CONTRACT LAW

FORMATION
Determining the Existence of an Agreement
Summary
1. Has there been an offer? Invitation to treat or an offer?
2. Has it been unequivocally accepted? Or is it a counter offer? Battle of the
Forms?
3. Has the acceptance been communicated effectively? Stipulated methods?
Postal rule/ receipt rule?
4. Upon accepted, is the offer still effective? Has there been a lapse of time?
Revocation? Death of party?

The existence of an agreement and whether that agreement was

intended to be legally binding are not determined on the basis of
what the parties themselves thought or intended. Instead, the
courts look at external evidence (what the parties said and did at
the time) as objectively indicating the parties intentions and ask
whether, on the basis of this evidence, the reasonable man would
say that the parties were in agreement.
As Lord Denning stated in Storer v Manchester City Council [1974]:
In contracts you do not look into the actual intent in a mans mind.
You look at what he said and did. A contract is formed when there
is, to all outward appearances a contract.
Whether there is a binding contract between parties depends upon
what they have agreed, not upon their subjective state of mind
Lord Clarke in RTS Flexible Systems v Molkerei Alois Miller [2010].

Offer and Acceptance

There must be a valid and communicated offer and acceptance of that
offer before any revocation (or withdrawal) of the offer occurs.
Has an offer been made?
1. Identification of the correspondence: The first question to
address is whether the offeree has made an offer. Was it an offer
or an invitation to treat?
2. Does that correspondence satisfy the relevant
communication rule i.e. is it effective and when does it take
effect? Has the offer been effectively communicated?

Offers and Invitations to Treat

An offer is an expression of willingness to contract on the specified
terms without further negotiation, so that it requires only
acceptance for a binding agreement to be formed.
DCFR: A proposal amounts to an offer if (a) it is intended to result in
a contract if the other party accepts it; and (b) it contains
sufficiently definite terms to form a contract.
An offer must be distinguished from all other statements made in
the course of negotiations towards a contract (so-called invitations
to treat) since only an offer is capable of immediate translation into
a contract by the fact of acceptance.
An invitation to treat is any negotiating statement falling short of an
offer that furthers the bargaining process e.g. Would you be
interested in buying my car?
In order to constitute an offer, the communication must be both:
1. Sufficiently specific in terms of the main obligation and price to be
capable of immediate acceptance
2. Made with an intention to be bound by the mere fact of acceptance
(i.e. a definite promise to be bound).

In Gibson v Manchester City Council (1979) the HL examined

the language of the correspondence between the parties in order to
determine whether there was an intention to be bound. The city
treasurer replied to a tenant that he may be prepared to sell the
house. HL held that no contract because the language used made
it clear that there was no intention to be bound.
This can be contrasted with the CA decision in Storer v
Manchester City Council [1974] where the court held that a
binding contract had been concluded because the language If you
sign the agreement and return it to me, I will send you the
agreement signed on behalf of the council in exchange indicated
that it was the councils intention to be bound and therefore
constituted an offer.
In Harvey v Facey [1984] Harvey (the plaintiffs) asked Facey
whether they would sell a property and requested that Facey
telegraph their lowest price. Facey stated that their lowest price was
900. This was held not to constitute an offer, but rather an
indication of the minimum price that Facey was willing to pay if they
decided to sell.

Recognised instances of offer or invitation to treat

The general rule: advertisements, brochures and price lists
amount to invitations to treat

In Partridge v Crittenden (1968) the appellant had placed an

advertisement indicating that he had certain wild birds for sale. The court
held that the advertisement (which stated a price, but gave no details
about delivery or quantities available) did not amount to an offer but was
merely an invitation to treat.
In Grainger v Gough [1896] a wine merchants catalogue and price list
were considered to constitute no more than an invitation to treat. If
however, the catalogue had been addressed to a limited group of
customers or had made it clear that unlimited supplies were available,
then it might have been sufficient to constitute an offer.
Exception: where the advertisement is unilateral
A unilateral contract (or if or reward contract) is where one party binds
itself to perform a stated promise upon performance of the requested act.
The promisee gives no commitment to perform the act or condition but
rather is left free to choose whether to perform or not.
If a reward is advertised for the performance of a specified act, such as
supplying information, that advertisement will constitute a unilateral offer,
assuming that the language is sufficiently definite to be viewed as such.
The acceptance of such an offer is the performance of that act:
In Carlill v Carbolic Smoke Ball Co. [1893] Carbolic Smoke Ball placed
an advert promising to pay 100 to anyone catching influenza after using
its smoke ball remedy three times a day for two weeks. The ad claimed
that 1,000 had been placed in a separate bank account in order to meet
any claims made. Carlill caught influenza after using the smoke ball, but
Carbolic Smoke Ball denied any liability to pay 100. CA held that advert
constituted an offer, since it requested performance of an act as
acceptance.
Shop displays: Shop windows or supermarket shelves
In Fisher v Bell [1961] it was held that to display a flick-knife with a price
marker in a ship window did not amount to commission of the offence of
offering such a knife for sale. No offer.
Websites

Regulation 12 of the Electronic Commerce (EC Directive) Regulation

2002 implies that a website will be treated as an invitation to treat
since it provides that the customers order may be the offer.

Pricing mistakes on websites

If a website constitutes no more than an invitation to treat,

mispricing will not result in the supplier having to fulfil a contract at
the misquoted price.

A request for tenders

A request for tenders is normally an invitation to treat. The request

for tenders (or quotations) is a negotiating device common in the
world of major commercial contracts. In normal circumstances, the
invitation for tenders is not treated as an offer, since the company
issuing it may have criteria other than price that it wishes to take
into account in awarding the contract.
In that case, the tenders themselves are the first offers made
Spencer v Harding (1870) and the person requesting the tenders
has the freedom to determine which (if any) they will accept.

Auctions

An advertisement that an auction is to be held is not an offer and a

request for bids at an auction is generally no more than an invitation
to treat: Harris v Nickerson (1873) even if the auction
advertisements refers to lots being offered for sale: British Car
Auctions v Wright (1972).
Each bid is an offer and acceptance occurs when the auctioneer
indicated acceptance of a bid with the fall of a hammer: Sale of
Goods Act 1979 s. 57(2).
Harris v Nickerson is authority for the fact that if an advertised
auction fails to take place or if the lots advertised are withdrawn
from the sale, since the advertisement was only an invitation to
treat, the auctioneer will incur no liability.
However, the position is different where an auction is advertised as
being without reserve (i.e. involving a promise to sell to the highest
bidder)
In auctions without reserve, even the second highest bidder will
have a remedy for breach of contract Warlow v Harrison (1859).

Communication of the offer

Was the offer actually communicated?

The communication of the offer is vital since a related principle

concerning factual acceptance states that an offeree cannot accept
an offer that she does not know about and must act in response to
an offer.
Taylor v Laird one cannot be bound by an offer of which they were
unaware. Knowledge of the offer is required. So, although an offer
can be communicated without the offeree having read or listened to
it, any acceptance of that offer would not then be given in exchange
for it, and so would be invalid as an acceptance.

Acceptance

Acceptance is what turns an offer, made with the intention to be

bound, into an agreement.
There are three requirements to fulfil
1. The response must correspond with the exact terms in the offer
(mirror-image rule).
2. It must be a response to the offer i.e. made with knowledge of that
offer
3. As a general rule, the response must follow any method for
acceptance which has been prescribed in the offer (prescribed
method).
Mirror image rule an acceptance must correspond with the exact
terms proposed by the offeror. This was explained in Butler
Machine Tools v Ex Cell O: must be a clear and unconditional
offer, which is matched by an equally clear and unequivocal
acceptance.
If the offeree either (a) introduces a new term or (b) amends a term
in the offer, the response will be a counter-offer rather than an
acceptance.
Counter-offers

If, when responding in a form purporting to be an acceptance, the

offeree alters the terms contained in the offer or adds a new term,
that response will constitute a counter-offer. This counter offer
cannot constitute an acceptance of the original offer.
Because the counter offer is itself an offer, on the revised terms
being made by the offeree, agreement will result only if there is
acceptance of this counter-offer by the original offeror.
A counter offer destroys the original offer and so prevents the
original offeree from changing its mind and accepting that original
offer. That effect is clearly demonstrated in the case of Hyde v
Wrench (1840).
Hyde v Wrench (1840)
Wrench offered to sell a farm to Hyde for 1,000 to which Hyde
responded by offering 950 for it. Wrench rejected this offer, and
Hughes then purported to accept the defendants original offer of
1,000. Hughes then brought an action for specific performance.
The response offering 950 was a counter offer which destroyed the
original offer. Original offer was thus no longer available to be accepted.
Effect of counter offer not acceptance and destroys the original offer.

Acceptances
can be made in one of two ways:

1. By explicit agreement to the terms and condition. In Butler

Machine this occurred because the sellers had completed and
returned a tear-off slip at the bottom of the buyers order stating
that the accepted the buyers order on the basis of its terms and
conditions. Therefore the buyers terms governed. OR
2. By conduct: Brogden v Metropolitan Railway Co (1877) so that
if X said nothing in response to Ys order but simply delivered the
machinery to Y, the agreement would be made on the basis of Ys
terms. Thus the last shot frequently wins in the battle of the forms.
Identifying a counter-offer

A counter offer that purports to accept, but in fact operates to

reject, the original offer must be distinguished from a request for
further information before the offeree decides whether to accept.
If there is no more than a request for further information, the offer
will remain available for acceptance. This can be seen in
Stevenson, Jacques and Co. v McLean.
Stevenson, Jacques & Co v McLean (1880):
D offered to sell at a price of 40s net cash per ton. The Ps had replied, asking
whether the defendant would accept 40 for delivery over two months, or if
Butler Machine Tool v Ex-Cell-O (1979)
not, the longest limit you could give. It was held that this reply did not operate
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The buyers placed an order and their letter contained conflicting conditions
that, in particular, contained no price variation clause (i.e. the buyers required
a fixed-price contract). At the bottom of the buyers order, there was a tear-off
confirmation slip expressly subject to the buyers terms, which the sellers
completed and returned.
The sellers claimed to be entitled to vary the contract price. The CA rejected
that claim on the basis that the sellers had expressly accepted the buyers
terms when they completed and returned the acknowledgement slip. In other
words, the sellers had accepted the buyers last shot. The majority (Lawton

The battle of the forms

In Butler Machine the majority of the CA applied Hyde v Wrench to this
scenario so that, since the buyer has altered the price term, the buyer is
making a counter-offer. It follows that at this point that there is no
agreement between the parties. However, the counter offer is an offer in
itself an offer to be accepted by the seller.

Failure to follow the prescribed method of acceptance

If an offeror wishes for the prescribed method of acceptance to be

mandatory it must be made explicit: Manchester Diocesan

Council for Education v Commercial and General Investments

[1969].
If the method was not mandatory, any equally effacious method will
suffice as long as it fulfils the purpose behind prescribing the
method in a way that was no less advantageous.
For example, if the offeror wants a quick response and prescribes
acceptance by fax, then as long as this method is not mandatory,
any acceptance just as quick as fax acceptance will suffice.
Alternatively, if the method was prescribed in order to benefit the
offeree, the offeree can waive (give up) a stipulation for his or her
benefit and use a different method as long as this method does not
disadvantage the offeror.
This was the case in Yates Building v Pulleyn & Sons (1975)
where the offer stipulated that the acceptance should be sent by
registered or recorded post. This was intended to enable the offeree
to prove that the acceptance had been posted. Accordingly, the
offeree could waive this requirement and take the risk of ordinary
post.

Acceptance must be made in response to the offer

It is clear from Williams v Carwardine (1833) that as long as the

offeree did have knowledge of the offer and accepted in response to
it, his motive in doing so is irrelevant.

Communication of Acceptance

Acceptance must be actually communicated to the offeror (in the

sense of being actually received).
Receipt Rule is generally followed: this means that acceptance will
only result when the acceptance has been received by the offeror.
There are two exceptions to this:
1. Implied waiver of the communication requirement in unilateral
contracts. In this situation, performance of the act constitutes
acceptance: Carlill v Carbolic Smoke Ball Co [1893]
2. Acceptance by post, where the parties are not necessarily in each
others presence (postal rule)

In bilateral negotiations, the general rule is that the offeror cannot

waive the need for communication and stipulate that silence will
constitute acceptance. The authority for this decision is Felthouse v
Bindley (1862): An uncle wrote to his nephew saying that if he heard
no more he would assume that his nephew agreed to his proposal of
the price he put forward for the sale of his horse. Held that silence
will not constitute acceptance, despite the fact that nephew was
satisfied with arrangement.
Words of acceptance must not only be spoken, but must also be
communicated to the offeror. Thus if words are drowned out by a

loud noise, they must be repeated before the contract is concluded:

Entores v Miles Far East Corporation (1955).

The postal rule of acceptance

If the parties are at a distance, a postal acceptance is one possible

method of acceptance, unless the circumstances indicate that a
quick response was required. If post is used, acceptance is complete
as soon as the letter is posted (dispatch rule) Adams v Lindsell
(1818) and it is irrelevant that the acceptance letter is lost in the
post and never arrives Household Fire Insurance v Grant
(1879). It follows that where the postal rule applies to the
acceptance, the offeree is protected on posting and the risk that the
acceptance may never arrive lies on the offeror. It should therefore
be in the offerors interests to avoid the application of the postal
rule and it would be preferable to do this expressly.
Only applies to acceptances and not revocations of offers by post
Adams v Lindsell (1818) in this case the letter was misdirected,
so that Adams reply was delayed beyond the normal course of post,
and Lindsell sold the wool to someone else. Held that acceptance is
when letter is posted.
This rule applies even if the acceptance never arrives and the
offeror is ignorant of the fact that an acceptance was posted:
Household Fire Insurance v Grant (1879).
Henthorn v Fraser (1892) made clear that the postal rule is only
applicable where it was reasonable in all of the circumstances for
the offeree to have used the post as would most obviously be the
case had the offer been sent by post.
Household Fire Insurance v Grant (1979) it must be addressed
and stamped properly, but does not matter if it is never received.

Why have the rule?

Efficiency
More certain can be certified by postal system when something is
posted.
Might seem harsh on offeror but only applies when they request or it
is reasonable.

Criticisms of the postal rule

Where a postal acceptance has been lost in the post, the offeror
may believe that, since no reply has been received, the offeree does
not wish to accept. The offeror may therefore believe that there will
be no question of breach if a contract relating to the same subject
matter is made with someone else.
A further criticism made by Bramwell LJ in a powerful dissent in
Household Fire Insurance v Grant (1879) was that the operation

of such a rule is arbitrary, since it does not apply to non-postal

acceptances and since little conscious thought may have been given
to the decision to communicate the acceptance using one form of
communication rather than another e.g. the post rather than hand
delivery or acceptance by faxed latter. Bramwell LJ would therefore
have preferred the ordinary rule of communication to apply equally
to acceptance by post.
Avoiding the postal rule

It is sensible, therefore, for the offeror to seek protection against the

risks posed by the postal rule by stipulating that a particular means

of acceptance (other than the post) is required, or by wording the
offer to require actual communication of any acceptance. This is
precisely what the offeror achieved in Holwell Securities Ltd v
Hughes [1974].
In Holwell the defendant granted the plaintiff an option for the
purchase of certain land, which was said to be exercisable by notice
in writing to the defendant at a given address within six months. An
option is no more than an offer, and although the plaintiff posted a
letter accepting the offer in question within the six-month period, it
failed to arrive. The CA held that the option had not been validly
exercised, and accordingly there was no contract. The main finding
was that the mere words notice in writing to were sufficient to oust
the postal rule. These words amounted instead to a stipulation that
notice must reach the offeror, thus reinstating the general principle
of actual communication.
From the Holwell interpretation, it would seem relatively
straightforward to avoid the operation of the postal rule. For
example, the words let me know your answer may suffice as
emphasising the need for actual communication.
Uncertain in English contract law whether it is possible to retract a
postal acceptance before it reaches the offeror e.g. whether the
offeree could post an acceptance, and then change his mind and
telephone the offeror to tell her that he does not want to accept and
that the offeror should therefore disregard any acceptance letter.
No English case authority and a Scottish case Countess of
Dunmore v Alexander (1830) is highly dubious authority,
although it is sometimes cited in support of the conclusion that it is
possible to overtake a postal acceptance.

Instantaneous methods of communication

E.g. a phone call. The parties are treated as if in each others
presence, and no contract will be formed unless the words of
acceptance are clearly heard by the offeror.

Denning LJ in Entores stated that the onus was on the

communicator to get his message through. Denning recognised that
there were occurrences that could jeopardise the instantaneous
nature of the transmission e.g. if the telephone or telex line were to
go dead during transmission, but the offeree be unaware of this fact
and think that the acceptance message had gone through.
If the offeror, knowing that a message was being sent, did not ask
for it to be repeated, then the offeror. Is clearly bound because
he will be estopped from saying that he did not receive the message
of acceptance. It is his own fault that he did not get it.
However, a general rule appears to be identifiable that if the offeree
has done all that he might reasonably be expected to do to get his
message through, acceptance should take effect when the offeree
might reasonably expect it to be communicated to the offeror.
Non-instantaneous methods of communication
Brinkibon v Stahag [1982] acceptance is only effective during
office hours.
What are ordinary office hours? In The Brimnes [1975] a
message received between 17:30 and 18:00 was considered to
be received within ordinary business hours.
In Thomas v BPE Solicitors [2010] an email sent at 18:00 was
sent within office hours given the context of the parties
negotiations. On the basis of previous emails, the transaction
could have been completed that evening, despite the fact that
the recipient had actually gone home at 17.45.
Telephone Answering Machines in Coote (1971) argued that
where the machine appears to be working, leaving a message
has put the matter out of his control, so that this should be the
point of communication.
Electronic means of communication

Electronic communications are covered by the Consumer

Protection (Distance Selling) Regulations, so that certain
information must be provided to the consumer before the
conclusion of the contract.
On the facts, it may be the case that, despite the use of email
communications during the negotiation stage, the parties did not
intend there to be a binding contract reached by the exchange of
emails Pretty Pictures v Quixote Films (2003) in which a
signed written contract was contemplated by the parties.
Obiter comments by Blair J in Thomas v BPE Solicitors [2010]
considered that where contracts are made by exchange of email,
the receipt rule applies, in line with Entores which stated that
responsibility for getting the message through to its destination

should lie with the communicator. This approach was supported

by the decision of the High Court of Singapore in Chwee Kin
Keong v Digilandmall.com [2004] on the basis that the receipt
rule has greater global acceptance and because email is in some
respects very different from a postal communication .

Termination of offers
Acceptance made after an offer has ceased to be valid is ineffective to form a
contract.

