CONTRACT LAW

GEORGE MPUNDU KANJA

LLB (UNZA), LLM (London), MBA (CBU)
 TABLE OF CONTENTS

PART I: INTRODUCTION

CHAPTER 1: NATURE OF CONTRACT – Definition & Essential Elements of

a KT

PART II: FORMATION OF THE CONTRACT

CHAPTER 2: OFFER
CHAPTER 3: ACCEPTANCE
CHAPTER 4: CONSIDERATION
CHAPTER 5: EQUITABLE ESTOPPEL
CHAPTER 6: INTENTION TO CREATE LEGAL RELATIONS
CHAPTER 7: CAPACITY OF PARTIES

PART III: CONTENTS AND TERMS OF CONTRACT

CHAPTER 8: CLASSIFICATION OF TERMS OF THE CONTRACT

CHAPTER 9: EXEMPTION CLAUSES

PART IV: FACTORS VIATIATING VALIDITY OF THE CONTRACT

CHAPTER 10: MISTAKE

CHAPTER 11: MISREPRESENTATION
CHAPTER 12: DURESS AND UNDUE INFLUENCE
CHAPTER 13: ILLEGALITY AND PUBLIC POLICY

PART V: PRIVITY OF CONTRACT

CHAPTER 14: DOCTRINE OF PRIVITY OF CONTRACT

CHAPTER 15: PRIVITY OF CONTRACT UNDER THE LAW OF AGENCY
RELATIONSHIP
CHAPTER 16: VOLUNTARY AND INVOLUNTARY ASSIGNMENT OF
CONTRACTUAL RIGHTS AND LIABILITIES

PART VI: DISCHARGE OF CONTRACT

CHAPTER 17: DISCHARGE BY PERFORMANCE

CHAPTER 18: DISCHARGE BY AGREEMENT
CHAPTER 19: DISCHARGE UNDER THE DOCTRINE OF FRUSTRATION
CHAPTER 20: DISCHARGE BY BREACH

PART VII: REMEDIES FOR BREACH OF CONTRACT

CHAPTER 21: LEGAL REMEDIES FOR BREACH OF CONTRACT

CHAPTER 22: EQUITABLE REMEDIES FOR BREACH OF CONTRACT
 CHAPTER 1

INTRODUCTION

Most of the business transactions in trade, commerce and industry are based
on contracts. The purpose of the law of contract is to provide a general
framework of rules that determines which agreements are valid or legally
binding and ones that are void or not legally binding. For instance, failure to
perform a moral obligation such as a pledge to contribute to friend’s wedding
expenses does not create any legal liability. However, non-performance of a
contract generally does.

Contract law enables parties to a contract to know or ascertain beforehand

whether what they agree to do is legally binding or not. It further defines the
consequences of failure by a contracting party to perform his agreement.

DEFINITION OF A CONTRACT

A contract is an agreement which is legally binding on the parties. It gives rise

to obligations for the parties involved. The law of contract determines which
agreements are enforceable and regulates those agreements, providing
remedies if contractual obligations, that is, undertakings or promises are
broken.

Under a contract the parties voluntarily assume their obligations or

undertakings. For example, Chanda promises to supply a new car to Mutale
by the end of the month, whilst Mutale promises to pay, on delivery, the price
of the car. Their agreement to perform these undertakings is a contract. There
is no legal duty to enter into such an agreement, but if the parties choose to
do so, it will give rise to legal obligations. Therefore the law of contract is
distinct from branches of law such as the law of tort where duties are not
voluntary but imposed by law.

A contract is valid whether it is written or oral. Contracts that are expressed in

words either verbally or in writing are termed as express contracts. However,
in certain cases the law requires that the contract must be in writing, for
example, in contracts for sale of land. A contract may also be implied from the
conduct of the parties, hence termed as an implied contract.
 CHAPTER 2

ESSENTIAL ELEMENTS OF A CONTRACT

For a contract to be valid the following essential elements must be present:

(i) An Agreement

An agreement is made up of an offer and acceptance. One party must offer

another party to enter into a contract and the other party must accept the
terms of the offer.

(ii) Consideration

The agreement must be supported by lawful consideration. Consideration

means value or benefit given by the other party. Consideration is the essence
of a bargain between the contracting parties.

(iii) Contractual Capacity

This refers to the legal competence for one to contract. Both parties making
the agreement must have the legal capacity to enter into contract. They must
be recognized by law as possessing the characteristics that qualify them as
parties competent to contract.

(iv) Free Consent

A contract must be made with the free consent of the parties. The validity of a
contract may be affected if misrepresentation, undue influence, coercion,
fraud, and mistake induced it.

(v) Legality

A contract must be made to accomplish something that is legal and not

against public policy. Thus courts of law will not enforce a contract whose
objective or consideration is found to be illegal, immoral or contrary to public
policy.

(vi) Intention to Create Legal Relationship

For any agreement to be considered as a contract, the parties must make the
agreement with the intention to create legal relations between them, that is to
be legally bound. In other words the parties must contemplate legal
consequences.

An agreement that meets all the above essential elements becomes a valid
contract. However, a contract which does not satisfy one or more of the above
elements will either be void, or voidable, or illegal and void, depending on the
type of element that is missing.
Besides, some contracts are required to be in a particular form in order for
them to be valid. For instance certain transactions involving land such as
conveyances, legal mortgages and leases must be in writing and require the
execution of a deed.

CLASSIFICATION OF CONTRACTS

Contracts may be grouped according to their formation, form, validity, or

performance.

(a) Types of Contracts According to Formation

(i) Express Contract

An express contract is a contract whereby the parties specifically agree on the

nature and terms that will govern their relationship.

(ii) Implied Contract

An implied contract is a contract whereby there is no specific agreement

between the parties. The agreement is not as a result of any express promise
by the parties but it is merely interpreted or inferred from the acts or conduct
of the parties and all the surrounding circumstances.

(b) Contracts According to Form

(i) Standard Form Contracts

Standard form contracts are contracts where the terms and conditions are not
subject to negotiation between the parties but are predetermined. A large
number of business organizations use their own standard form contracts so
that they can trade on terms they want. Examples of standard form contracts
include laundry service contracts, insurance policies, hotel accommodation
contracts, and bank guarantee forms.

The standard form contracts ensure that the terms that are included in the
contract are advantageous to one who has prepared or designed on the
standard form contracts. Besides standard form contracts is that they enable
procedures to be standardized and less time is used in making a contract.
Standard form contracts are also known as contracts of adhesion, which
means you either accept it as it is or leave it.

(ii) Contracts by Deed

A deed is a formal document, which must be signed, witnessed and delivered.

The law requires that certain contracts be made in writing. The reasons for
demanding a written contract vary. In some cases, the purpose is to provide
the consumer with a measure of protection which can be achieved by
requiring a clear statement of rights and responsibilities to be contained in the
written agreement. In other cases it is required in order to oblige parties
involved in technical transactions to record their respective obligations.

Examples of contracts that must be in writing include:

- Contracts for the sale or transfer of land or when a legal

mortgage of land is created. (Lands & Deeds Registry Act)
- The transfer of shares in a registered company. This is required
under section 64 of the Companies Act, Cap 388, which states that “a
proper instrument of transfer” must be delivered to the company. The
company cannot register the transfer until this is done.
- Cheques, bills of exchange and promissory notes, under section
… of the Bills of Exchange Act 1882.
- Assignment of Life Policies (Insurance Act)
- Hire Purchase and conditional sale

Failure to comply with the statutory requirements stated above renders the
contract invalid.

(iii) Simple Contract

This is a contract that is not made under a deed. It is a contract which is

informal and can be in writing, made orally or can be implied from the conduct
of parties.

(c) Contracts According to Validity

(i) Void Contract

A void contract has no binding effect at all. A void contract does not create
any rights or obligations and the partie

s will be treated to have never entered into an agreement in such a contract.

An example of a void contract is one whose purpose is illegal, such an
agreement to commit a criminal act, or to trade with an enemy alien during the
time of war.

(ii) Voidable Contract

Sometimes the contract will not be void but merely voidable. Where this is the
case, one of the parties has the option of avoiding the contract, but until the
option is exercised the contract still stands. In short a voidable contract is a
contract, which is binding, but one party has the right at his own volition to set
it aside. For example, if consent of a party to a contract is caused by undue
influence or induced by fraud that party may avoid or terminate the contract if
he so wishes. Alternatively he may choose to have it carried out. A voidable
contract continues to be binding till the party who is entitled to avoid it does
so.

(iii) Illegal Contract

An illegal contract is a contract which is forbidden by law or is contrary to
some rule of public or is immoral or is criminal in nature. All illegal agreements
are void but not every void contract is illegal. Illegality has wider implications
than a merely void contract. For instance, if a party transferred property under
a void contract, he can recover it even from an innocent third party, but
property transferred under an illegal contract is irrecoverable by action in a
court of law.

(iv) Unenforceable Contract

An unenforceable contract is a contract which cannot be enforced in a court of

law due to some technical defects as regards its form such as not being
evidenced in writing or lack of registration where registration is required or
where the remedy has been statute barred because of lapse of time. The
parties concerned may carry out such contract but if one party refuses to
perform, the other party cannot seek the assistance of the courts to compel
him to do so.

In Action Strength Ltd v. International Glass Engineering and Saint –Gobain

Glass Ltd [2003] 2 ALL ER 615; Saint – Gobain Glass (SGG) Limited had
retained International Glass Engineering (IGE) Limited as the main contractor
to build a new factory. IGE Limited engaged Action Strength (AS) Limited to
supply labour. The contract between IGE Limited and AS Limited entitled the
AS Limited to terminate the contract within 30 days’ notice if invoices were not
paid. IGE Limited fell behind on the contract. SGG Limited allegedly then
made an oral promise to AS Limited that if IGE Limited did not settle the
invoices, SGG Limited would pay them. AS Limited continued working but
when IGE Limited did not pay, AS Limited sought to enforce SGG’s promise to
pay. SGG Limited defended the claim arguing that its oral guarantees could
not be enforced because it had not been evidenced in writing.

The House of Lords held that SGG’s oral guarantee was unenforceable
because it had not been evidenced in writing as required by section 4 of the
Statute of Frauds 1677.

(d) Contracts According to Performance

(i) Executed Contract

An executed contract is a contract in which the objective of the contract is at

once performed, that is both parties perform their obligations under the
contract. For example, when a food vender agrees to sell food and the
purchaser consumes or takes the food away on payment to the vendor.

(ii) Executory Contract

An executory contract is a contract in which one of the parties is bound to do

a given thing at some future date. An example is an agreement whereby the
seller promises to deliver a car in a week’s time, and the buyer agrees to pay
for it on delivery.

The contract is executory only as regards the obligation of the party who is yet
to perform his part of the contract and hence may also be described as partly
executed. A contract in which both parties have not performed their
obligations is also an executory contract.

(iii) Unilateral Contract

A unilateral contract binds only one party. It is a contract in which only one
party to the contract has to fulfil his obligation, the other party having fulfilled
his obligation at the time of the contract. Unilateral contracts are also known
as executed consideration.

(iv) Bilateral Contract

A bilateral contract binds both parties in that the obligations of both parties to
the contract are outstanding at the time of the formation of the contract. It is
the most common type of contract. Bilateral contracts are similar to executory
contracts.
 CHAPTER 3

OFFER

INTRODUCTION

For a contract to be created parties must reach an agreement. The idea of

agreement is therefore central to an understanding of the law of contract.
Whether or not there is an agreement between the parties is a question,
which can be answered by looking at the way parties have conducted
themselves and examine what they have said and done.

Thus in Smith v. Hughes (1871) L R 6 QB 597, Blackburn J said:

“If, whatever a man’s real intention may be, he so conducts himself that a
reasonable man would believe that he was assenting to the terms proposed
by the other party, and that other party upon that belief enters into the contract
with him, the man thus conducting himself would be equally bound as if he
had intended to agree to the other party’s terms”.

Likewise in Storer v. Manchester City Council [1974] 3 ALL ER 824 at p. 828

Lord Denning stated:

“In contracts you do not look into the actual intent in a man’s mind. You look
at what he said and did. A contract is formed when there is, to all outward
appearances, a contract”.

In deciding whether the parties have reached agreement the law looks for an
offer by one party and an acceptance of the terms of that offer by the other. In
the bargaining process leading up to an agreement one party will finally
propose terms such as price, date of delivery, and express a willingness to be
bound by them if the other party signifies his acceptance of them. The person
making an offer is known as the offeror, and the person to whom the offer is
addressed is called the offeree.

What is Offer?

An offer is a promise or proposal by one party (the offeror) to enter into a

contract, on a particular set of terms, with the intention of being bound as
soon as the other party to whom the proposal or promise is made (the offeree)
signifies his acceptance. An offer may be made either to an individual person,
or to a particular group of persons, or it may be made to the general public, as
in the case of a reward offered for the provision of information.

An offer may be written, spoken or implied by conduct. For example, when a

transport company runs a bus on a particular route, there is an implied offer
by the company to carry passengers for a certain fare. The offer is accepted
when passengers board the bus.
Characteristics of a Valid Offer
An offer is made up of terms, which if accepted would govern the contract. For
instance, an offer to sell a car will state the price and describe the type of car
being offered for sale. The offeror (promissor) becomes bound only if the
offeree (promisee) accepts the terms of the offer as expressed by him. An
offer to be legally effective must satisfy the following general requirements:

(a) the offer must be firmly made;

(b) the offer must be communicated to the person to whom it is made;
(c) the terms of the offer must be definite, clear and certain.

(a) Offer and Invitation to Treat

An offer is a statement by one party of a willingness to enter into a contract on

stated terms, provided that these terms are in turn accepted by the party or
parties to whom the offer is addressed. As already noted there is generally no
requirement that the offer be made in any particular form, as it may be made
orally, in writing or by conduct.

However, care must be taken in distinguishing between an offer and an

invitation to treat. An invitation to treat is simply an expression of willingness
to enter into negotiations which, it is hoped will lead to the conclusion of the
contract at a later date. In other words invitation to treat can be said to be a
statement and an act that appears like an offer but is not an offer. It is merely
an incentive or encouragement designed by the person making it to
encourage the making of offers to him and is certainly not intended to be
legally binding.

The distinction between an offer and invitation to treat is said to be primarily

one of intention, that is, did the maker of the statement intend to be bound by
an acceptance of his terms without further negotiation or did he only intend his
statement to be part of the continuing negotiation process? In Gibson v.
Manchester City Council [1978] 1 WLR 520, (CA), and [1979] 1 WLR 294
(HL), the Conservative – controlled Manchester City Council advertised details
of a scheme for tenants to buy their council houses from the corporation and
Mr. Gibson expressed interest and asked to be told the price of buying his
house. The City Treasure wrote in reply: “The corporation may be prepared to
sell the house to you at #2,180”, but the letter was not to be “regarded as a
firm offer of a mortgage.” Mr. Gibson had to fill in a form to make a formal
application, which he did, leaving blank the purchase price and listing certain
defects in the property. He was told by the Council that the price had been
fixed in accordance with the condition of the property, and Mr. Gibson wrote
that he wished to go ahead on the basis of his application. The Council took
the house off the list of tenant occupied houses which had to be maintained
by them, and put it on their house purchase list.

As a result of a local election, Labour Party gained control of the Council and
reversed the policy of selling council houses. They would sell only those
houses where a legally binding contract had already been concluded.
The House of Lords held that the letter written by the treasurer, which stated
that the council may be prepared to sell, was not an offer as it did not finally
commit the council to selling the house. It was simply an expression of their
willingness to enter into negotiations for the sale of the house and was
capable of being accepted. This was further evidenced by the fact that Mr.
Gibson was invited to make a ‘formal application’ to purchase the house and
not to signify his agreement to the stated terms.

Offer or Invitation to Treat: Practical Examples

Because of the difficulty in making a distinction between an offer and invitation

to treat the law has attempted to clarify the position in certain common types
of transaction which include the following:

(i) Goods Displayed for Sale in Shops

The general principle of law is that the display of goods in a shop constitutes
an invitation to treat and that the offer is made by the customer when he
presents the goods at the cash desk, where the offer may be accepted by the
shopkeeper. The application of this rule can be seen in the case of
Pharmaceutical Society of GB v. Boots Cash Chemists (Southern) Ltd [1953]
1 Q.B. 401. The defendants (Boots Cash Chemists Ltd) organized their shop
on a self-service basis. They were charged with a breach of the Pharmacy
and Poisons Act 1933, which required that a sale of drugs take place under
the supervision of a registered pharmacist. There was no pharmacist present
close to the selves, but a pharmacist supervised the transaction at the cash
desk and was authorised to prevent a customer from purchasing any drug if
he thought fit.

It was held that the sale took place at the cash desk and not when the goods
were taken from the selves. The display of the goods was simply an invitation
to treat and therefore had been no breach of the Act.

Similarly, in Fisher v. Bell [1961] 1 QB 394, a shopkeeper was prosecuted for

displaying a flick-knife inside his shop window with a price attached. He was
found by the Court not to have committed the offence of offering for sale an
offensive weapon contrary to the Restriction of Offensive Weapons Act 1959.
The Court held that the display of goods in a shop window was simply an
invitation to treat rather than an offer.

(ii) Advertisements

The general rule is that the advertisement of goods for sale is an invitation to
treat rather than an offer. In Partridge v. Crittenden [1968] 1 WLR 1204, the
appellant advertised Bramblefinch locks and hens for sale at a stated price.
He was charged with the offence of ‘offering for sale’ wild live birds contrary to
the protection of Birds Act 1954. It was held that the advertisement was an
invitation to treat and not an offer and so the appellant was acquitted.
Nonetheless, there are certain cases where an advertisement may be treated
or interpreted as an offer rather than an invitation to treat because no further
bargaining between the parties is possible or intended. Advertisements of
rewards, for example, for information or the return of lost property, fall in this
category. In the famous case of Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB
256: The defendants, who were the manufacturers of the Carbolic Smoke Ball
placed an advertisement in the newspaper offering a reward of #100 to any
person who contracted influenza after having used one of their smoke balls in
according to the prescribed manner. The advertisement added that #1000 has
been deposited at a bank ‘showing our sincerety in this matter’. The plaintiff
read the advertisement and used the smoke balls according to the directions
of the company but contracted influenza. The plaintiff sued for #100. The
defendant argued that no offer had been made which the plaintiff could have
accepted, as it could not have been the intention of the company to make an
offer to the whole world.

It was held that the advertisement was not an invitation to treat but was an
offer to the whole world and that a contract was made with those persons who
performed the condition ‘on the faith of the advertisement’. The plaintiff was
therefore entitled to recover #100.

Likewise in Bowerman v. Association of British Travel Agents Ltd [1996] CLC

451, Hobhouse LJ stated at p. 463:

“In my judgment this document is intended to be read and would reasonably

be read by a member of the public as containing an offer of a promise which
the customer is entitled to accept by choosing to do business with an ABTA
member … it satisfies the criteria for a unilateral contract and contains
promises which are sufficiently clear to be capable of legal enforcement. The
principles established in the Carbolic Smoke Ball case apply”.

(iii) Auction Sales

The advertisement of an auction sale is an invitation to treat. Thus an

advertisement of an auction of specific goods will not be construed as an offer
to sell those goods. There is no promise to sell the goods and the auctioneer
will not be liable for withdrawing them from the sale without notice. In Harris v.
Nickerson (1873) LR 8 QB 286, plaintiff attended an auction in order to buy
furniture which the auctioneer had advertised for sale. When the furniture was
not put up for sale, plaintiff’s subsequent claim for damages, for his loss of
time, failed as the court held that the advertisement was not an offer of sale.

Similarly, in British Car Auctions Ltd v. Wright [1972] 1 WLR 1519, the court
held that an auctioneer by inviting bids to be made, makes an invitation to
treat. The offer is made by the bidder which in turn is accepted when the
auctioneer strikes the table with his hammer.

(iv) Tenders
Where a person invites tenders for a particular project the general rule is that
the invitation to tender is simply an invitation to treat. The offer is made by the
person who submits the tender and the acceptance is made when the person
inviting the tenders accepts one of them. However, in some instances a court
may hold that the invitation to tender was, in fact an offer. Thus in Harvela
Investments Ltd v. Royal Trust Co of Canada [1986] AC 207, the defendants
decided to sell their shares by sealed competitive tender. They invited the two
parties most likely to be interested in the shares each to submit a single
sealed offer for their shares and stated that they would accept the highest
‘offer’ received by them which complied with the terms of their invitation. The
claimants tendered a fixed bid of $2,175,000. The second defendant tendered
a ‘referential’ bid of $2,100,000 or $101,000 in excess of any other offer
whichever is the higher. The first defendants accepted the second defendant’s
bid, treating it as a bid of $2,276,000. But the House of Lords held that the
first defendants were bound to accept the claimant’s bid.

It was held that the invitation to tender was an offer of a unilateral contract to
sell the shares to the highest bidder, despite the fact that the invitation asked
the claimants and the second defendants to submit an ‘offer’. The bid
submitted by the second defendant was held to be invalid because the object
of the vendor’s invitation was to ascertain the highest amount which each
party was prepared to pay and this purpose would be frustrated by a
referential bid.

(b) Communication of an Offer

An offer must be communicated to the person to whom it is made, for

otherwise the offeree has no opportunity of accepting or rejecting the offer.
Thus the party to whom the offer is directed to must be made aware of it. An
offer will normally be made to a single individual or organization, though there
is nothing to prevent an offer being directed to a specific group of individuals,
anyone or more of whom may choose to accept it. For example, a private
limited company that is going public may offer some of its shares to the
members of its workforce at a favourable rate. It is also possible to make an
offer to the general public in cases where the offeror is not able at the time the
offer is made to identify who the possible recipients are.

Only the person or persons to whom the offer is made can accept it. A general
offer may be accepted by anyone and when a certain person accepts it, it
results in a contract. If, for example, a bank offers a financial reward for
information leading to the arrest of bank robbers by placing the advertisement
in a newspaper or by displaying the notice inside the bank, any person who
provides the information leading to the arrest of the robbers will satisfy the
terms of the offer and hence entitled to the reward, as long as he was aware
of the offer beforehand. The classic case of Carlill v. Carbolic Smokeball Co.
is a good illustration of the fact that the offer can be made to the whole public
or world as opposed to an offer being made to a specific person.

(c) Certainty of the terms an Offer

the offer must be definite, clear and certain. This means that the terms must
be definite, clear and certain so that the offeree is in a position to know what
exactly the offer is all about. Where the terms of the offer are obscure,
uncertain or meaningless the contract will fail. Thus, in Loftus v. Roberts
(1902) 18 TLR 532, an agreement provided for the appointment of an actress
by another person at a “West End salary to be mutually agreed between us.”
Subsequently the parties were unable to arrive at a salary which satisfied
them both. The Court held that the contract must fail. Even if it were possible
to assess a suitable salary by reference to West End rates of pay, the court
could not impose such a figure since the parties had already stated that it had
to be mutually agreed, something they had been unable to achieve. What they
had was an agreement to agree at a further date. The contract thus failed.

TERMINATION OF AN OFFER

An offer may be terminated in a number of ways namely:

(i) By Acceptance

An offer which has been accepted constitutes a contract. That offer is

therefore no longer available for acceptance.

(ii) Revocation or withdraw of an offer

Although an offer cannot be withdrawn once it has been accepted, it may be

revoked at any time before acceptance occurred. The revocation of an offer is
effective even if it is not communicated directly to the offeror, provided it is
communicated through some reliable channel.

(iii) Rejection of an offer

An offer is rejected if:

(a) the offeree notifies the offeror that he does not wish to accept the offer;
(b) the offeree attempts to accept subject to certain conditions;
(c) the offeree makes a counter-offer.

