ENGLISH CONTRACT LAW.
INTRODUCTION:
A
contract is an agreement enforceable in
court. Contract law regulates every transaction, from buying a
tube ticket to computerised
derivatives trading.
English contract law is a body of
law regulating
contracts in England and Wales. With its roots in the
lex mercatoria and the activism of the judiciary during the
industrial revolution, it shares a heritage with countries across the
Commonwealth (such as
Australia,
Canada and
India[1]), and the
United States. It is also experiencing gradual change because of the UK's membership of the
European Union and international organisations like
Unidroit. Any agreement that is enforceable in
court is a contract. Because a contract is a
voluntary obligation, in contrast to paying
compensation for a
tort and
restitution to reverse
unjust enrichment,
English law places a high value on ensuring people have truly consented
to the deals that bind them in court. Generally a contract forms when
one person makes an offer, and another person accepts it by
communicating their assent or performing the offer's terms. If the terms
are certain, and the parties can be presumed from their behaviour to
have intended that the terms are binding, generally the agreement is
enforceable. Some contracts, particularly for large transactions such as
a sale of land, also require the formalities of signatures and
witnesses and English law goes further than other
European countries by requiring all parties bring something of value, known as "
consideration", to a bargain as a precondition to enforce it. Contracts can be made personally or through an
agent
acting on behalf of a principal, if the agent acts within what a
reasonable person would think they have the authority to do. In
principle, English law grants people broad freedom to agree the content
of a deal. Terms in an agreement are incorporated through express
promises, by reference to other terms or potentially through a course of
dealing between two parties. Those terms are interpreted by the courts
to seek out the true intention of the parties, from the perspective of
an objective observer, in the context of their bargaining environment.
Where there is a gap, courts typically imply terms to fill the spaces,
but also through the 20th century both the judiciary and legislature
have intervened more and more to strike out surprising and unfair terms,
particularly in favour of consumers, employees or tenants with
weaker bargaining power.
Contract law works best when an agreement is performed, and recourse
to the courts is never needed because each party knows her rights and
duties. However, where an unforeseen event renders an agreement very
hard, or even impossible to perform, the courts typically will construe
the parties to want to have released themselves from their obligations.
It may also be that one party simply breaches a contract's terms. If a
contract is not substantially performed, then the innocent party is
entitled to cease her own performance and sue for
damages
to put her in the position as if the contract were performed. She is
under a duty to mitigate her losses and cannot claim for harm that was a
remote consequence of the contractual breach, but remedies in English
law are footed on the principle that full
compensation
for all losses, pecuniary or not, should be made good. In exceptional
circumstances, the law goes further to require a wrongdoer to make
restitution for their
gains from breaching a contract, and may demand
specific performance
of the agreement rather than monetary compensation. It is also possible
that a contract becomes voidable, because, depending on the specific
type of contract, one party failed to make adequate disclosure or they
made
misrepresentations during negotiations.
Unconscionable agreements
can be escaped where a person was under duress or undue influence or
their vulnerability was being exploited when they ostensibly agreed to a
deal. Children, mentally incapacitated people and companies, whose
representatives are acting wholly outside their authority, are protected
against having agreements enforced against them where they lacked the
real capacity to make a decision to enter an agreement. Some transactions are considered
illegal,
and are not enforced by courts because of a statute or on grounds of
public policy. In theory, English law attempts to adhere to a principle
that people should only be bound when they have given their informed and
true consent to a contract.
History
The modern law of contract is primarily a creature of the
industrial revolution
and the social legislation of the 20th century. However, the
foundations of all European contract law are traceable to obligations in
Ancient Athenian and
Roman law,
[2] while the formal development of English law began after the
Norman Conquest of 1066.
William the Conqueror created a
common law across England, but throughout the
middle ages
the court system was minimal. Access to the courts, in what are now
considered contractual disputes, was consciously restricted to a
privileged few through onerous requirements of
pleading,
formalities and
court fees. In the local and manorial courts, according to English law's first
treatise by
Ranulf de Glanville in 1188, if people disputed the payment of a debt they, and witnesses, would attend court and swear oaths (called a
wager of law).
[3] They risked
perjury
if they lost the case, and so this was strong encouragement to resolve
disputes elsewhere. The royal courts, fixed to meet in London by the
Magna Carta 1215, accepted claims for "
trespass on the case" (more like a
tort
today) was alleged. A jury would be called, and no wager of law was
needed, but some breach of the King's peace had to be alleged.
Gradually, the courts allowed claims where there had been no real
trouble, no
tort with "force of arms" (
vi et armis), but it was still necessary to put this in the pleading. For instance, in 1317 one Simon de Rattlesdene alleged he was sold a
tun of
wine
that was contaminated with salt water and, quite fictitiously, this was
said to be done "with force and arms, namely with swords and bows and
arrows".
[4] The
Court of Chancery and the
King's Bench
slowly started to allow claims without the fictitious allegation of
force and arms from around 1350. An action for simple breach of a
covenant (a solemn promise) had required production of formal proof of the agreement with a
seal. However, in
The Humber Ferryman’s case
a claim was allowed, without any documentary evidence, against a
ferryman who dropped a horse overboard that he was contracted to carry
across the
River Humber.
[5]
Despite this liberalisation, in the 1200s a threshold of 40 shillings
for a dispute's value had been created. Though its importance tapered
away with inflation over the years, it foreclosed court access to most
people.
[6] Moreover, freedom to contract was firmly suppressed among the peasantry. After the
Black Death, the
Statute of Labourers 1351 prevented any increase in workers' wages fuelling, among other things, the
Peasants' Revolt of 1381.
Merchants trading within the North European
Hanseatic League followed a law of the merchant, or
lex mercatoria, whose principles were received into the English law of contract.
Increasingly, the English law on contractual bargains was affected by
its trading relations with northern Europe, particularly since the
Magna Carta 1215
had guaranteed merchants "safe and secure" exit and entry to England
"for buying and selling by the ancient rights and customs, quit from all
evil tolls".
[7] In 1266
King Henry III had granted the
Hanseatic League a charter to trade in England. The "Easterlings" who came by boats brought goods and money that the English called "
Sterling",
[8] and standard rules for commerce that formed a
lex mercatoria, the laws of the merchants. Merchant custom was most influential in the coastal trading ports like
London,
Boston,
Hull and
King's Lynn.
And with the courts' hostility to restraints on trade, a doctrine of
consideration was forming, so that to enforce any obligation something
of value needed to be conveyed.
[9] Some courts remained sceptical that damages might be awarded purely for a broken agreement (that was not a
sealed covenant).
[10] Other disputes allowed a remedy. In
Shepton v Dogge[11]
a defendant had agreed in London, where the City courts' custom was to
allow claims without covenants under seal, to sell 28 acres of land in
Hoxton. Although the house itself was outside London at the time, in
Middlesex, a remedy was awarded for
deceit,
but essentially based on a failure to convey the land. The resolution
of these restrictions came shortly after 1585, when a new
Court of Exchequer Chamber was established to hear common law appeals. In 1602, in
Slade v Morley,
[12]
a grain merchant named Slade claimed that Morley had agreed to buy
wheat and rye for £16, but then had backed out. Actions for debt were in
the jurisdiction of the
Court of Common Pleas, which had required both (1) proof of a debt, and (2) a subsequent promise to repay the debt, so that a finding of
deceit (for non-payment) could be made against a defendant.
[13]
But if a claimant wanted to simply demand payment of the contractual
debt (rather than a subsequent promise to pay) he could have to risk a
wager of law. The judges of the
Court of the King's Bench was prepared to allow "
assumpsit" actions (for obligations being assumed) simply from proof of the original agreement.
[14] With a majority in the Exchquer Chamber, after six years
Lord Popham CJ held that "every contract importeth in itself an Assumpsit".
[15] Around the same time the Common Pleas indicated a different limit for contract enforcement in
Bret v JS,
[16] that "natural affection of itself is not a sufficient
consideration to ground an assumpsit" and there had to be some "express
quid pro quo".
[17] Now that wager of law, and sealed covenants were essentially unnecessary, the
Statute of Frauds 1677 codified the contract types that were thought should still require some form. Over the late 17th and 18th centuries
Sir John Holt,
[18] and then
Lord Mansfield
actively incorporated the principles of international trade law and
custom into English common law as they saw it: principles of commercial
certainty, good faith,
[19] fair dealing, and the enforceability of seriously intended promises.
[20] As Lord Mansfield held, "Mercantile law is not the law of a particular country but the law of all nations",
[21] and "the law of merchants and the law of the land is the same".
[20]
‘governments do not limit their concern with contracts to a simple
enforcement. They take upon themselves to determine what contracts are
fit to be enforced.... once it is admitted that there are any
engagements which for reasons of expediency the law ought not to
enforce, the same question is necessarily opened with respect to all
engagements. Whether, for example, the law should enforce a contract to
labour, when the wages are too low or the hours of work too severe:
whether it should enforce a contract by which a person binds himself to
remain, for more than a very limited period, in the service of a given
individual.... Every question which can possibly arise as to the policy
of contracts, and of the relations which they establish among human
beings, is a question for the legislator; and one which he cannot escape
from considering, and in some way or other deciding.’
Over the industrial revolution, English courts became more and more wedded to the concept of "
freedom of contract".
It was partly a sign of progress, as the vestiges of feudal and
mercantile restrictions on workers and businesses were lifted, a move of
people (at least in theory) from "status to contract".
[22] On the other hand, a preference for
laissez faire thought concealed the
inequality of bargaining power
in multiple contracts, particularly for employment, consumer goods and
services, and tenancies. At the centre of the general law of contracts,
captured in nursery rhymes like
Robert Browning's
Pied Piper of Hamelin in 1842, was the fabled notion that if people had promised something "let us keep our promise".
[23]
But then, the law purported to cover every form of agreement, as if
everybody had the same degree of free will to promise what they wanted.
Though many of the most influential liberal thinkers, especially
John Stuart Mill, believed in multiple exceptions to the rule that
laissez faire was the best policy,
[24] the courts were suspicious of interfering in agreements, whoever the parties were. In
Printing and Numerical Registering Co v Sampson Sir George Jessel MR
proclaimed it a "public policy" that "contracts when entered into
freely and voluntarily shall be held sacred and shall be enforced by
Courts of justice."
[25] The same year, the
Judicature Act 1875 merged the
Courts of Chancery and common law, with equitable principles (such as
estoppel,
undue influence,
rescission for misrepresentation and
fiduciary duties or disclosure requirements in some transactions) always taking precedence.
[26]
But the essential principles of English contract law remained stable
and familiar, as an offer for certain terms, mirrored by an acceptance,
supported by consideration, and free from duress, undue influence or
misrepresentation, would generally be enforceable. The rules were
codified and exported across the
British Empire, as for example in the
Indian Contract Act 1872.
[27]
Further requirements of fairness in exchanges between unequal parties,
or general obligations of good faith and disclosure were said to be
unwarranted because it was urged by the courts that liabilities "are not
to be forced upon people behind their backs".
[28] Parliamentary legislation, outside general codifications of commercial law like the
Sale of Goods Act 1893, similarly left people to the harsh realities of the
market and "
freedom of contract".
This only changed when the property qualifications to vote for Members
of Parliament were reduced and eliminated, as the United Kingdom slowly
became more democratic.
[29]
Over the 20th century, legislation and changes in court attitudes effected a wide-ranging reform of 19th century contract law.
[32]
First, specific types of non-commercial contract were given special
protection where "freedom of contract" appeared far more on the side of
large businesses.
[33]
Consumer contracts came to be regarded as "contracts of adhesion" where
there was no real negotiation and most people were given "take it or
leave it" terms.