Lapse of time

Where an offer is left open indefinitely, there may come a time when
the offeree can no longer accept.
In Ramsgate Victoria Hall v Montefiore (1866) the defendant
had applied for shares in the plaintiff company in early June 1864.
Shares were allotted to him in late November 1864. The defendant
refused to pay for the shares, although he had not withdrawn his
application at the time when the shares were allotted. It was held
that he was not obliged to go through with the purchase of the
shares. The companys response to the defendants offer had not
been made within a reasonable time

Death

Where the contract is for the performance of a personal service by

the offeror, which depends upon skill that is exclusive to the offeror,
the offerors death automatically terminates the offer. Thus an offer
by a concert pianist to perform at a concert could not be accepted
after the death of the pianist.
Death of offeror: An offeree cannot accept an offer after he has
been informed of the death of the offeror: Coulthart v
Clementson.
Death of offeree: Although there are obiter statements in
Reynolds v Atherton (1921) suggesting that, in the situation of
the death of the offeree, the offer ceases to be an offer at all, the
position is probably that the offerees representatives can accept
the offer, if it is of a non-personal nature.
Revocation

An offer may be expressly terminated (or revoked), or the revocation

may occur by implication e.g. where the response to the offer is a
counter offer: Hyde v Wrench (1840).
An offer may be impliedly revoked by the offeror making a second
offer. the decision in Pickfords v Celestica (2003) provides
authority for the fact that where A makes an offer to B and then

makes a second (differing) offer without expressly revoking the first,

the second offer may automatically revoke the first if, in making the
second offer, the offeree clearly indicates an intention to
withdraw the first offer.
Express revocation of an offer. in negotiations towards a
bilateral contract, the general rule is that the offeror is free to
withdraw the offer at any time before acceptance: Offord v Davies
(1862). Revocation of an offer after acceptance is ineffective.
Routledge v Grant (1828) a firm-offer promise is freely revocable
in English law unless supported by consideration.
In Routledge v Grant (1828), the defendant offered to take a lease of
premises belonging to the plaintiff, at the same time promising to
hold his offer open for six weeks. After only three weeks, the
defendant purported to revoke this offer, while at the end of the six
weeks, the plaintiff purported to accept it. The court held that there
was no contract. In the absence of consideration to support the
promise to keep the offer open for a specified period, the offer may
be withdrawn at any time, even before expiry of that period.
A revocation must be actually communicated and the postal rule of
acceptances does not apply to revocation of offers.
If a letter of acceptance is posted after a letter of revocation has
been posted, but before that revocation has been received, the
acceptance will be effective to form a binding contract, although it
was dispatched after the revocation. This was exactly what
happened in Byrne and Co v Van Tienhoven and Co. (1880).
A further example is provided by the facts of Henthorn v Fraser
(1892) in which the revocation of the offer posted at 12 noon did
not reach the offeree until 5pm. However, since the offeree posted
the acceptance at 3.50pm, there was a binding contract from that
time. The revocation has to be communicated in order to be
effective and was therefore too late.
There is a special rule applicable in the case of revocations of
unilateral offers made to the whole world in which the offerees are
necessarily identified, so that actual communication of a revocation
to individual offerees cannot occur: Shuey v United States (1875).

Unilateral Contracts

A unilateral contract is a contract under which one party (the

promisor) binds himself or herself to perform a stated promise upon
performance of a stated act by the promisee, but under which the
promisee gives no commitment to perform the act and instead is left
free to choose whether to perform or not.

Such contracts are sometimes referred to as if contracts since they take

the form of the following well-known example, first cited in Great

Northern Railway v Witham (1873): If you will go to York, I will give

you 100.

In unilateral contracts acceptance must still be made in response to

the offer.
In Carlill v Carbolic Smoke Ball Co (1893) defendants sought to
avoid having to pay promised sum, despite the fact Carlill caught
influenza, by saying that there could be no contract because
otherwise there would have been a unilateral contract with the
whole world. Argument rejected.
Performance of the requested act constitutes both acceptance and
the consideration to support the offerors promise to pay the reward.
Revocation presents particular difficulties in the case of offers of
unilateral contracts owing to the fact that acceptance in a unilateral
contract is constituted by performance of the act requested in the
offer promise.
It follows that, in theory, it would be open to the offeror to revoke
the offer at any time before completion of that performance, even
where the offeree had gone to effort or expense in attempting
performance, since the revocation would have occurred before the
moment of acceptance: Petterson v Pattberg (1928). It has long
been recognised that application of the normal rule in this situation
can cause hardship and injustice. Nevertheless, attempts to
overcome the rule have run into conceptual difficulties. It is
generally accepted that it would be desirable for the power to
revoke to be lost once the offeree has unequivocally embarked upon
performance. Loss of the power to revoke would not affect the rule
that acceptance is constituted only by full performance of the act
requested in the offer.

Agreement Problems

As a general principle, it is for the parties to make their agreement

and to ensure that the terms are sufficiently certain to be enforced.
As a result, the courts will generally refuse to fill any gaps and an
uncertain agreement will be void as a contract.
However, in practice, the courts may rescue the agreement if some
objective evidence is available to fill the gaps. The courts use
commercial practice and previous performance to determine the
meaning of vague terms on the basis of reflecting the obvious
intentions of the parties. If there is no such evidence, there will be
no contract.
If an uncertain clause is meaningless, as opposed to still to be
agreed, it may be possible to sever that clause (to remove it) and
enforce the remaining terms of the agreement.

Agreements for the parties to agree a matter, such as the price, will
generally lack the necessary certainty. If nothing is said as to price,
then statute will imply a reasonable price. If the parties have
provided a mechanism for fixing the price and that mechanism
operates, there is no certainty problem. However, where such a
mechanism for fixing the price breaks down, the courts will need to
decide whether the mechanism is integral and essential for fixing
the price, and whether any of the parties is at fault in relation to this
breakdown.
If there is uncertainty so that no contract results, in some
circumstances there may nevertheless by an obligation to pay the
reasonable value for requested performance that has been received,
on the basis that otherwise the recipient would be unjustly enriched
(i.e. a quantum meruit claim).
A formation mistake will occur where one or both of the parties
allege that they made a fundamental mistake which prevents
agreement. However, the doctrine of mistake is very narrow and
limited; in part this is because of the effect on third parties of a
finding that the agreement is void. In particular, the mistake must
be a mistake as to terms, as opposed to a mistake as to a collateral
matter.

Certainty of Agreements

The courts will not enforce an apparent agreement if it is too

uncertain in terms. A contract will be too uncertain because:
1. It is vague, or
2. Essential terms are missing and the contract is therefore incomplete
The task of the court is to walk the narrow line between (1) writing
the parties agreement for them (which has traditionally been
viewed as beyond the power of the judges and an infringement of
freedom of contract); and (2) maintaining the contract by construing
it to spell out what the parties would reasonably understand it to
mean, through the implication of terms that are deemed necessary
to the workability of the contract and the perceived intentions of the
parties.
In Hillas v Arcos (1932) Lord Wright made it clear that the role of
the court is to preserve the contract whenever possible: The court
is not to make a contract for the parties.

Agreements in which essential terms are vague

In Raffles v Wichelhaus (1864) the level of ambiguity was such

that there could be no agreement between the parties. Raffles had
promised to sell and deliver 125 bales of cotton at a given price to
arrive ex Peerless from Bombay. However, 2 ships were called
Peerless. One left Bombay in October, and the other in December.
Wichelhaus refused to accept the cotton, which had been shipped

on later ship alleging breach of contract. The fact that there were
two ships of this name sailing from Bombay within this time period
seems not to have been known by either party. Court found for
defendants.
Even where there is no total ambiguity, it must be possible to
ascertain a meaning that would satisfy the objective bystander.
In Scammell & Nephew v Ouston (1941) the House of Lords was
faced with an agreement to purchase a van on hire purchase terms
but details of these hire purchase terms had not been agreed. HL
considered that there were so many possible interpretations of this
expression that it was impossible to say which one the parties had
intended. The parties must express themselves so that the
meaning can be determined with a reasonable degree of
certainty. Therefore contract void for uncertainty of terms
Hillas v Arcos (1932) the courts are reluctant to come to the
conclusion that there is no valid agreement where there has been
performance. After all, if the parties have managed to perform an
apparent agreement, it would appear odd if a court were to
conclude that it is too vague to be capable of agreement. This case
demonstrates the reluctance of English courts to enforce
agreements to agree where there has been no performance.

Severing a meaningless clause

It is only possible to sever a clause if it is meaningless (as opposed

to a clause that has still yet to be agreed). The policy objective
underling this principle Is the ned to prevent a party from escaping a
contract by inserting a meaningless clause.
Nicolene v Simmons (1953): the agreement referred to
acceptance as being on the usual conditions of acceptance. In fact,
there were no usual such conditions, when the D failed to deliver,
the Ps brought an action for breach of contract. The clause in
question was severed so that the rest of the agreement was
enforceable.

Incomplete terms

Agreements to negotiate on a particular term are incomplete and so

too uncertain to be a contract: Walford v Miles (1992).
In Baird Textiles Holdings v Marks & Spencer [2001] the
alleged term was that Marks and Spencer would acquire garments
from Baird in quantities and prices which in all the circumstances
were reasonable but there was no objective criteria for assessing
any reasonable quantity or price. The CA held that it could not make
an agreement for the parties in the absence of any objective basis
for determining its terms.

However, it is equally clear that where a court can resort to clear

commercial practice or to previous dealings between the parties in
order to ascertain the meaning of a particular contractual
expression, it will do so, thereby giving effect to what must have
been the obvious intention of the parties.
SGA 1979 s.8(2) sets out that where the price is not determined by
the contract, statute will provide that the buyer must pay a
reasonable price which would be determined on a case-by-case
basis.
However, if there is a mechanism for fixing price but it has not been
implemented S. 8 SGSA and s.51 CRA cannot apply to allow the
implication of a reasonable price.
In May and Butcher v R [1934] Lord Dunedin suggested that s.8
and the ability to fix a reasonable price, applies only where the
contract is silent as to price and does not apply when a price-fixing
mechanism has failed to work.

In May & Butcher v R (1934) the contract provided for the price to be
agreed upon by the parties from time to time. There was no party
agreement. The contract contained a mechanism for fixing the price but
this had failed. There was a mere agreement to agree and no contract
ever came into existence. S.8 cannot apply when a price-fixing
mechanism has failed to work.

However, the courts have devised ways around May & Butcher
and we need to determine whether either of these exceptions
applies on the facts.
1. Exception 1: if the agreement has already been executed and the
price is to be agreed by the parties but has not been, the courts
may not be prepared to declare the contract void.
In Foley v Claissique Coaches (1934) there was a similar
agreement to purchase petrol at a price to be agreed between the
parties from time to time. However, Foley had bought petrol for 3
years when they sought to avoid the contract by arguing that it was
invalid because there was no agreement as to price. Therefore
agreement was binding.
2. Exception 2: Does the principle in Sudbrook Trading Estate v
Eggleton apply?
Sudbrook Trading Estate v Eggleton (1983): the agreement
provided that a tenant was permitted to purchase the premises at a price
to be agreed upon by two valuers nominated by the lessor and the tenant.
The lessor had refused to appoint a valuer and claimed that the
agreement was void for uncertainty. The clause was not too vague to be
enforceable as it put in place a mechanism to ascertain the price.

If the agreement has in fact been executed (performed) by the

parties, it is most unlikely that the courts would refuse to enforce it

on the basis that it is too uncertain: Trentham v Archital Luxfer

(1993).
However, much depends on the facts. In Baird v Marks and
Spencer (2001) there was no evidence on which to determine the
essential terms of the alleged contract, although plenty evidence of
past dealings.
However, courts usually conclude that where there has been
performance on both sides, the contract will be binding: RTS
Flexible Systems v Molkerei Alois Miller (2010).
Although uncertainty means that the agreement will be void and so
automatically of no effect from the very beginning, a party may still
be required to pay for performance under an uncertain contract on
the basis of a quantum meruit (reasonable value of services).
In British Steel Corporation v Cleveland Bridge (1984) the
parties were still in the process of negotiating in the expectation
that a contract would follow. British Steel had been requested to
commence work immediately, which they had done. No formal
contract had concluded but delivery had occurred. British Steel
sought payment for the goods manufactured on quantum meruit
basis. Judge held that, since Cleveland Bridge requested
performance, and had received benefit at the expense of British
Steel, it would be unjust for them to retain the benefit without recompensating British Steel on quantum meruit basis.
This case was distinguished in Regalian Properties v London
Dockland Development Corporation (1995). It is only possible to
recover performance expenses where the performance was
specifically requested by the other party.

Agreement Mistakes

An apparent agreement may be void where the parties entered into

the agreement under a fundamental mistake which the law
recognises as preventing the parties from ever reaching agreement.
There are two types of agreement mistake which prevent agreement
being reached: mutual (or cross-purposes) mistake and unilateral
mistake.

Mutual (cross-purposes) mistake

Where the parties are genuinely at cross-purposes, so that each

party makes a mistake, but the mistakes are different. Both parties
are mistaken, but they each make different mistakes.
The problem is that although one or both parties may assert that a
contract exists, each on terms favourable to that party, on an
objective interpretation it is impossible to resolve the ambiguity
over what was agreed, so that the only possible conclusion is that
there is no contract.

There will be no agreement as a result of mutual mistake where it is

not possible for the reasonable man to say which persons
interpretation is the more reasonable (using the objective test for
contract formation) because of the ambiguity in the offer terms.
Such a contract is void i.e. of no effect from the very beginning.

The Objective Test

The courts apply the objective test to the question of the existence
of agreement, and whether one partys interpretation is more
reasonable than the others.
Smith v Hughes (1871) is the leading case on the meaning of
objectivity, and involved an allegation of cross-purposes mistake,
but the courts concluded that since, on an objective assessment,
there was symmetry between what was offered and what was
accepted, then the contract should be upheld.
In Smith v Hughes (1871) Smith offered to sell oats to Hughes. On
delivery it was discovered that the oats were new and of no use to
Hughes, who required old oats (the previous seasons oats).
Hughes refused to pay, claiming the contract was void for mistake.
Court refused this defence. The mere fact that one party had
deluded himself into entering into a contract that was no advantage
to him did not enable the court to say that there was no contract in
the absence of any express mention by Hughes that he required old
oats.
Raffles v Wichelhaus (1864): Raffles agreed to sell Wichelhaus
cotton ex Peerless from Bombay. In fact 2 ships called Peerless.
Raffles could not succeed in action against Wichelhaus for refusing
to take delivery of the goods on the December Peerless.
Objectively it was not possible to say which Peerless was intended
and which partys interpretation was more reasonable. Such an
agreement will be void.
Scriven Brothers v Hindley (1913): Hindley mistakenly bid for
bales of tow believing they were hemp. At the auction, Hindley had
examined a sample, which happened to be hemp, and thought that
all the bales were hemp because they all had same shipping mark.
This was accepted as a reasonable interpretation but so too was
auctioneers belief that bales being sold were tow. Held: no contract
and Hindley did not have to pay for the tow.
It is difficult in relation to these cases to resist the inference that
the courts sometimes apply an unarticulated fault doctrine. Where a
genuine situation of cross-purposes is seen to exist and one party is
seen as responsible for provoking the mistake, the court will decide
in favour of the other party.
However, in Tamplin v James (1880) the purchaser mistakenly
believed the lot of property being sold included some garden but

had failed to check the plan. The purchaser was at fault and could
not avoid contract using mistake.
Unilateral mistake

Where only one party is mistaken as to a term of the contract and

the other knows or ought to know of this mistake and cannot be
allowed to take advantage of it.
The courts assume that a party is aware of the others mistake
where a reasonable person in that persons place would have been
aware.
In Chwee Kin Keong v Digilandmall.com (2005) Singapore CA
considered that goods on an internet site were priced so absurdly
low in relation to their known market value that the buyer ought
reasonably to have known that the seller was making a mistake.

The very limited mistake doctrine of unilateral mistake applies only where:
1. One party is genuinely mistake as to a term of the contract, and the
mistake is one with which the party would not have entered into the
contract
2. That mistake was known or ought reasonably to have been known to
the other party;
3. The mistaken party is not in any way at fault.
Examples of all the conditions being met are rare.
Mistake as to a term

If the mistake does not relate to a term of the contract but to a

collateral matter relating to the quality of the subject matter, then it
will not be fundamental and wil not prevent agreement.
In Smith v Hughes (1871) in the absence of an express stipulation
for old oats, whether the oats supplied were old or new was only a
collateral matter concerning the quality of the oats.
Hartog v Colin and Shields (1939): Colin & Shields mistakenly
offered to sell hare skins at a price per pound instead of per piece
and Hartog accepted this. Hartog could not enforce the contract on
these alleged terms. The negotiations had been conducted on the
basis of a price per piece and this was normal trade practice. Hartog
must have known about Colins mistake as to tis term when they
accepted (price per pound would have been much cheaper) and
therefore the contract was void.

Mistakes as to identity

This occurs where one party is mistaken as to the identity of the

other contracting party (a term of the contract) and that other
knows of the mistake (usually because he will have fraudulently
misrepresented his identity).

This type of mistake will only render the contract void if it is

fundamental.
If it is not a fundamental mistake the contract will only be voidable
(capable of being set aside) for fraudulent misrepresentation.

If there is a unilateral mistake as to the identity of the person contracted

with, the contract will only be void for mistake where:

The identity of the contracting person is of fundamental importance

to the contract Cundy v Lindsay (1878) and
This is made clear by the party who is mistaken before or at the
time of the contract Boulton v Jones (1857).

This distinction between void and voidable is particularly important where

the goods have been sold by the rogue to an innocent third party.

The goods can only be recovered from that third party if the
contract was void, so that the rogue had no title (ownership) to
pass on.
If the contract with the rogue was merely voidable for fraudulent
misrepresentation, the right to set aside the contract will have been
lost when an innocent third party acquires rights in the good.