In Hyde v. Wrench (1840) 3 Beav 334, Wrench offered to sell his farm to Hyde
for £1,000. Hyde replied with a ‘counter-offer’ of £950, which was refused.
Hyde then said that he was prepared to meet the original offer of £1,000. it
was held that no contract had been formed. The counter-offer of £950 had the
effect of rejecting Wrench’s original offer.

Sometimes it is difficult to decide whether the offeree is making a counter offer

or simply asking for more information about the offer. A request for more
information will not amount to rejection of an offer. In Stevenson v. Mc Lean
(1880) 5 QBD 346, the defendant offered to sell a quantity of iron to the
claimants for cash. The claimants asked whether they could have credit
terms. When no reply to their enquiry was forthcoming, the claimants
accepted the terms of the original offer. Meanwhile, the defendant had sold
their iron elsewhere. It was held that the inquiry was a request for more
information, not a rejection of the offer. The defendant was liable for breach of
contract.

(iv) Lapse of time

An offer may come to an end due to the lapse of time. An offer which is
expressly stated to last only for a specific period of time cannot be accepted
after that date. Where the offeror does not specify a time limit for acceptance,
the offer will lapse unless it is accepted within a reasonable time. What
amounts to reasonable time will depend on the circumstances of the case and
must take account of the subject matter of the offer.

In Ramsgate Victoria Hotel v. Montefiore (1866) LR 1 Ex 109, the defendant

was offered by letter on 8 June to buy shares in the company, and was
allotted the shares on 23 November. It was held that the defendant was
entitled to refuse the shares, since his offer had lapsed before the company
had made the allotment. The offer had not been accepted in a reasonable
period, bearing in mind the fluctuating nature of the subject matter.

(v) Failure of a Condition attached to the offer

(vi) Death

An offer may be terminated by the death of the offeror, although the law is not
entirely clear and settled on this point. One view is that death always
terminates an offer because the parties cannot enter into an agreement once
one of the parties is dead. However, it seems to be the case that an offeree
cannot accept an offer once he knows that the offeror has died but that his
acceptance may be valid if it is made in ignorance of the fact that the offeror
has died, provided that the contract is not one for the performance of personal
services. There is no authority on the position where it is the offeree who dies.
The generally accepted view is that on the offeree’s death the offer comes to
an end by operation of law.
 CHAPTER 4

ACCEPTANCE

An acceptance is an unqualified expression of assent to all the terms of the

offer either in writing or by words or by conduct.

Rules Governing Acceptance

The various rules governing acceptance of an offer include the following:

(a) Acceptance must be unconditional

(b) Acceptance must be in response to and in exchange for an offer
(c) Acceptance must be communicated

(a) Acceptance Must be Unconditional

In order that acceptance gives rise to legally binding contract the acceptor
must signify his assent to the offer without any qualification. The general
position regarding the need for unconditional assent is as follows:

(i) A conditional acceptance will constitute a counter offer. Therefore a

conditional acceptance does not complete the transaction but rather
continues the negotiations.

(ii) A counter offer both rejects and extinguishes or destroys the original
offer. In Hyde v. Wrench (1840) 3 Beav 334: The defendant offered to
sell his farm to the Plaintiff for 1000 pounds and the Plaintiff replied by
offering to purchase the farm for 950 pounds. The defendant refused to
sell for 950 pounds. So the Plaintiff then wrote to the defendant
agreeing to pay the 1000 pounds but the defendant still refused to sell.
It was held that there was no contract between the parties since the
plaintiff’s offer of 950 pounds was a counter-offer which destroyed the
defendant’s original offer so as to render it incapable of subsequent
acceptance.

(iii) Any alteration to the terms of the offer will render the acceptance
invalid. In Northland Airlines Ltd v. Dennis Ferranti Meters Ltd (1970)
114 SJ 845, which involved negotiations for the purchase of an aircraft
by Northland from Ferranti, a telegram from Ferranti stated, “confirming
sale to you – aircraft – 27,000 pounds. Winnipeg. Please remit 5,000
pounds for account of…” to which Northland replied by telegram, “This
is to confirm your cable and my purchase – aircraft on terms set out in
your cable. Price 27,000 pounds delivered Winnipeg. 5,000 pounds
forwarded to your bank in trust for your account pending delivery.
Balance payable on delivery. Please confirm delivery to be made 30
days within this date.

This was held to be a counter offer, for it contained new terms

provisions regarding delivery, and payment of the deposit in trust rather
 than outright, so that it did not transfer to the seller until physical
delivery had occurred.

(iv) In commercial dealings between parties each trading on their standard

terms, the terms which apply to the contract will often be those
belonging to the party who fired the last shot. This situation has
become known as the ‘battle of the forms’. Thus in Butler Machine
Tool Co. v. Ex-Cell-O Corporation (England) Ltd [1979] 1 ALL ER 965:
The Plaintiffs offered to sell a machine tool to the defendants in a
quotation. This contained a price variation clause, which by no means
of a specific formula enabled the plaintiffs to raise the quoted price
between contract and delivery if their own costs rose. The defendants
ordered the goods but on their own standard terms which did not
include a price variation clause. The Plaintiffs, on receipt of the order
form, signed and returned an acknowledgment slip which it contained.
The Plaintiff’s costs rose considerably between the contract and
delivery. The Court regarded the defendant’s order as a counter offer,
and the return of the acknowledgement slip as the plaintiff’s
acceptance. The contract between them did not therefore contain a
price variation clause.

(c) Acceptance Must be Communicated

The general rule is that an acceptance must be communicated to the offeror if

it is to lead to a binding agreement. The operation of this rule was stated in
the case of Entores v. Miles Far East Corporation [1955] 2 QB 327 (cite the
facts)

Methods of Acceptance

It is open to the offer to prescribe the method by which acceptance may be

made. If no stipulation is made, anything that achieves communication will
suffice, namely words, writing or conduct. If it is clear that the offeror
prescribes a specific method of acceptance only, the general rule is that the
offeror is not bound if other method of communication is used. In the case of
Manchester Diocesan Council for Education v. Commercial and General
Investments Limited [1969] 3 ALL ER 1593: The Plaintiff invited offers to buy
property and supplied forms of tender on which the offers were to be made.
Clause 4 provided that “the person whose tender is accepted shall be the
purchaser and shall be informed of the acceptance of his tender by letter sent
to him by post addressed to the address given in the tender”. A letter
accepting the defendant’s tender was sent, not to the address given in the
tender, but to the defendant’s surveyor. This did not affect the defendant
adversely, as it was the Plaintiff (the offeree), which had introduced this
requirement in its standard form and now the plaintiff waived it. The defendant
claimed that the acceptance failed to comply with the method of
communication stipulated in the offer.
The Court held that communication to the address in the tender was not the
sole permitted means of communication of acceptance and that therefore a
valid contract had been concluded.

Acceptance by Silence

Silence can never amount to an effective acceptance of the offer. The general
rule is that acceptance of an offer will not be implied from mere silence on the
part of the offeree. Thus an offeror cannot impose a contractual obligation
upon the offeree by stating that, unless the latter expressly rejects the offer,
he will be held to have accepted it. The rationale behind this rule is that it is
thought to be unfair to put an offeree to time and expense to avoid the
imposition of unwanted contractual arrangements.

In Felthouse v. Bindley (1862) 11 CB (NS) 869: An uncle wrote to his nephew

offering to buy the nephew’s horse for £30.15s and stating that “If I hear no
more about him I shall consider the horse mine at that price”. The nephew
gave instructions to the defendant, an auctioneer, not to sell the horse as he
intended it for his uncle. The defendant inadvertently sold the horse, and the
uncle sued him in the tort of conversion. The auctioneer argued that the
claimant had no title to sue because he was not the owner of the horse as his
offer to buy the horse has not been accepted by his nephew.

The Court held that the action must fail as the horse had not become the
uncle’s for there was not a contract. The nephew’s silence did not amount to
acceptance of the offer.

Exceptions

The general rule that acceptance must be communicated to the offeror is not
an absolute one. The exceptions to the aforesaid rule include the following:

(i) Acceptance by Post

As a general rule, an acceptance must be brought to the offeror’s attention for

it to be effective. However, communication through the post provides an
important exception to this general rule. The general rule as regards
acceptance sent by post is that the acceptance of the offer takes place or
becomes effective, provided it was correctly addressed and prepaid, is posted
by the offeree. This rule applies even if the letter of acceptance is lost or
destroyed.
This general rule traces its origin from the case of Adams v. Lindsell (1818) 1
B & Ald 681. The defendant wrote to the plaintiff offering to sell wool and
requested a reply “in the course of post”. The defendant misdirected the letter
and this caused it to be delayed for a couple of days. On receiving the letter,
the plaintiff replied immediately, by posting a letter of acceptance. After the
plaintiff’s acceptance was posted, but before it arrived, the defendant sold the
wool to a third party, in the belief that the plaintiff was not interested. The
Court held that a contract was concluded between the defendant and the
plaintiff when the letter of acceptance was posted by the plaintiff.
Similarly, in Henthorn v. Fraser [1892] 2 Ch, Fraser offered to sell some
horses to Henthorn and gave him fourteen days to consider. The following
day Fraser decided the price he had quoted was too low and wrote to
Henthorn revoking the offer. After the letter of revocation had been posted but
before he had received it, Henthorn decided to buy the houses, and posted
his letter of acceptance at 3.50 p.m. It was held that a binding contract had
come into existence at 3.50 p.m. the letter of revocation was ineffective, for it
had arrived too late.

(ii) Acceptance in Unilateral Contracts

A unilateral contract is a contract whereby one party promises to pay to the

other a sum of money or to do some other act if that other party will do, or
refrain from doing something without making a promise to that effect. Classic
example is the reward cases such as the Carlill v. carbolic Smoke Ball Co.

A unilateral contract should be contrasted with a bilateral contract in that the

latter is formed by the exchange of promises between the parties, resulting in
reciprocal undertakings, whereas in the former one party binds himself, for
example, to pay the reward, and the offeree accepts by performing the
requested act such as finding the lost property. Unlike a bilateral contract, the
acceptance of an offer in a bilateral contract can be made by fully performing
the requested act, and hence there is no need to give advance notification of
the acceptance of the offer. The contract is “unilateral” in that it is only one
party, the offeror, who is bound, and the contra ct is concluded by the
offeree’s act.
 CHAPTER 5

CONSIDERATION
 CHAPTER 6

EQUITABLE ESTOPPEL
 CHAPTER 7

INTENTION TO CREATE LEGAL RELATIONS

 CHAPTER 8

CAPACITY OF PARTIES
 CHAPTER 9

CLASSIFICATION OF TERMS OF THE CONTRACT

INTRODUCTION

A contract is made up of many clauses or provisions. However, the most

important clauses in a contract are the terms of the contract, which are the
obligations owed by the parties to each other under the contract. The terms of
a contract, thus, set out the parties’ respective rights and duties under the
contract. If a party fails to act as required by the contract that party is in
breach of contract and may be sued as a result. Though the parties to a
contract usually state the terms of a contract expressly, that is, in writing or
orally or both, terms may also be implied in the contract by the courts, statute
or custom. The terms of the contract, whether express or implied have varying
degrees opf importance and as such the breach of an important or major term
of the contract namely, a condition will attract wider and serious remedies as
compared to the bre3ach an unimportant or minor term, namely, a warranty.
Finally, terms in a contract may not only confer rights on one or both of the
parties, but may also restrict or exclude a party’s rights.

Before examining the terms of a contract in detail we must first distinguish

between terms and representation. A term is part of the contract, a
representation, which is a statement of fact made by one party, which induces
the other party to enter into the contract, is not part of the contract.

The distinction between a term and a representation is important because the

remedies available where there is a breach are different. If a statement is held
to be a term of a contract, a failure to comply with it will be a breach of
contract entitling the innocent party to a remedy for breach of contract. If
however, the statement is held to be a mere representation, the innocent
party cannot claim that there has been a breach of contract because the
statement was not a term of the contract. The innocent party’s remedy if any
is to seek to have the contract set aside or claim damages for
misrepresentation.

The basic test for determining whether a statement made by a party to a

contract is a term or mere representation depends on the intention. In
considering the intention the courts have adopted the objective test. In Oscar
Chess Ltd v Williams [1957] 1WLR 370, Lord Denning stated at p.375:

“It is sometimes supposed that the tribunal must look into the minds of the
parties to see what they themselves intended, that is a mistake… the question
of whether a warranty was intended depends on the conduct of the parties, on
their words and behaviour rather than on their thoughts. If an intelligent
bystander would reasonably infer that a warranty was intended that would
suffice.”

In Thake v Maurice [1986] 1 ALL ER 497, Mr and Mrs Thake did not want to
have any more children and so Mr. Thake decided to have an operation which
would sterilize him. The defendant, the surgeon who undertook the operation
had explained beforehand that it was irreversible. He had not told them that
there was a slight possibility that it might reverse itself naturally even after the
usual tests on Mr Thake’s sperm count had shown that the operation had
been successful. The couple believed that Mr Thake must be sterile after the
operation, and they did not realize that Mrs Thake was pregnant till it was too
late for her to have an abortion. Mr Thake’s operation had been successful,
and his sperm count had been correctly checked, but a natural reverse of the
operation had subsequently occurred. Mr. and Mrs. Thake argued that it had
been a term of their contract with the surgeon that the operation would render
Mr Thake sterile and that the term had been breached.

The Court of Appeal in rejecting Mr. and Mrs. Thake’s argument held that the
defendant had merely guaranteed to carry out the operation with care and
skill. However, Mr. and Mrs. Thake were awarded damages on the basis that
the surgeon had been negligent in failing to warn them on the possibility of
natural reversal. Nourse LJ sytated on p.511:

“The function of the court in ascertaining objectively the meaning of words

used by contracting parties is one of everyday occurrence. But it is often
exceedingly difficult to discharge it where the subjective understandings of the
parties are clear and opposed. Here the plaintiffs understood that Mr. Thake
would be permanently sterile. The defendant himself recognized they would
have been left with that impression. On the other hand, he did not intend, and
on the state of his knowledge he could not have intended, to guarantee that
that would be the case. Both the understanding and intention appear to them,
as individuals to have been entirely reasonable, but an objective interpretation
must choose between them. In the end the question seems to be reduced to
one of determining the extent of the knowledge which is to be attributed to the
reasonable person standing in the position of the plaintiffs.”

In ascertaining the intention of the parties as to whether a statement was

intended to be a term or mere representation the courts have established
some principles. As Lord Moulton stated in the case of Heilbut, Symous &
Company v Bukklet on [1913] A.C 30 at p.50, non of these principles is
decisive or conclusive but are only tools to assist the court to establish the
intention of the parties:

(a) Importance of the statement

A statement is likely to be a term of the contract where it is of such importance

to the person to whom it is made that, if had not been made; he would not
have entered into the contract. Thus, in Bannerman v White [1861] 10 CB NS
844: brewers were refusing to use hops contaminated with sulfur. Bannerman
offered hops to White, and White asked if any sulfur had been used in the
growth or treatment of hops. Bannerman said “No” and White said that he
would not even ask the price if sulfur had been used. A contract was made for
the sale of hops. But later it was found that sulfur had in fact been used in
growing a small portion of hops.
It was held that it was a term of the contract that sulfur had not been used in
growing of hops. It had been clear to both parties that the question of the use
of sulfur was very important to White and that he would not he would not have
contracted without the assurance that no sulfur had been used on
Bannerman’s hops. White was therefore, entitled to terminate the contract for
breach.

Similarly, in Couchman v Hill [1947] KB 554, the plaintiff bought the

defendant’s heifer at an auction but no warranty was given as to its condition.
Before the sale, the plaintiff asked the defendant whether the heifer was in
calf and stated that he was not but he was not interested in purchasing it if it
was. The plaintiff was told that the heifer was not in calf. Approximately seven
weeks after the purchase, the heifer suffered a miscarriage and died. The
plaintiff brought an action for breach of contract. It was held that the statement
that the heifer was not in calf was held to be a term of the contract because of
the importance attached to the statement.

Verification
A statement is not likely to be a term of the contract if the maker of the
statement asks the other party not to rely on it without verifying its truth. In
Ecay v Godfrey [1947] 80 Lloyds LR 286, a seller of a boat stated that the
boat was sound but advised the buyer to have it surveyed. The seller’s
statement was held not to be a term of the contract but a mere representation.

However, in Schawel v Reade [1913] 2 IR 64, the plaintiff wished to purchase

a horse for stud purposes and went to the defendant’s stables where he
began examining a horse. While the plaintiff was inspecting a horse
“Mallowman”, the defendant said “You need not look for anything; the horse is
perfectly sound. If there was anything the matter with the horse, I would tell
you.” The plaintiff ceased his inspection and three weeks later he bought
“Mallowman”. The horse was found to be totally unfit for stud purposes
because hereditary eye disease. The question in the case was whether the
defendant’s statement amounts to a term or a representation. The House of
Lords held that the defendant’s statement was a term of the contract, and as
such the defendant was in breach of the contract.

This case should, however, be contrasted with the case of Hopkins v

Tangueray [1854] 15 CB 130; the plaintiff purchased the defendant’s horse at
auction. The previous day the defendant had found the plaintiff examining the
horse’s legs and had said, “You need not examine his legs: you have nothing
to look for. I assure you that he is perfectly sound in every respect.” The Court
of Common Pleas held that the defendant’s statement was not a term of the
contract only a representation.

(c) Special knowledge of the maker of the statement

If the maker of a statement has some special knowledge or skill compared top
the other party, the statement may be held to be a contractual term. If on the
other hand, the parties’ degrees of knowledge are equal or if the person to
whom it is made has the greater knowledge, the statement may be held to be
a mere representation. These propositions are illustrated by the two cases
discussed below.

In Oscar Chess Ltd v Williams [1957] 1WLR 370, in June 1955 the defendant
sold a second hand Morris car to the plaintiffs, car dealers, for £290. The
registration book which was examined by the plaintiffs’ representative showed
that the car was first registered in 1948, and the defendant honestly believed
that it was a 1948 model. The purchase price was calculated on this basis. In
January 1956, the plaintiffs discovered from the manufacturers that the car
was a 1939 model, so the price was £175, and claimed for breach of
warranty. It was held that the defendant was not liable to the plaintiffs in
damages for breach of the term of the contract because, as the plaintiffs
knew, the defendant had no personal knowledge of the date of the
manufacture of the car and the plaintiffs were in at least as good a position to
know this. The defendant had made an innocent misrepresentation, that is,
non fraudulent.

However, in Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965]
1 WLR 623, where the maker of the statement was in the better position to
establish its truth, the statement was found to be a term of the contract. The
facts of the case were:

The plaintiff, Dick Bentley, asked the defendants, Harold Smith Ltd, who were
car dealers, to find him “a well vented” Bentley car. A car was found. The
defendants informed the plaintiff that they were in a position to find out the
history of cars and this car had been fitted with a replacement engine and
gear box and had done only 20,000 miles since then when in fact the car had
done 100,000 miles. The defendants relied on the odometer reading and had
not checked the details. The plaintiff bought the car and discovered that this
representation as to the mileage was untrue. The plaintiff sued the defendants
seeking damages for breach of contract. It was held that the defendants’
statement as to the car mileage was a term of the contract; and the
defendants, being car dealers, were in a better position than the plaintiff to
know their statement was true.

EXPRESS TERMS

IMPLIED TERMS
Implied terms are terms which, though not expressly stated, by the parties by
words or conduct, are implied to give effect to the presumed intention of the
parties. The three ways through which terms may be implied into the contract
are by custom, statute, or courts.
TERMS IMPLIED BY CUSTOM
By custom we mean an established practice or usage in a trade, profession,
locality, type of transaction, or between parties. It is a well settled principle of
law that a contract may be subject tot eh terms that are sanctioned by custom
though they have not been expressly stated or mentioned by the parties. In
Hutton v Warren [1836] 1M & W; the tenant of a farm was given notice to quit
by the landlord. He had worked and planted the land and the landlord would
obtain the benefits of that when he left. It was held that the tenant was entitled
to an allowance for the seeds and labour on leaving. There was no express
term to that effect, but he was so entitled on the basis of a local custom.

Baron Parke, in explaining the rationale of implying terms in the contract on

the basis of custom had the following to say (at p.475):

“It has long been settled that, in commercial transactions, extrinsic evidence of
custom and usage is admissible to annex incidents to written contracts in
matters with respect to which they are silent. The same rule has also been
applied to contracts in other transactions of life, in which known usages have
been established and prevailed; and this has been done upon the principle of
presumption that, in such transactions the parties did not mean to express in
writing the whole of the contract by which they intended to be bound but to
contract with reference to those known usages.”

Similarly, in British Crane Hire Corporation v Ipswich Plant Hire Ltd [1975] Q.B
303: Both the plaintiffs and defendants were in the business of hiring out
heavy earth moving equipment. The defendants hired a crane by telephone
from the plaintiffs. After delivery, the plaintiffs sent the defendants a printed
form setting out the conditions of hire, which were similar to those used by all
plant hiring firms and which stated that the defendants would be liable for all
expenses arising out of the use of the crane. Before this form was signed by
the defendants, the crane sank in marshy ground. The plaintiffs sought to
recover expenses incurred in recovering the crane form marshy ground, and
the defendants claimed that the conditions had not been incorporated. It was
held that the conditions of the hire were opart of the contract and the
defendants knew that the conditions were in common use in the business and
they are always applied.

Also in Coutts v Jacobs [1927] EDL 120, Jacobs, a wool farmer in the Eastern
Cape of the Republic of South Africa, sent a consignment of wool to Coutts a
wool Broker in East London, to sell on his behalf. The wool was sent to Coutts
early in August and by December Coutts had only sold small quantities of
wool. Jacobs disappointed with sales instructed Coutts to hand the wool over
to a different Broker. Coutts refused to release the wool till Jacobs had paid
him the sum he would have earned by way of commission had he succeeded
in selling the wool. Various witnesses called before the court testified that it
had been a practice amongst wool Brokers in East London since 1917 to
charge commission if they were instructed to transfer the wool to a different
Broker, provided that the original Broker had done his best in trying to sell the
wool. The court held that Jacobs was obliged to pay commission even though
he himself did not know the existence of the practice. The courts warned that
persons who choose to transact with members of a particular trade or industry
must acquaint themselves with the practices and usages of that trade or
industry, for they will not be able to invoke their own ignorance to prevent
usages within the trade or industry from applying to them also.

Where an express term of the contract contradicts or conflicts with a custom,

then an express term will prevail. In London Export Corporation Ltd v Jubilee
Coffee Roasting Company [1958] 1 WLR 661, Lord Jenkins at p.675 stated:

“An alleged custom can be imported or incorporated into a contract only if

there is nothing in the express or necessarily implied terms of the contract to
prevent such inclusion and further that a custom will only be imported into a
contract where it can be so imported consistently with the tenor of the
document as a whole.”

Afffreteurs Reunis Societe Anonyme v Walford [1919] AC 801: A charter party

provided that commission was to be paid to the Charterers Brokers on the
signing of the Charter whereas by custom commission was payable only when
the hire had actually been earned. It was held that the commission was
payable on the signing of the charter as custom was entirely inconsistent with
the plain words of the agreement and thus, in the circumstances of the case
of no effect. The Charterers would enforce this provision against the ship
owners.

It is not easy to establish the existence of a particular custom or usage. The

custom or usage must, in the words of Ungoed Thomas J. at p.1438 in
Cunliffe-Owen v Teather & Greenwood [1967] 1WLR 1421, be:

“Certain, in the sense that the practice is clearly established; it must be

notorious, in the sense that it is so well known in the market in which it is
alleged to exist, that those who conduct business in the market contract with
the usage as an implied term; and it must be reasonable.”

