What is a legal agreement
Contract is an agreement which the law will enforce.
What is the difference between an agreement and a legally binding agreement?
To understand this problem we should consider two scenarios. The first is if we ask a friend or colleague to have lunch with us and they agree. There is an offer and an acceptance. If we were to be asked if we are suing the friend or colleague for breach of contract our answer would be an emphatic no. (Why would we give an emphatic no? What is the common sense reason for this?)
Before going further into this scenario lets look at a different one. We make a booking at a hotel. We fail to turn up. The hotel having reserved a room for us has been unable to sell the room to anyone else. If the hotel were to sue us we would accept the fact because there is an intention to create legal relations.Why? Because it is a business relationship. In the same way if the hotel had sold our room we would consider legal action of our own.
A legally binding contract needs offer, acceptance, intent to create legal relations and consideration. It is the presence of intent to create legal relations and of consideration that converts a social agreement into a legal agreement.
Characteristics of an offer
Must be certain : Gunthing v Lynn 1831
Must be differentiated from an enquiry : Harvey v Facey 1893
Must be differentiated from an intent to trade: Pharmaceutical Society of Great Britain v Boots 1953
May be to world at large (sometimes termed a unilateral offer) : Carlill v Carbolic Smokeball Co. 1893
During the build up to an agreement there is often a period of negotiation which differentiates an offer from negotiations. e.g. Harvey v Facey and must be distinguished from an intent to trade : Fisher v Bell 1961 and Pharmaceutical Society of Great Britain v Boots Cash Chemists 1953. This is due to the "limited stock argument" put by Lord Herschel in Grainger and Son v Gough 1896 re : wine list sent out by wine merchant. The concept of intent to trade is one of the most important and must be thoroughly understood. Remember, the general rule is that an offer is made by the customer. We offer to buy the goods.
Nature of offer
Offer may be express or implied. Court of Appeal in Thornton v Shoe Lane Parking Ltd 1971 held that an automatic ticket machine in a car park was an offer. An offer must be communicated before it can be accepted and an offer may be to a particular person or to the world at large.
Consider : Why is the term 'offer for sale' not really an offer in law whilst taking a ticket from an automatic ticketing machine is an offer?
Advertisements, catalogues and circulars
Not usually an offer. See : Partridge v Crittenden 1968; re advertisement in "Cage and Aviary Review". Can you see the logic for this? If in doubt read again the section on offer and differentiating from an intent to trade.
In an auction the bid is the offer and acceptance is when the auctioneer's hammer falls. See Payne v Cave 1789. An advertisement of an auction will as a result of Harris v Nickerson 1873 be regarded as an intent to trade, but if the advertisement of the auction states that the goods will be sold without a reserve price, then it appears from Warlow v Harrison 1859 to be an offer.
Duration or Termination of offer
An offer lasts until it is :
2 rejected, rejection terminates offer as does a counter offer. See Hyde v Wrench 1840. Also Jones v Daniel 1893 where the acceptance contained new terms it was held to be a rejection
3 revoked. Offer can be withdrawn (revoked) even if the offeror has promised to keep the offer open for a specified time. Routledge v Grant 1828. Revocation is only effective when it has been communicated to a third party and may be communicated by a third party as in Dickinson v Dodds 1876 where sale of house offered to Dickinson was told to him by a third party. A case I particualrly like for revocation is Byrne v Van Tienhoven 1880.
4 lapse of time as in Ramsgate Victoria Hotel v Montefiore 1866. See also Manchester Diocesan Council for Education v Commercial and General Investments Ltd 1970 where it was held that because of application for consent etc. The council had not rejected the offer due to lapse of time.
5 death of offeror or offeree. Usually leads to termination especially when contract is for personal services.
At this stage you might be thinking that soem of the above points are obvious. Well, in legal examinations you get credit fro stating the obvious.
Must take place before offer terminates.
Must be absolute and unconditional :
Felthouse v Bindley 1862
Hyde v Wrench 1840
May be by conduct :
Brogden v Metropolitan Railway 1877
Note the case of : Yates v Pulleyn 1975 where requirement that acceptance be by first class post not enforced. Acceptance must take place before the offer has ended. The place of acceptance is where the contract is made. Acceptance must be absolute and unconditional acceptance of the terms offered. However in Branco v Cobarro 1947 "provisional agreement until a fully legalised agreement is signed" was held to be binding.