[34] The courts began by requiring entirely clear information before onerous clauses could be enforced,
[35] the
Misrepresentation Act 1967 switched the burden of proof onto business to show misleading statements were not negligent, and the
Unfair Contract Terms Act 1977 created the jurisdiction to scrap contract terms that were "unreasonable", considering the bargaining power of the parties.
Collective bargaining by
trade unions and a growing number of employment rights carried the employment contract into an autonomous field of
labour law where workers had rights, like a minimum wage,
[36] fairness in dismissal,
[37] the right to join a union and take collective action,
[38]
and these could not be given up in a contract with an employer. Private
housing was subject to basic terms, such as the right to repairs, and
restrictions on unfair rent increases, though many protections were
abolished during the 1980s.
[39]
Nevertheless, the scope of the general law of contract had been
reduced. It meant that most contracts made by people on an ordinary day
were shielded from the power of corporations to impose whatever terms
they chose in selling goods and services, at work, and in people's home.
Nevertheless, classical contract law remained at the foundation of
those specific contracts, unless particular rights were given by the
courts or Parliament. Internationally, the UK had joined the
European Union,
which aimed to harmonise significant parts of consumer and employment
law across member states. Moreover, with increasing openness of markets
commercial contract law was receiving principles from abroad. Both the
Principles of European Contract Law, the
UNIDROIT Principles of International Commercial Contracts,
and the practice of international commercial arbitration was reshaping
thinking about English contract principles in an increasingly globalised
economy.
Formation
An English and a Frenchman shake hands on an agreement.
In its essence a contract is an agreement which the law recognises as giving rise to enforceable obligations.
[40] As opposed to
tort and
unjust enrichment,
contract is typically viewed as the part of the law of obligations
which deals with voluntary undertakings, and accordingly gives a high
priority to ensuring that only bargains to which people have given their
true
consent
will be enforced by the courts. While it is not always clear when
people have truly agreed in a subjective sense, English law takes the
view that when one person objectively manifests their consent to a
bargain, they will be bound.
[41]
However, not all agreements, even if they are relatively certain in
subject matter, are considered enforceable. There is a rebuttable
presumption that people do not wish to later have legal enforcement of
agreements made socially or domestically. The general rule is that
contracts require no prescribed form, such as being in writing, except
where statute requires it, usually for large deals like the sale of
land.
[42]
In addition and in contrast to civil law systems, English common law
carried a general requirement that all parties, in order to have
standing to enforce an agreement, must have brought something of value,
or "
consideration"
to the bargain. This old rule is full of exceptions, particularly where
people wished to vary their agreements, through case law and the
equitable doctrine of
promissory estoppel. Moreover statutory reform in the
Contracts (Rights of Third Parties) Act 1999
allows third parties to enforce the benefit of an agreement that they
had not necessarily paid for so long as the original parties to a
contract consented to them being able to do so.
Agreement
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Cases on agreement
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The formal approach of English courts is that agreement exists when an
offer is mirrored by an unequivocal
acceptance of the terms on offer. Whether an offer has been made, or it has been accepted, is an issue courts determine by asking what a
reasonable person would have thought was intended. Offers are distinguished from "
invitations to treat" (or an
invitatio ad offerendum,
the invitation of an offer) which cannot be simply accepted by the
other party. Traditionally, English law has viewed the display of goods
in a shop, even with a price tag, as an invitation to treat,
[43]
so that when a customer takes the product to the till it is she who is
making the offer, and the shopkeeper may refuse to sell. Similarly, and
as a very general rule, an advertisement,
[44] the invitation to make a bid at an auction with a reserve price,
[45]
or the invitation to submit a tender bid are not considered offers. On
the other hand, a person inviting tenders may fall under a duty to
consider the submissions if they arrive before the deadline, so the
bidder (even though there is no contract) could sue for damages if his
bid is never considered.
[46] An auctioneer who publicises an auction as being without a reserve price falls under a duty to accept the highest bid.
[47] An automated vending machine constitutes a standing offer,
[48]
and a court may construe an advertisement, or something on display like
a deckchair, to be a serious offer if a customer would be led to
believe they were accepting its terms by performing an action.
[49]
Statute imposes criminal penalties for businesses that engage in
misleading advertising, or not selling products at the prices they
display in store,
[50] or unlawfully discriminating against customers on grounds of race, gender, sexuality, disability, belief or age.
[51] In this respect the common law is out of line with modern practice, and also the practice in
European Union states, where the
Principles of European Contract Law article 2:201 suggests that most countries count a proposal to supply any good or service by a professional as an offer.
"Read the advertisement how you will, and twist it about as you will," said
Lindley LJ of the Smoke Ball advert, "here is a distinct
promise expressed in language which is perfectly unmistakable".
Once an offer is made, the general rule is the offeree must
communicate her acceptance in order to have a binding agreement.
[52]
Notification of acceptance must actually reach a point where the
offeror could reasonably be expected to know, although if the recipient
is at fault, for instance, by not putting enough ink in their fax
machine for a message arriving in office hours to be printed, the
recipient will still be bound.
[53] This goes for all methods of communication, whether oral, by phone, through telex, fax or email,
[54] except for the post. Acceptance by letter takes place when the letter is put in the postbox. The
postal exception is a product of history,
[55] and does not exist in most countries.
[56]
It only exists in English law so long as it is reasonable to use the
post for a reply (e.g. not in response to an email), and its operation
would not create manifest inconvenience and absurdity (e.g. the letter
goes missing).
[57] In all cases it is possible for the negotiating parties to stipulate a prescribed mode of acceptance.
[58] It is not possible for an offeror to impose an obligation on the offeree to reject the offer without her consent.
[59]
However, it is clear that people can accept through silence, firstly,
by demonstrating through their conduct that they accept. In
Brogden v Metropolitan Railway Company,
[60] although the
Metropolitan Railway Company
had never returned a letter from Mr Brogden formalising a long term
supply arrangement for Mr Brogden's coal, they had conducted themselves
for two years as if it were in effect, and Mr Brogden was bound.
Secondly, the offeror may waive the need for communication of
acceptance, either expressly, or implicitly, as in
Carlill v Carbolic Smoke Ball Company.
[61] Here a quack medicine company advertised its "smoke ball", stating that if a customer found it did not cure them of the
flu
after using it thrice daily for two weeks, they would get £100. After
noting the advertisement was serious enough to be an offer, not
mere puff or an
invitation to treat,
the Court of Appeal held the accepting party only needed to use the
smokeball as prescribed to get the £100. Although the general rule was
to require communication of acceptance, the advertisement had tacitly
waived the need for Mrs Carlill, or anyone else, to report her
acceptance first. In other cases, such as where a reward is advertised
for information, the only requirement of the English courts appears to
be knowledge of the offer.
[62]
Where someone makes such a unilateral offer, they fall under a duty to
not revoke it once someone has begun to act on the offer.
[63]
Otherwise an offer may always be revoked before it is accepted. The
general rule is that revocation must be communicated, even if by post,
[64]
although if the offerree hears about the withdrawal from a third party,
this is as good as a withdrawal from the offeror himself.
[65] Finally, an offer can be "killed off" if, rather than a mere inquiry for information,
[66] someone makes a counter offer. So in
Hyde v Wrench,
[67]
when Wrench offered to sell his farm for £1000, and Hyde replied that
he would buy it for £950 and Wrench refused, Hyde could not then change
his mind and accept the original £1000 offer.
The
Valkyrie II, sunk by the aptly named
The Satanita, had to be paid for because of a tacit contract of the racers.
While the model of an offer mirroring acceptance makes sense to
analyse almost all agreements, it does not fit in some cases. In
The Satanita[68]
the rules of a yacht race stipulated that the yachtsmen would be
liable, beyond limits set in statute, to pay for all damage to other
boats. The Court of Appeal held that there was a contract to pay arising
from the rules of the competition between
The Satanita's owner and the owner of
Valkyrie II,
which he sank, even though there was no clear offer mirrored by a clear
acceptance between the parties at any point. Along with a number of
other critics,
[69] in a series of cases
Lord Denning MR
proposed that English law ought to abandon its rigid attachment to
offer and acceptance in favour of a broader rule, that the parties need
to be in substantial agreement on the material points in the contract.
In
Butler Machine Tool Co Ltd v Ex-Cell-O Corp Ltd[70]
this would have meant that during a "battle of forms" two parties were
construed as having material agreement on the buyer's standard terms,
and excluding a price variation clause, although the other court members
reached the same view on ordinary analysis. In
Gibson v Manchester CC[71]
he would have come to a different result to the House of Lords, by
allowing Mr Gibson to buy his house from the council, even though the
council's letter stated it "should not be regarded as a firm offer".
This approach would potentially give greater discretion to a court to do
what appears appropriate at the time, without being tied to what the
parties may have subjectively intended, particularly where those
intentions obviously conflicted.
In a number of instances, the courts avoid enforcement of contracts
where, although there is a formal offer and acceptance, little objective
agreement exists otherwise. In
Hartog v Colin & Shields,
[72]
where the seller of some Argentine hare skins quoted his prices far
below what previous negotiations had suggested, the buyer could not
enforce the agreement because any reasonable person would have known the
offer was not serious, but a mistake.
[73]
Moreover, if two parties think they reach an agreement, but their offer
and acceptance concerns two entirely different things, the court will
not enforce a contract. In
Raffles v Wichelhaus,
[74] Raffles thought he was selling cotton aboard one ship called
The Peerless, which would arrive from
Bombay in
Liverpool in December, but Wichelhaus thought he was buying cotton aboard another ship called
The Peerless that would arrive in September. The court held there was never
consensus ad idem
or a meeting of minds on any one thing. Where agreements totally fail,
but one party has performed work at another's request, relying on the
idea that there will be a contract, that party may make a claim for the
value of the work done, or
quantum meruit.
[75] Such a
restitution
claim allows recovery for the expense the claimant goes to, but will
not cover her expectation of potential profits, because there is no
agreement to be enforced.
Certainty and enforceability
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Sources on enforceability
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While agreement is the basis for all contracts, not all agreements
are enforceable. A preliminary question is whether the contract is
reasonably certain in its essential terms, or
essentialia negotii,
such as price, subject matter and the identity of the parties.
Generally the courts endeavour to "make the agreement work", so in
Hillas & Co Ltd v Arcos Ltd,
[76]
the House of Lords held that an option to buy softwood of "fair
specification" was sufficiently certain to be enforced, when read in the
context of previous agreements between the parties. However the courts
do not wish to "make contracts for people", and so in
Scammell and Nephew Ltd v Ouston,
[77]
a clause stipulating the price of buying a new van as "on hire purchase
terms" for two years was held unenforceable because there was no
objective standard by which the court could know what price was intended
or what a reasonable price might be.
[78] Similarly, in
Baird Textile Holdings Ltd v M&S plc[79] the Court of Appeal held that because the price and quantity to buy would be uncertain, in part, no term could be implied for
M&S
to give reasonable notice before terminating its purchasing agreement.
Controversially, the House of Lords extended this idea by holding an
agreement to negotiate towards a future contract in
good faith is insufficiently certain to be enforceable.
[80]
While many agreements can be certain, it is by no means certain that
in the case of social and domestic affairs people want their agreements
to be legally binding. In
Balfour v Balfour[82] Lord Atkin held that Mr Balfour's agreement to pay his wife £30 a month while he worked in
Ceylon
should be presumed unenforceable, because people do not generally
intend such promises in the social sphere to create legal consequences.