In summary, the custom must be generally known, clear and reasonable, and
must not conflict with common or statute law.

TERMS IMPLIED BY STATUTE

Terms implied by statute are those terms that are implied into contracts based
on the rule of law or public policy, and not on the intention of the parties. The
purpose of terms implied by statute is to provide some form of protection to
the weaker party from the exploitation by the stronger party. Often the weaker,
such as the purchasers, particularly consumers, may not have the same
bargaining powers as the sellers. Examples of contracts to which terms are
implied include the contracts for sale of goods, landlord and tenant, and
master and servant.

The Sale of Goods Act 1883 contains a number of implied terms which
include the following:
The seller has the right to sell the goods, and the goods are free from charges
or encumbrances in favour of third parties (s.12);
(ii) In a sale by description, the goods shall correspond with the
description
(s.13);
(iii) In a case of a seller who sales goods in the course of business, there is
an
implied condition that the goods supplied under the contract are of
satisfactory quality (s.14);
(iv) Where the seller sells goods in the course of a business, and the buyer
makes known to the seller any particular purpose for which the goods
are
bought, there is an implied condition that the goods supplied under the
contract are reasonably fit for that purpose (s.14 (3)).

TERMS IMPLIED BY THE COURTS

Although it is not the duty of the courts to insert a term into contracts, but
rather interpret contracts, courts at times do imply a term to give a contract
‘business efficacy.’ The rationale for such court’s intervention is that since the
parties intended to create a binding contract, they must have intended to
include terms to make the contract work. The courts will imply two types of
terms into contracts namely, terms implied in fact and terms implied in law.

Terms Implied In Fact

The terms implied in fact, also known as tacit terms, are those terms which
are so obvious that the parties must have intended them to be included into
the contract. In order to give ‘business efficacy’ to the contract, the implied
term must be both obvious and necessary. Therefore, courts will not imply a
term into a contract merely because it is reasonable to do so. The test which
is often used by the courts in implying a term into a contract is the ‘officious
bystander’ test, whose original lies from the statement of Lord Mack: nnon L.J
in Shirlaw v Southern Foundries Ltd [1939] 2 KB 206, at p.207:

“Prima facie that which in any contract is left to be implied and need not be
express is something so obvious that it goes without saying; so that if, while
the parties were making their bargain, an officious bystander were to
suggest some express provision for it in the agreement, they would testily
suppress him with a common, ‘Oh, of course’.”

In BP Refinery (Western Port) PTY Ltd v Shire of Hastings [1978] ALJR 20,
Lord Simon laid down the requirements for terms implied in fact as follows (at
p.26):

“For a term to be implied, the following conditions (which may overlap) must
be satisfied:

It must be reasonable and equitable;

It must be necessary to give business efficacy to the contract, so that no term
will be implied if the contract is effective without it;
It must be so obvious that ‘it goes without saying’;
It must be capable of close expression;
It must not contradict any express term of the contract.”

In the Moorcock [1889] 14 PD 16; the defendant owned a wharf on the

Thames and made a contract with the plaintiff ship owner for him to unload his
vessel at their wharf. Both parties knew that the vessel was such that, while at
the wharf, it must ground at low tide. The vessel grounded and was damaged.
It was held to be an implied term of the contract that the defendant had taken
due care to ascertain that the bed of the river adjoining the wharf was not
such as to damage the vessel when it grounded. The defendants were in
breach of the implied term that the wharf was safe.

The above case should however, be contrasted with the case of Voigt Ltd v
South Africa railways [1933] CPD 4, where the courts refused to imply a term
into the contract. In that case the South African Railways (SAR) advertised for
the sell of various second hand goods, which included an old marine boiler
weighing 25 tons.
In the advert SARs stated that the items would be sold ‘Free on Rail’, Cape
Town Harbour. In other words, SAR would deliver the goods to a rail truck in
Cape Town Harbour, where the items advertised for sale were standing at the
time.
Voigt Ltd saw the advert and made an offer to buy the marine boiler for £30,
which offer was accepted. Voigt Ltd then, instructed SAR to transport the
boiler to Huguenot Station, against payments of SAR’s ordinary rail charges.
At that stage, SAR discovered that it could not actually transport the boiler
anywhere outside the harbour as the boiler was to big and heavy for either
road or rail transport. In order to get the boiler from Cape Town harbour to
Huguenot Station, extensive infrastructural alterations would have had to be
done, for the boiler was to big to pass by platforms or to fit under bridges or
inside tunnels.

SAR then offered to cancel the contract and reimburse Voigt Ltd the £30
purchase price, but Voigt Ltd rejected the offer, and sued SAR for breach of
contract, claiming £830 in damages.
Voigt Ltd argued that there was an implied term in the contract to the effect
that SAR would transport the boiler to Huguenot Station or any other place of
its choice, against the payment by hire of SAR’s ordinary rail charges. The
court rejected Voigt Ltd’s argument. The court employed the ‘officious
bystander test’, held that SAR would not have promptly agreed to transport
the boiler to Huguenot Station had the question been brought to their attention
at the time the contract was entered into.

TERMS IMPLIED IN LAW

Terms implied in law cover many classes of contract, such as contracts of

employment and contracts between landlord and tenant. In a tenancy
agreement, for example the landlord impliedly covenants that his tenant shall
enjoy quiet possession, and the tenant impliedly agrees not to commit waste.
Similarly, in a contract of employment the employee impliedly undertakes, for
example, to faithfully serve his employer and that he is reasonably skilled. The
employer on the other hand, impliedly undertakes that he will not require the
employee to do unlawful act, and that he will provide safe premises.

In Liverpool City Council v Irwin [1977] AC 239, the defendant let a flat in an
upper floor of a block of flats to the plaintiff tenant. A term was implied by the
court into a tenancy agreement between the plaintiff and the defendant that
the defendant had an obligation to keep in repair the stairs and the lift in the
block of flats which they owned, thereby insuring that the plaintiff could gain
access to his property.

Similarly in Baylis v Barnett [1988] the plaintiff lent the defendant a sum of
money. The defendant knew this involved the plaintiff in borrowing the money
from the bank. Although the parties did not discuss the question of interest the
court held there was an implied term that the defendant would indemnify the
plaintiff for any interest he owed to the bank.
 CHAPTER 10

EXEMPTION CLAUSES

Exemption or exclusion clauses are terms which exclude or limit, or purport to

exclude or limit, a liability which would otherwise arise at common law, or by
statute, or under the terms of the contract. Such a clause may exclude or limit
a liability to a specific sum or amount, which would otherwise arise under the
express or implied terms of the contracts.

Exemption clauses perform a number of useful functions which include the

following:

(i) They help in the allocation or distribution of risks to the parties under
the contracts.
(ii) They help reduce litigation costs by making clear the division of
responsibility between the parties to the contract.
(iii) They are often used in standard from contracts, which helps reduce
the costs of negotiations and making of contract especially those
dealing with numbers of customers or clients.

Exemption clauses can also perform a function which is socially harmful in

that it may be used by those with ‘ strong bargaining power’ such as suppliers
of goods and services to exclude liability towards the weaker party thereby
leaving the weak without a remedy. It is this socially undesirable function of
exemption clauses that has led to both parliament and courts impose some
restrictions on exemption clauses.

A party relying on the exemption clause must show that:

(a) The exemption clause has been incorporated as a term of the contract:
(b) The exemption clause covers the event (s) or loss which has/have a
reason or occurred.
(c) The exemption clause has not been rendered unenforceable or
invalidated by the rule of law

INCORPORATION

An exemption clause can be incorporated in the contract by signature, by

notice, or by course of dealing:

(1) SIGNATURE

As a general rule, if a person signs a contractual document, he will be bound

by its terms even if he has not read the document. In L’Estrange v Graucob
Ltd [1934] 2 K.B 394, the plaintiff, Miss L’ Estrange, bought an automatic
cigarette vending machine from the defendants. She signed the order form
which, contained the following term in small print, ‘any express or implied
condition, statement or warranty, statutory or otherwise not stated herein is
hereby excluded.’ When the machine was delivered it did not work
satisfactorily and the plaintiff sought damages for breach of the implied
statutory term that the machine was fit for the purpose for which it was sold.
The defendants sought to rely on the exemption clause, but the plaintiff
argued that she had not read the order form and did not know what it
contained.

It was held that as the plaintiff had signed the written contract and had not
been induced to do so by misrepresentation, she was bound by the terms. It
was wholly immaterial that she had not read the document and did not know
its contents.

Similarly in Springs v Sotheby Parke Bernet and co. Ltd [1984] the plaintiffs
deposited a diamond with the Sotheby’s to be auctioned. He signed a
document, without reading it, and put it straight into his wallet. The document
contained details of the agreement and a declaration in bold type immediately
above the space for the plaintiff’s signature. The declaration “I have read and
agreed to the instructions for sale as detailed on the reverse of this form”. On
the reverse of the form there was an exclusion clause. It was held that the
clause had been validly incorporated into the contract.

However, a person will not be bound by a signed contractual document if the

other party misrepresented its terms or effect. In Curtis v Chemical Cleaning
Co [1951] 1 KB 805, the plaintiff took a white satin wedding dress to the
defendants shop to be cleaned. The shop assistant asked her to sign a
‘receipt’, which in fact contained a condition excluding the defendants’ liability
for any damage however arising. When the plaintiff asked why she had to
sign, the assistant told her that the defendant would not accept liability for
damage to the beads and sequins with which the dress was trimmed. The
plaintiff signed, and when the dress was returned it was stained. The
defendants argued that the clause excluded liability.

It was held that the defendants were liable for the damage to the dress and
could not rely on the exclusion clause because of the assistants’ innocent
misrepresentation which had misled the plaintiff as to the extent of the
exemption clause and thereby induced him to sign the receipt.

(2) NOTICE

If the exemption clause is set out or referred to in a document, it will only be

incorporated in the contract if reasonable notice of its existence is brought to
the attention of the party adversely affected by it. Whether such notice has
been given depends on the following factors namely, nature of the document,
degree of notice and time of notice.

(i) Nature of the document

An exemption clause is incorporated in the contract if the document in which it
is set or is referred to is intended to have contractual force. In Chapelton v
Barry Urban District Council [1940] 1 KB 532, the plaintiff wished to hire a
deck chair to sit on the bench. The defendant council had left a pile of deck
chairs with a notice giving the hire charge and stating that tickets were
obtainable from the deck chair attendant. The notice itself contained no
exempting conditions. The plaintiff obtained two chairs from the attendant and
received two chairs from the attendant and received two tickets. The plaintiff
did not know that tickets contained conditions because he simply glanced at
them and put them into his pocket. In fact, on the reserve side of the ticket
were the words: ‘The council will not be liable for any accident or damage
arising from the hire of the chair’. Due to the negligence of the defendant
council, the canvas on the plaintiff’s chair gave way when he sat on it. The
council argued that the clause on the ticket exempted them from liability.

It was held that the ticket was merely a receipt and not the sort of contractual
document which a reasonable person might have expected to contain
contractual terms. The exemption clause was therefore ineffective and the
defendants were liable.

However, in Thompson v London, Midland & Scottish Railway [1930] 1 KB 41,

the plaintiff, an elderly lady, obtained an excursion ticket which contained a
notice on its reverse side stating that it was issued subject to the conditions in
the defendant’s timetables. The timetables, which could be obtained for 6d,
stated that the ticket was issued subject to the condition that ‘no action would
lie against the company in respect of the injury, fatal or otherwise, however
caused.’ The plaintiff, who could not read, was injured when she got off the
train when, due to the defendant’s negligence, it was not safe to do so. She
sued claiming damages and the defendant company relied on the exemption
clause.

It was held that the fact that the plaintiff could not read did not alter the fact
that she was bound by the condition on the ticket. An indication of where a
condition could be found in another document was sufficient notice of the
existence of the clause so that it was validly incorporated.

(ii) Degree of Notice

The party relying on the exemption clause must take reasonable steps to
bring it to the attention of the other party. In Parker v South Eastern Railway
[1877] 2 CPD 416, the plaintiff deposited his bag in the defendant’s
cloakroom, paid 2d and received a ticket. On the face of the ticket the words
‘see back’ were printed, and on the back a notice stated that the company
would not be responsible for the value of any package in excess of £10. A
notice containing the same condition was displayed in the cloakroom. The
plaintiff’s bag was lost or stolen and he claimed its value, which was more
than £10. He argued that he had taken the ticket without reading it and
thought it was only a receipt for 2d or evidence that the company had
possession of his bag. He had not seen the notice in the cloakroom.

It was held that the defendant had not taken reasonable steps to give the
plaintiff notice of the condition.

Also, where a term is unexpected or unusual, the party seeking to enforce it

must show that he has taken steps to bring it to the attention of the other
party. In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989]
QB 433, the defendants, who were advertising agents, required photographs
for a 1950’s presentation. The plaintiffs, in response to their requests, sent 47
transparencies with a delivery note which stated that they were to be returned
in 14 days. In the small print on the back of the delivery note, condition 2
stated, ‘a holding fee of £5 plus VAT per day will be charged for each
transparency which is retained by you for longer than the said period of 14
days.’ The defendants did not use the transparencies, put them to one side,
and forgot about there for a further two weeks. The plaintiffs sent an invoice
for £3,783.50 for the holding fee.

It was held that if the condition is a particularly onerous or unusual one which
would not generally be known to the other party, then the party seeking to
enforce it had to show that it had fairly and reasonably been brought to the
other party’s attention. Condition 2 was unreasonable and extortionate, and
the plaintiffs had not brought it to the attention of the defendants. Instead, the
plaintiffs were entitled to an award of £3.50 per transparency per week.

(iii) Time of Notice

An exemption clause will not be effective or incorporated in the contract

unless it is adequately brought to the attention of the other party before the
contract is made. In Olley v Marlborough Court Hotel Ltd [1949] 1 KB 532, the
plaintiff booked at the defendant’s hotel. When she went to her room she saw
a notice on the wall stating that the hotel would not be liable fore articles lost
or stolen unless they were deposited for safe custody. The plaintiff left some
furs and jewelry in the bedroom, closed the self-locking door, and hung the
key on a board at the reception. The furs were stolen.

It was held that the defendant was not entitled to rely on the exclusion clause
as it was not a term of the contract. The contract was concluded at the
reception desk and the plaintiff had no notice of the exclusion clause at that
stage.

Likewise, in Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, the plaintiff
went to park his car in the defendants’ automatic car park. A notice at the
entrance to the car park gave details of the charges and stated that all cars
were ‘parked at owner’s risk’. When a car was driven up to it, a machine
dispensed a ticket. The plaintiff took the ticket which gave the car’s time of
arrival and stated in small print that it was issued subject to the terms and
conditions displayed within the car park. One of these conditions purported to
exclude the defendants’ liability for injury to customers howsoever caused.
The plaintiff was injured by the defendants’ negligence when he came to
collect his car.

The court held that the exclusion clause was ineffective because it had been
introduced after the contract was concluded.

Lord Denning, at p.169, stated as follows:

“The customer pays his money and gets a ticket. He cannot refuse it. He
cannot get his money back. He may protest to the machine, even swear at it.
But it will remain unmoved. He is committed beyond recall. He was committed
at the very moment when he put his money into the machine. The contract
was concluded at that time. It can be translated into offer and acceptance in
this way: the offer is made when the proprietor of the machine holds it out as
being ready to receive the money. The terms of the offer are contained in the
notice placed on or near the machine stating what is offered for the money.
The customer is bound by these terms as long as they are sufficiently brought
to his notice before-hand, but not otherwise. He is not bound by the terms
printed on the ticket if they differ from the notice, because the ticket comes too
late. The contract has already been made.”

(3) COURSE OF DEALING

Where there has been a previous course dealing between the parties, an
exemption clause will be deemed to be so incorporated into a contract even
though it was not specifically referred to at the time the contract was read.
Thus in Spurling v Bradshaw [1956] 2 Aller 121, [1956] WLR 461, the plaintiffs
were warehouse men who had dealt with the defendant for many years and
always on the plaintiffs standard contractual terms. The defendant delivered
eight barrels of orange juice for strorage. A few days later the defendant
received from the plaintif a document acknowledging the receipt of the eight
barrels and referring on its face to clauses printed on the back. One such
clause exempted the plaintiffs ‘from any loss or damage occasioned by the
negligence, wrongfull act or default’ by themselves or their servants. when the
defendant came to collect the barrels, they were found to be empty. The
defendant refused to pay the storage charges and the plaintiff sued.

It was held that the exemption clause though introduced after the contract
after the contract was made it was part of the contract. This is because the
parties had regularly dealt with each other in the past and had done so
consistently on the same contractual terms. The defendant therefore was well
aware of these terms when he deposited the goods. The exemption from
liability was valid and plaintiffs claim for storage charges succeeded.

It is worth emphasizing that the course of dealing must not only be regular
but, must also be consistent .Thus in McCutcheon v David Macbrayne Ltd
[1964] 1 WLR 125,McSporrran arranged for a car belonging to he’s brother-in
–law ,McCutcheon, the appellant to be skipped from Western Isles of Scotland
to the mainland by the respondents ,McBrayne Ltd .The usual practice of the
respondents was to ask customers to sign a risk note by which they agreed to
be bound by the conditions printed on it . The conditions included a statement
that the goods were shipped at the owner’s risk. The appellant had skipped
various items three or four times in the past and so had McSporran. On each
previous occasion the appellant had signed a risk note but McSporran had
only done so twice . the ship sank due to the negligence of the respondents,
and the appellant sought to recover the cost of hes car from the respondents.
The respondents argued that the exemption clause on the on the risk note
was incorporated by reason of the other dealings. It was held that there was
no consistent course of dealing by which the exemption clause could have
been incorporated.

What constitutes a ‘regular’ course of dealing depends upon the facts of a

particular case. Thus in Henry Kendale Ltd v William Lillico Ltd[1969] 2 AC 31,
the sellers had sold had sold goods to the buyers under an oral contract .The
next day the sellers had sent the buyers a ‘sold note’ containing a clause
stating that the buyer took responsibility latent defects in the goods.

There had been three or four contracts a month between the parties over a
three year period using the same ‘note’, though the buyers never read the
clause.
It was held that 100 similar contracts over a period of three years constituted a
course of dealing.

However, in Hollier v Rambler Motors (AMC) Ltd [1972] l2 QB71, the plaintiff
had had his car repaired at the defendants garage on three or four occasions
over a five year period. On at least two of these occasions he had signed a
form containing an exemption clause which he had not read. The exemption
stated that ‘the company is not responsible for damage caused by fire to
customers’ cars on the premises.

The court held that the exemption clause had not been incorporated because
there was not a consistent course of dealing. The defendant was therefore
liable.
This position may, however, be viewed different where the contracting parties
are commercial parties of equal bargaining power and in the same business.
Thus in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1975] QB
303, a clause was incorporated into the contract on the basis of two previous
transactions and the custom of the trade. The court put emphasis on the fact
that the parties were of equal bargaining power, and they were dealing in the
same business or trade and as such conditions were habitually incorporated
into these types of contracts.

CONSTRUCTION

In considering the construction or interpretation of the contract in relation to

the exemption clause, the question that must be determined is whether the
clause used is appropriately worded to cover what has happened. However,
before discussing in detail the exemption clauses, we first need to examine
briefly the interpretation of the contracts in general.

Once the terms of the contract have been ascertained, they must be
construed or interpreted to establish their true meaning. Many contractual
disputes are as a result of disagreements over the proper interpretation of a
particular phrase in a contract and most of them depend upon the precise
wording and context of the contract.

In interpreting the contract, the role of the court is to seek to ascertain and
give effect to the intention of the parties. The intention of the parties is
ascertained from the objective assessment of the wording of the contract and
of the surrounding circumstances. The methodology of the common law is not
to probe the real intentions of the parties but to ascertain the contextual
meaning of the relevant contractual language. The intention is determined by
reference to the expressed rather than actual intention. Thus the intention of
the parties must be ascertained from the document in which they have chosen
to enshrine the agreement. It is only inj very limited circumstances that the
courts are prepared to go outside the four corners of the document. Thus the
actual words used in the document that the parties have elected to enshrine
their agreement is of crucial importance.

The traditional approach of the courts to the interpretation of contracts was a

literal one. Thus in Lavell & Christmas Ltd v Wall [1911] 104 LT 85, Cozens
Hardy MR stated:

“It is the duty of the court…to construe the document according to the ordinary
grammatical meaning of the words used therein.”

However, in recent years there has been a fundamental shift in the approach
in the court’s interpretation of contracts. Thus the courts have moved away
from the literal approach towards a purposive approach of interpretation, with
particular emphasis being laid upon the adoption of an interpretation which
has regard to the commercial purpose of the transaction. In Deutshe
Genossenschaftsbank v Burnhope [1995] 1 WLR 1580, Lord Steyn, at p.1589,
stated:

“Parallel to the shift during the last two decades from a literalist to a purposive
approach to the construction of statutes there has been a movement from a
strict or literal method of construction of commercial contracts towards an
approach favouring a commercially sensible construction.”

Lord Steyn repeated this view in his speech in the case of Lord Napier &
Ettrick v R.F Kershaw Ltd [1999] 1 WLR 756, when, at p.763, he stated:

“Loyalty to the text of the commercial contract, instrument or document read in

its contextual setting is the paramount principle of interpretation. But in the
process of interpreting the meaning of the language of the commercial
document, the court ought to generally to favour a commercially sensible
construction. The reason for this approach is that a commercial construction is
likely to give effect to the intention of the parties. Words ought therefore to be
interpreted in the way in which a reasonable commercial person would
construe them. And the reasonable commercial person can safely be
assumed to the unimpressed with technical interpretations and undue
emphasis on niceties of language.”

In Investors Compensation Scheme Ltd v Bromwich Building Society [1998] 1

WLR 816, at p.912-913, Lord Hoffman re-stated in a more modern form the
principles by which contractual documents are now interpreted. He stated that
the result of these principles is:
“to assimilate the way in which such documents are interpreted by Judges to
the common sense principles by which any serious utterance will be
interpreted in ordinary life. Almost all the intellectual baggage of ‘legal’
interpretation has been discarded.”

Lord Hoffman then set out the following five principles:

“(1) Interpretation is the ascertainment of the meaning which the document

would convey to a reasonable person having all the background knowledge
which would reasonably have been available to the parties in which the
situation in which they were at the time of the contract.

The background was famously referred to by Lord Wilberforce as the ‘matrix

of fact’, but this phrase is, if anything, an understated description of what the
background may include. Subject to the requirement that it should have been
reasonably available to the parties and to the exception mentioned next, it
includes absolutely anything which would have affected the way in which the
language of the document would have been understood by a reasonable man.

The law excludes from the admissible background the previous negotiation of
the parties and their declarations of subjective intent. They are admissible
only in an action for rectification. The law makes this distinction for reasons of
practical policy and, in this respect only, legal interpretation differs from the
way in which we would interpret utterances in ordinary life. The boundaries of
this exception are in some respects unclear. But this is not the occasion on
which to explore them.

The meaning which a document (or any other utterance) would convey to a
reasonable man is not the same thing as the meaning of its words. The
meaning of the words is a matter of dictionaries and grammars; the meaning
of the document is what the parties using those words against the relevant
background would reasonably have been understood to mean. The
background may not merely enable the reasonable man to choose between
the possible meanings of words which are ambiguous but even (as
occasionally happens in ordinary life) to conclude that the parties must for
whatever reason, have used the words or syntax (see Mannai Investments
Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] AC 749; [1997] 3 ALL ER
352).

