THE UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE LEARNING

BACHELOR OF LAWS

MODULE

L 221: LAW OF CONTRACT

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 Copyright © 2013. UNZA Institute of Distance Learning

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Contents
ACKNOWLEDGEMENT ............................................................................................................................ 6

MODULE OVERVIEW ............................................................................................................................... 7

Introduction.................................................................................................................................................. 7

Module Outcomes ...................................................................................................................................... 7

Time Frame ................................................................................................................................................. 7

Study Skills .................................................................................................................................................. 7

Need Help? ................................................................................................................................................. 7

Assignments................................................................................................................................................ 7

UNIT ONE ................................................................................................................................................... 8

FORMATION OF CONTRACTS .............................................................................................................. 8

Introduction.................................................................................................................................................. 8

Objectives .................................................................................................................................................. 26

What is …? ................................................................................................................................................ 26

Cases ......................................................................................................................................................... 26

UNIT TWO ................................................................................................................................................. 61

QUASI CONTRACTUAL OBLIGATION................................................................................................ 61

Introduction................................................................................................................................................ 61

Objectives .................................................................................................................................................. 62

What is …? ................................................................................................................................................ 62

Cases ......................................................................................................................................................... 63

UNIT THREE............................................................................................................................................. 69

PRIVITIES OF CONTRACT ................................................................................................................... 69

Introduction................................................................................................................................................ 69

Objectives .................................................................................................................................................. 79
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What is …? ................................................................................................................................................ 79

Cases ......................................................................................................................................................... 80

UNIT FOUR ............................................................................................................................................... 89

CONTENTS OF CONTRACTS .............................................................................................................. 89

Introduction................................................................................................................................................ 89

Objectives .................................................................................................................................................. 98

What is …? ................................................................................................................................................ 98

Cases ......................................................................................................................................................... 99

UNIT FIVE ............................................................................................................................................... 122

ENFORCEABILITY OF CONTRACT .................................................................................................. 122

Introduction.............................................................................................................................................. 122

Objectives ................................................................................................................................................ 131

What is …? .............................................................................................................................................. 131

Cases ....................................................................................................................................................... 132

UNIT SIX.................................................................................................................................................. 149

INVALIDITY – VOID AND ILLEGAL CONTRACTS .......................................................................... 149

Introduction.............................................................................................................................................. 149

Objectives ................................................................................................................................................ 152

What is …? .............................................................................................................................................. 152

Cases ....................................................................................................................................................... 153

UNIT SEVEN........................................................................................................................................... 163

PERFORMANCE AND BREACH ........................................................................................................ 163

Introduction.............................................................................................................................................. 163

Objectives ................................................................................................................................................ 169

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What is …? .............................................................................................................................................. 169

Cases ....................................................................................................................................................... 170

UNIT EIGHT ............................................................................................................................................ 180

REMEDIES FOR BREACH OF CONTRACT..................................................................................... 180

Introduction.............................................................................................................................................. 180

Objectives ................................................................................................................................................ 184

What is …? .............................................................................................................................................. 184

Cases ....................................................................................................................................................... 184

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ACKNOWLEDGEMENT
The University of Zambia (UNZA), Institute of Distance Education (IDE), wishes to thank
Dr. Matakala for writing this Module, L210: Legal Process.

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MODULE OVERVIEW

Introduction

Module Outcomes

Time Frame

Study Skills

Need Help?

Assignments

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 UNIT ONE

FORMATION OF CONTRACTS

Introduction
NATURE OF CONTRACTS

Definition of Contract

Contracts are an integral part of everyday life. A contract is an exchange of promises

between two or more parties to do, or refrain from doing, an act which is enforceable in a
court of law. It can also be defined as a promise or a set of promises for the breach of
which the law gives a remedy. It is an agreement which is legally binding on the parties
and gives rise to obligations for the parties involved. The law of contract determines which
agreements are enforceable and regulates those agreements, providing remedies if
contractual obligations, undertakings or promises are broken. Three elements can be
picked from the above definition of a contract:

1. A promise: Distinction between two types of promise, namely; those which do and
do not give rise to a legal duty. A promise to contribute money to one’s wedding does not
give rise to legal obligation, because it is a mere promise. However, a promise to sell
someone a car for K10, 000,000 gives rise to legal obligation.

2. A legal duty arising from that promise: Distinction is made between bilateral and
unilateral contracts. A bilateral contract gives rise to obligations to both sides. Thus in a
contract of sale, the seller has an obligation to transfer title in the thing sold to the buyer,
while the buyer has an obligation to pay the price. A Unilateral contract, by contrast, gives
rise to obligations one side only.

3. A remedy for breach of that duty. A distinction between common law remedies
(damages) and equitable remedies (injunctions and specific performance).

Essential Elements of a Contract

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

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

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

2. Consideration: The agreement must be supported by lawful consideration.

Consideration means value or benefit given by the other party. Consideration is the
essence of a bargain between the contracting parties.
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3. Intention to Create Legal Relations: For any agreement to be considered as a
contract, the parties must make the agreement with the intention to create legal relations
between them, that is to be legally bound. In other words the parties must contemplate
legal consequences.

4. Capacity of Parties: This refers to the legal competence for one to contract. Both
parties making the agreement must have the legal capacity to enter into a contract. They
must be recognised by law as possessing the characteristics that qualify them as parties
competent to contract.

5. Free Consent: A contract must be made with the free consent of the parties. The
validity of a contract may be affected if it is induced by factors which include;
misrepresentation, undue influence, coercion/duress, fraud and mistake.

6. Legality: A contract must be made to accomplish something that is legal and not
against public policy. Thus courts of law will not enforce a contract whose objective or
consideration is found to be Illegal, immoral or contrary to public policy.

7. Form: Some contracts are required to be in a particular form in order for them to
be valid. For instance certain transactions involving land such as conveyances, legal
mortgages and leases must be in writing and require the execution of a deed.

Classification of Contracts

Contracts may be grouped according to the followings classes / clusters:

1. Formation: A contract can classified as express or implied. An express contract is

a contract whereby the parties specifically agree on the nature and terms that will govern
their relationship. An implied contract on the other hand is a contract whereby there is no
specific agreement between the parties. The agreement is not as a result of any express
promise by the parties but it is merely interpreted or inferred from the acts or conduct of
the parties and all the surrounding circumstances.

2. Form: There are standard form contracts, contracts by deed and simple contracts.
Standard form contracts are contracts where the terms and conditions are not subject to
negotiation between the parties but are predetermined. A large number of business
organisations use their own standard form contracts so that they can trade on terms they
want. Examples of standard form contracts include insurance policies, hotel
accommodation and bank guarantee forms. The standard form contracts ensure that the
terms that are included in the contract are advantageous to one who has prepared or
designed on the standard form contracts. Besides standard form contracts enable
procedures to be standardised and less time is used in making a contract. Standard form

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contracts are also known as contracts of adhesion, which means you either accept it as
it is or leave it.

A deed is a formal document, which must be signed, witnessed and delivered. The law
requires that certain contracts be made in writing. The reasons for demanding a written
contract include providing the consumer with a measure of protection which can be
achieved by requiring a clear statement of rights and responsibilities to be contained in
the written agreement and to oblige parties involved in technical transactions to record
their respective obligations. Examples of contracts that must be in writing include
contracts for the sale or transfer of land or when a legal mortgage of land is created and
the transfer of shares in a registered company.

A simple contract is one that is not made under a deed. It is a contract which is informal
and can be in writing, made orally or can be implied from the conduct of parties.

3. Validity: There are void, voidable, illegal and unenforceable contracts. A void
contract has no binding effect at all. A void contract does not create any rights or
obligations and the parties will be treated to have never entered into an agreement in
such a contract. An example of a void contract is one whose purpose is illegal, such an
agreement to commit a criminal act or to trade with an enemy alien during the time of war.

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

An illegal contract is a contract which is forbidden by law or is contrary to some rule of

public or is immoral or is criminal in nature. All illegal agreements are void but not every
void contract is illegal.

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

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

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4. Performance: There are executed and executor contracts. An executed contract is
a contract in which the objective of the contract is at once performed, that is, both parties
perform their obligations under the contract. For example, when a food vender agrees to
sell food and the purchaser consumes or takes the food away on payment to the vendor.

Executory Contract: An executory contract is a contract in which one of the parties is

bound to do a given thing at some future date. An example is an agreement whereby the
seller promises to deliver a car in a week’s time, and the buyer agrees to pay for it on
delivery. The contract is executory only as regards the obligation of the party who is yet
to perform his part of the contract and hence may also be described as partly executed.
A contract in which both parties have not performed their obligations is also an executory
contract.

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

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

OFFER

For a contract to be created parties must reach an agreement. The idea of agreement is
therefore central to an understanding of the law of contract. Whether or not there is an
agreement between the parties is a question, which can be answered by looking at the
way parties have conducted themselves and examine what they have said and done. In
determining whether the parties have reached agreement the law looks for an offer by
one party and an acceptance of the terms of that offer by the other. In the bargaining
process leading up to an agreement one party will finally propose terms such as price,
date of delivery and express a willingness to be bound by them if the other party signifies
his acceptance of them.

The person making an offer is known as the offeror, and the person to whom the offer is
addressed is called the offeree. An offer is a promise or proposal by one party (the offeror)
to enter into a contract, on a particular set of terms, with the intention of being bound as
soon as the other party to whom the proposal or promise is made (the offeree) signifies
his acceptance.

An offer may be made either to an individual person, to a particular group of persons or it

may be made to the general public. An offer may be written, spoken or implied by conduct.
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For example, when a transport company runs a bus on a particular route, there is an
implied offer by the company to carry passengers for a certain fare. The offer is accepted
when passengers board the bus.

Characteristics of a Valid Offer

An offer is made up of terms which if accepted would govern the contract. For instance,
an offer to sell a car will state the price and describe the type of car being offered for sale.
The offeror (promissor) becomes bound only if the offeree (promisee) accepts the terms
of the offer as expressed by him. An offer to be legally effective must satisfy the following
general requirements:

1. The offer must be firmly made;

2. The offer must be communicated to the person to whom it is made; and

3. The terms of the offer must be definite, clear and certain: This means that the terms
must be definite, clear and certain so that the offeree is in a position to know what exactly
the offer is all about. Where the terms of the offer are obscure, uncertain or meaningless
the contract will fail.

Offer and Invitation to Treat

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

terms provided that these terms are in turn accepted by the party or parties to whom the
offer is addressed. As already noted an offer may be made orally, in writing or by conduct.
However, care must be taken in distinguishing between an offer and an invitation to treat.

Invitation to treat (or "bargain") is a contract law term. It comes from the Latin phrase
invitatio ad offerendum and means an "inviting an offer". An invitation to treat is simply an
expression of willingness to enter into negotiations which, it is hoped will lead to the
conclusion of the contract at a later date. In other words invitation to treat can be said to
be a statement and an act that appears like an offer but is not an offer. It is merely an
incentive or encouragement designed by the person making it to encourage the making
of offers to him and is certainly not intended to be legally binding.

Practical Examples

Because of the difficulty in making a distinction between an offer and invitation to treat
the law has attempted to clarify the position in certain common types of transaction which
include the following:

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1. Goods Displayed for sale in Shops: The general principle of law is that the display
of goods in a shop constitutes an invitation to treat and that the offer is made by the
customer when he presents the goods at the cash desk, where the offer may be accepted
by the shopkeeper.

2. Advertisements: The general rule is that the advertisement of goods for sale is an
invitation to treat rather than an offer. Nonetheless, there are certain cases where an
advertisement may be treated or interpreted as an offer rather than an invitation to treat
because no further bargaining between the parties is possible or intended.
Advertisements of rewards, for example, for information or the return of lost property, fall
in this category.

3. Auction Sales: The general principle of law is that an advertisement of an auction

sale is an invitation to treat. Thus an advertisement of an auction of specific goods will
not be construed as an offer to sell those goods. There is no promise to sell the goods
and the auctioneer will not be liable for withdrawing them from the sale without notice.

4. Tenders: Where a person invites tenders for a particular project the general rule is
that the invitation to tender is simply an invitation to treat. The offer is made by the person
who submits the tender and the acceptance is made when the person inviting the tenders
accepts one of them.

Communication of an Offer

An offer must be communicated to the person to whom it is made otherwise the offeree
has no opportunity of accepting or rejecting the offer. Therefore the party to whom the
offer is directed to must be made aware of it. An offer will normally be made to a single
individual or organization, though there is nothing to prevent an offer being directed to a
specific group of individuals, anyone or more of whom may choose to accept it.

It is also possible to make an offer to the general public in cases where the offeror is not
able at the time the offer is made to identify who the possible recipients are. Only the
person or persons to whom the offer is made can accept it. A general offer may be
accepted by anyone and when a certain person accepts it, it results in a contract. If, for
example, a bank offers a financial reward for information leading to the arrest of bank
robbers by placing the advertisement in a newspaper or by displaying the notice inside
the bank, any person who provides the information leading to the arrest of the robbers
will satisfy the terms of the offer and hence entitled to the reward, as long as he was
aware of the offer beforehand.

Termination of an Offer

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

1. By Acceptance: An offer which has been accepted constitutes a contract. That

offer is therefore no longer available for acceptance.

2. Revocation or withdraw of an offer: Although an offer cannot be withdrawn once it

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

3. Rejection of an offer: An offer is rejected if the offeree notifies the offeror that he
does not wish to accept the offer, the offeree attempts to accept subject to certain
conditions or the offeree makes a counter-offer.

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

5. Failure of a Condition attached to the offer.

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

ACCEPTANCE

An acceptance is a final and unqualified acceptance of the terms of an offer either in

writing, by words or by conduct. An acceptance is a final and unqualified expression of
assent to the terms proposed by the offeror, either in writing, by words or by conduct. The
acceptance should reflect the offer precisely or must exactly match the offer in order to
result in agreement. This is what used to be called “consensus ad idem” or “meeting of
the minds”.

Rules Governing Acceptance

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

1. Acceptance must be absolute and unconditional or unqualified: Acceptance should

be in Toto and without any condition. Therefore an acceptance with a variation is no
acceptance. A qualified or a conditional acceptance is no acceptance at all, and in fact it
is only a counter-offer. A counter-offer puts an end to the original offer and it cannot be
revived by subsequent acceptance.

2. Acceptance must be communicated to the Offeror: Acceptance is completed only

when it has been communicated to the offeror. Until the acceptance is communicated it
does not create any legal relations.

3. Acceptance must be in the Prescribed Manner: Where the offeror prescribes a

particular mode of acceptance the acceptor or offered should follow that mode. Where no
mode of acceptance is prescribed by the proposer or offeror, then acceptance must be
according to some usual and reasonable mode.

4. Acceptance must be in Response to Offer: There can be no acceptance without

offer. Acceptance should follow the offer and not precede it.

5. Acceptance may be express or implied: An acceptance, which is expressed by

words, written or spoken, is called express acceptance. An acceptance, which is
expressed by conduct, is called implied acceptance.

6. Acceptance must be by the Offeree: An offer can be accepted only by the person(s)
to whom it is made. A valid contract arises only if acceptance is communicated by a
person who has authority to accept. If it is communicated by any unauthorised person, it
will not create legal relationship.

7. Acceptance must be given before the offer Lapses or is revoked: To be legally

effective acceptance must be given within the specified time limit, if any, and no time is
stipulated, acceptance must be given within a reasonable time.

The term reasonable time depends upon the facts and circumstances of each case

Counter-Offer

If in the reply to an offer, the offeree introduces a new term or varies the terms of the offer,
then that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter
offer", which the original offeror is free to accept or reject. A counter-offer also amounts
to a rejection of the original offer which cannot then be subsequently accepted.

A statement would be considered or regarded as a counter-offer if the reply:

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1. Introduces new terms;

2. Varies the offer;

3. Imposes new conditions;

4. Is only a limited or qualified agreement; or

5. Is merely an agreement to agree to a future agreement.

A statement will not be a counter-offer if the offeree is:

1. Seeking clarification; or

2. Seeking further information about the offer.

Conditional Acceptance

If the offeree puts a condition in the acceptance, then it will not be binding.

1. Acceptance by Conduct: Whether there has been an acceptance by one party of

an offer made to him by the other may be collected from the words or documents that
have passed between them, or may be inferred from their conduct.

2. Acceptance in Case of Tenders: A tender is an offer, the acceptance of which leads

to the formation of a contract. However, difficulties arise where tenders are invited for the
periodical supply of goods:

Where A advertises for offers to supply a specified quantity of goods, to be supplied

●
during a specified time, and B offers to supply, acceptance of B's tender creates a
contract, under which B is bound to supply the goods and the buyer A is bound to accept
them and pay for them.

Where A advertises for offers to supply goods up to a stated maximum, during a

●
certain period, the goods to be supplied as and when demanded, acceptance by A of a
tender received from B does not create a contract.

Instead, A's acceptance converts B's tender into a standing offer to supply the
●
goods up to the stated maximum at the stated price as and when requested to do so by
A.

The standing offer is accepted each time A places an order, so that there are a
●
series of separate contracts for the supply of goods.

Communication of Acceptance

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The general rule is that an acceptance must be communicated to the offeror if it is to lead
to a binding agreement. Until and unless the acceptance is so communicated, no contract
comes into existence. The general rule also applies to “instantaneous” communications.
This ranges from the human voice when parties are face to face or on the telephone, to
telex, fax machines, the internet and e-mails.

Exceptions to the Communication Rule

1. The Post Rule: Where acceptance by post has been requested or where it is an
appropriate and reasonable means of communication between the parties, then
acceptance is complete as soon as the letter of acceptance is posted, even if the letter is
delayed, destroyed or lost in the post so that it never reaches the offeror. As a general
rule, an acceptance must be brought to the offeror’s attention for it to be effective.
However, communication through the post provides an important exception to this general
rule. The general rule as regards acceptance sent by post is that the acceptance of the
offer takes place or becomes effective, provided it was correctly addressed and prepaid,
is posted by the offeree. This rule applies even if the letter of acceptance is lost or
destroyed. The postal rule applies to communications of acceptance by cable, including
telegram, but not to instantaneous modes such as telephone, telex and fax. The postal
rule will not apply:

Where the letter of acceptance has not been properly posted;

●
Where the letter is not properly addressed;
●
Where the express terms of the offer exclude the postal rule, ie if the offer specifies
●
that the acceptance must reach the offeror; and

Where it would produce a "manifest inconvenience or absurdity" as it was said in

●
Holwell Securities.

2. Waiver of Communication: The offeror may expressly or impliedly waive the need
for communication of acceptance by the offeree, e.g., where goods are dispatched in
response to an offer to buy.

3. Unilateral Contracts: In unilateral contracts the normal rule for communication of

acceptance to the offeror does not apply. Carrying out the stipulated task is enough to
constitute acceptance of the offer. A unilateral contract is a contract whereby one party
promises to pay to the other a sum of money or to do some other act if that other party
will do, or refrain from doing something without making a promise to that effect. A
unilateral contract should be contrasted with a bilateral contract in that the latter is formed
by the exchange of promises between the parties, resulting in reciprocal undertakings,

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

Prescribed Method of Acceptance

It is open to the offeror to prescribe the method by which acceptance may be made. If no
stipulation is made, anything that achieves communication will suffice namely words,
writing or conduct. If it is clear that the offeror prescribes a specific method of acceptance
only, the general rule is that the offeror is not bound if other method of communication is
used. If a method is prescribed without it being made clear that no other method will
suffice then it seems that an equally advantageous method would suffice.

Acceptance by Silence

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

CONSIDERATION

Consideration is based upon the idea of ‘reciprocity’; that a promisee should not be able
to enforce a promise unless he has given or promised to give something in exchange for
the promise or unless the promisor has obtained or been promised something in return.
In short a promise, which is a starting point in the process of the formation of the contract,
is only enforceable as a contract if it is supported by consideration. Consideration is
defined as something of value in the eyes of the law, promised or given by one party to
the contract which makes the other party’s promise enforceable as a contract. The benefit
or detriment interchange represents the traditional idea of contract as being an exchange
based upon reciprocal obligation.

Types of Consideration

1. Executed Consideration: Where the act constituting the consideration is

completely performed, the consideration executed. For example, Kaluba receives K500,
000 from Chongo when he promises to deliver a computer to Chongo. The money Kaluba

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receives constitutes an executed promise by Chongo in return for Kaluba’s promise to
deliver the computer. Performance of the requested act in the case of general offers is
executed consideration.

2. Executory Consideration: Where the consideration takes the form of a promise to

be performed in future the consideration is said to be executory. For instance, when
consideration from one party to the other is to pass subsequent to the conclusion of the
contract, the consideration is executory. The promise by Kaluba to deliver a computer to
Chongo, in the above example, is executory consideration on the part of Chongo.
Therefore consideration is executory when it relates to the future.