Cundy v Lindsay (1878) The HL held that a contract made by written

correspondence was void for mistake as to identity since identity would be
of fundamental importance to the formation of a written contract by post.
The offer to contract would be made only to the person named in the
written contract so that only that person could accept it.
Shogun Finance v Hudson (2003) a rogue expressed an interest in
purchasing a Mitsubishi Shogun at car dealership. He identified himself
under fake name and produced a stolen driving license as proof of identity
and address. After purchasing vehicle, he sold the car to Hudson. Held
that the finance contract was void because Mr Patel was the customer
named in the written agreement and his signature had been forged.
Boulton v Jones (1857): Jones send a written order to Brocklehursts
shop but Brocklehurst had already sold the business. Boulton, the new
purchaser of the business, could not fulfil the order. Identity was crucial in
this case, because Jones wished to use a set-off (type of credit note) that
he had used against Brocklehurst. It followed that it was clear that the
offer was intended for Brocklehurst and Boulton could not accept it.
Face-to-face contracts

There is a series of cases applying a presumption in face-to-face

contracting whereby the mistaken party is presumed to intend to

deal with the person who is physically present i.e. the rogue:
Phillips v Brook (1919) and Lewis v Averay (1972). These
mistakes are therefore treated as attribute mistakes relating to the
decision to allow the rogue to have possessions of the goods on
credit. The contract is voidable and this protects the innocent third
party purchaser who acquires the goods from the rogue.
Following Shogun Finance v Hudson, the crucial distinguishing
fact is whether the contract is written or an oral face-to-face
contract. It is made face-to-face so that there is a presumption that
the party intends to contract with whoever is physically present
(Lewis v Averay). If the contract is written, rather than face-to-face,
it would be a Shogun situation and identity would be crucially
important and contract would therefore be void for fundamental
mistake.

Document mistakes

The court may be asked to rectify a written document to reflect

accurately what the parties in fact agreed i.e. to reflect their
common continuing intention: Joscelyne v Nissen (1970) the
parties had agreed that their daughter was to pay certain household
expenses but this had not been spelt out in specifics in the contract.
Rectification was ordered in order to reflect the parties continued
common intention.
Chartbrook v Persimmon Homes (2009) To secure rectification it
had to be shown that the parties were in complete agreement on
the terms of their contract but by an error wrote them down
wrongly. This could be demonstrated here by reliance on precontractual letters as an outward expression of the continuing
common intention.
In Daventry DC v Daventry and District Housing (2011) the CA
adopted an objective approach to the determination of whether
there was a continuing common intention i.e. by reference to what a
hypothetical reasonable observer, aware of all the relevant facts,
known to both parties, would conclude. This has been criticised
since rectification ought to be based on subjective intention.
Rectification has not been allowed where the parties were agreed as
to the terms of the agreement but made a mistake as to the
meaning of those terms.
Frederick E Rose v William Junior (1953) Frederick asked to
supply feveroles and William Junior thought feveroles was another
word for horsebeans. Accordingly, they entered into a contract for
supply of horsebeans but feveroles were a superior type. Held that
the contract could not be rectified to read feveroles because the
parties were agreed that William Junior were to supply only

horsebeans. There was no error in terms of expression of the

contract that would permit rectification.
The plea of non est factum
A successful plea of non est factum (this is not my deed) means that the
person signing a document is fundamentally mistaken as to the nature of
the document signed. If the plea succeeds the written contract is void and
a third party cannot acquire a good title under it. However, as third parties
may have relied to their detriment upon this signature, as being binding,
the plea has been very narrowly construed.

The transaction must be fundamentally different in nature from the

one signed.
The mistake regarding the nature of the document signed must not
be a mistake which is the result of carelessness on the part of the
person signing.

Saunders v Anglia Building Society: An elderly widow signed a

document relating to her interest in a house. She had broken her
spectacles and could not read it. She asked the third party requiring her
signature about the nature of the document and signed it when told that it
was a deed of gift of the house to her nephew. In fact it was a transfer of
the house to that third party who mortgaged it to a building society and
then defaulted. The widow pleaded non est factum. Her plea failed
because she had intended the document to enable her nephew to raise
money on the security of the house and the document she had signed was
not fundamentally different. In addition, she had been careless in signing
the document.
Recission
Recission is available where it is unconscionable to allow one party to take
advantage of the mistake Solle v Butcher. However, it is not available
for common mistake Great Peace v Tsavliris.

Enforceability of the Agreement

Intention to be Bound

Is there an intention to create legal relations?

In the case of commercial agreements, intention to be legally bound
is presumed once a promise has been made and only is likely to be
rebutted where clear words to opposite effect are used e.g. honour
clauses whereby the parties agree to exclude the courts and rely on
each others honour: Jones v Vernon Pools (1938), or where there
is extreme uncertainty of terms so there is no clear contract: Baird
Textile Holdings v Marks & Spencer (2001).

The key question is, would the promise be understood by the

reasonable person as constituting a binding offer? Bowerman v
ABTA (1996).
Domestic/Social agreements is there a presumption to be
legally bound? If the parties to the promise are husband and wife
then it is likely that the presumption will only be rebutted if (i) the
promises in the agreement are made when the parties have decided
to separate and (ii) the promisee is sufficiently certain in its terms
(Gould v Gould 1970).
Held that there was no intention to be legally bound in Balfour v
Balfour (1919) because husband and wife purely social and
domestic agreement. However, agreement in Merritt v Merritt
(1970): distinguished on the grounds that the parties were
separated. Where spouses have separated it is generally considered
that they do intend to be bound by their agreements.
Presumed no intention with parents and children/relatives Jones v
Padvatton

Duress

Was the promise given freely or was it extorted by illegitimate

pressure or threats from the promisee?
If an alteration promise to pay more was obtained as a result of
duress, then the promise is voidable, and will not be enforceable.
Do the circumstances constitute economic duress?

In Pao On v Lau Yiu Long (1980) it was held that for a contract to be
voidable for
economic duress:
o There must be a threat or pressure which is illegitimate
o That pressure or threat must amount to a coercion or will that
vitiates consent.

In William v Roffey Bros, there was no duress since the initiative

for the promised extra payment came from the main contractor.
There was no evidence of any pressure or threat from the
subcontractor.
Difficult to know what constitutes an illegitimate threat. A distinction
appears to exist between commercial and consumer contracts. In
CTN Cash and Carry v Gallaher (1994) (a commercial contract)
the threat was to withdraw credit facilities unless payment was
made for a consignment of cigarettes under which the supplier
thought had been delivered but had in fact been stolen. The supplier
had a legitimate right to demand payment for goods delivered. CA
rejected an argument to recognise lawful act duress in an arms

length dealing between two trading companies, on the basis that

this would create uncertainty in commercial dealings.
In Progress Bulk Carriers v Tube City (2012) it was held that
illegitimate pressure could be constituted by conduct which was
not in itself unlawful, although it would be an unusual case where
that was so, particularly in the commercial context. On the facts, the
ship-owner had refused to supply an alternative vessel unless the
charterer waived its rights to full compensation for the ship-owners
breach. This amounted to illegitimate pressure.
According to Lord Scarman in The Universe Sentinel (1983) there
will be duress if a lawful threat is being used to achieve a goal which
is unlawful.
A party cannot coerce the other party into paying double the agreed
price, knowing that B has no realistic commercial choice other than
to agree given that alternative supplies are unavailable at short
notice and it will otherwise find itself in breach of contract with a
third party.
B & S Contracts v Victor Green Publications (1984): there was an
agreement to erect exhibition stands for Victor Green. Workers threatened
not to complete unless Victor Green paid 4,500. Victor Green paid, since
although they could have brought a claim for breach, the failure to erect
the stands on time would have exposed them to claims from those to
whom they had let the exhibition stands. Held that the extra payment was
voidable for duress.

Must also be causation In a claim for economic duress it must be

the illegitimate threat or pressure that is the reason why the
promisor agreed to make the promise.

Consideration

In general terms, a promise will be unenforceable unless it is

contained in a deed (indicating that the promise is taken seriously)
or it must be supported by consideration.
Consideration means an act or promise given in exchange for the
promise (i.e. the price for which the others promise was bought).
Consideration need not be adequate, but must be sufficient. In other
words, the courts will not examine whether what has been given in
exchange is of equivalent value, but some acts or promises are not
recognised by the law as being good consideration, e.g. past
consideration, performance of an existing legal duty.

Definitions of consideration

Traditional analysis considered the existence of consideration to be

demonstrated by proof of a benefit and/or a detriment. For example,
in Currie v Misa (1875) Lush J stated that 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 forebearance,

detriment, loss or responsibility, given, suffered or undertaken by

the other.
Dunlop v Selfridge (1915) in this case Sir Frederick Pollocks
definition was adopted, defining consideration as an act of
forebearance of one party, or the promise thereof being the price
for which the promise of the other is bought.

Identifying consideration

Consideration is whatever is asked for and given in exchange for the

promise (Lord Dunedin in Dunlop v Selfridge (1915): the price for
which the other is bought.
In the case of a bilateral contract, each partys promise is the
consideration to support the promise given by each other. Therefore
parties to a bilateral contract are bound on the exchange of
promises although neither has yet undertaken any performance of
those promises.
In the case of a unilateral contract, consideration is the performance
of the act which was requested in order to earn the reward of the
promise. The promise is not capable of being enforced until the act
is completed.

Consideration need not be adequate

It need not match the value of the promise sought to be enforced.

Chappell v Nestle (1960) trivial acts (three chocolate wrappers) as
part payment for the supply of a record were regarded as part of the
consideration because they had been requested. The fact that the
wrappers were of no economic value and were thrown away was
irrelevant as consideration need not be adequate.

Consideration must be sufficient

The consideration merely needs to be requested by the other party

and be something which the law will recognise as consideration.

The following will not be sufficient (good) consideration:

Sentimental motives (Thomas v Thomas (1842): testators desire

could not act as consideration).
Anything that is not capable of expression in economic terms e.g.
promising to refrain from doing something that you have no right to
do anyway (White v Bluett (1853).
Past consideration
Performance of a duty imposed by law
Performance of an existing contractual duty owed to the other party

If there is already an existing contractual duty owed by the promisor to

the promisee, any further promise will involve an alteration of an existing
contract.
Past consideration is not a good consideration
Any act carried out before a promise is given is not given in exchange for
the promise and therefore cannot be consideration to support the
promise: Re McArdle (1951): improvements carried out before the
promise to pay for them.

There is a rule that allows the past-consideration rule to be sidestepped and the key question is whether it applies to the facts in
any case.

The previous request device

In Pao on v Lau Yiu (1980) Lord Scarman set out criteria for past
consideration to be valid:
-

If the act is done at the promisors request

The parties understood act was to be remunerated further
Payment must be legally enforceable if had been promised in
advance.

An example of this:
1. Jess requests that Rhys performs a particular act such as finding
customers for a product.
2. This request carries with it an implied promise to pay for these
services.
3. Jess finds the customers (performs the requested act)
4. There is a later promise which fixes the amount of her reward.
There is now a promise that predates the performance of the act and in
exchange for which the promise is performed. The later express promise
merely fixed the amount of payment already impliedly promised by Rhys.
The crucial question therefore is whether this is an appropriate context for
the request to give rise to the implied promise to pay for services e.g. this
would be unlikely if I am drowning in a lake and ask you to rescue me
(domestic or social context) and quite likely in the context of professional
services (commercial context).
Performance of a duty implied by law is not good consideration

A party cannot promise to do something that he is already legally

bound to do: Collins v Godefroy (1831).
However, going beyond that duty imposed by law will be
consideration. For example in Glasbrook v Glamorgan CC (1925):
police services that went over and above services required by law

could amount to consideration to support a promise of specific

payment for those services).
Performance of an existing contractual duty owed to a third party
is good consideration

A party can use the promise or performance owed to a third party as

consideration to support a new promise: The Eurymedon (1975).

Alteration promises

Promises to pay or do more, or promises to accept less.

Alteration promises must still be supported by consideration and
performance of an existing duty owed to the promisor is not good
consideration because no additional legal benefit has been supplied
and the promisee has incurred no additional detriment. Therefore,
the promisee will have done no more than already legally bound to
do.
However, in late 1980s, the CA in William v Roffey Bros made it
much easier to establish the consideration necessary to support
certain alteration promises.

Promises to pay more than the promisor is contractually obliged

Two possible arguments that a promise to pay more is supported by

consideration.
1. Going beyond the scope of the contract terms if the promisee
can demonstrate additional performance beyond the scope of the
terms of the contractual duty this will constitute fresh consideration
to support the promise to pay more.
Stilk v Myrick (1809) Stilk was a seaman on voage 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
remaining crew members that if they worked the ship undermanned,
he would pay them extra. Captain never gave extra payment. Held,
that the claimant was already under an existing duty to work the
ship back to London. Therefore, no fresh consideration for the
promise for extra money. Consequently, he was entitled to nothing.
Hartley v Ponsonby (1857): half of a ships crew deserted on a
voyage. Captain promised the remaining crew members extra
money if they worked the ship and completed voyage. Captain
refused to pay. Held that the crew were entitled to extra payment on
the grounds that 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 new
contract.

2. There is consideration to pay more in the form of a factual

benefit (or practical benefit) arising to the other party from
making the promise to pay more: Williams v Roffey Bros
Williams v Roffey Bros (1991): a promise was given by the main
contractor to pay more money to the subcontractor in order to get
the subcontract work completed in the original deadline in the
contract, with the building owner and thereby avoid payment of a
penalty. The promise was enforceable as supported by consideration
since there were factual benefits to the promisor in making such a
promise.
The decision is based on the argument that since the doctrine of
duress exists to prevent the enforcement of alteration promises
extracted under threats, there is no longer a need for such a strict
approach to consideration in the alteration contract as was
evidenced in Stilk v Myrick (although that decision was not
overruled in Roffey).
What constitutes a factual benefit?
In Williams v Roffey Bros the factual benefit was identified as:

The fact that the promisor intended to avoid having to make

payment for late performance under a penalty clause in its contract
with the building owner.
The fact that the promisor was seeking to avoid the hassle of finding
another subcontractor to complete the work.

If, as seems to be the case, factual benefits are judged subjectively by the
promisor, any promise to pay more will be supported by consideration as
the promisor would not agree to pay more unless he subjectively
considered this to be of benefit to him. It is only if factual benefit is to
viewed objectively that any difficulty is likely to arise in establishing the
existence of a binding promise to pay more. It follows that consideration
means something more than the price for which the promise of the other
was bought in this context of alteration promises to pay more.
Alteration Promises to accept less than the promisee is legally
bound to pay (or perform) under an existing contract
As is the case with all promises not in deeds, any promise to alter the
terms of that debt contract must be supported by consideration if it is to
be enforceable. Since promising to perform an existing duty is not a good
consideration because there is no additional benefit or detriment,
promising to perform only part of that duty cannot be consideration:
Pinnels case (1602) and Foakes v Beer (1884).

Pinnels Case (1602): the claimant was owed 8, 10 shillings. The

defendant paid 5 2 shillings. The claimant sued for the amount
outstanding. 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 promisors request part
payment is made either: before the due date, with a chattel, or to a
different destination.
Foakes v Beer (1884):
Dr Foakes owed Mrs Beer 2000 after she had obtained judgement
against him in an earlier case. Dr Foakes offered to pay 500 immediately
and the rest by instalments and Mrs Beer agreed to this and agreed that
she would not seek enforcement of the payment provided he kept up with
the instalments. No mention was made in this agreement of interest
although judgement debts generally incurred interest. Dr Foakes paid all
the instalments as agreed and Mrs Beer then brought an action for the
interest. Dr Foakes was liable to pay the interest. The agreement reached
amounted to part payment of a debt and under the rule in Pinnels case
this was not good consideration for a promise not to enforce the full
amount due.

William v Roffey Bros does not apply to alteration promises to

accept less (only to alteration promises to pay more) according to
obiter in Re Selectmove (1995).

Estoppel

Towards the end of the nineteenth century, the courts developed a

doctrine of equitable estoppel intended to prevent injustice arising
out of the kind of situation in which one party agrees to forgo his
strict legal rights under the contract and this induces the other party
on this position, but the first party then goes back on the
arrangement and seeks to enforce his strict rights.
Promissory estoppel is a doctrine designed to prevent the promisor
going back on their promise where this would be inequitable (unfair)
because the promisee has relied on it.
Promissory estoppel can make a promise binding, even without
consideration. It was developed from Lord Dennings obiter
statement in Central London Property Trust v High Trees
[1947].
Where the parties have an existing legal relationship, and party A
promises party B that a right which party A has under the contract
will not be fully enforced, intending party B to rely upon that
promise and party B does rely on the promise, the promisor (Party
A) cannot go back on that promise where it would be inequitable to
do so.

To this extent promissory estoppel gives limited enforceability to

(alteration) promises.

Estoppel by Representation

Traditional doctrine of estoppel

Estoppel by representation only applies to statements of fact, not
promises or statements of opinion.
Where A has by his words or conduct justified B in believing that a
certain state of facts exists, and B has acted upon such belief to his
prejudice, A is not permitted to affirm against B that a different state
of facts existed at the same time MacLaine v Gatty.
A classic example of estoppel is if one party represents to another
that A has authority to contract on his behalf, when in fact he has
not so authorised A. If, in reliance on this representation, the other
party enters a contract with A as agent, the first party (the principal)
is estopped from denying that A had authority to act as his agent,
and the contract made through A will be binding on him.
Arises when B acts on the fact he has assumed to be true to his
prejudice or detriment.
Jordan v Money J promised M that she would not claim for the money
that was owed to her on a bond. Later tried to claim money. Could
not rely on the estoppel to enforce the promise because cant
enforce a promise using estoppel. It was not a fact that shed given
up her right, but a promise.

Promissory Estoppel

The equitable doctrine of promissory estoppel can make promise

binding without consideration.
Denning held promissory estoppel to mean:
(By words or conduct) unambiguous representation about future
conduct
Intending for representation to be relied on and to affect legal
relations
Central London Property Trust v High Trees (1947): The
landlords of a block of flats promised to reduce the rent charged to
tenants during the bombing in the Second World War when the
tenants were unable to sublet. The reduced rent was paid until
September 1945 when the landlords claimed to receive the full rent.
Despite the fact that the tenants had provided no consideration to
support the promise to accept less rent, the landlord could not go
back on that promise, because of the tenants reliance on it, until it
was no longer inequitable to do so.
Central London would be estopped (prevented) from reneging on the
promise upon which the defendants had relied as long as the
circumstances that led to the promise continued.

Defence Only In English law promissory estoppel operates purely

as a defence by the promisee to an action by the promisor where
the promisor seeks to go back on this promise. As it currently
stands, promissory estoppel cannot be used as a cause of action in
itself Combe v Combe. This also explain why there was no
promissory estoppel argument in Williams v Roffey since the
subcontractor needed to sue on the promise to pay more money.
Combe v Combe (1951) Husbands promise to pay ex-wife was not
supported by consideration and promissory estoppel could not apply
on the facts because (i) this was a formation issue rather than an
alteration to an existing contract and (ii) in any event, promissory
estoppel operates as a defence where a promisor goes back on a
promise not to sue, it could not be used as a cause of action (shield
not a sword Lord Denning in C v C).

When will the promissory estoppel doctrine operate?