The “rule” that words should be given their “natural and ordinary meaning”
reflects the common sense proposition that we do not easily accept that
people have made linguistic mistakes, particularly in formal documents. On
the other hand, if one would nevertheless conclude from the background that
something must have gone wrong with the language, the law does not require
Judges to attribute the parties an intention which they plainly could not have
had.”

RECTIFICATION
Once the contract has been interpreted, one of the parties may argue that the
written contract or document, as interpreted, fails to reflect accurately the
agreement which the parties had actually reached. In such a case, the court
nmay be called upon to rectify the document so that it accurately reflects the
agreement which the parties did in fact reach. In Lavell & Christmas Ltd v
Wall [1911] 104 LT 85, the claimant asked the court to adopt a particular
interpretation of the contract and, when that argument failed, sought to have
the document rectified.

There is a distinction between interpretation and rectification. Interpretation is

the process of considering a meaning to a term of the contract. Rectification,
on the other hand, is the process whereby a document, the meaning of which
the meaning of which has already been ascertained, is rectified so that it gives
effect to the intention of the parties. Rectification is, therefore, a remedy which
is concerned with defects not in the making, but in the recording, of a contract.
In Ferederick E. Rose (London) Ltd v William H. Pim Junior and Co. Ltd
[1953] 2 QB 450, the buyers asked the plaintiff to supply them with ‘Moroccan
Horsebeans described as feveroles’. The plaintiffs did not know what
feveroles were but were informed by the defendants that they were to supply
them with ‘horsebeans’ which the plaintiffs would then sell to the buyers, both
parties believing that feveroles were just horsebeans. In fact, ‘feveroles’ were
a superior type of horsebean, and the buyers had claimed damages from the
plaintiffs for not supplying ‘feveroles’. The plaintiffs wanted to have their
written contracts with the defendants rectified by the insertion of the word
‘Feveroles’ so that the defendant would have been in breach in supplying the
wrong goods.

The Court of Appeal refused to rectify the contract since the parties had
agreed on the sale of horsebeans and the agreement correctly reflected this.
The Court of Appeal observed that this is not a case in which the document
failed to record the intention of the parties. The document did reflect their prior
agreement; it was simply the case that the parties were under a shared
misapprehension that ‘horsebeans’ were ‘feveroles’.

Lord Denning LJ, on p.519, Stated:

“Rectification is concerned with contracts and documents, not with intentions.

In order to get rectification, it is necessary to show that the parties were in
complete agreement on the terms of their contract, but by an error wrote down
wrongly; and in this regard, in order to ascertain the terms of their contract,
you do not look into the inner minds of the parties- into their intentions- any
more than you do in the formation of any other contract. You look at their
outward acts, that is, at what they said or wrote to another in coming top the
agreement and then compare it with the document which they have signed. If
you can predicate with certainty what their contract was, and that is, by
common mistake, wrongly expressed in the document, then you rectify the
document; but nothing less will suffice…there is a passage in Crane v
Hegeman-Harris Co. Inc. [1939] 1 ALL ER 662, 664, which suggests that a
continuing common intention alone will suffice; but I m clearly of opinion that a
continuing common intention is not sufficient unless it has found expression in
outward agreement. There could be no certainty at all in business
transactions if a party who had entered into a firm contract could afterwards
turn to have it rectified on the ground that the parties intended something
different. He is allowed to prove, if he can, that they agreed something
different: see Lavell & Christmas Ltd v Wall ([1911] 104 LT 85, 88), per Lord
Cozens-Hardy, MR, and per Buckley LJ (93), but not that they intended
something different.

The present case is a good illustration of the distinction. The parties no doubt
intended that the goods should satisfy the inquiry of the Egyptian buyers,
namely, “horsebeans described in Egypt as feveroles”. They assumed that
they would do so, but they made no contract to that effect. Their agreement
as outwardly expressed both orally and in writing, was for ‘horsebeans’. That
is all that the defendants ever committed themselves to supply, and all they
should be bound to. There was, no doubt, an erroneous assumption
underlying the contract- an assumption for which it might have been set aside
on the ground of misrepresentation or mistake- but expression of contract,
such as to give rise to rectification.”

Rectification is an equitable remedy, and as such it is only available at the

discretion of the court. In deciding whether to rectify a document, the court will
have regard to the following considerations: first, a court will not rectify a
document where “convincing proof” is provided that the document fails to
record the intention of the parties. In Joscelyne v Nissen [1970] 2 QB 86, the
plaintiff father and his daughter, the defendant, shared a house owned by the
daughter. They agreed that the father was to transfer his car hire business to
his daughter, and in return the daughter was to pay him a weekly pension and
to pay certain household expenses such as gas, electricity and coal bills. The
contract specified that she was to “discharge all expenses in connection with
the whole premise… and shall indemnify the plaintiff from and against any
claim arising in respect of the same”. At first the defendant paid several of the
household bills but then stopped paying. The plaintiff sought rectification of
this contract to provide for the payment of gas, electricity and coal bills on the
basis that this reflected what had been orally agreed between the parties
during negotiations.

At first instance, the Judge found that though there was no complete
concluded and antecedent agreement, the agreement should be rectified. It
was held, dismissing the appeal, that it was not necessary to find a concluded
contract antecedent to the agreement. Rectification could be ordered as long
as there was a common intention (demonstrated by the outward expression)
regarding a particular provision.

The second consideration is that the document must fail to record the
intention of both parties. Thus in Unilateral mistake, the claim for rectification
cannot be granted unless the defendant had actual knowledge of the
existence of the plaintiff’s mistake at the time the contract was signed. In A.
Roberts & Co. Ltd v Leistershire County Council [1961] Ch. 555
Furthermore, where the defendant has been found guilty of unconscionable
conduct then the claimant may be entitled to rectification. Thus in Commission
for the New Town v Cooper (Great Britain) Ltd [1995] Ch. 259, Stuart-Smith
LJ, at p.280, stated:

“The commonest circumstances in which rectification is granted is where the

written contract does not accurately record the parties’ joint agreement. In
other words, there is a mistake common to both parties. In the case of
unilateral mistake, that is to say, where only one party is mistaken as to the
meaning of the contract, rectification is not ordinarily appropriate. This follows
from the ordinary rule that it is the objective intention of the parties which
determines the construction of the contract and not the subjective intention of
one of them. Also, it would generally be inequitable to compel the other party
to execute a contract, which he had no intention of making, simply to accord
with the mistaken interpretation of the other party.

…Where A intends B to be mistaken as to the construction of the agreement,

so conducts that he diverts B’s attention from discovering the mistake by
making false and misleading statements, and B in fact makes the very
mistake that A intends, then notwithstanding that A does not actually know,
but merely suspects, that B is mistaken, and it cannot be shown that the
mistake was induced by any misrepresentation, rectification may be granted.”

Thirdly, the document must have been preceded by a concluded contract or

by a ‘continuing common intention’. In Joscelyne v Nissen (above), though the
formal contract signed by the parties made no mention that the daughter had
agreed to pay gas, electricity and coal bills, the court held that there was
sufficient evidence of a continuing common intention that the daughter pay
these bills to enable the court to rectify the agreement to give effect to the
parties’ intention.

Fourthly, rectification will not be granted in favour of the claimant who has
been guilty of excessive delay in seeking rectification, nor will it be granted
against a bona fide purchaser for value without notice.

CONTRA PROFERENTEM

The general approach that the courts have adopted to the interpretation of
exemption clauses is a restrictive one, under which the exemption clause
interpreted narrowly or strictly against the party seeking to rely on it. This rule
is known as the ‘contra proferentem’ rule. The effect of the rule is that any
ambiguity in an exemption clause will be resolved against the party seeking to
rely on it. Besides, the words used in the exemption clause must be clear and
unambiguous, and must cover the liability that has occurred.

Thus in Andrew’s Brothers (Bournemouth) Ltd v Singer & Co. Ltd [1934] 1 KB
17, the plaintiff agreed in writing to buy a ‘new Singer car’. The contract
contained a clause which excluded the defendant’s liability for breach of “all
conditions, warranties and liabilities implied by statute, common law or
otherwise”. The plaintiff car delivered to the plaintiff had in fact done a
considerable number of miles.

It was held that the seller was in breach of an express condition that the car
would be new. He could not therefore rely on an exclusion of implied terms,
and was liable to the plaintiff.

Similarly, in Baldry v Marshall [1925] the plaintiff told the defendant that he
required a car suitable for touring. The defendant was a car dealer and, on his
recommendation, the plaintiff bought a Bugatti him. The written contact
excluded the seller’s liability for breach of any “guarantee or warrantee,
statutory or otherwise”. The car proved unsuitable for touring.

It was held that the seller was in breach of the implied condition under S.14 of
the Sale of Goods Act that the car would be suitable for a purpose made
known to the seller. The exclusion clause was ineffective because it excluded
only guarantees or warranties and did not exclude liability for breach of a
condition of the contract.

Also in Houghton v Trafalger Insurance CO. Ltd [1954] QB 247, a car

insurance policy excluded liability for damage ‘caused or arising while the car
is conveying any load in excess of that for which it was constructed’. At the
time of an accident there were six people in a car with a sitting capacity of five
and the insurers denied liability claiming that this was a load in excess of that
for which the car was constructed.

It was held that the word ‘load’ only covered cases where there was a
specified weight which must not be exceeded, as in the case of Lorries or
Vans. Romer LJ stated as follows:

“…I think that it would be most regrettable if the provision of this kind were
held to have a force for which the defendants contend. It would be a serious
thing for a motorist involved in a collision if he were told that the particular
circumstances of the accident excluded him from the benefit of the policy. I
think that any clause or provision that purports to have that effect ought to be
clear and unambiguous so that the motorist knows exactly where he stands.
This provision is neither clear nor unambiguous.”

LIABILITY FOR NEGLIGENCE

In determining whether the exemption clause covers negligence liability, the

courts apply the three stage test laid down in Canada Steamship Lines Ltd v
R [1952] AC 192, at p.208 by Lord Morton of Henryton, which are as follows:
(1) If a clause contains language which expressly
exempts the party relying on the exclusion clause from the
consequences of his own negligence then effect must be given to the
clause;

(2) If there is no express reference to negligence, the

court must consider whether the words used are wide enough, in their
ordinary meaning, to cover liability for negligence; any doubt must be
resolved against the party in breach;

(3) Even if the words used are wide enough to cover

liability for negligence, it must be asked whether the party in breach
could be liable on some ground other than that of negligence. If he
could be, and if that other ground is not far fanciful or remote that the
party in breach cannot be supposed to have desired protection against
it, then it is likely that the words will be taken to refer to the non-
negligent liability only.

The first test may be fulfilled by using a word which is a synonym for
negligence such as ‘any act, omission, neglect or default’. Thus in Monarch
Airlines Ltd v London Luton Airport Ltd [1997] CLC 698, loose paving blocks
had damaged one of the plaintiff’s Airline’s Aircraft as it was preparing to take
off from the airport. When the plaintiff sued to recover damages for negligence
and/or breach of duty under section 2 of the Occupiers Liability Act 1957, the
defendant sought to rely on clause 10 of its standard conditions which
excluded the liability of the airport, its servants and agents for any damage to
aircraft “arising or resulting directly or indirectly from any acts, omissions,
neglect or default unless done with intent to cause damage or recklessly and
with knowledge that damage would probably result”. The plaintiff submitted
that this clause did not cover the liability which occurred since it did not cover
negligence liability.

It was held that the clause excluded liability for negligence and any breach of
statutory duty unless tha negligence or breach was caused either with intent
to cause damage or recklessly and with knowledge that damage would
probably result. In any event, the words “neglect or default” were synonymous
with negligence.

Also in White v John Warwick & Co. Ltd [1953] 1 WLR 1285, the plaintiff
contracted with the defendant for the hire of a tradesman’s tricycle. The
tricycle supplied under the agreement had a defective saddle. The plaintiff
was thrown off the tricycle when the saddle tripped up, and was injured.
Clause 11 of the agreement provided that “nothing in this agreement shall
render the owners liable for any personal injury to the riders or the machines
hired.” The plaintiff sought damages alleging (i) that the defendants were
strictly liable in supplying a tricycle which was not reasonably fit for the
purpose for which it was required, and (ii) they were negligent in that they had
failed to take care to ensure that the tricycle supplied was in a proper state of
repair and in working condition. It was held that the exemption clause should
be construed as merely applying to the strict liability under the contract and
not the liability for negligence.

Denning LJ stated:

“… in this type of case two principles are well settled. The first is that if a
person desires to exempt himself from a liability which the common law
imposes on him, he can only do so by a contract freely and deliberately
entered into by the injured party in words that are clear beyond the possibility
of misunderstanding. The second is, if there are two possible heads of liability
on the part of defendant, one for negligence, and the other, a strict liability, an
exemption clause will be construed, so far as possible, as exempting the
defendant only from his strict liability and not as relieving him from his liability
for negligence.

In the present case, there are two possible heads of liability on the
defendants, one for negligence, and the other for breach of contract. The
liability for breach of contract is more strict than the liability for negligence.
The defendants may be liable in contract for supplying a defective machine
even though they were not negligent. (see Hayman v Nye [1881] 6 QBD 685).
In these circumstances, the exemption clause, I think, be construed as
exempting the defendants only from their liability in contract and not from their
liability in negligence.”

LIMITATION OF LIABILITY

Exemption clauses which totally exclude liability are construed differently from
those clauses which merely limit liability. In Ailsa Craig Fishing Co. Ltd v
Malvern Fishing Co. Ltd [1983] 1 WLR 964, Securicor had undertaken to
provide a security service for the boats belonging to a fishing association
whilst those vessels were in Aberdeen Harbour. Ailsa Craig were members of
that association. One night their vessel, the Strathallen, fouled another boat
and sank. Ailsa Craig claimed £55,000 damages from Securicor. Securicor
conceded that they had been negligent, and breached their contract, but
sought to rely upon a clause in the contract restricting their liability to £1,000.

It was held that the limitation clause operated to limit liability to £1,000.
Limitation were not to be construed by the exacting standards applicable to
exclusion clauses and since this clause was clear and unambiguous, it was
wide enough to cover liability in negligence.

Lord Wilberforce, at p.966, stated:

“Whether a clause limiting liability is effective or not is a question of

construction of that clause in the context of the contract as a whole. If it is to
exclude liability for negligence, it must be most clearly and unambiguously
expressed, and in such a contract as this, must be construed contra
preferentem. I do not think that there is any doubt so far. But I venture to add
one further qualification, or at least clarification: one must not strive to create
ambiguities by strained construction, as I think that the appellants have striven
to do. The relevant words must be given, if possible, their natural, plain
meaning. Clauses of limitation are not regarded by the courts with the same
hostility as clauses of exclusion. This is because they must be related to other
contractual terms, in particular to the risks to which the defending party may
be exposed, the remuneration which he receives and possibly the opportunity
of the other party to insure.”

INCONSISTENT TERMS

If an exemption clause is inconsistent with another express term of the

contract or oral undertaking given at or before the time of contracting, then the
exemption clause will be overridden by that term or undertaking. Thus in
Mendelssohn v Normand Ltd [1970] 1 QB 177, the plaintiff, wishing to park his
car, was told by the car park attendant that the rules required the car to be
unlocked. The plaintiff explained that he had a suitcase in the car containing
valuables, and the attendant agreed to lock the car as soon as he had moved
it. The plaintiff was then given a ticket exempting the garage from
responsibility for loss or damage to the vehicles or their contents, however
caused. On his return the plaintiff found the car unlocked and later discovered
that his suitcase was missing.

It was held that the defendants were liable, since the attendant’s promise (to
lock the car, which implied that he would see that the contents were safe) took
priority over the printed condition because the printed condition was
repugnant to that express promise.

The same conclusion has been reached in other cases where there has been
a clear oral promise, essential to the contract, and in contradiction of that
promise in one party’s standard terms. In Harling v Eddy [1951] 2 KB 739, Mr.
Eddy had put a heifer up for sale at an auction. When the heifer came into the
ring nobody bid for her until Mr. Eddy said there was nothing wrong with her
and he would absolutely guarantee her in every respect. Mr. Harling then bid
for and purchased the heifer. Within three months the heifer was dead from
tuberculosis. Mr. Eddy sought to defend himself from a claim for breach of
contract by relying on condition 12 of the printed conditions of sale at the
auction. Conditions 12 said “No animal….is sold with a warranty unless
specifically mentioned at the time of offering, and no warranty so given shall
have any legal force or effect unless the terms thereof appear on the
purchaser’s account”. The statement Mr. Eddy had made as to the heifer’s
condition had not appeared on Mr. Harling’s account.

The court held that the statement was a condition and not covered by a
clause relating to the warranty but, even if this was not the case, the oral
statement overrode the printed term. The defendant implied “that the animal
should be sold on the faith of what he stated, to the exclusion of condition 12,
or any other condition which might be found in the auction particulars which
would of itself appear to exclude any oral statement” (Lord Evershed MR at
P.744).

FUNDAMENTAL BREACH
The doctrine of fundamental breach was developed to prevent anyone relying
on an exemption clause if he had failed to perform or carry out the basic
purpose of the contract. As Lord Abinger stated in Chanter v. Hopkins [1838]
4 M & W 399, at P 404, “If a man offers to buy peas of another, and sends him
beans, he does not perform his contract. But that is not a warranty; there is no
warranty that he should sell him peas; the contract is to sell peas, and if he
sends him anything else in their stead, it is a non-performance of it”.

Similarly in Nichol v. Godts [1854], 10 Exch.191, Pollock, C.B in holding that

the seller was not protected by the term he inserted into the contract stated
that “if a man contracts to buy a thing, he ought not to have something else
delivered to him.”

In that case a seller contracted to sell a buyer “foreign refined rape oil,
warranted only equal to the sample.” The oil delivered corresponded with the
sample, but was found not to be “foreign refined rape oil” at all.

A ‘fundamental’ breach is more serious than a breach of condition or

warranty, and as such an exemption clause which protects a party against a
breach of a condition or warranty, could not shield him from the
consequences of a fundamental breach of the contract. Thus in Karsales
(Harrow) Ltd v. Wallis [1956] 2 ALL E.R 866, the defendant inspected a car
owned by Z, found it in good order and wished it on hire purchase. Z thus sold
it to the plaintiffs, and they resold it to a hire-purchase company. The
defendant made a contract with his company. The contract contained a term
that ‘no condition or warranty that the vehicle is road-worthy or as to its
condition or fitness for any purpose is given by the owner or implied therein’.
On attempted delivery the car was seen to have changed dramatically to be a
virtual wreck incapable of moving. The defendants refused delivery or pay the
hire-purchase installment. However, the car was towed to his place of
business. When sued the defendant pleaded the state of the so called car
towed to his business premises. In reply to this, the plaintiffs relied on the
excluding term.

The court of Appeal held that the thing delivered was not the thing contracted
for. The excluding term therefore did not avail the plaintiff, and judgment was
given for the defendant.

Although the doctrine of fundamental breach has been developed by the

courts into an extremely effective way of combating exemption clauses, there
are subjects to two qualifications, namely waiver of the breach and excluding
liability for a fundamental breach.

(i) Waiver of the breach

An innocent party to contract may elect to waiver the fundamental breach and
treat a contract as subsisting. Thus in Hain SS Co Ltd v. Tate & Lyle [1936] 2
ALL ER 597, the defendant lost their claim because they had earlier waived
their rights and so the charter party remained in force.

(ii) Excluding liability for a fundamental breach

An exemption clause can be framed or drafted in such wide terms so that it
covers even a fundamental breach or excludes liability even for a fundamental
breach. In Suisse Atlantique Societe’ D’ Armement maritime SA v.
Rotterdamsche kolen Centrale [1967] 1 AC 361, the plaintiffs owned a ship
which in December, 1956, they chartered to the defendants for the carriage of
coal from the United States to Europe. The charter was to remain in force for
two years consecutive voyages. The defendants agreed to load and discharge
cargoes at specified rates; and, if there was any delay they were to pay $1000
a day demurrage. In September 1957 the plaintiffs claimed that they were
entitled to treat the contract as repudiated by the defendants’ delays in
loading and discharging cargoes. The defendants rejected the contention. In
October 1957, the parties agreed, without prejudice to their disputes, to
continue with the contract. The defendants subsequently made eight round
voyages. The plaintiffs then claimed all the money which they had lost through
the delays. The defendants argued that the claim must be limited to the
agreed demurrage for the actual days in question. The plaintiffs replied that
the delays were such as to entitle them to treat the contract as repudiated; the
demurrage clause therefore did not apply and they could recover their full
loss.

The House of Lords held that there was no fundamental breach by the ship
beyond the lay time and, any event would demurrage clause was a liquidated
damages clause and not a limitation clause. It was not possible for the
appellants to recover any more than the liquidated damages amount. The
House of Lords also held that there is no rule of law that an exemption clause
is nullified by the fundamental breach of contract or breach of fundamental
term; in each case the question is one of construction of the contract.

Also in Photo Production Ltd v. Securicor Transport Ltd [1990] AC 827, the
plaintiffs factory owners, entered into a contract with the defendants whereby
the defendants would patrol the factory at a cost of £8 15s per week. The
contract was on the defendants’ standard form, which included the following
clause:
“Under no circumstances shall the company (Securicor) be responsible for
any injurious or default by any employee of the company unless such act or
default could have been foreseen and avoided by the exercise of due
diligence on the part of the company as his employer; nor, any event, shall the
company be held responsible for (a) any loss suffered by the customer
through burglary, theft, fire or any other cause, except in so far as such loss
solely attributable to the negligence of the company’s employees acting within
the course of their employment…”

One of the defendants’ employees was patrolling the factory when he

deliberately started a fire by discarding a lighted match. The flames spread
and the factory was destroyed, causing a loss of £615, 000.The plaintiffs
claimed damages from the defendants.

The House of Lords held:

(a) The question whether and to what extent an exemption clause was
to be applied to any breach of contract was a question of construction
of the contract.
(b) On their true construction, the words of the exclusion clause
covered deliberate acts, and therefore the defendants were relieved
from their responsibility for breach of their implied duty to operate with
due regard to the safety of the premises.
(c) Normally, when the parties were bargaining on equal terms they
should be free to apportion the risks as they saw fit.
(d) It was not good law to say that on termination of a contract of a
fundamental breach of contract terms (including any exemption
clauses) came to an end.
CHAPTER 11

MISTAKE
 CHAPTER 12

MISREPRESENTATION
 CHAPTER 13

DURESS AND UNDUE INFLUENCE

 CHAPTER 14

ILLEGALITY AND PUBLIC POLICY

The general principle of law is that the courts will not enforce or uphold an
agreement or a contract which is illegal or contrary to public policy. The court
will also not allow the recovery of benefits conferred under such a contract.

CONTRACTS ILLEGAL AT COMMON LAW

The contracts which are considered illegal at common law include the
following:

(a) Contracts to commit crimes or civil wrongs

Where the purpose of a contract between the parties is to commit a crime, or

a tort, or a fraud against another party, then that contract will be illegal and
unenforceable. Thus in Alexander v. Rayson [1936] 1 KB 169, the plaintiff,
Alexander, and defendant, Rayson entered into an agreement whereby the
agreed rent was split into two parts, one part declared to be rent and the other
declared to be for services to the flat concerned. The object was to reduce the
assessment for rates. It was held that since the plaintiff intended to use the
lease and service agreement for an illegal purpose, the plaintiff could not
enforce either the lease or the service agreement.

Similarly, in Foster V Driscoll (1929) 1 KB 470, a contract made to smuggle

whisky into the United States during prohibition was need to be illegal and
void.

