LA243 - Contract Law (Lecture notes and Case facts) PDF

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Summary

Lecture 1: Setting the Context Transactions = any kind of exchange between individuals and/or business Contracts = particular type of transaction (governed by Contract Law, but not exclusively) - Involve economic exchanges - Legal recognition and enforceability under Contract Law Other areas of law ...

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Contract Law Lecture 1: Setting the Context Transactions = any kind of exchange between individuals and/or business Contracts = particular type of transaction (governed by Contract Law, but not exclusively) - Involve economic exchanges - Legal recognition and enforceability under Contract Law Other areas of law relevant e.g. Competition Law, Criminal or Financial Services Law. - Regulatory rules to guide conduct of some parties (e.g. financial services providers) - Normative impact of trade customs/usages Codes of practice: (rules of conduct which have evolved between the parties to transactions in that sector have taken on the status of being de facto rules which everyone in that business sector is expected to follow, not necessarily written down but followed) There to prevent the intervention of parliament. - Utilisation of digital technology in contracting Dramatic expansion in usage for transactions, created potential to enable or restrict certain ways of negotiating, concluding contracts e.g. website transactions. What is a contract? A transaction based on agreement (both parties agree to be bound by the contracts to one another) Simple transaction- coffee in café-bar. Parties assume mutual obligations towards one another, the voluntary nature is essential. Contracts can be - Oral or written - Standard-form contracts or negotiated (partially or fully) - Performed instantly or over an extended time for performance e.g. raw materials are supplied regularly to a manufacturer Contract Law helps us to: 1- Figure out whether and when a contract has been conducted 2- To work out what the obligations between the parties are 3- To determine the consequences of some flaw when making a contract 4- To provide when the parties can be discharged from their obligations 5- To specify what should happen if one party has failed to honour its obligations Common Law based (case-law). Occasionally find some supplementary statutory provision e.g. remedies for frustration (but no codification of contract law). For certain types of contract, we have more detailed statutory regulation of certain types of contract e.g., consumer or employment contracts (combination of common law and statute). There are multiple stages of contracting- Pre-contractual: negotiation (not every contract is subject to pre negotiation) - Contract formation: concluding a binding contract - Determining the substance of the contract - Performance of the contract - Discharge Contract law in context: commercial deals - Relevance of ‘the context’ in a commercial deal Planning stage: o Contract to record agreement o Contract law as a backdrop for contract - Disputes

Contract Law o Problem occurs during performance o Relationship between parties broken down Freedom of contract: Fundamental principle of English Contract Law but has a particularly broad scope in English contract Law. Parties are free to contract on whatever terms and who they choose and the courts enforce it- this is the case irrespective of the consequences (Arnold v Britton [2015]chalet leases & inflation of service charges. - The Supreme Court has supported a literal interpretation of a 1974 service charge clause in a lease even though it means that it is harsh for the individual tenants. In doing so it has set clear limits on the "commercial common sense" approach to the interpretation of English law contracts. )

Lord Neuberger: “…the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language” The court will not step in to make the contract fairer to parties, the parties have to accept the consequences of what they have agreed, no matter how disastrous this may turn out for one of the parties. Limits to freedom of contract - Some limitations at common law e.g. effectiveness of certain contract terms - penalty clauses - clauses granting wide discretion to one party - Statutory intervention e.g. Unfair Contract Terms Act 1977 (commercial- business to business) and Part II of the Consumer Rights Act 2015(consumer to business) provides a fairness test that can be applied to every contract term in a consumer contract- so when it comes to consumers, there is much greater scope for intervention in case the contract is unfair. Lecture 2: Requirements for a legally binding contract Requirements for a legally binding contract: Agreement between the parties 1) Offer 2) Acceptance Enforceability criteria 1) Intention to create legal relations 2) Consideration Objective standard: Offer and acceptance together constitute the agreement between the parties- has to be determined objectively e.g. Smith v Hughes [1871]. = Held against a reasonable man – can be detrimental or in favour. CASE FACTS Smith provided oats to Hughes, when arrived Hughes didn’t get what expected He needed old oats, due to horses diet, but received green oats – same as original sample Smith argued Hughes BOC as he didn’t pay for delivery or future oats delivery Contract held, no discussion on type of oats= objective test and reasonable person would expect the sale of good quality oats in a similar contract