Similarly, an agreement between friends at a pub, or a daughter and her
mother will fall into this sphere,
[83] but not a couple who are on the verge of separation,
[84]
and not friends engaged in big transactions, particularly where one
side relies heavily to their detriment on the assurances of the other.
[85]
This presumption of unenforceability can always be rebutted by express
agreement otherwise, for instance by writing the deal down. By contrast,
agreements made among businesses are almost conclusively presumed to be
enforceable.
[86]
But again, express words, such as "This arrangement... shall not be
subject to legal jurisdiction in the law courts" will be respected.
[87] In one situation, statute presumes that
collective agreements between a
trade union and an employer are not intended to create legal relations, ostensibly to keep excessive litigation away from
UK labour law.
[88]
A
bill of exchange, for instance a
cheque, is an order by one person to another (typically a bank) to pay a sum of money to a third person. Under
BEA 1882 s 3 it must be written and signed.
In a limited number of cases, an agreement will be unenforceable
unless it meets a certain form prescribed by statute. While contracts
can be generally made without formality, some transactions are thought
to require form either because it makes a person think carefully before
they bind themselves to an agreement, or merely that it serves as clear
evidence.
[89] This goes typically for large engagements, including the sale of land,
[90] a lease of property over three years,
[91] a consumer credit agreement,
[92] and a
bill of exchange.
[93] A contract for guarantee must also, at some stage, be evidenced in writing.
[94]
Finally, English law takes the approach that a gratuitous promise, as a
matter of contract law, is not legally binding. While a gift that is
delivered will transfer property irrevocably, and while someone may
always bind themselves to a promise without anything in return to
deliver a thing in future if they sign a
deed that is witnessed,
[95]
a simple promise to do something in future can be revoked. This result
is reached, with some complexity, through a peculiarity of English law
called the doctrine of consideration.
Consideration and estoppel
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Consideration cases
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Consideration is an additional requirement in English law before a
contract is enforceable. A person wishing to enforce an agreement must
show that they have brought something to the bargain which has
"something of value in the eyes of the law", either by conferring a
benefit on another person or incurring a detriment at their request.
[96] In practice this means not simple gratitude or love,
[97]
not things already done in the past, and not promising to perform a
pre-existing duty unless performance takes place for a third party.
[98] Metaphorically speaking consideration is "the price for which the promise is bought".
[99]
It is contentious in the sense that it gives rise to a level of
complexity that legal systems which do not take their heritage from
English law simply do not have.
[100]
In reality the doctrine of consideration operates in a very small
scope, and creates few difficulties in commercial practice. After reform
in the United States,
[101] especially the
Restatement of Contracts
§90 which allows all promises to bind if it would otherwise lead to
"injustice", a report in 1937 by the Law Revision Committee,
Statute of Frauds and the Doctrine of Consideration,
[102]
proposed that promises in writing, for past consideration, for part
payments of debt, promising to perform pre-existing obligations,
promising to keep an offer open, and promises that another relies on to
their detriment should all be binding. The report was never enacted in
legislation, but almost all of its recommendations have been put into
practice through case law since, albeit with difficulty.
The old case of
Stilk v Myrick[103]
held that sailors could not enforce a promise for higher wages for
getting home on fewer crew when their contract required them to perform
in all emergencies. At the time, there was no doctrine of economic
duress, and significant fear of
mutiny on the high seas.
When a contract is formed, good consideration is needed, and so a
gratuitous promise is not binding. That said, while consideration must
be of sufficient value in the law's eyes, it need not reflect an
adequate price. Proverbially, one may sell a house for as little as a
peppercorn, even if the seller "does not like pepper and will throw away
the corn."
[104] This means the courts do not generally enquire into the fairness of the exchange.
[105]
Another difficulty is that consideration for a deal was said not to
exist if the thing given was an act done before the promise, such as
promising to pay off a loan for money already used to educate a girl.
[106]
In this situation the courts have long shown themselves willing to hold
that the thing done was implicitly relying on the expectation of a
reward.
[107]
More significant problems arise where parties to a contract wish to
vary its terms. The old rule, predating the development of the
protections in the law of economic
duress,
was that if one side merely promises to perform a duty which she had
already undertaken in return for a higher price, there is no contract.
[108] However in the leading case of
Williams v Roffey Bros & Nicholls (Contractors) Ltd,
[109]
the Court of Appeal held that it would be more ready to construe
someone performing essentially what they were bound to do before as
giving consideration for the new deal if they conferred a "practical
benefit" on the other side.
[110]
So, when Williams, a carpenter, was promised by Roffey Bros, the
builders, more money to complete work on time, it was held that because
Roffey Bros would avoid having to pay a penalty clause for late
completion of its own contract, would potentially avoid the expense of
litigation and had a slightly more sensible mechanism for payments,
these were enough. Speaking of consideration,
Russell LJ stated that, "courts nowadays should be more ready to find its existence... where the
bargaining powers are not unequal
and where the finding of consideration reflects the true intention of
the parties." In other words, in the context of contractual variations,
the definition of consideration has been watered down. However, in one
situation the "practical benefit" analysis cannot be invoked, namely
where the agreed variation is to reduce debt repayments. In
Foakes v Beer,
[111] the House of Lords held that even though Mrs Beer promised Mr Foakes he could pay back £2090 19
s
by instalment and without interest, she could subsequently change her
mind and demand the whole sum. Despite Lord Blackburn registering a note
of dissent in that case and other doubts,
[112] the Court of Appeal held in
Re Selectmove Ltd,
[113] that it was bound by the precedent of the Lords and could not deploy the "practical benefit" reasoning of
Williams for any debt repayment cases.
However, consideration is a doctrine deriving from the common law, and can be suspended under the principles of
equity. Historically, England had two separate court systems, and the
Courts of Chancery which derived their ultimate authority from the
King via the
Lord Chancellor, took precedence over the
common law courts. So does its body of equitable principles since the systems were merged in 1875.
[114] The doctrine of
promissory estoppel
holds that when one person gives an assurance to another, the other
relies on it and it would be inequitable to go back on the assurance,
that person will be estopped from doing so. So in
Hughes v Metropolitan Railway Co[115]
the House of Lords held that a tenant could not be ejected by the
landlord for failing to keep up with his contractual repair duties
because starting negotiations to sell the property gave the tacit
assurance that the repair duties were suspended. And in
Central London Properties Ltd v High Trees House Ltd[116] Denning J held that a landlord would be estopped from claiming normal rent during the years of
World War II
because he had given an assurance that half rent could be paid till the
war was done. The Court of Appeal went even further in a recent debt
repayment case,
Collier v P&M J Wright (Holdings) Ltd.
[117]
Arden LJ argued that a partner who had been assured he was only liable
to repay one third of the partnership's debts, rather than be
jointly and severally liable
for the whole, had relied on the assurance by making repayments, and it
was inequitable for the finance company to later demand full repayment
of the debt. Hence, promissory estoppel could circumvent the common law
rule of
Foakes. Promissory estoppel, however, has been thought to be incapable of raising an independent
cause of action,
so that one may only plead another party is estopped from enforcing
their strict legal rights as a "shield", but cannot bring a cause of
action out of estoppel as a "sword".
[118] In Australia, this rule was relaxed in
Walton Stores (Interstate) Ltd v Maher,
where Mr Maher was encouraged to believe he would have a contract to
sell his land, and began knocking down his existing building before
Walton Stores finally told him they did not wish to complete. Mr Maher
got generous damages covering his loss (i.e.
reliance damages, but seemingly damages for loss of expectations as if there were a contract).
[119] Yet, where an assurance concerns rights over property, a variant "
proprietary estoppel" does allow a claimant to plead estoppel as a cause of action. So in
Crabb v Arun District Council,
Mr Crabbe was assured he would have the right to an access point to his
land by Arun District Council, and relying on that he sold off half the
property where the only existing access point was. The council was
estopped from not doing what they said they would.
[120] Given the complex route of legal reasoning to reach simple solutions, it is unsurprising that a number of commentators,
[121] as well as the
Principles of European Contract Law
have called for simple abandonment of the doctrine of consideration,
leaving the basic requirements of agreement and an intention to create
legal relations. Such a move would also dispense with the need for the
common law doctrine of privity.
Privity
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Privity of contract cases
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The common law of privity of contract is a sub-rule of consideration
because it restricts who can enforce an agreement to those who have
brought consideration to the bargain. In an early case,
Tweddle v Atkinson,
it was held that because a son had not given any consideration for his
father in law's promise to his father to pay the son £200, he could not
enforce the promise.
[122]
Given the principle that standing to enforce an obligation should
reflect whoever has a legitimate interest in its performance, a 1996
report by the Law Commission entitled
Privity of Contract: Contracts for the Benefit of Third Parties,
recommended that while courts should be left free to develop the common
law, some of the more glaring injustices should be removed.
[123] This led to the
Contracts (Rights of Third Parties) Act 1999.
Under section 1, a third party may enforce an agreement if it purports
to confer a benefit on the third party, either individually or a member
as a class, and there is no expressed stipulation that the person was
not intended to be able to enforce it.
[124] In this respect there is a strong burden on the party claiming enforcement was not intended by a third party.
[125]
A third party has the same remedies available as a person privy to an
agreement, and can enforce both positive benefits, or limits on
liability, such as an exclusion clause.
[126]
The rights of a third party can then only be terminated or withdrawn
without her consent if it is reasonably foreseeable that she would rely
upon them.
[127]
The 1999 Act's reforms mean a number of old cases would be decided differently today. In
Beswick v Beswick[129] while the House of Lords held that Mrs Beswick could
specifically enforce a promise of her nephew to her deceased husband to pay her £5 weekly in her capacity as
administratrix of the will, the 1999 Act would also allow her to claim as a third party. In
Scruttons Ltd v Midland Silicones Ltd[130] it would have been possible for a
stevedore firm to claim the benefit of a limitation clause in a contract between a carrier and the owner of a damaged drum of chemicals.
Lord Denning dissented, arguing for abolition of the rule, and
Lord Reid gave an opinion that if a
bill of lading
expressly conferred the benefit of a limitation on the stevedores, the
stevedores give authority to the carrier to do that, and "difficulties
about consideration moving from the stevedore were overcome" then the
stevedores could benefit. In
The Eurymedon,
[131]
Lord Reid's inventive solution was applied where some stevedores
similarly wanted the benefit of an exclusion clause after dropping a
drilling machine, the consideration being found as the stevedores
performing their pre-existing contractual duty for the benefit of the
third party (the drilling machine owner). Now none of this considerably
technical analysis is required,
[132] given that any contract purporting to confer a benefit on a third party may in principle be enforced by the third party.
[133]
Given that the 1999 Act preserves the promisee's right to enforce the contract as it stood at common law,
[134]
an outstanding issue is to what extent a promisee can claim damages for
a benefit on behalf of a third party, if he has suffered no personal
loss. In
Jackson v Horizon Holidays Ltd,
[135]
Lord Denning MR held that a father could claim damages for
disappointment (beyond the financial cost) of a terrible holiday
experience on behalf of his family. However, a majority of the House of
Lords in
Woodar Investment Development Ltd v Wimpey Construction UK Ltd[136]
disapproved any broad ability of a party to a contract to claim damages
on behalf of a third party, except perhaps in a limited set of consumer
contracts. There is disagreement about whether this will remain the
case.
[137]
Difficulties also remain in cases involving houses built with defects,
which are sold to a buyer, who subsequently sells to a third party. It
appears that neither the initial buyer can claim on behalf of the third
party, and nor will the third party be able to claim under the 1999 Act,
as they will typically not be identified by the original contract (or
known) in advance.
[138] Apart from this instance relating to
tort, in practice the doctrine of privity is entirely ignored in numerous situations, throughout the law of
trusts and
agency.