Manner of acceptance
1 by word written or spoken
2 by conduct Brogden v Metropolitan Railway 1877; where coal was supplied without formal agreement. Formal contract sent, returned with amendment. Coal still supplied even though supplier tried to claim amendment a counter offer. Held acceptance by conduct
Acceptance of Tenders
If tender is for a specified amount then there is a contract. However where the tender calls for the supply of goods as and when required - it is regarded as a standing offer and may be revoked at any time up to legal acceptance. This applies to future supplies. as in Great Northern Railway v Witham 1873
Communication of acceptance
Basic rule is that there is no contract until acceptance is communicated as Felthouse v Bindley 1862. Note exceptions where offeror can waive need for communication of acceptance as in Carlill v Carbolic Smokeball Co. 1893
Rule of postal acceptance is that acceptance takes place when posted. See Adams v Lindsell 1818, and Household Fire and Carriage Insurance v Grant 1879; and Byrne v Van Tienhoven 1880 which was a battle as to when revocation and postal acceptance took place. Acceptance must be properly posted as in Re London and Northern Bank 1900 ;and usually must be the stipulated form of acceptance, but note Tinn v Hoffman and Co. 1873; where it was held that "reply by return of post" included an equally speedy method. Also in Yates v Pulleyn 1975; where the requirement that a reply be sent by registered post was not enforced.
Exceptions to Postal Rule
See Hughes v Holwell Securities 1973
This is an important part of postal acceptance and must be understood.
Rule in Telex Acceptances
See Entores v Miles Far East Corporation 1955 confirmed in Brinkibon v Stahg Stahl 1983.
Battle of Forms in Acceptance
Court of Appeal held in Butler Machine Tool Co. v Ex-Cell-O Corporation 1979 that seller had consented to buyer's terms because :
- seller's document was an offer
- buyer's reply was a counter offer
- return of acknowledgement slip was an acceptance of the counter offer
Intention to Create Legal Relations
Social and Domestic Agreements
When we began this subject we discovered that the general rule is that a social agreement is not usually legally binding, whilst a business agreement is usually binding. See Balfour v Balfour 1919, Jones v Padavatton 1969 where a mother agreed to finance and house her daughter during studies. Later, after a quarrel the mother went back on her agreement. Held that it was not legally binding as it was a social or domestic arrangement. This last case can be contrasted with that of Merritt v Merritt 1970 where the family circumstances were different, and with Simpkins v Pays 1955.
Consider : A group odf student decide to buy 100 ottery tickets. They designate one of the group t ocollect the money and purchase the tickets. One of the tickets wins the jackpot. The person who bought the ticket decides to keep the money as there was not a legal agreement. Commercial Agreements
Here the law presumes that there is an intent for the agreement to be legally binding. however this presumption can and has been rebutted as in Jones v Vernon's Pools 1938 and Ford v AUEW 1969. It is important to look at Kleinwort Benson v Malaysian Mining Corporation 1989 at both High Court and Appeal Courts for differing views on a comfort letter and intent. (see cases at end of paper)
This is the last part of the constituents of the legal agreement.
English law of contract is concerned with the presence of and not the fairness of a bargain. The law requires that in all contracts other than those by deed, both parties bring something - to the agreement i.e. provide consideration to the bargain.
Note distinction between Executed and Executory Consideration
Consideration Must Move From Promisee
Tweddle v Atkinson 1861; No stranger to the consideration can take advantage of a contract although made for his benefit.
Consideration Need Not Be Adequate
In Thomas v Thomas 1842 it was held that payment of £1 for a house which was obviously much less than its value, was held to be of some value, in law; to the contract and was adequate consideration. What the law requires is that something is given in return for the promise. The law does not require that the bargain should be fair. This means that a Rolls Royce could be sold for a consideration of £5.
Consideration Must Be Sufficient
This appears to be a contradiction to the rule that consideration must be adequate. What we need to remember is that something has to be given (sufficiency) for the promise. This topic is best approached through the cases of Stilk v Myrick 1809 and Hartley v Ponsonby 1857. After looking at these cases we will be in a position to understand the distinction between adequacy and sufficiency of consideration. However, note how Stilk may be altered by Williams v Roffey Bros & Nicholls 1989.