3. Past Consideration: If a person makes a promise subsequent to some act or

service rendered independent of any promise, the previous act or service cannot be
consideration for the promise being made. Anything which has already been done before
a promise in return is given, is called past consideration. As a general rule, past
consideration is not consideration to make a promise legally binding. For example, if
James provides assistance to George who has been knocked down by a hit and run car,
by taking him to the hospital and paying all the medical expenses, James cannot later on
demand compensation from George. There are however, some exceptions to the general
rule that past consideration is not consideration. One such notable exception is found
under section 27 of the Bills of Exchange Act 1882 which provides that a valuable
consideration for a bill may be constituted by an antecedent debt or liability. Such a debt
or liability is deemed “valuable consideration”.

Rules Governing Consideration

Various rules governing consideration can be summarised as follows:

1. Consideration must move at the desire of the Promisor: An act constituting

consideration must be done at the desire or request of the promisor. If an act or
abstinence is done at the instance of a third party and or without the desire of the
promisor, it will not be good consideration.

2. Consideration must not be Past: A party to the contract cannot use a past act as a
basis for consideration. Therefore, if one party performs an act for another, and only
receives a promise of reward after the act is completed, the general rule is that he cannot
enforce the promise because the consideration he has provided is past.

3. Consideration must move from the Promisee: The maxim that ‘consideration must
move from the promisee’ simply means that a promise can only be enforced by a
promisee if there is consideration for the promise. Only parties to the agreement who
have provided consideration can sue on the contract. Thus a person who has not provided
19
consideration does not have the right to sue on the contract, for that person is not a party
or privy to the contract.

4. Consideration need not be Adequate but must have some Value: As already
explained consideration is something given in return for something. That something need
not be the comparative value of the promises made by the parties or what is received
from the other party. Thus the law will enforce only those promises for which something
is given in return; it will not enforce gratuitous promises. Where consideration has been
given the courts will not normally judge the adequacy of consideration, that is, whether
adequate value has been given in exchange for a promise or whether the parties to the
contract in fact made a fair bargain or exchange.

5. Consideration must be Legal: If consideration is illegal the whole contract will be

invalidated. There are two classes of illegal contract, those existing under the common
law and those made illegal by Parliament. Illegality at common law arises in cases where
the contract is considered as being contrary to public policy, for instance, contracts
involving sexual immorality, contracts involving commission of crime and contracts
associated with corruption in public life. In these cases the courts consider the promises
being exchanged between the parties as unlawful and therefore unenforceable.

6. Consideration must be Sufficient: Consideration is treated as insufficient and thus

incapable of supporting a contract when it involves the promisor undertaking to do
something that he is already obliged to do by law. The justification for this is that since
the promisor is bound to carry out the promise anyway, there can be no true bargain in
using performance of this promise to support another contract. Consideration is said to
be insufficient in the following circumstances, namely:

Where a performance of a duty is imposed by law;

●
Where a performance of contractual duty is owed to the promisor; and
●
Where a performance of a duty is owed to a third party
●
Part Payment of a Debt is not Sufficient Consideration

A general rule at common law is that a promise by a creditor to take less than is owed to
them by the debtor is not legally binding as such a promise lacks consideration. In other
words, a promise to accept part payment of a debt in discharge of the entire debt is not
supported by consideration. This is because the debtor is already contractually obliged to
repay the entire debt and so provides no consideration for the creditor’s promise to accept
part payment.

INTENTION TO CREATE LEGAL RELATIONS

20
Although the parties have reached an agreement, it does not necessarily mean that they
have concluded a legally enforceable contract, even where the agreement is supported
by consideration. The parties must therefore satisfy the third requirement in the
contractual formation namely that there is an intention to create legal relations. In other
words, the parties to the contract must contemplate legal consequences or to be legally
bound. However, some agreements may be made subject to a condition expressly
excluding legal liability. For the purpose of establishing the intention of the parties to the
contract, the courts have developed two key guidelines for determining whether or not an
intention to create legal relations exists that would make an agreement enforceable. In
the case of an agreement that is of a social or domestic nature it is presumed that there
is no intention to create a legal relationship enforceable in law, unless the contrary can
be proved. In case of business or commercial arrangements it is presumed that there is
an intention to create legal relationship and that the agreement is legally enforceable,
unless the contrary can be proved.

Social and Domestic Agreements

The social and / or domestic agreements can be classified into three groups namely:

1. Agreements between husband and wife: Generally speaking friendly, social or

domestic arrangements are presumed as not intended to be legally binding on the parties
even though they may have the outward appearance of a contract. The presumption is
however, rebuttable. Where there is no express provision as to the intention of the parties,
the court can determine whether a certain domestic agreement was intended to be legally
binding by drawing an inference from the language used by the parties and the
circumstances under which the agreement was made.

2. Agreements between parent and child: Like agreements between a husband and
wife, an agreement between a parent and child is presumed not to be legally enforceable
or binding between the parent and child.

3. Agreement between friends: Social arrangements between friends do not usually

amount to contracts because the parties never intended their agreements to be legally
binding. If however, it can be demonstrated that the transaction had a commercial flavour,
the court may be prepared to find the necessary intention for a contract.

Commercial and Business Agreement

21
In commercial agreements, it is generally presumed that the parties intend to make or
enter into a legally binding or enforceable contract. However, this presumption may be
rebutted.

CAPACITY OF PARTIES

The general principle of law is that anyone can bind himself by a contract, as long as it is
not illegal, or void for public policy. There are however, exceptions to this rule of which
the most important are contracts made by the followings persons:

Minors - those under the age of 18

Minors’ contracts are divided into three categories namely:

1. Contracts that are valid and therefore enforceable against the minor

Contracts that are valid or enforceable against minors are divided into two further
categories:

Contracts for Necessaries

●
A contract to supply a minor with necessaries is binding upon the minor where the contract
as a whole is for the benefit of the minor. The purpose and effect of the rule is to allow
minors to enter into contracts that are beneficial to them. However, at the same time, it
prevents unscrupulous businesses from taking advantage of their youth and
inexperience. The word ‘necessary’ in this context is a very specific legal term. Section 2
of the Sale of Goods Act 1893 defines ‘necessaries’ as goods suitable to the condition in
life of such infant or minor or other person, and to his actual requirements at the time of
the sale and delivery. The courts have established a two-part test for determining what a
necessary is and therefore what will be enforceable against the minor:

i. The goods or services must be necessary according to the ‘station in life’ of the
particular minor; and

ii. The goods or services must also suit the actual requirements of the minor at the
time when the contract is formed.

Beneficial Contracts of Service

●
A minor may need to support himself financially, and therefore must have the capacity to
enter contracts of employment. Such a contract would be prima facie valid and therefore
enforceable. However, from an early time the courts accepted that the contract would be
binding on the minor only if, on balance, the terms of the contract were substantially to
the benefit of the minor. The fact that some of the terms of the contract act to the minor’s
22
detriment will not automatically invalidate the contract of service provided that it still
operates mostly for the minor’s benefit.

A beneficial contract of employment is one which is for the benefit of the minor. A minor
is bound by contracts of employment, apprenticeship and education if they are generally
for his benefit. In contrast, a contract which is not generally beneficial to the minor will not
be binding on the minor. In other words where the contract is made up of terms, which
are predominantly detrimental to the minor, the court will have no choice but to invalidate
the contract as a whole. The principle of the beneficial contracts of service has also been
extended to cover contracts of apprenticeship, education and training, since it is to the
general advantage of a minor that he should secure the means of acquiring a livelihood.

2. Contracts Voidable by Minors

This type of contracts made by minors refers to those contracts which, though the minor
might enter with perfect validity, he may nevertheless avoid the contract by repudiating
his obligations under the contract while still a minor or within a reasonable time after
reaching the age of 18. Voidable contracts are contracts that bind the minor until he
decides to reject them. The minor must repudiate the contract before reaching the age of
majority, that is, 18, or within a reasonable time after becoming 18. The main effect of
repudiation is to release the minor from all future liabilities or obligations. The four kinds
of contracts which fall within this category are:

Contracts to lease property;

●
Contracts to purchase shares in a company;
●
Contracts to enter a partnership; and
●
Contracts of marriage settlement.
●
Contracts that the minor may enter but can also back out of if required and which are
therefore voidable. Contracts that are unenforceable against the minor and which in
practical terms therefore may be difficult for him to make.

Mentally unsound or disordered persons

In considering the capacity of mentally disordered persons to contract, the first question
for the court to determine is whether at the time of contracting that party was actually
suffering from a mental disability to the extent that he was incapable of understanding the
nature of his act when forming the contract. If this is the case then the contract will be
voidable by the party with the mental disorder rather than void, provided also that the

23
other party to the agreement was aware of the disability at the time at which the contract
was formed.

Where necessaries are supplied to a person who is suffering from a mental illness then
section 3 of the Sale of Goods Act will apply. The person will be obliged, as usual, to pay
a reasonable price for the goods and it will not matter whether the other party is aware of
the disability.

Drunkards

When a party who is drunk enters into a contract he is given certain protections. Provided
that he does not know the quality of his actions at the time that the contract is formed,
and provided also that his drunkenness is also evident to the other party to the contract,
then the contract is voidable by the drunken person on his return to a sober state. Where
necessaries are supplied to a drunken party or person then section 3 of the Sale of Goods
Act will apply.

Corporations

A company or corporation is a legal entity or artificial person created by a process of law.

It has a separate legal existence from the person or persons who actually created it and
represents it in human form. Therefore the company has a separate legal entity from the
shareholders who own it and the directors of the board that conduct its business. It can
own property, employ staff and sue and be sued in its corporate name. A company may
come into existence by registration under the Companies Act of 2017, or by an Act of
Parliament. The capacity of a company to make contracts is regulated by law. The Act of
Parliament that establishes a company would set out its contractual capacity. The powers
of a company that are created through the process of incorporation under the Companies
Act are contained in its Articles of Association which limits its contractual capacity.

Ultra Vires Doctrine

A company’s articles of association is a document which sets down the objects, functions
and purposes of the company. Any contract that is made outside the company’s objects
will be ultra vires and void. Ultra vires means beyond or outside the powers of the
company. The doctrine of ultra vires is a means of preventing the company from doing
anything that was not empowered by its objects clause. Any ultra vires act would be void
and therefore unenforceable by either party to the transaction. The doctrine is intended
to protect three classes of people namely, the investors (shareholders), creditors of the
company, and third parties entering transactions with the company.

IN SUMMARY

24
The policy behind the law of capacity to contract is to protect the interests of persons who
because of their deficiencies or disabilities in their mental build up, are not expected to
be in a position to make sound judgments concerning their own interests. Also the law of
contract is aimed at protecting the certain types of person who may enter a contract either
for their own protection or for the protection of the party who contracts with them. It also
avoids unfair advantage being taken by a party in a superior position. The law
distinguishes between natural persons and artificial persons, the latter being corporation
of whatever type. In case of natural persons there are three categories that may be
affected by capacity:

Minors – those under the age of 18 when the contract is formed;

●
People who are drunk, when the contract is formed; and
●
Mental patients – those suffering from a mental illness when the contract is formed.
●
Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
a system adopted for the resolution of disputes, with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?

25
Cases
Hyde v. Wrench (1840) 3 Beav 334
●
Wrench offered to sell his farm in Luddenham to Hyde for £1200, an offer which Hyde
declined. On 6 June 1840 Wrench wrote to Hyde's agent offering to sell the farm for
£1000, stating that it was the final offer and that he would not alter from it. Hyde offered
£950 in his letter by 8 June, and after examining the offer Wrench refused to accept, and
informed Hyde of this on 27 June. On the 29th Hyde agreed to buy the farm for £1000
without any additional agreement from Wrench, and after Wrench refused to sell the farm
to him he sued for breach of contract.

Lord Langdale's judgement read: Under the circumstances stated in this bill, I think there
exists no valid binding contract between the parties for the purchase of this property. The
defendant offered to sell it for £1000, and if that had been at once unconditionally
accepted there would undoubtedly have been a perfect binding contract; instead of that,
the plaintiff made an offer of his own, to purchase the property for £950, and he thereby
rejected the offer previously made by the defendant. I think that it was not afterwards
competent for him to revive the proposal of the defendant, by tendering an acceptance of
it; and that, therefore, there exists no obligation of any sort between the parties.

Brogden v. Metropolitan Railway Co. (1877) 2 App Cas 666

●
The claimants were the suppliers of coal to the defendant railway company. They had
been dealing for some years on an informal basis with no written contract. The parties
agreed that it would be wise to have a formal contract written. The defendant drew up a
draft contract and sent it to the claimant. The claimant made some minor amendments
and filled in some blanks and sent it back to the defendant. The defendant then simply
filed the document and never communicated their acceptance to the contract. Throughout
this period the claimants continued to supply the coal. Subsequently a dispute arose and
it was questioned whether in fact the written agreement was valid.

Held: The written contract was valid despite no communication of the acceptance. The
acceptance took place by performing the contract without any objection as to the terms.

Powel v. Lee (1908) 99 L.T. 284

●
Mr. A applied for the post of a Headmaster in a school. He was selected by the appointing
authorities. But the decision of his appointment was not communicated to him. One of the
members of the appointing committee informed him of his appointment. But this member
was not authorised to communicate the decision. He communicated the decision in his

26
individual capacity. Subsequently, the appointing authority cancelled his selection. Mr. A
brought a legal action for breach of contract. His action was rejected by the court.

Judgment: The county court judge held that there was no contract as there had been no
authorised communication of intention to contract on the part of the body, that is, the
managers, alleged to be a party to the contract. This decision was upheld by the King's
Bench Division.

Stevenson v. McLean (1880) 5QBD 346

●

The defendant held documents of title to certain quantities of iron and offered to sell them
to the plaintiff for 40/- cash, indicating that the offer would be held open until the following
Monday. The plaintiff was a broker and would only buy once they had lined up a buyer to
take from them. On Monday at 9:42am P sent a telegram to D sounding out what flexibility
there might be to negotiate before the days trading got under way. The market was
unstable and P wanted to know the negotiating range. "Please wire whether you would
accept 40 for delivery over 2 months, if not, longest time limit." There was no response
from D and P later purported to accept the original offer. D claimed that the acceptance
was not effective as their telegram had rejected the offer by way of counter-offer.

Held: This case should be distinguished from that of Hyde v Wrench (1840). In that case
D had offered his estate for £1000. P offered to pay £950. When this was refused, P then
purported to agree to pay the full £1000. P could not claim the estate, because his original
counter-offer had put an end to D's offer. Here, the telegram was not a counter-proposal,
but a mere inquiry "which should have been answered" [morally or legally?]. It was not as
a rejection of the offer. Pothier has suggested a more subjective view. He has argued that
if the offeror changes their mind (but does not communicate this) before acceptance, then
at the moment of acceptance, there is no meeting of minds, and therefore no contract
(Cooke v Oxley). However a more objective view is preferable. Once an offer is made, it
is taken to be continuing each moment until accepted or withdrawn. The law will regard
the intention evidenced in the offer as continuing, until notice of its revocation has been
communicated to the other party. As stated in Byrne v Van Tienhoven (1880) "an
uncommunicated revocation is, for all practical purposes and in point of law, no revocation
at all". As no notice of withdrawal was given by the offeror, the P could regard it as a
continuing offer, and their acceptance of it made the contract complete.

Butler Machine Tool v Excell-o-Corp [1979] 1 All ER 965

●
The Plaintiffs offered to sell a machine tool to the defendants in a quotation. This
contained a price variation clause, which by no means of a specific formula enabled the
plaintiffs to raise the quoted price between contract and delivery if their own costs rose.
The defendants ordered the goods but on their own standard terms which did not include
27
a price variation clause. The Plaintiffs, on receipt of the order form, signed and returned
an acknowledgment slip which it contained. The Plaintiff’s costs rose considerably
between the contract and delivery.

The Court regarded the defendant’s order as a counter offer, and the return of the
acknowledgement slip as the plaintiff’s acceptance. The contract between them did not
therefore contain a price variation clause.

Great Northern Railway Co v. Witham (1873) LR 9 CP 16

●
The plaintiffs advertised for tenders for the supply of stores. The defendant made a tender
in these words: ‘I undertake to supply the Company for twelve months with such quantities
of specified articles as the Company may order from time to time’. The Company replied
by letter accepting the tender, and subsequently gave various orders which were
executed by the defendant. Ultimately the Company gave an order for goods within the
schedule, which the defendant refused to supply.

The company succeeded in an action for breach of contract. The tender was a standing
offer, to be converted into a series of contracts by the subsequent acts of the company.
The defendant was bound to supply the goods actually ordered.

Harvela Investments Ltd v. Royal Trust Co of Canada [1986] AC 207

●
Bids may not use other bids as the basis of calculation. A trustee of shares wanted to sell
the shares. There were 2 obvious buyers being existing shareholders - A and B. A bid
$2,700,000 and B bid $2,100,000 or $101,000 higher than A's bid. B's bid was accepted
and A said that it did not come within the terms of the proposal therefore A had an
entitlement to the shares. But was the Trustee in breach of any binding promise?

Held: That the contract should have been awarded to the highest fixed bid. [NB This case
also suggests that a promise to accept the highest bid may be binding - on the basis that
the promise is like that in Carlill which is accepted by the highest bidder. So an invitation
to tender can be seen as an offer which is accepted by putting in the tender. This
completes one contract - another contract may then arise if most competitive and in
accordance with the specification].

Blackpool & Fylde Aero Club v. Blackpool BC [1990] 1 WLR 1195

●
An invitation to Tender can create contractual obligations. The local council called for
tenders. The club submitted a tender shortly before the expiry of the deadline. The
council's staff failed to empty the letter box until the following morning, and the applicants
tender was stamped with the date and time of the day after closing. They were
subsequently informed that their tender had been submitted late and that the tender had
been awarded to another tenderer. When they realised their error, the Council said they

28
would re-tender. The company which had been awarded the original tender said that if
they did they would sue for breach of contract. The Council decided to honour their award
of the tender to them. P claimed a breach of warranty, and further or in the alternative, a
breach of a duty of care. D said that the invitation to tender was no more than an invitation
to treat, and therefore there was no intention to create legal relations.

The judge said that a request to tender might in appropriate circumstances, give rise to
an implied obligation to consider that tender. Contra - it was argued that if the Council
had wanted to give such an undertaking, they could have said so. It was argued that there
is a vital distinction between expectations and obligations; if there was no obligation, then
the Council could accept any tender, even before the deadline expired. The court took
the view that if that were so, then there would be an unacceptable discrepancy between
the law of contract and the confident assumptions of commercial parties. Had the Club
asked at the time if a conforming tender would be considered, the answer would be "of
course". The court took the view that the law would be defective if it did not give effect to
that understanding. An implication was needed because there was no explicit statement
on the point. The judge said that he was pleased to see that the right legal answer accords
with the merits.

Entores v Miles Far East Corporation [1955] 2 All ER 493

●
Entores was a London-based trading company that sent an offer by telex for the purchase
of copper cathodes from a company based in Amsterdam. The Dutch company sent an
acceptance by telex. The contract was not fulfilled and so Entores attempted to sue the
owner of the Dutch company for damages. The controlling company, Miles Far East Corp,
was based in the US and under English law Entores could only bring the action in the US
(serve notice of writ outside the jurisdiction) if it could prove that the contract was formed
within the jurisdiction, i.e. in London rather than Amsterdam.

Denning LJ, delivering the leading judgment. He said that the postal rule could not apply
to instantaneous communications, such as telephone or telex: if a phoneline "went dead"
just before the offeree said "yes", it would be absurd to assume that the contract was
formed and the parties would not have to call each other back. The same applied to telex.
Since the contract was therefore only formed when and where the telex was received, the
place of formation was London.

Brinkibon Ltd v. Stahag Stah [1983] 2 AC 34

●
The case involved a contract for the sale of steel bars between an English Co, the buyer,
and an Austrian Co, the seller. The English Co made an application to issue the writ and
to serve notice on the other party out of the jurisdiction. At issue was whether England
was the correct jurisdiction. Two grounds were stated: The contract was made in England:
The buyer in London accepted a counter-offer by telex issued from England - or the
29
counter offer was accepted by the conduct of the buyer in England. The breach of contract
was committed in England.