Construction
If an enforceable agreement - a contract - exists, the details of the
contract's terms matter if one party has allegedly broken the
agreement. A contract's terms are what was
promised. Yet it is up to the courts to
construe
evidence of what the parties said before a contract's conclusion, and
construe the terms agreed. Construction of the contract starts with the
express promises people make to one another, but found in other
documents or notices. The general rule for incorporation of terms into
agreements is that reasonable notice of the term is needed, and more
notice is needed for an onerous term. The meaning of those terms must
then be interpreted, and the modern approach is to construe the meaning
of an agreement from the perspective of a reasonable person with
knowledge of the whole
context.
The courts, as well as legislation, may also imply terms into contracts
generally to 'fill gaps' as necessary to fulfil the reasonable
expectations of the parties, or as necessary incidents to specific
contracts. English law had, since the 19th century, adhered to the
laissez faire principle of "
freedom of contract"
so that, in the general law of contract, people can agree to whatever
terms or conditions they choose. By contrast, specific contracts,
particularly for
consumers,
employees or
tenants
were built to carry a minimum core of rights, mostly deriving from
statute, that aim to secure the fairness of contractual terms. The
evolution of case law in the 20th century generally shows an ever
clearer distinction between general contracts among commercial parties
and those between parties of
unequal bargaining power,
[140] since in these groups of transaction true choice is thought to be hampered by lack of real
competition in the
market. Hence, some terms can be found to be unfair under statutes such as the
Unfair Contract Terms Act 1977 or the
Unfair Terms in Consumer Contract Regulations 1999 and can be removed by the courts, with the administrative assistance of the
Office of Fair Trading.
Incorporation of terms
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Incorporating contract terms
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The promises offered by one person to another are the terms of a
contract, but not every representation before an acceptance will always
count as a term. The basic rule of construction is that a representation
is a term if it looked like it was "intended" to be from the viewpoint
of a reasonable person.
[141]
It matters how much importance is attached to the term by the parties
themselves, but also as a way to protect parties of lesser means, the
courts added that someone who is in a more knowledgeable position will
be more likely to taken to have made a promise, rather than a mere
representation. So in
Oscar Chess Ltd v Williams[142] the Court of Appeal held that when Mr Williams sold a
Morris car to a second hand dealer and wrongly (but in
good faith,
relying on a forged log-book) said it was a 1948 model when it was
really from 1937, the car dealer could not later claim breach of
contract because they were in a better position to know. This matters
because while one party may have a right to escape from a bargain, or
rescind the contract, if they were induced by misrepresentations to
enter a contract and can claim damages for any losses, if the statement
is a term and is broken, they will be able to claim lost
profits.
So broken terms lead to damages to protect all a claimant's
expectations, to put them in the position as if the contract were
actually performed.
When a contract is written down, there is a basic presumption that
the written document will contain all the terms of an agreement,
[144] and when people sign documents every term referred to in the document binds them
[145] (unless it is found to be merely an administrative paper, or under the very limited defence of
non est factum[146]).
This matters most in commercial dealings, where businesses place a high
value on certainty. If a statement is a term, and the contracting party
has not signed a document, then terms may be incorporated by reference
to other sources, or through a course of dealing. The basic rule, set
out in
Parker v South Eastern Railway Company,
[143] is that reasonable notice of a term is required to bind someone. Here Mr Parker left his coat in the
Charing Cross
railway station cloakroom and was given a ticket that on the back said
liability for loss was limited to £10. The Court of Appeal sent this
back to trial for a jury (as existed at the time) to determine. The
modern approach is to add that if a term is particularly onerous,
greater notice with greater clarity ought to be given.
Denning LJ in
J Spurling Ltd v Bradshaw[147] famously remarked that "Some clauses which I have seen would need to be printed in
red ink on the face of the document with a
red hand pointing to it before the notice could be held to be sufficient." In
Thornton v Shoe Lane Parking Ltd[148]
a car park ticket referring to a notice inside the car park was
insufficient to exclude the parking lot's liability for personal injury
of customers on its premises. In
Interfoto Picture Library Ltd v Stiletto Ltd[149] Bingham LJ held that a notice inside a jiffy bag of photographic
transparencies
about a fee for late return of the transparencies (which would have
totalled £3,783.50 for 47 transparencies after only a month) was too
onerous a term to be incorporated without clear notice. By contrast in
O’Brien v MGN Ltd[150] Hale LJ held that the failure of the
Daily Mirror
to say in every newspaper that if there were too many winners in its
free draw for £50,000 that there would be another draw was not so
onerous on the disappointed "winners" as to prevent incorporation of the
term. It can also be that a regular and consistent course of dealings
between two parties lead the terms from previous dealings to be
incorporated into future ones. In
Hollier v Rambler Motors Ltd[151]
the Court of Appeal held that Mr Hollier, whose car was burnt in a fire
caused by a careless employee at Rambler Motors' garage, was not bound
by a clause excluding liability for "damage caused by fire" on the back
of an invoice which he had seen three or four times in visits over the
last five years. This was not regular or consistent enough. But in
British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd[152] Lord Denning MR
held that a company hiring a crane was bound by a term making them pay
for expenses of recovering the crane when it sunk into marshland, after
only one prior dealing. Of particular importance was the equal
bargaining power of the parties.
[153]
Interpretation
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Construing contract terms
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All English contracts are, after
ICS Ltd v West Browmwich BS,
[154] involving the
FSA's compensation scheme for insolvent financial service providers, interpreted objectively and in their context.
Once it is established which terms are incorporated into an
agreement, their meaning must be determined. Since the introduction of
legislation regulating unfair terms, English courts have become firmer
in their general guiding principle that agreements are construed to give
effect to the intentions of the parties from the standpoint of a
reasonable person. This changed significantly from the early 20th
century, when English courts had become enamoured with a literalist
theory of interpretation, championed in part by
Lord Halsbury.
[155]
As greater concern grew around the mid-20th century over unfair terms,
and particularly exclusion clauses, the courts swung to the opposite
position, utilising heavily the doctrine of
contra proferentum.
Ambiguities in clauses excluding or limiting one party's liability
would be construed against the person relying on it. In the leading
case,
Canada Steamship Lines Ltd v R[156] the Crown's shed in
Montreal
harbour burnt down, destroying goods owned by Canada Steamship lines.
Lord Morton held that a clause in the contract limiting the Crown's
excluding liability for "damage... to... goods... being... in the said
shed" was not enough to excuse it from liability for
negligence because the clause could also be construed as referring to
strict liability under another contract clause. It would exclude that instead. Some judges, and in particular
Lord Denning wished to go further by introducing a rule of "
fundamental breach of contract" whereby no liability for very serious breaches of contract could be excluded at all.
[157] While the rules remain ready for application where statute may not help, such hostile approaches to interpretation
[158] were generally felt to run contrary to the plain meaning of language.
[159]
Reflecting the modern position since unfair terms legislation was enacted,
[160] the most quoted passage in English courts on the canons of interpretation is found in
Lord Hoffmann's judgment in
ICS Ltd v West Bromwich BS.
[154] Lord Hoffmann restated the law that a document's meaning is what it would mean (1) to a
reasonable person (2) with knowledge of the
context, or the whole matrix of fact (3) except prior
negotiations (4) and meaning does not follow what the
dictionary says but meaning understood from its context (5) and the meaning should not contradict
common sense. The objective is always to give effect to the intentions of the parties.
[161] While it remains the law for reasons of litigation cost,
[162] there is some contention over how far evidence of prior negotiations should be excluded by the courts.
[163]
It appears increasingly clear that the courts may adduce evidence of
negotiations where it would clearly assist in construing the meaning of
an agreement.
[164] This approach to interpretation has some overlap with the right of the parties to seek "
rectification"
of a document, or requesting from a court to read a document not
literally but with regard to what the parties can otherwise show was
really intended.
[165]
Implied terms
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Implied terms cases
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Part of the process of construction includes the courts and statute implying terms into agreements.
[167]
Courts imply terms, as a general rule, when the express terms of a
contract leave a gap to be filled. Given their basic attachment to
contractual freedom, the courts are reluctant to override express terms for contracting parties.
[168]
Legislation can also be a source of implied terms, and may be
overridden by agreement of the parties, or have a compulsory character.
[169]
For contracts in general, individualised terms are implied (terms
"implied in fact") to reflect the "reasonable expectations of the
parties", and like the process of interpretation, implication of a term
of a commercial contract must follow from its commercial setting.
[170] In
Equitable Life Assurance Society v Hyman the House of Lords held (in a notorious decision) that "guaranteed annuity rate" policy holders of the
life insurance
company could not have their bonus rates lowered by the directors, when
the company was in financial difficulty, if it would undermine all the
policy holders' "reasonable expectations". Lord Steyn said that a term
should be implied in the policy contract that the directors' discretion
was limited, as this term was "strictly necessary... essential to give
effect to the reasonable expectations of the parties".
[171]
This objective, contextual formulation of the test for individualised
implied terms represents a shift from the older and subjective
formulation of the implied term test, asking like an "
officious bystander" what the parties "would have contracted for" if they had applied their minds to a gap in the contract.
[172]
The custom of the trade may also be a source of an implied term, if it
is "certain, notorious, reasonable, recognised as legally binding and
consistent with the express terms".
[173]
In specific contracts, such as those for sales of goods, between a
landlord and tenant, or in
employment,
the courts imply standardised contractual terms (or terms "implied in
law"). Such terms set out a menu of "default rules" that generally apply
in absence of true agreement to the contrary. In one instance of
partial codification, the
Sale of Goods Act 1893
summed up all the standard contractual provisions in typical commercial
sales agreements developed by the common law. This is now updated in
the
Sale of Goods Act 1979,
and in default of people agreeing something different in general its
terms will apply. For instance, under section 12-14, any contract for
sale of goods carries the implied terms that the seller has legal title,
that it will match prior descriptions and that it is of satisfactory
quality and fit for purpose. Similarly the
Supply of Goods and Services Act 1982 section 13 says
services
must be performed with reasonable care and skill. As a matter of common
law the test is what terms are a "necessary incident" to the specific
type of contract in question. This test derives from
Liverpool City Council v Irwin[174]
where the House of Lords held that, although fulfilled on the facts of
the case, a landlord owes a duty to tenants in a block of flats to keep
the common parts in reasonable repair. In employment contracts, multiple
standardised implied terms arise also, even before statute comes into
play, for instance to give employees adequate information to make a
judgment about how to take advantage of their pension entitlements.
[175] The primary standardised employment term is that both employer and worker owe one another an obligation of "
mutual trust and confidence".
Mutual trust and confidence can be undermined in multiple ways,
primarily where an employer's repulsive conduct means a worker can treat
herself as being
constructively dismissed.
[176] In
Mahmud and Malik v Bank of Credit and Commerce International SA[177]
the House of Lords held the duty was breached by the employer running
the business as a cover for numerous illegal activities. The House of
Lords has repeated that the term may always be excluded, but this has
been disputed because unlike a contract for goods or services among
commercial parties, an employment relation is characterised by
unequal bargaining power between employer and worker. In
Johnstone v Bloomsbury Health Authority[178]
the Court of Appeal all held that a junior doctor could not be made to
work at an average of 88 hours a week, even though this was an express
term of his contract, where it would damage his health. However, one
judge said that result followed from application of the
Unfair Contract Terms Act 1977,
one judge said it was because at common law express terms could be
construed in the light of implied terms, and one judge said implied
terms may override express terms.
[179]
Even in employment, or in consumer affairs, English courts remain
divided about the extent to which they should depart from the basic
paradigm of
contractual freedom, that is, in absence of legislation.