This depends on identifying the conditions for its operation.
1. There must be a clear or unequivocal promise or
representation: Colin v Duke of Westminster [1985] the
context is alteration promises since the doctrine applies to promises
which forgo or amend existing legal rights.
2. The promise must be intended to be binding and to be acted
upon and it must in fact be acted upon: Spence v Shell
(1980).The essential element is reliance but it need not be
detrimental reliance. W. J. Alan v El Nasr Export (1972) need to
have been led to act differently.
3. It must be inequitable (unfair) to allow the promisor to go
back on his promise. This is easier to establish where there has
been detrimental reliance: The Post Chaser (1982).
The promise must have influenced the conduct of the promisee in
some way (the promisee must have acted in reliance upon that
promise).
D & C Builders v Rees (1966): it will not be inequitable (it would be
fair) to go back on a promise where that promise was not freely given (i.e.
if it was extracting by duress).
D & C Builders v Rees: The defendant owed plaintiff builders 482. The
defendant was taken to know that the plaintiff was in financial difficulties
when the defendant offered 300 in full settlement. The plaintiff accepted
the smaller sum and then sought to recover the balance. There was no
consideration to support the plaintiffs promise to accept the smaller sum.
Lord Denning considered that promissory estoppel could not operate on
these facts since it was not inequitable (unfair) for the plaintiff to go back
on a promise that was not freely given. Cannot go back on a promise,

where the other party has relied on it, where the promise was not freely
given (i.e. extracted by duress).
What is the effect of promissory estoppel? Does it have the same
effect as the presence of consideration?
Promissory estoppel suspends legal rights and, unlike consideration, it
does not generally extinguish them. This means that where a promise to
accept less is supported by consideration, the entire debt will be
discharged. However, promissory estoppel merely suspends the legal right
to full payment while estoppel conditions operate (or until the estoppel
comes to an end) i.e. when it is no longer inequitable (unfair) to go back
on the promise.
However, the result of obiter comments in High Trees is that periodic
payments (as part of a continuing obligation to pay e.g. rental) which were
made while an estoppel operated, will be extinguished so that it is not
possible to sue for the balance on the individual rent payments. However,
once the promissory estoppel ends the general right to full payment will
revive, i.e. for the future the full rent will be payable each month or
quarter.
How is the promissory estoppel brought to an end? Reasonable
notice given and notice period has expired
This issue is complicated by the facts of High Trees since the estoppel in
that case was considered to turn on the bombing in the Second World War
and so came to end automatically when the conditions under which the
estoppel operated ceased to exist. However, the HL in Tool Metal
Manufacturing v Tungsten Electric (1955) reviewed the strict legal
rights only after the promisor had given reasonable notice of an intention
to do so and so that notice had elapsed.
It seems safest to demonstrate the giving of reasonable notice as a means
of showing fairness and that it is no longer equitable to go back on the
strict contractual rights rather than assuming that the estoppel conditions
have come to an end. In any event, court action would probably be
required to enforce the strict legal position so that it would be necessary
to initiate proceedings. This is exactly what happened in High Trees.
Proprietary Estoppel
o Enforces gratuitous promises in relation to interests being created in
land
o Can be used as a sword where there is reliance
o Dilwyn v LLwellyn father says to son that he is going to give him a
certain piece of land, but title is not actually transferred over. D then
wants to back out of this, but cant, owing to doctrine of proprietary
estoppel.
o Rules set out in Wilmott v Barber:

The claimant:
Made a mistake as to his legal rights
Has acted in reliance
The defendant:
Knows of a legal right which he possesses, which is inconsistent with
the right claimed by the claimant
4. Knows of the claimants mistaken belief
5. Encouraged the claimant to rely on that belief
o
1.
2.
o
3.

Contractual Terms

Pre-contractual statements are of three types:

Puffs
Representations, or
Terms

Puffs

Puffs are statement that give rise to no legal consequences.

The most common type of puff is the advertising gimmick.
They are statements which are not meant to be taken literally and
by which there is no intention to be legally bound.
Carlill v Carbolic Smoke Ball [1893] is an example of an
advertising gimmick in which the statement was more than a puff,
because there was evidence of an intention to be bound in the
statement in that the company had deposited 1,000 with its bank.

Representations and Terms

The basic distinction between a representation and a term is that a

term involves a promise as to the truth of the statement, whereas a
representation involves no such promise as to the truth, although
the statement does induce the making of the contract.
Both representations and terms give rise to legal consequences if
the representation is false (misrepresentation) or if the term is
broken (breach of contract). It is significant, however, that the legal
consequences for misrepresentation and breach of contract are not
the same.
There is an automatic right to claim damages on proof of a breach of
a term of the contract, whereas damages for misrepresentation may
be claimed only on proof of fault (i.e. where the statement maker
was fraudulent or negligent in making the statement). Damages
cannot be claimed for innocent misrepresentation, although they
may be awarded at the discretion of the court under s.2(2) of the
Misrepresentation Act 1967.
Different measure of damages. In the event of a breach of contract,
the normal measure of damages will be the expected measure i.e.
the claimant is put into the position in which the claimant would

have been had the contract been properly performed i.e. had the
breach not occurred.
On the other hand, the measure of damages for misrepresentation is
tortious i.e. it aims to put the claimant into the position in which the
claimant would have been had the contract not been made.

Distinguishing between representations and terms

If the statement maker intended to make a binding promise as to

the truth of his statement then his statement is a term: Schawel v
Reade. If not, it is a representation inducing the contact rather than
a binding promise that it is true.

Guiding Principles to assist in determining intention

Although the existence of the intention necessary for a statement to

be incorporated into the contract as a term is regarded as a
question of fact, some guiding principles emerge from examination
of the cases.
Prima facie assumption that the written contract includes all terms
the parties wanted to be binding between them Lightman J
Inntrepreuneur Pub v East Crown [2000].

A statement will be a term if:

If the statement maker accepts responsibility for the truth of a

statement, the statement is likely to be regarded as a term, because
in accepting responsibility the statement maker is guaranteeing its
truth: Schawel v Reade [1913].

OR, it passes the importance attached test,

The importance attached test
If it is made clear that the statement was so important to the
recipient that the recipient would not have contracted had the
statement not been made, that statement is likely to be interpreted
as a term (or binding promise that the statement is true).
To pass the importance attached test, the person to whom the
statement was made:
Must have considered the statement to be so important that he
would not otherwise have contracted AND
He made clear that importance clear to the statement maker prior
to that statement being made.
Bannerman v White (1861): defendant was the purchaser of hops.
Before contract was formed the purchaser stated that if they had
been treated with sulphur, he was not interested in even knowing
the price of them. The seller stated, wrongly, that they had not
been so treated. When the purchaser discovered this, he repudiated

the contract. The seller sued on the basis that the discussions were
preliminary to the contract and not a part of it. Seller failed. The
court held that the statement was so important to the purchaser
that it became a term of the contract that had been breached.
OR
o Where the party relies on a statement made with the specialist
knowledge or skill of the other party in deciding whether or not to
enter into a contract: Dick Bentley v Harold Smith
Representation
o A statement will be a representation where:
o The written contract makes no mention of earlier oral statements,
and the assumption is that it was not intended to be included as a
term of the contract.
o If the party asked the other party to check the reliability of the
statement to verify it: Ecay v Godfrey (1947).
o Statement-maker has no special knowledge of the subject matter
but relies on (incorrect) official document: Oscar Chess v Williams
(1957).
Classification of Terms
Terms which are incorporated into a contract fall into three categories:
o Conditions
o Warranties
o Innominate terms
The distinction between these three types relate to their relative
importance and the consequence action that can be taken in the event of
their breach.
Conditions
A condition is said to go to the root of the contract. Therefore, conditions
are the most important terms of the contract. It follow that the breach of a
condition would mean that something essential to the contract has failed
and as such the contract could not feasibly continue: Poussard v Spiers
(1876).
The injured claimant can sue for damages as well as repudiating his own
obligations under the contract. In other words, the claimant can consider
that his contractual obligations have ceased. Once discharged, he is free
from the contract.
Warranties
A warranty is a contractual term of lesser importance than a condition.
Since breach of a warranty is less significant than beach of a condition the

contract might be able to continue after such a breach: Bettini v Gye

(1876). Since a warranty does not go to the root of the contract, its breach
is less likely to be fatal to the contract as a whole.
Therefore, the remedies available to a claimant who has suffered a breach
of warranty are limited to damages only.
Innominate terms
The classification of contractual terms as conditions or warranties is
based upon a determination of whether the parties to the contract
intended the term in question to be classified as one or the other.
More recently, the courts have developed an approach involving so-called
innominate terms. This is a wait and see approach. In other words, the
courts look at the effects of the breach on the injured party to determine
whether the breach itself was of a condition determined once the effects
of its breach are known. This gives the courts some flexibility in
determining the appropriate remedy (repudiation and/or damages or
damages only) which is fair to both parties: Hong King Fir v Kawasaki
[1962].
Parol Evidence Rule
o The parol evidence rule states that if the contract is written then the
writing will constitute the whole contract and the parties cannot
adduce extrinsic evidence to add to, vary or contradict that writing.
o However, it is relatively straightforward to avoid this rule since it
does not apply to exclude the implication of terms, and in the
absence of an entire agreement clause, it does not apply if oral
terms also exist since the contract is not then a written contract.
o Doesnt apply when:
o The written statement was not intended to be the whole contract: J
Evans v Mezario
o If there is an oral statement, and on the importance attached test, it
is classified as a term, then this term may override inconsistent
terms of the written contract: Couchman v Hill (1947).
Entire Agreement Clauses

In practice, the majority of contracts will contain an entire

agreement clause. This states that all the terms of the parties
agreement are contained in the written document and there are no
other terms. This prevents a party from alleging that there are
separate oral terms or an oral or written collateral contract:
Inntrepreuner v East Crown (2000).

Implied Terms
Terms can be implied by:

o Statute
o Custom or as a result of trade usage/business practice
o The courts either into all contracts of a particular type on the basis
that the term is a necessary incident of that type of contract, or into
the particular contract as a matter of construction to give efficacy to
the contract and reflect the parties assumed intentions.
Statutory Implied Terms
Certain terms are implied, irrespective of the wishes of the parties into
contracts of specific types in order to provide protection which the law
considers necessary.
Types of sale and supply contract:
Type of Contract
Contract for the sale of
Goods

Sales Contract

Contract for supply of

services in B2B

Contract to supply a
service in B2C

Mixed contracts:
services and goods
(work and materials)

Description
S. 2(1) Sale of Goods Act
1979: a contract of sale
of goods is a contract by
which the seller
transfers or agrees to
transfer the property in
goods to the buyer for a
money consideration,
called the price.
S. 5 Consumer Rights
Act 2015: a contract
whereby the trader
transfers or agrees to
transfer ownership of
goods to the consumer
and the consumer pays
or agrees to pay the
price.
S. 12 Supply of Goods
and Services Act 1982:
this is a commercial
contract under which the
supplier agrees to carry
out a service
s. 48 Consumer Rights
Act 2016: this is a
consumer contract by
which a trader supplies a
service to a consumer
There are two elements
to such a contract. The
services or work element
and the transfer of
goods (materials) that is
incidental to carrying out

Example
Purchase stationery for a
business (B2B)

Purchase of milk, a
newspaper, a new sofa
(B2C).

Provide legal services,

accounting services.

Providing window
cleaning or gardening
service

Installing central heating

so that the property in
the valves and radiators
needs to be transferred;
servicing a car involving
the labour of the

that service

Contract for hire of

goods

B2B s. 6 SGSA a
contract by which one
person bails (hires) or
agrees to bail goods to
another. Under such a
contract, one party
acquires possession of
the other partys goods.

mechanic and the new

parts (goods) which are
transferred in the
process.
Hiring equipment such
as a carpet cleaner or a
specialist drill.

Where it applies, the CRA 2015 refers to all consumer contracts involving sales,
hires and transfer of goods as contracts to supply goods S. 3(4) CRA 2015.

Implied terms in Sale of Goods Act (1979): B2B Sale of Goods

Contract
S. 12: Implied term that the seller has a right to sell the goods or will
have such a right (in the case of an agreement to sell) when the property
is to pass.
S. 13 Sale by Description: Contract for sale by description there is
an implied term that the goods will correspond with the description.
S. 14(3) fitness for particular purpose: Where the seller sells goods
in the course of a business and the buyer expressly or by implication
makes known to seller any particular purpose for which the goods are
required, there is an implied term that the goods are reasonably fit for
that purpose, whether or not that is a purpose for which such goods are
commonly supplied, except where the circumstances show that the buyer
does not rely, or that it is unreasonable for him to rely, on the skill or
judgement of the seller.
S. 15 Sale by sample: Where there is a sale by sample, there is an
implied term that the bulk will correspond with the sample in quality and
if the sale is by sample and description (s. 13(2) the bulk must correspond
with both the sample and description.
There are similar obligations relating to the goods or materials for B2B
contracts in both (i) mixed contracts for work and materials and (ii) hire.
Implied terms in Supply of Goods and Services Act 1982: B2B
Contract for supply of a service
S. 13 Standard of Service: Where the supplier is acting in the course
of a business, there is an implied term that the supplier will carry out the
service with reasonable care and skill.
Implied terms in Consumer Rights Act 2015 B2C Contracts

Contracts to supply goods statutory rights

S. 9 Satisfactory Quality: Every contract to supply goods is treated as
including a term that the quality of the goods is satisfactory.
Section 9(2) Goods should meet the standard that a reasonable person
would regard as satisfactory taking account of any description, the price
and all other relevant circumstances (including any public statement by
the trader or producer). Section 9(3): Quality inclides state and condition
of the goods, plus fitness for all usual purposes, appearance and finish,
freedom from minor defects, safety and durability are all aspects of
quality. Section 9(4): it does not cover anything making the goods
unsatisfactory (i) which were specifically drawn to consumers attention
pre-contract or (ii) where the consumer examined the goods pre-contract,
which the examination ought to have revealed.
S. 10 Fitness for Particular Purpose: Where consumer makes known to
the trader (expressly or by implication) any particular purpose for which
the consumer is contracting for the goods, the contract is to be treated as
including a term that the goods are reasonably fit for that purpose
whether or not that is a purpose for which such goods are usually
supplied, except where the circumstances show that the consumer does
not rely, or that it is unreasonable for the consumer to rely, on the skill or
judgement of the trader.
S. 11 Goods to be as described: Every contract to supply goods will
match the description.
S. 13 Goods to match a sample: Where the contract is to supply goods
by reference to a sample that is seen or examined by the consumer before
the contract is made, that contract includes a term that the goods will
match the sample except to the extent of any differences brought to the
consumers attention pre-contract, and that the goods will be free from
any defect making their quality unsatisfactory and that would not be
apparent on a reasonable examination of the sample.
S. 17 Traders responsibility to supply the goods: Every contract to
supply goods is to be treated as including a term that the trader has the
right to sell or transfer the goods at the time when ownership is to be
transferred, or in the case of hire of goods, the trader must have the right
to transfer possession. If the goods by way of hire at the beginning of the
period of the hire.
Contracts to supply a service to a consumer
S. 49 Standard of Service: Every contract to supply a service is to be
treated as including a term that the trader must perform the service with
reasonable care and skill.

S. 50 Information about trader or service: every contract to supply a

service is to be treated as including as a term anything that is said or
written to the consumer by or on behalf of the trader about the trader or
the service, if it is taken into account by the consumer when deciding
whether to enter into the contract or if it is taken into account by the
consumer when making any decision after entering into the contract.
Customary Implied Terms
Terms may be implied on the basis of an established custom or usage of
the relevant trade: Hutton v Warren (1836), unless such a term would
be inconsistent with an express term of the contract.
o Example of implication based on business practice: British Crane
Hire v Ipswich Plant Hire (1975).
Terms Implied by the Courts
Courts can imply terms in law or in fact.
Terms implied in law
Terms are implied in law as a matter of policy into all contracts of a
particular type, e.g. employment contracts, as a necessary incident of
the type of contract.
Liverpool City Council v Irwin (1977): Tenants of a council tower block
claimed that the council landlord was in breach of an implied obligation to
repair and maintain the common parts of the building i.e. to ensure the
lifts and lighting worked and that the rubbish chutes were not blocked.
There was nothing stated expressly on this matter in the lease. The nature
of the contract required an implied term, but it was not a guarantee
obligation only an obligation to use reasonable care to keep the common
parts in reasonable repair and use. The council was not in breach of this
(qualified) implied contractual obligation.
Terms implied in fact
Terms are implied in fact into the particular contract as a one-off, in order
to give effect to the meaning the parties would reasonably understand the
contract to have (construction) and as a matter of necessity to make it
workable.
In Attorney General of Belize v Belize Telecom (2009) Lord Hoffman
stated that sometimes a process of construction would reveal that the
omission of an express term was deliberate, and the court should accept
that conclusion and let the loss lie where it falls.
Implication of terms in fact recognises terms which are necessary and
therefore must already exist in order to render the contract effective and
workable as the parties must have intended in accordance with the rest of

its terms: The Reborn (2009). If the instrument is a commercial

contract, the process of construction would involve considering whether
any other meaning would fail to give effect to the parties business
purposes and render the contract workable.
The Moorcock (1889): The Ds had contracted to allow the Ps to load
and unload at Ds wharf on the River Thames. It was known to both parties
that at low tide any vessel at the wharf would be grounded, but there was
no express provision governing this in the contract. The Ps ship moored at
the wharf and was damaged because of the condition of the river bed.
Held that a term had to be implied whereby the Ds warranted that they
had taken reasonable care to see that the berth was safe. The Ds were in
breach of this term.

Exemption Clauses and Unfair Contract Terms

An exemption clause is a clause that seeks either to exclude a
partys liability for breach or to limit that liability to a specified
amount.
o There is evidence of a greater willingness to interfere with the use of
such clauses in consumer, rather than commercial contracts. The
Consumer Rights Act 2015 extends intervention beyond exemption
clauses to a larger category of unfair terms in the context of
consumer contracts.
o

Can the exemption clause operate as a defence to this liability?

The clause must:
o Be incorporated as a term
o Cover what has happened
o Not be rendered ineffective by the operation of legislation
Is the clause incorporated as a term?
1. Is it contained in a signed contractual document?
The document that is signed must be of a type that would normally
be expected to contain contractual conditions. Signing a time sheet
was not sufficient as it merely evidenced performance under an
existing contract: Grogan v Robin Plant Hire (1996).
If yes the clause is incorporated as a term, even if they have not
read them: LEstrange v Graucob (1934). The only exception
occurs when the signature was obtained as a result of fraud or
misrepresentation: Curtis v Chemical Cleaning (1951).
If no go to the next question.
2. Has reasonable notice of the existence of the clause been
given in a contractual document and in time?