An objective assessment considers each party’s words and actions as likely indication of what was actually intended No agreement in cases: Where it is clear that final agreement does not reflect one party’s intention -

Contract Law 1) Hartog v Colin and Shields [1939] (mistake in contract over pricing of beauty product) -

held that there was no contract between the complainant and the defendant. Any contract would be void by the mistake of the hare skin price; the complainant would have known that it was normally sold per piece and not by pound. The court said that there is a duty to correct a mistake that is known to not be the real intention of the person making it. You cannot simply take advantage and ‘snap up’ the offer.

Parties of cross-purposes 1) Raffles v Wichelhous [1864] (2 ships with the same name) One party is mistaken about the terms of the contract or the identity of the other party, and the other party knows (or should know) about that 1) Shogun Finance Ltd v Hudson [2004] (stolen car, couldn’t enforce contract) Sometimes referred to as ‘unilateral’ mistake Offer and Invitation to treat: An offer has to be made to have a contract- one party has to make a clear offer. ‘an expression, by words or conduct, of a willingness to be bound by specified terms.’ (Burrows, A restatement of the English Law of Contract, Art.7(3)) Made by the offeror, received by the offeree Distinguish from invitation to treat – indication made by one party of a willingness to enter into negotiations Partridge v Crittenden [1968]- advertisement is an invitation to treat Pharmaceuticals Soc v Boots [1953] (Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401 Court of Appeal)- goods displayed in a shop are ITT. -

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Goods on the shelf constitute an invitation to treat not an offer. A customer takes the goods to the till and makes an offer to purchase. The shop assistant then chooses whether to accept the offer. The contract is therefore concluded at the till in the presence of a pharmacist.

Applying this in practice might be difficult- pinpointing whether something was an invitation to treat or offer e.g. we know for example that as a general rule on advertisements in the newspaper on by analogy, of course websites etc are regarded as invitations to treat. Even if the word offer has been used. Clothes in shops are invitations to treat.

Acceptance Requires us to find that the offeree has accepted the offer made by the offeror on exactly the terms stated by the offeror. – sometimes referred to as the mirror image rule (means that any suggestions for change would result in counter-offer Hyde v Wrench [1840] 

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The court dismissed the claims and held that there was no binding contract for the farm between Mr Hyde and Mr Wrench. It was stated that when a counter offer is made, this supersedes and destroys the original offer. This original offer is no longer available or on the table. In this case, when Mr Hyde offered £950, he cancelled the £1,000 offer and could not back track and accept.

Butler Machine Tools v Ex-Cell-O Corp [1979] 

The offer to sell the machine on terms provided by Butler was destroyed by the counter offer made by ExCell-O. Therefore the price variation clause was not part of the contract. The contract was concluded on Ex-Cell-O's terms since Butler signed the acknowledgement slip accepting those terms. Where there is a battle of the forms whereby each party submits their own terms the last shot rule applies whereby a contract is concluded on the terms submitted by the party who is the last to communicate those terms before performance of the contract commences.