Unfair terms
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Sources on unfair terms
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In the late 20th century, Parliament passed its first comprehensive incursion into the doctrine of contractual freedom in the
Unfair Contract Terms Act 1977. The topic of unfair terms is vast, and could equally include specific contracts falling under the
Consumer Credit Act 1974, the
Employment Rights Act 1996 or the
Landlord and Tenant Act 1985. Legislation, particularly regarding
consumer protection, is also frequently being updated by the European Union, in laws like the
EU Airline Compensation Regulation,
[180] or the
EU Electronic Commerce Directive,
[181] which are subsequently translated into domestic law through a
statutory instrument authorised through the
European Communities Act 1972 section 2(2), as for example with the
Consumer Protection (Distance Selling) Regulations 2000. The primary legislation on unfair contract terms deriving from the EU is the
Unfair Terms in Consumer Contracts Regulations 1999.
[182] Both
UCTA 1977 and
UTCCR 1999 cover similar ground and can give rise to concurrent claims. For this reason the
Law Commission devised a draft
Unfair Contract Terms Bill to unify the two in one document, and make protection for
small business explicit, but Parliament has not acted yet.
[183]
"None of you nowadays will remember the trouble we had - when I was
called to the Bar - with exemption clauses. They were printed in small
print on the back of tickets and order forms and invoices. They were
contained in catalogues or timetables. They were held to be binding on
any person who took them without objection. No one ever did object. He
never read them or knew what was in them. No matter how unreasonable
they were, he was bound. All this was done in the name of "
freedom of contract."
But the freedom was all on the side of the big concern which had the
use of the printing press. No freedom for the little man who took the
ticket or order form or invoice. The big concern said, "
Take it or leave it."
The little man had no option but to take it. The big concern could and
did exempt itself from liability in its own interest without regard to
the little man. It got away with it time after time. When the courts
said to the big concern, "You must put it in clear words," the big
concern had no hesitation in doing so. It knew well that the little man
would never read the exemption clauses or understand them. It was a
bleak winter for our law of contract."
The
Unfair Contract Terms Act 1977
regulates clauses that exclude or limit terms implied by the common law
or statute. Its general pattern is that if clauses restrict liability,
particularly
negligence,
of one party, the clause must pass the "reasonableness test" in section
11 and Schedule 2. This looks at the ability of either party to get
insurance, their
bargaining power and their alternatives for supply, and a term's transparency.
[184] In places the Act goes further. Section 2(1) strikes down any term that would limit liability for a person's
death or
personal injury.
Section 2(2) stipulates that any clause restricting liability for loss
to property has to pass the "reasonableness test". One of the first
cases,
George Mitchell Ltd v Finney Lock Seeds Ltd[185]
saw a farmer successfully claim that a clause limiting the liability of
a cabbage seed seller to damages for replacement seed, rather than the
far greater loss of profits after crop failure, was unreasonable. The
sellers were in a better position to get insurance for the loss than the
buyers. Under section 3 businesses cannot limit their liability for
breach of contract if they are dealing with "
consumers",
defined in section 12 as someone who is not dealing in the course of
business with someone who is, or if they are using a written
standard form contract, unless the term passes the reasonableness test.
[186] Section 6 states the implied terms of the
Sale of Goods Act 1979 cannot be limited unless reasonable. If one party is a "
consumer" then the
SGA 1979
terms become compulsory. In other words, a business can never sell a
consumer goods that do not work, even if the consumer signed a document
with full knowledge of the exclusion clause. Under section 13, it is
added that variations on straightforward exemption clauses will still
count as exemption clauses caught by the Act. So for example, in
Smith v Eric S Bush[187] the House of Lords held that a
surveyor's
term limiting liability for negligence was ineffective, after the
chimney came crashing through Mr Smith's roof. The surveyor could get
insurance more easily than Mr Smith. Even though there was no contract
between them, because section 1(1)(b) applies to any notice excluding
liability for negligence, and even though the surveyor's exclusion
clause might prevent a duty of care arising at common law, section 13
"catches" it if liability would exist "but for" the notice excluding
liability: then the exclusion is potentially unfair.
Relatively few cases are ever brought directly by consumers, given
the complexity of litigation, cost, and its worth if claims are small.
In order to ensure consumer protection laws are actually enforced, the
Office of Fair Trading has jurisdiction to bring consumer regulation cases on behalf of consumers after receiving complaints. Under
Unfair Terms in Consumer Contracts Regulations 1999 regulations 10-12, the
OFT
has jurisdiction to collect and consider complaints, and then seek
injunctions in the courts to stop businesses using unfair terms (under
any legislation). The
UTCCR 1999 are both broader than
UCTA 1977
in that they cover any unfair terms, not just exemption clauses, but
narrower in that they only operate for consumer contracts. The UTCCR
1999 definition of a consumer is also narrower, under regulation 3,
where a consumer must be a natural person (and never a legal person,
like a
company[188])
who contracts outside his business. However, while the United Kingdom
could always opt for greater protection, when it translated the
Directive into national law it opted to follow the bare minimum
requirements, and not to cover every contract term. Under regulation
6(2), a court may only assess the fairness of terms which do not involve
the "definition of the main subject matter of the contract", or terms
which relate to "price or remuneration" of the thing sold. Outside such
"core" terms, a term may be unfair, under regulation 5 if it is not one
that is individually negotiated, and if contrary to
good faith
it causes a significant imbalance in the rights and obligations of the
parties. A list of examples of unfair terms are set out in Schedule 2.
In
DGFT v First National Bank plc[189] the House of Lords held that given the purpose of consumer protection, regulation 6(2) should be construed tightly and
Lord Bingham stated
good faith
implies fair, open and honest dealing. This all meant that the bank's
practice of charging its (higher) default interest rate to customers who
had (lower) interest rate set by a court under a debt restructuring
plan could, under regulation 6(2), be assessed for fairness, but that
under regulation 5 the term did not create such an imbalance given the
bank wished only to have its normal interest. This appeared to grant a
relatively open role for the Office of Fair Trading to intervene against
unfair terms. However in
OFT v Abbey National plc[190]
the Supreme Court held that if a term related in any way to price, it
could not by virtue of regulation 6(2) be assessed for fairness. All the
High Street banks, including
Abbey National, had a practice of charging high fees if account holders, unplanned, exceeded through withdrawals their normal
overdraft limit. Overturning a unanimous Court of Appeal,
[191]
the Supreme Court viewed that if the thing being charged for was part
of a "package" of services, and the bank's remuneration for its services
partly came from these fees, then there could be no assessment of the
fairness of terms. This controversial stance was tempered by their
Lordships' emphasis that any charges must be wholly transparent,
[192] though its compatibility with
EU law is not yet established by the
European Court of Justice, and it appears questionable that it would be decided the same under the proposed
Unfair Contract Terms Bill.
[193]
Conclusion and remedies
Clauses governing when a contract can be terminated, and what remedies are available are particularly important in
commercial contracts, such as shipping and the
sale of goods, to achieve business certainty.
Although
promises are made to be kept,
parties to an agreement are generally free to determine how a contract
is concluded, can be terminated and remedial consequences for
breach of contract,
just as they can generally determine a contract's content. The courts
have fashioned only residual limits on the parties' autonomy to
determine how a contract concludes. The courts' default, or standard
rules, which are generally alterable, are first that a contract is
automatically concluded if it becomes impossible for one party to
perform. Second, if one party breaches her side of the bargain in a
serious way, the other party may cease his own performance. If a breach
is not serious, the innocent party must continue his own obligations but
may claim a remedy in court for the defective or imprecise performance
he has received. Third, the principle remedy for breach of contract is
compensatory damages,
limited to losses that one might reasonably expect to result from a
breach. This means a sum of money to put the claimant in mostly the same
position as if the contract breaker had performed her obligations. In a
small number of contract cases, closely analogous to property or trust
obligations, a court may order
restitution
by the contract breaker so that any gains she has made by breaking the
agreement will be stripped and given to the innocent party. Additionally
where a contract's substance is for something so unique that damages
would be an inadequate remedy courts may use their discretion to grant
an
injunction against the contract breaker doing something or, unless it is a personal service, positively order
specific performance of the contract terms.
Performance and breach
| [show]
Performance and breach cases
|
|
Generally speaking, all parties to a contract must precisely perform
their obligations or there is a breach of contract and, at the least,
damages can be claimed. However, as a starting point, to claim that
someone else has breached
their side of a bargain, one must have at least "substantially performed" their own obligations. For example, in
Sumpter v Hedges[194]
a builder performed £333 worth of work, but then abandoned completion
of the contract. The Court of Appeal held he could not recover any money
for the building left on the land, even though the buyer subsequently
used the foundations to complete the job.
[195] This rule provides a powerful remedy in home construction cases to a customer. So in
Bolton v Mahadeva[196]
Mr Bolton installed a £560 heating system in Mahadeva's house. However,
it leaked and would cost £174 to correct (i.e. 31% of the price).
Mahadeva did not pay at all, and the Court of Appeal held this was
lawful because the performance was so defective that there could not be
said to be any substantial performance. However where an obligation in a
contract is "substantially performed", the full sum must be paid, only
then deducting an amount to reflect the breach. So in
Hoenig v Isaacs[197]
Denning LJ held a builder who installed a bookcase poorly, with a price
of £750 but costing only £55 to correct (i.e. 7.3% of the price), had
to be paid minus the cost of correction.
[198] If a contract's obligations are construed as consisting of an "entire obligation", performance of it all will be a
condition precedent (a requirement before) to performance from the other side falling due, and allowing a breach of contract claim.
In the simplest case of a contractual breach, the performance that
was owed will merely be the payment of a provable debt (an agreed sum of
money). In this case, the
Sale of Goods Act 1979 section 49 allows for a
summary action
for price of goods or services, meaning a quick set of court procedure
rules are followed. Consumers also benefit under sections 48A-E, with a
specific right to have a broken product to be repaired. An added benefit
is that if a claimant brings an action for debt, she or he will have no
further duty to mitigate his loss. This was another requirement that
common law courts had invented, before a claim for breach of contract
could be enforced. For instance, in contracts for services that spanned a
long period of time (e.g. 5 years), the courts would often state that
because a claimant should be able to find alternative work in a few
months, and so should not receive money for the whole contract's
duration. However,
White & Carter (Councils) Ltd v McGregor[199]
an advertising company had a contract to display adverts for McGregor's
garage business on public dustbins. McGregor said he wished to cancel
the deal, but White & Carter Ltd refused, displayed the adverts
anyway, and demanded the full sum of money. McGregor argued that they
should have attempted to mitigate their loss by finding other clients,
but the majority of the Lords held there was no further duty to
mitigate. Claims in debt were different from damages.
Shylock: My deeds upon my head! I crave the
law, The penalty and forfeit of my bond...
Portia: ... prepare thee to cut off the
flesh. Shed thou no
blood;
nor cut thou less nor more, But just a pound of flesh: if thou tak’st
more, Or less, than a just pound, be it but so much As makes it light or
heavy in the substance, Or the division of the twentieth part Of one
poor scruple; nay, if the scale do turn But in the estimation of a hair,
Thou diest, and all thy goods are confiscate.
Remedies are often agreed in a contract, so that if one side fails to
perform the contract will dictate what happens. A simple, common and
automatic remedy is to have taken a deposit, and to retain it in the
event of non-performance. However, the courts will often treat any
deposit that exceeds 10 per cent of the contract price as excessive. A
special justification will be required before any greater sum may be
retained as a deposit.
[200]
The courts will view a large deposit, even if expressed in crystal
clear language, as a part payment of the contract which if unperformed
must be restored in order to prevent
unjust enrichment.