HELD - Lord Wilberforce: Where there are successive telephone calls, it may be artificial
to ask where the contract was made. Most people would not think of it at the time. Whether
there was a contract can only be decided at the trial. However, we need to assume at this
interlocutory stage that a contract was made, and decide where it was made. If the telex
was sent from London to Vienna where is the contract made? If seen as a postal
acceptance, then on posting - in London. If seen as a telephone acceptance, then on
reception in Vienna. Entores says that a telex is to be treated like a telephone message.
The English Co says this should be reviewed. But Entores has not been subject to
adverse comment and should be accepted as a general rule. In this area, it is difficult to
have a universal rule. One should have regard to intentions, business practice and where
the risk should lie. In the case of instant communication between principals, the contract
is made when and where the communication is received, indicating the time at which the
deal is clinched and the jurisdiction and law which applies. [NB Lord Wilberforce, a well-
respected judge in commercial matters, here demonstrated his awareness of the
artificiality of the intention theory, and took into account more commercial considerations].

Adams v Lindsell (1818) 1 B & Ald 681

●
The defendant wrote to the plaintiff offering to sell wool and requested a reply “in the
course of post”. The defendant misdirected the letter and this caused it to be delayed for
a couple of days. On receiving the letter, the plaintiff replied immediately, by posting a
letter of acceptance. After the plaintiff’s acceptance was posted, but before it arrived, the
defendant sold the wool to a third party, in the belief that the plaintiff was not interested.

The Court held that a contract was concluded between the defendant and the plaintiff
when the letter of acceptance was posted by the plaintiff.

Henthorn v. Fraser [1892] 2 Ch. 27

●
Fraser offered to sell some horses to Henthorn and gave him fourteen days to consider.
The following day Fraser decided the price he had quoted was too low and wrote to
Henthorn revoking the offer. After the letter of revocation had been posted but before he
had received it, Henthorn decided to buy the houses, and posted his letter of acceptance
at 3.50 p.m.

It was held that a binding contract had come into existence at 3.50 p.m. the letter of
revocation was ineffective, for it had arrived too late.

Household Fire Insurance Co. v Grant (1879) 4 Ex D 216

●

30
Mr Grant applied for shares in the Household Fire and Carriage Accident Insurance
Company. The company allotted the shares to the defendant, and duly addressed to him,
posting a letter containing the notice of allotment. The letter was lost in the post and he
never received the acceptance. Later the company went bankrupt, and asked Mr Grant
for the outstanding payments on the shares, which he refused saying there was no
binding contract. The liquidator sued. The question was whether Mr Grant's offer for
shares had been validly accepted, and was he legally bound to pay?

Judgment: Thesiger LJ for the majority held that there was a valid contract, because the
rule for the post is that acceptance is effective even if the letter never arrives. He noted
that anyone can opt out of the rule, and that even if it sometimes causes hardship, it would
cause even more hardship to not have the rule. Once someone posts acceptance, he
argued, there is a meeting of minds, and by doing that decisive act a contract should
come into effect.

Carlill v. Carbolic Smoke Ball Co. Ltd [1893] 2 Q.B. 163

●
The defendants advertised their preparation by offering to pay 100 pounds to any
purchaser who used it and yet caught influenza within a given period, and by declaring
that they had deposited 1,000 pounds with their bankers ‘to show their sincerity’. The
plaintiff bought the preparation, used it and caught influenza. Among the many ingenious
arguments raised by the defence was that there was no legal relations ever contemplated
between the plaintiff and defendant. The advertisement, it was said, was ‘a mere puff’, ‘a
mere statement by the defendants of the confidence they reposed in their remedy’, ‘a
promise in honour’.

The Court of Appeal rejected this plea holding that the fact of the deposit was cogent
evidence that the defendants had contemplated legal liability when they issued their
advertisement.

Manchester Diocesan Council for Education v. Commercial and General

●
Investments Limited [1969] 3 ALL ER 1593
The court held that the method of acceptance prescribed for a tender was not mandatory
and if an offeror wishes it to be mandatory this needs to be made explicit.

Holwell Securities v Hughes [1974] 1 All ER 161

●
The defendant issued a grant to sell a property at 571 High Road, Wembley. It contained
a clause stipulating that there must be notice in writing within six months in order to
exercise the option. The claimants sent a letter exercising the option. It was lost in the
mail and was never received by the defendant.

31
Judgment: The postal acceptance rule does not apply in every case, even if the parties
involved consider the post to be an acceptable means of communication. Lawton LJ
asserted that in the law relating to options, the grantee (here, the plaintiff) must comply
strictly with the conditions stipulated for exercise by the offeror (the defendant in this
case). Following this reasoning, the postal acceptance rule cannot apply when there are
express terms in the offer specifying that acceptance must reach the offeror. The Court
also advances that the rule ought not to apply in cases where its application would
produce manifest inconvenience and absurdity. More broadly, the Court states that the
rule does not apply if when looking at all the circumstances, it is apparent that the parties
could not have intended a binding agreement until notice of acceptance was
communicated to the offeror. Russell LJ added that although the parties had a telephone
conversation, this does not constitute the requisite notice of acceptance as laid out in the
offer. This case sets a precedent for overriding the postal rule.

Felthouse v. Bindley (1862) 11 CB (NS) 869

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

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

Gibbons v. Proctor (1891) 64 LT 594

●
A police officer supplied information for which a reward had been offered; he was not
aware of the offer at the time that he gave the information but he had become aware of
the offer by the time the information reached the relevant party. It was held that the officer
was entitled to claim the reward.

Judgment: This case held that the advertisements of rewards for information leading to
the arrest or conviction of the perpetrator of a crime, is treated as an offer, as the intention
to be bound is inferred from the fact that no further bargaining is expected to result from
them. The case is sometimes wrongly cited as authority for the proposition that
acceptance in ignorance of an offer is effective. A closer inspection of the facts of the
case reveals that the party claiming the reward possessed full knowledge of the offer at
the time when he gave the information.

32
 R v Clarke (1927) 40 CLR 227
●
The claimant wanted to compel the Crown to pay a reward it had offered for information
leading to the conviction of a murderer. The claimant gave the information. But he gave
it while he was under investigation himself for murder. He told the police "exclusively in
order to clear himself". It was uncertain whether he was thinking about the reward at the
time he provided the information.

Judgment: Higgins J interpreted the evidence to say that Clarke had forgotten about the
offer of the reward. Starke J and Isaacs ACJ only went so far as to say that he had not
intended to accept the offer. The Court held it was necessary to act in "reliance on" an
offer in order to accept it, and therefore create a contract. Starke J said "the performance
of some of the conditions required by the offer also establishes prima facie an acceptance
of the offer." But here it was held that the evidence showed, Mr Clarke was not acting on
the offer. So a presumption that conduct which appeared to be an acceptance was relying
on an offer was displaced.

Williams v Carwardine (1833) 5 Car & P 566

●
Walter Carwardine was murdered in Hereford. The plaintiff, Mrs Williams, gave evidence
at the Hereford assizes against two suspects, but did not say all she knew. The suspects
were acquitted. On April 25, 1831, the victim's brother and defendant, Mr Carwardine,
published a handbill, stating there would be a £20 for...whoever would give such
information as would lead to the discovery of the murder of Walter Carwardine. In August,
1831, the Mrs Williams gave more information which led to the conviction of two men
(including a Mr John Williams, the plaintiff's husband). She claimed the reward. Mr
Carwardine refused to pay. At the trial her motives were examined. It was found that she
knew about the reward, but that she did not give information specifically to get the reward.
It was apparent that after the first murder trial, Mrs Williams had been savagely beaten
by Mr Williams.

Judgment: At the trial (nisi prius) Parke J said, "The motive was the state of her own
feelings. My opinion is, the motive is not material." He held that she was entitled to the
reward.

Tinn v Hoffman & Co (1873) 29 LT 271

●
P wrote to D asking for a price on 800 tons of iron. D offered the iron at 69s [69 shillings,
or £3.45]per ton and asked for a reply "by return". It was conceded that since the offer
was not in fact accepted by return of post there was no contract, but Honeyman J said
obiter that a telegram or verbal message or any other means at least as fast as a letter
written by return of post would have been sufficient.

Chapple v. Cooper [1844] 3 M & W 252

●
33
A minor whose husband had recently died contracted with the undertakers for his funeral.
She later refused to pay the cost of the funeral, claiming her incapacity to contract.

The court held that she was liable to pay the bill. The funeral was for her private benefit
and was necessary as she had an obvious obligation to bury her dead husband.

Nash v. Inman [1908] 2 KB 1

●
A Cambridge undergraduate, the son of an architect, was supplied with clothes to the
value of 122 pounds by a Savile Row tailor. These included 11 ‘fancy waistcoats’ priced
at 2 guineas each. While the court was prepared to accept that the supply of such clothing
could be appropriate to the station in life of the undergraduate, the contract was still held
to be unenforceable because facts showed that the minor was already adequately
supplied with clothes. Therefore those that the tailor supplied could not classed as
necessaries.

Peters v. Fleming (1840) 6 M & W 42

●
The minor was an undergraduate whose father was ‘a gentleman of fortune and a
Member of Parliament’, rings, a breast pin and a watch chain were held to be necessaries.

Fawcett v. Smethurst [1914] 84 KB 473

●
The minor hired a car in order to transport luggage. A term in the contract stated that a
minor was to be held absolutely liable for any damage to the car regardless of how that
damage was caused.

The court held that the contract was too onerous and therefore unenforceable against the
minor.

Clements v. London and North Western Railway Co [1894] 2 QB 482

●
The minor, Clements, was employed by the railway company as a porter. Under the
contract of employment, he had given up his right to claim for personal injury under the
Employer’s Liability Act 1880 but had, instead, acquired rights under an insurance
scheme. Although, under the insurance scheme, the payments were generally lower, it
did not require the injury to have resulted from the Employer’s negligence. Clements was
injured and claimed under the 1880 Act.

It was held that the contract as a whole was beneficial to Clements. He was bound by it
and could not claim under the 1880 Act.

Roberts v. Gray [1913] 1 KB 520

●
The defendant, a minor, with a view to becoming a professional billiards player, had
entered an agreement with the plaintiff, himself a leading professional, to accompany the
plaintiff on a world tour. The plaintiff spent time and money organising the tour, but

34
following a dispute the defendant refused to go. The plaintiff sought damages of 6,000
pounds for breach of contract.

The Court of Appeal held that the contract was for the defendant’s benefit, being in the
nature of a course of instruction in the game of billiards. The plaintiff was awarded 1,500
damages.

De Francesco v. Barnum (1890) 45 Ch D 430

●
A 14 year old girl entered into a seven year apprenticeship with De Francesco, to be
taught stage dancing. By the apprenticeship deed the girl agreed she would accept no
professional engagements except with his express approval. He was under no obligation
to maintain her or to employ her. In the event that he did employ her, the scales of pay
were set extremely low.

She was also obliged not to marry except with his permission. Finally, De Francesco was
able to terminate their arrangement without notice whenever he wished. When the girl
was set to accept other work, De Francesco’s action to prevent it failed. The provisions
of the apprenticeship deed were held to be unfair by the court and therefore
unenforceable against her. They were not substantially for her benefit.

Doyle v. White City Stadium [1935] 1 KB 110

●
A minor who was a professional boxer entered into a contract with the British Boxing
Board of Control. The contract provided that the minor would lose his ‘purse’ (the payment
for the fight) if he were disqualified.

The agreement was held to be binding on the minor since it was to encourage not only
clean fighting but also proficiency in boxing, and was therefore for the benefit of the minor.

Chaplin v. Leslie Frewin (Publishers) Ltd [1966] Ch 71

●
In this case the principle was extended to a contract to write an autobiography. This was
held to be similar to a contract for services and was beneficial to the minor, and so was
binding on him.

Since contracts for necessaries and beneficial contracts of service are enforceable
against the minor, if the goods or services are not necessaries or if the contract of service
is not beneficial then these contracts are voidable by the minor.

Edwards v. Carter [1893] AC 360

●
A minor sought to repudiate an agreement under a marriage settlement by which he
agreed to transfer the money he would inherit from his father’s will to the trustees under
the settlement. He tried to repudiate more than a year after his father’s death and four-

35
and-a-half years after actually reaching the age of majority. His argument that he was
incapable of repudiating until he knew the full extent of his interest under his father’s
estate failed. The court held that his repudiation was too late in time to be reasonable.

Imperial Loan Co v. Stone [1892] 1QB 599

●
It was stated in this case that where a person enters into a contract, and afterwards he is
able to prove that he was of unsound mind at the time of entering into that contract, the
contract is still binding on him unless he can prove that the person with whom he
contracted knew him to be insane as not to be capable of understanding what he was
about.

Gore v. Gibson [1845] 13 M & W 621; 153 E.R. 260

●
It was held that a contract made by a person so intoxicated as not to know the
consequences of his act is not binding on him if his condition is known to the other party.

Matthews v. Baxter (1873) LR 8 Ex. 132

●
It was held that if the drunken party, upon coming to his senses, ratifies the contract, he
is bound by it.

Ashbury Railway carriage Co v. Riche (1875) LR 7 HL 653

●
The objects of the appellant company, as stated in the memorandum of association, were
‘to make, sell or lend on hire, railway carriages and wagons, and all kinds of railway plant,
fittings, machinery and rolling stock; to carry on the business of mechanical engineers
and general contractors; to purchase, lease and sell mines, minerals, land and buildings;
to purchase and sell as merchants, timber, coal, metals or other materials, and to buy
and sell any such materials on commission or as agents’. The directors agreed to assign
to a Belgian company a concession which they had bought for the construction of a
railway in Belgium.

It was held that this agreement, since it related to the construction of a railway, a subject
matter not included in the memorandum, was ultra vires, and that not even the
subsequent assent of the whole body of shareholders could make it binding. Thus an
action brought by the Belgian company to recover damages for breach of the contract
failed.

Currie v. Misa (1875) LR 10 Ex 153

●
A company named Lizardi & Co, then in good credit in the City, sold four bills of exchange
to Mr Misa, drawn from a bank in Cadiz. Mr Currie was another of the banking firm and
the plaintiff bringing the action. The bills of exchange were sold on the 11th of February,
and by the custom of bill, brokers were to be paid for on the first foreign post-day following
the day of the sale. That first day was the 14th of February Lizardi & Co. was much in

36
debt to his banking firm, and being pressed to reduce his balance, gave to the banker a
draft or order on Mr Misa for the amount of the four bills. This draft or order was dated on
the 14th, though it was, in fact, written on the 13th, and then delivered to the banker. On
the morning of the 14th the manager of Misa's business gave a cheque for the amount of
the order, which was then given up to him. Lizardi failed, and on the afternoon of the 14th
the manager, learning that fact, stopped payment of the cheque.

Judgment: Exchequer Chamber: Lush J, Archibald J, Quain J held that the banker was
entitled to recover its amount from Mr Misa. Lord Coleridge CJ dissented. House of Lords:
The House of Lords upheld the decision of the majority in the Exchequer Chamber. Lord
Chelmsford gave the opinion, with which Lord Hatherley and Lord O'Hagan concurred.
Where Lush j. Stated that: “A valuable consideration, in the sense of the law, may consist
either in some right, interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other”.

Eleanor Thomas v. Benjamin Thomas (1842) 2 Q.B. 851

●
John Thomas, shortly before dying, orally expressed a desire for his wife to have either
the house used as their residence and its contents or £100 in addition to the other
provisions made for her in his will. After his death the executors of his estate (Samuel
Thomas, his brother, and Benjamin Thomas) entered into an agreement with Eleanor (his
wife) “in consideration of John's desires” whereby Elanor would take possession of the
house and in return maintain the house and pay £1/year for the "ground rent". The
respondent remained in the house for some time; however after the death of Samuel, the
appellant refused to complete the conveyance, claiming that consideration was lacking.
The lower court found for Eleanor and Benjamin appealed.

Issue: Is respecting the wishes of her dead husband (motive) sufficient consideration?
Does the willing of the house constitute a voluntary gift and hence the respondent has no
rights?

Decision: Appeal dismissed. Reasons: In the court's findings Justice Patteson held that
motive is not the same as consideration; consideration must be something which is of
value in the eyes of the law. The court found that the agreement entered into between
the executors and Ms. Thomas contained an agreement to pay £1 rent/year which
showed this was not merely a voluntary gift and was sufficient consideration. Ratio:
Consideration must have value in the eyes of the law. Motive is not sufficient
consideration.

Roscorla v. Thomas (1842) 3 QBD 234

●
The seller of a horse, after the buyer had purchased it, promised the buyer that the horse
“did not exceed five years old” and “was sound and free from vice”. In fact on the contrary
37
it was found by the Court that the horse was “vicious, restive, ungovernable and ferocious”
and the buyer sued for breach of the promise. The action failed.

The court held that the consideration provided by the buyer was already past when the
promise by the seller that the horse was “free from vice” was made. The warranty was
not given in return for the promise of payment made for the horse and, being made after
the sale, was gratuitous and therefore insufficient consideration. The seller’s promise was
therefore not enforceable as it was not supported by new or fresh consideration.

Eastwood v. Kenyon (1840) 11 A & E 438

●
The plaintiff had become the guardian of Sarah, a young heiress, on the death of Sarah’s
father. He spent money on improving her estate, and on her education, and he had to
borrow 140 pounds in order to do so. When she came of age, she promised to pay the
plaintiff the amount of the loan. After her marriage to the defendant (her husband), he
repeated this promise of reimbursement to the plaintiff.

The Court held that the plaintiff was unable to enforce this promise because the
consideration which he had provided, which was bringing up and financing Sarah, was
past. The plaintiff’s acts were gratuitous in that they were not given in return for the
defendant’s or Sarah’s promise. The court conceded that the husband might have been
under a moral obligation to pay, but that moral obligation could not be converted into a
legal obligation because of the absence of consideration.

Re McArdle [1951] Ch 669, [1951] 1 All ER 905

●
The five children of a family, by their father’s will, were to inherit a house after their
mother’s death. During the mother’s life, one of the children and his wife (Mrs Majorie
McArdle) lived with her in the house. The wife made various improvements and alterations
to the house, which she paid for herself. She had not been asked to do this. However,
about a year later, all five children signed a document addressed to her, in which they
promised to repay 488 pounds from the estate when it was eventually distributed. The
document specifically stated that “in consideration of your carrying out certain alterations
and improvements to the property, we hereby agree that the executors shall repay to you
from the estate, when distributed, the sum of 488 pounds in settlement of the amount
spent on such improvements”. When the mother died, the daughter-in-law tried to enforce
the promise made in this document. This action was held to be unenforceable as all the
work had been done before the promise was made.

The Court of Appeal held that as all the work on the house had in fact been completed
before the document was signed, the undertaking by the children amounted to past
consideration. Jenkins L.J. stated that “the work had in fact all been done and nothing
remained to be done by Mrs Marjorie McArdle at all, the consideration was a wholly past
38
consideration, and therefore the beneficiaries’ agreement for the repayment to her of the
488 pounds out of the estate was a nudum panctum (a bare promise), a promise with no
consideration to support it (at p. 678).

Re casey’s patents, steward v. Casey [1892] 1 Ch 104

●
The joint owners of a patent agreed with Casey that he should manage and publicise their
invention. Two years later joint owners wrote to casey that, “In consideration of your
services as practical manager in working our patents, we hereby agree to give you one
third share of the patents”. When casey tried to enforce the agreement it was argued for
the joint owners that their promise was made only in return for casey’s past services as
manager and that there was therefore no consideration to support it.

The court founding in favour of casey rejected the view that this promise was supported
by past consideration from casey. The request to him to render his services carried an
implied promise to pay for them. The promise of a third share was simply the fixing of the
price.

Lampleigh v. Brathwait (1615) Hob 105

●
Thomas Brathwait had killed Patrick Mahume and then asked anthony Lampleigh to do
all he could to get a pardon for him from the king. Lampleigh did as requested, which
involved making journeys at his own expense, and obtained a pardon for Brathwait.
Afterwards, Brathwait promised to pay him 100 pounds for his endeavours. He then failed
to pay Lampleigh and was sued by him. Brathwait’s defence was that the act had been
performed before the promise of a reward was made.

The Court found in favour of Lampleigh and rejected the argument that the consideration
was past. It stressed that the plaintiff’s service was performed at the request of the
defendant and his promise to pay for it was binding. This is because the later promise
related to the earlier request for help; essentially it was all part of the same transaction.

Pao On v. Lau Yiu Long [1979] 3 ALL ER 65 at p. 74; [1980] AC 614 at p. 629
●
Lord Scarman in the Privy Council decision summarised the position as follows:

“An act done before the giving of a promise to make a payment or to confer some other
benefit can sometimes be consideration for the promise. The act must have been done
at the promisor’s request, the parties must have understood that the act was done to be
remunerated further by a payment or the conferment of some other benefit, and payment,
or the conferment of a benefit must have been legally enforceable had it been promised
in advance”.