White v Bluett 1853; contained a vague promise and was not consideration. In the same manner uncertainty as in Gunthing v Lynn 1831 is also no adequate consideration
See Re McCardle 1951. Note however that where a promise is made for services after the service has been performed then such a promise in enforceable if the services were carried out at the request of the promisor and the parties understood that there was an implied promise of payment when the service was first asked for. Cases such as Lampleigh v Braithwait 1615 and Re Casey's Patents 1892 apply.
Where a promise is made to do something already committed to do
See Collins v Godfrey 1831 and Ward v Byham 1956 where the court said that the mother had done more that her duty to look after the child by stating the child would be well looked after , happy and could choose with which parent to live. In Ward the mother was giving consideration for the promise. Also in Shadwell v Shadwell 1860 where an uncle promised Shadwell to pay him money if he married Ellen Nicoll to whom he was engaged. There was no consideration for the new promise as Shadwell was already engaged and the fact that an engagement was legally binding. Refer also to Stilk v Myrick above.
Rule in Pinnel's Case 1602
This important case stated that payment of a smaller sum was not consideration for the discharge of the debt. Pinnel's Case stated the there will be consideration for the discharge of the contract if the payment is in a form different from the original debt, or at a different time or in a different place. Pinnel's Case was confirmed in Foakes v Beer 1884 and in D and C Builders Ltd v Rees 1966 it was held that a cheque was the same as money (cash) and of itself was not consideration to discharge the debt.
This is a relatively new equitable doctrine in English law, being brought to notice in Central London Property Trust v High Trees House 1947. One aspect of the still evolving doctrine of promissory estoppel is the rule that it is to used as "a shield and not as a sword". This means that you can bring forward a promise unsupported by consideration as a defence if you are sued. In Combe v Combe 1951 where the husband who had volunteered to pay his wife £100 a year could not be sued. The doctrine did not permit the wife to use it as a sword. It appears that an action for promissory estoppel requires three conditions :
1) there must be a promise not to enforce rights under a contract
2) the promise must have been acted upon by the other party
3) it must have been inequitable to allow the promisor to go back on his promise.
What Have We Learned?
We have learnt about the constituents of a contract. A legal agreement requires an offer, an acceptance, an intent to create legal relations and the presence of consideration. We are now in a position to examine further aspects of the law of contract.
Consider and analyse in legal terms the legal consequences of not turning up to keep a booking made by telephone for a party from your office to go to a restaurant for a Christmas meal.
Terms of a Contract
It is important for us to consider some basic information on the terms of a contract. Terms can be divided into :
These are of two types conditions and warranties. Two cases, Poussard and Spiers 1876 and Bettini v Gye 1876 both about singers, illustrates the legal distinction between condition and warranty.
Terms may be implied into a contract by custom, courts or statute. Hutton v Warren 1836 is an example of custom. Also consider Liverpool Corporation v Irwin 1976 which stated that the legal relationship between banker and customer is governed by implied terms. In a similar manner it was held to be an implied term that ground along a wharf was safe at low tide i.e. The Moorcock 1889. Statute law has implied terms into contract law. An important example is the Sale of Goods Act 1979
In Cehave v Bremer, The Hansa Nord 1975 the House of Lords introduced a form of intermediate clause called an innominate clause. In such cases the court could delay deciding whether an event is a breach of condition or warranty until the extent of the damage is known.
Consider : You buy a new CD Rom. When you arrive home you discover that a fuse has blown in the electricity plug. Is this a breach of condition or of warranty?. Just in case you have made an inspired guess give reasons for your answer.
Exclusion, Exemption and Limitation Clauses
Such clauses have the objective of :
a) Limits compensation for breach of contract
b) Limits remedies available
c) specifically excludes liability for breach of an express or an implied term
d) Attempt to restrict the scope of a contractual obligation.
L'Estrange v Graucob 1934 re cigarette vending machine, Chapleton v Barry UDC 1940 re collapsing deck chair, Olley v Marlborough Court Hotel 1949, Curtis v Chemical Cleaning Company 1951 where it was held the exclusion clause could be varied by the oral representation of a shop assistant.