The effect of making a counter-offer is that the original offer is extinguished and off the table for good. (Hyde v Wrench). So, we have to look carefully if an offer was actually accepted or whether the seeming acceptance constituted a counter-offer. -

Causes particular difficulties in commercial contexts, where we often have negotiations conducted on paper and as the parties send their various messages back

Contract Law and forth they often inadvertently or deliberately, attach their standard form contracts to their communications meaning every time, they modify an offer, make a counter offer, they do so not just on the substantive point they’ve mentioned, but also by re-establishing that they want to contract on their standard terms. (Butler v Ex-Cell) Acceptance must be communicatedBy words or inferred from conduct Any reasonable method unless specific method stipulated by offeror Difficulties posed by some means of communication (Entores V Miles Far East Corporation [1955]) CASE FACTS It was stated that the postal rule did not apply for instantaneous communications. Since Telex was a form of instant messaging, the normal postal rule of acceptance would not apply and instead, acceptance would be when the message by Telex was received. Thus, the contract was created in London. This general principle on acceptance was held to apply to all forms of instantaneous communication methods. Acceptance via these forms of communication had to be clear before any contract is created  The complainants, Entores, were a company that was based in London. They had sent an offer to purchase 100 tons of copper cathodes to the defendants, Miles Far East Corp. Their company was based in Amsterdam and this offer was communicated by Telex, a form of instantaneous communication. The Dutch company sent an acceptance of this offer by Telex to the complainants. When the contract was not fulfilled, the complainants tried to sue the defendants for damages. Unilateral offers: Offeror has promised something in return for performance by the offeree. Offeree does not promise to perform in return e.g. reward for finding and returning lost item. GIBBONS V PROCTOR (1891) 64 LT 594 Facts: A reward was promised to anyone who provided certain information. The person who ended up supplying the information was not aware of the reward available Held: It was held that the person was still entitled to the reward. So, despite there being no communication of the offer to the person, he was still able to 'accept' it. This appears to go against the principle that an offer must be communicated.

Acceptance occurs through the performance of the acts requested by the offeror (Carlill v The Carbolic Smoke Ball Co [1893]) o

The Court of Appeal found for the claimant, determining that the advert amounted to the offer for a unilateral contract by the defendants. In completing the conditions stipulated by the advert, Mrs Carlill provided acceptance. The Court further found that: the advert’s own claim to sincerity negated the company’s assertion of lacking intent; an offer could indeed be made to the world; wording need only be reasonably clear to imply terms rather than entirely clear; and consideration was identifiable in the use of the balls.

No obligation on offeror until performance completed (Errington v Errington [1952]) o

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father-in-law purchased a house for his son and daughter-in-law to live in. The house was put in the father's name alone. He paid the deposit as a wedding gift and promised the couple that if they paid the mortgage instalments, the father would transfer the house to them. The father then became ill and died. The mother inherited the house. After the father's death the son went to live with his mother but the wife refused to live with the mother and continued to pay the mortgage instalments. The mother brought an action to remove the wife from the house. Held:The wife was entitled to remain in the house. The father had made the couple a unilateral offer. The wife was in course of performing the acceptance of the offer by continuing to meet the mortgage payments. Under normal contract principles an offer may be revoked at any time before acceptance takes place, however, with unilateral contracts acceptance takes place only on full performance. Lord Denning held that once performance

Contract Law had commenced the Mother was estopped from revoking the offer since it would be unconscionable for her to do so. Furthermore there was an intention to create legal relations despite it being a family agreement.

Consideration Parties need to have intention to be legally bound and must have out in consideration (must promise to do something in return for the other party’s promise (bilateral contracts) In the case of unilateral contracts, performance by offeree would also be consideration. Has to have value, but nominal value sufficient (Chappell & Co Ltd v Nestle Co Ltd [1960]) o

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The House of Lords held that the wrappers did form part of the consideration for the sale of records despite the fact that they had no intrinsic economic value in themselves. Lord Somervell said (at 114): ‘A contracting party can stipulate what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn.’ Therefore, as the wrappers had no monetary value, the sale was not covered by s.8 of the 1956 Act, and the Lords found in favour of the defendants.

Ward v Byham [1956] – By promising to ensure the child was well looked after and happy she had gone beyond her existing legal duty and therefore had provided consideration. She was entitled to the payment.