Tweddle v. Atkinson (1861) 1 B & S 393

●

39
John Tweddle and William Guy agreed each to pay a sum of money to a couple on their
marriage. The couples in question were their son and daughter respectively. The plaintiff,
John Tweddle’s son, tried to enforce his father-in-law’s promise, when William Guy failed
to make the agreed payment.

The action failed as the son did not provide any consideration for his father-in-law’s
promise. In other words there was not privity of contract between him and his father-in-
law. Crompton J. Stated that, at p. 398:

“The consideration must move from the party entitled to sue upon the contract. It would
be a monstrous proposition to say that a person was a party to a contract for the purpose
of suing upon it for his own advantage, and not a party to it for the purpose of being
sued”.

Mountford v. Scott [1975] Ch 258

●
The defendant made an agreement with the plaintiff, granting the plaintiff an option to
purchase the defendant’s house for 10,000 pounds within six months. The plaintiff paid 1
pound for the option, and later sought to exercise it. The value of the defendant’s property
had risen by this time and he refused to sell.

The Court held that this option agreement was enforceable against the defendant and
that it was irrelevant that the consideration provided by the plaintiff could be described as
a token payment.

Chappell & Co v. Nestle Co [1960] AC 87

●
The defendants, as part of the sales promotion, offered a record at a reduced price if their
chocolates bar wrappers accompanied the payment. The plaintiffs held the copyright in
the record, and argued that the royalties they were entitled to should be assessed on the
price of the record plus the value of the wrappers, which the defendants in fact simply
threw away when they had been received.

The House of Lords decided in favour of the plaintiff holding that wrappers were part of
consideration. It was irrelevant that the wrappers were of no intrinsic value to the
company.

Pitt v. PHH Asset Management Ltd [1993]

●
The Court held that a lock out agreement negotiated by a vendor and a prospective
purchaser of property constituted a binding contract.

The Court found that the contract was supported by valuable consideration, namely the
removal of the purchaser’s threat to seek an injunction to prevent a sale to another buyer

40
and the purchaser’s further pressure to exchange contracts on the purchaser of the
property within a two week period.

Shadwell v. Shadwell (1860) 9 C.B.N.S. 159

●
An uncle promised to pay his nephew a yearly sum in consideration of the nephew getting
married. The nephew married, but the annuity fell into arrears. On his uncle’s death the
nephew brought an action against the executors of the estate. They were held bound
since, inter alia, the nephew’s marriage was something of interest to the uncle.

Collins v. Godefroy (1831) 1 AD 950

●
The plaintiff was subpoenaed to give evidence on defendant’s behalf at a trial in which
the defendant was involved. The plaintiff claimed that the defendant promised him 1.05
pounds per day for attending court.

The court held that there was no consideration for this promise as the plaintiff was under
a legal duty to attend court and give evidence. Lord Tenterden stated that “if it be a duty
imposed by law upon a party regularly subpoenoed to attend from time to time to give his
evidence, when a promise to pay him any remuneration for loss of time incurred in such
attendance is a promise without consideration”.

Glasbrook Brothers Ltd v. Glamorgan County Council [1925] AC 270

●
The mine-owners during a miners strike were fearful of violence occurring. Their
assessment of the amount of police station that they needed differed from assessment of
the amount of police protection that they needed from that of police whose job it was to
provide it. Eventually, the police did agree to amount stationery guard, which they did not
think necessary, but they did so on the basis that it would be paid for by the company.
The company agreed to pay 2,200 pounds for this more extensive police operation, but
later refused to make the payment, claiming that there was no consideration given for
their promise.

The House of Lords held that the police were entitled to recover the payment as they had
done more than perform their existing legal duty. The extra service given was
consideration for the promise to pay.

Harris v. Sheffield United Football Club Ltd [1987] 2 All E.R. 838
●
Where the football club challenged its contractual liability to pay for the policing of its
football ground during home matches. The Court of Appeal held that the contract between
itself and the Police authority was valid. The number of Police officers provided was in
excess of those who would have been provided had the Police simply been fulfilling their
public obligation to keep the peace and prevent disorder. The football club was therefore
liable to pay for the services rendered by the Police authority.

41
 Stilk v. Myrick (1809) 2 Camp 317, 170 E.R. 1168
●
A promise by a ships captain to pay sailors an additional sum for working the ship on the
return voyage was unenforceable, even though they had to work harder due to the
dissertion of two crew members.

The Court found that their existing contracts bound them to work the ship home in
circumstances, therefore they provided no new consideration to support the promise of
extra wages.

Williams v. Roffey Brothers & Nicholls (Contractors) Ltd [1901] 1 All ER 512
●
The defendants had a contract with a housing association for the refurbishment of a
number of flats. They subcontracted the joinery work to the plaintiff. After performing most
of his obligations under the contract the plaintiff found himself in financial difficulties, for
the agreed price of 20,000 pounds was too low. The defendants were anxious for their
contract with the housing association to be completed by the agreed date, since the
penalty clause they would suffer financially for late completion. The defendants met the
plaintiff and agreed to pay him an additional 10,300 pounds for completion of the joinery
work. He then carried out most of the remaining work, but refused to complete it when the
defendants indicated that they would not pay additional agreed sum. They argued that he
was under a contractual obligation to carry out the work arising from the original contract.
He had given no new consideration for the promise of extra payment.

The Court held that the new agreement was binding on the defendants. By promising the
extra money they had received a benefit, namely the avoidance of a penalty payment, or
alternatively the need to employ another sub-contractor. This benefit was consideration
to support the new agreement even though the plaintiff was not required to any more work
than he had originally undertaken.

Hartley v. Ponsonby (1857) 7 EL & BL 872

●
When almost half of the crew of a ship disserted, the captain offered those remaining 40
pounds extra to complete the voyage. In this case, the ship was so seriuosly under
manned that the rest of the journey had become extremely hazardous. It was held that
this fact discharged the sailors from their existing contract and left them free to enter into
a new contract for the rest of the voyage.

Couldery v. Bartrum (1881) 19 Ch. 394 at p. 399

●
Jessel M.R. stated that: “a creditor might accept anything in satisfaction of his debt except
a less amount of money. A creditor could accept a horse, or a canary, or a tomtit if he
chose. That would be good consideration for the promise; but, by a most extraordinary
peculiarity of the English Common Law, he could not take 19s.6d. in the pound; that was
nudum pactum (that is, a gratuitous promise). Therefore, although the creditor might take
42
a canary, yet, if the debtor did not give him a canary together with his 19s 6d, there was
no accord and satisfaction; if he did, there was accord and satisfaction”.

Foakes v. Beer (1884) 9 App Cas. 605

●
The defendant John Weston Foakes, owed Julia Beer a sum of 2,090 pounds on a
judgment debt. Mrs Beer agreed to accept 500 pounds immediately, with the remainder
to be paid in instalments, and promised that she would thereafter not take any further
proceedings against Foakes. Foakes paid the money as agreed, but Mrs Beer went back
on her word, and claimed interest on the judgment debt, which Foakes refused to pay.
Foakes claimed that he was not obliged to pay interest as this was covered by the promise
of Mrs Beer not to sue. However, Mrs Beer argued that Foakes had not furnished
consideration for the promise not to sue on the judgment.

The House of Lords found in favour of Mrs Beer and held that there was no consideration
for the agreement and that Foakes was still bound to pay for the interest. Payment of part
of the debt could not be good consideration for Mrs Beer’s promise to forgo the interest.

Balfour v. Balfour [1919] 2 KB 571

●
The defendant who worked as a civil servant stationed abroad, left his wife, the plaintiff,
in England. The plaintiff had been advised by her doctor that her health was not
sufficiently good to accompany her husband. Before departing, the defendant promised
to pay the plaintiff an allowance of 30 pounds a month as maintenance whilst they were
forced to live apart. The plaintiff sued for breach of this agreement.

The Court held that the defendant’s promise was not enforceable, as there was no
intention to create legal relations. Lord Atkin LJ stated, on p. 578: “It is necessary to
remember that there are agreements between parties which do not result in contracts
within the meaning of that term in our law. ... and one of the most usual forms of
agreement which does not constitute a contract appears to me to be the arrangements
which are made between husband and wife... To my mind those arrangements, or many
of them, do not result in contracts at all... even though there may be what as between
other parties would constitute consideration... They are not contracts because the parties
did not intend that they should be attended by legal consequences”.

Merrit v. Merrit [1970] 1 WLR 1211

●
The husband had left the matrimonial home which, was in the joint names with his wife
and subject to a binding society mortgage, to live with another woman. The husband and
wife later met to discuss the financial arrangements for the future. They agreed that the
husband would pay 40 pounds per month to his wife out of which she must keep up the
mortgage payments on the house. On her insistence and refusal to leave the car, the
husband wrote and signed a note of agreed terms, under which he undertook to transfer
43
the house into her sole ownership when the mortgage was paid off. After she had paid off
the mortgage he refused to transfer the house to her. She sued him and it was argued
that there was no contract between them because the arrangement was a social one and
not intended to be legally binding.

It was held that in the circumstances the parties had intended to create legal relations
and an action for breach of contract could be sustained. The Court further stated that the
presumption that agreements between husband and wife are not intended to create legal
relations does not apply to a husband and wife who are not leaving in amity but are
separated or are about to be separated.

Jones v. Padavatton [1969] 1 WLR 328

●
A mother persuaded her daughter, who was a secretary in Washington DC, to give up
her work and read for the English bar by promising to pay her $200 maintenance per
month. After the daughter had begun to read for the Bar, the agreement was varied. The
mother bought a house in London so that the daughter could live there rent free and the
rent from letting out the other rooms to tenants would provide the daughter with her
maintenance. Three years later, the mother and daughter quarreled, and the mother
claimed possession of the house. The daughter had not yet passed her bar exams.

Simpkins v. Pays [1955] 3 All ER 10, [1955] 1 WLR 975

●
The plaintiff, Simpkins, lodged with the defendant, Mrs. Pays, and her granddaughter.
The three took part together each week in a competition organised by a Sunday
newspaper. The entries were made in the defendant’s name, but there was no regular
rule as to the payment of the postage and other expenses. One week the entry was
successful and the defendant obtained a prize of 750 pounds. The plaintiff claimed a third
of this sum, but the defendant refused to pay on the ground that there was no intention to
create legal relations but only a friendly adventure.

It was held that the parties had embarked on a joint enterprise, to which each contributed
in the expectation of sharing any prize that was won. There was an intention to enter into
a legal relationship and the plaintiff was entitled to one-third of the winnings.

Parker v. Clark [1960] 1 W.L.R. 286

●
The plaintiffs Dudley and Madeleine Parker made an agreement with Herbert and Jane
Clark to leave their own house The Thimble and live with the Parkers at their much larger
house Cramond. An agreement was made whereby the plaintiffs were to make various
contributions such as buying a new television set and car in return for which the Parkers
promised they would leave them the house when they died. When the parties became
estranged the Parkers claimed breach of contract. It was held that they would succeed.

44
Devlin J. held that “the parties intended to enter into an agreement therefore binding in
law and not a mere unenforceable family agreement”.

Edwards v. Skyways Ltd [1964] 1 All ER 494, [1964] 1 WLR 349

●
The plaintiff was employed by the defendants as an aircraft pilot. In January 1962, the
defendants told the plaintiff that they must reduce their staff and gave him three months’
notice to terminate his employment. By his contract he was a member of the defendants’
contributory pension fund and was thereby entitled, on leaving their service, to choose
one of two options: (a) to withdraw his own total contributions to the fund, (b) to take the
right to a paid-up pension payable at the age of fifty. The plaintiff chose option (a) and the
defendants agreed to pay him an ‘ex gratia’ payment equivalent or approximating to the
defendants’ contributions to the pension fund. The defendants paid him the amount of his
own contributions but refused to make the ‘ex gratia’ payment. The plaintiff sued the
defendants for breach of contract. The defendants argued that the use of the words ‘ex
gratia’ payment showed that there was no intention to create legal relations.

The Court in finding in favour of the plaintiff held that as this was a business and not
domestic agreement, the burden of rebutting the presumption of legal relations lay upon
the defendants; it was a heavy burden which the defendants had failed to discharge. The
fact that the payment was ex gratia did not show that the defendants’ promise lacked
contractual intention. Accordingly, the defendants’ agreement to make the payment was
duly accepted by the plaintiff, who provided consideration for it.

Rose and Frank v. J.R. Crompton & Bros Ltd [1925] AC 445
●
A written agreement entered into by two commercial entities included the following clause,
described as ‘the Honourable Pledge Clause’: “This arrangement is not entered into nor
is this memorandum written, as a formal or legal agreement, and shall not be subject to
legal jurisdiction in the law courts either of the united States or England, but is only a
definite expression and record of the purpose and intention of the parties concerned, to
which they each honourably pledge themselves”.

The Court held that this agreement was not a legally binding contract because it was not
intended that it would have such an effect. Scrutton LJ, in the Court of Appeal, stated as
follows, at p. 288: “It is quite possible for parties to come to an agreement by accepting a
proposal with the result that the agreement does not give rise to legal relations. The
reason of this is that the parties do not intend that their agreement shall give rise to legal
relations. This intention may be implied from the subject-matter of the agreement, but it
may also be expressed by the parties. In social and family relations such an intention is
readily implied, while in business matters the opposite result would ordinarily follow. But
I can see no reason why, even in business matters, the parties should not intend to rely
on each other’s good faith and honour, and to exclude all idea of settling disputes by any
45
outside intervention, with the accompanying necessity of expressing themselves so
precisely that outsiders may have no difficulty in understanding what they mean”.

Partridge v. Crittenden [1968] 1 WLR 1204

●
On the 13th April 1967 an advertisement by the appellant (Arthur Robert Partridge)
appeared in the periodical "Cage and Aviary Birds", under the general heading "Classified
Advertisements" which contained, amongst others, the words Quality British A.B.C.R...
Bramblefinch cocks, Bramblefinch hens 25 s. each. In no place was there any direct use
of the words "offer for sale". A Thomas Shaw Thompson wrote to Partridge asking him to
send him an ABCR Bramblefinch hen (a brambling) and enclosed a cheque for 30s. On
the 1st May 1967 Partridge dispatched a brambling, which was wearing a closed-ring
around its leg, to Thompson in a box. Thompson received the box on 2 May 1967 and
was able to remove the ring from the bird's leg without injuring it. Partridge was charged
by Anthony Ian Crittenden, on behalf of the RSPCA, with illegally offering for sale a live
wild bird which was not a close-ringed specimen, bred in captivity, against s. 6(1)* and
Sch. 4* of the Protection of Birds Act 1954. The magistrates decided that the
advertisement was an offer for sale and that the ABCR Bramblefinch hen was not a close-
ringed specimen bred in captivity, because it was possible to remove the ring from the
bird's leg. Partridge was convicted, was fined £5 and ordered to pay £5 5 s. advocate's
fee and £4 9 s. 6 d. witnesses' expenses. Partridge appealed against conviction.

Judgment: The High Court had to answer whether the appellant's advertisement
constituted a legitimate offer for sale, and whether the bird was not a close-ringed
specimen bred in captivity under the Protection of Birds Act 1954 if it were possible to
remove the ring from its leg. It was held that the advertisement in question constituted in
law an invitation to treat and not an offer to sell; therefore the offence with which the
appellant was charged was not established. The judges also said that if the only issue
were whether the bird was a close-ringed specimen under the Protection of Birds Act
1954, the magistrates' judgment would have been upheld. Ashworth J gave his judgment
first.

Fisher v. Bell [1961] 1 QB 394

●
The Defendant displayed a flick knife in the window of his shop next to a ticket bearing
the words "Ejector knife – 4s." Under the Restriction of Offensive Weapons Act 1959,
section 1(1), it was illegal to manufacture, sell, hire, or offer for sale or hire, or lend to any
other person, amongst other things, any knife "which has a blade which opens
automatically by hand pressure applied to a button, spring or other device in or attached
to the handle of the knife". On 14 December 1959, the Claimant, a chief inspector of police
force, brought forward information against the Defendant alleging the Defendant has
contravened section 1(1) by offering the flick knife for sale. This loophole was closed by

46
Restriction of Offensive Weapons Act 1961 [1] Ban on Flick Knives: which inserted after
the words “offers for sale or hire” the words “ or exposes or has in his possession for the
purpose of sale or hire”."

Judgment: At first instance, the Prosecutor submitted that the Defendant has displayed
the knife and ticket in the window with the object of attracting a buyer, and that this
constituted an offer of sale sufficient to create a criminal liability under section 1(1) of the
Act. The Defendant submitted that this was not sufficient to constitute an offer. The judges
at first instance found that displaying the knife was merely an invitation to treat, not an
offer, and thus no liability arose. The Prosecutor appealed the judges' decision. Court of
Appeal: The court upheld that, although the display of a knife in a window might at first
appear to "lay people" to be an offer inviting people to buy it, and that it would be
"nonsense to say that [it] was not offering it for sale", whether an item is offered for the
purpose of the statute in question must be construed in the context of the general law of
the country. He stated that the general law of the country clearly established that merely
displaying an item constituted an invitation to treat. He also read the statute on an
exclusive construction (inclusio unius exclusio alterius est), noting that other legislation
prohibiting the sale of weapons referred to "offering or exposing for sale" (emphasis
added). The lack of the words exposing for sale in the Restriction of Offensive Weapons
Act 1959 suggested that only a true offer would be prohibited by the Act. The court
dismissed the appeal.

Pharmaceutical Society of GB v. Boots Cash Chemists (Southern) Ltd [1953]

●
1 Q.B. 401
Boots Cash Chemists had just instituted a new method for its customers to buy certain
medicines. The company would let shoppers pick drugs off the shelves in the chemist
and then pay for them at the till. Before then, all medicines were stored behind a counter
and an assistant had to get what was requested. The Pharmaceutical Society of Great
Britain objected and argued that under the Pharmacy and Poisons Act 1933, that was an
unlawful practice. Under s 18(1), a pharmacist needed to supervise at the point where
"the sale is effected" when the product was one listed on the 1933 Act's schedule of
poisons. The Society argued that displays of goods were an "offer" and when a shopper
selected and put the drugs into their shopping basket, that was an "acceptance".
Therefore because no pharmacist had supervised the transaction at this point, Boots was
in breach of the Act. Boots argued that the sale was effected only at the till.

Judgment: Both the Queen's Bench Division of the High Court and the Court of Appeal
sided with Boots. They held that the display of goods was not an offer. Rather, by placing
the goods into the basket, it was the customer that made the offer to buy the goods. This
offer could be either accepted or rejected by the pharmacist at the cash desk. The

47
moment of the completion of contract was at the cash desk, in the presence of the
supervising pharmacist. Therefore, there was no violation of the Act

Spencer v Harding
●
The Defendants sent out a circular containing the following wording: “ 28, King Street,
Cheapside, May 17th, 1869. We are instructed to offer to the wholesale trade for sale by
tender the stock in trade of Messrs. G. Eilbeck & Co., of No. 1, Milk Street, amounting as
per stock-book to 2503l. 13s. 1d., and which will be sold at a discount in one lot. Payment
to be made in cash. The stock may be viewed on the premises, No. 1, Milk Street, up to
Thursday, the 20th instant, on which day, at 12 o'clock at noon precisely, the tenders will
be received and opened at our offices. Should you tender and not attend the sale, please
address to us sealed and inclosed, 'Tender for Eilbeck's stock.' Stock-books may be had
at our offices on Tuesday morning. Honey, Humphreys, & Co.” The Defendants did not
promise to sell the stock to the highest bidder for cash. The Claimants sent a tender to
the Defendants which, following the submission of all tenders was the highest tender. The
Defendants refused to sell the stock to the Claimants. The Defendants submitted that the
circular was not intended to be a binding offer capable of acceptance. Rather, it was
merely a circular inviting others to make offers. The Claimants submitted that the circular
did constitute a valid offer and that the Claimant had, by submitting the highest tender
and attending all the necessary meetings, accepted that offer.

Judgment: Willes J held that the circular was not an offer, but merely an invitation to
gather tenders, upon which the Defendants were entitled to act. Willes, J. held that the
absence of any specific wording such as "and we undertake to sell to the highest bidder"
rebutted any presumption that the Defendants had intended to be bound by a contract
and distinguished the present circumstances from instances of reward contract offers or
an offer to the world. Keating J and Montague Smith J concurred.