Nevertheless where commercial parties of equal bargaining power wish to
insist on circumstances in which a deposit will be forfeit and insist
precisely on the letter of their deal, the courts will not interfere. In
Union Eagle Ltd v Golden Achievement Ltd[201] a purchaser of a building in
Hong Kong for
HK$4.2
million had a contract stipulating completion must take place by 5pm on
30 September 1991 and that if not a 10 per cent deposit would be
forfeited and the contract rescinded. The purchaser was 10 minutes late
only, but the Privy Council advised that given the necessity of certain
rules and to remove business' fear of courts exercising unpredictable
discretion, the agreement would be strictly enforced. Agreements may
also state that, as opposed to a sum fixed by the courts, a particular
sum of "
liquidated damages"
will be paid upon non-performance. The courts place an outer-limit on
liquidated damages clauses if they became so high, or "extravagant and
unconscionable" as to look like a penalty.
[202] This jurisdiction is exercised rarely, so in
Murray v Leisureplay plc[203]
the Court of Appeal held that a severance payment of a whole year's
salary to a company's Chief Executive in the event of dismissal before a
year was not a penalty clause. Additionally, the ability of courts to
strike down clauses as penalties only applies to clauses for payment of
money upon the breach of the contract rather than events during its
performance,
[204] though the
Unfair Terms in Consumer Contracts Regulations 1999[205] confers jurisdiction to interfere with unfair terms used against consumers.
Frustration and common mistake
| [show]
Sources for impossibility
|
|
While the early common law held that performance of a contract always
had to take place, and no matter what hardship was encountered
contracting parties had
absolute liability on their obligations,
[207]
in the 19th century the courts developed a doctrine that contracts
which became impossible to perform would be frustrated and automatically
come to an end. In
Taylor v Caldwell Blackburn J held that when the
Surrey Gardens Music Hall
unexpectedly burnt down, the owners did not have to pay compensation to
the business that had leased it for an extravagant performance, because
it was neither party's fault. A "
condition precedent"
to or underlying all contracts is that they are possible to perform.
People would not ordinarily contract to do something they knew was going
to be impossible. Apart from physical impossibility, frustration could
be down to a contract becoming illegal to perform, for instance if war
breaks out and the government bans trade to a belligerent country,
[208]
or perhaps if the whole purpose of an agreement is destroyed by another
event, like renting a room to watch a cancelled coronation parade.
[209]
But a contract is not frustrated merely because a subsequent event
makes the agreement harder to perform than expected, as for instance in
Davis Contractors Ltd v Fareham UDC
where a builder unfortunately had to spend more time and money doing a
job than he would be paid for because of an unforeseen shortage of
labour and supplies. The House of Lords denied his claim for contract to
be declared frustrated so he could claim
quantum meruit.
[210]
Because the doctrine of frustration is a matter of construction of the
contract, it can be contracted around, through what are called "force
majeure" clauses.
[211]
Similarly, a contract can have a force majeure clause that would bring a
contract to an end more easily than would common law construction. In
The Super Servant Two[212] Wijsmuller BV contracted to hire out a self-propelling barge to J Lauritzen AS, who wanted to tow another ship from
Japan to
Rotterdam,
but had a provision stating the contract would terminate if some event
made it difficult related to the ‘perils or dangers and accidents of the
sea’. Wijsmuller BV also had a choice of whether to provide either
The Superservant One or
Two. They chose
Two
and it sank. The Court of Appeal held that the impossibility to perform
the agreement was down to Wijsmuller's own choice, and so it was not
frustrated, but that the force majeure clause did cover it. The effect
of a contract being frustrated is that it is that both parties are
prospectively discharged from performing their side of the bargain. If
one side has already paid money over or conferred another valuable
benefit, but not got anything in return yet, contrary to the prior
common law position,
[213] the
Law Reform (Frustrated Contracts) Act 1943 gives the court discretion to let the claimant recover a 'just sum',
[214] and that means whatever the court thinks fit in all the circumstances.
[215]
A related doctrine is "common mistake", which since the decision of Lord Phillips MR in
The Great Peace[217]
is essentially the same in operation as frustration, except that the
event making a contract impossible to perform takes place before, not
after, a contract is concluded.
[218]
A "common mistake" differs from the "mistakes" that take place between
offers and acceptance (that mean there is no agreement in the first
place), or the so-called "mistake about identity" cases that follow from
a
fraudulent misrepresentation
(which typically makes a contract voidable, not void, unless in a
written document and concluded at a distance), because it is based on
performance becoming seriously difficult to perform. For instance, in
Courturier v Hastie[219]
a corn shipment had decayed by the time two businesspeople had
contracted for it, and so it was held (perhaps controversially) that the
seller was not liable, because it was always physically impossible. And
in
Cooper v Phibbs[220]
the House of Lords held that an agreement to lease out a fishery was
void because it turned out the lessee was in fact the owner. It is
legally impossible to be leased something one owns. Again, the doctrine
of common mistake may be contracted around, so in
McRae v Commonwealth Disposals Commission[221] it was held that despite the fact that a wrecked ship off the
Great Barrier Reef
never in fact existed, because a salvage business was actually promised
by the Australian government that it was there, there was no common
mistake. Like frustration, the doctrine operates only in narrow
confines. In
Bell v Lever Bros Ltd[222]
Lord Atkin stated that a mistake must be of such a ‘fundamental
character as to constitute an underlying assumption without which the
parties would not have entered into the agreements’. Post-war, Denning
LJ added to the doctrine, beyond its narrow legal confines, in line with
the more permissive approach recognised throughout civil law countries,
most of the Commonwealth and the United States. In
Solle v Butcher[223]
he held that in equity a contract could be deemed voidable (rather than
outright void) if it would be 'unconscientious' for a court to hold
someone to a bargain. This gave the courts some flexibility in the kind
of remedy they would grant, and could be more generous in the
circumstances they allowed escape. But in
The Great Peace, Lord Phillips MR said that this more permissive doctrine had been contrary to the House of Lords authority in
Bell v Lever Bros Ltd.
Although it probably would not have been avoidable under the mistake in
equity doctrine anyway, Lord Phillips MR held that a rescue company
could not escape from an agreement to save a ship because both parties
were mistaken that the distressed vessel was further than they
originally thought. The result is that English contract law jealously
prevents escape from an agreement, unless there is a serious breach
because of the conduct of one party, which gives rise to the right to
terminate.
Termination
The primary way in which contracts are brought to an untimely end is
through one party not performing the major primary obligations on her
side of the bargain. As a rule, if a breach is small the other party
must still go ahead and perform his obligations, but will then be able
to claim compensation, or a "secondary obligation" from the party in
breach.
[225]
If, however, the breach is very big, "fundamental" or goes "to the root
of the contract", then the innocent party gets the right to elect to
terminate his own performance for the future. The same goes where one
party makes clear they have no intention of performing their side of the
bargain, in an "
anticipatory repudiation",
so the innocent party can go straight to court to claim a remedy,
rather than waiting till the contract's date for performance which never
arrives.
[226]
The test for whether a term's breach will allow for termination
essentially depends on construction of the contract's terms as a whole
by the court, following the same rules as for any other term. In
Bettini v Gye,
Blackburn J
held that although an opera singer arrived 4 days late for rehearsals,
given that the contract was to last three and a half months, and only
the first week of performance would be slightly affected, the Opera
House owner was not entitled to turn the singer away.
[224]
The opera owner could have withheld some payment to reflect his loss
from the breach, but should have let the show go on. The intentions of
the parties manifested in the contract showed that such a breach was not
so serious as to give rise to the right to terminate. As
Lord Wilberforce said in
The Diana Prosperity the Court must, ‘place itself in thought in the same factual matrix as that in which the parties were.’
[227]
While when a contract is silent a court must essentially make an
informed choice about whether a right to terminate should exist, if a
contract deals with the matter the courts' general approach is to follow
the parties' wishes. The drafters of the old
Sale of Goods Act 1893
distinguished between "conditions" (major terms, which when breached
confer a right to terminate) and "warranties" (minor terms, which do
not), and under the present
Sale of Goods Act 1979 some terms, such as descriptions about quality, are conditions by default.
[228] A third kind is an "innominate term", which is typically a vague term like citrus pulp pellets being "in good condition",
[229]
or a ship having to be "seaworthy". Because such a term could be
breached in both a major way (e.g. the ship sinks) or a trivial way
(e.g. a lifejacket is missing) the court will determine whether the
right to terminate arises based on how serious in fact the consequences
of the breach were. So in
The Hong Kong Fir,
Lord Diplock held that a ship crew being too incompetent to properly
operate the vessel did not breach the contract's "seaworthiness" term in
a serious enough way as to allow for termination, because the
charterers still got a working boat and could have replaced the crew. If
a contract specifies that a particular obligation is a "condition" the
dominant approach of the courts is to treat it as such. Nevertheless,
concerned with the ability of a stronger party to specify the terms it
finds most convenient as "conditions" at the expense of the weaker,
courts retain the ability to construe an agreement
contra proferentum. In
L Schuler AG v Wickman Machine Tool Sales Ltd[230]
the majority of the House of Lords held that clause 7 of a contract,
stating it was "a condition of this agreement" that Mr Wickman would
visit 6 major car companies "at least once in every week" to try selling
panel presses, was not really a condition in the technical sense. So
when Mr Wickman was found to have visited much less, Schuler AG could
not dismiss him. This was because clause 11 said that 60 days of warning
was needed before Schuler AG could terminate, so the whole contract
read together meant the clause 7 had to be subject to clause 11. The
language in the contract is not decisive. If the word "condition" is not
used, but the contract describes a right to terminate, such as the
contract being terminable for "any breach" of obligation, the issue is,
again, one of construction and the courts may be reluctant to give
effect to the plain meaning if it would have "draconian consequences"
for the weaker party.
[231] By contrast, in
Bunge Corporation v Tradax SA[232]
the House of Lords held that giving notice for a ship to start loading
the soya bean cargo four days late, when the contract expressly
stipulated the date, should allow the right to terminate regardless of
the actual consequences of the breach. In mercantile contracts, ‘broadly
speaking time will be considered of the essence’, and so it is highly
likely the courts will enforce obligations to the letter.
Damages and injunctions
Whether or not a contract is terminated, every breach of a
substantially performed contract gives rise to the right to a remedy. A
court's power to award remedies is the final sanction against
non-performance and, unless the defendant is
insolvent,
the objective is to achieve full compensation for the innocent party as
if the contract were performed. This measure of the remedy to protect
"expectations" forms a principal distinction between contracts as
obligations from torts or unjust enrichment. In cases where performance
is defective, the courts generally award money for the cost of curing
the defect, unless the sum would be disproportionate and another sum
would adequately achieve the same compensatory objective. In
Ruxley Electronics Ltd v Forsyth[233]
although a £17,797 swimming pool was built 18 inches too shallow, the
land's market value was exactly the same. The House of Lords' solution,
rather than awarding the cost of rebuilding it at £21,560 and rather
than reject any award at all, was to reflect the forgone "
consumer surplus" or the "loss of
amenity"
with an award of £2,500. Greater recognition of benefits in contracts
other than purely financial ones has also been seen in cases concerning
contracts where pleasure, enjoyment, relaxation or the avoidance of
stress are construed as being "important terms". In
Jarvis v Swans Tours Ltd
Lord Denning MR held that a council worker could get not just his money
back, but also a small sum to reflect his disappointment after his
dream-holiday to the Swiss Alps, contrary to the promises in Swan Tours'
travel brochure, proved a boring disaster, complete with sub-standard
yodelling.
