). The wife was the sole beneficial owner of the matrimonial
home. The wife was against her husband's involvement in the
business. He had left a well paid reliable job to start it. She had
no faith in the business and did not want to sign the charge but
her husband pressured her and threatened to end the relationship
if she did not sign. The trial judge held that the charge was
procured by actual undue influence of which the bank had
constructive notice. The bank appealed.
Held:
The charge was procured by actual undue influence although the
trial judge erred in finding constructive notice. The trial judge had
assumed the bank had the knowledge that the wife was the sole
beneficial owner of the property and only held an 11% sharing
holding when there was in fact no evidence that they were aware
of these facts.
Lord Justice Chadwick:
"The correct approach, in cases of this nature, is to look at the
transaction through the eyes of the lender and to ask whether, in

the light of all the facts which the lender does know, it is put on
inquiry that there is a real risk that the wifes apparent consent to
the transaction may have been obtained by some improper
conduct (pressure, abuse of trust and confidence or
misrepresentation) on the part of the husband."
Conoco Ltd v Khan & Anor [1996] EWCA Civ 968

Case summary

Conoco Ltd v Khan & Khan [1996] EWCA Civ 968 Court of
Appeal
The defendants, Mr and Mrs Khan, owned a petrol station which
was run by Mr Khan. Mr Khan entered an agreement with the
claimant supplier of petrol whereby the defendants were to
borrow 300,000, which was to be secured on the petrol station,
to be repaid by 5 annual instalments. The loan was to pay for the
supply of petrol during that five years. Also by the agreement the
defendants were not to purchase petrol from any other supplier.
The defendants breached the agreement by purchasing petrol
elsewhere. The claimants terminated the contract and demanded
the balance outstanding under the loan standing at 240,000.
Mrs Khan raised class 2 b undue influence in her defence stating
she took no part in the running of the business and always signed
what her husband asked her to. She did not speak English and
had no knowledge of the affect of what she signed. She trusted
her husband implicitly not to prejudice her interest. She had not
been given any advice at all as to what she was signing.
Held:
The bank was not put on enquiry. The agreement was a
commercial agreement under which she was to obtain benefits.
The claimant would have no reason to consider that the wife
should obtain independent advice.
The current factors to be considered were set out in:

Royal Bank of Scotland v Etridge [2001] 3 WLR 1021

Case summary

Royal Bank of Scotland v Etridge [1998] 4 All ER 705 House of Lords


The case concerned a number of conjoined appeals concerning banks
seeking possession of homes where a wife had signed a charge or
mortgage agreeing to secure the debts of the husband on the family
home. The House of Lords reviewed the current authorities and restated
some of the principles. The main changes:
1. Manifest disadvantage
This term should no longer be used as it is ambiguous and leads to many
misunderstandings and is often misapplied. Instead the transaction must
be one which can not readily be explained on ground of friendship,
relationship or charity.
2. Constructive notice
A bank will be put on enquiry whenever a wife offers to stand surety for
her husband's debts.
There is no need to show that the bank was aware of the relationship
capable of giving rise to a presumption of influence.
There is no absolute obligation on a bank to have a private meeting with
the wife provided they take other steps to satisfy themselves that the
wife has been appropriately advised. This may be achieved through
confirmation from a solicitor that she has been advised.
The steps a solicitor should take as a core minimum:
(1) He will need to explain the nature of the documents and the practical
consequences these will have for the wife if she signs them. She could
lose her home if her husband's business does not prosper. Her home may
be her only substantial asset, as well as the family's home. She could be
made bankrupt.
(2) He will need to point out the seriousness of the risks involved. The
wife should be told the purpose of the proposed new facility, the amount
and principal terms of the new facility, and that the bank might increase
the amount of the facility, or change its terms, or grant a new facility,
without reference to her. She should be told the amount of her liability
under her guarantee. The solicitor should discuss the wife's financial