Harris v. Nickerson (1873) LR 8 QB 286

●
The Defendant placed an advertisement in London papers that certain items, including
brewing equipment and office furniture, would be placed up for auction over three days in
Bury St. Edmunds. The Plaintiff obtained a commission to buy the office furniture and
expended time and expense to travel to Bury St. Edmunds to bid for the office furniture.
On the third day, the lots for the office furniture were withdrawn. The Plaintiff sued for loss
of time and expense. The judge at first instance found in favour of the Plaintiff. Leave was
given to appeal to the High Court. The Plaintiff submitted that the advertisement
constituted a contract between themselves and the Defendant that the latter would sell
the furniture according to the conditions stated in the advertisement, and that accordingly
the withdrawal of the furniture was a breach of contract. The Defendant submitted the

48
advertisement of a sale did not constitute a contract that any particular lot or class of lots
would actually be put up for sale.

Judgment: The court held unanimously that the advertisement did not constitute an offer,
but rather was a mere declaration of intent. Blackburn, J. founded his judgment on public
policy grounds, calling it a "startling proposition" that "anyone who advertises a sale by
publishing an advertisement [would become] responsible to everybody who attends the
sale for his cab hire or travelling expenses". Quain and Archibald, JJ. Also drew public
policy arguments, emphasising that there existed no authority on which to base a decision
that the Defendant be liable to indemnify all those who attended his auction. The court
upheld the appeal.

Harvey v Facey
●
The case involved negotiations over a property in Jamaica. The defendant, Mr LM Facey,
had been carrying on negotiations with the Mayor and Council of Kingston to sell a piece
of property to Kingston City. On 7 October 1891, Facey was traveling on a train between
Kingston and Porus and the appellant, Harvey, who wanted the property to be sold to him
rather than to the City, sent Facey a telegram. It said, "Will you sell us Bumper Hall Pen?
Telegraph lowest cash price-answer paid". Facey replied on the same day: "Lowest price
for Bumper Hall Pen £900." Harvey then replied in the following words. "We agree to buy
Bumper Hall Pen for the sum of nine hundred pounds asked by you. Please send us your
title deed in order that we may get early possession." Facey, however refused to sell at
that price, at which Harvey sued. Facey successfully defended his action at trial, but
Harvey appealed to the Court of Appeal, which reversed the trial court decision. The
appellants obtained leave from the Supreme Court of Judicature of Jamaica to appeal to
the Queen in Council (i.e. the Privy Council). The Privy Council reversed the Supreme
Court's opinion, reinstating the trial court's decision and stating the reason for its action.

The Privy Council advised that no contract existed between the two parties. The first
telegram was simply a request for information, so at no stage did the defendant make a
definite offer that could be accepted.

Financing Ltd. v. Stimson

●
The defendant signed an "offer to buy" a car on hire-purchase from a finance company.
The document had been given to him by the car dealer. The document had a clause which
said that the agreement would not be binding until it had been accepted by the finance
company. D paid the first installment, insured the car and took it away. Being unhappy
with its performance, he returned the car to the dealer and cancelled his insurance. The
car was stolen from the dealers and damaged. Not knowing of this the finance company
then accepted the written offer which had been sent to them. D refused to pay the charges
and the Co sued him for breach of the hire purchase agreement.
49
Held: D's offer was subject to an implied condition that the car should continue in its
undamaged state and that on the failure of that condition, the offer lapsed.

The Society of Lloyd’s v Twinn

●
Appeal by the Society of Lloyd's ('Lloyd's') from the judgment of Jacob J on 11 May 1999
setting aside bankruptcy orders made by Mr Registrar James against the respondents
('Mr and Mrs T'), who were Lloyd's Names. The Registrar found that they had accepted
the Reconstruction and Renewal Settlement Agreement extended by Lloyd's to Names
in July 1996 by completing the acceptance form, although they did not return the
accompanying payment forms. They did not pay the sums due by the specified deadline
of 30 September 1999. Lloyd's therefore pursued them by serving a statutuory demand
following bankruptcy proceedings for the full amount of their underwriting liabilities, based
on Lloyd's rights under the Settlement Agreement. No application had been made to set
aside the statutory demands. Jacob J held that Mr and Mrs T had not accepted the
Settlement Agreement as the letter dated 23 August 1996 accompanying the signed
acceptance forms from Mr T so hedged the acceptance around with conditions as not to
constitute an effective acceptance at all. In that letter Mr T asserted that neither he nor
his wife would be able to pay the net sums due from them under their respective finality
statements. On appeal Mr and Mrs T also argued that paragraph 38, Appendix 2 of the
Settlement Agreement, under which the settlement credits were lost if the net sum shown
due in the finality statement was not paid by 30 September 1996, constituted a penalty or
alternatively a forfeiture provision and was unenforceable.

Held: (1) The true effect of the letter of 23 August was that Mr T was following up
unconditional acceptances with an attempt to obtain concessions as to the means by
which his and his wife's payment obligations under the Settlement Agreement might be
discharged. This was borne out by subsequent correspondence. (2) An acceptance which
sought an indulgence would be effective if it was clear that the offeree was unconditionally
accepting the offer. Whether an acceptance was truly unconditional, with the counter-
offer being collateral to the concluded contract or whether the counter-offer was a
condition of the acceptance was an issue which would depend on the facts of the
particular case. The intended effect of a purported acceptance must be judged objectively
from the language used and the surrounding circumstances. (3) On the facts of the case
the probabilities favoured strongly the conclusion that the acceptances were
unconditional. The judgment of the Registrar would be restored on the acceptance issue.
(4) The substance of the Settlement Agreement was that the Name was offered a benefit,
i.e. the settlement credits against his underwriting liabilities, provided he paid the balance
by a specified date. If he did so, he discharged his liability. If he did not do so, his original
liability revived. That was the reverse of a penalty. It was a conditional benefit. (Jones v
Lloyd’s: Standen v Lloyd's (1999) TLR 2/2/2000 approved). (5) The doctrine of relief
50
against forfeiture was applicable only where the alleged forfeiture was of some proprietary
interest (Jones (supra) approved). If the Name failed to pay his finality bills by 30
September 1996, nothing was forfeited. The Name simply did not fulfill the contractual
condition upon which his entitlement to the credits depended. (6) Equitable relief from
forfeiture was always on terms that the applicant complied with the contractual term the
breach of which had led to the forfeiture. There had been no tender by Mr and Mrs. T of
the net sums that, under the finality statements, were payable by 30 September 1996. (7)
Neither the penalty nor the forfeiture point was of any substance. (10) The points raised
by Mr and Mrs. T in contesting their indebtedness to Lloyd's on which the bankruptcy
petitions were based, ought to have been raised on applications to set aside the statutory
demands in the manner envisaged in the 1986 bankruptcy code (Insolvency Act 1986
and Insolvency Rules 1986).

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976]

●
Esso offered a World Cup coin with likenesses of English 1970 squad players, given to
every motorist buying over four gallons of petrol. The Revenue argued these coins should
have purchase tax charged on them because they were ‘produced in quantity for general
sale.’

Judgment: Court of Appeal: Lord Denning MR said it was amazing that this case had
gotten so far. He said the coins were not ‘sold’. House of Lords: The House of Lords (Lord
Fraser dissenting) agreed with the Court of Appeal that the petrol, not the coins, were
being sold. But, then, on the question of whether the coins were being given under a
contractual obligation, or as a mere gift, Lord Simon of Glaisdale, Lord Wilberforce and
Lord Fraser agreed there was intention to create legal relations, given the heavy onus of
proof to show a bargain was not intended. Lord Russell and Viscount Dilhorne dissented
on this point, saying that the language in the poster advertisements that the coins were
‘going free’ and the minimal value of the coins indicated no intention to create legal
relations.

Dunlop v Selfridge (1915)

●
Dunlop made tyres. It did not want them sold cheaply but to maintain a standard resale
price. It agreed with its dealers (in this case Dew & Co) not to sell them below its
recommended retail price. It also bargained for dealers to get the same undertaking from
their retailers (in this case Selfridge). If retailers did sell below the list price, they would
have to pay £5 a tyre in liquidated damages to Dunlop. Dunlop thus was a third party to
a contract between Selfridge and Dew. When Selfridge sold the tyres at below the agreed
price, Dunlop sued to enforce the contract by injunction and claimed damages. Selfridge
argued it could not enforce the burden of a contract between itself and Dew, which
Selfridge had not agreed to. At trial, the judge found in favour of Dunlop. In appeal the

51
damages and injunction were reversed, saying that Selfridge was not a principal or an
agent and thus was not bound. The issue put to the court was whether Dunlop could get
damages from Selfridge without a contractual relationship.

Judgment: Viscount Haldane based his argument on three fundamental principles in law.
First, the doctrine of privity requires that only a party to a contract can sue. Second, the
doctrine of consideration requires a person with whom a contract not under seal is made
is only able to enforce it if there is consideration from the promisee to the promisor. Third,
the doctrine of agency requires that the principal not named in the contract can only be
sued if the promisor was contracted as an agent. In application to the facts, Haldane could
not find any consideration between Dunlop and Selfridge, nor could he find any indication
of an agency relationship between Dew and Selfridge. Consequently, Dunlop's action
must fail.

Pinnel’s Case (1602)

●
P sued D on a bond. The defence was that the P had agreed to accept £5 2/6d on 1 Oct
instead of £8 10s on 11 Nov.

Held: The payment of a lesser sum on the day in satisfaction of a greater cannot be
satisfaction for the whole. The gift of a horse, hawk or robe might be more beneficial than
the money, but where the whole sum is due, then in no way can an acceptance of part of
it be satisfaction for the whole. But payment of part of it before the day on which the whole
is due, might be more beneficial. Similarly, if I am due to pay you £10 at Westminster,
and you say that you will accept £5 at York, then that will be good satisfaction for the
whole.

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

●
Glass Ltd [2003] 2 ALL ER 615
Action strength agreed with Inglen to provide construction staff to build a factory for St-
Gobain. Inglen failed to pay. Action strength claimed against for the amount due. Inglen
went into liquidation. The claim was now against St-Gobain. The claim was based on an
alleged oral guarantee. When the defendant pleaded the Statute of Frauds, the claimant
alleged an estoppel, saying the defendant had urged it to continue to supply workers.

Held: Some recognisable structural framework must be established before recourse could
be had to the underlying idea of unconscionable conduct. It needed to be shown that
Action strength assumed that St-Gobain would honour the guarantee; that that
assumption was induced or encouraged by St-Gobain; and that Action strength relied on
that assumption. They had not established all these elements. These factors could not all
be found in the pleadings. The only assurance given to Action strength was the promise
itself. In order to be estopped from invoking the statute there must be something more,
52
such as some additional encouragement, inducement or assurance. In addition to the
promise there must be some influence exerted by St-Gobain on Action strength to lead it
to assume that the promise would be honoured. However there was no suggestion made
that St-Gobain said or did anything to lead Action strength to assume that St-Gobain
would not stand on its rights. The purpose of the Statute was, said Lord Hoffmann:
‘precisely to avoid the need to decide which side was telling the truth about whether or
not an oral promise had been made and exactly what had been promised.’ and ‘It is quite
true . . that the system of civil procedure in 1677 was not very well adapted to discovering
the truth. For one thing, the parties to the action were not competent witnesses. But the
question of whether the Act should be preserved in its application to guarantees was
considered in 1953 by the Law Reform Committee (First Report, Statute of Frauds and
Section 4 of the Sale of Goods Act 1893 (Cmd 8809)) and the recommendation of a very
strong committee was to keep it.’

Lord Bingham said that section 4 was enacted ‘to address a mischief facilitated, it seems,
by the procedural deficiencies of the day. The calling of perjured evidence to prove
spurious agreements said to have been made orally. The solution applied to the five
classes of contract specified in section 4 was to require, as a condition of enforceability,
some written memorandum or note of the agreement signed by the party to be charged
under the agreement or his authorised agent’

Storer v. Manchester City Council [1974] 3 ALL ER 824

●

The plaintiff, Mr Storer applied to buy his council house and was sent an 'Agreement for
Sale of a Council House' form, which he signed and sent to the Council. This was done
before the political change took place. The defendants argued that the form titled
‘Agreement of Sale' was not an offer so no contract was formed. The judges, however,
disagreed and concluded that the form was an offer and the offer was accepted as soon
as Mr Storer signed and returned it to the Council.

Lord Denning stated at p. 828: “In contracts you do not look into the actual intent in a
man’s mind. You look at what he said and did. A contract is formed when there is, to all
outward appearances, a contract”.

Gibson v. Manchester City Council [1978] 1 WLR 520, (CA), [1979] 1 WLR 294
●
The local Council sent a letter inviting a formal application by council tenants to buy their
house. The plaintiff, a council tenant, completed and returned the application. However
there was then a change of Government, and the incoming Labour Government dropped
the privatisation of housing policy. The Council refused to accept the plaintiff's application.
The plaintiff sued for breach of contract even though there had not been a formal
exchange of documents (contracts) in accordance with the ordinary practice.
53
Held: Lord Denning: It is a mistake to think that all contracts can be analysed into the form
of offer and acceptance. I know that in some of the textbooks it has been the custom to
do so, but as I understand the law, there is no need to look for strict offer and acceptance.
You should look at the correspondence as a whole. If by that correspondence and conduct
you can see an agreement on all material terms, then there is a binding contract, even
though all the formalities have not been gone through.
On this basis, Lord Denning found that a contract had been completed. In order that the
contract could be seen to be valid, Denning found it necessary to imply into the contract
three terms required by law, even though these were not referred to in any of the
correspondence, and there was no evidence that the plaintiff was aware of them.

Warlow v. Harrison (1859) 1 E & E 309; 120 ER 925

●
Property was advertised for sale at public auction without reserve. The Plaintiff, when in
the position of being the highest bidder, had been overbid by the vendor, and the property
had been knocked down to the vendor. The P sued the auctioneer, arguing that being the
highest bona fide bidder, there was a contract which the auctioneer, as his agent was
bound to complete.

Barry v. Davies (t/a Heathcote Ball & Co.) [2001] 1 All ER 944
●
The auctioneer withdrew goods from an auction (the goods had no reserve price) when a
bona fide bid of £200 was effective. The court held that an auctioneer is bound to sell to
the highest bidder where there is no reserve price, and can't withdraw the sale simply
because the price is too low. A bid in an auction, the possibility of acceptance of the bid,
unless the bid is withdrawn, and the benefit to the auctioneer of driving up the price bid is
sufficient consideration. The contract in an auction is between the buyer and the seller,
not the buyer and the auctioneer, although the buyer has a collateral agreement with the
auctioneer.

Judgment: The remedy is the difference between the contract value, and the current
market value of the goods under the Sale of Goods Act 1971 s51(3). The value in this
case was £27,600.

Loftus v. Roberts (1902) 18 TLR 532

●
An agreement provided for the appointment of an actress by another person at a “West
End salary to be mutually agreed between us.” Subsequently the parties were unable to
arrive at a salary which satisfied them both.

The Court held that the contract must fail. Even if it were possible to assess a suitable
salary by reference to West End rates of pay, the court could not impose such a figure
since the parties had already stated that it had to be mutually agreed, something they had
54
been unable to achieve. What they had was an agreement to agree at a further date. The
contract thus failed.

Byrne v. Van Tienhoven (1880) 5 CPD 344

●
Van Tienhoven & Co posted a letter from their office in Cardiff to Byrne & Co in New York,
offering 1000 boxes of tinplates for sale on 1 October. Byrne and Co got the letter on 11
October. They telegraphed acceptance on the same day. But on 8 October Van
Tienhoven had sent another letter withdrawing their offer, because tinplate prices had just
risen 25%. They refused to go through with the sale.

Judgement: Lindley J held that the withdrawal of the offer was not effective until it was
communicated. His judgment stated the following. There is no doubt an offer can be
withdrawn before it is accepted, and it is immaterial whether the offer is expressed to be
open for acceptance for a given time or not. The offer was posted on the 1st of October,
the withdrawal was posted on the 8th, and did not reach the plaintiff until after he had
posted his letter of the 11th accepting the offer. It may be taken as now settled that where
an offer is made and accepted by letters sent through the post, the contract is completed
the moment the letter accepting the offer is posted: Harris's Case; Dunlop v Higgins, even
although it never reaches its destination. When, however, those authorities are looked at,
it will be seen that they are based upon the principle that the writer of the offer has
expressly or impliedly assented to treat an answer to him by a letter duly posted as a
sufficient acceptance and notification to himself, or, in other words, he has made the post
office his agent to receive the acceptance and notification of it. But this principle appears
to me to be inapplicable to the case of the withdrawal of an offer. In this particular case I
find no authority in fact given by the plaintiffs to the defendants to notify a withdrawal of
their offer by merely posting a letter, and there is no legal principle or decision which
compels me to hold, contrary to the fact, that the letter of the 8th of October is to be
treated as communicated to the plaintiff on that day or on any day before the 20th, when
the letter reached him...

...Before leaving this part of the case it may be as well to point out the extreme injustice
and inconvenience which any other conclusion would produce. If the defendants’
contention were to prevail no person who had received an offer by post and had accepted
it would know his position until he had waited such a time as to be quite sure that a letter
withdrawing the offer had not been posted before his acceptance of it.

Significance: Revocation of an offer must be received and understood by the offeree

before it comes into effect. An acceptance by the offeree before they receive notice of the
revocation will be considered valid.[

Dickinson v. Dodds [1876] 2 Ch D 463

●
55
On Wednesday 10 June 1874 Mr Dodds delivered Mr Dickinson an offer to sell some
houses for £800, an offer open until 9am on Friday 12 June. On Thursday afternoon,
another man called Mr Berry told Mr Dickinson that the houses had already been sold to
someone called Mr Allan (who was the second defendant). Mr Dickinson found Mr Dodds
in the railway carriage at 7am on Friday morning, leaving Darlington Railway Station, and
gave his acceptance there. But Mr Dodds said it was too late. Mr Dickinson sued for
breach of contract.

Judgment: James LJ held that Mr Berry had conveyed notice of the withdrawal of the
offer. After referring to the document of the 10th of June, 1874 he said the following. The
document, though beginning, "I hereby agree to sell”, was nothing but an offer, and was
only intended to be an offer, for the Plaintiff himself tells us that he required time to
consider whether he would enter into an agreement or not. Unless both parties had then
agreed there was no concluded agreement then made; it was in effect and substance
only an offer to sell. The plaintiff being minded not to complete the bargain at that time
adds this memorandum: "This offer is to be left over until Friday, 9 o'clock a.m. 12th June
1874." That shows it was only an offer. There was no consideration given for the
undertaking or promise, to whatever extent it may be considered binding, to keep the
property unsold until 9 o'clock on Friday morning; but apparently Dickinson was of
opinion, and probably Dodds was of the same opinion, that he (Dodds) was bound by that
promise, and could not in any way withdraw from it, or retract it, until 9 o'clock on Friday
morning, and this probably explains a good deal of what afterwards took place. But it is
clear settled law, on one of the clearest principles of law, that this promise, being a mere
nudum pactum, was not binding, and that at any moment before a complete acceptance
by Dickinson of the offer, Dodds was as free as Dickinson himself. Well, that being the
state of things, it is said that the only mode in which Dodds could assert that freedom was
by actually and distinctly saying to Dickinson, "Now I withdraw my offer.” It appears to me
that there is neither principle nor authority for the proposition that there must be an
express and actual withdrawal of the offer, or what is called a retractation. It must, to
constitute a contract, appear that the two minds were at one, at the same moment of time,
that is, that there was an offer continuing up to the time of the acceptance. If there was
not such a continuing offer, then the acceptance comes to nothing. Of course it may well
be that the one man is bound in some way or other to let the other man know that his
mind with regard to the offer has been changed; but in this case, beyond all question, the
Plaintiff knew that Dodds was no longer minded to sell the property to him as plainly and
clearly as if Dodds had told him in so many words, "I withdraw the offer.” This is evidence
from the Plaintiff's own statements in the bill.

The Plaintiff says in effect that, having heard and knowing that Dodds was no longer
minded to sell to him, and that he was selling or had sold to someone else, thinking that
56
he could not in point of law withdraw his offer, meaning to fix him to it, and endeavoring
to bind him, "I went to the house where he was lodging, and saw his mother-in-law, and
left with her an acceptance of the offer, knowing all the while that he had entirely changed
his mind. I got an agent to watch for him at 7 o'clock the next morning, and I went to the
train just before 9 o'clock, in order that I might catch him and give him my notice of
acceptance just before 9 o'clock, and when that occurred he told my agent, and he told
me, you are too late, and he then threw back the paper." It is to my mind quite clear that
before there was any attempt at acceptance by the Plaintiff, he was perfectly well aware
that Dodds had changed his mind, and that he had in fact agreed to sell the property to
Allan. It is impossible, therefore, to say that there was ever that existence of the same
mind between the two parties which is essential in point of law to the making of an
agreement. I am of opinion, therefore, that the Plaintiff has failed to prove that there was
any binding contract between Dodds and himself.