Can be a malleable concept but nevertheless essential that consideration is provided by both parties. If the parties wish to modify their agreement you need to ensure both parties provide consideration for this modification. Intention to Create Legal Relations Presumed in commercial agreements BUT Esso Petroleum v Custom & Excise [1976]) There was an intention to create legal relations. The coins were offered in a commercial context which raised a presumption that they did intend to be bound. However, the coins were not exchanged for a money consideration and therefore the coins were not for resale.

In contrast, where the agreement has been reached in a social or domestic setting, the presumption is that it will not be legally enforceable and will not be presumed to be legally bound but can also be rebutted dependant on the facts. INSERT CASE – wife etc Finally, the parties may wish to defer the point at which they intend to create legal relations, e.g. they may have reached agreement on every aspect, but they make this subject to the execution of a written contract. In other words, the contract has to be drafted, verified and then signed by the parties. So even though everything has already been agreed, the parties do not actually want to be legally bound until they have signed and exchanged the written contract. This is again quite common in the commercial setting, where the parties just want to make sure that everything has been done properly in the written contract, so they might defer an expression of the intention to be legally bound until the point of signing and exchanging the written contracts. RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] CASE FACTS o

The claimant was a supplier of automated machines and agreed to manufacture an automated system in the defendant’s factory. Work began on the basis of a letter of intent with a long form contract to follow. The letter of intent expired whilst negotiations on the long form contract continued. A dispute arose as to whether the defendants’ performance requirements were satisfied by the machines delivered by the claimants.

Contract Law o

The defendant successfully appealed to the Supreme Court. The Court considered the communication between the parties in terms of words and conduct and whether it could be objectively concluded that honest sensible businessmen in the position of the parties intended to enter legally binding relations. In the circumstances, the idea that there was no contract was unconvincing. Where a contract is negotiated “subject to contract” and work begins before the final contract is executed, it depends on the circumstances whether the parties had waived the subject to contract term. In the instance case, the unequivocal conduct of the parties led to the conclusion that they had made a binding agreement to waive the “subject to contract” provision.

Lecture 3: Defects in contract formation Vitiating factors are relevant for instances where on the one hand, we have all the requirements for a legally binding contract- in other words, we have our agreement based on offer and acceptance we have consideration and we have an intention to create legal relations. - But during the process of reaching an agreement there was some flaw which the law regards as a factor which vitiates the agreement the parties have reaches- hence called a vitiating factor. - Limited scope for English contract law to intervene a) Not simply because contract economically disadvantageous to one party or if it seems harsh - Common law has developed specific doctrines for the most serious instances - Usual consequence is that agreement may be set aside (rescinded) by ‘innocent’ party a) Agreement = ‘voidable’, until the innocent party takes action b) Exception in the doctrine of mistake where the agreement becomes automatically void

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Misrepresentation General position: no duty of disclosure a) Smith v Hughes [1871] b) Sykes v Taylor-Rose [2004] (EWCA Civ 299; [2004] PLSCS 110) the seller was not deemed to have been under a duty to disclose that the property had been the site of a notorious murder, despite it having obvious implications on the prospects of an onward sale

However, once a party does say something there can be liability. If one party says a false statement which is relied upon (induced) by the other party when entering into the contract = actionable misrepresentation - Has to be a false statement, or representation by conduct, of present facts or law a) Spice Girls Ltd v Aprilia World Service BV [2002] (Misrepresentation by conduct) o

held that their conduct constituted a misrepresentation by giving the impression that Halliwell intended to remain part of the group in the foreseeable future, allowing AWS to rescind their contract with the Spice Girls

- Contrast with: o Statement of intention (Edgington v Fitzmaurice [1885]) a.

The directors of a business provided a prospectus which contained a range of debentures, in order to invite subscriptions. The directors stated that the debentures were in order to enable the business to complete alterations to the buildings of the company, to develop trade and to purchase vans and horses. However, it was later discovered that the real reason for issuing the debentures was for the directors to pay off other liabilities. The plaintiff for...