Where the exemption clause is contained in an unsigned document

(e.g. a ticket) or notice or is referred to in such a document,
incorporation can be achieved by reasonable notice.
Chapleton v Barry (1940): Deckchairs were displayed in a pile as
available for hire. The tickets, which might have been obtained later
form the deckchair attendant, purported to exclude liability. It was
held that the ticket was not a contractual document, but only a
voucher or receipt for money paid therefore the council could not
rely on the exemption contained in the ticket.
Does the document contain writing so that people in general
(Thompson v London Midland & Scottish Railway) would
reasonably assume that writing to include terms and conditions?
An indication of where conditions can be found in another document
is sufficient notice e.g. subject to conditions on timetables: Thomas
v London Midland. The particular clauses do not need to have been
read by the other party. However, the writing must be supplied or
reference must be made to a place where it can be obtained:
Sterling Hydraulics & Dichtomatik (2006).
Has notice of the existence of the clause been given before or at the
time of contracting? Olley v Marlborough Court (1949).
If a contract is made orally and is followed later by a written
document, notice on this occasion will be too late: Grogan v Robin
Meredith Plant Hire.
If yes go to question (3), if no go to question (4).
3. A higher standard of incorporation will apply if the particular
clause is considered to be onerous or unusual
Interfoto v Stilleto Visual Programmes (1988): A clause imposed a
fee of 5 per day for the late return of photographic transparencies.
There were 47 of these transparencies and they had been kept
inadvertently for an additional two weeks and a charge of 3,783.50
had been imposed. Held that since the clause was particularly
onerous and unusual, it had to be fairly and reasonably brought to
the others attention in order to be incorporated. This had not been
achieved and incorporation had not occurred.
OBrien v MGN (2001) the clause in a document relating to a scratch
card competition stated that if there was more than one winner lots
would be drawn to determine the prize winner. It was neither
onerous nor unusual.
If the clause is onerous or usual it must be asked whether the
onerous or unusual clause was fairly brought to the attention of the

other party: J. Spurling v Bradshaw (1956). If no, the clause will

not be incorporated and cannot be relied upon as a defence to
liability in q.2.
4. Has the clause been incorporated as a result of a consistent
course of dealing including the clause between these
parties?
It is easier to find the consistency in dealings between commercial
parties. If yes, the clause is incorporated. If no, the clause will not be
incorporated and cannot be relied upon as a defence to the liability
identified in step 2.
Construction: Does the clause on its natural and ordinary
meaning cover the liability in question in the circumstances in
which it occurred?
1. Is the clause ambiguous? If so the ambiguity will be
construed against the party relying on the clause.
Houghton v Trafalgar Insurance (1954): car insurance policy
reference to excess load was ambiguous and therefore construed
against the insurers to mean excess weight rather than too many
passengers. It followed that the insurance policy remained
enforceable.
2. Is there any inconsistent undertaking which may prevent
reliance on the clause?
If an exemption clause is inconsistent with another term of the
contract or with an oral undertaking given before or at the time of
contracting, the exemption clause will be overridden (Mendelssohn
v Normand).
3. Limitation clauses (clauses limiting liability to a fixed figure
as opposed to denying any liability) are construed more
favourably than total exclusion clauses that deny all liability
For example, a limitation clause will cover negligence liability if the
clause is clear and unambiguous: Alisa Craig Fishing v Malvern
Fishing (1983).
4. Is the wording of the clause wide enough to cover a
fundamental or serious breach of contract?
If the breach is fundamental i.e. affecting the very purpose and
substance of the contract, then very clear words will be required for
the clause to cover it. However, it is common for exemption clauses
to be drafted generously (leaving it for the legislation to control the
ability to rely on the clause.
Photo Production v Securicor Transport (1980): a contract involving
the provision of security services for a factory contained a wide
exemption clause exempting the security provider from loss. The
security firms employee started a fire on the premises and the
factory owner suffered significant loss.

Held that where the parties are negotiating at arms length, and
have set out who should bear the risks, the courts should be
unwilling to interfere.
5. Where there is negligence liability on the facts, it is
necessary to determine whether the clause covers this
negligence liability or whether the clause is llimited to
providing a defence to the strict contractual liability only.
o If there is only negligence liability on the facts then the clause must
be construed as covering that negligence liability: Alderslade v
Hendon Laundry (1945).
o If there is both negligence and strict contractual liability, then a
clause will cover both negligence and strict contractual liability only
if the clause expressly purports to cover the negligence Monarch
Airlines v London Luton Airport.
o If such express language of negligence is not used then the clause
will be construed so that it covers only the strict contractual liability
and it cannot operate as a defence to liability in negligence: White
v John Warwick.
Does legislation prevent the use of the exemption clause as a
defence to this liability on the facts?
The applicable pieces of legislation are:
o The Unfair Contract Terms Act 1977
o The Consumer Rights Act 2015
Summary of scope and effect of the legislation
UCTA: Since the CRA 2015, UCTA applies only to B2B contracts, i.e. where
one business is using an exemption clause against another business
(irrespective of the respective sizes of those businesses). Depending on
the liability which the clause seeks to exclude or limit, UCTA renders the
clause in question either totally unenforceable or only enforceable if it can
be shown to be reasonable (s. 11 reasonableness requirement).
CRA: The CRA applies to B2C contracts only contracts between a trader
and a consumer. The act defines trader and consumer as:
Trader is a person acting for the purposes relating to that persons trade,
business, craft or profession.
Consumer means an individual acting for purposes that are wholly or
mainly outside that individuals trade, business, craft or profession. The
CRA has potentially wide application since it regulates unfair terms in
general. Such unfair terms are not binding on the consumer i.e. the
consumer can avoid the application of an unfair exemption clause.
The Unfair Contract Terms Act 1977

Does the Act apply?

UCTA applies to exemption clauses covering business liability (and since
the CRA 2015 it does not cover any exemption clauses that would be
covered by that Act i.e. in contracts between a trader and consumer).
Exemption clause has an extended definition within s. 13(1). You may
therefore need to consider the following where it is not clear that the
clause is excluding or limiting liability:
o Does the clause state that there is to be no liability unless some
condition is complied with such as identifying and reporting a defect
within seven days? If yes, it is covered by UCTA. Or
o Does the clause exclude or limit any right or remedy that would
otherwise be available such as the right to claim damages? If yes, it
is covered by UCTA. OR
o Does the clause exclude or restrict rules of evidence of procedure? If
yes, it is covered by UCTA. OR
o Does the clause exclude or limit the obligation or duty? In other
words, the clause deny that there is any contractual promise or
responsibility e.g. a general disclaimer. If yes, it is covered by UCTA
(Smith v Eric Bush).
To determine how the Act applies in an individual case we need to
identify which section of the Act applies to the liability sought to
be included.
This involves:
o Looking at what happened and the liability which arose.
o Assessing which of these liabilities is covered by the clause
o Applying the relevance section of UCTA
Negligence Liability
Section 1 UCTA states that negligence includes:
(1)Breaches of contractual obligations which impose a duty to exercise
reasonable care and skill (qualified contractual liability)
(2)Breach of a duty of care in tort
There will therefore be liability in negligence where a valuer fails to take
care when carrying out a valuation of a property: Smith v Eric Bush.
UCTA covers negligence, in cases of:
Section 2 UCTA (negligence) must be applied where negligence is a
liability on the facts and the clause has been construed to cover that
negligence.
Section 2(1): death or personal injury resulting from negligence. This
liability cannot be excluded or limited.

Section 2(2): other loss or damage (property damage or economic loss).

This liability can only be excluded or limited if the party seeking to rely on
the clause establishes that the clause is reasonable (s.11).
Section 4(1) consumer annot be made to indemnify a loss arising through
negligence of breach of contract unless this would be reasonable.
Case example of S. 2(2) is Smith v Eric Bush: financial loss resulting
from negligent valuation. It followed that the valuer could rely on the
disclaimer only if it could establish that the clause was reasonable.
UCTA covers liability for breach of contract (i.e. strict contractual
obligations) in these circumstances:
S. 3(1) Where one party deals as consumer or deals on the others
written standard terms
S. 3(1) then the other party cannot exclude or restrict liability for a
breach of contract, unless the clause is shown to be reasonable (s. 11).
Dealing as consumer
o For the purposes of UCTA, dealing as consumer is defined in
section 12(1), as:
o Where one party must not make the contract in the course of
business nor hold himself out as doing so.
o The other party must make the contract in the course of business.
o In the case of contracts governed by the law of sales of goods or
hire-purchase, the goods to which the contract related must be of a
type ordinarily supplied for private use or consumption.
o Section 12(2) UCTA: instances where a party does NOT deal as a
consumer:
o Where the party is an individual and the goods are second hand and
sold at a private auction which has the opportunity for buyers to
attend the sale in person
o Where the party is not an individual and the goods are sold by
auction or competitive tender.
o Section 12(3) burden falls on the party seeking to rely on the
exclusion clause to disprove that the contract is a consumer
contract.
Sale of Goods
o Where the contract is for sale of goods, there are a number of terms
which are implied into the contract SGA 1979 ss 13-15.
o S. 6(1) UCTA provides that liability for s. 12 SGA (title) cannot be
excluded.
o S 6(2) UCTA states that if claimant is dealing as consumer, liability
for s. 13-15 cannot be excluded UNLESS

o S. 6(3) not a consumer. Then can be excluded providing the clause

satisfies the reasonableness test s. 11.
Reasonableness
o The test for reasonableness is found in UCTA s. 11
o The test is whether the clause is fair and reasonableness when
judged at the time the contract is made (as opposed to in light of
the breach) and on the basis of the circumstances which were, or
ought reasonably to have been, known, or in the contemplation of
the parties (s. 11(1)).
o Burden of proof is on the defendant
o The courts have favoured a finding of reasonableness of a clause
where:
o The clause is contained in a commercial contract between
commercial parties of equal bargaining power. The courts adopt a
policy of non-intervention with the parties agreement Photo
Production v Securicor Transport (2001).
o The clause is a standard operating clause in the particular industry
and has been negotiated by the relevant trade bodies
o Where it is possible to cover the risk excluded by the exemption
clause with insurance which could more economically and should
reasonably be taken out by the non breaching party e.g. Photo
Production v Securicor Transport (2001).
o The fact that a breaching partys resources are limited may favour
the reasonableness of a limitation clause (s. 11(4)).
o Where there was an inducement to agree to accept the exemption
clause, such as a lower price (Sched 2(b)).
Traditionally the courts have favoured a finding of unreasonableness
where:
-

There has been an imbalance of the parties bargaining positions in

favour of the party seeking to rely on the clause (Sched 2(a)).
A partys negligence may weigh in the balance against the
reasonableness of a clause designed to protect that party e.g.
suppliers in George Mitchell v Finney Lock Seeds had been
negligent in supplying incorrect seed.
If the clause is ignored in practice that may be evidence that it is
regarded as unreasonable e.g. George Mitchell
George Mitchell v Finney Lock Seeds (1983): in a contact for the
supply of a specific cabbage seed, the wrong type of seed was
supplied and the crop failed resulting in actual loss of over 60,000.
However, the contract contained a limitation clause limiting the
suppliers liability to the purchase price (roughly 200). Held that
although the breach involved the supply of a different product, the
clause was construed to cover it. The clause was unreasonable in
the circumstances and could not be relied on the by supplier.

Summary
SOURCE OF
LIABILITY
NEGLIGENCE
LEADING TO DEATH
OR INJURY
NEGLIGENCE
LEADING TO OTHER
LOSS OR DAMAGE
BREACH OF
STANDARD-FORM
CONTRACT
SGA DEFECTIVE
TITLE
SGA NOT MATCHING
DESCRIPTION
SGA
UNSATISFACTORY
QUALITY
SGA NOT MATCHING
SAMPLE
SGSA DEFECTIVE
TITLE
SGSA NOT
MATCHING
DESCRIPTION
SGSA
UNSATISFACTORY
QUALITY
SGSA NOT
MATCHING SAMPLE
MISREPRESENTATIO
N

EFFECT ON
CONSUMER
Void s. 2(1)

EFFECT ON NON
CONSUMER
Void s.2(1)

Acceptance if
reasonable s.2(1)

Acceptable if
reasonable s. 2(1)

Acceptable if
reasonable s. 3(2)

Acceptable if
reasonable s. 3(2)

Void s. 6(1)

Void s. 6(1)

Void s.6(2)

Acceptable
reasonable
Acceptable
reasonable

Void s.6(2)

Void s. 6(2)
Void s.7(3a)

if
s. 6(3)
if
s. 6(3)

Acceptable if
reasonable s. 6(3)
Void s.7(3a)

Void s.7(2)

Acceptable if
reasonable s.7(3)

Void s.7(2)

Acceptable if
reasonable s.7(3)

Void s.7(2)

Acceptable if
reasonable s.7(3)
Acceptable if
reasonable: UCTA
s.8(1)

Acceptable if
reasonable s.8(1)

The Consumer Rights Act 2015, Part 2 (Unfair Terms)

Does the Act apply to the contract?
This new regime regulating unfair terms in consumer contracts applies to
contracts between traders and consumers and replaces the revoked Unfair
Terms in Consumer Contracts Regulations 1999.

Significantly, a consumer must be an individual (and therefore not a

company or other legal entity) and that consumer must be acting for
purposes which are wholly or mainly outside that individuals business or
profession, although the trader has the burden of disproving this position.
How does the Act regulate?
The CRA 2015 requires contract terms and notices in consumer contracts
to be fair (s.62) but not all terms can be assessed for fairness. The
assessment for fairness cannot extend to terms which (i) specify the main
subject matter of the contract or (ii) relate to an assessment of the
appropriateness of the price payable under the contract by comparison
with the goods or services received as long as those terms are transparent
and prominent. Transparency relates to the way in which the term is
expressed (plain and intelligible language and written terms need to be
legible). Prominence relates to the way in which the term is presented.
The term is prominent if it is brought to the attention of the consumer so
that an average consumer would be aware of it. S. 64(5) defines the
average consumer as reasonably well-informed, observant and
circumspect.
With the exception of the need for the excluded terms to be transparent
and prominent, this exclusion from the assessment for fairness existed
under the previous legislation and caused difficulties in distinguishing
between core and ancillary terms. It seems likely that this will continue.
Director General of Fair Trading v First National Bank : A term of a
loan agreement issued by the Bank provided that if the debtor defaulted
on the loan, contractual interest on the outstanding debt remained
payable until the debt was discharged. The debtor was taken to court and
the judgement debt was ordered to be paid by instalments. However, the
judgement debt and instalments did not include the contractual interest
so that having paid the instalments the debtor would find that he still
owed money in respect of the interest. It was argued that the term could
not be challenged as unfair under the previous regulations since the
contractual interest term was a core term relating to the price of the
goods and therefore the regulations did not apply. Held that the interest
term was ancillary and not core. It was not concerned with the price since
it was not concerned with the Banks remuneration for the service
supplied.
However, in Office of Fair Trading v Abbey National (2009), the
Supreme Court held that the regulations could not be applied to bank
charges since these charges were part of the core bargain.
The terms listed in Sched. 2, Part 1 (terms which may be unfair the grey
list) cannot be subject to exclusion from the fairness evaluation.
Is the term in question unfair?

The term or notice is regarded as unfair, if contrary to the requirement of

good faith, it causes a significant imbalance in the parties rights and
obligations under the contract to the detriment of the consumer s.62(4).
This is the same wording as under the previous regulations so that
previous interpreting case law will remain relevant.
What guidance is there on judging whether a term is unfair?
Section 62(5) contains some guidance regarding how the unfairness of a
contractual term shall be assessed. It is necessary to take into account:
-

The nature of the subject matter of the contract, and

All the circumstances existing when the term was agreed, together
with all the other terms of the contract or any other contract on
which it depends.

Part 1 of Sched 2 contains an indicative and non-exhaustive list of terms

which may be regarded as unfair (s. 63(1)). This lists 20 examples, some
of which are:
-

A term which has the object or effect of limiting the traders liability
in the event of death or PI resulting from an act or omission of the
trader.
A term inappropriately excluding or limiting the legal rights of the
consumer in the event of total or partial non-performance, or
inadequate performance.

Section 65 CRA 2015 states that a trader cannot by a term of a consumer

contract or a consumer notice either exclude or restrict liability in
negligence for death or personal injury.
When contrary to the requirement of good faith, does a term
cause a significant imbalance in the parties rights and
obligations to the consumers detriment?
Director General of Fair Trading v First National Bank: The CA had
concluded that the interest term was unfair to the debtor because of the
element of unfair surprise i.e. the judgement debtor would think that the
entire debt had been repaid only to discover that interest was also owed.
On appeal the HL disagreed and held that the term was not unfair as it
stood. The exception is that interest will be payable on money owed and
any unfairness stemmed not from this term but from the fact that the
judgement debt instalments did not incorporate the interest due on top of
the capital sum owed.
The HL dealt separately with significant imbalance and good faith:
-

There would be a significant imbalance if the term was weighed in

its substance (content) so heavily in favour of the trader that the
parties rights and obligations under the contract were tilted

significantly in favour of that trader e.g. a discretion or power

granted to trader or imposition of a disadvantage, risk, or duty on
the consumer. To determine this substantive fairness it is necessary
to assess the particular term in the context of the contract as a
whole e.g. there might be a balancing provision in favour of the
consumer.
Good faith meant fair and open dealing.
Openness is procedural and requires the terms to be clearly and
legibly expressed with no concealed pitfalls or traps. In particular,
prominence needs to be given to terms which might operate to the
disadvantage of the consumer.
Fair dealing refers to the fact that the trader should not seek to take
advantage of the inequality of bargaining position and the
consumers lack of experience or knowledge. It follows that fair
dealing is both procedural and substantive since the substance of a
term is relevant to whether advantage has been taken.

What is the consequence if the term is unfair under the CRA

2015?
If a term is unfair, it is not binding on the consumer (S. 62(1) CRA 2015)
although the contract can continue without that term (if this is possible -)
s. 67.
Duty of court to consider fairness of terms
Where there are proceedings before a court which relate to terms of a
consumer contract and the court considers it has sufficient legal and
factual material to do so, that court must consider whether the term is fair
even if none of the parties has raised this as an issue or indicated that it
intends to do so.

Discharge of a Contract

A contract can be discharged by performance, agreement,

frustration, or breach.

Discharge by Performance

Strictly speaking, a contract is not discharged until all the

obligations arising under it have been performed precisely and
exactly.

The Strict rule

Cutter v Powell: A seaman agreed to serve on a ship. His wages were to
be paid at the end of the voyage. He died mid-voyage. His widow
attempted to claim his wages. Held that his widow was not able to recover
any of his wages because he had not completed performance of his
contractual obligation.