Contra Proferentum Rule
This rule that the courts will in cases of ambiguity interpret the clause against the person making it.
Doctrine of Fundamental Breach
This doctrine is well set out in Suisse Atlantique 1967 and affirmed in Photo Production v Securicor Transport Ltd 1980. In these cases an exemption clause could still be applied even though there had been a fundamental breach of the contract containing the exemption clause. This is an important issue and one which must be given adequate study time.
Statute Law and Exclusion clauses
The Unfair Contract Terms Act 1977 is a landmark in the development of exclusion, exemption clauses and its main provisions must be appreciated.
Consider : Can you describe any exclusion clause you may see in a car park or a restaurant.
The common law states that we must live with our mistakes. However, over the years there have been exceptions :
Where both sides make the same mistake as to the subject matter. See Galloway v Galloway 1914
Where both parties are mistaken, but about different things . The best case is Raffles v Wichelhaus 1864 the so called "Ex Peerless Case"
Cundy v Lindsay 1878 and Phillips v Brookes 1919 are important to read and understand. Remember that cases concerning unilateral mistake frequently involve mistaken identity.
Why Identity is Important in Unilateral Contract.
If we are mistaken at all times about the identity of the person we are contracting with, then the contract is void. See Cundy v Lindsay.
If the identity is not important or becomes of importance after our initial dealings the law in Phillips v Brookes and Lewis v Avery suggests that the contract is not void by mistake, but is voidable by reason of deceit.
Whether the contract is void or voidable determines whether the supplier can recover goods from an innocent third party.
Equity and Mistake
Equity provides remedies for mistake. These include
1) recission see Leaf v International Galleries 1950
2) rectification see Weeds v Blaney 1976 and
3) Webster v Cecil 1861
An actionable misrepresentation is an untrue statement of past or existing fact made by one party to another party of the contract which induces the representee to enter the contract. Misrepresentation is best learnt by referring to the following statements and explanations.
Must be a Statement of Fact
Two good cases are Smith v Land and House Property Corporation 1884 and Bisset v Wilkinson 1927. Where statements of law are made then it is not a misrepresentation as everyone is deemed to know the law. See .Solle v Butcher 1950
Silence not Misrepresentation
No general duty to disclose facts that are not known to the other contracting party. Rule confirmed in Keates v Lord Cadogan 1851.
Exceptions to Silence Rule
With v O'Flanagan 1936
Re Kyslant 1931
Insurance contracts of the utmost good faith
Inducement in Misrepresentation
Representation must induce the representee to enter the contract and it is usual for the representee to prove that he was induced by the representation
Remedies for Misrepresentation
Misrepresentation Act 1967
Derry v Peak 1889
The main remedies are damages and or recission. Recission is an equitable remedy and it must be understood when recission will fail i.e. if we fail to act in time, and when a third party has develops rights are the most important. cases such as Leaf v International Galleries 1950 and Phillips v Brookes 1919 and Lewis v Avery 1972
Performance of Contract
General rule is that the contract must be performed in the exact and precise manner in which was agreed. See Cutter v Powell 1795 and Moore v Landauer 1921. We now need to examine some of the exceptions.
Exceptions to General Rule of Performance
Prevention of performance i.e. Planche v Colburn 1831
Acceptance of partial performance
In Paradine v Jayne 1647 the severity of the common law was shown to parties who failed to perform their part of the contract even though it had become impossible for that to happen. Frustration is another example of equitable remedies and is best approached through case law.
Taylor v Caldwell 1863 which set out the doctrine of subsequent impossibility (frustration) stated that the parties to a contract are excused further performance of their obligations if some event occur, without fault of either party, which makes further performance impossible or radically different from the original intention.
Krell v Henry 1903
Herne Bay Steamboat Company v Hutton 1903
Davis Contractors v Fareham UDC 1956
If the frustrating event was self induced then there is no frustration of contract. See Maritime National Fish Ltd v Ocean Trawlers Ltd 1935
If the event was foreseeable by both parties then the law is unclear whether there is frustration or not. See Ocean Tramp Tankers Corporation v Sovfracht : The Eugenia 1964
Finally note the importance of the Law Reform (Frustrated Contracts) Act 1943
Consider : England did not reach the World Cup rugby finals in South Africa in 1996. Could the fans who had made advanced bookings claim that the contract with the tour operator had been frustrated?