Mellish LJ agreed and said, just as when a man who has made an offer dies before it is
accepted it is impossible that it can then be accepted, so when once the person to whom
the offer was made knows that the property has been sold to someone else, it is too late
for him to accept the offer, and on that ground I am clearly of the opinion that there was
no binding contract for the sale of this property…

Baggallay JA concurred. Significance: Communication of the withdrawal of the offer can

be made by any reliable third party.[

Errington v. Errington [1952] 1 KB 290

●
Mr Errington in 1936 bought a house in Milvain Avenue, Newcastle upon Tyne, for his
son and daughter in law, paying £250, and the remaining £500 coming from a mortgage,
paid off with 15s a week by the newlyweds. Mr Errington promised them they could stay
in occupation as long as they paid the mortgage and that when all the instalments were
paid it would be theirs. He gave her the building society book and said, ‘Don't part with
this book. The house will be your property when the mortgage is paid.’ He died and the
son left to move in with his mother. The mother sought possession from the daughter in
law.

Judgment: there was no tenancy at will, and the father could not have revoked the
promise once the couple had begun performing the act. It would only cease to bind him if
they left it incomplete and unperformed. The 15s a week was not rent, they were not
bound to pay it, the father could only refuse to transfer them the house. The couple was
licensees, but they got an equitable right to remain as long as they paid installments,
which would mature into a good equitable title once the mortgage was paid. The father
made a unilateral contract, which could not be revoked once they began performance,
but would cease to bind him if they did not perform their side. Although they had exclusive
57
possession, they were licensees because they only have a mere personal privilege to
remain, with no right to assign or sublet. But not bare licensees, contractual licensees.
He said there was no need to imply an obligation to complete the payments. The limit is
where the daughter stops paying, and the father’s estate has to pick up the bill. Then she
would lose her right to stay. The couple was on a license, short of a tenancy but a
contractual or at least equitable right to remain, which would grow into good equitable title
as soon as the mortgage was paid. The rule that a licence could always be revoked at
will was ‘altered owing to the interposition of equity.’ The infusion of equity means that
contractual licences now have a force and validity of their own and cannot be revoked in
breach of the contract. Neither the licensor nor anyone who claims through him can
disregard the contract except a purchaser for value without notice…It is of the essence
of a tenancy at will that it should be determinable by either party on demand...The
difference between a tenancy and a licence is, therefore, that in a tenancy an interest
passes in the land, whereas in a licence it does not.... Although a person who is let into
exclusive possession is, prima facie, to be considered to be a tenant, nevertheless he will
not be held to be so if the circumstances negative any intention to create a tenancy.
Words alone may not suffice. Parties cannot turn a tenancy into a licence merely by calling
it one. But if the circumstances and the conduct of the parties show that all that was
intended was that the occupier should be granted a personal privilege with no interest in
the land, he will be held only to be a licensee. It is clear law that the court is not to imply
a term unless it is necessary; and I do not see that it is necessary here...I should have
thought it clear that, if they did fail to pay the installments, the father would not be bound
to transfer the house to them. The father’s promise was a unilateral contract - a promise
of the house in return for their act of paying the installments...They have acted on the
promise, and neither the father nor his widow, his successor in title, can eject them in
disregard of it.

Ramsgate Victoria Hotel v. Montefiore (1866) LR 1 Ex 109

●
The defendant offered to purchase shares in the claimant company at a certain price. Six
months later the claimant accepted this offer by which time the value of the shares had
fallen. The defendant had not withdrawn the offer but refused to go through with the sale.
The claimant brought an action for specific performance of the contract.

Held: The offer was no longer open as due to the nature of the subject matter of the
contract the offer lapsed after a reasonable period of time. Therefore there was no
contract and the claimant's action for specific performance was unsuccessful.

58
 UNIT TWO

QUASI CONTRACTUAL OBLIGATION

Quasi-contractual obligations, also known as implied-in-law contracts or contracts

implied by law, are legal obligations that arise in the absence of an express agreement
between parties. These obligations are not based on the parties' actual intentions or
consent, but rather on the principles of fairness and justice. Quasi-contractual
obligations are imposed by the law to prevent unjust enrichment or unfairness when one
party benefits at the expense of another without a valid contract in place.

Different types of quasi contractual obligation:

1. Unjust Enrichment: If one party receives a benefit from another party under
circumstances that would make it unfair to retain that benefit without compensating the
other party, the law may impose an obligation to make restitution. This prevents one
party from profiting at the expense of another without justification.

2. Necessaries: In some cases, the law imposes an obligation on one party to pay
for necessary goods or services provided to another party, such as medical care or
essential living expenses. This ensures that individuals are not left without basic
necessities even in the absence of a formal contract.

3. Officious Intermeddler: If someone voluntarily provides goods or services to

another party without their request, the law may imply a contract to prevent unjust
enrichment. However, the person providing the goods or services must have acted in
good faith and with the reasonable belief that they were benefitting the other party.

However, we will only focus on Promissory Estoppel and Quantum Meruit

Introduction
Rule in Pinnel’s Case: Part Payment of a Debt is not Sufficient Consideration

The basic rule is that part-payment of a debt is not sufficient consideration as it does not
satisfy the whole debt. There are two basic exceptions where the agreement to pay less
than the full debt can be enforced and these are:

1. Accord and Satisfaction: There is an agreement to accept something other than

the money from the existing debt. This might take a number of forms:

An agreement to accept an earlier payment of a smaller sum than the whole debt.
●
e.g. if A owes B K1000 which is due for payment by A on March 31, and B agrees to
59
accept a payment of K800 on March 10, then B will be unable to sue for the remaining
K200. In effect, the earlier payment reflects consideration for the changed agreement.

An agreement to accept something other than money instead of the debt. E.g. If A
●
owes B K1000 and B accepts a table worth K700, then the full debt is satisfied.

An agreement to accept a part-payment together with something else, not to the

●
value of the balance of the debt. E.g. If A owes B K1000 and B agrees to accept K600
together with a law book worth K200. In cash value B has received is only K800 but again
the debt has been paid.

2. Doctrine of Promissory Estoppel: The doctrine of estoppel acts as a defence to a

claim by a creditor for the remainder of the debt where part-payment has been accepted.
The effect of the doctrine is to prevent (estop) the claimant from going back on the
promise because it would be unfair and inequitable to do so. The following essential
elements must be present for the doctrine of estoppel to be used successfully:

There must be a promise or a representation as to future conduct which is intended

●
to affect the legal relations between the parties and which indicates that the promisor will
not insist on his strict legal rights against the promisee.

The promise or representation must have been relied upon by the promisee.
●
It must be ‘inequitable’ for the promisor to go back upon his promise. This will be
●
satisfied by demonstrating that the promisee has acted in reliance upon the promise.

The effect of promissory estoppel is generally suspensory; it does not extinguish

●
the promisor’s rights.

Promissory estoppel cannot act as a cause of action; it acts as a shield but not as
●
a sword.

What is Estoppel?

Estoppel is a common law rule of evidence which prevents a person denying a fact which
he had previously asserted to be true if such assertion would be unfair or unjust in the
circumstances.

Types of Equitable Estoppel

1. Estoppel by Conduct: This type of estoppel arises when one party makes a
representation or behaves in a certain way, leading another party to believe that certain
facts are true or certain rights exist. If the second party relies on this representation or
conduct to their detriment, the first party may be estopped from denying the truth of the
60
representation or asserting rights inconsistent with it. In other words, their conduct has
created a legal barrier (estoppel) preventing them from going back on what they
previously indicated or implied.

2. Estoppel by Representation: If a person makes a clear and unambiguous

representation of fact, he may be prevented from denying the truth of the statement if the
person to whom it was made acted upon the statement to their detriment, as was the
intention of the representor.

3. Estoppel by Convention: Estoppel by convention applies when both parties to a

transaction act on a shared assumption that certain facts are true. They are estopped
from denying this later if it would be unconscionable for them to do so.

4. Proprietary Estoppel: Proprietary estoppel typically arises in the context of property

rights. It occurs when someone relies on a promise or assurance regarding property made
by another party to their detriment. If the person who made the promise later seeks to act
inconsistently with it, the doctrine of proprietary estoppel may prevent them from doing
so. The court may enforce the promise or assurance to prevent unconscionable conduct
or injustice.

Quantum Meruit

Quantum meruit" is a Latin term meaning "as much as he deserves" or "as much as is
earned." It refers to a legal principle where a party is entitled to recover the reasonable
value of goods or services provided to another party, even in the absence of a formal
contract. Quantum meruit is a form of quasi-contract, which is a legal obligation imposed
by a court to prevent unjust enrichment when no formal contract exists between the
parties.

In cases where one party has conferred a benefit upon another with the reasonable
expectation of being compensated, but no contract exists, the court may imply a contract
to prevent unjust enrichment and award damages based on the value of the benefit
conferred.

Here are a few case law examples illustrating quantum meruit:

1. Lambert v. Heath [1911] 1 Ch 352: In this English case, the court applied the
principle of quantum meruit when a builder constructed a house for a landowner without
a formal contract. The court awarded the builder the reasonable value of his services
based on quantum meruit.

61
2. Cobbe v. Yeoman's Row Management Ltd [2008] UKHL 55: In this case, the
House of Lords (UK) held that a property developer was entitled to quantum meruit for
his work in negotiating a property deal, even though the negotiations ultimately failed and
no formal contract was signed. The court found that the defendant had been unjustly
enriched by the developer's efforts.

3. Merrick v. Linden Gardens Trust Ltd [2002] UKHL 38: In this English case, the
House of Lords recognised quantum meruit as a basis for awarding compensation to a
party who had conferred a benefit on another in reliance on an expectation of payment,
even though no formal contract existed.

These cases illustrate how quantum meruit operates as a quasi-contractual remedy to

prevent unjust enrichment and ensure fairness between parties when there is no express
contract governing their relationship.

Quantum Meruit

Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
Cases
a system adopted for the resolution of disputes, with the sanction of the State?
Pinnels’ Case (1602) 5 Co Rep 117a
●
a technique for the regulation of social power?
62
the embodiment of social, moral and sometimes theological constructs?
Pinnel sued Cole in debt for 8 pounds 10s on 11 November 1600. Cole’s defence was
that, at Pinnel’s request, he had paid him 5 pounds 2s 6d on 1 October, and that Pinnel
had accepted this payment in full satisfaction of the original debt.

The Court held that payment of a smaller sum than the debt itself on the due date can
never relieve the liability of the debtor to pay the whole debt, so the creditor can always
sue for the balance of the debt which is unpaid. The Court found in favour of the plaintiff
on a point of pleading, but the court made it clear that, had it not been for a technical flaw,
it would have found for the defendant, on the ground that the payment had been made
on an earlier day than that appointed in the bond. “Payment of a lesser sum on the day
in satisfaction for the whole, because it appears to the Judges that by no possibility a
lesser sum can be a satisfaction to the plaintiff for a greater sum. But the gift of a horse,
hawk or robe, etc. in satisfaction is good. For it shall be intended that a horse, hawk or
robe, etc. might be more beneficial to the plaintiff than the money in respect of some
circumstance, or otherwise the plaintiff would not have accepted it in satisfaction… The
payment and acceptance of parcel before the day in satisfaction of the whole would be a
good consideration in regard to the circumstance of time; for per adventure parcel of it
before the day would be more beneficial to him than the whole at the day, and the value
of the satisfaction is not material. So if I am bound in 20 pounds to pay you 10 pounds at
Westminster, and you request me to pay you 5 pounds at the day at York, and you will
accept it in full satisfaction of the whole 10 pounds, it is good satisfaction for the whole:
for the expenses to pay at York is sufficient consideration”.

63
 DC Builders v. Rees [1965] 3 All ER 837
●
D & C Builders Ltd was a two man building firm run by Mr Donaldson and Mr Casey. They
had done work for Mr Rees at 218 Brick Lane, London E1, coming to £732. Mr Rees had
only paid £250. £482 owed. D&C were facing bankruptcy if they were not paid. Mrs. Rees
phoned up to complain that the work was bad, and refused to pay more than £300. D&C
reluctantly accepted and took a receipt marked ‘in completion of account’. After that, they
consulted their solicitors and sued for the balance.

Judgment: Lord Denning MR held that the doctrine of part payment of a debt not
discharging the whole ‘has come under heavy fire’ but noted that estoppel, deriving from
the principle laid down in Hughes v Metropolitan Railway Co. could give relief in equity.
Although in his opinion part payment of debt could satisfy a whole debt, he found that
Mrs. Rees had effectively held the builders to ransom. Therefore any variation of the
original agreement was voidable at the instance of the debtors for duress. In point of law
payment of a lesser sum, whether by cash or by cheque, is no discharge of a greater
sum. This doctrine of the common law came under heavy fire. It was ridiculed by Sir
George Jessel in Couldery v Bartram.[1] It was said to be mistaken by Lord Blackburn in
Foakes v Beer.[2] It was condemned by the Law Revision Committee (1945 Cmd 5449),
paras. 20 and 21. But a remedy has been found. The harshness of the common law has
been relieved. Equity has stretched out a merciful hand to help the debtor. The courts
have invoked the broad principle stated by Lord Cairns in Hughes v Metropolitan Railway
Co.[3]

"It is the first principle upon which all courts of equity proceed, that if parties, who have
entered into definite and distinct terms involving certain legal results, afterwards by their
own act or with their own consent enter upon a course of negotiation which has the effect
of leading one of the parties to suppose that the strict rights arising under the contract will
not be enforced, or will be kept in suspense, or held in abeyance, the person who
otherwise might have enforced those rights will not be allowed to enforce them when it
would be inequitable having regard to the dealings which have taken place between the
parties."

It is worth noticing that the principle may be applied, not only so as to suspend strict legal
rights, but also so as to preclude the enforcement of them. This principle has been applied
to cases where a creditor agrees to accept a lesser sum in discharge of a greater. So
much so that we can now say that, when a creditor and a debtor enter upon a course of
negotiation, which leads the debtor to suppose that, on payment of the lesser sum, the
creditor will not enforce payment of the balance, and on the faith thereof the debtor pays
the lesser sum and the creditor accepts it as satisfaction: then the creditor will not be
allowed to enforce payment of the balance when it would be inequitable to do so. This

64
was well illustrated during the last war. Tenants went away to escape the bombs and left
their houses unoccupied. The landlords accepted a reduced rent for the time they were
empty. It was held that the landlords could not afterwards turn round and sue for the
balance, see Central London Property Trust Ltd v High Trees House Ltd.[4] This caused
at the time some eyebrows to be raised in high places. But they have been lowered since.
The solution was so obviously just that no one could well gainsay it.

In applying this principle, however, we must note the qualification: The creditor is only
barred from his legal rights when it would be inequitable for him to insist upon them.
Where there has been a true accord, under which the creditor voluntarily agrees to accept
a lesser sum in satisfaction, and the debtor acts upon that accord by paying the lesser
sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist
on the balance. But he is not bound unless there has been truly an accord between them.

In the present case, on the facts as found by the judge, it seems to me that there was no
true accord. The debtor's wife held the creditor to ransom. The creditor was in need of
money to meet his own commitments, and she knew it. When the creditor asked for
payment of the £480 due to him, she said to him in effect: "We cannot pay you the £480.
But we will pay you £300 if you will accept it in settlement. If you do not accept it on those
terms, you will get nothing. £300 is better than nothing." She had no right to say any such
thing. She could properly have said: "We cannot pay you more than £300. Please accept
it on account." But she had no right to insist on his taking it in settlement. When she said:
"We will pay you nothing unless you accept £300 in settlement," she was putting undue
pressure on the creditor. She was making a threat to break the contract (by paying
nothing) and she was doing it so as to compel the creditor to do what he was unwilling to
do (to accept £300 in settlement): and she succeeded. He complied with her demand.
That was on recent authority a case of intimidation: see Rookes v. Barnard[5] and
Stratford (JT) & Son Ltd v Lindley.[6] In these circumstances there was no true accord so
as to found a defence of accord and satisfaction: see Day v McLea.[7] There is also no
equity in the defendant to warrant any departure from the due course of law. No person
can insist on a settlement procured by intimidation. In my opinion there is no reason in
law or equity why the creditor should not enforce the full amount of the debt due to him. I
would, therefore, dismiss this appeal.

Central London Property Trust Ltd v. High Trees House Ltd [1947] KB 130
●
Lord Denning stated: “A promise to accept a small sum in discharge of a larger sum, if
acted upon is binding notwithstanding the absence of consideration, and if the fusion of
law and equity leads to this result, so much the better”.

The facts in the High Trees Case where that from 1937 the defendants leased a block of
flats in Wimbledon from the claimants to sublet to tenants at an annual rent of 2500
65
pounds. In 1940 discovered that as a result of the outbreak of the war and evacuation of
people from London, they were unable to let many of the flats and pay the rent. So the
claimants agreed to accept half rent of 1250. This promise to accept a reduced rent was
not supported by consideration. At the end of the war in 1945 the property market had
returned to normal and the flats were all let. The claimants demanded that the defendants
resume payment of the entire rent from 1945, but the defendants refused to pay.

Lord Denning held that the claimants were entitled to demand the entire rent from the
date when the flats became fully let early in 1945. Lord Denning stated in orbiter that had
the claimants tried to sue for the extra rent for the whole period of the war they would
have failed. Estoppel would prevent them from going back on the promise on which the
defendants had relied so long as the circumstances persisted. Lord Denning also
explained the doctrine promissory estoppel as follows “Where by words or conduct, a
person makes an unambiguous representation as to his future conduct, intending the
representation to be relied on and to affect the legal relations between the parties, and
the representee alters his position in reliance on it, the representor will be unable to act
inconsistently with the representation if by so doing the representee would be prejudiced.”

Combe v. Combe [1951] 2 KB 215

●
Mr and Mrs. Combe were a married couple. Mr Combe promised Mrs Combe that he
would pay her an annual maintenance. Their marriage eventually fell apart and they were
divorced. Mr Combe refused to pay any of the maintenance he had promised. Seven
years later Ms Combe brought an action against Mr Combe to have the promise enforced.
There was no consideration in exchange for the promise and so no contract was formed.
Instead, she argued promissory estoppel as she had acted on the promise to her own
detriment. At first instance the Court agreed with Mrs Combe and enforced the promise
under promissory estoppel. However this decision was then appealed.

Judgment: Denning LJ reversed the lower court decision and found in favour of Mr
Combe. He elaborated on the doctrine from High Trees. Stating the legal principle,
Denning wrote, where one party has, by his words or conduct, made to the other a
promise or assurance which was intended to affect the legal relations between them and
to be acted on accordingly, then, once the other party has taken him at his word and acted
on it, the one who gave the promise or assurance cannot afterwards be allowed to revert
to the previous legal relations as if no such promise or assurance had been made by him.
He must accept their legal relations subject to the qualification which he himself has so
introduced, even though it is not supported in point of law by any consideration but only
by his word.

He stated the estoppel could only be used as a "shield" and not a "sword". In the High
Trees case, there was an underlying cause of action outside the promise. Here,
66
promissory estoppel created the cause of action where there was none. In this case, the
court could not find any consideration for the promise to pay maintenance. He further
stated that the High Trees principle should not be stretched so far as to abolish the
doctrine of consideration, "[t]he doctrine of consideration is too firmly fixed to be
overthrown by a side-wind....it still remains a cardinal necessity of the formation of a
contract".

While it may be true that the wife did forbear from suing the husband on the arrears for
seven years, this forbearance was not at the request of the husband. He held that in the
absence of proof of any request, express or implied, by the husband that the wife should
forbear from applying to the court for maintenance, there was no consideration for the
husband's promise. Moreover, even if the wife had promised to not apply to court for
maintenance, there would have been no consideration, because one cannot waive the
statutory right to apply for maintenance.

Maclaine v. Gatty [1921] 1 AC 376, p.386

●
As arising “where A has by his words or conduct justified B in believing that a certain state
of facts exists, and B has acted upon such belief to his prejudice, A is not permitted to
affirm against B that a different state of facts existed at the same time”. It is notable that
B must have acted on the words in question.