[234] And in
Farley v Skinner[235] the House of Lords held that a homebuyer close to
Gatwick
airport could recover money for lack of peaceful enjoyment, and the
disruption of what would otherwise be his "quiet contemplative
breakfast" from the house surveyor who assured there would be no noise.
The market value of the property was unchanged, but ensuring peace and
quiet had been an important term in their agreement. The courts have,
however, remained reluctant to allow recovery for disappointment over
any breach of contract, particularly in employment where a flood of
people might claim damages for stress and upset after a
wrongful dismissal.
[236]
In addition to damages for not getting the thing promised itself, a
contract breaker must compensate for the costly consequences of the
breach that one would reasonably expect to exist. There must be a causal
connection between the breach and the consequence complained of. In
Saamco v York Montague Ltd[239]
it was held a bank could not recover damages from property valuer for
all of the difference in what the properties it bought after getting the
valuations were assured to be and actual property values, because a
large part of the difference resulted from generally depressed market
prices following "
Black Wednesday"
in 1992. In a business deal, calculation will typically be based on the
forgone profits that one could reasonably have expected to make. This
could also include the "
loss of a chance" to profit, so in
Chaplin v Hicks
an entrant in a beauty contest wrongfully excluded from the final round
was awarded 25% of the final prize money to reflect her 1 in 4 chance
of having won. One limit lies at consequential losses that are too "
remote", or are not a natural result of the breach, and are not in the parties' contemplation. In
Hadley v Baxendale[240]
a miller tried to recover damages from Baxendale's delivery company for
the lost profits from his mill grinding to a halt, after they were late
delivering a crankshaft back from being fixed. But
Alderson B
held that because millers would usually be expected to keep spare crank
shafts, and because he had not informed Baxendale of the importance of
the timely delivery, an award for profits could not be compensated. More
recently in
The Achilleas[238]
the majority of the House of Lords preferred to express the remoteness
rule as one of construing the contract to reflect the parties'
"background of market expectations". Transfield Shipping returned
The Achilleas late to its owner, Mercator, which led Mercator to lose a lucrative contract with
Cargill
that would make over $1.3 million, an occurrence that was plainly a
natural consequence of the breach and easily foreseeable. Yet because
the standard practice and expectation in the shipping industry was that
if a ship were returned late only the ordinary sum for hire would be
due, this was the limit on recovery.
[241] It is also possible to lose one's entitlement to damages if steps are not taken to
mitigate further losses, that any prudent person would, rather than sitting back and letting losses run up.
[242] But the burden of proof of a failure to mitigate is on a contract breaker, to whom the courts are unlikely to be sympathetic.
[243]
A contract breaker could may also, if a concurrent liability arises in
tort, argue a claimant's damages should be reduced to reflect their
contributory fault, and the courts can reduce an award to achieve a just
and equitable result.
[244]
Sometimes potential profits will be too uncertain, or a general fall in
market prices means that even claiming damages for the thing itself
would leave one in a negative position, and so the courts allow a
claimant to choose whether to sue, not for a failure in expectations,
but to cover her expenses in preparing for the contract, or the "
reliance interest". In
Anglia Television Ltd v Reed[245] a TV channel successfully sued
Robert Reed
for not turning up for shooting a film. It was unclear whether the film
would make any profits at all, and so Anglia TV got compensated for its
wasted expenses in preparing the set.
[246]
The level of damages is generally assessed at the date of the breach,
but this is variable if the court thinks another time would be fairer.
[247]
When
compensatory damages are an inadequate remedy, restitution may be awarded as where a record company exploited a licence to
Jimi Hendrix records in breach of contract.
By way of exception, alternative remedies to compensatory damages are
available depending on the contract's nature. If damages would be an
inadequate remedy, for instance, because the subject matter was a unique
painting, or a piece of land, or was to deliver petrol during an oil
crisis,
[248] a court may compel literal or
specific performance of the contract's terms. It can also compel a defendant to refrain from actions that would continue a breach of contract.
[249] Injunctions
are discretionary remedies, and so they are not awarded in cases where
it might cause hardship, like compelling conveyance of property when it
would mean an unexpectedly disabled inhabitant would lose her home.
[250] Additionally, the courts have, at least since the
Slavery Abolition Act 1833,
refused to grant specific performance of contracts involving personal
services. This is part of a more general principle that two (potentially
hostile) parties to litigation should not be made to work in a long
term relationship. In
Cooperative Insurance Ltd v Argyll Ltd[251]
although a shop broke its contract with a shopping centre to keep its
business operating, and actual performance was important to keep
flagship businesses and so attract more customers to the centre
generally, specific performance was not granted because compelling a
potentially loss making business to keep operating was draconian and
probably not capable of being policed by the court. No award can be made
which punishes, or makes an example of a defendant, even for a cynical
and calculated breach of contract.
[252]
However, in limited situations, a claimant may succeed in a claim for
restitution of the contract breaker's gains, as is routinely available
in cases involving
trustees or other
fiduciaries who profit from transactions where they have a
conflict of interest. In the leading case,
Attorney General v Blake[253]
a former secret service agent's profits from book sales, which
recounted government information in breach of Blake's employment
contract, were stripped. While Lord Nicholls stated, other than
compensatory damages are not an adequate remedy, that "no fixed rules
can be prescribed" and their Lordships were eager to not hamper the
development of the law, the cases where such awards have been made in
contract have all involved some quasi-proprietary element. In an earlier
case,
Wrotham Park Ltd v Parkside Homes Ltd,
[254]
Brightman J awarded a percentage of gains resulting from building a lot
of homes in breach of a restrictive covenant, based on a sum that the
parties would have been likely to contract for had they struck a
bargain.
[255] More recently in
Experience Hendrix LLC v PPX Enterprises Inc[256] Mance LJ held that a percentage of profits made by PPX breaching the intellectual property rights on songs by
Jimi Hendrix
would have to be paid up. So if in the course of a contract one party
is in a position to take advantage of another's rights without their
fully informed consent, a restitutionary remedy can be awarded.
Cancelling the contract
Because contracts concern
voluntary obligations,
the courts employ a number of protections to ensure only people who
give informed and true consent are legally bound. Before 1875, the
common law courts only allowed escape from an agreement and damages if
someone was induced to enter an agreement by
fraud or was put under physical
duress,
or suffered from a lack of legal capacity. The courts of equity,
however, were significantly more generous because they allowed "
rescission"
(i.e. cancellation) of a contract if a person was the victim of any
misrepresentation, even an innocent one, and any "undue influence",
beyond influence by physical threats.
[257]
In these situations the victim of the misrepresentation or
unconscionable behaviour has the option to avoid the contract. If
avoided, the parties are both entitled to have returned whatever
property they had already conveyed, so nobody remains
unjustly enriched
(though this terminology was not used till the 20th century). As the
20th century unfolded, the courts and statute expanded on the range of
circumstances in which a person could claim
damages for
negligent misrepresentation, on top of fraud.
[258] As concern over the use of
unfair terms
grew, there were calls to recognise a positive duty on contracting
parties to disclose material facts as part of a broader duty of "
good faith" and some judges attempted to follow the American
Uniform Commercial Code by fashioning a broader doctrine of "unconscionable" bargains, procured through
inequality of bargaining power.
This development was, however, stopped by the House of Lords, so that
problems of unfair contract terms continued to be dealt with through
targeted legislation. The courts also declare contracts void if they
were for an illegal purpose, and refuse to enforce the agreement, or
give any legal remedy if doing so would require a person to rely on
their illegal act.
Disclosure and misrepresentation
| [show]
Misrepresentation cases
|
|
In a specific set of contracts, negotiating parties must conduct themselves in
utmost good faith (or "
uberrima fides") by disclosing all material facts to one another. In one of the earliest cases,
Carter v Boehm,
[260] Mr Carter bought an
insurance policy for any losses to a naval fort of the
British East India Company in
Sumatra,
but failed to tell his insurer, Boehm, that the fort was only built to
resist attacks from locals, and the French were likely to invade.
Lord Mansfield held the policy was invalid. Since insurance is a contract based on
speculation and the special facts "lie most commonly in the knowledge of the insured only",
good faith precluded Mr Carter "concealing what he privately knows". The same policy was extended for sale of
shares in a
company. So in
Erlanger v New Sombrero Phosphate Co[261] the promoter and director-to-be of a
guano mining business failed to disclose he had paid for the mining rights on the island of
Sombrero
half as much as he subsequently was valuing the company at. The House
of Lords held that, despite a delay in making a claim, the purchasers of
the shares had a right to their money back.
Lord Blackburn
held, further, that it was no barrier to rescission that the guano
could not be put back in the ground. Counter-restitution (i.e. both
parties giving back what they had got), if it could be substantially
made in its monetary equivalent, was enough. However, outside
insurance,
partnerships,
surety,
fiduciary relations, company shares, a narrow range of regulated securities,
[262] and consumer credit agreements,
[263]
the duty on negotiating parties to disclose material facts does not
extend to most contracts. Even though there is a duty to correct
previous false statements,
[264] in
Smith v Hughes, it was held that the general duty is merely to not make active
misrepresentations.
Hence, in the general law of contract, negotiating parties have a duty to not make false statements of fact or law,
[265] or misrepresent themselves through conduct.
[266]
Statements of opinion, "mere puff" or vague "sales talk" (e.g. "this
washing powder will make your clothes whiter than white!"), are
generally not considered factual. However representations of people who
profess special skill or knowledge are more likely to be actionable, as
they warrant their opinions are based on concrete facts.
[267] So in
Esso Petroleum Co Ltd v Mardon[268] Lord Denning MR held that
Esso's
expert opinion that a petrol station would have 200,000 gallons worth
of business was an actionable misrepresentation. If someone is induced
to enter a contract by any misrepresentation, whether
fraudulent,
negligent
or innocent, they are entitled to rescind the contract and get back the
property they have conveyed. As a remedy originating in the courts of
equity, this right to rescind could be lost, in four situations that
courts regard as unfair to allow a claim. First, if a claimant takes too
long to claim, the lapse of time (or "
laches") will create a bar to
rescission.
[269]
Second, if a claimant affirms a contract by expressly showing they
still consent to a deal even though they are aware of a
misrepresentation, rescission is barred.
[270] Third, if a third party's rights have intervened, when that third party is a
bona fide purchaser
rescission will be barred to the extent that property cannot be
recovered from the third party (although a claim in damages can still
exist against the misrepresentor).
[271] Fourth, and important in practice to prevent
unjust enrichment
is that counter-restitution must be possible. There is confusion over
whether in cases at law, rather than in equity, counter-restitution must
be precise (i.e. a thing received must be given back
in specie) or whether, as in
Erlanger, substantial counter-restitution may be in money.
[272]
Depending on how a court construes negotiations, a representation
could become a term of the contract, as well as one giving rise to the
right to rescind. A misrepresentation that is a term, will entitle the
misrepresentee to a simple breach of contract claim, with "expectation
damages" for loss of potential profits (subject to remoteness and the
duty to mitigate). If the misrepresentation is not a term, then damages
may also be available, but only "
reliance damages" for losses that have been incurred. Until 1963, the general rule was that only for
fraud
(i.e. an intentional or reckless misrepresentation) were damages
available. For fraud, damages are available for all losses that flow
directly from the misrepresentation.
[274]
However, in its Tenth Report the Law Reform Committee recommended that
damages should also be available for negligent misrepresentations.