Remedies For Breach of Contract
Damages is the standard common law remedy. If the plaintiff proves the case then the plaintiff is entitled to damages for his loss. Other remedies are mainly equitable and as such are discretionary.
What is Purpose of Damages
The purpose of damages is to put the plaintiff back in the position he would have been in if the contract was carried out as agreed. See Lazenby Garages Ltd v Wright 1976 but note the case of Jarvis v Swan Tours 1973 and the consequence of that case on the travel tour industry and photographic development industry.
The plaintiff has an express duty to mitigate losses.
Remoteness of Damages
Hadley v Baxendale 1854 and Victoria Laundry (Windsor) Ltd V Newman Industries Ltd 1949 are the important cases. Students frequently need to read and think both cases through before seeing the logic behind the theory of remoteness of damage. The lasting importance of Hadley v Baxendale is that it states damages should be awarded when :
"arising naturally or as may reasonably been supposed to have been in the contemplation of both the parties at the time they made the contract."
Liquidated Damages and Penalty Clauses
The parties to a contract may anticipate the possibility of a breach and include in the contract a term that a certain sum shall be paid to the injured party by the party in default if a specified breach occurs. If this sum is a genuine pre-estimate of the damage the term is known as Liquidated Damages. If the estimated sum is much less it is frequently termed a limitation clause. If it is much more it is termed a Penalty Clause. See Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd 1915 which lays down the test for distinguishing between liquidated damages and penalty clauses.
Consider : B Builders agree to build a hotel for us. The hotel is to be handed over to us in March. We, as tough negotiators insert a clause stating that in the event of a delay, the builder will pay us compensation of £35,000 for each week's delay. If the hotel is handed over three weeks late what compensation will we receive from the builder?
What have We Learned
We should now have a sound knowledge of the basics of contract law. Before we finish we need to consider some factors that might affect the existence of a contract. These are restraint of trade, duress, undue influence and capacity to contract.
Restraint of Trade Clauses
A restraint of trade occurs when one party to a contract seeks to limit the future liberty of the other party to carry out his business. In reality the restraint clause is usually seen as part of a contract such as a contract of employment or a contract to purchase a business. The law states that a restraint clause is prima facie void unless it is held to be reasonable from the point of view of the parties and of the community. It is all a question of reasonableness in all the circumstances.
Must protect some form of proprietary interest of the person receiving the promise. Usually to do with either trade secrets or business connections. In Forster v Suggett 1918 it was held that an employer cannot prevent an employee from using his own skill after he has left even if that skill was learnt from the employer. In regard to business connections Lord Parker in Herbert Morris v Saxelby 1916 said the before any restraint is justifiable the employee must be one who will acquire not merely the knowledge of customers but influence over them.
In considering whether a restraint is reasonable depends on :
1 Area See Fitch v Dewes 1921
2 Time See Fitch v Dewes 1921
3 Activities. A restraint will not extend to an activity which is irrelevant to the activity being protected. See Home Counties Dairies Ltd v Skilton 1970 where the contract of employment contained a clause "the employee expressly agrees not at any time during one year after the determination of his employment...either on his own account or as representative or agent of any person or company to serve or sell milk or dairy produce to, or solicit orders for milk or dairy produce from any person or company who at any time during the last six months of his employment shall have been a customer of the employer and served by the employee in the course of his employment"
Should only be applied to agreements whereby garages agree with oil companies to only stock petrol and lubricating oils from the company and in return have a rebate and often loans from the company. See Esso v Harper's Garage (Southport) Ltd 1968
Duress and Undue Influence
Duress original concerned itself with physical duress i.e. Barton v Armstrong 1976 where there was a threat to kill unless a substantial sum of money was paid. In Maskell v Horner 1915 there appeared to be an attempt to widen the scope of duress to economic duress but this was an exception to the rule and it was not until Northern Ocean Shipping Co Ltd v Hyundai Construction Co. Ltd (The Atlantic Baron) 1979 that Maskel was recognised and the right to sue in economic duress established. A case that deeply analyses duress in business is Universe Tankships of Monrovia v International Transport Workers Federation 1983.