(b) Contracts promoting sexual immorality

A contract which seeks to promote or encourage sexual immorality will be

held to be illegal as a principle of common law. In Pearce V. Brooks (1886) LR
1 EX 213, the plaintiff let a coach out on hire to a prostitute (Brooks), knowing
that it would be used by her to ply her trade. It was held that the plaintiff could
not recover the hire charge when the defendant refused to pay it.

Lord Pollock stated (at P218) as follows:

“I have always considered it as settled law that any person who contributes to
the performance of an illegal act by supplying a thing with the knowledge that
it is going to be used for that purpose, cannot recover the price of the thing so
supplied… nor can any distinction can be, made between an illegal and an
immoral purpose; the rule which is applicable to the matter is ex turpi causa
non oritur action (no action arises from a base or wrongful cause), and
whether it is an immoral or an illegal purpose in which the plaintiff has
participated, it comes equally within the terms of that rexion, and the effect is
the same; no cause of action can arise out of either the one or the other”.
Similarly, in Upfill V Wright (1911) 1 KB 506, the plaintiff, through his agent, let
a flat in London to Defendant, an unmarried woman. The agent knew that the
defendant was the mistress of a certain man and he assumed that the rent
would be paid as a result of her being a ‘kept woman’; that is, it would come
from the man whose mistress she was. Eventually, plaintiff’s agent gave the
defendant notice to quit. The defendant failed to pay the rent for the last half
year of the tenancy. The plaintiff sued for the rent which was still owed to him.
It was held that the plaintiff was not entitled to recover the rent because the
flat was let for an immoral purpose.

(c) contracts promoting corruption in public life

An agreement for the sale or purchase of public offices or honours is unlawful

as such practices encourage corruption. In Parkinson V College of
Ambulance Ltd and Harrison (19253 2 KB1), Colonel Parkinson was told by
Harrison, the secretary of the defendant charity that the charity would arrange
for hire to be granted a knighthood if he made a substantial donation. Harrison
had told Parkinson of the charity’s royal patronage. Parkinson paid ₤3,000 to
the college of Ambulance on the understanding that he would receive a
knighthood and he also promised further payment to the charity in the future.
When Parkinson did not receive a knighthood and realized that he had been
duped, he brought an action against the charity to recover back the money
that he had paid. The court held that the contract was for the purchase of the
title, it was contrary to public policy and was an illegal contract. Despite the
fact that the plaintiff had been defrauded,; he knew that he was entering into
an improper agreement and he could not recover back the money he had paid
to the charity; nor could he recover damages from the charity or its secretary.

(d) Contracts prejudicial to the Administration of justice

Contracts which are prejudicial to the administration of justice are illegal.

Therefore a contract to prevent a prosecution may be illegal and a contract
under which one party promises to give false evidence in criminal proceedings
is illegal. In R.V. Andrews (1973) QB 422, the defendant witnessed a traffic
accident between a motor car and a moped, as a result of which criminal
proceedings against the car driver. Were contemplated. The defendant invited
the car driver to pay hire to give false evidence at the prospective prosecution,
and the driver offered hire a sum of money but no bargain was in fact struck.
The defendant was convicted on a charge of inciting the motorist to pervert
the course of justice.

(e) Contracts prejudicial to the interest of the state

Contracts which are prejudicial to the interests of the state, such as trading
with an enemy during war time, are illegal. In Ragazzoni V. KC Sethia Ltd
(1957) 3 ALL ER 286, an ordinance issued by the government of India
prohibited the taking of goods out of India if they were destined for any part of
South Africa, or were intended to be taken to South Africa despite being
initially destined for another country. KC Sethia Ltd, an English company,
agreed to sell and deliver to Polissino Regazzoni 500,000 bags of jute. To the
knowledge of both contracting parties the jute was to be shipped from India to
Genoa so that it might there be resold to a South Africa buying agency in
contravention of the Indian ordinance.

KC Sethia Ltd failed to deliver the jute and Regazzoni claimed damages in an
English court for breach of contract. Sethia defended the action by claiming
that the contract was; to Ragazzoni’s knowledge, an illegal contract and
therefore un enforceable as it’s breach of the Indian ordinance was harmful to
the interests of the state.

The House of Lords held that, as a matter of public policy, the contract was
enforceable in England. Its performance would have involved, as the parties
were well aware, doing an act in a friendly foreign country which violated the
law of that country.

Consequences of illegality

The general principle of law is that a contract which is illegal from the start will
be void and unenforceable. Thus money or property transferred under the
contract is not usually recoverable. This general rule, however, is subject to
three exceptions:

(i) A party or claimant may be able to recover money paid or property

transferred under an illegal contract if he can establish his right to the
money or the property without relying on the illegal contract.

In Bowmarkers Ltd V. Barnet Instruments Ltd (1945) KB 65, the plaintiffs had
been supplied with machine tools and had let them to the defendants under
three hire-purchase contracts. War-time regulations provided that no person
was to pay or receive any price for any machine tool provided in the United
Kingdom till a maximum price had been issued by the Ministry of Supply. All
three contracts were assumed to contravene these regulations. The
defendants failed to make hire-purchase payments due and sold the tools
they had acquired under two of the contracts. The refused to return the tools
held under the third contract. The defendants argued that the plaintiffs had no
remedy because the contracts were in breach of the regulations and therefore
illegal. The plaintiffs brought an action for conversion of the tools.

It was held that this action could succeed because it was not based on
founding a claim on the contracts which were illegal but on the plaintiff’s
proprietary right to their own goods.

(ii) Where a parties are not in pari delicto, that is, where they are not
equally guilty. In Kiriri Cotton Ltd V Dewani (1960) AC192, KC Ltd let a flat in
Uganda for a term of seven years to Dewani, who paid a premium of 10,000
shillings. Although neither party realized they were breaking the law, in fact, a
breach of a government ordinance. This ordinance did not make any express
provision that an illegal premium was recoverable by the tenant. Dewani
brought an action to recover the premium.
It was held, by the Privy Council, that the premium was recoverable by the
tenant, despite the lack of an express provision in the ordinance permitting
this. It was clear that the statute was aimed at protecting a particular class of
person from another, namely prospective tenants from landlords.

Where a party withdraws or repents before the contract has been

substantially performed.

In Kearley V Thomson (1890) 24 QBD 742, the defendants were solicitors

who were acting on behalf of a creditor petitioning against a bankrupt. The
plaintiff, a friend of the bankrupt, agreed to pay the defendants their costs if
they did not appear at the public examination of the bankrupt and if they did
not oppose the order of discharge against the bankrupt. The money was paid
and the solicitors did not appear at the public examination. However, before
the application to discharge the bankrupt, the friend changed his mind and
sought the return of his money from the defendants. It was held that the
plaintiff could not recover. The contract was illegal since it interfered with the
administration of justice, and as the defendants had partly performed this
contract, the plaintiff’s repentance was too late.

Fry L J had the following to say (at p.747):

“Where there has been a partial carrying into effect of an illegal purpose in a
substantial manner, it is impossible, though there remains something not
performed, that the money paid under that illegal contract can be recovered
back”.

Contracts void at common law

The types of contracts that are void at common law are contracts to oust the
jurisdiction of the courts, contracts prejudicial to the status of marriage, and
contracts in restraint of trade.

(a) Contracts to oust the jurisdictions of the courts.

It is a general principle of law that a contract which purports or seek to oust

the jurisdiction of the courts is void. This general rule is well illustrated by the
case of Barker V Jones (1945) 1 WLR 1005. In this case an association,
which controlled the sport of weightlifting the United Kingdom, by its rules
vested the government of the association in a central council consisting of the
officers and a number of members. The association in a central council
consisting of the officers and a number of interpreters of the association
concerning any matter not dealt with by the rules. In all circumstances, the
decision of the council was to be considered as final. As a result of
discouragements between the members, two libel actions were brought
against certain officers and council members. The central council authorized
the payment of two sums of ₤100 to solicitors, out of the association’s funds,
towards the defendant’s legal costs. A member of the association challenged
this decision of the council by seeking a declaration that this use of the
association’s fund was improper.
It was held that the provision in the rules giving the central council\the sole
right to interpret the rules of the association was contrary to public policy and
void. The judge further explained that though, in theory, the parties to a
contract may make any contract that they like, this is subject to certain
limitations imposed by public policy. One of these limitations is that the
jurisdiction of the courts cannot be ousted by the agreement of the parties. He
cited with approval the statement of Lord Denning in Lee V Showmen’s guild
of Great Britain (1952) 2 QB 329 at p 342;
“If parties should seek, by agreement, to take the law out of the hands of the
courts and put it into the hands of a private tribunal, without any recourse at
all the courts in case of error of law, then the agreement is to that extent
contrary to public policy and void”.

It is imperative to note that an arbitration clause does not oust the jurisdiction
of the courts. Therefore, the parties may provide in their contract that no
cause of action will arise till the matter has been determined by arbitration.
This was laid down in Scott V Avery (1855) 5 HLC 811, where a contract
between a ship owner and the underwriters made it clear that no action
should be brought against the insurers until the arbitrators had dealt with any
dispute arising between the parties.

It was held that it is permissible for the parties to agree that no right of action
shall accrue until an arbitrator has decided on any difference, which may arise
between them.

(b) Contracts undermining the status of marriage

A contract which is prejudicial to the status of marriage is void. An example of

such contracts is one which seeks to restrict a person’s freedom to marry
whoever he wishes. In Lowe V Peers [1768] 4 Burr 2225, a man promised the
plaintiff, under seal, that he would not marry any other person except her. He
stated that if he broke this promise to her, he would pay her ₤2000. His
promise was held to be void, as it restricted his freedom of choice without
there being any reciprocal promise from the plaintiff.

Another type of agreement which is considered to undermine the status of

marriage is the “the marriage breakage” contract, this is, an agreement for
reward to procure marriage. Such agreements are considered as contrary to
public policy and therefore void. In Hermann V Charlseworth [1905] 2 KB 123,
the plaintiff saw an advertisement in the defendant’s paper, the matrimonial
post and fashionable marriage advertiser, and later signed an agreement with
the defendant in the following terms: In consideration of being of being
introduced to or put in correspondence with a gentleman through the influence
of the proprietor of the paper entitled “The matrimonial post and fashionable
marriage advertiser”, and in the event of a marriage taking place between
such gentleman and myself, I hereby agree to pay to the said proprietor the
sum of ₤250 on the date of my said marriage”. The plaintiff also paid the
defendant a ‘special fee’ of ₤52. The plaintiff was introduced to several men
by the defendant, who also interviewed and wrote to other on her behalf, but
no marriage or engagement followed. She sued the defendant to recover back
the ₤52. It was held that the transaction of this case came within the rule
which invalidates marriage breakage contracts. Accordingly, the plaintiff was
entitled to recover back the money paid under this contract, even though the
defendant had brought about introductions and incurred expense in doing so.

(c) Contracts in restraint of trade

A contract in restraint of trade is one that contains an undertaking, which

restricts the future freedom of one person to freely carry on or exercise his
business, trade or profession. A contract in restraint of trade is contrary to
public policy and void unless it can be shown to be reasonable, and is not
contrary to public interest.

In Nordenfelt V Maxim Nordenfelt Guns and Ammunition Company Ltd [1894]

AC 535, the seller of a gun and ammunition manufacturing business agreed
with the buyer not, directly or indirectly, to engage in the business of a
manufacturer of guns or ammunition anywhere in the world, or compete in any
way, for a period of twenty five years. Though the undertaking not to compete
in any way was considered unreasonable by the court as being too wide, the
provision not to manufacture guns and ammunition was held to be valid
because even though it was a worldwide restriction, there was only a limited
number of consumers so that the restriction was not wider than was
necessary to protect the company and it was not injurious to the public
interest.

Lord MacNaghten [at p 565] laid the following principle:

“The public have an interest in every person’s carrying out his trade freely; so
has the individual. All interference with individual liberty of action in trading,
and all restraints of trade themselves, if there is nothing more, are contrary to
public policy, and therefore void: That is the general rule. But there are
exceptions: restraints of trade and interference with individual liberty of action
may be justified by the special circumstances of a particular case. It is a
sufficient justification, and indeed it is the only justification, if the restriction is
reasonable-reasonable, that is, in reference to the interests of the parties
concerned and reasonable in reference to interests of the public, so framed
and so guarded as to afford adequate protection to the party in whose favour
it is imposed, while at the same time it is in no way injurious to the public”.

Restraints take many forms, but among the most important are the following:

Restraints in the contract of employment;

Restraints on the sale of business;
A ‘solus’ agreement by which a trader agrees to restrict his orders from one
supplier.
Price fixing agreements and agreement which seek to regulate or limit
supplies of goods.

(i) Restraints in a contract of employment

Often contracts of employment contain an express term or covenant which
purports to restrict the freedom of the employee, on the termination of
employment, from engaging in a competing business or working for a
competitor for a certain period. So long as such a clause is inserted to protect
legitimate proprietary interests of the employer and is reasonable in extent,
the covenant will be valid and enforceable.

In determining the validity of the restraint clause in employment contract two

important factors must be considered. The first factor is that the restraint
clause must seek to protect some legitimate proprietary interest of the
employer such as clientele, confidential information, trade secrets, trade
connection.

In Forster & Sons Ltd V Suggett (1918) 35 TLR 87, the defendant was
employed as the plaintiff’s works manager and had been instructed in their
confidential manufacturing processes for glass. The contract of employment
contained a covenant whereby the defendant was not to divulge any trade
secrets and was not to carry on or be interested in glass manufacture or any
business connected with glass making carried on by the plaintiffs for five
years after the termination of his employment.

The court granted an injunction to restrain the divulging of the trade secrets,
namely the confidential manufacturing process, since this restriction was
reasonable to protect the company’s interests, even though it extended to the
whole country and lasted for five years.

Similarly, in Littlewoods Organisation limited V Harris [1978] 1 ALL ER 1026,

the defendant, Paul Harris, was employed as a director by the plaintiff,
Littlewoods, a large company which competed with great Universal stores Ltd
(GUS) for the major share of the mail order business in the United Kingdom. A
clause in the defendant’s contract of employment provided that, in the event
of termination of his contract, he should not at any time within twelve months
enter into a contract of employment with GUS Ltd or any of its subsidiary
companies or be involved in the trading or business of GUS Ltd or its
subsidiaries. The defendant resigned from his job with Littlewoods, informing
them that he had accepted an offer of employment from GUS Ltd. Littlewoods
sought an injunction to restrain the defendant.

The court of appeal held that the plaintiffs were entitled to the protection of a
reasonable covenant restraining Harris from going to work for a rival company
in the mail order business within a limited period of leaving their employment.

Lord Denning at p. 1034 stated:

“It seems to me that this really was a case where Littlewoods had a great deal
of confidential information which Paul Harris had acquired in the course of his
service with them and which they were entitled to protect by a reasonable
covenant against his going away and taking it to their rivals (GUS Ltd) in
trade…….”
A distinction must, however, be made between protecting trade secrets or
confidential information, which is protectable interest, and preventing an
employee from making use of knowledge and skills which he has acquired in
the course of his employment, which is not protectable. Thus in Herbert
Morris Ltd V Saxelby [1916] 1 AC 688, a seven year restraint on the employee
was held by the House of the Lords to be void as being simply an attempt to
prevent the employee making use of the technical skill and knowledge which
he acquired with his employer if he took up employment with a rival company.
The acquired skills and knowledge were not owned by the employer.

In this case the plaintiff company employed the defendant as a draftsman and
then as an engineer on a two year contract. The terms of this contract
contained a covenant by the defendant that he would not, during a period of
seven years from ceasing to be employed by the company, either in the
United Kingdom or Ireland, carry on either as principal, agent, servant or
otherwise, alone or jointly or in connection with any other person, firm or
company, or be concerned or assist, directly or indirectly, whether for reward
or otherwise, in the sale or manufacture of pulley blocks, hand overhead
runways, electric overhead runways, or hand traveling cranes.

Besides the protection of trade secrets or confidential information, the

employer is entitled to protect his customer connections by preventing
employees from soliciting or enticing his customers away from him. A restraint
of this will only be valid of the nature of the employment is such that the
employee has personal contact with customers and some influence over
them. Thus in Flitch V Dewes [1921] 2 AC 158, a life ong restraints on
solicitor’s managing clerk was held by the House of Lords to be valid and
enforceable. Whilst working in Tamworth, the managing clerk agreed with his
employer that he would not practice within seven miles of Tamworth town hall,
after leaving his employment. This covenant was enforceable, despite that the
restriction was of unlimited duration. It was adjudged reasonable, given the
nature of the profession concerned. The defendant would have acquired an
influence over his employer’s clientele and a limited time restraint would not
have given the required protection to the employer.

Also in Lucas T and company V Mitchell [1974] Ch 129, the defendant

salesman contracted that he should not for one year after the determination of
his employment solicit orders within his trading area from present customers
and those whom his employer supplied during the previous twelve months;
and to deal in the same or similar goods to those that he sold. In an action for
breach of contract, the court held the first clause not to solicit orders to be
valid and enforceable; but held the second clause of dealing to be
unreasonable and void.

However, in SW Strange Ltd V Mann [1965] 1 ALL ER 1069, an agreement by

a manager of a book makers not to engage in a similar business to his
employer within a twelve mile radius on the termination of his employment
was held to be invalid as the manager had little or no influence over the firm’s
clientele and in fact communicated with them mainly by telephone. As the
employer had no valid interest to protect, the primary aim of the clause was
simply to prevent competition and it was declared void.

The second factor in determining the validity of a restraint clause in a contract

of employment is that it must be reasonable in the circumstances. An
employer is not generally entitled to restrain an employee from carrying on a
business which is different from that in which he was employed. Likewise, the
restraint must not be too excessive or wide in area of coverage than is
necessary to protect the employer’s interest. In Mason V Provident clothing
and supply Company Limited [1913] AC 724, Provident Clothing Limited
employed Mason as a local canvasser in its Islington branch in London. His
job was to obtain members and collect their installments. He had no duties
outside his assigned district. Mason covenanted not to enter into similar
employment within five miles of London for a period of three years.

The House of Lords held that the clause covered an area which was much
greater or wider than reasonably required for the protection of his former
employers, and as such void and unenforceable. Provident Clothing were
entitled to protect themselves against the danger of a former employee
canvassing or collecting for a rival firm in the district in which he had been
employed. But the restraint which the company was trying to enforce was too
wide.

Similarly, in Commercial plastics Ltd V Vincent [1965] 1 QB 623, the plaintiff

company (CP) were manufacturers thin PVC calendered plastic sheeting, a
rapidly developing section of the plastic sheeting. The plaintiff company had
five principal United Kingdom competitors with whom they shared most of the
market, but the plaintiff’s pre-eminence was in the field of manufacturing thin
PVC calendar sheeting for adhesive tape. The plaintiff company employed the
defendant, Vincent, a plastic technologist, to coordinate research and
development in the production of thin PVC calendered sheeting for adhesive
tape. It was a condition of the defendant’s employment that he would not seek
employment with any of CP’s rival in the PVC calendered sheeting field for
one year after leaving the plaintiff’s employment. The defendant and the
plaintiff sought an injunction.

The plaintiff company action failed because the clause in restraint of trade
was too wide. The clause was worldwide, whereas the plaintiff did not require
the protection outside the United Kingdom. Besides, it extended to their
competitors in the whole PVC calendaring field, when the plaintiff required
protection from the defendants only in relation to competitors in the
plastics/adhesive tape industry. Accordingly, the court of appeal held the
restraint clause to be unreasonable and consequently void and
unenforceable.

The restraint must also be reasonable in terms of time. Where the restraint is
excessive as regards time of operation it will be unenforceable. In Fellows
and Sons V Fisher [1976] convenyancing clerk employed by the firm in
Walthamstow agreed that for five years after the termination of employment
he would not be employed or concerned in the legal profession anywhere
within the postal district of Walthamstow and Chingford or solicit any person
who had been a client of the firm when he had worked there. The court held
that the five year restraint was too long and as such was void and
unenforceable.

This case should however, be contrasted with Fitch V Dewes [1921] 2 AC

158, where the court held a lifetime restraint on a solicitor’s clerk from working
for another solicitor within a radius of seven miles of Tamworth Town Hall to
be valid and, hence reasonable and enforceable.

Restraints on sale of Business

A contract for the sale of a business often contain a clause under which the
seller of the business agrees or undertakes not to set up a competing or
similar business. This kind of restraint is more likely to be upheld by the courts
than a restraint on an employee since the buyer and the seller of the business
will be negotiating on equal footing.

For a restraint to be valid two requirements must be satisfied. Firstly, there

must be genuine sale of the good will of the business. In Vancouver Malt and
sake brewing Co Ltd V Vancouver Breweries Co Ltd [1943] AC 181, a
company that was licensed to brew beer, but which did not in fact brew any,
agreed to sell it business, and to refrain from manufacturing beer for 15 years.
Since the company was not actually brewing the beer the purchaser could
only have paid for the tangible assets, that is, goodwill to sell. The purchaser
had not therefore bought the promise not to brew beer, and so he could not
enforce it.

Secondly, the restraint clause must not be too wide in its scope. Thus the
restraint will not be valid if it purports to give protection on the purchaser that
goes beyond the actual business sold to the seller. In British reinforced
Concrete Engineering Co Ltd V Schelff [1921] 2 Ch 563, the plaintiff company
manufactured and sold “BRC” road reinforcements throughout the United
Kingdom. The defendant had a smaller, more local business, selling “Loop”
road reinforcements, but he was not involved in manufacturing these
products. The plaintiff company bought the defendant’s business, and the
defendants covenanted that he would not enter into competition with them,
either in business or in the employment of a rival, in the manufacture or sale
of road reinforcements. The defendant was later employed by a road
reinforcement company and was sued by the plaintiff company for breach of
his agreement with them.

The court held that had the clause been confined to ‘sales’ it would have been
valid, but to include ‘the manufacture of reinforcements’ made the restraint
wider than was necessary, and therefore void.

The plaintiffs were entitled to the protection of their proprietary interest in the
defendant’s business, which they had just bought, but they were not entitled
to protection in respect of their wider business interests. The defendant’s
business was concerned with the sale, not the manufacture, of a particular
type of road reinforcement. It was not reasonable to restrict the defendant’s
future activities in such an extensive way.

(iii) ‘Solus’ Agreement

Solus agreement is the name given to a contract by which a trader agrees to
restrict his orders to one supplier. The reasonableness of a Solus agreement
is determined in terms of duration of the restraint and if the restraint is not
contrary to public policy. In ESSO Petroleum V Harper’s garage (Stourport)
Ltd (1968) AC 269: The parties entered into agreements relating to the supply
of ESSO petrol to two garages belonging to Harper. By these agreements
Harper agreed to purchase petrol only from ESSO, and in return they
obtained a small discount on the price. For the first garage the tie was to last
for four years and five months, but for the second garage a loan of £7,000
was made and the tie was to last for 21 years while the mortgage repayments
were made on this loan. An injunction was sought to prevent Harper from
buying petrol from another supplier.

It was held that the exclusive dealing agreements were within the restraint of
trade doctrine because Harper had given up a right to sell other petrol.
Though the restraint which operated for four and a half years were not longer
than was necessary to afford adequate protection to ESSO’s legitimate
interests in maintaining a stable system of distribution, the tie of 21 years went
beyond a reasonable period, and therefore that restraint agreement was void.

Similarly, in Petrofina Ltd V Martin (1965), the defendant broke the agreement
by selling other makes of petrol, and the plaintiff sought to enforce it by means
of an injunction preventing the defendant from doing so. It was held that the
restraint was invalid because its 12 years duration was unreasonable.