This principle has also led to harshness in contracts for the sale of goods
Re Moore (1921): defendants agreed to buy 3,000 tins of canned fruit from
the claimants, packed in cases of 30 tins. Part of the consignment was in
fact packed in cases of 24 tins. The defendants refused to pay. Court held
that the defendants were entitled to reject the entire consignment as it
was not precisely that which was agreed.
The harshness has now been mitigated by statute, in relation to non-consumer
contracts for the sale of goods, by the following two provisions inserted in the
Sale of Goods Act 1979 by the Sale and Supply of Goods Act 1994.

Sale of Goods Act 1979, Section 15A

Where in the case of a contract of sale
(a) The buyer would have the right to reject goods by reason of a
breach on the part of the seller of a term implied by section 13, 14,
or 15 above, but
(b)The breach is so slight that it would be unreasonable for him to
reject them,
Then, if the buyer does not deal as consumer, the breach is not to be
treated as a breach of condition but may be treated as a warranty.
Sale of Goods Act 1979, Section 30(2A)
A buyer who does not deal as consumer may not
(a) Where the seller delivers a quantity of goods less than he
contracted to sell, reject the goods. Or
(b)Where the seller delivers a quantity of goods larger than he
contracted to sell, reject the whole
If the shortfall, or, as the case may be, excess is so slight that it would
be unreasonable for him to do so.
Exceptions to the strict rule
Exceptions to the strict rule exist in relation to contracts which impose
severable obligations.
A contract imposes severable obligations if payment under it is due from
time to time as performance of a specified part of the contract is
rendered Treitel, The Law of Contract
Whether or not a contract is severable is a question of interpretation for
the court to decide. However, work and materials contract are usually
considered severable.
Partial Performance
If a contract is severable, then, provided that the whole contract is not
breached, payment can be expected for part-performance.

Roberts v Havelock (1832): A shipwright agreed to repair a ship. The

contract did not expressly state when payment was to be made. Before
completing the repairs, he requested payment for the work completed to
date. The defendants refused to pay. Since the contract did not require the
claimant to complete all the work before payment was made, the court
held that the shipwright was not therefore bound to complete the repairs
before claiming some payment.
Where partial performance is accepted (and the defendant has free choice
whether or not to accept partial performance) then payment is
enforceable in respect of the partial performance.
Sumpter v Hedges (1898): Sumpter agreed to build a house and stables
on Hedges land. He completed around two-thirds of the work and then
abandoned the contract. Hedges completed the buildings and refused to
pay Sumpter for the work done. Sumpters claim failed. The claimant
could not recover for the work done since the defendant had no option but
to accept the partially completed building.
Substantial Performance
Where performance is substantial then the contract may be enforced,
although damages may be payable in respect of the incomplete
performance. In other words, the amount payable corresponds to the price
of the contract minus the cost of the incomplete component.
H. Dakin v Lee (1916): the claimants agreed to carry out repairs to the
defendants house. The work was completed but for three minor defects
which could be fixed at a small cost. The defendant refused to pay. The
court upheld the claim since the obligations under the contract had been
substantially completed, subject to a deduction of the cost of fixing the
outstanding defects.
Bolton v Mahadeva [1972]: The claimants contracted to install a hot
water and central heating system in the defendants home for 560. There
were numerous defects: fumes affecting the air in the living room, the
house was on average 10 per cent less warm than it should have been,
and the deficiency in heat varied from room to room. Overall, it would cost
175 to rectify the deficiencies. CA held that there had not been
substantial performance and therefore the claimant was not entitled to
recover anything.
Prevention of performance
Where a party is wrongly prevented from performing its contractual
obligations by the other party then the strict rule does not apply. The
claimant can either claim damages for breach of contract or on a quantum
meruit basis for the work done Planche v Colburn (1831).
Tender of performance

If a party is unable to complete its contractual obligations without the

cooperation of the other party, then it may make a tender of
performance which can be accepted or rejected by the other party. If a
tender of performance is rejected, then the party who has tried to
complete their contractual obligations will be discharged from further
liability.
Time of performance
Where a contract fixes a date for performance, it will still only be possible
for the contract to be repudiated for breach of the time clause where time
is of the essence. This will occur where:
-

The contract expressly provides that time is of the essence.

Time being of the essence can be inferred from the nature of the
subject matter and the circumstances of the contract (e.g. a
contract for the sale of perishable fresh fruit);
Time becomes of the essence: this happens where one party fails to
perform in a timely manner and the injured party gives notice that
performance must take place within a reasonable time.

If time is of the essence, any delay will amount to repudiation: In Union

Eagle v Golden Achievement [1997] the Privy Council considered that
even a 10 minute delay would suffice.

Discharge by Agreement

Just as a contract can be made by agreement, so it may also be

discharged by agreement. However, in general, consideration is required
to enforce the agreement to discharge or vary the contract. In some cases,
certain formalities will also be required.
Where consideration is wholly executory (exchanged promises to perform
some act in the future) then there is no problem. The parties exchanged
promises to release one another from the contract will be good
consideration.

Where consideration is executed (either in part or wholly) then

-

A deed is required to effect a valid release of the other party; or

The other party must provide accord and satisfaction (that is, new
consideration)
Alternatively, one party could give a voluntary waiver to the other not to
insist on the precise performance stipulated in the contract. A waiver can
be given without formality.

Discharge by Breach
A breach of contract is committed when a party without lawful excuse fails or
refuses to perform what is due from them under the contract, or performs
defectively or incapacitates themselves from performing Treitel, The Law of
Contract

Repudiatory Breach

Repudiatory breaches are serious breaches that entitle the innocent party
to consider themselves as being discharged from his obligations under the
contract. This is an addition to the standard remedy of damages. In
respect of repudiatory breach, the innocent party may:
-

Accept the breach as repudiation of the contract, or

Affirm the breach and continue with the contract

If the breach is treated as repudiatory, this must be communicated to the

party in breach of the contract: Vitol SA v Norelf.
Anticipatory Breach
Anticipatory breaches occur before performance is due. In essence, an
anticipatory breach is where one party makes the other aware of their
intention not to perform their contractual obligations. This may be:
-

Explicitly Hochester v De La Tour

Implied by conduct Frost v Knight

The innocent party may either accept the repudiation and sue
immediately, or wait for the contractual date of performance and sue for
breach (if it occurs) in the usual way.

Discharge by Frustration
A contract may be automatically discharged (so that the parties are excused
from further performance of their contractual obligations) if during the currency
of the contract, and without the fault of either party, some event occurs which
renders further performance:
-

Impossible
Illegal
Radically different so that the purpose of both parties is no longer possible
and the contract becomes essentially different

Impossibility
There are a number of events which can lead to a situation in which it is
impossible to perform a contract:

The subject matter of the contract is destroyed Taylor v Caldwell

(1863) music hall where concert was due to take place burned
down
The subject matter of the contract becomes unavailable Jackson v
Union Marine Insurance (1874)
A person required for the performance of the contract becomes
unavailable through illness Robinson v Davidson (1871)
A person required for the performance of the contract becomes
unavailable for other good reason Morgan v Manser [1948]
There is an unavoidable excessive delay Pioneer Shipping v BTP
Tioxide

Illegality
A contract may also become frustrated if there is a change in the law that
makes the contract illegal to perform in the way that was anticipated in
the contract. The courts do not expect parties to be contractually bound to
do something illegal. The main cases here arose in wartime when laws are
subject to change.
Change in circumstances
Krell v Henry [1903]: Henry hired a room from Krell for two days in order
to view the coronation procession of Edward VII, but the contract itself
made no reference to that intended use. The Kings illness caused a
postponement in the procession. The defendant refused to pay for the
room. The court held that the contract was frustrated. Henry was excused
from paying the rent for the room. The holding of the procession on the
dates planned was regarded as the foundation of the contract.
For the contract to be frustrated in this way, all commercial purpose must
have been destroyed. If there is some purpose to be found in the contract
then it will continue. An example of this can be found in another case
which came about from Edward VIIs postponed coronation:
Herne Bay Steamboat v Hutton [1903]: The defendant hired a boat to
sail around the Solent to see the new Kings inspection of the fleet that
was gathered in port and to see the fleet itself, which was seldom
gathered in one place. The inspection was postponed. The court held that
the contract was not frustrated. Although one purpose (seeing the Kings
inspection of the fleet) had been destroyed, the defendant was still able to
use the boat and see the fleet. The court considered that there was still
some commercial value in the contract.
Limitations on the doctrine of frustration
Although the courts developed the doctrine of frustration to mitigate the
harshness from the strict common law position in Paradine v Jane, it might
still lead to unfair results. The courts have therefore identified certain
situations in which the doctrine of frustration does not apply.
When the frustration is self-induced: The Super Servant Two [1990]
When the contract has merely become more difficult to perform
or less beneficial to one of the parties: Davis Contractors v Fareham
[1958].
Where the frustrating event was in the contemplation of the
parties at the time that the contract was formed (or the parties
should have contemplated that it might occur): Walton Harvey v
Walker [1931]

Where there were provisions in the contract for the frustrating

event which covered the extent of the loss or damage caused:
Fibrosa SA v Fairbairn (1943).
Where the contract expressly provides that performance should
occur under any circumstances: Paradine v Jane (1647).
The Effect of Frustration at Common Law
At common law, the contract ends at the actual point at which it is
frustrated that is, from the frustrating evet. Therefore, the parties are
released from any contractual obligations from that point forward.
However, they are still bound by any obligations that arose before the
contract was frustrated.
However, this can lead to unfairness. The outcome of frustration of a
contract would depend entirely on the point in the contract at which
frustration took place.
However, the Law Reform (Frustrated Contracts) Act 1943 has mitigated
the harshness of this rule.
The Law Reform (Frustrated Contracts) Act 1943
The Act deals with three areas:

Recovery of money paid in advance

Recovery of work already completed
Recovery for a benefit gained through partial performance

Money paid in advance

This provision confirms the Fibrosa principle that money already paid is
recoverable and that money due under the contract ceases to be payable.
Under section 1(2) the court has discretion to reward a party who has
already carried out work under or in preparation for the contract.
However, this is discretionary and therefore does not automatically
guarantee that all actual expenses will be recoverable: Gamerco SA v
ICM [1995].
Section 1(3) of the Act considers recovery for partial performance.
-

Where a party to the contract has obtained a valuable benefit

(other than the payment of money, before the time of discharge)
this will be recoverable from him by the other party
Such a sum which would not exceed the value of the benefit to the
party obtaining it, and as the court considers just having regard to
all the circumstances.

Therefore the court must first consider whether a valuable benefit has
been conferred. Having established this, the court must consider a just
sum to award in all the circumstances.

Restrictions on the Act

The Act should not apply to:
-

Carriage of goods by sea (except time charter parties) s. 5(a)

Contracts of insurance s. 2(5)(b)
Perishing of goods under section 7 of SGA 1979 s.5(c).

Where the contract is severable, and one part has been treated as
completely performed, the court should treat the severable part as if it
were separate.

Damages for Breach of Contract

-

The principal remedy for breach of contract in English law is damages

(compensation for loss suffered as a result of breach). There may also be
an option to terminate or affirm here if the breach in question is
repudiatory.
Damages, as a common law remedy, are available as of right on proof of
breach. There are however, other potential remedies

Other Remedies

Debt claim: a debt claim may be combined with a claim for damages
where there is additional (unliquidated) loss
Restitutionary claims: Restitution allows for the recovery of money paid
or the value of benefits conferred on the guilty party on the basis that the
guilty party should not be unjustly enriched at the injured partys expense.
-

It must be shown that the D was enriched by the receipt of some

benefit
It must be shown that the D was enriched at the expense of the
claimant
It must be unjust for the D to retain the benefit without
compensating the claimant.

Recovery of money paid: An action for money had and received where
there has been a total failure of consideration (no contractual
performance) is an example of a restitutionary claim. E.g. in McRae v
Commonwealth Disposals Commission (1951) the price paid for a
non-existent wreck of an oil tanker was recovered in restitution as the
payer had received no part of the performance in return.
Quantum Meruit: Another type of restitutionary claim is recovery on a
quantum meruit for the reasonable value of a non-financial benefit which
the innocent party has provided and which is not otherwise recoverable
since there is no express contractual provision for remuneration British
Steel v Cleveland Bridge (1984).
Specific Performance

Specific performance is an order which compels the party in breach to

perform its obligations, where an injunction is generally prohibitory in the
sense that it is an order preventing the breach of an obligation in the
contract.
-

Unlike damages for breach which are available as of right and are
the primary remedy for breach, specific performance is an equitable
remedy available only at the courts discretion and subject to the
usual rules of equity such as coming to equity with clean hands,
equity will not assist a volunteer (someone who has not provided
consideration). THIS means that
A claimant who delays in bringing an action may be denied specific
performance Milward v Earl of Thanet
Specific performance will not be available to a claimant who has
behaved dishonestly or improperly: Walters v Morgan

The court is only willing to exercise that discretion if damages would

not be an adequate remedy. As in Bronx Engineering. Damages
will be an adequate remedy if it is possible to use the compensatory
damages to purchase a substitute so specific performance is limited
to unique goods, including the sale of land.
Equally, damages may not be an adequate remedy on the facts
Beswick v Beswick (1968).
It is unlikely that such an order would be made if it would involve
the court in supervision over a period of time: Ryan v MT
Westminster Chambers Association.
A court will not usually order specific performance of a contract
involving personal services, such as a contract of employment
Warren v Mendy (1989).
Sale of Goods Act 1979 s. 52(1) if any action for breach of contract
to deliver specific or ascertained goods the court may, if it thinks fit,
on the plaintiffs application, by its judgement or decree, direct that
the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on the payment of
damages.

Cohen v Roche [1927]: claimants purchased eight Heppelwhite chairs at

auction but the defendant refused to honour the sale as he claimed that
there had been some irregularity in the transaction. The court held that
the sale was invalid but ordered an award of damages rather than the
order of specific performance. It was held that the chairs were
unremarkable and possessed no special feature that made them unique or
irreplaceable. As such the claimant could obtain substitute chairs from
another source and an order of specific performance would not be
appropriate.
Damages

There are three factors that can limit the availability of damages:
-

Causation
Remoteness
Mitigation of loss

Causation
A claimant can only recover damages if the breach of contract caused his
loss. It is not enough that there is breach of contract and loss: the loss
must be a consequence of the breach. As such, an intervening act that
occurs between the breach of contract and the loss may breach the chain
of causation.
The breach of conduct may be a cause of the loss i.e. one of several
causes rather than the sole cause of the loss: County v Girozentrale
Securities (1996).
Remoteness
It is necessary to establish that the loss, even though caused by the
breach, was not too remote from it. In other words, not all loss that is
caused by breach of contract is recoverable.
Hadley v Baxendale (1854): claimants owned a mill. A crankshaft, which
was essential for the operation of the mill broke and needed to be
replaced using the original as a template. The claimants, engaged the
defendants, a firm of carriers, to transport the broken part ot engineers in
Greenwich where a replacement would be made but the defendants failed
to do this within the timeframe specified thus delaying the arrival of the
new part and causing the mill to stand inoperative. The claimants sought
damages to compensate for the losses sustained whilst the mill was idle.
Defendants loss was held to be too remote and unrecoverable. It would
have been an entirely different position if the defendants had been made
aware that the mill would be inoperable without the part but they were
not aware that this was the only crankshaft that the claimant possessed.
This judgement gave rise to the foreseeability test per Alderson B:
Where two parties have made a contract which one of them has broken,
the damages which the other party ought to receive in respect of such a
breach of contract should be such as may fairly and reasonably be
considered arising naturally i.e. according to the usual course of things,
from such breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation of both parties at the time
they made the contract as the probable result of breach of it.
This was considered in two subsequent cases.
Victoria Laundry v Newman Industries (1949): The claimants ran ag
laundry business. They purchased a boiler from the defendants that was

due for delivery in July. The boiler sustained some damage and had to be
repaired which delayed delivery until November. The claimants had made
the defendants aware that they needed the boiler to expand their
business and that they wanted it for immediate use. They claimed
damages to represent the loss of ordinary profits that would have been
made from their additional business if the boiler had arrived as agreed
and also for the loss of government contracts that they had intended to
secure once the boiler arrived.
It was held that the claimants could recover damages for the loss of
additional profit but not for the loss of revenue from the government
contracts. This was because the defendants were aware that the
claimants aimed to increase their business by acquiring another boiler,
thus the loss of the additional income was a reasonably foreseeable
consequence of breach, whereas there was nothing to suggest that the
defendants were aware of the claimants plans concerning government
contracts so this was not recoverable.
However, the HL disagreed with this level of probability in The Heron II
The Heron II [1969]
The claimants chartered The Heron II to transport a cargo of sugar on a
journey that should have taken 20 days but actually, due to a deviation
from the route by the defendant, took 29 days during which the price of
sugar fell significantly. The late arrival put the defendant in breach of
contact so the claimant sought damages to cover the difference in the
price he received for the sugar and the higher price that he would have
received had the boat arrived on time. The claimant had not told the
defendant that he had intended to sell the sugar at the destination but the
defendant was aware that he was carrying sugar and that the destination
was a popular trading place for sugar.
HL held that, although the claimant had not told the defendant that he
intended to sell the sugar, as soon as the boat arrived, the defendants
knowledge that he was carrying sugar and his awareness that the
destination was a popular trading place for sugar was sufficient to make it
so probable that it must have been in his contemplation at the
time the conract was made. HL criticised the reference to reasonable
foresight in Victoria Laundry.
Provided that the type of loss caused by the breach is within the
reasonable contemplation of the parties, the magnitude of that loss does
not have to be The Achilleas (2008).
Mitigation of Loss
The third factor to take into account when considering the availability and
quantification of damages is the duty to mitigate.