A contract or gift may be set aside under the equitable doctrine of undue influence. There are two distinct situations where the doctrine is applied :
1) where a special relationship of confidence exists and one party has abused his position of trust and confidence acting for his own interests.
2) where one exerts unfair mental pressure over another.
Cases : Alcard v Skinner 1887, Williams v Bayley 1866, Lloyds Bank v Bundy 1975, National Westminster Bank plc v Morgan 1985 and George Michael case 1994
Capacity to Contract
The Minor's Contract Act 1987 sets out the rules relating to the contractual capacity of minors. Basically two kinds of contract negotiated by a minor are valid
1) contracts for the supply of goods and services which are necessaries i.e. Nash v Inman 1908 and
2) a service or educational contract which is for the benefit of the minor.
Capacity of a company can be seen by examining its articles and memorandum of association. From these document s we can determine if an action is ultra vires or not. The Companies Act 1989 has made many previously ultra vires actions now intra vires.
What Have We Learned
We now have a sound appreciation of the basics of contract law. We can see how case law has played an important part in the development of contract law. It is important to use your list of key words in order to learn and importantly, understand the case and where its story fits in relation to any question you may have to answer.
Cases To Analyse
The cases of Kleinwort Benson Ltd v Malaysian Mining Corporation (1989) and Williams and Roffey Bros. v Nicholls (Contractors) Ltd (1989) are important cases for students studying the „A¾ level law course.
Kleinwort Benson Ltd v Malaysian Mining Corporation (1989)
This case is one on intent to create legal relations and questions to assumption that all business agreements are legally binding unless there is a clause to the contrary in the agreement.
Students have copies of the transcripts of the QBD and Court of Appeal hearings. Some of the main points about the comfort letter and its intent or otherwise are seen in the transcripts.
It is our policy to ensure that the business of MMC Metals Ltd is at all times in a position to meet its liabilities to you under the arrangement. (NLJ 29 January 1988 p 21)
Hirst J said „I have to carry out precisely the same task...of ascertaining what common intentions should be ascribed to the parties from the terms of the documents in question and the surrounding circumstances (NLJ 29th January 1988 p 21)
For Hirst, the presumption that there was an intent to create legal relations was reinforced by „(a) KB clearly acted in reliance...on this paragraph in agreeing to advance £10 million. (b) It was of paramount importance to KB that MMC should ensure that Metals were at all times in a position to meet the liabilities made under the facility arrangements (NLJ 29th January 1988 p 22)
Now we can look at the ratio of the Court of Appeal hearing in NLJ February 17th 1989 p 221) „A letter of comfort stating that it is the policy of the defendants to ensure that its subsidiary is at all times in a position to meet its liabilities in respect of a loan made by the plaintiffs to a subsidiary will not have contractual effect if it is shown to be merely a statement of present fact regarding the defendants intentions and is not a contractual promise as to the defendants future conduct (NLJ February 17th 1989 p 221)
Ralph Gibson LJ said „ In my judgment the defendants made a statement as to their policy and did not...expressly pronounce that such policy would be continued in future (NLJ February 17th 1989 p 221)
Ralph Gibson ended his speech with The consequences of the decision of the defendants to repudiate their moral responsibility are not mater for the court. (NLJ February 17th 1989 p 222)
Williams and Roffey Bros v Nicholls (Contractors) Ltd (1989)
This short Court of Appeal case looks at the topic of sufficiency in consideration and examines the attempts over the years to alter the rule in Stilk v Myrick 1809.
Glidewell LJ recalls attempts of Denning L to break free from the constraints of Stilk v Myrick and mentions Ward v Byham (1956) and Williams and Williams (1957)
The judge also examined whether the concept of economic duress might help. In this case it was of little help but examine closely the ratio and remember the words of Glidewell LJ It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application to the present day (NLJ December 15th 1989 p 1714) Other writers see what was regarded as a policy decision in 1809 as being outdated and in need of change.
It is the ratio (heading note) that is so important in Williams and Roffey Bros. v Nicholls (Contractors) Ltd (1989)
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