However, the above two cases should be contrasted with the case of Alec
Lobb (garages) Ltd V Total Oil (GB) Ltd (1985) 1 WLR 173, where the court of
appeal upheld a 21 year restraint tied to a loan agreement as reasonable in
the circumstances. The loan was part of a rescue package which greatly
benefited the garage. There were also opportunities for the garage to break
the arrangement after seven and 14 years.

(iv) Agreements between traders by which prices or output are regulated.

These agreements are often contrary to public interest and regulated to
protect the consumers and public at large.

(v) Restraints protecting other interests

Restraints clauses may also be used in circumstances which do not exactly
fall within the categories discussed above. In Schroeder Music Publishing Co
Ltd V Macaulay (1974) 3 ALL ER 616, Ton Macaulay, a young and unknown
song writer, entered into an agreement with the defendant music publishing
company, whereby the defendants engaged his exclusive services. Under this
agreement, Macaulay gave the company the copyright of all his compositions
for the next five years, with a further five year option, and in return was to
receive royalty payments. The company could end the contract by giving
Macaulay one month’s written notice, but there was no corresponding
provision to allow Macaulay to do the same. The company was not even
under any obligation to publish any of Macaulay’s songs. Though this
agreement was not a contract of employment as such, Macaulay sought a
declaration that it was contrary to public policy, as being unreasonable
restraint of trade, and void. The company argued that the doctrine of restraint
of trade was inapplicable to its standard form contract.

The House of Lords held that the restrictions in the agreement between
Macaulay and Schroeder Music Publish Company Limited were not fair and
reasonable in that they combine a lack of obligation on the company’s part,
with a total commitment on the part of Macaulay. If the company, for instance,
chose not to publish his work he would be unable to earn his living as a song
writer. Therefore, the contract was in unreasonable restraint of trade and
Macaulay was entitled to a declaration.

Lord Reid, at p. 622, stated as follows:

“Any contract by which a person engages to give his exclusive services to
another for a period necessarily involves extensive restrictions during that
period of common law right to exercise any lawful activity he chooses in such
manner as he thinks best. Normally the doctrine of restraint of trade has no
application to such restrictions: they require no justification. But if contractual
restriction appears to be unnecessary or to be reasonably capable of
enforcement in an oppressive manner, then they must be justified before they
can be enforced.”

Similarly, in Silverton Records V Mountfield (1993) EMLR 152, the

agreements made between the record company and members of a pop
group, gave the company, inter alia, the option of the group’s service for six
further periods beyond the duration of the original contract. The group claimed
that the agreement were one-sided and represented an unreasonable
restraint of trade. The company claimed that it had been made clear to the
group that the agreements were one-sided and represented an unreasonable
restraint of trade. The company claimed that it had been made clear to the
group that the agreements were a package and that the group members had
waived their objections to it. Accordingly, the company sought a declaration
that the agreements were enforceable against the group.

The court held that the whole agreement was objectionable, as there was a
large inequality of bargaining power between the parties at the time it was
entered into.

Consequences
A clause which is a restraint of trade is void and unenforceable. However, it
may be possible to sever the void parts of the contract. In other words the
court may sever the void or illegal part from the rest of the restraint clause in a
contract. In Goldsoll V Goldman (1915) 1 Ch 292, the plaintiff and the
defendant were both in business as dealers in imitation jewelry in London.

The defendant sold his business to the plaintiff and covenanted that the two
years he would not “either solely or jointly with or as agent or employee for
any person or persons or company directly or indirectly carry on or be
engaged or concerned or interested in or render services to the business of a
vendor of or dealer in real or imitation jewellery in the county of London,
England, Scotland, Ireland, Wales, or any part of the United Kingdom of Great
Britain and Ireland and Isle of man or in France, the USA, Russia or Spain.”

The plaintiff sought an injunction when the defendant committed breaches of

the agreement.
It was held that the restraint clause was too wide in terms of subject matter
since it reffered to real jewellery when the defendant had not traded in real
jewellery. It was also too wide in geographical areas since the defendant had
not traded abroad. However, these restrictions were severable from the rest of
the promise, leaving the restraint clause that the defendant would not carry on
the business of dealing in imitation jewellery in the UK or Isle of Man. This
restriction was reasonably necessary for the plaintiff’s protection, and hence
was enforceable.

Contracts prohibited by statute

A contract that is expressly or implicitly prohibited by statute or an act of

parliament is illegal. Examples of contracts which are prohibited by the statute
include:
(i) Wagering contracts
Section 18 of the Gaming Act 1845 provides that ‘all contracts or agreements,
whether by parole or in writing by way of saveing or wagering shall be null and
void.’ The section 18 further provides that no action can be maintained in any
court for recovery of ‘any money or valuable thing alleged to be won upon any
wager’.

(ii) Restrictive trade agreements

These are agreements where producers or suppliers restrict the manufacture,
supply or distribution of goods by, for instance, fixing a maximum selling price
for goods or regulating the supply of goods. Section of the
 CHAPTER 15

PRIVITY OF CONTRACT
 CHAPTER 16

FRUSTRATION OF CONTRACT

DISCHARGE BY FRUSTRATION
A contract may be discharged by frustration if something happens which is not
the fault of the parties and was not contemplated by them, and prevents them
from performing the contract. Originally, the common law did not take such a
lenient view of changes in circumstances and required that the parties to a
contract should provide for all eventualities or unforeseen contingencies. If,
however, because of the happening of an unforeseen event performance of
an obligation became impossible, the party required to perform the impossible
obligation would be liable to pay damages for non performance. The common
law justification for this harsh principle or rule is that a party to a contract can
always guard against unforeseen contingencies by express stipulations, if he
voluntarily undertakes an absolute and unconditional obligation he cannot
complain merely because events turn out to his disadvantage.

The rule of absolute contracts was laid down in Paradine v Jane [1647],
Aleyn, 26, the defendant was lessee of land and when sued for arrears of rent
he contended that he was not liable to pay as the land in question had been
occupied by a German Prince who had invaded the realm with an hostile army
of men; therefore preventing the defendant from receiving the profits from the
land.

It was held that the plaintiff was entitled to recover as the defendant had
covenanted to pay the rent and if he had wished to be excused he should
have inserted a term to that effect in the contract.

“Where a party by his own contract creates a duty or charge upon himself, he
is bound to make it good, notwithstanding any accidents by inevitable
necessity, because he might have provided against it by his contract.”

Starting with the case of Taylor V. Caldwell [1863], 3B & s. 826, the courts
developed the doctrine of frustration as an exception to the rule about
absolute contracts laid in Paradine V. Jane discussed above. Under the
doctrine of frustration the parties are discharged from their contract if
circumstances or events occur which makes it impossible for the parties to
perform their obligations under the contract.

For the doctrine of frustration to occur three requirements must be satisfied;

namely:
An event has taken place which could not have been foreseen by the parties
when they entered into the contract.
None of the parties to the contract is in any way responsible for the event.
If the contract was to be performed now despite the event, the contract would
be fundamentally different from the one originally entered into.

The doctrine of frustration has been held to apply in the following

circumstances:
 Destruction of the subject matter
A contract may be frustrated by the destruction or non availability of the
subject matter of the contract, that is, a thing essential to the performance of
the contract or attainment of the fundamental object which the parties had in
view. Thus in Taylor v Caldwell, a hall was let to the plaintiff for a series of
concerts on specified dates. Before the date of the first concert the hall was
accidentally destroyed by fire. The plaintiff sued for damages for failure to let
him have the use of the hall as agreed. It was held that the destruction of the
subject matter rendered the contract impossible to perform and discharged
the defendant from his obligations under the contract.

Personal incapacity to perform a contract of personal service

If the presence of a particular person is necessary for the execution of the
contract, illness, insanity or death of that person will discharge a contract of
personal service. In Robinson v Davison [1871] LR 6 Ex 269, the defendant
contracted to play in a concert on a particular day but fell ill. It was held that
the performer’s illness on that particular day was sufficient to frustrate the
contract.

Similarly, in Condor v Barron Knights Ltd [1966] 1 WLR 87, the plaintiff aged
16 contracted to perform a drama in a pop group. His duties, when the group
had won were to play on every night of the week. He fell ill and his doctor
advised him that he should restrict his performances to four nights per week.
The group terminated his contract.

It was held that a contract of personal service is based on the assumption that
the employee’s health will permit him to perform his duties. If that is not so,
the contract is discharged by frustration.

However, in long term contracts, the courts are reluctant to find that illness
frustrates the contracts. In Storey v Fulham Steel Works [1907] 24TRL 89,
the plaintiff was employed by the steel works for five years as manager. After
working for two years he became ill and needed time away from work. Six
months later he recovered, but during his illness his employment had been
terminated. The plaintiff sued for breach of contract and the defendant
claimed that the plaintiff’s illness discharged the contract. It was held that the
plaintiff’s absence for six months did not go to the root of the five year contract
and termination could not be allowed.

Non-occurrence of an event if it is the sole purpose of the contract

Where the parties make a contract on the basis of some forth coming event,
and if the event fails to take place, and as a result, the main purposed of the
contract cannot be achieved, the doctrine of frustration will apply. Thus in
Krell v Henry [1903] 2 KB 740, a room belonging to the plaintiff and
overlooking the root of the coronation procession of Edward VII was let for the
day of the coronation for the purposed of viewing the procession. However,
the coronation was postponed owing to the illness of the King. The owner of
the rooms sued for the agreed fee which was payable on the day of
coronation. It was held that the contract was made for the sole purpose of
viewing the procession, as the event did not occur, the contract was
frustrated.

However, in Herne Bay Steamboat Co. v Hutton [1903] 2 KB 683, the court
refused to declare the contract to be discharged by frustration. A steam boat
was hired for two days to carry passengers, for the purpose of viewing the
naval review at Spithead and for a day’s cruise around the fleet. The review
was, however, cancelled due to the illness of the king but the steam boat
could have taken passengers for a trip around the assembled fleet, which
remained at Spithead.

It was held that the royal review of the fleet was not the sole occasion of the
contract and so the contract was not discharged. The owner of the steam boat
was therefore entitled to the agreed hire charge less what he has earned from
the normal use of the vessel over the two day period.

Supervening Illegality
Where the performance of the main object of the contracts subsequently
becomes illegal, the contracted will be discharged. An example is where there
is a change in the law which makes the performance of the contract illegal. In
Baily v De Crespigny [1869], LRF 4 QB 180, a landlord covenanted that
neither he nor his successors in the title would permit building on paddock
which adjourned the land let. The paddock was then compulsorily acquired for
a railway, and a station was built. It was held that the landlord was not liable
for breach of the covenant because it was impossible for him to secure
performance of it.

Similarly, in Denny, Mott and Dickson Ltd v Fraser and Company Ltd [1944]
AC 265, in 1929, the two parties made an agreement relating to the sale of
timber and the option to purchase or lease a timber yard. Both parties agreed
that the sale of timber was frustrated in 1939 by timber control orders.
However, in 1941, Denny, Mott and Dickson attempted to exercise their option
to purchase the timber yard. The House of Lords held that a contract for the
sale of timber was frustrated because the subsequent passage of various
control of timber orders rendering performance of the contract, trading in
timber, illegal. Lord Macmillan, at p.272, stated:

“It is plain that a contract to do what it has become illegal to do cannot be

legally enforceable. There cannot be default in not doing what the law forbids
to be done.”

Government interference
Government or administrative interference in the activities of one or both of
the parties to the contract is a common cause of frustration, more especially in
time of war. If the maintenance of the contract in such a case imposes upon
the parties a contract that is fundamentally different from that which they
made, the contract is discharged. Thus in Metropolitan Water Board v Dick,
Kerr and Co. Ltd [1918] AC 119, in July 1914 the appellants contracted to
construct a reservoir in six years. The agreement contained a proviso which
stated that time should be extended if delays were caused by difficulties,
impediments or obstruction howsoever occasioned. War broke out and in
1916 the Minister of Munitions ordered the respondents to stop work and to
disperse and sell the plant. This prohibition was still in force in November
1917. The appellants claimed that the order had put an end to the contract.

It was held that the provision for extension of time did not cover such a
substantial interference with the performance of the work as this, and that the
contract was completely discharged. The interruption was likely to be so long
that the contract, if resumed, would be radically different from that originally
made.

This case should however be contrasted with Tamplin Steamship Co. Ltd v
Anglo-Mexican Petroleum Products Co. Ltd [1916] 2AC 397, a tanker was
hired or chartered for five years from December 1915, to December 1917, to
be used by the charters for the carriage of oil. In February, 1915, the tanker
was requisitioned by the Government and used as troop ship. The charters
were willing to pay the agreed freight to the owners, but the latter, desirous of
receiving the much larger sum paid by the Government, contended that the
requisition had frustrated the commercial object of the venture and therefore
put an end to the contract.

It was held that the commercial objects of the contract was not frustrated
since there may have been months during the remaining period during which
the ship would be available to fulfill substantial part of the contract, and also
the charters were still prepared to pay the agreed price.

NON FRUSTRATING EVENTS

The common law doctrine of frustration will not apply in the following
circumstances:

(a) Where parties have expressly provided for in the contract for the event
or
contingency which has occurred. It is a means by which risk is
allocated
and loss apportioned between the parties in circumstances which
neither
party has seen.

Where the contract has become more expensive or difficult or burdensome to

perform to one of the parties.

In Tsakirolou & Co Ltd V. Noblee and Thorl Gmbh [1962] AC 93, in October
1956 sellers agreed to deliver ground nuts from Port Sudan to buyers to
buyers in Hamburg, Germany, shipment to take place in November/December
1956. On November 2, 1956 the Suez Canal was closed to traffic. The sellers
failed to make the shipment and, when sued for damages, claimed that the
contract had been frustrated. The House of Lords held that this was not
sufficient to discharge the contract for frustration. It had not become
impossible to carry out the contract, as shipment could have been made via
the Cape of Good Hope, a longer and much more expensive operation.

Similarly, in Davis Contractors Ltd V. Fareham Urban District Council [1956]

A.C 696, the plaintiffs contracted to build the defendants 78 council houses
within eight months for a fixed price through no fault of the plaintiffs there was
no scarcity of skilled labour and the work took 22 months to complete at a cost
of £115,000.The plaintiff claimed that by reason of the scarcity of labour the
contract had been frustrated and that they were entitled to recover a sum in
excess of the contract price on the basis of a quantum meruit.

It was held that the plaintiff’s claim should fail. Hardship, material loss or
inconvenience did not amount to frustration; the obligation must change such
that the thing undertaken would, if performed, be a different thing from that
contracted for.

Lord RADCLIFFE, at pp728-9, stated: “…. That frustration occurs whenever

the law recognizes that without default of either party a contractual obligation
has become incapable of being performed because the circumstances in
which performance is called for would render it a thing radically different from
that which was undertaken by the contract.

Where one party is responsible for the frustration event. This is also referred
to as ‘self induced’ frustration.

In Maritine National Fish Ltd V. Ocean Trawlers Ltd [1935] ALL E.R Rep. 86,
the appellants entered into a contract for the hire or charter of a trawler for
use in Otter trawling from the respondents. They had four other trawlers of
their own. They applied to the Canadian Minister of Fisheries for the
necessary licences for five trawlers but were granted only three licences. They
nominated three of their own trawlers for the licences and argued that the
contract for the charter of the fifth trawler had been frustrated since it could
not lawfully be used.

It was held by the Privy Council that the contract was not frustrated as they
appellants had decided quite deliberately not to nominate the respondents’
trawler and were, therefore, responsible for the frustrating event.

The onus of proving that the frustration was self-induced rests upon the party
raising the allegation. Thus in Joseph Constantine Steamship Line, Ltd V.
Imperial Smelting Corporation, Ltd [1941] 2 ALL E.R 165, the day before
chartered ship was due to load her cargo an explosion of such violence
occurred in her auxiliary boiler that the performance of the charter-party
became impossible. The cause of the explosion could not be definitely
ascertained, but only one of three possible reasons would have imputed
negligence to the ship-owners. It was held by the House of Lords that, since
the characters were unable to prove that the explosion was caused by the
fault of the owners, the defence of frustration succeeded and the contract was
discharged.
Consequences of frustration of Contract
Once a contract is frustrated the common law position is that it abruptly and
automatically comes to an end. The contract is not void ab initio, that is from
the outset or beginning, but only from the time the frustrating event occurred.
Therefore, if before the frustrating event has happened work had been done
or money transferred, the common law rule is that losses lie where they fall. It
is therefore not possible to recover money due or paid before frustrating event
unless there is a total failure of consideration.

In Chandler V. Webster [1905] 1 KB. 493, the defendant agreed to let a room
in Pall Mall to the plaintiff for the purpose of viewing the coronation procession
in 1902. The price was £141.15 s payable immediately. The plaintiff paid
£100, but he still owed the balance when the contract was discharged on
June 24 1902 owing to the abandonment of the procession because of the
King’s illness. The plaintiff sued for the return of his £100 and the defendant’s
counter claimed for the unpaid amount of £41.15s.

It was held that, not only that the plaintiff had no right to recover the sum of
£100, but also that he claimed liable for the balance of £41.15s. The
obligation to pay rent had fallen due before the frustrating event.

Similarly, in Krell V. Henry [1903] 2 K.B 740, it was held that the plaintiff could
not recover the agreed rent from the defendant, since it did not fall due until
the time of the procession, and before that time had arrived the abandonment
of the procession had been announced.

The common law rule that loss shall lie where it falls and money paid before
frustration cannot be recovered, and money payable at the time of frustration
remains payable, was modified in 1942 so that where there is a complete
failure of consideration, the contract can be held void ab initio.

Thus in Fibrosa V. Fairbairn [1942] 2 ALL E.R. 122, the plaintiff placed an
order for the machinery to be delivered to Poland within three or four months.
He paid £100 of the contract price of £4,800 with this order. Shortly afterwards
the Second World War broke out and Germany army occupied Poland. The
contract therefore was frustrated. The plaintiff sued to recover the £1000,
which had been paid. It was held that the deposit was repayable since the
plaintiff had received absolutely nothing for it. There had been a total failure of
consideration.

Besides the rule laid down in Fibrosa case, the rights and liabilities of parties
to a contract discharged by frustration are now regulated by the law reform
(Frustrated contracts) Act cap 73 of the Laws of Zambia.

The Law reform (Frustrated contracts) Act is confined to a case where “a

contract governed by the Zambia law has become impossible of performance
or been otherwise frustrated, and the p[arties thereto have for that reason
been from the further performance of the contract” In other words the said
provisions do not apply where a contract is discharged by breach or for any
reason other than impossibility or frustration.
The law reform (Frustrated contracts) Act may be said to make two
fundamental changes to the law. Firstly, it implies the decision in Fibrosa V.
Fairbairn by permitting the recovery of money prepaid, even though at the
date of frustration there has been no total failure of consideration. Secondly, it
allows a party who has done something in the performance of the contract
before the frustrating event happens to claim compensation for any benefit
conferred upon the other.

The Law Reform (Frustrated contracts) Act therefore modifies the common
law rule losses lie where they fall, and the doctrine of strict performance.

The right to recover money paid

Section 3 (2) provides as follows:

All sums paid or payable to any party in pursuance of the contract before the
time when the parties were so discharged (in this Act referred to as “the time
of discharge”) shall, in the case of sums so paid, be recoverable from him as
money received by him for the use of the party by whom the sums were paid,
and, in the case of sums so payable, cease to be so payable.

Like the rule laid down in Fibrosa V. Fairbairn case, section 3(1) reverse the
rule laid down in Chandler V. Webster, that any loss arising from the
termination of the contract must lie where it had fallen.

The Law Reform (Frustrated contracts) Act, however, permits the person or
party to whom advance payment has been made or is due to recover
expenses incurred in the course of fulfilling or performing the contract.

Thus section 3 (2) proviso reads as follows:

Provided that, if the party to whom the sums were so paid or payable incurred
expenses before the time of discharge in or for the purpose of the
performance of the contract, the court may, if it considers it just to do so
having regard to all the circumstances of the case, to allow him to retain or, as
the case may be, to recover the whole or any part of the sums so paid or
payable, not being an amount in excess of the expenses so incurred.

The right to recover compensation for partial performance.

Under the doctrine of strict performance established at common law in cases
such as Cutter V. Powell, discussed above, a man who fails to complete in
toto his obligation under an entire contract can often recover nothing for what
he may have done, even though the non-completion of the obligation is due to
an extraneous cause which, through no fault of his own, frustrates the
common adventure or even renders further performance altogether
impossible.

An example of the injustice or hardship caused by the above stated common

law principle is illustrated by the case of Appleby V. Myers [1867] L.R 2 C.P
651. In that case the plaintiffs, in consideration of a promise to pay £459,
agreed to erect machinery on the defendant’s premises, and to keep it in
order for two years from the date of completion. When the erection was nearly
complete an accident al fire entirely destroyed the premises together with all
they contained. An action brought by the plaintiff’s to recover £419 for word
done and materials supplied failed.

Under the doctrine of frustration the effects of the destruction of the subject
matter of the contract was that both parties were excused from the further
performance of their obligations. The plaintiffs were not bound to erect new
machinery; and also the defendant was not bound to pay for what had been
done, since the obligation to pay had not matured at the time when the
contract was discharged. The Law reform (Frustrated contracts) Act has
attempted to deal with the hardships, discussed above, caused by common
law. Thus section 3 (3) of the said Act provides: “where any party to the
contract has, by reason of anything done by any other party thereto in, or for
the contract, the performance of the contract, obtained valuable benefit (other
than a payment of money….) before the time of discharge, there shall be
recoverable from him by the said other party such sum (if any) not exceeding
the value of the said benefit to the party obtaining it as the court considers
just.”

In estimating the amount of the sum to be recovered, the court must consider
all the circumstances of the case, in particular any expenses that the
benefited party may have incurred in the performance of the contract before
the time of discharge, and also whether the circumstances giving raise to the
frustration of the contract have affected the value of the benefit.

The Law Reform (Frustrated contracts) Act as provide under section 5, does
not apply to the following classes of contract:

To any charter party or a charter-party by way of demise, or to, any contract

(other than a charter party) for carriage of goods by sea; or
To any contract of insurance.
To any contract to which section 7 of the sale of goods Act 1893, applies, or
to any other contract for the sale, or for the sale and delivery, of specific
goods where the contract is frustrated by reason of the fact that the goods
have perished.

Section 7 of the 1893 sale of goods Act provides that:

“Where there is an agreement to sell specific goods and subsequently goods,

without any fault on the part of the seller or buyer, perish before the risk
passes to the buyer, the agreement is thereby avoided.

For section 7 stated above to operate, four elements must be present:

(i) There must be an agreement to sell, not a sale;

(ii) The risk must not have passed to the buyer;
(iii) The goods must be specific; and
The goods must have perished.
 CHAPTER 17

DISCHARGE BY BREACH AND PERFORMANCE

DISCHARGE OF CONTRACTS

The discharge of a contract means in general that parties are freed from their
mutual rights and obligations. The parties are discharged or freed from their
contractual obligations in four ways namely, by performance, agreement,
frustration and breach.

DISCHARGE BY PERFORMANCE
The normal way in which a contract is discharged is that both parties perform
their obligations under it. If only one party performs his obligations, then he
alone is discharged, and he acquires the right of action against the other. The
general rule is that performance of the contract must be precise and exact. In
other words the law will not regard a person to have discharged the contract
unless he has completely and precisely performed the exact thing that he
agreed to do under the contract.

The strictness of this general rule is demonstrated by the following cases

discussed hereunder. In Cutter V Powell [1875], 6 Term. Rep 320 the plaintiff,
Cutter, agreed to serve on a ship sailing from Jamaica to Liverpool. He was to
be paid 30 guineas on arrival at Liverpool. The ship sailed on 2 August,
arriving in Liverpool on 9 October, but Cutter died at sea on 20 September. It
was held that his widow could not recover anything for the work he had done
before he died. Cutter was obliged to complete the voyage before he was
entitled to payment.