Amalgamated Investment and Property Co Ltd v. Texas Commerce

●
International Bank Ltd [1982] QB 84
The court explained the nature of an estoppel by convention. Lord Denning MR said: ‘The
doctrine of estoppel is one of the most flexible and useful in the armoury of the law. But it
has become overloaded with cases. That is why I have not gone through them all in this
judgment. It has evolved during the last 150 years in a sequence of separate
developments: proprietary estoppel, estoppel by representation of fact, estoppel by
acquiescence, and promissory estoppel. At the same time it has been sought to be limited
by a series of maxims: estoppel is only a rule of evidence, estoppel cannot give rise to a
cause of action, estoppel cannot do away with the need for consideration, and so forth.
All these can now be seen to merge into one general principle shorn of limitations. When
the parties to a transaction proceed on the basis of an underlying assumption – either of
fact or of law – whether due to misrepresentation or mistake makes no difference – on
which they have conducted the dealings between them – neither of them will be allowed
to go back on that assumption when it would be unfair or unjust to allow him to do so. If
one of them does seek to go back on it, the courts will give the other such remedy as the
equity of the case demands.’ and ‘If parties to a contract, by their course of dealing, put
a particular interpretation on the terms of it — on the faith of which each of them — to the
knowledge of the other — acts and conducts their mutual affairs — they are bound by

67
that interpretation just as much as if they had written it down as being a variation of the
contract. There is no need to inquire whether their particular interpretation is correct or
not — or whether they were mistaken or not — or whether they had in mind the original
terms or not. Suffice it that they have, by their course of dealing, put their own
interpretation on their contract, and cannot be allowed to go back on it.’

68
 UNIT THREE

PRIVITIES OF CONTRACT

Introduction
The basic rule of the doctrine of privity of contract is that any person who is not a party to
the contract can neither sue on the contract nor can they be sued under it.

Justification for the Rule

Since contract law concerns bargains it is said that it would be unfair to allow a person to
gain under a bargain when he has actually provided nothing in return for the benefit
gained from the arrangement. It would be unfair to impose an obligation on a party who
has played no part in the agreement, e.g. If A and B agree on a certain price if C performs
some service for A then why should C be bound when he has not been a party to the
agreement in the first place? It is unfair to allow somebody the right to sue on a contract
when he cannot be sued.

The exceptions to the basic rule of the doctrine of the privity of the contract are:

1. Statutory Exceptions: The Road Traffic Act obliges a motorist to take out third party
liability insurance. Another motorist who is involved in an accident with this motorist can
then rely upon the statutory provision for recovery of compensation for damage or any
loss. The insurance is enforceable despite the fact that the other motorist lacks any privity
in the insurance contract.

2. Trust Law: Where a trust has been created, the beneficiary under the trust can sue
the trustees even if he was not a party to the original agreement.

3. Restrictive Covenants: This is device or tool used by equity by which a party selling
land retains certain rights over the use of land, such as preventing the use of the land for
business or preventing building on the land. The covenant is said to run with the land, so
if properly created will bind subsequent purchasers of the land even though there is no
privity between them and the original seller.

4. Assignment: Assignment is specific system devised for the transfer of property

right such as real property (e.g. land) or ‘choses in action’ (e.g. shares). The rights can
be assigned and the party to whom the rights have been assigned can sue despite lack
of privity to the contract. There are two methods of enforcing these rights are through
statutory provisions and equity.

5. Leases: Where an owner of land creates a lease in favour of another person the
terms of the lease are in effect contractual obligations, and these terms (known as
69
covenants) of the lease and are enforceable by both parties because there is privity
between them. However, the landowner will able to enforce the covenants also against
anybody to whom the holder of the lease then assigns their lease.

6. Agency: A principal can sue and be sued on contracts made on his behalf.

7. Negotiable Instruments: Negotiable instruments namely a cheque is transferable

and the person to whom it has been transferred can use on it.

Privity of Contract under the Law of Agency Relationship

The law recognises that it is impossible for any individual person to act on his behalf all
the time. Acting through ‘middlemen’ is a familiar practice that mankind has employed
from time immemorial. In the area of business and commerce, activity would grand to a
halt if businessmen could not employ the services of other people with expertise such as
factors, brokers, forwarding agents, auctioneers and the like, and were expected to do
everything themselves. Besides agents may possess special skills, knowledge,
experience or expertise necessary for the making of sound business decisions. Since the
agent is primarily engaged to negotiate and conclude a contract with a third party on
behalf of another person called the principal, such specialized knowledge or skill may be
essential. The common law position that he who can act for himself may act through an
agent is summed up in the Latin maxim qui facit per alium facit per se. There are however,
two exceptions to the said Latin maxim namely:

Where personal performance is required; and

●
Where the parties involved expressly or by necessary implication prohibit
●
delegation.

Agency is the long established exceptions to the doctrine of privity of contract which
normally operates to prevent a person acquiring rights under a contract unless he is a
party to the contract. Through this exception where a contract is concluded by an agent
on behalf of the principal, the agent’s acts are treated as if they were those of the principal.
The principal steps into the shoes of the agent and becomes a party to the contract
through the agent.

Definition of Agency

An agency involves three very specific parties namely:

1. Principal: The Principal is the person on whose behalf the contract is made. It is
a person on whose behalf the agent acts.

70
2. Agent

3. Third Party: The Third Party is the party with whom the agent contracts on behalf
of the principal and who as a result of the very special rules enjoys a series of mutual
rights and obligations with the principal, but there is no contractual relationship with the
agent.

In law the word ‘agent’ is used to refer to a person who has legal authority to bind another
by entering into contract with a third person on that other’s behalf. An agent is a person
employed to do any act for another, or to represent another in dealing with third parties
or persons. The important feature of the relationship is that the agent has power to bind
his principal to a contractual relationship with a third party without the agent himself
becoming a party to the contract. In other words the agent is the party who is actually a
party to the formation of the contract with a third party with whom he has a direct
relationship, but the agent merely makes the contract on behalf of the principal and not
on his own behalf. The relationship between the principal and agent is called agency,
and may be created by an express or implied agreement.

Essential and Legal Rules for a Valid Agency

The essential features for a valid agency are as follows:

1. There should be an agreement between the principal and the agent: According to
this element, the agency must be created by an agreement between the principal and
agent. Therefore there must be an agreement by which a person is appointed as an agent
by the other. The agreement may be express (that is, by words of mouth or in writing), or
implied (that is, it may arise by the conduct of the parties, by necessity or circumstances
of the cases).

2. The agent must act in the representative capacity: The agent must represent his
principal and act on his behalf. Moreover, the agent must have the power to create legal
relationship of his principal with third parties. Therefore, the true nature of the relationship
should be seen. If the agent acts in representative capacity and had the power to bind his
principal with third parties, the relationship is that of ‘agency’.

3. The principal must be competent to contract: The principal must be competent or

have capacity to enter into a valid contract, that is, he must of sound mind, and have
attained the age of majority. Therefore, a minor or a person of unsound mind (insane)
cannot appoint an agent to act on his behalf. An appointment of an agent, made by an
incompetent person is void.

71
4. The agent need not be competent to contract or have capacity to contract: As a
general rule there is no requirement that an agent must have full contractual capacity
when he acts on behalf of the principal. This is because the contract is that of the principal,
and not the agent. The principal must, however, have contractual capacity at the time the
contract in question is entered into.

It is therefore legally possible for a minor to act on behalf of an adult principal in bringing
about a binding contractual relationship with a third party who has contractual capacity.
However, the agency contract between the principal and agent will not be binding on the
agent because of the agent’s minority. For the same reasons the law denies minors from
entering into contractual relations of any kind, minors are generally not engaged as
agents for persons with full contractual relations.

Classification of Agents

Agents may be classified on the basis of extent of authority given by their respective
principals:

1. Special Agents: A special agent is an agent who is engaged or appointed to

undertake or perform a particular task or a special function or act. In other words, he is
an agent who represents his principal in some particular transaction, for example, an
estate agent appointed to find a purchaser for a principal’s property or a lawyer engaged
to represent a client in a particular matter will act as a special agent relative to the
assignment. A special agent has limited authority which comes to an end as soon as the
special act is performed.

2. General Agents: A general agent is an agent who is appointed to perform all acts
relating to a particular trade or business for which he is appointed. He has authority to
enter into any contract on behalf of his principal which is normally within the scope of the
trade or profession in which the agent is employed. For example, an agent appointed to
manage a property would have implied authority to enter into tenancy agreements and
cleaning contracts on behalf of the principal.

3. Universal Agents: A universal agent is an agent who is appointed to do all the

various trades or business of his principal. In other words, he is an agent who is
authorized to do all the acts which his principal can lawfully do under the law. As a matter
of fact, the universal agent has more powers than those enjoyed by special or general
agents.

72
Kinds of Agents

Though agents are of several kinds, the two most important ones are:

1. Commercial or Mercantile Agents: A commercial agent is an agent who has

authority either to sell the goods, or to consign the goods for the purpose of sale, or to
buy the goods or to raise the money on the security of the goods on behalf of his principal.
Therefore, a commercial or mercantile agent is an agent who deals in the buying and
selling of goods.

2. Non-Commercial or Non-Mercantile Agents: Non-mercantile or non-commercial

agent is an agent who does not usually deal in the buying or selling of goods. He is
appointed by the principal to do some acts which are not done by commercial agents.
The following are some of the important non-commercial agents:

Insurance Agents – who is an agent appointed to effect insurance policies on

●
behalf of his principal. He receives commission for his services.

Counsel or advocate – who is engaged to conduct legal proceedings on behalf of

●
his principal (client). He receives fees for his services.

Principles of Agency

The agency relationship is based upon the following two established principles:

1. Whatever a person can lawfully do himself, he may also do the same through an
agent. This however, subject to certain exceptions, for example, contracts involving
personal services or skills such as painting, singing, marriage, or where delegation is
prohibited.

2. He who acts through another is considered to have acted personally, that is, the
acts of the agent are considered the acts of his principal.

Creation of Agency

An agency relationship may arise or be created in any of the following ways namely:

1. Express Agreement: An agency may be created by express agreement. In this

case, an agent is appointed by an agreement in writing or by words of mouth. It may,
however, be noted that no particular form or set of words is required for the appointment
of an agent.

2. Implied Agreement: An agency may also be created by an implied agreement. In

this case, a person becomes an agent of the other due to the conduct of the parties or
73
the course of dealing between the parties or the situation of the particular case, for
example, when one person places another in such a situation in which the other person
is understood to represent or act on his behalf, he becomes an implied agent.

3. Operation of Law: In certain instances agency will arise without the parties
expressly stating that such a relationship has come into existence between them or
indeed that they desire such a relationship be created. The following are the
circumstances under which the an agency relationship will be deemed to have come into
existence by operation of the law:

Agency of necessity: The law recognizes that in certain situations emergencies

●
arise which may necessitate a person to act promptly in order to protect the interests of
another by doing acts which that other person may have done if he were himself present.
In such circumstances, the law implies authority on the part of a person to bind another
by any act honestly done on his behalf under the pressure of a real commercial necessity
even if the person acting in fact acts without the authority or consent of the person on
whose behalf he acts. Agency is said to arise in such situations by implication of the law.
A typical example of a situation when an agency of necessity will arise is where a carrier
of perishable goods suffers a breakdown and engages another transporter to carry the
goods to their destination or sells them off quickly at the nearest available market to avoid
the loss of the consignment. However, to constitute a valid agency of necessity the
following conditions must be satisfied:

- There must be a genuine or real commercial emergency: Agency of necessity will

only arise where there is an emergency. Where the circumstances are such as not to
imply an emergency, the law will not recognize the person acting on behalf of another as
being an agent of necessity.

- It must have been impracticable to obtain instructions from the principal or the
agent must not be in a position to communicate with the principal or to obtain instructions:
It must be shown that the person who acted on behalf of another could not obtain that
other’s instructions before acting because it was impracticable to or commercially
impossible to obtain instructions. This requirement is however, getting more and more
watered down with the improvements in com Whereas before, the quickest means of
communication would have been the telex machine where no phone facilities existed, the
world has in recent years witnessed phenomenon increase in modes of communication
such as fax machine, cell phone, the internet, etc. which have made communication
easier and fast. This in turn makes the satisfaction of this requirement in proving agency
of necessity less easy.

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- The act must be done with the principal’s best interest in mind: The law does not
encourage people to employ themselves all in the name of agency of necessity and
thereby impose liabilities on other persons behind their backs. Therefore, it is a
requirement that the agent must have acted bona fide in the principal’s interests rather
than the agent’s own interests, and must have acted reasonably in the circumstances.
The best interests of the principal will however not override the express instructions given.

Agency by Cohabitation: A wife who lives or cohabits with her husband is regarded
●
has having authority of her husband to buy articles of household necessity. This means
that the wife is considered an implied agent of the husband for the purpose of buying
household necessaries on credit, and the husband becomes bound to pay for the same.
The presumption of cohabitation is rebuttable by the husband showing that his wife is
adequately supplied with necessaries or that the goods supplied are not necessaries.

Agency under Statutory Provisions: Provisions of certain Acts of Parliament

●
provide for the existence of an agency relationship between parties.

- Partnership Act, 1890 – section 5, provides that every partner is an agent of the
firm and his partners for purposes of the business of partnership.

- The Income Tax Act – section 84 provides that any person or partnership may be
declared by the Commissioner General to be an agent for the payment of tax due by
another person or partnership.

- Bank of Zambia Act – section 48 provides that the Bank (BOZ) shall act as agent
for the Government for such purposes and on such terms and conditions as the Minister
may determine.

Agency by Estoppel: An agency relationship may arise by operation of the doctrine

●
of estoppel where a person holds out another as having authority to represent him. The
term ‘estoppel’ may be defined as prevention of a claim or assertion by law. In other
words, when someone makes another person to believe that a particular thing or fact is
true, then later on he cannot be allowed to deny the truth of that thing. Therefore, when a
person, by his conduct or statement, wilfully leads another person to believe that a certain
person is an agent, then he is estopped or prevented from denying the truth of the agency.

Ratification: The term ‘ratification’ may be defined as the confirmation of the acts
●
already done. Ratification occurs where the agent does an act on behalf of his principal
without the principal’s prior authority and the principal subsequently adopts the act done.
Ratification need not be expressly done; it may be inferred from an act showing an
intention to adopt the act performed on behalf of another without that other’s prior
authority. The acts of a person not appointed agent by another may bind that other if he
75
does an act that amounts to ratification of those acts. There are a number of conditions
that must be satisfied for there to be a valid ratification:

- The principal must be in existence at the time the act was done.

- The principal must be ascertainable or known.

- The principal must have had capacity to contract at the time of the act.

- The act must be ratifiable.

- The ratification must be made within a reasonable time.

- The acts to be ratified should be valid and lawful

Relations of Principal with His Agent

The relationship between the principal and agent are governed by an agreement between
them. Therefore the principal and his agent may expressly enter into a agreement
providing for their mutual duties and rights which govern their relations with one another.
However, there certain duties imposed by law on every agent unless they are modified or
excluded by an express agreement.

Duties of an Agent

1. Duty to obey or follow instructions of the principal.

2. Duty to show proper skill and care.

3. Duty not to make secret profits from agency.

4. Duty not to delegate.

5. Duty not to disclose confidential information.

Rights of an Agent

1. Right to receive remuneration.

2. Right to be indemnified.

3. Right to set-off.

4. Right of Lien.

Relations of Principal with Third Parties

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The types of authority which may be exercised by the agent in his acts in relation to third
parties are known as:

1. Actual or Real authorities – this authority conferred on the agent either by express
authority or implied authority.

2. Ostensible or Apparent Authority - this is the authority exists when the principal
creates an appearance which reasonably leads another to believe that his agent has
some authority.

In such a case the principal is bound by the acts of the agent, and cannot deny his agent’s
authority in dealing with third parties who assumed that the agent is authorised to deal on
behalf of the principal.

Principal’s relations with third parties where the agent contracts for a named
●
principal.

Principal’s relations with third parties where the agent contracts for an unnamed
●
principal.

Principal’s relations with third parties where the agent contracts for undisclosed
●
principal.

Termination of Agency

The relationship between the agent and principal can come to an end through the
following:

1. Termination of agency by act of the parties: The agency may end because it is for
a fixed time and that time has lapsed. The agency may end because of an express
agreement between the parties. If one party unilaterally ends the agency then that party
may in breach of the contract.

2. Termination of agency by operation of law: The agency may be frustrated in the

same way that other contracts are, e.g. becomes impossible to perform. The agency may
terminate because of the death of either party. The agency may be ended because of the
insanity of either party. The agency may end because of the bankruptcy of either party.

Assignments

Assignment is a specific system devised to transfer of property rights. The property rights
comprises of:

1. Real Property e.g. land.

77
2. Choses in action i. e. all personal rights of property which can only be claimed or
enforced by action, and not by taking physical possession.

Choses in action comprises a large number of proprietary rights, such as debts, shares,
negotiable instruments, rights under a trust, legacies, policies of insurance, bills of lading,
patents, copyrights and rights of action arising out of tort or breach of contract.

Assignment of Contractual Rights

Contractual rights can be assigned through the following ways:

1. Novation: This is a transaction whereby, with the agreement of all parties

concerned, a new debtor is substituted for the old one. The creditor at the request of the
debtor agrees to take another person as his debtor in the place of the original debtor. The
effect of novation is to release the original debtor from his obligations under the contract
and to impose those obligations on the new debtor.

2. Legal Assignment: All choses in action may be assigned, but the assignment must
meet the following requirements:

Must be in writing, signed by the assignor.

●
Must be absolute and not purporting to be by a way of charge only.
●
Must give express notice in writing to the debtor, trustee, or other person from
●
whom the assignor would have been entitled to claim such a debt or thing in action.

The effect of the assignment is to transfer to the assignee:

The legal right to the debt or chose in action.

●
The right to sue the debtor and all other remedies against him.
●
The power to give a good discharge without the concurrence of the assignor.
●
3. Equitable Assignment: An equitable assignment is one which does not comply with
the requirement of a legal assignment, such as registration.

4. Assignment by Operation of Law: Contracts are assigned by operation of law on:

Death
●
Will
●
Bankruptcy
●
78
Contractual Prohibition on assignment

If the contract itself prohibits assignment, then any assignment will be ineffective as
against the debtor and thus the assignee will not be able to enforce the contract against
the debtor. The following are transferred at law in accordance with the statute relating to
them:

1. Bill of exchange and promissory notes according to Bills of Exchange Act 1882.

2. Shares in companies registered under Companies Act.

3. Bills of lading.

4. Policies of marine insurance and life assurance.

Involuntary Assignment

1. Bankruptcy or Liquidation.

2. Death.

3. Intestate.

Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
a system adopted for the resolution of disputes,
79 with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?
1.
2.

Cases
Price v. Easton [1833] 110 ER 518
●
This is a case where a contract was made for work to be done in exchange for payment
to a third party. When the third party attempted to sue for the payment, he was held to be
not privy to the contract, and so his claim failed.

Gregory & Parker v. Williams (1817) 3 Mer 582

●
Parker owed money to both Gregory and Williams. Since he could see no way of
organizing settlement of his debts himself, he assigned all of his property to Williams on
the understanding that Williams would then pay off the debt to Gregory. Williams failed to
pay over the money to Gregory. Gregory, of course, was not a party to the agreement
between Parker and Williams and as a result was unable to sue on it in contract law.

However, the court was nevertheless prepared to accept Gregory’s argument that a trust
of the money had been created in Gregory’s favour, which was then enforceable against
Williams. There was never any intention that Williams should keep all of the money, a
beneficial interest was created in Gregory’s favour and Williams held the sum of the debt
owed to Gregory by Parker only as a trustee. Williams was therefore bound to return this
money to Gregory.

Tulk v. Moxhay [1848] 41 ER 1143

●
Tulk owned certain land in London that he sold with an express undertaking that it would
never be used to build property on. The land was then resold on a number of occasions,
each time subject to the same undertaking, until Moxhay eventually bought it. Moxhay
bought it knowing of the limitation but nevertheless intended to build on it.

Tulk sought an injunction to prevent this building from taking place and was successful.
The court accepted that it would be against conscience for Moxhay to buy, knowing of the
restriction, and it was prepared to grant the injunction and enforce the original agreement
even though Moxhay had never been a party to it.
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 Hely-Hutchinson v. Brayhead Ltd [1967] 3 All ER 98
●
Lord Suirdale (Richard Michael John Hely-Hutchinson) sued Brayhead Ltd for losses
incurred after a failed takeover deal. The CEO, chairman and de facto managing director
of Brayhead Ltd, Mr Richards, had guaranteed repayment of money, and had indemnified
losses of Lord Suirdale in return for injection of money into Lord Suirdale's company
Perdio Electronics Ltd. Perdio Ltd was then taken over by Brayhead Ltd and Lord Suirdale
gained a place on Brayhead Ltd's board, but Perdio Ltd's business did not recover. It went
into liquidation, Lord Suirdale resigned from Brayhead Ltd’s board and sued for the losses
he had incurred. Brayhead Ltd refused to pay on the basis that Mr Richards had no
authority to make the guarantee and indemnity contract in the first place. Roskill J held
Mr Richards had apparent authority to bind Brayhead Ltd, and the company appealed.