[275] This led to the drafting of the
Misrepresentation Act 1967, and just before the Act was passed, the House of Lords also decided in
Hedley Byrne & Co Ltd v Heller & Partners Ltd[276] there should be a new claim for negligent misrepresentation at common law. While
Hedley Byrne remains an important case for an independent action in
tort,
MA 1967
section 2(1) was instantly more generous than the common law. It allows
damages if the claimant shows a defendant has made a false
representation, and then
the defendant cannot prove that they had
reasonable grounds for making a statement and honestly believed it was
true. So while the common law would put the burden of proof on a
claimant to show a defendant made a negligent misstatement,
MA 1967 s 2(1) shifts the
burden of proof
to the defendant. The measure of damages is also more generous under
the Act than at common law, because just as the Law Reform Report was
drafted, the House of Lords was introducing a limit on the quantum of
damages for negligence to losses that are reasonably foreseeable.
[277] MA 1967 section 2(1), however, was drafted by reference to state the same damages were available as for fraud. So in
Royscot Trust Ltd v Rogerson,
[278]
the Court of Appeal held that even where a representation is negligent,
and not fraud, the same quantum of damages is available as for fraud.
This is controversial among academics who argue that fraud is more
morally culpable than negligent behaviour, and should therefore deserve a
more severe limit on compensation, though it is not entirely resolved
what the proper circumstances for remoteness ought to be.
[279]
Under section 2(2) the court has the discretion to substitute the right
to rescind a contract for a small misrepresentation with an award of
damages.
[280]
Under section 3, a court has the power to strike down clauses excluding
remedies for misrepresentation if they fail the reasonableness test in
the
Unfair Contract Terms Act 1977.
[281]
An exception to the law on misrepresentation - that contracts are
voidable at the instance of the misrepresentee, but the right to
rescission can be barred
inter alia
by the intervention of third party rights - arises when someone is
induced by the fraudulent misrepresentation to enter an agreement
through a written document at a distance (and
not when a transaction is face to face). In
Shogun Finance Ltd v Hudson[282] a crook obtained Mr Patel's credit details and bought a
Mitsubishi Shogun on
hire purchase
contract at a car dealer. Shogun Finance was faxed through Mr Patel's
details, and agreed to finance the purchase of the car, letting the
crook drive away. Subsequently Mrs Hudson bought the car from the crook.
The crook disappeared. Then Shogun Finance, who had predictably never
been paid, found Mrs Hudson and sued to retrieve the car. A bare
majority in the House of Lords held that to protect the certainty of
commercial dealings through a signed document, the contract between the
finance company and the crook was void (the same consequence as if there
had never been any offer mirrored by an acceptance). They had only ever
intended to contract with Mr Patel. And because nobody can convey
property they do not have (
nemo dat quod non habet) Mrs Hudson never acquired legitimate title to the car from the crook and had to give back the car.
[283]
The minority held that this situation should follow ordinary law of
misrepresentation, and should mean that the right of the finance company
to rescind the contract would be barred by the intervention of Mrs
Hudson's rights as a
bona fide third party purchaser, just like all of Europe, the United States, and previous decisions of the Court of Appeal suggest.
[284]
However, because of the majority's decision this special category of
"mistake about identity" cases remains a general exception to the
English law on misrepresentation.
[285]
Unconscionability
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Unconscionability cases
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While the law on disclosure and misrepresentation aims to make
contracting parties informed (or not disinformed), the law on
"unconscionable" bargains says agreements may be avoided when, in a very
general sense, a person's
free will
was impaired. Complete exercise of "free will" is rare for most people,
because they make choices within a constrained range of alternatives.
The law still holds people to nearly all contracts (if consumer,
employment, tenancy, etc. legislation is not activated) except where
someone was under duress, unduly influenced or exploited while in a
vulnerable position. Like misrepresentation, the victim may avoid the
contract, and the parties restore their property to reverse
unjust enrichment, subject to the victim's claim for damages, so long as none of the four equitable bars to rescission lie (i.e. no excessive
lapse of time,
affirmation of the contract, intervention of an innocent third party's
rights and counter-restitution is possible). The most straight forward
claim, for duress, involves illegitimate threats. The common law long
allowed a claim if duress was of a physical nature. So long as a threat
is just one of the reasons a person enters an agreement, even if not the
main reason, the agreement may be avoided.
[286]
Only late in the 20th century was escape allowed if the threat involved
illegitimate economic harm. A threat is always "illegitimate" if it is
to do an unlawful act, such as breaking a contract knowing non-payment
may push someone out of business.
[287] However, threatening to do a lawful act will usually not be illegitimate. In
Pao On v Lau Yiu Long
the Pao family threatened to not complete a share swap deal, aimed at
selling their company's building, unless the Lau family agreed to change
a part of the proposed agreement to guarantee the Paos would receive
rises in the swapped shares' prices on repurchase.
[288]
The Laus signed the guarantee agreement after this threat, and then
claimed it was not binding. But the Privy Council advised their
signature was only a result of "commercial pressure", not economic
duress. The Laus' considered the situation before signing, and did not
behave like someone under duress, so there was no
coercion
amounting to a vitiation of consent. However, contrasting to cases
involving business parties, the threat to do a lawful act will probably
be duress if used against a vulnerable person.
[289] An obvious case involving "lawful act duress" is
blackmail.
The blackmailer has to justify, not doing the lawful act they threaten,
but against a person highly vulnerable to them, the demand of money.
[290]
Third parties, particularly
banks, will not see their security cancelled over
undue influence claims if they ensure people seeking
mortgages have independent advice.
Parallel to the slow development of common law duress, the courts of equity allowed escape from a contract if any form of
undue influence
was used against a contracting party. "Actual undue influence" is now
essentially the same thing as duress in its wider form. In these "class
1" cases, a claimant proves they were actually put under undue
influence. Most relevant are the cases on "presumed undue influence", of
which there are two sub-classes.
[291]
"Class 2A" cases involve someone being in a pre-defined relation of
trust and confidence with another, before which they enter a very
disadvantageous transaction. In
Allcard v Skinner,
Miss Allcard joined a Christian sect, the "Protestant Sisters of the
Poor", run by her spiritual adviser, Miss Skinner. After taking vows of
poverty and
obedience she gave the sect almost all her property.
Lindley LJ
held that if she had not been barred from the claim by letting 6 years
lapse, it could be presumed that Miss Allcard was unduly influenced and
she would have been able to rescind the transfer. Other class 2A
relationships include doctor and patient, parent and child, solicitor
and client, or any fiduciary relation (but not wife and husband). Where
the relation does not fall into one of these, it stands with "class 2B"
cases. Here, a claimant may first prove that there was in fact a strong
relation of trust and confidence. If that is done, and there is a
disadvantageous transaction, it will be presumed to result from undue
influence.
[292]
It will then be up to the recipient of the property to rebut the
presumption. This takes on greatest significance in cases involving
banks typically lending money to a husband for his business, and
securing a mortgage over the husband and wife's jointly owned home.
Significant problems arose, particularly after the early 1990s housing,
stock market and currency crashes, where the husband's business failed,
the bank attempted to repossess the house, and the wife claimed she
never understood the implications of the mortgage or was pressured into
it.
[293]
Even though a bank may have played no illegitimate role, if it had
"constructive notice" of undue influence (i.e. if it was aware that
something was potentially wrong) the bank would lose its security and
could not repossess the house. In
Royal Bank of Scotland plc v Etridge (No 2)[294]
the House of Lords decided that in such situations a bank should ensure
that the spouse has been independently advised by a solicitor, who in
turn confirms in writing there is no question of undue influence, before
giving out a loan.
As opposed to duress and actual undue influence, where illegitimate
pressure is applied, or presumed undue influence which depends on a
relationship of trust and confidence being abused, further cases allow a
vulnerable person to avoid an agreement merely on the basis that they
were vulnerable and exploited. In
The Medina[295] the Court of Appeal found that a group of pilgrims shipwrecked on a rock in the
Red Sea
did not need to pay £4000 they promised to a rescue ship, because the
"rescuers" had exploited the pilgrims vulnerable position. To prevent
unjust enrichment, the Court substituted an award of £1800. Similarly,
in
Cresswell v Potter,
Ms Cresswell conveyed her ex-husband her share of their joint property
in return for release from mortgage repayments, later making him £1400
profit. Because Potter took advantage of Ms Creswell's ignorance of
property transactions, Megarry J held the agreement was voidable.
[296] One potential exception to this pattern, and now very heavily restricted, is the defence of "
non est factum",
which originally applied in favour of illiterate people in the 19th
century allowed a person to have a signed contract declared void if it
is radically different from what was envisaged.
[297] In
Lloyds Bank Ltd v Bundy,
[298] Lord Denning MR proposed it was time that all cases be placed into one unified doctrine of "
inequality of bargaining power".
[299]
This would have allowed escape from an agreement if without independent
advice one person's ability to bargain for better terms had been
heavily impaired, and would have essentially given courts broader scope
to change contracts to the advantage of weaker parties. The idea was
disapproved by some members of the House of Lords from 1979.
[300] There is specific legislation, such as the
Consumer Credit Act 1974, the
Landlord and Tenant Act 1985, or the
Employment Rights Act 1996 which create targeted rights for vulnerable contracting parties, in the same way specific legislation circumscribes a duty of
disclosure and
good faith. The common law, subject to the existing exceptions, nevertheless retains an essential foundation of
freedom of contract.
Incapacity
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Contracting capacity cases
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Heavily
intoxicated people will be bound to contracts for "necessaries", which can include more alcohol.
In three main situations, English law allows people who lack legal
capacity to contract to escape from enforcement of agreements and
recover property that was conveyed, to reverse
unjust enrichment.
First, a person may be too young to be bound by large or onerous
contracts. Minors, under 18 years, can bind themselves to contracts for
"necessaries" to pay a reasonable price, but only unusual contracts,
such as for eleven luxury waistcoats will not be deemed "necessaries".
[301]
While the adult contracting party is bound, the minor has the option to
rescind the contract, so long as one of the four equitable bars (lapse
of time, affirmation, third party rights, counter-restitution possible)
is not present. Second, people who are mentally incapacitated, for
instance because they are
sectioned under the
Mental Health Act 1983 or they are completely
intoxicated, are in principle bound to agreements when the other person could not or did not know they lacked mental capacity.
[302]
But if the other person did know or should have known, then the
mentally incapacitated individual may no longer have agreements for
non-necessaries enforced upon them. Third, companies can generally bind
themselves to any agreement, even though many (particularly older)
companies have a limited range of objects that their members (in most
companies this means
shareholders) have consented that the business is for. Under the
Companies Act 2006
sections 39 and 40, if a third party contracting with the company in
bad faith takes advantage of a director or officer to procure an
agreement, that contract will be wholly void. This is a high threshold,
and in practice no longer relevant, particularly since 2006 companies
may elect to have unrestricted objects. It is more likely that a
contract ceases to be enforceable because, as a matter of the
law of agency
the third party should have reasonably known that the person
contracting lacked authority to enter an agreement. In this situation a
contract is voidable at the instance of the company, and could only be
enforced against the (probably less solvent) employee.
In a fourth case, the consequences of incapacity are more drastic. Although the
Crown Proceedings Act 1947
made it possible for the government or emanations of the state to be
sued on contracts in the same way as a normal individual, where statute
confers power on a public body to do certain acts, actions by
representatives beyond that power will be
ultra vires and void. The result is the same as it was for
companies before reform in 1989, so that whole chains of agreements could be declared as non-existent.
Illegality
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Sources for illegality
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Theory
- Specific contracts: Agency. Arbitration clauses. Bailment. Bills of
exchange and banking. Building contracts. Carriage by air. Carriage by
land. Construction contracts. Credit and security. Employment. Gaming
and wagering. Insurance. Restrictive agreements and covenants. Sale of
goods. Suretyship.
See also