Also in Re Moore & Co. and Landaver & Co [1921] 2KB 519, the buyer
ordered a consignment of tinned fruit, to be packed in cases of 30 tins each.
The correct amount was delivered, but about half was in cases of 24 tins
each. It was held that the buyer was entitled to reject the whole consignment.

Similarly, in Bolton V Mahadeva [1972] 2 ALL ER 1322, Bolton installed a

central heating system in Mahadeva’s house for an agreed price of ₤560. The
work was carried out defectively and it was estimated that it would cost ₤179
to put matters right. It was held that since Bolton had not performed his side of
the contract, he could recover nothing for the work he had done.

The obligation the general rule places on the contracting party to provide
precise and complete performance of the contract before the contractual
obligation can be treated as discharged, can obviously produce injustice and
hardship as demonstrated by the three cases discussed above. In each of the
above cases, one party has profited from the failure of the other party to
provide complete performance. The injustice, thus, created by the rule has led
to the adoption of exceptions to the rule so as to ensure that the interests of
both parties are protected. The exceptions to the rule are as follows:

Divisible/severable contracts
Acceptance of partial/ part performance
Prevention of performance
Substantial performance
Time of performance

(a) Divisible contracts

Most contracts are said to be ‘entire’, that is indivisible. The obligations of the
parties are interdependent and concurrent, and as such neither party is
entitled to demand performance from the other, either in whole or in part, until
he himself has completely fulfilled, or is ready and willing to fulfill, his own
obligations. Thus a party is not entitled to payment until he has completely
performed his part of the contract.

However, where a contract may be divided or split into several parts or

stages, then payments for parts or stages that have been completed can be
claimed.

Whether a contract can be severable or not depends on the intention of the

parties. In the absence of evidence as to intention the courts are reluctant to
construe the contract so as to require complete performance before any
payment becomes due. In Roberts V. Havelock [1832], 3 B & Ad. 404, the
defendant’s ship was sailing from Cardiff to Alexandria with a cargo of iron
when it was damaged and forced to dock at Milford Haven to allow necessary
repairs to be carried out. The plaintiff, a shipwright, was employed and
undertook to put the ship into thorough repair. Before the work was completed
the plaintiff asked for payment in respect of that part which he had carried out,
but when payment was refused he sued to recover the amount to which he
maintained he was entitled at that stage.

It was held that the plaintiff would succeed as there was no agreement to the
effect that the plaintiff would make no demand for payment until all the repairs
were completed.

(b) Acceptance of partial performance

If one part to a contract partially performs his obligations and the other party
accepts the benefit of the partial performance, then he is obliged to pay a
reasonable price for it. If however, the party receiving the benefit of partial
performance does not have the option of whether or not to accept or reject the
partial performance, then he is not obliged to pay for it. Thus in Sumpter V.
Hedges [1898] 1 QB 673, the plaintiff, a builder, contracted to build two
houses and stables upon the defendant’s land for the sum of ₤565. The
plaintiff did part of the work, amounting in value to about ₤333, and then
abandoned the contract. The defendant completed the buildings and the
plaintiff claimed payment in respect of that part of the work which he had
carried out.

It was held that the plaintiff could not recover ₤333 because though the
defendant ‘accepted’ the plaintiff’s part performance the defendant had no
option to reject. It was impossible to reject a half–built house since the status
quo cannot be restored.
COLLINS, L.J stated:

“There are cases in which, though the plaintiff has abandoned the
performance of a contract, it is possible for him to raise the inference of a new
contract to pay for the work on a quantum meruit from the defendant’s having
taken the benefit of that work, but, in order that may be done, the
circumstances must be such as to give an option to the defendant to take or
not to take the benefit of the work done…. Where, as in the case of work done
on land, the circumstances are such as to give the defendant no option
whether he will take the benefit of the work or not, then one must look to other
facts than the mere taking of the benefit in order to ground the inference of a
new contract. In this case I see no other facts on which such an inference can
be founded. The mere fact that a defendant is in possession of what he
cannot help keeping, or even has done work upon it, affords no ground for
such an inference. He is not bound to keep unfinished a building which in an
incomplete state would be a nuisance on his land”

(c) Prevention of performance

Where a party is prevented from completely performing his obligations under
the contract by the action of the other party he can either bring an action for
damages for breach of contract or he can bring a quantum meruit action to
claim for the work done. The leading authority for this rule is Planche V.
Colburn (1831), 8 Bins. 14. The plaintiff had agreed to write a book on
costume and ancient Armour which was to appear in serial form in the
defendants periodical. The plaintiff was to be paid ₤100 on completion of the
book. After the plaintiff had done some research, and written some of the
book, but before he had completed it, the defendant stopped publishing the
periodical. It was held that the plaintiff had been wrongfully prevented from
performing the contract and he was entitled to 50 guineas as reasonable
remuneration on a quantum meruit basis.

(d) Substantial performance

Where a party to a contract has substantially performed his obligations he is
entitled to claim the contract price less a reduction for defects or deficiencies.
This exception only applies when the defect relates to the quality of the
performance. In Hoeing V. Isaacs [1952] ALL ER 176, the defendant
employed the plaintiff to decorate and furnish his flat at a total price of ₤750.
There were defects in the furniture, which could be put right at a cost of ₤56.
The defendant argued that the plaintiff was only entitled to reasonable
remuneration.

It was held that the plaintiff was entitled to the full contract rate, less the cost
(₤56) of making the defects good, since he had substantially performed the
contract.

In contrast in Bolton V. Mahadeva [1972] 2 ALL ER 1322, the plaintiff, a

heating contractor agreed to install a central heating system in the
defendant’s house for ₤560. On completion of the work the system proved to
be so defective that it would cost ₤174 to repair. The defendant refused to pay
the plaintiff any of the cost of the work and the plaintiff sued.

It was held that in the circumstances the plaintiff had not substantially
performed the contract and he was not therefore entitled to recover any of the
cost of the work.

(e) Time of performance

At common law a person who failed to perform his obligations under the
contract within a given time was in breach of contract. The equitable rule,
which now prevails, is that time is only of essence if the parties expressly
state; or if a party who has been guilty of undue delay is notified by the other
party that unless he performs his obligations within a reasonable time, the
contract will be regarded as breached or broken.

Thus in Charles Richards, Ltd V. OppenHeim [1950] 1 KB 616, early in 1947

the defendant ordered from the plaintiffs a Rolls Royce chassis, and in July
the plaintiffs agreed that a body should be built for it within “six or at most
seven months”. The body was not completed seven months later, but the
defendant agreed to wait another three months. At the end of this extended
period the body was still not built. The defendant then gave a final notice that
if the work were not finished within a further period of four weeks he would
cancel the order. The body was not finished within this period and the
defendant cancelled the order. The completed body was tendered to the
defendants three months later, but he refused to accept it.

It was held that the defendant could not have refused delivery merely because
the original date had not been met, but he could do so upon giving the plaintiff
a reasonable time to deliver. Here the notice did given a reasonable time, so
the defendant was justified in refusing delivery.

DISCHARGE BY AGREEMENT
The basic legal principle is that ‘what has been created by agreement may be
extinguished or discharged by agreement’. Therefore the parties to an existing
contract may agree to discharge or abandon the contract before it has been
completely performed on both sides. However, the agreement to discharge
the existing contract is in itself a binding new contract which must either be
made under seal or supported by consideration. The difficulties raised by
consideration in the discharge of the contract by agreement depend on
whether discharge is bilateral or unilateral.

Bilateral discharge
Bilateral discharge occurs when both parties to the contract have some right
to surrender. Thus, if there are unperformed obligations of the original
contract on both parties, each party provides consideration by agreeing to
release his rights under the contract in consideration of a similar release by
the other party. The discharge is therefore called bilateral, in that each party
surrenders something of value.
The agreement for bilateral discharge can be reduced to one of three possible
situations which the parties might have intended namely:

Variation of the existing contract;

Recission plus agreement on the terms of a new contract;
Rescind or termination of the existing contract.

Unilateral contract
Unilateral discharge happens where only one party to the contract has rights
to surrender. Where one party has completely performed his side of the
contract, that is, it is wholly executed on one side, any release by him of the
other party must be either by deed or supported by fresh consideration.

Unilateral discharge supported by consideration, that is, where there is a

release supported by fresh consideration, is called accord and satisfaction.
The accord is the agreement for the discharge of the original contract and the
satisfaction is the consideration conferred upon the party who has performed
his obligations.

In British Russian gazette and Trade Outlook Ltd V. Associated Newspapers

Ltd [1933] 2 K. B. 616, Mr. Talbot agreed to compromise two actions of libel,
which had been commenced by him and by the British Russian gazette, in
respect of certain articles in the Daily Mail. His promise was expressed in a
letter in which he stated as follows: “I accept the sum of one thousand
guineas on account of costs and expenses in full discharge and settlement of
my claim……. And I will forthwith instruct my solicitors to serve notice of
discontinuance; or to take other steps….. to end the proceedings now
pending.” Before payment of the thousand guineas had been made, Talbot
disregarded this compromise and proceeded with the action.

It was held that the letter recorded an agreement in which the consideration
was a promise for a Promise: “In consideration of your promise to pay a
thousand guineas,” The defendants were, therefore, entitled to enforce the
accord by way of counterclaim.

There are two further situations where parties can discharge the contract by
agreement, namely, novation and condition subsequent.

Novation
Novation happens when two existing contracts are replaced by a new one.
Condition subsequent
A contract may include provision for its own discharge by imposing a condition
precedent, which prevents the contract from coming into operation unless the
condition is satisfied. Alternatively, the contract may impose a condition
subsequent by which a contract is discharged on the later happening of an
event. In Aberfoyle Plantations Ltd V. Cheng [1906] A.C. 115, the parties
agreed in 1955 to sell and buy a plantation, which included 182 acres in
respect of which the leases had expired in 1950. The vendor had tried without
success in the intervening years to obtain a renewal of the leases. Clause 4 of
the agreement provided that “the purchase is conditional on the vendor
obtaining a renewal” of the leases. If he proved “unable to fulfill this condition,
this agreement shall become null and void”. The vendor failed to obtain the
renewal. It was held that the purchaser could not recover the deposit he had
paid. Also in Head v Tattersall [1871] LR 7Ex ch 7, the plaintiff bought from
the defendant guaranteed “to have been hunted with Bicester hounds,” with
the understanding that he could return it up to the following Wednesday, if it
did not answer the description. While in the plaintiff’s possession, but without
fault on his part, the horse was injured, and was then found never in fact to
have been hunted with a Bicester hounds. The plaintiff returned it within the
time limit and sued for the price he had paid.

It was held that a contract of sale had come into existence, but the option to
return the horse operated as a condition subsequent of which the plaintiff
could take advantage. He was entitled to cancel the contract, return the horse
despite the injuries it had suffered and recover the price.

DISCHARGE BY BREACH
A breach of contract occurs if a party to a contract fails to comply with his
obligations under it or performs his obligations in a defective manner. It may
also occur where one party to a contract fails to comply with the terms of the
contract.

Breach of contract gives rise to a secondary obligation to pay damages to the

innocent party who has suffered as a result of the breach. However where the
breach falls into one of the two categories, the primary obligation to perform
the contract’s terms remains.

The said two categories of breach, which will entitle an innocent party not only
to claim damages but also to treat the contract as discharged are:

Where the party in default has repudiated the contract either before
performance is due or before it has been fully performed.
Where the party in default has committed a fundamental breach.
Anticipatory breach
The anticipatory breach occurs where, one party indicates to, or informs the
other either by words (express) or by conduct (implicit) that he will not honour
or perform his contractual obligations. This type of breach will normally be
repudiatory, since the contract is renounced or the party incapacitates himself
from performing the obligations under the contract. In Mersey Steel & Co
[1884], 9 APP cas 434, Lord BLACKBURN stated as follows:
“Where there is a contract to be performed in the future, if one of the duties
has said to the other in effect ‘if you go on and perform your side of the
contract I will perform mine,’ that in effect, amounts to saying ‘I will not
perform the contract.’ In that case the other party may say, ‘You have given
me distinct notice that you will not perform the contract. I will not wait until you
have broken it, but will treat you as having put an end to the contract, and if
necessary I will sue you for damages, but at all events I will not go on with the
contract,”

An anticipatory breach gives the injured party two options namely:

(a) He can elect to treat the contract as repudiated by the other, recover
damages for breach or for reasonable remuneration for the work which he has
performed and treat himself as being discharged from his primary obligation
under the contract; or
(b) He can elect to affirm the contract, that is, allow the contract to
continue until there is an actual breach.

In Hochetster V. De La Tour [1840-60] ALL E.R Rep. 12, the defendant

engaged the plaintiff as a courier to accompany him ton a European tour
commencing on 1 June. On May 11 the defendant wrote to the plaintiff to say
that he no longer required his services. On 22 May the plaintiff commenced
legal proceedings for anticipatory breach of contract. The defendant objected
that there was no actionable breach until 1 June.

It was held that the plaintiff was entitled to sue as soon as the anticipatory
breach occurred on 11 May.

Similarly, in White and Carter (councils) Ltd V. McGregor [1961] 3 ALL ER

1178, the respondent’s sales manager, acting within his authority, entered into
a contract with the appellants for the fixing to litter-bins of plates advertising
the respondent’s business. On the same day, upon hearing of the contract the
respondent wrote to the appellants to cancel the agreement, but the
appellants refused to accept his cancellation and went ahead to display the
advertisements. The contract was for a period of 156 weeks and, under the
terms of the contract, if any installment was unpaid for four weeks, the whole
of the amount due for the 156 weeks, or the remainder of that period, became
payable. The respondent did not pay the first installment within the time
allowed and the appellant sought to recover the whole price.

It was held that the respondents were entitled to succeed. ‘If one party to a
contract repudiates it the other party, the innocent party, has an option. He
may accept that repudiation and sue for damages for breach of contract
whether or not the time for performance has come; he may if he chooses
disregard or refuse to accept it and then the contract remains in full effect.’

If the innocent party elects to treat the contract as still in subsisting despite the
other party’s anticipatory breach, then the innocent party may lose the to \sue
for breach of contract if the contract is discharged for frustration or illegality. In
other words a party in default will be discharged from his obligations or liability
in case of the contract being discharged by frustration or illegality. Thus in
Avery V. Bowden (1885) 5 E & B 714, A ship was required to load cargo at
Odessa within 45 days. The ships master was told before the expiry of these
laydays that no cargo would be available. He elected to affirm the contract
and remained in port hoping that a cargo would be provided. Before the expiry
of the 45 day period the contract was frustrated by the outbreak of war, which
made it illegal to load a cargo at an enemy port.

It was held that the ship-owners could not recover damages for the
anticipatory breach in failing to provide a cargo since the master had affirmed.
If the master had sailed away on receiving that information, then not only
could another cargo have been loaded at a friendly port, but the ship owner
would have had a right to claim damage for the loss caused by the breach.

Termination of Anticipatory Breach

Where the innocent party elects to treat the contract as discharged or
terminated he must notify or make his decision known to the party in default.
The effects of such a termination to the innocent party are as follows:

He is not bound to by his future or containing contractual obligations, and

cannot be sued on them;
He need not accept nor pay for further performance;
He can refuse to pay for partial defective performance already received.
He can claim back the money paid to the defaulter if hue can and does reject
defective performance.
He is not discharged from the contractual obligations, which were due at the
time of termination.

Besides, the innocent party may also claim damages from the party in default
for losses sustained by him in respect of contractual obligations not performed
at the time of the default; and losses sustained by him regarding contractual
obligations, which were due in future.

Finally an innocent party who began to perform his contractual obligations and
was prevented from completing them by the other party in default, he can
claim reasonable remuneration on a quantum meruit basis.

Actual Breach
Actual breach of a contract may occur through the following three ways
namely:

Non-performance that is the due date of the performance arrives and the
other party does not perform his obligation or part of the bargain.
Defective performance, that is, the performance is not precise and exact.
Untruth as regards a term of the contract, for instance, where the promise
made by a party has deliberately concealed the true intensions.

Whether an actual breach discharges the parties from their contractual

obligations depends on whether the breach is fundamental. The breach is
fundamental if the term of the contract that has been broken is of importance
to the parties, and goes to the root of the contract that it makes further
performance impossible.

The terms of the contract may be divided into those terms which are important
(conditions) and those less important (warranties). A breach of a condition
does not automatically terminate the contract. It gives the injured party the
option of either treating the contract as discharged or he may wish to continue
with the contract and then claim damages for breach.

On the other hand, breach of a warrant does not discharge the contract. It
merely entitles the injured party to sue for damages, and in all respects the
contract continues as before.
 CHAPTER 18

LEGAL REMEDIES FOR BREACH OF CONTRACTS

If a party to a contract fails to perform his contractual obligations, the courts,

at the request of the aggrieved or injured party, will impose conditions upon
the defaulting party. These conditions are aimed not at punishing the party in
default but to provide a remedy for the injured party. In this respect, therefore,
the law of contract is quite unlike criminal law, as remedies are designed to
compensate, and not to penalize.

The remedies that are available for the break of contract fall into two groups
namely common law remedies, and equitable remedies. The common law
remedies are repudiation of the contract, damages, can action for the price or
agreed sum, and a quantum meruit The equitable remedies are specific
performance and injunction.

COMMON LAW REMEDIES

(1) Repudiation of the contract

Where there has been anticipatory breach or breach of a vital condition of the
contract, the injured party has the option of repudiating the contract that is
treating it as ended or terminated. The injured party has however the right to
decide not to exercise this option, as was the case in White and Carter
(councils) Ltd V. McGregor, discussed earlier. Where the injured party opts to
repudiate the contract he will do nothing further on the contract. Besides he
will escape from all further contractual obligations and in addition will sue for
damages.

(2) Damages

Damages are a common law remedy and are primarily intended to restore the
party to whom has suffered loss to the same position he would have been in if
the contract had been performed or carried out properly. Consequently, the
injured party should not be awarded damages when the result would be to put
him in a better financial position than would have been the case if the contract
had not been broken. Thus the injured party can never get more in damages
than the extent of his loss.

In C & P Haulage V. Middleton [1983] 3 ALL ER 94, the court of appeal

refused to grant damages to an engineer, who was evicted from the business
premises he occupied before the contractual licence he held had expired. The
reason for the refusal was that the damages would make the engineer better
off.

The facts of the case were that C& P had granted Mr. Middleton, an engineer,
a six-month renewable licence to occupy a garage which he used to carry on
his business. Mr. Middleton spent some money equipping the premises, but
the terms of his agreement prevented him from removing such equipment at
the end of the licence. The parties quarreled and, as a result, Mr. Middleton
was unlawfully evicted from the garage 10 weeks before the end of a six-
month period. Mr. Middleton’s local council allowed him to use his own garage
for more than 10 weeks, which meant that he did not have to pay rent. He
sued C& P Haulage for the cost of equipping the premises.

The court of appeal held that he was entitled to nominal damages only. The
cost of equipping the garage would have been lost even if the contract had
been carried out as agreed. It is not the function of the courts to put the
injured party in a better financial position than if the contract had been
properly performed.

Remoteness of Damages

It is important to note the distinction between damage and damages. Damage

is the loss suffered a party, whilst damages are the financial compensation
awarded to the party.

The consequences of a contractual breach can often extend well beyond the
immediate, obvious losses. For example, failure to deliver goods may result in
the buyer being unable to complete the work on a particular job, which will in
turn put him in breach with the party who had contracted him to carry out the
job. That party may in turn suffer consequences, thus the original breach
leads to a chain of events which become increasingly remote from it. The
courts take the view that it is unfair to make a party in default responsible for
damages caused as a result of circumstances of which he was not aware. In
other words the injured party cannot be compensated for all the
consequences that logically result from the other party’s breach, other wise
there might be no end to liability. Some losses therefore will be too remote.

In Hadley V. Baxendale [1843-60] ALL R.R Rep 461, the plaintiff owned a mill
at Gloucester which came to a standstill because the main crankshaft had
broken. They made a contract with the defendant, a carrier, for the transport
of the broken shaft to the makers at green which to serve as a pattern for
making a new shaft. Delivering was to be made at Greenwich the following
day. Owing to neglect by the defendant delivering was delayed and the mill
was out of action for a longer period than would have resulted if there had
been resulted if there had been no delay. The defendant did not know that the
mill would be idle during the interval. He was merely aware that he had to
transport a broken millshaft from the plaintiffs’ claimed for loss of profits of the
mill during the period of delay.

The court held that this loss was recoverable as it was too remote. The
possible loss of profit was a circumstance of which the defendant was
unaware at the time of the contract. The result would have been different
however had the plaintiff expressly made the defendants ware that this loss of
profit was the probable result of a breach of contract.

The court in Hadley V. Baxendale, laid down two tests, which still form the
basis of the rules covering remoteness of damage. ALDERSON, B delivering
the judgment of the court rule governing remoteness of damage “where two
parties have made a contract which one of them has broken, the damages
which the other party out to receive in respect of such breach of contract
should be such as may fairly and reasonably be considered either arising
naturally, that is, 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
payable result of the breach of it .”

The rule laid down in Hadley V. Baxendale has been applied to many
subsequent cases and is well settled. The following cases further illustrate the
application of this rule.

In Horne V. Midland Railway Co [1873] LR 8 C P 131, Horne had a contract to

manufacture boots for the French army at a price higher than the normal
market price, provide that he could deliver by a certain date. The boots were
consigned to the Railway Company, which was informed of the importance of
the delivery date but not the special price. Delivery was delayed, the boots
were rejected and had to be sold else where at below the normal market
price. Horne only recovered the difference between his re-sale price and
normal market price. His claim for the difference between the contract price
and the price on re-sale failed, because the carriers did not know of the
original (higher) contract price.

Similarly, in Victoria Laundry (Windsor) Ltd V. Newman Industries Ltd [1949] 2

K B 528, the defendants contracted to sell stated as follows, at p. 539

“In cases of breach of contract, the aggrieved party is only entitled to recover
such part of the loss actually resulting as was at the time of the contract
reasonably foreseeable as liable to result from the breach. What was at the
time reasonably so foreseeable depends upon the knowledge then possessed
by the parties or, at all events, by the party who commits the breach. For this
purpose knowledge ‘possessed’ is of two kinds; one imputed, the other actual.
Everyone, as a reasonable person, is taken to know the ‘ordinary course of
things’ and consequently what loss is liable to result from a breach of contract
in that ordinary course. This is the subject-matter of the ‘first rule’ in Hadley V.
Baxendale. But to this knowledge, which a contract-breaker is assumed to
possess whether he actually possess it or not, there may to be added in a
particular case knowledge which he actually possesses of special
circumstances, outside the ‘ordinary course of things,’ of such a kind that a
breach in those special circumstances would be liable a large boiler to the
plaintiff ‘for immediate use’ in their business of launderers and dyers. Owing to
an accident in dismantling the boiler at its previous site delivery was delayed
for five months. The defendants were aware of the nature of the plaintiffs were
most anxious to put the boiler into use in the shortest possible space of time.
The plaintiff claimed damages of £16 per week for the loss of profit it would
have made on the planned expansion of the laundry business; and the
damages of £262 a week for the loss of profits it would have made on the
extremely lucrative dyeing contracts.
It was held that the plaintiff was entitled to recover damages for the loss of
normal profits on both cleaning and dyeing contracts, but it could not recover
loss of special profits for dyeing contracts because the defendants had no
knowledge of the dyeing contracts and the abnormal profits which they would
yield. ASQUITH, L.J in delivering his judgment of the court to cause more
loss. Such a case attracts the operation of a ‘second rule’ so as to make
additional loss also recoverable.’’