The duty to mitigate refers to a principle of contract law whereby the

innocent party who has suffered a breach of contract has a duty to take
reasonable steps to minimise the extent of their loss arising from the
breach.
The innocent victim of a breach of contract will be entitled to damages to
cover losses caused by the breach that are not too remote provided that
he has not failed to take action that would have reduce the extent of his
losses.
Brace v Calder [1895]: claimant was offered employment for a period of
two years. After five months, the claimant was dissolved due to the
retirement of two of its owners which cut short the claimants
employment. However, two of the owners continued the business in their
own right and offered the claimant employment which he refused.
His claim for damages to cover loss of earnings was refused on the basis
that he failed to take advantage of the opportunity to reduce his losses by
accepting the offer of employment.
Calculation of Damages
As damages are available as of right, the question is not whether the
successful claimant will receive damages, but how the amount of
damages payable is to be calculated. There are two methods of
determining the extent of damages that will be awarded:
-

Loss of a bargain: places the innocent party in the position they

would have been if they contract had been performed
Reliance loss: places the innocent party in the position they would
have been if the contract had never been made

Loss of a bargain
This is the main category of damages awarded for breach of contract. As
such, this form of damages aims to put the innocent party in the position
that they would have been in if the contract had been performed.
Charter v Sullivan (1957): Substitute at actual value: the claimant
accepted that there was a good market for the car, thus it would not be
difficult to obtain the same price from another purchaser. As such, the
claimant had suffered no loss, so only nominal damages were awarded.
WL Thompson v Robinson Gunmakers [1955] Here, there was less
demand for the car in question, and it was likely that it would be sold for a
lower price than that agreed with the defendant. As such, the claimant
was entitled to damages to reflect the loss of profit.
Ruxley Electronics v Forsyth [1995]
The claimant engaged the services of the defendant to construct a
swimming pool at a cost of 70,000. When it was completed, the depth of

the pool was several inches less than had been stipulated in the contract.
The cost of rectifying the defect by rebuilding the swimming pool would
have been over 20,000 which would have imposed an unacceptable
hardship on the defendant, given that the pool was perfectly functional in
every other respect. The difference in depth made no difference to the
value of the pool so the claimant received only nominal damages
(although an award of 2,500 was made for loss of amenity).
HL emphasised that the aim of damages was to put the innocent party in
the position they would have been if the contract had been performed but
ruled that this did not necessary mean that the innocent party would be
entitled to the monetary equivalent of specific performance.
Reliance Loss
There are situations where it is difficult or impossible to calculate
damages on the basis of the position that the defendant would have been
in if the contract had been performed so a different basis for calculation is
used that focuses on loss caused by reliance on the contract. Here, the
aim is to place the innocent party in the position they would have been if
the contract had never been made.
Anglia Television v Reed [1972]: the claimant television company entered
into a contract with the actor, Robert Reed, to star in a film. Reed
subsequently decided to take part in an American fil and as the filming
would have clashed with the claimants film, refused to go ahead, thus
breaching his contract. As a result, the film was abandoned. The claimant
sought to recover expenditure both before and after the contract was
signed on the basis that this money was spent in reliance on the contract
with the defendant.
It was uncomplicated to find that expenditure after the contract was
formed was recoverable as it was reasonable to expect that the fil
company would spend money preparing for filming. It was less clear that
damages were recoverable for expenditure incurred prior to the formation
of the contract as it seemed less clear that these arose due to reliance on
the contract as the contract did not exist at the time. However, it was held
that there was no reason why costs incurred prior to the contract could
not be recoverable provided that they were not too remote. As the
defendant was aware that all costs associated with the fil would be wasted
if the contract did not go ahead, the claimant was able to claim damages
for money spent prior to the formation of the contract.
In Anglia Television v Reed, the CA also stated that it was for the
claimant to decide whether they wanted to claim for expectation loss or
reliance loss.
Reliance loss provides a good basis for a claim of damages for claimants
who cannot establish what, if anything, they have lost that falls within

expectation loss. Here for example, the film company did not seek
damages for expectation loss based upon the profit that the film would
have made as this would have been too difficult to predict.
However, claimants cannot claim for losses that they would have occurred
anyway if the contract had been properly performed. To allow this would
be to put the claimant in a better position than he would have been in had
the contract not been breached. Losses made as a result of a bad bargain
would have happened regardless and come from the claimant agreeing
the contract on unfavourable terms, not as a result of the defendants
breach: C & P Haulage v Middleton.
Non-Pecuniary Loss
The calculation of damages is most straightforward in relation to financial
loss. For many years, damages were limited to pecuniary loss but it is now
recognised that there are situations in which damages may be paid in
relation to injury to feelings, mental distress and loss of amenity.
Jarvis v Swan Tours [1973]: the claimants booked a two week holiday
that specified certain features, such as a welcome party, afternoon tea
and yodelling sessions. These features were either absent or
unsatisfactory. The holiday company was clearly in breach of contract for
failing to provide these features but the issue was the extent to which the
claimant could recover for their absence given that they amounted to loss
of enjoyment rather than financial loss.
At first instance, the claimant recovered only a small sum to cover the
cost of the features that he had not received, but, on appeal, his award
was increased to reflect damages for loss of enjoyment. The rationale for
the decision was that the very purpose of a holiday is enjoyment,
therefore, it followed that damages should be available if the level of
enjoyment promised was not forthcoming.
This notion of identifying the very object or purpose of the contract and
providing damages if that object is not provided also enables claimants to
recover for the mental distress associated with the failure of the contract.
This is applicable only to contracts where the essence of the contract is to
provide pleasure: there can be no recovery for mental distress in purely
commercial contracts.
Cases in which damages have been awarded for mental distress include:
-

A sum awarded to represent the disappointment and anxiety caused

by the non-appearance of a wedding photographer: Diesen v
Sampson 1971
Damages for mental distress arising from a solicitors negligent
failure to obtain an injunction to protect the claimant from
molestation: Heywood v Wellers 1976

Damages may be awarded for loss of amenity as was the case in Ruxley
Electronics v Forsyth.
There are situations in which damages may be available in relation to the
loss of chance caused by breach of contract.
-

In Blackpool and Flyde Aero Club v Blackpool BC [1990]

damages were awarded to the claimant when Blackpool BC failed to
consider their application for a tender, as this had deprived them of
the chance to win the contract, even thought it was by no means
certain that they would have done so.
In Chaplin v Hicks [1911] the claimant received damages to
represent the lost chance of success in a beauty contest even
though her success was only a possibility not a certainty.

Privity of Contract and Third Party Rights

Privity of Contract

The general rule of Privity of contract is that only parties to a

contract can acquire rights and liabilities under that contract. It
follows that if you are not a party to a contract then you cannot sue
upon it, or be sued under it.
Dunlop v Selfridge [1915]: Dunlop sold tyres to Dew & Co who
were wholesalers. Dew & Co undertook (expressly in the contract)
that the manufactures could fix the lowest price at which they could
sell the tyre and promised not to sell the tyres below that price. Dew
& Co also agreed to obtain the same pricing terms from customers
to whom they resold the tyres. They sold tyres to Selfridge on these
terms. Selfridge broke the pricing agreement and sold the tyres at
discount prices. Dunlop sued Selfridge and sought an injunction to
prevent them from selling their tyres at a discount. Dunlop failed.
Although there was a contract between them and Dew & Co,
Selfridge were not a party to tat contract and Dunlop, therefore,
could not impose their terms.
The common law rule of Privity has been criticised for leading to
harsh and unfair outcomes, particularly in cases where the contract
purports to confer a benefit on a third party who remains unable to
sue if that benefit is not forthcoming due to a breach of one of the
parties to the contract (this was the situation in Tweedle v
Atkinson). Therefore a number of exceptions to the basic rule has
been developed:
Exceptions provided by statute
Collateral contracts
Agency
Covenants in land law
Trusts

Exceptions provided by statute

Statutory exceptions to the rule include the following:

Section 148(7) Road Traffic Act 1988: Requires drivers to have thirdparty insurance which can be relied upon by third parties who suffer loss
or damage even though they are not a party to that contract.
Section 11, Married Womens Property Act Allows a wife to claim on
her husbands life assurance policy
Section 29, Bills of Exchange Act 1883: A third party may sue on a
cheque or a bill of exchange
Section 136, Law of Property Act 1925: Allows rights arising under a
contact to be assigned to a third party
Section 56(1) Law of Property Act 1925: Allows a person to acquire
an interest in land or other property or the benefit of a covenant relating
to land or other property even if that person is not expressly named in the
conveyance (or other document).
Competition Act 1998 Prohibits price-fixing arrangements (such as
those in Dunlop v Selfridge).
However, attempts to use statute as a creative loophole to avoid the
basic doctrine of Privity have failed for example, see Beswick v Beswick
which concerned the use of section 56(1) of the Law of Property Act 1925
in relation to personal property rather than to land or an interest in land.
Collateral Contracts
A collateral contract may be used to avoid the rule relating to Privity. In
essence a contract between two parties may be accompanied by a
collateral contract between one of those parties and a third party relating
to the same subject matter.
Shanklin Peir v Detel Products [1951]: the claimants entered into a
contract with painting contractors to paint their pier, having been assured
by the defendants (paint manufacturers) that their paint would last for at
least seven years without deterioration. The defendants then sold the
paint to the contractors. However, the paint peeled within three months.
The pier owners could not sue the painters since they had carried out the
work professionally and thus had completed their side of the contract. The
pier owners sued the paint manufacturers. The pier owners were
successful. Although there were not a party to the contract between the
paint manufacturers and the painting contractors (and therefore there was
no Privity of contract), it was held that a collateral contract had risen from
their promise as to the sustainability of the paint.
The collateral contract device can be seen as a way to identify a contract
between the party making a promise (Detel) and the other party (Shanklin
Pier) since this promise has induced the other party (Shanklin Pier) to

enter into a separate contract with a different party (the painting

contractors). Therefore, the party making the promise (Detel) gains some
benefit in being able to sell their goods (paint) on the strength of the main
contract (between Shanklin Pier and the painting contractors) and are held
to be bound by their promise.
Strictly speaking, the use of a collateral contract is not an exception to the
doctrine of Privity, since a new contract arises. However, it is an effective
means of evading the doctrine of Privity.
Agency
The contract of agency is a common law exception to the doctrine of
Privity. The parties in an agency arrangement are as follows
Principal: the party on whose behalf the contract is made and who
receives the benefit arising under the contract
Agent: the agent is a party to the contract with the third party. The agent
has a direct contractual relationship with the third party, but is making the
contract on behalf of the principal and not on his own behalf.
Third Party: the third party enters into the contract with the agent.
However, the rules of agency provide that there is no contractual
relationship with the agent. Instead, the principal is bound by the
contractual relationship with the third party which has been entered into
by the agent on his behalf.
Covenants in Land Law
A covenant is an agreement between two or more parties made in the
form of a deed. It is therefore similar to a contract, with the exception that
contracts made by deed do not need to be supported by consideration.
Restrictive covenants
In land law, in certain circumstances, covenants can run with the land. If,
for example, Tom, a builder, builds a row of houses, and sells them to
Chris, Becky and Tricia, he can enter into a covenant with each of them in
which they promise not to block the shared drains. However, if Becky sells
her house to Sanjay, then Sanjay and Tom are not parties to any contract.
Therefore, if Sanjay blocks the shared drain, under the doctrine of Privity,
Tom could not sue Sanjay because they are not parties to the covenant.
Chris and Tricia also have no contractual relationship with Sanjay, even
though they are suffering from blocked drains as a result of his actions.
In order to address this situation, an equitable device has developed
which means that restrictive covenants (promises to refrain from doing
something) will, if properly created, bind successive purchasers of the
land even though there is no Privity between them and the original seller.

Tulk v Moxhay (1848): Tulk owned land which he sold subject to an

express promise that it would not be used for property development. The
land was resold several times, subject to the same undertaking. Moxhay
eventually bought the land and, despite knowing of the restriction
intended to build on it. Tulk sought an injunction to prevent Moxhay from
building on the land. Tulks claim was successful. The court considered
that it would be unconscionable for Moxhay to buy with knowledge of the
restriction and yet to build on the land. An injunction was therefore
granted to enforce the original agreement between Tulk and the first
purchaser of the land, even though Moxhay had not been a party to the
first agreement.
This principle applies subject to two conditions:
-

The third party must have had notice of the restrictive covenant at
the time of purchase; and
The original seller must have retained land which was capable of
benefitting from the restriction.

Covenants in Leases
Where a landlord grants a lease to another person, there are typically
various covenants contained within the lease. There is a Privity of contract
between the landlord and tenant and the terms of the lease are
enforceable by both. The landlord may also enforce those covenants
against anyone to whom the lease is assigned (sold). Sections 141 and
142 of the Law of Property Act 1925 also provide that a tenant may be
able to enforce covenants against a new landlord (if the freehold is sold)
and vice versa that the new landlord may enforce those covenants against
the tenant. However, if the lessee sub-lets the property the landlord will
have no Privity with the sub-tenant.
Trusts
The doctrine of Privity may also be avoided in the situation where one of
the parties to a contract which confers a benefit on a third party holds
contractual rights in trust for that third party.
This principle was established in Gregory & Parker v Williams and
affirmed in Les Affreteurs v Walford. In order for the principle to apply,
there must be an express intention in the contract between A and B that C
should receive a benefit and a trust will be found only if the court
considers that the interest is compatible with the general principles of
trust law: Green v Russell (1959).
The right to claim damages
Unless one of the exceptions to the doctrine of Privity arises, then the
third party has no means of enforcing the contract at common law unless
one of the parties to the contract sues in their own right. However, if the

contract confers a benefit on the third party, it is unlikely that the party
who brings the claim will have suffered the loss themselves. Therefore, if
an award of damages is made, strictly speaking, this will be to
compensate the party who brings the claim, who having suffered no loss
would be entitled to only nominal damages.
However, there is a common law rule originating from the shipping case of
Dunlop v Lambert which allows a remedy to be awarded to a party even
without Privity of contract where no other would be available to a person
sustaining loss which under a rational legal system ought to be
compensated by the person who caused it.
This rule was applied broadly in relation to a family holiday:
Jackson v Horizon Holidays [1974]: Jackson had booked a family
holiday in his sole name. For a variety of reasons, the holiday was a
complete travesty: the accommodation, food, services, facilities and the
general standard of the hotel which they were transported to proved so
unsatisfactory that the whole family suffered discomfort, vexation,
inconvenience, and distress and went home disappointed. Jackson sued
the holiday company on his own behalf and that of his family. The
company disputed that it should pay damages in respect of the family
since it was not a party to the contract. CA held that the disappointment
suffered by the family was a loss to Jackson himself and awarded
damages in respect of the whole family on that basis.
This decision was criticised as being too wide on application and was
narrowed by the HL.
Woodar v Wimpey Construction [1980]: The purchasers, Wimpey
Construction, had entered into a contract to buy certain land from the
vendors, Woodar. The purchase price was 850,000 of which 150,000
was to be paid on completion to Transworld Trade, a third party. The sale
was to complete within two months of planning permission for the site
being granted or a fixed date (whichever was the earlier). Wimpey
unlawfully repudiated the contract after the market fell. The issue here
concerned whether damages should include the 150,000 payable to the
third party. Although the HL did not overrule Jackson, it was held that
there was no general principle allowing a party to a contract to sue on
behalf of a third party who had suffered loss as a result of breach of that
contract.
It appeared, then, that the relaxation of the doctrine was not of general
utility and that its use had been specifically restricted by the HL to holiday
contracts. However, the principle from Dunlop v Lambert was extended to
property as well as carriage of goods in Linden Gardens v LS
Disposals, and was more recently considered by the HL in Alfred
McAlpine v Panatown.

McAlpine v Panatown [2001]: there was a contract between McAlpine

and Panatown for the design and build of a multi-storey car park. McAlpine
had also entered into a duty of care deed with UIPL who were the owners
of the site. By that deed UPIL acquired a direct remedy against McAlpine
in respect of any failure by the contractor to exercise reasonable skill, care
and attention to any matter within the scope of the contractors
responsibilities under the contract. The deed was expressly assignable by
the owner to its successors in title. Serious defects were found in the
building and Panatown sued. HL held that the duty of care deed with the
third party prevented Panatown from suing since this deed gave the third
party a specific remedy. However, the Lords were split 3-2 on the issue,
which suggests that the law is still somewhat unclear in this area.
The common law position was amended by statute in the form of the
Contracts (Rights of Third Parties) Act 1999.
Contracts (Rights of Third Parties) Act 1999
Statutory Third-Party Rights
The main changes to the common law position are found in section 1 of
the Act
Section 1 (1)-(3)
1 (1) Subject to the provisions of this Act, a person who is not a party to a
contract (a third party) may in his own right enforce a term of the
contract, if
(a) The contract expressly provides that he may, or
(b)Subject to subsection (2) the term purports to confer a benefit on
him.
2 Subsection (1) (b) does not apply if on a proper construction of the
contract it appears that the parties did not intend the term to be
enforceable by the third party.
3 The third party must be expressly identified in the contract by name, as
a member of a class or as answering to a particular description but need
not be in existence when the contract is entered into.
Therefore, the Act allows contractual provisions to be enforced by a noncontracting party in two circumstances:
-

Where the contract expressly provides that he may 1(1)(a)

Where the contract term purports to confer a benefit on him 1(1)(b)
Provided that it appears that the parties did not intend the term not
to be enforceable by that third party 1(2).

In Nisshin Shipping v Cleaves [2004] the interpretation of the Act was

tested in court for the first time. It was held that if the contract is neutral

on the question of whether the term was intended to be enforceable by

the third party, then section 1(2) does not disapply section 1(1)(b).
In The Swedish Club [2009] Christopher Clark J drew a distinction
between contracts which have a purpose of conferring a benefit and those
which have a benefit as an incidental effect.
A contract does not purport to confer a benefit on a third party simply
because the position of that third party will be improved if the contract is
performed. The reference in section to the term purporting to confer a
benefit seems to me to connote that the language used by the parties
shows that one of the purposes of their bargain (rather than one of the
incidental effects if performed) was to benefit the third party.
Section 1(3) provides that the party must be identified by name, as a
member of a class or answering a particular description but need not exist
when the contract is entered into. This could extend rights to unborn
children, a future spouse or a company which was not incorporated at the
time of formation of the contract.
Exceptions
The Act will not apply to:
-

Bills of exchange, promissory notes and negotiable instruments s.

6(1)
Statutory contracts that were made under section 14 of the
Companies Act 1985 (now repeated by the Companies Act 2006 s.
6(2)
Any incorporation document of a limited liability partnership or any
limited liability partnership agreement s. 6(2A).
Contracts of employment s. 6(3)
Contracts for the carriage of goods by sea s. 6(4)

Variation of the contract

The promised benefit to the third party may not be removed by a variation
of a contract if:
-

The third party has communicated his assent to the term to the
promisor s. 2(1)(a).
The promisor is aware that the third party has relied on the term s.
2(1)(b) or
The promisor can reasonably be expected to have foreseen that the
third party would rely on the term and the third party has in fact
relied on it 2(1)(c).

Remedies for third parties

Section 1(5) of the Act provides that the third party has available to him
any remedy that would have been available to him in an action for breach

of contract if he had been a party to the contract. The rules relating to

damages, injunctions, specific performance and other relief apply in the
same way as if he had been a party to the contract. However, if the
promise has already recovered damages from the promisor in respect of
losses suffered by the third party, then section 5 will operate to reduce
any award to the third party to take account of damages already
recovered from the promisor. This provision operates to prevent the
promisor from double liability to both the promisee and the third party.
Beswick v Beswick (1968) The House of Lords

Misrepresentation

An actionable misrepresentation is a statement of material fact

made prior to the contract by one party to the contract to the other
which is false or misleading and which induced the other party to
enter into the contract.