means, including her understanding of the value of the property being


charged. The solicitor should discuss whether the wife or her husband has
any other assets out of which repayment could be made if the husband's
business should fail. These matters are relevant to the seriousness of the
risks involved.
(3) The solicitor will need to state clearly that the wife has a choice. The
decision is hers and hers alone. Explanation of the choice facing the wife
will call for some discussion of the present financial position, including
the amount of the husband's present indebtedness, and the amount of his
current overdraft facility.
(4) The solicitor should check whether the wife wishes to proceed. She
should be asked whether she is content that the solicitor should write to
the bank confirming he has explained to her the nature of the documents
and the practical implications they may have for her, or whether, for
instance, she would prefer him to negotiate with the bank on the terms
of the transaction. Matters for negotiation could include the sequence in
which the various securities will be called upon or a specific or lower
limit to her liabilities. The solicitor should not give any confirmation to
the bank without the wife's authority.
The solicitor's discussion with the wife should take place at a face-to-face
meeting, in the absence of the husband. The solicitor's explanations
should use non-technical language.
The solicitor should obtain from the bank any information he needs. If the
bank fails for any reason to provide information requested by the
solicitor, the solicitor should decline to provide the confirmation sought
by the bank.
Agency?
Where a bank instructs solicitors to advise the wife, the solicitor acts solely for the
wife and not as an agent for the bank:
Barclays Bank Plc v Thompson [1996] EWCA
Barclays Bank Plc v Thompson

Case summary

[1997] 4 All ER 816 Court of Appeal

Mrs Thompson was the sole beneficial owner of the family home. She
signed a mortgage securing the debts of the husband's business on the
family home. She had received advice from a firm of solicitors appointed

by the bank who were also the husband's solicitors. The advice she
received was defective in that it failed to explain the full extent of
liability. The solicitors wrote to the bank certifying that Mrs Thompson
had been advised. The bank later sought possession of the property. Mrs
Thompson argued that the fact that the solicitor was that of the bank
that the knowledge of the defective advice should be imputed to the
bank.
Held:
Mrs Thompson was unsuccessful. The bank were entitled to assume that
the solicitors had correctly advised the wife. The doctrine of imputed
knowledge had not survived Barclays Bank v O'Brien. The correct analysis
was in terms of constructive notice and reasonable steps. Whilst the
solicitor was the agent of the bank there was no duty of an agent to
disclose their short comings to the principal.
This applies even where the bank paid for the advice:
National Westminster Bank Plc v Beaton & Anor [1997] EWCA Civ 1391
summary
Natwest v Beaton

Case

[1997] EWCA Civ 1391 Court of Appeal

Mr Beaton was an architect and was a partner in the business.


Mrs Beaton had no interest in the business. The partnership had a
debt of 20,000 secured on the Beaton's family home. The
Beatons then wished to move house. The bank agreed to transfer
the charge to the new property. The bank instructed a solicitor to
execute the charge and to advise the wife explaining that she had
no interest in the business and was putting up her interest in the
home as security. The solicitor executed the charge and
witnessed the wife's signature. The solicitor wrote to the bank
and confirmed that they had executed the charge and advised
Mrs Beaton accordingly. The new charge was not limited to
20,000. The document did state the limit of 20,000 but this
was deleted. The wife claimed that neither her husband nor the
solicitor had explained the change to her and she believed it to be
limited to 20,000. She argued the failure to disclose the
information amounted to a misrepresentation as they were both
under an obligation to disclose the true nature of the charge. She
also the bank would have constructive notice of the inadequate

advice of the solicitor either under s.199 Law of Property Act


1925 or because the solicitor was the agent of the bank.
Held:
When the solicitor was advising the wife he was not acting as an
agent for the bank his duty was to the wife alone. The bank were
entitled to assume the solicitor had advised the wife appropriately
and were thus not fixed with constructive notice.
For consideration of the position of unjust enrichment of the wife see:
Dunbar Bank Plc v Nadeem & Anor [1998] EWCA Civ 1027

Various remedies exist in contract law. These


include:

Damages

Repudiation

Rescission

Specific performance

Injunctions

Restitutionary awards

Damages in Contract Law

Damages in contract law are a legal


remedy available for breach of contract.
Damages are an award of money to
compensate the innocent party. The primary
purpose of damages in contract law is to
place the injured party in the position they
would have been in had the contract been
performed.
Addis v Gramophone [1909] AC 488 House of Lords
The claimant was employed as a manager by the defendant. The defendant in
breach of contract dispensed with his services and replaced him with a new
manager. The claimant brought an action for breach of contract claiming that
the level of damages should reflect the circumstances in which he was
dismissed damaged his reputation and ability to find suitable employment.
Held:
Contract law seeks to put the parties in the position they would have been in
had the contract been performed. He was therefore limited to claiming wages
and loss of commission during the contractually agreed notice period. There
was no right to exemplary damages or damage to reputation in contract
claims. Such claims would have to be actioned in the law of tort.
Lord Atkinson:
In many other cases of breach of contract there may be
circumstances of malice, fraud, defamation, or violence,
which would sustain an action of tort as an alternative
remedy to an action for breach of contract. If one should
select the former mode of redress, he may, no doubt, recover
exemplary damages, or what is sometimes styled vindictive
damages; but if he should choose to seek redress in the form

of an action for breach of contract, he lets in all the


consequences of that form of action: Thorpe v. Thorpe. One
of these consequences is, I think, this: that he is to be paid
adequate compensation in money for the loss of that which
he would have received had his contract been kept, and no
more.

An award of damages in contract law is


subject to the application of the rules on
causation, remoteness and a duty to mitigate
loss.
Causation:
The Monarch Steamship v Karlshamns
Oljefabrika [1949] AC 196 Case
summary
Remoteness:
Under the rules of remoteness of damage in
contract law set out in Hadley v Baxendale, a
claimant may only recover losses which may
reasonably be considered as arising naturally
from the breach or those which may
reasonably be supposed to be in the
contemplation of the parties at the time the
contract was made:

Hadley v Baxendale (1854) 9 Ex Ch 341

Case

summary

The application of this principle can be seen in the following


cases:

Victoria Laundry (Windsor) Ltd v Newman


Industries Ltd [1949] 2 KB 528 Case
summary
Kpohraror v Woolwich Building Society
[1996] 4 All ER 119 Case summary
Pilkington v Wood [1953] Ch 770
summary

Case

Jackson v Royal Bank of Scotland [2005]


1 WLR 377 Case summary
Czarnikow Ltd v Koufos (The Heron II)
[1969] 1 AC 350 Case summary
Parsons v Uttley Ingham [1978] QB 791
Case summary
Duty to mitigate loss

The claimant is not permitted to allow their


losses to mount up. They are under a duty to
take reasonable steps to reduce their loss:
Payzu v Saunders [1919] 2 KB 581 Case
summary
Pilkington v Wood [1953] Ch 770 Case
summary
Heads of damages
There exist various heads of damage in
contract law under which an amount can be
claimed to reflect different types of loss.
These include loss of bargain, reliance loss,
discomfort or disappointment, inconvenience,
diminution of future prospects, speculative
damages and liquidated damages.
Reliance loss
Where it is difficult to quantify the position the claimant
would have been in it may be possible to recover expenses
incurred in reliance of the contract:

Anglia TV v Reed [1971] 3 All ER 690


Case summary
Discomfort, disappointment
Damages to reflect discomfort and
disappointment can only be claimed where
enjoyment was part of the bargain of the
contract eg holidays or a meal out or
entertainment. This most commonly seen in
holidays which fail to meet the standard the
holiday maker was lead to believe would be
enjoyed:
Jarvis v Swann Tours [1972] 3 WLR 954
Case summary
Jackson v Horizon Holidays [1975] 1 WLR
1468 Case summary
Inconvenience
Where the claimant has been put to physical inconvenience
rather than anger or disappointment that the defendant has
not met his contractual obligation, the court may award a
sum to reflect such inconvenience:

Bailey v Bullock [1950] 2 All ER 1167


Case summary
Diminution of future prospects
Where a breach of contract adversely affects the claimant's
future prospects, for example a contract promising training
and qualifications, a sum can be awarded to reflect the loss:

Dunk v George Waller [1970] 2 QB 163


Case summary
Speculative damages

Chaplin v Hicks [1911]2 KB 786

Case summary

Liquidated damages/Penalty clauses

Parties to a contract may legitimately agree the amount of


damages to be paid in the event of a breach and provide for
this in their contract terms. This provides certainty to each
party so that they know exactly what they are liable to pay
should they be unable to perform their obligations. Such a
clause will be enforceable by the courts only in so far as it is
a genuine pre-estimate of loss. If it is a genuine pre-estimate
it is known as a liquidated damages clause. If however, the
amount specified in the contract is not a genuine pre-

estimate but is aimed at deterring a breach of contract or


punishing the party in breach, this is known as a penalty
clause which is not enforceable:

Dunlop v New Garage [1915] AC 79 Case


summary
Cine Bes Filmcilik v United International
Pictures [2003] EWCA Civ 1669 Case summary
Murray v Leisureplay Plc [2005] EWCA Civ
963 Case summary
Euro London Appointments Ltd. v
Claessens [2006] EWCA Civ 385 Case
summary
Repudiation

Repudiation is a remedy available for breach


of contract. Repudiation involves bringing an
end to the contract. It is only available for
breach of condition as oppose to breach of
warranty:
Bettini v Gye (1876) QBD 183 Case

summary
Poussard v Spiers (1876) 1 QBD 410
Case summary
It may also be available for breach of an
innominate term, where the breach
substantially deprives the claimant of the
whole benefit of the contract.

Hong Kong Fir Shipping v Kawasaki Kisen


Kaisha [1962] 2QB 26 Case summary

See further here.

Rescission
Rescission is an equitable remedy available at
the discretion of the judge. Rescission seeks
to place the parties back in their precontractual position and thus represents an
unraveling of the contract. Rescission is

available where a contract is voidable as a


result of a vitiating factor such as
misrepresentation, undue influence or duress.
The right to rescind may be lost if the
claimant affirms the contract, where a third
party acquires rights in the goods, through
lapse of time or where restitutio in integrum
is not possible.
Car & Universal Credit v Caldwell [1964]
2 WLR 600 (Case summary)

Long v Lloyd [1958] 1 WLR 753 (Case


summary)
Leaf v International Galleries [1950] 2 KB
86 (Case summary)

Specific performance
Specific performance is an equitable remedy
available at the discretion of the judge. It is
an order by the court requiring one party to

perform their contractual obligation. Whilst it


is often said that contracts are made to be
performed and parties should be held to their
contractual obligations, the courts are often
reluctant to order a party to unwillingly
perform the contract and specific performance
is only available in limited circumstances. In
considering whether to grant specific
performance the courts look to whether
damages would be an adequate remedy, the
type of contract and whether equity requires
such an order.
1. Where damages are an inadequate
remedy:
If the claimant could adequately be
compensated by an award of damages for the
breach of contract, the courts are unlikely to
order specific performance.
Compare the cases:
Nutbrown v Thornton (1805) 10 Ves 159
Case summary

Cohen v Roche [1927] 1 KB 169


summary

Case

2. Type of contract
Specific performance is most commonly
ordered for contracts for the sale of land
The courts are unlikely to order specific
performance for contracts for personal
service.

3. Equity
Clean hands:
Walters v Morgan (1861) 3 DF & J 718
Case summary
Lamare v Dixon (1873) LR 6 HL 414 Case
summary
Hardship:

Co-op insurance v Argyll Stores [1997] 2


WLR 898 Case summary

Patel v Ali [1984] 1 All ER 978 Case


summary
Injunctions

Injunctions are another form of an equitable


remedy available only at the discretion of the
judge. There are three types:

1.

2.

3.

Interlocutory or interim (temporary


injunction until a court hearing)
Prohibitory (a court order that a party
must not do something)
Mandatory (an order that a party must do
something)

There is an overlap between mandatory injunctions and


specific performance which has been recognised by the
courts. The courts will not grant an injunction in

circumstances that would in effect be an order for specific


performance where it would not generally be allowed:

Page One Records v Britton [1968] 1 WLR 157


summary

Case

However, this does not prevent the ordering of a prohibitory


injunction which may be an indirect way of ensuring
compliance with contract:

Lumley v Wagner (1852) 42 ER 687

Case summary

The court may sever terms and only order an injunction in


respect of partial obligations:

Warner Bros v Nelson [1937] 1 KB 209


summary

Case

Remedies in contract law

Theories of contract Law


Equity theory of contract law
courts asked whether the parties to a contract exchanged
things of equal value

Will theory of contract law

whether the parties really had agreed to the terms of an


agreement

Formalist theory of contract law


courts tried to determine if the parties had reached a
meeting of the minds- the courts focused on the form of
agreements

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