Also in Koufos V. C. Czarnikow Ltd, the Heron II [1969] 1 AC 350, charterers

chartered a ship from the owners for the carriage of sugar from Constanza to
Bashrah. The shipowners new that the charterers were sugar merchants and
that there was a sugar market at Barsrah but did not actually know that the
charterers intended to sell the sugar promptly on arrival at Basrah. In breach
of the charter party, the ship deviated from the voyage, so that instead of
arriving at Basra on 22 November. The market price of sugar at Basrah had
fallen in this period from £32.10 s per ton to £31.2s 9d per ton. It was held that
the charterers were entitled to recover the difference price caused by delay.
Knowledge was imputed to them that it was likely that the sugar would be sold
on arrival and that market prices fluctuate.

MEASURE OF DAMAGES

(a) LOSS OF EXPECTATION

Once the cause for which the injured party may receive damages has been
established the issue to be then determined is the size of those damages, that
is, how to express the loss suffered in terms of money. As already stated
above contractual damages are awarded to compensate for the injured party’s
loss of expectation, that is, what the inured party would have received had the
contract been properly performed. Thus in Robinson V. Harman [1848] 1 Exch
850, Parke B said, at p. 855: ‘the rule of the common law is, that where a
party sustains a loss by reason of a breach of contract, he is, so far as money
can do it, to be placed in the same situation, with respect to damages, as if
the contract had been performed.’

(i) Difference in value

One way in which expectation of loss may be measured is to determine the

difference in value between what the injured party expected to receive and
what he actually did receive. For example, in relation to defective goods, the
measure of the expectation of loss will be the difference in value between the
goods as promised and the goods actually received. Similar examples are
provided by the sale of goods Act 1893 as regards damages for non-delivery
(section 51).

Thus section 50 (3) of the sale of goods Act 1893 provides that where there is
an available market for the goods in question the measure of damages is
prima facie to be ascertained by the difference between the contract price and
the market or current price at the time or times when they ought to have been
accepted, or, if no time was fixed for acceptance, then at the time of the
refusal to accept.

Furthermore, section 51 (3) of the sale of goods Act 1893 provides that where
there is an available market for the goods in question the measure of
damages is prima facie to be ascertained by the difference between the
contract price and the market or current price of the goods at the time or times
when they ought to have been delivered, or, if no time was fixed, then at the
time of refusal to deliver.

In Thompson (W.L.) Ltd V. Robinson (gun makers) Ltd [1955] Ch 177, the
defendant company refused to accept delivery of a ‘Vanguard’ motor car
which they had contracted to buy from the plaintiffs, who were motor dealers.
The ‘Vanguard’ car was readily available. Although the dealers took the car
back, the plaintiff contended that they were still entitled to the lost profit on the
repudiated sale, namely £61. The defendants, relying on section 50 (3) of the
sale of goods Act contended that the plaintiffs’ loss was only nominal.

It was held that there was no available market for the goods within section 50
(3), as the supply of the ‘Vanguard’ model exceeded the demand, and
therefore the loss of the bargain meant a loss of profit.

In the words of UPJOHN, at p. 183: ‘A part altogether from authority and

statute it would seem to me on the facts which I have to consider to be quite
plain that the plaintiffs’ loss in this case is the loss of their bargain. They have
sold one Vanguard less than they otherwise would. The plaintiffs, as the
defendants must have known, are in the business as dealers in Motor-cars
and make their profit in buying and selling motor-cars; what they have lost is
their profits on the sale of this Vanguard.”

This should however, be contrasted with Charter V. Sullivan [1957] 1 ALL E.

R 809. The defendant refused to accept delivery of a ‘Hillman Minx’ car that
he had bought from the plaintiff. The plaintiff claimed £97 as loss of profits.
The plaintiffs claim for the recovery of loss of profits of £97 failed, because the
demand for Hillman Minx cars exceeded the supply. The plaintiff could
therefore sell every car that he could obtain from the makers and had
accordingly not lost a scale.

(ii) Cost of cure

Where the breach of contract consists of defective performance of a building

contract, the courts have sometimes based the award of damages on the
difference between the value of the building contracted for and the defective
building, and sometimes on the cost of curving the defect. Thus in Ruxley
Electronics & Construction Ltd V. Forsyth [1996] 1 AC 344, the defendant
contracted with the plaintiff company for the construction of an enclosed
swimming pool in his garden. The contract terms required that the pool should
be 7ft 6 in at the deep end, to allow for safe diving. When the pool was built, it
was discovered that the maximum depth was 6ft 9in and was only 6ft under
the diving board. When the plaintiffs claimed the unpaid balance of the
purchase price, the defendant counter claimed for breach of contract. The trial
judge held that even though the pool was not as deep as the one specified in
the contract, it was still safe for diving, and that there was no difference in
value between the swimming pool contracted for and that supplied. He
refused to award the claimed cost of cure damages of £21,560 so that the
specified depth could be achieved, which meant demolition the pool and build
a new one at the cost of £21,560. The judge was also not satisfied that the
defendant would construct a new pool. Instead the judge awarded £2500
pounds for loss of amenity. The court of appeal reversed the decision of the
trail judge and awarded the defendant the full cost of achieving a cure, that is,
£21,560. The House of Lords reversed the decision of the court of appeal and
confirmed the award of £2,500 for loss of amenity by the trial court.

Their Lordships took the view that if the cost of cure was unreasonable, the
measure of damages should be the difference in value. Though then pool was
probably no less valuable. The defendant was entitled to some compensation
for his loss of satisfaction.

Lord Jauncey stated as follows:

“….. Damages are designed to compensate for an established loss and not to
provide a gratuitous benefit to the aggrieved party, from which it follows that
the reasonableness of an award of damages is to be linked directly to the loss
sustained. If it is unreasonable in a particular case to award the cost of
reinstatement it must be because the loss sustained does not extend to the
need to reinstate. A failure to achieve the precise contractual objective does
not necessarily result in the loss which is occasioned by a total failure.”

Also, in Watts V Morrow [1991] WLR 1421, the plaintiff purchased a country
house for £177,500 in reliance of the defendant’s survey, in which he stated
that overall the dwelling house was sound, stable and in good condition,
although there were minor defects. When the plaintiff took possession, they
discovered that there were substantial defects not mentioned in the report
which required urgent repair, including renewal of the roof, windows and floor
boards.

The true value of the house at the date of the purchase was therefore only
£162,500, a difference in value of £15,000. The plaintiff carried out the repair
at a cost of nearly £34,000 brought an action to recover those costs. At first
instance the cost of repair was awarded. It was held by the court of appeal
that although it was reasonable for the plaintiffs to retain the property and
carry out the repairs, the proper measure of damages was the amount
required to put the plaintiffs into the position that they would have been in had
the survey been carried out properly and the true value of the house paid. If
they would be recovering damages for breach of warrant as to the condition of
the house when no such warrant had been given.

(b) Reliance Loss

The injured party may claim for reliance loss (wasted expenses), that is, the
expenses incurred in preparing to perform or performing the contract which
have been wasted as a result of the breach. Thus in Anglia Television Ltd V.
Reed [1972] 1 QB 60, the defendant, an American actor, contracted with the
plaintiffs to play the leading male role in a television play from 9 September to
11 October. On 3 September, the defendant repudiated. The plaintiff could not
get a substitute and abandoned the production. The plaintiffs, instead of
claiming the profit they would have made, sued the defendant for damages of
£2,750, being their total wasted expenditure on the production. The defendant
argued that they could only recover the expenditure incurred after they made
the contract (£854).

In awarding £2,750, the court of appeal held that since the plaintiffs had
elected to claim their wasted expenditure instead of loss of profits, they could
also recover pre-contract expenditure as long as it was reasonably in the
contemplation of the parties as likely to be wasted if the contract was broken.

Similarly, in Mc Rea V. Commonwealth Disposal Commission [1951] 84 CLR

377, the Commission invited tenders “for the purchase of an oil tanker lying on
Jourmaund Reef. The vessel is said to contain oil.” The plaintiff’s tender of
£285 was accepted. The plaintiff spent money in fitting out a salvage
expedition but there was no tanker at the location. It was held that the
Commission were in breach of contract since they had promised that there
was an oil tanker at the location given. The amount that the plaintiff was
entitled to recover was £285, being the purchase price, and damages of
£3,000 being the cost of salvage expendition which was wasted in valiance on
the promise that the oil tanker was at the stated location. The salvage
expendition was within the reasonable contemplation of the parties. However,
since the commission had not promised to deliver any oil or a tanker of any
specialized size, the claim for the loss of profit on the tanker and the oil was
too speculative.

(c) Inconvenience and Annoyance

At one time damages could not be recovered for any non-financial loss arising
from the breach of the contract. In some recent cases, however, damages
have been recovered for mental distress, inconvenience or annoyance. Thus
in Jarvis V. Swans Tours Ltd [1973] QB 233, the plaintiff, a solicitor, paid for a
two-week winter sports holiday in Switzerland. The defendants’ brochure
described the holiday as a ‘House party’ and stated that the hotel had its own
‘Alphutte Bar’ which would be open several evenings a week. It was also
stated that a welcome party, afternoon tea and cakes, a fondue party and
Yodeller evening were included in the price. The holiday was a considerable
disappointment, and in the second week the plaintiff was the only guest in the
hotel and no one could speak English. The bar was only open evening and
the skiing did not correspond to the claims in the brochure.

It was held that the plaintiff was entitled to be compensated for his
disappointment and distress at the loss of his holiday and the loss of the
facilities which had been promised in the brochure.
Similarly, HEYWOOD v. WELLERS [1976] QB 446, the plaintiff employed the
defendant solicitors to secure a method of preventing the plaintiff’s former
male friend from pestering her. The solicitors sought a non-Molestation
injunction but were negligent in making the application so that the injunction
was effective, and the plaintiff was molested on three or four further
occasions, causing her mental distress and upset. The court of appeal
awarded damages which included a sum to compensate her for the anxiety
and distress she had suffered in consequence of the continued molestation,
since this was a direct and foreseeable consequence of the solicitor’s failure
to obtain the relief which it was the very purpose of the contract to secure.

Also in Perry V. Sidney Philips & Sons [1982] 1 WLR 1297, the plaintiff
purchased a house in reliance on a survey report prepared by the defendants.
This stated that the house was in good order. After moving in the plaintiff
discovered that the roof leaked and was in poor condition, and that the septic
tank was inefficient and caused a nuisance by its smell. The court of appeal
awarded damages for discomfort caused by the repairs since this was
foreseeable.

(d) Contributory Negligence

Where a person fails to perform the ‘duty’ to mitigate, his damages are
reduced because it can be argued that he is at fault in failing to avoid loss. He
may also be at fault in the sense actually helping to bring about the loss or the
event causing it. In the law of tort, such conduct is called contributory
negligence. The law Reform (Miscellaneous provisions) Act chapter 74 of the
laws of Zambia provides for the apportionment of liability in case of
contributory negligence.

Section 10 of the Law Reform (miscellaneous provision) Act provides:

‘Where any person suffers damages as the result of party of his own fault and
party of his own fault and partly of the fault of any other person or persons, a
claim in respect of that damage shall not be defeated by reason of the fault of
the person suffering the damage, but the damages recoverable in respect
thereof shall be reduced to such extent as the court thinks just and equitable
having regard to the claimant’s share in the responsibility of the damage….”

In Barclays Bank plc V. Fairclough building ltd [1955] QB 214, the defendant
contractor was in breach of a contract to clean roofs containing asbestos, in
that it had failed to execute the work in an expeditious, efficient and
workmanlike manner and had failed to comply with statutory requirements
relating to asbestos. The defendants argued that the plaintiff had failed to
supervise the work and therefore damages should be reduced for this
contributory negligence under the 1945 act. It was held that contributory
negligence was held not a defence to claim for damages based on a breach
of a strict contractual obligation, even where the defendant might have also
had a parallel liability in tort.
MITIGATION

The law imposes a duty on the injured party to take all reasonable steps to
mitigate the loss caused by the breach of contract, and prevents him from
claiming compensation for any part of the damage which, may arise due to his
negligence. Thus in Brace V. Calder [1895] 2 QB 253, the defendants, a
partnership of comprising of four members, agreed to employ the plaintiff as
manager of a branch of the business for two years, five months two of the
partnership was dissolved by the retirement of two of the members, and the
business was transferred to the other two, who offered to employ the plaintiff
on the same terms. He rejected the offer and sued for breach of contract and
claimed as damages the salary for the remainder of the two year contract
period.

It was held that the plaintiff was entitled to nominal damages only because it
was his duty to mitigate his loss which he could easily have done by accepting
re-employment. Similarly, in Darbishire V. Warran [1963] 1 WLR 1067, the
plaintiff owned a car of which he was particularly proud. Though it was old he
maintained it in excellent condition. It had a market value of about £85. The
car was damaged by the defendant’s negligence and the plaintiff was advised
it would cost him £192 to get it repaired. The plaintiff went ahead with repairs
and claimed £192 from the defendant, less the money he had received from
his insurance company, and plus the cost of hiring a car while the repairs
were carried out. The plaintiffs claim failed.

It was held that the expenditure on repairs was not justified as the plaintiff
should have mitigated his loss by buying a replacement vehicle on the open
market.

Whether the plaintiff has failed to take reasonable steps to mitigate the loss in
question of the fact dependant upon the particular circumstances of each
case, and the burden of proving such failure rests upon the defendant. In
Payzu Ltd V. Saunders [1919] 2 K.B. 581, the parties had entered into a
contract for the supply of goods to be delivered and paid for by instalments.
The plaintiffs failed to pay for the first instalment when due, one month after
delivery. The defendant declined to make further deliveries unless the
plaintiffs paid cash in advance with their orders. The plaintiffs refused to
accept delivery on those terms. The price of the goods rose, and they sued for
breach of contract. It was held in the first place that the seller liable in
damages, since the circumstances did not warrant his repudiation of the
contract. On the other hand, it was held that plaintiffs should have mitigated
their loss by accepting the seller’s offer of delivery against cash payment, and
that the damages recoverable were not to be measured by the difference
between the contract and market price, but by the loss that plaintiff would
have suffered if they had paid cash and acquired the goods at the contract
price, that is, the loss of one month’s credit which had originally applied under
the contract. The court also held that the question of whether the steps were
reasonable was a question of fact in each case.

LIQUIDATED DAMAGES AND PENALTIES

Often, parties to the contract may agree beforehand what amount or sum
should be paid by way of damages in the event of breach of the contract. For
example, in the construction contract, parties may provide that failure to
complete a construction job on time will lead to claim for damages of
K50,000.00 per day. An amount fixed in this manner falls into one of two
classes.

Firstly the amount may be a genuine pre-estimate of the loss likely to be

caused to or suffered by one party if the contract is broken by the other party.
In this case it is called ‘liquidated damages’ and it constitutes the amount, no
more or less, that the plaintiff is entitled to recover in the event of the breach
without being required to prove actual damage.

Secondly, the amount may be in the nature of a threat held over the other
party in terrorem (to frighten the other party)-a security to the promisee that
the contract will be performed. A sum of this nature is called a ‘penalty’, and is
designed to compel the other party to perform the contract. Liquidated
damages are enforceable, and penalty clauses are not enforceable beyond
the amount of the injured party’s actual loss. Thus the party who brings an
action for the enforcement of the penalty can recover compensation only for
the damage that he in fact suffered, and as such he is not entitled to recover
the amount stated in the contract if he has not in fact suffered so much loss.

Whether a particular sum is a liquidated damages or penalty is a matter of

construction and depends on the intention of the parties. In Law V. Redditch
Local Board [1892] 1 QB 127, at p. 132, Lopez J stated: “The distinction
between penalties and liquidated damages depends on the intention of the
parties to be gathered from the whole of the contract. If the intention is to
secure performance of the contract by the imposition of a fine or penalty, then
the sum specified is a penalty; but if, on the other hand, the intention is to
asses the damages for breach of the contract, it is liquidated damages.”

In Dunlop Pneumatic Tyre Co Ltd V. New garage and Motor Co Ltd [1915]
A.C. 79, the appellants, manufacturers of motor tyres, supplied goods to the
respondents under a contract which provided that the respondents would not
sell tyres at less than the appellants list price. It was further provided that if the
respondent sold a tyre in breach of this agreement they would pay £5. It was
held that since the sum was not extravagant, it was a genuine attempt by the
parties to estimate the damage which price undercutting would cause the
appellants. The £5 would be regarded as liquidated damages and not as a
penalty.

Lord Dunedin, at p. 86, laid down certain rules for guidance in the
determination of whether an agreed or stipulated sum is liquidated damages
or a penalty.

(i) The stipulated sum is a penalty if it is extravagant and unconscionable

in amount in comparison with the greatest loss that could possibly
follow from the breach.
(ii) If the obligation of the promise or under the contract is to pay a certain
sum of money, and it is agreed that he fails to do so he shall pay a
larger sum, this larger sum is a penalty. The reason is that, since
damage arising from breach is capable of exact definition, the fixing of
a large sum cannot be a pre-estimate of the probable damage.
(iii) If a single lump sum is made payable upon the occurrence of one or
more or all of several events, some of which may occasion serious and
others mere trifling damage, there is a presumption that it is a penalty.
(iv) Where a precise pre-estimate of the consequence of the breach is
impossible the court may regard the lump sum as a genuine pre-
estimate, and thus a liquidation damages.

In Kemble V. Farren [1829] 6 Bing 141, an actors contract provided that if

either he or the theatre management broke their contract then the party in
breach must pay the other £1,000 as ‘liquidated damages’. This was held to
be a penalty clause because it was disproportionate both to the actor’s daily
fee of £3 6s 8d, and the greatest possible loss that would result from the
breach.

Similarly, in Ford Motors Co. (England) Ltd V. Armstrong (1915) 31 T.L.R.

267, a dealer, the defendant, agreed to sell the plaintiffs motorcars and, in the
event of his selling any car or parts below list price, to pay £250 for every
breach of such undertaking such sum being the agreed damages which the
manufacturer will sustain. It was held that the sum of £250 was a penalty and
not liquidated damages.

Also in Ariston S.R.L. V. Charly Records Ltd [1990], the plaintiff agreed to
manufacture records and print sleeve for the defendants. The defendants
entrusted the plaintiff with certain metal parts, artwork, label information,
negatives and lacquer necessary for the work. Since this equipment was very
valuable the contract provided that if the plaintiff did not return the items within
10 days of the defendant’s request they pay a penalty of 600 per day for late
delivery. Following a request the plaintiff returned most of the equipment
within the required time. The plaintiff commenced an action to claim amounts
outstanding on the invoices, but the defendants counter-claimed £600 per day
for failure to return the equipment.

It was held that the clause was unenforceable because it was a penalty. £600
per day may have been a reasonable estimate of loss resulting from the
failure to return all of the equipment, but under the clause the same amount
was payable even if only one item were retained. It was not therefore a
reasonable pre-estimate of the loss.

Unlimited Damages
Unlimited damages are the damages that are/which are not agreed upon by
the parties, but are assessed by the court.

3. ACTION FOR AN AGREED SUM

If one party has performed his contractual obligations and the other party’s
breach consists of a failure to pay the contractual price or other agreed sum,
the performing party can claim this agreed (liquidated) sum rather than
damages.
For example, in relation to an action for the price in a contract for the sale of
goods, section 49 (1) of the sale of goods Act provides:
“Where, under a contract of sale, the property in the goods has passed to the
buyer, and the buyer wrongfully neglects to pay for the goods according to the
terms of the contract, the seller may maintain an action against him for the
price of the goods.
Since an action for an agreed sum is a liquidated claim, the remoteness rules
and duty to mitigate do not arise or apply.

4. QUANTUM MERUIT

The common law provides a convenient remedy when the injured party seeks,
not a precise sum alleged to be due to him, but a reasonable remuneration for
services rendered. He is then said to sue on a quantum meruit. Quantum
Meruit is classified as a claim in quasi-contract. In some circumstances where
there is no contract the law seeks to achieve a just result by treating the
person concerned as if they had entered into a contract on the appropriate
terms. Quasi-contract relates only to the payment of money on the ground
that retention of certain funds would be unjustified enrichment.

The term ‘Quntum Meruit’ literally means ‘how much it is worth’. It is a

measure of the value of contractual work, which has been performed. The aim
of such an award is to restore the plaintiff to the position he would have been
in if the contract had never been made. It is a restitutory award. By contrast an
award of damages aims to put the injured party in the position he would have
been in if the contract had been performed. It is a compensatory award.

Quntum Meruit may be claimed in the following circumstances:

Where one party has already performed part of his contractual obligations and
the other party then repudiates the contract. Provided the injured party elects
to treat the contract as terminated, he may claim a reasonable amount for the
work done.

In De Bernardy V. Harding [1853], 8 Exch. 822, the defendant proposed to

erect and let seats to view the funeral of the Duke of Wellington. He agreed
that the plaintiff should advertise the seats outside England and sell tickets,
and that he should receive commission on all the tickets thus sold. the plaintiff
prepared advertisements and paid printers, but, before he had sold any
tickets, the defendant wrongfully revoked his authority. It was held that the
plaintiff could sue in quantum meruit for the work already done

ALDERSON.B, said:

“Where one party has absolutely refused to perform, or has rendered himself
incapable of performing, his part of the contract, he puts it in the power of the
other party either to sue for a breach of it or to rescind the contract and sue on
a quantum meruit for the work actually done.

(ii) Where the claimant or injured party is prevented from completing his
side of the bargain by the other party’s conduct and repudiation. The claimant
may have done a lot of work, but not yet earned or received any fee. He may
be entitled to claim on a quantum meruit basis for what he has done.

In Panché V. Coldurn [1824-34] ALL ER Rep 9481, the plaintiff was

commissioned by the publisher, defendants, to write a book on customes and
armour for £100. After he had done the necessary research and written part of
the book, the publisher repudiated the contract. It was held that the plaintiff
was entitled to £50 as reasonable remuneration on a quantum meruit basis.

Where work done has been done under a void contract. The injured party
cannot recover damages for breach, because no contract exists, but he may
recover on a quantum meruit basis.

In Craven Ellis V. Canons Ltd [1936] 2 K.B.403, the plaintiff was appointed
managing director of a company by an agreement under the companies seal
which provided for his remuneration. By the articles of association each
director was required to obtain certain qualification scores within two months
of his appointment. Neither the plaintiff nor the other directors ever obtained
these scores. The plaintiff none the less, purporting to act under the
agreement rendered services for the company and sued for the five specified
in the agreement , or alternatively, for a reasonable remuneration on quantum
recruit.

It was held that the agreement was void, since the persons purporting to act
as directors had no authority and could not bind the company. The claim in
contract must therefore fail. But, as services had in fact been rendered
whereby the company had benefited, the alternative claim on the quantum
meruit could succeed.

Likewise, In British Steel Corporation V. Cleveland Bridge & Engineering Co

Ltd [1984] ALL ER 504, the plaintiff supplied steel to the defendants while still
negotiating terms of the contract. Negotiations failed and there was, therefore,
no contract. It was held that as the parties had not reached agreement it was
impossible to say what the material terms were. Consequently there was no
formal contract. Since there was no contract, the work performed under the
letter of intent was not referable to any contractual terms as to payment and
performance. However, as the defendants had requested the plaintiffs to
deliver the steel, and therefore received a benefit at the expense of the
plaintiffs, it would be unjust for them to retain that benefit without
recompensing the plaintiff for the reasonable value of the steel. The plaintiff
was, therefore, entitled to a quantum meruit payment.
 CHAPTER 19

EQUITABLE REMEDIES FOR BREACH OF CONTRACT