A statement of material fact

There are certain statements which might not be treated as being
statements of material fact:
-

Opinion: Bissett v Wilkinson

Mere sales talk: Dimmock v Hallett
Statements of future intention or conduct: Edgington v Fitzmaurice
Statements of law: Solle v Butcher

It is also necessary to consider whether silence (or failure to disclose

certain information) can ever amount to a misrepresentation.
Opinion
A false statement of opinion is not a misrepresentation as to a fact
Bissett v Wilkinson (1927): the claimants purchased two pieces of land
from the defendant for the purpose of sheep farming. During negotiations
the defendant said that he believed that it would be suitable for 2,000
sheep. The claimant therefore bought the land in that belief. Both parties
knew that the defendant had not carried on sheep farming on the land.
The land would not, in fact, hold 2,000 sheep.
A statement made by an owner who has been occupying his own farm to
its carrying capacity would be regarded as a statement of fact. However,
in this case, the defendants were not justified in regarding anything said
by the plaintiff as to the carrying capacity sa being anything more than an
expression of his opinion on the subject.
Therefore a statement of opinion cannot give rise to an actionable
misrepresentation. In the absence of fraud, the claimant had no basis on
which to rescind the contract.

However, where the party making the statement has some special
knowledge or skill which gives weight to their opinion, their opinion may
be treated as being an implied representation of fact, and therefore
capable of being a misrepresentation Smith v Laird (1884).
Sales Talk
Mere sales talk or puff is not considered to be a statement of fact. The
courts treat such utterances is idle boasts and attach no contractual
significance to them.
Dimmock v Hallett (1866): During negotiations for the sale of land, the
land was described as fertile and improvable. The court considered that
the statement had insufficient substance to be classed as a
representation.
Statements of future intent
Since a misrepresentation is a false representation of material fact, it
follows that since a statement which expresses a future intention is
speculation rather than fact, it cannot amount to misrepresentation.
However, in much the same way that an opinion can be treated as fact
where the party has special knowledge, if the statement of future
intention falsely represents the actual intention then it may also be
treated as a misrepresentation of fact.
Edgington v Fitzmaurice (1885): the claimant was a shareholder who
received a circular issued by the directors of a company requesting loans
the amount of 25,000 with interest in order to grow their business.
However, the money was in fact to be used to pay off the companys debt,
not to grow the business. The claimant who had taken debentures,
claimed repayment of his money on the ground that it had been obtained
from him by misrepresentation. The court held that the untrue statement
as to future intention was a misrepresentation of fact.
Statements of Law
Traditionally, a false statement of law cannot amount to a representation
because there is a presumption that everyone knows the law and
therefore it cannot be falsely stated. However, since the distinction
between fact and law is not always clear cut, it can be difficult to
distinguish between a statement of law and a statement of fact:
Solle v Butcher [1950]: Before the Second World War, a house had been
converted into flats. After the war, the defendant leased the building with
the intention to repair bomb damage and undertake other improvements.
The claimant and defendant discussed the rents to be charged after the
work had been completed. The defendant stated that the flat had become
a new and separate dwelling by reason of change of identity, and was

therefore not subject to the Rent Restrictions Acts. This was held to be a
statement of fact and therefore actionable.
Non-disclosure of information and silence
Generally, and perhaps unsurprisingly, silence cannot amount to
misrepresentation. In other words, there is no duty for a party who is
about to enter into a contract to disclose material facts known to that
party but not to the other party.
Keates v Cadogan (1851): A landlord who was letting his house did not
tell the tenant that it was in a ruinous condition. This failure to disclose
material information was held not to be a misrepresentation.
However, this is a general rule, and the courts may decide that in
particular circumstances there is a positive duty of disclosure.
The general rule is also subject to a number of established exceptions:
-

Contracts of utmost good faith

Where there has been a change in circumstances
Half-truths
Where there is a fiduciary relationship.

Contracts of utmost good faith

In contracts of utmost good faith there is a duty to disclose all material
facts. These typically arise where one party is in a strong position to know
the truth and the other is in a weak position. Examples of such contracts
include:
-

Contracts of insurance these are the leading examples of contracts

of utmost good faith. There is a duty on the insured party to disclose
all material facts which are relevant to the insurers acceptance of
the risk and the insurance premium to be paid in respect of that
risk. Insurance contracts are voidable if there has not been full
disclosure of material facts.
Contracts involving family arrangements for instance, in
agreements between family members for dividing family property
on death or divorce.
Contracts for the sale of land.
Contracts for the sale of shares.

Where there has been a change in circumstances

This covers the situation where the statement was true when made, but
became false by the time that the contract was formed:
With v OFlanagan [1936]: during the course of negotiations for the sale
of a medical practice, the vendor made representations to the purchaser
that it was worth 2,000 a year. By the time the contract was signed, four

months later, the value of the practice had declined to only 250 because
the vendor had been ill.
Lord Wright MR stated that If a statement has been made which is true at
the time, but which during the course of negotiations becomes untrue,
then the person who knows that it has become untrue is under an
obligation to disclose to the other the change of circumstances.
Therefore, the failure of the vendor to disclose the state of affairs to the
purchaser accounted to a misrepresentation.
Half-truths
Where a statement does not represent the whole truth (in other words, if
there are other facts which affect the weight of those truths stated) then
this may be regarded as misrepresentation. For instance in Notts Patent
Brick v Butler (1886), a purchaser of property asked the vendors
solicitor whether the land was subject to any restrictive covenants. The
solicitor replied that he was not aware of any. However, while this was
true, the solicitors lack of awareness was a result of his failure to read the
relevant documents (rather than having made due enquiry). This
amounted to a misrepresentation.
Where there is a fiduciary relationship
A fiduciary relationship between the parties to a contract imposes a duty
of disclosure. Examples of such relationships include:
-

Agent principal
Solicitor client
Partners in a partnership
Doctor-patient

Misrepresentation by conduct
A misrepresentation can be made by conduct rather than being written or
oral:
Spice Girls v Aprilla World Service (2000): Aprilla, contracted with the
Spice Girls to sponsor a concert tour. The group had appeared in
promotional material before Aprilla entered into the contract in May 1998.
This contract was based on the representation (made at the promotional
photo call) that all five members of the band, each with their distinctive
image, would continue working together. Geri Halliwell left the band later
that May. Held that there had been a misrepresentation by conduct, since
the participation of all five band members in the commercial had induced
Aprilla into entering the contract.
Made prior to the contract

The misrepresentation must be made before the contract is formed. A

statement that is made after formation of the contract cannot be
actionable Roscorla v Thomas (1842).
Inducement to the contract
Finally, the statement must be an inducement to the other party to enter
into the contract. In other words, the claimant must have relied on, or
been induced to enter the contract by the false statement of fact.
Therefore:
-

The claimant must have known of the existence of the statement,

and
The statement must have materially affected the claimants
judgement such that the claimant was induced by it or acted in
reliance upon it.

Existence of the statement

The misrepresentation must be made to the party that was misled: Peek
v Gurney unless the claimant can establish that the party that made the
statement knew that it would be passed onto them. In this case, the party
making the statement can be liable in misrepresentation: Pilmore v
Hood. It follows in either case, that the claimant must be aware of the
representation:
Horsefall v Thomas (1862): the buyer of a gun did not examine it prior
to purchase. A defect in the gun was concealed. The court held that
concealing the defect in the gun did not affect the claimants decision to
purchase, as, since he was unaware of the misrepresentation, he could not
have been induced into the contract by it. His claim failed.
Reliance or inducement
The claimant must actually have relied upon or acted upon the
representation:
Attwood v Small (1838) The purchasers of a mine were told
exaggerated statements as to its earning capacity by the vendors. The
purchasers had these statements checked by their own experts, who
erroneously reported them as being correct. Six months after the sale was
complete the claimants discovered that the defendants statement had
been false. They sought to rescind the contract with the vendors on the
basis of their misrepresentation. Held that there was no misrepresentation
since the purchasers did not rely on the representation made by the
vendor. The purchaser had relied on the verification of their agents.
It follows therefore, that if the claimant knows that the representation is
false, then there is no claim in misrepresentation, as there can be no
reliance upon a known false statement.

There will be reliance even if the party to whom the representation is

made is given an opportunity to verify its truth but chooses not do so. The
misrepresentation will still be considered to be an inducement
Redgrave v Hurd (1881).
Moreover, there will be reliance where the misrepresentation was not the
only inducement for the claimant to enter into the contract Edgington v
Fitzmaurice.
Reliance may also be demonstrated by acting upon the representation.
JEB Fasteners v Marks Bloom [1981]: the defendants prepared an
audited set of accounts for a manufacturing company in which the value
of the companys stocks was incorrectly stated. The defendants were
aware when they prepared the accounts that the company had liquidity
problems and was seeking outside financial support from, amongst others,
the claimants. The claimants had reservations about the stock valuation.
However, they took over the company for a nominal amount because they
were thereby obtain the services of the companys two directors who had
considerable experience. The takeover was not as successful as the
claimants had wished and they sued the defendants for negligent
misrepresentation in the audited accounts.
Legal principle: there was no misrepresentation, since the purchasers
wanted to acquire the services of two of the companys directors and
would have gone ahead with the purchase even if they had known the
true financial state of the company.
Finally, the misrepresentation must be material. This was generally
thought to mean that the misrepresentation must have been likely to
affect the judgement of a reasonable man in deciding whether to enter
the contract. However, in Museprime Properties v Adhill Properties
[1990] the judge considered that even where the claimants reliance upon
a representation has been unreasonable, if the representation had
nevertheless induced the claimant to enter into the contract, then the
representation would be held to be material.
Types of Misrepresentation
Not all misrepresentation are as grave as each other. There is a sliding
scale of seriousness.
Innocent misrepresentation Less serious
Negligent misrepresentation somewhat serious
Fraudulent misrepresentation most serious
Fraudulent misrepresentation
Fraudulent misrepresentation was considered in Derry v Peek.

Derry v Peek (1889): The defendants were directors of the Plymouth,

Davenport and District Tramways Co, which was authorised by statute to
run tramways by animal power, or with the consent of the Board of Trade,
by steam power. The prospectus issued by the company indicated that
steam power would be used, but the Board of Trade refused its content.
The claimant, acting in reliance upon the representation in the prospectus,
had obtained shares in the company.
This case concerned the tort of deceit. The HL held that in the absence of
any evidence that the defendants believed the statement in the
prospectus to be untrue, they had not committed the tort of deceit.
Lord Herschell considered the meaning of fraudulent as follows:
Fraud is proved when it is shown that a false representation has been
made (1) knowingly, or (2) without belief in its truth, or (3) recklessly,
careless whether it be true or false. Although I have treated the second
and third as distinct cases, I think the third is but an instance of the
second, for one who makes a statement under such circumstances can
have no real belief in the truth of what he states. To prevent a false
statement being fraudulent, there must, I think always be an honest belief
in its truth.
Therefore, honest belief, or lack thereof, is at the heart of fraud. Motive is
irrelevant Akerheilm v De Mare. Recklessness does not, or itself,
establish fraud, unless it is a blatant disregard for the truth (and is
therefore sufficiently serious to be dishonest).
Negligent misstatement
Historically, all misrepresentations which were not fraudulent were
considered innocent and, as such, gave no rise to no cause of action or
remedy at common law. However, there are now actions available for
certain non-fraudulent misrepresentation at both common law and
statute.
Common law
At common law, damages may be recoverable for negligent misstatement
which causes financial loss:
Hedley Byrne v Heller [1963]: the claimant was an advertising agency
which had asked the defendant bank for a reference in respect of one of
its clients, which was a customer of the bank. The bank replied that the
agency could assume that its client would be able to meet its financial
obligations. The agencys client was in fact unable to do so.
HL held that negligent statements could attract liability and that this
liability would extend to pure economic loss. This liability arises if:

The defendant carelessly makes a false statement to the claimant,

and
The circumstances are such that it is reasonable to assume that the
statement will be relied upon,
There is a special relationship between the parties

This special relationship (which does not have to be contractual)

between the parties gives rise to a duty of care and generally exists where
the party making the statement:
-

Has special knowledge or skill in relation to the subject matter of the

contract Harris v Wyre Forest DC [1988]
Can reasonably foresee that the other party will rely on their
statement Chaudry v Prabhakar [1988].

The party must in fact, rely upon the statement, and the party which has
made the statement must be aware of this Smith v Eric S Bush.
The principles of negligent misstatement stated obiter in Hedley Byrne v
Heller have been applied so that it is now the case that liability arises for
negligent misstatement which has induced a party to enter into a
contract. This may also cover representations as to a future state of
affairs.
Esso v Marden [1976] during the negotiations for the franchise of a
petrol station, a representative of Esso stated that the station would sell
200,000 gallons of fuel annually based on its proximity to a busy road.
Marden contracted on the basis of this statement. The local authority then
insisted that the pumps and entrance to the petrol station were moved
such that the station would be accessible only from side streets and
unseen by passing trade. As a result, actual sales were around 85,000
gallons. Marden lost all his money in the enterprise. Esso claimed for back
rent. Marden argued that, inter alia, the relationship with Esso was special
and created a duty of care under the Hedley Byrne principle.
The court held that the failure to disclose the change in circumstances
amounted to negligent misrepresentation under the Hedley Byrne
principle.
The Misrepresentation Act 1967
S. 2(1) Where a person has entered into a contract after a
misrepresentation has been made to him by another party thereto and as
a result thereof he has suffered loss, then if the person making the
misrepresentation would be liable to damages in respect thereof had the
misrepresentation been made fraudulently, that person shall be so liable
notwithstanding that the misrepresentation was not made fraudulently,
unless he proves that he had reasonable ground to believe and did believe
up to the time the contract was made that the facts represented were
true.

The key differences between the common law and statutory claims are
illustrated in the following table.
Common Law
Burden of proof on claimant
No contract required
Special relationship required

Statute
Burden of proof on defendant
Contract required
No special relationship required

Therefore, where there is a contract, and an action under the Hedley

Byrne principle might not be straightforward, then the statutory claim
under s. 2(1) of the Misrepresentation Act 1967 would be preferable since
it is for the defendant to prove that he had a continuing honest belief in
his statement. This may be difficult to do.
Innocent Misrepresentation
Following the developments in Hedley Byrne, and section 2(1) of the
Misrepresentation Act 1967, it follows that an innocent misrepresentation
is one which is made in the belief that it is true and that there are
reasonable grounds for that belief.
Remedies for Misrepresentation
The remedies that are available for misrepresentation depend on the type
of misrepresentation that occurred.
Innocent representation: Recission or damages
Negligent and fraudulent misrepresentation: recission and/or damages
Recission
Recission is an equitable remedy. It involves setting the contract aside and
is available regardless of the type of misrepresentation that has occurred.
Rescinded contracts are terminated ab initia: in other words, from the very
start. It follows that the object of recission is to put the contracting parties
into the position they would have been if the contract had never existed
at all. however, there are limitations to its availability (so-called bars to
recission):
-

Affirmation: recission will not be available if the claimant has

affirmed the contract either by expressly stating that they intend to
continue with it or by acting in such a way that the intention to
continue with the contract can be implied from their conduct.
Affirmation must be done with full knowledge of the representation
and right to rescind the contract: Long v Long [1958].
Lapse of time: Where there has been too great a lapse of time
before recission is sought, this may be evidence of affirmation and
thus a bar to recission. For fraudulent misrepsentation the time runs
from the point at which the fraud was discovered (or could have

been discovered with reasonable due diligence). For non-fraudulent

misrepresentation, the time runs from the date of the contract itself,
not the date of discovery Leaf v International Galleries [1950].
Rights of third parties: recission is not available where a third
party has gained bona fide rights for value in property under the
contact Oakes v Turquand. Therefore if goods are obtained by
misrepresentation and sold in good faith to a third party, the
contract can then be rescinded to allow the party to whom the
misrepresentation was made to recover the goods from the third
party: White v Garden.
Restitution is impossible: Since the aim of recission is to restore
the parties to their pre-contractual position, it follows that it cannot
be available as a remedy where it is impossible to do so. This may
occur if the nature of the subject matter of the contract has
changed. However, there is some discretion available to the court.
Precise restoration is not required as long as substantial restoration
is possible (Head v Tattersall). Diminution in value of the property
is not, of itself, a bar to recission Armstrong v Jackson.

Damages in lieu of recission is a better remedy

Recission may not be available if the court considers that damages in lieu
of recission provides a better remedy. This arises by virtue of section 2(2)
of the Misrepresentation At 1967.
In William Sindall v Cambridgeshire CC [1994] the court considered
that the damages awarded under section 2(2) should be the difference in
value between what the claimant was misled into believing he was
acquiring and the value of what he in fact received.
Damages
Damages for misrepresentation are assessed on principles of tort law.
Fraudulent misrepresentation
For fraudulent misrepresentation, the claim arises in the tort of deceit. The
intention is to return the claimant to the position that they would have
been in if the misrepresentation had not been made that is the out of
the pocket financial loss (McConnel v Wright) as well as a possible
element for opportunity cost (such as the loss of profits that resulted
from the reliance on the misrepresentation East v Maurer (1991).
The claimant can recover damages for all direct loss regardless of
foreseeability: in Doyle v Olby, Lord Denning stated that the defendant
is bound to make reparation for all the damage flowing from the
fraudulent inducement. This was affirmed by the House of Lords in Smith
New Court Securities v Scrimgeour Vickers [1997].
Negligent misrepresentation

In negligent misrepresentation, a claim can be made under the principles

from Hedley Byrne v Heller (provided that the tort can be established).
Here (unlike in the tort of deceit) only reasonably foreseeable losses may
be recovered.
Alternatively, the claimant may claim under section 2(1) of the
Misrepresentations Act 1967 if there is a contract. Damages under section
2(1) are assessed on the same basis as fraudulent misrepresentation
Royscot v Rogerson [1991].
Innocent misrepresentation
There is no common law action or innocent misrepresentation, although
recission is still possible as an equitable remedy. If recission is available,
then damages in lieu may be available under section 2(2) of the
Misrepresentation Act 1967.

Approaching Problem Questions

1. Is there an agreement?
Has there been offer and acceptance?

Offer or invitation to treat? Battle of the Forms.

Has acceptance been communicated effectively (postal rule or receipt
rule)?
Upon acceptance is the offer still effective? Lapse of time? Revocation?

2. Is the agreement enforceable?

Is there consideration to support the promise?
Is the agreement void for uncertainty or mistake?