Judgment: Lord Denning MR held that he did have authority, but it was actual authority
because (like a "course of dealing" in contract law) the fact that the board had let Mr
Richards continue to act had in fact created actual authority. I need not consider at length
the law on the authority of an agent, actual, apparent, or ostensible. That has been done
in the judgments of this court in Freeman & Lockyer v Buckhurst Park Properties (Mangal)
Ltd.[1] It is there shown that actual authority may be express or implied. It is express when
it is given by express words, such as when a board of directors passes a resolution which
authorises two of their number to sign cheques. It is implied when it is inferred from the
conduct of the parties and the circumstances of the case, such as when the board of
directors appoints one of their numbers to be managing director. They thereby impliedly
authorise him to do all such things as fall within the usual scope of that office. Actual
authority, express or implied, is binding as between the company and the agent, and also
as between the company and others, whether they are within the company or outside it.

Ostensible or apparent authority is the authority of an agent as it appears to others. It

often coincides with actual authority. Thus, when the board appoint one of their number
to be managing director, they invest him not only with implied authority, but also with
ostensible authority to do all such things as fall within the usual scope of that office. Other
people who see him acting as managing director are entitled to assume that he has the
usual authority of a managing director. But sometimes ostensible authority exceeds actual
authority. For instance, when the board appoint the managing director, they may
expressly limit his authority by saying he is not to order goods worth more than £500
without the sanction of the board. In that case his actual authority is subject to the £500
limitation, but his ostensible authority includes all the usual authority of a managing
director. The company is bound by his ostensible authority in his dealings with those who
do not know of the limitation. He may himself do the "holding-out." Thus, if he orders
goods worth £1,000 and signs himself "Managing Director for and on behalf of the
company," the company is bound to the other party who does not know of the £500
81
limitation, see British Thomson-Houston Co Ltd v Federated European Bank Ltd.,[2]
which was quoted for this purpose by Pearson L.J. in Freeman & Lockyer. Even if the
other party happens himself to be a director of the company, nevertheless the company
may be bound by the ostensible authority. Suppose the managing director orders £1,000
worth of goods from a new director who has just joined the company and does not know
of the £500 limitation, not having studied the minute book, the company may yet be
bound. Lord Simonds in Morris v Kanssen,[3] envisaged that sort of case, which was
considered by Roskill J. in the present case.

Apply these principles here. It is plain that Mr. Richards had no express authority to enter
into these two contracts on behalf of the company: nor had he any such authority implied
from the nature of his office. He had been duly appointed chairman of the company but
that office in itself did not carry with it authority to enter into these contracts without the
sanction of the board. But I think he had authority implied from the conduct of the parties
and the circumstances of the case. The judge did not rest his decision on implied
authority, but I think his findings necessarily carry that consequence. The judge finds that
Mr. Richards acted as de facto managing director of Brayhead. He was the chief executive
who made the final decision on any matter concerning finance. He often committed
Brayhead to contracts without the knowledge of the board and reported the matter
afterwards. The judge [Roskill J] said: "I have no doubt that Mr. Richards was, by virtue
of his position as de facto managing director of Brayhead or, as perhaps one might more
compendiously put it, as Brayhead's chief executive, the man who had, in Diplock L.J.'s
words, 'actual authority to manage,' and he was acting as such when he signed those two
documents." and later he said: "the board of Brayhead knew of and acquiesced in Mr.
Richards acting as de facto managing director of Brayhead."

The judge held that Mr. Richards had ostensible or apparent authority to make the
contract, but I think his findings carry with it the necessary inference that he had also
actual authority, such authority being implied from the circumstance that the board by
their conduct over many months had acquiesced in his acting as their chief executive and
committing Brayhead Ltd to contracts without the necessity of sanction from the board.
Lord Pearson and Lord Wilberforce concurred.

Watteau v. Fenwick (1893) 1 QB 346

●
The case of Watteau v Fenwick has been criticized because it was decided that an
undisclosed principal could be held liable for an act of the agent, which had been
expressly forbidden. Some claim that the case was decided upon apparent authority, yet
it is doubted whether this contention is valid because the principal was not known.[1] An
agency by ratification, which allows a known principal to ratify a contract and be bound
by it, could not be inferred because Humble did not contract as an agent.[2]

82
Therefore, Wills J decided that:“Once it has been established that the defendant was the
real principal, the ordinary doctrine as to principal and agent applies – that the principal
is liable for all the acts of the agent which are within the authority usually confided to an
agent of that character, notwithstanding limitations, as between the principal and the
agent, put upon that authority. It is said that it is only so where there has been a holding
out of authority…But I do not think so. Otherwise in every case of undisclosed principal,
or at least in every case where the fact of there being a principal was undisclosed, the
secret limitation of authority would prevail and defeat the action of the person dealing with
the agent and then discovering that he was an agent and had a principal”.

Great Northern Railway v. Swarfield (1874) LR 9

●
Mr Swaffield sent his horse by railway to a station at Sandy. The horse arrived late at
night, and the railway company lodged the horse overnight for their own account at a
livery stable. Mr Swaffield failed to collect it on the following morning. The only basis on
which he was prepared to give any instructions about the fate of his horse was that the
railway company assumed all responsibility for storing and delivering it to him from the
time of its arrival at Sandy. After four months of this, the railway company lost patience.
They unilaterally delivered the horse to Mr Swaffield’s farm and then sued him for the
livery charges to date.

Held: The contract of carriage had come to an end on the day after the arrival of the horse
at Sandy, when the performance required of them as carriers was completed. Baron
Pollock drew attention to Cargo ex Argos in the course of argument and based his
judgment upon it. Having referred to previous authority to the effect that the railway
company was bound to take reasonable care of the horse notwithstanding the termination
of the contract of carriage, he observed that “if there were that duty without the correlative
right, it would be a manifest injustice.” Kelly CB, concurring treated the principle as
applying because it was necessary for the railway company to incur the expenditure.
“They had no choice unless they would leave the horse at the station or in the high road
to his own danger and the danger of other people.”

Sims & Co. v. Midland Railway Company (1913) 1 KB 103

●
The defendant consigned certain quantity of butter with the plaintiff, Midland Railway
Company. Due to the strike, the butter was delayed in transit. The plaintiff sold the butter
as it was of perishable nature.

It was held that the sale was binding on the owner the Defendant, and that the plaintiff
was an agent of necessity.

Couturier v. Hastie (1856) 5 HLC 673

●

83
Couturier agreed with Hastie to deliver some corn. They thought it was in transit between
Salonica (now Thessaloniki) and the UK. But the corn had already decayed. The
shipmaster had sold it. Couturier argued that Hastie was liable for the corn because
Hastie had already bought an ‘interest in the adventure’, or rights under the shipping
documents.

Judgment: The House of Lords held that because the corn effectively did not exist at the
time of the contract, there was a total failure of consideration and the buyers were not
liable to pay the price.

Prager v. Blastpiel, Stamp and Heacock Ltd (1924) 1 KB 566

●
It was held that there was no necessity and that the sellers had not acted bona fide, and
were not therefore agents of necessity to resell the goods.

Springer v. Great Western Railway (1921) 1 KB 257; 24 LT 79

●
The plaintiff instructed the defendant railway company to transport tomatoes from the
Channel Island to London, by ship to Weymouth and by train to London. Owing to bad
weather, the ship was detained at Channel Island for three days. When the ship finally
arrived at Weymouth, the railway company’s employees were on strike, and so offloading
was delayed for two days. Worried that the tomatoes would go bad, the railway company
sold the tomatoes off locally without communicating, as they could have done, with the
plaintiff. The plaintiff then brought the action claiming damages for breach of the contract
of carriage. The defendant sought to justify their action of selling the tomatoes under the
agency of necessity.

It was held that for there to be an agency of necessity, it must have been practically
impossible for the ‘agent’ to obtain the owner’s instructions as to what should be done.
In the circumstances of this case the defendant should have communicated with the
plaintiff when the ship arrived at Weymouth, in order to get the plaintiff’s instructions.
There was no agency of necessity in this case since communication was not impossible.

Fray v. Voules (1859) 120 ER 1125

●
An attorney was engaged to conduct a case on behalf of his client. He reached a
compromise on the advice of counsel. The compromise was contrary to the express
instructions given by the client.

It was held that an attorney has no authority to enter into a compromise against the
directions of the instructing client even if he is acting bona fide in the interests of his client.

Sachs v. Miklos (1948) 2 KB 23

84
This case considered the issue of conversion and whether or not a woman who sold a
man’s furniture to auction was guilty of conversion when she could not locate the man.

Debenham v. Mellon (1880) 6 AC 24

●
A man and his wife were manager and manageress respectively of the hotel in which they
cohabited. The husband gave his wife an allowance for clothes but expressly forbade her
from purchasing goods on his behalf as an agent. The wife ordinarily purchased clothes
from the plaintiff in her own name. On one occasion, however, she purchased clothes
and pledged her husband’s credit.

It was held that there was no agency in this case as the husband had expressly forbidden
it. No agency could be implied from cohabitation either as the couple was not cohabiting
in a domestic situation. As the plaintiff well knew, the couple lived in a hotel as manager
and manageress, not as a family. The husband was not consequently liable for the debt
incurred.

Kelner v. Baxter (1866) LR 2 CP 174

●
A group of company promoters for a new hotel business entered into a contract,
purportedly on behalf of the company which was not yet registered, to purchase wine.
Once the company was registered, it ratified the contract. However, the wine was
consumed before the money was paid, and the company unfortunately went into
liquidation. The promoters were sued. They argued that their liability had passed to the
company, and were not personally accountable.

Judgment: Erle CJ held the promoters were personally liable. He said the following. I
agree that if the Gravesend Royal Alexandra Hotel Company had been an existing
company at this time, the persons who signed the agreement would have signed as
agents of the company. But, as there was no company in existence at the time, the
agreement would be wholly inoperative unless it were held to be binding on the
defendants personally. The cases referred to in the course of the argument fully bear out
the proposition that, where a contract is signed by one who professes to be signing “as
agent,” but who has no principal existing at the time, and the contract would be altogether
inoperative unless binding upon the person who signed it, he is bound thereby: and a
stranger cannot by a subsequent ratification relieve him from that responsibility. When
the company came afterwards into existence it was a totally new creature, having rights
and obligations from that time, but no rights or obligations by reason of anything which
might have been done before. It was once, indeed, thought that an inchoate liability might
be incurred on behalf of a proposed company, which would become binding on it when
subsequently formed: but that notion was manifestly contrary to the principles upon which
the law of contract is founded. There must be two parties to a contract; and the rights and
obligations which it creates cannot be transferred by one of them to a third person who
85
was not in a condition to be bound by it at the time it was made. The history of this
company makes this construction to my mind perfectly clear. It was no doubt the notion
of all the parties that success was certain: but the plaintiff parted with his stock upon the
faith of the defendants' engagement that the price agreed on should be paid on the day
named. It cannot be supposed that he for a moment contemplated that the payment was
to be contingent on the formation of the company by the 28th of February.

Newborne v. Sensolid Ltd (1953) 1 QB 45

●
A consignment of tinned ham was sold to Sensolid under a contract headed "Leopold
Newborne (London) Ltd" and ending "Yours faithfully, Leopold Newborne (London) Ltd"
and signed by Leopold Newborne. Sensolid refused to take delivery of the ham. It was
held that neither the then unincorporated company nor Mr Newborne personally could
sue on the contract.

Lord Goddard said: This contract purports to be a contract by the company; it does not
purport to be a contract by Mr Newborne. He does not purport to be selling his goods but
to be selling the company's goods. The only person to have any contract here was the
company, and Mr Newborne's signature merely confirmed the company's signature...In
my opinion, unfortunate though it may be, as the company was not in existence when the
contract was signed there never was a contract, and Mr Newborne cannot come forward
and say: "Well, it was my contract."

Keighley, Maxted & Co. v. Durant (1901) AC 240

●
K & Co authorized Roberts, a corn merchant, to buy wheat on a joint account for himself
and them at a certain price. Roberts, on his own behalf and without authority of anybody
else, bought wheat at a higher price than the authorized one, from Durant. The intention
that he was acting for K& Co. as well as himself was not disclosed by Roberts to Durant.
K & Co, however, later agreed with Roberts to buy the wheat at that (high) price but
eventually failed to do so. Durant resold it at a loss and sued them for loss.

ISSUE: Whether a contract made by a man purporting and professing to act on his own
behalf alone, and not on behalf of a principal, but having an undisclosed intention to give
the benefit of the contract to a third party, can be ratified by that third party, so as to render
him able to sue or liable to be sued on the contract.

HELD: Day J. and a special jury ( favoured K& Co. and Durant) It dismissed the action
against the appellants (K& Co.) on the ground that there was no ratification in law of the
contract, and gave judgment against Roberts for the amount claimed. COURT OF
APPEAL (favoured Robert) It reversed the decision as regards the appellants, and
ordered a new trial on the ground that there was evidence for the jury that Roberts
contracted on behalf of himself and the appellants. *It, for the first time, asserted the
86
proposition that a contract made by a man in his own name, intending it to be on behalf
of a third party who has not authorized it but keeping his intention secret, can be ratified
by that third party so as to make himself able to sue or liable to be sued on the contract.
HOUSE OF LORDS: Contentions: Appellants-There is absolutely no authority in English
law for the proposition, *marked, by court of appeal. A contract made by an agent in his
own name (as the present contract was) does not require and cannot receive any
ratification: it is complete in itself. The contract in the present case being complete, no
third party could be introduced into it except by a new contract, and no new contract is
here made or alleged.

LAW POINT: Undisclosed principal and ratification-A contract made by a person intending
to contract on behalf of a third party, but without his authority, cannot be ratified by the
third party so as to render him able to sue or liable to be sued on the contract, where the
person who made the contract did not profess at the time of making it to be acting on
behalf of a principal.

Ashbury Railway carriage & Iron Co. v. Richie (1875) LR 7HL 653
●
Incorporated under the Companies Act,1869, the Ashbury Railway Carriage and Iron
Company Ltd’s memorandum, clause 3, said its objects were ‘to make and sell, or lend
on hire, railway-carriages…’ and clause 4 said activities beyond needed a special
resolution. But the company agreed to give Riche and his brother a loan to build a railway
in Belgium. Later, the company refused the agreement. Riche sued, and the company
pleaded the action was ultra vires.

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 UNIT FOUR

CONTENTS OF CONTRACTS

Introduction
A contract is made up of many clauses or provisions. However, the most important
clauses in a contract are the terms of the contract, which are the obligations owed by the
parties to each other under the contract. The terms of a contract, therefore sets out the
parties’ respective rights and duties under the contract. If a party fails to act as required
by the contract that party is in breach of contract and may be sued as a result. Though
the parties to a contract usually state the terms of a contract expressly, that is, in writing
or orally or both, terms may also be implied in the contract by the courts, statute or
custom.

The terms of the contract, whether express or implied have varying degrees of importance
and as such the breach of an important or major term of the contract namely, a condition
will attract wider and serious remedies as compared to the breach an unimportant or
minor term, namely, a warranty. Finally, terms in a contract may not only confer rights on
one or both of the parties, but may also restrict or exclude a party’s rights. Before
examining the terms of a contract in detail we must first distinguish between terms and
representation.

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

Pre-Contract Statements and Representations

The statements made by the parties in the pre-contractual stage are known as
‘representations’. Any statement made at the time of contracting or before the contract is
formed is referred to as a ‘representation’. The representation may be as to current facts
or as to the intention of the parties. At this stage it is merely a statement that may or may
not be relied upon once the contract is complete.

The law then makes a distinction between terms and representations. Any statement
made by either party to the contract which may or may not have been intended to induce
the other party to enter the contract but was not intended to form part of the contract is a
representation. It may have certain legal consequences if certain circumstances are
satisfied but it never forms part of the contract.

Even if the statement is false, it cannot amount to a breach of the contract itself. An
express term of a contract is any statement by which the parties to the contract do intend
to be bound and so does also form part of the contract and can be relied upon by the
88
parties. If these terms are not complied with there will be a breach of the contract, but the
remedy available will depend on the precise classification of the term, e.g. a condition, or
warranty.

Types of Representation and their Consequences

There are a number of statements made at the time the contract was formed or in the
negotiations leading up to the formation that will not attach liability and have no legal
significance. This is because the courts cannot find reliance placed upon such statements
by the parties, and no sensible person would believe that they would induce a party to
enter a contract. These types of representation can be divided into three distinct groups
namely:

1. Trade Puffs: Puffs are mere boasts or unsubstantiated claims, commonly made
by, amongst others, advertisers of products or services. Puffs are often nothing more than
a catchy gimmick designed or used to highlight the product that is being sold, e.g. mosi
‘as might as the mosi-oa-tunya’. Puffs are an exaggerated claim made to boost the sale
ability of the product, and hence not intended to be taken seriously. The law allows the
puffs and thus the legal maxim simplex commendatio non obligat – meaning no
obligations are created because no reliance can be placed upon them.

2. Mere Opinions: Some statements such as a mere opinion made by a party to a

contract attach little legal significance because they lack any weight and the other party
ought not to rely on them. An opinion does not carry any liability for the party making it
because it is not based on fact.

3. Mere Representations: Where a party to a contract has made a representation as

to fact, which is intended to induce the other party to enter the contract, but which is not
intended to form part of the contract, and it is in fact true, there can be no further
contractual significance. This is known as a ‘mere representation’. On the other hand,
where a representation has been made so as to induce a party to enter a contract and
they have done so, if the representation has been falsely made then there may well be
further legal consequences. In this case the representation may amount to a
misrepresentation which can be actionable and lead to a variety of remedies. This will be
the case even though the representation has never actually become incorporated as a
term of the contract.

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Terms

A term is an expression of willingness by both parties to be bound by the obligation

contained in the contract and if a term is breached, or not complied with, it will give the
other party the right to sue. The distinction between a term and a representation is
important because the remedies available where there is a breach are different. If a
statement is held to be a term of a contract, a failure to comply with it will be a breach of
contract entitling the innocent party to a remedy for breach of contract.

If however, the statement is held to be a mere representation, the innocent party cannot
claim that there has been a breach of contract because the statement was not a term of
the contract. The innocent party’s remedy if any is to seek to have the contract set aside
or claim damages for misrepresentation. The basic test for determining whether a
statement made by a party to a contract is a term or mere representation depends on the
intention.

Express Terms

Express terms are terms that are agreed upon by the parties at the time the contract is
formed. Since contracts can be formed in writing or orally or even by the conduct of the
parties, then the terms may arise in many ways, such as individual expression of the
agreement between the parties, through standard method of contracting as in ‘standard
forms’, or simple oral promise. What they all have in common is that parties themselves
have agreed on them and they are subject to some form of legal action if they are
breached.

The Process of Incorporating Express Terms

Where a contract is in writing the process of distinguishing between terms and

representations is much easier. The terms are stated in the written contract. Where,
however, negotiations leading up to the contract are oral, the courts have developed
guidelines to determine whether or not a particular statement is incorporated as a term.
In general, the courts adopt an objective test or analysis, basing their decision on what a
reasonable man would consider in the mind of the parties at the time they formed the
contract.

Factors Relevant to Incorporating Terms

Whether or not a statement is incorporated as a term can depend on a number of factors.

These factors have been developed by the judges in the case law in an attempt to produce
a consistent approach. These factors are:

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1. Importance of the Statement: A statement is likely to be a term of the contract
where it is of such importance to the person to whom it is made that, if it had not been
made he would not have entered into the contract. In short the more importance is
attached to the statement by either party then the more likely it is that it is a term of a
contract. Failure to treat the statement as such would be to ignore the intention of that
party.

2. Verification: A statement is not likely to be a term of the contract if the maker of the
statement asks the other party not to rely on it without verifying its truth.

3. Special Knowledge or Skill of the maker of the Statement: If the maker of a

statement has some special knowledge or skill compared to the other party, the statement
may be held to be a contractual term. If on the other hand, the parties’ degrees of
knowledge are equal or if the person to whom it is made has the greater knowledge, the
statement may be held to be a mere representation.

4. Time between making the statement and formation of the Contract: Sometimes the
court may assess the time lapse between the statement made in the negotiations and the
creation of the contract itself, particularly if there is a major difference between the two.
Courts will generally hold that the longer the time between the two, the less possible it is
to support any claim that the statement was in fact incorporated into the contract as a
term. This is then particularly so where the substance of the statement is not repeated in
the contract.

5. Reducing the Agreement, including the statement, to writing: Written evidence is

more powerful and more immediately convincing than the spoken word. Consequently,
where a contract is made in a written document and a statement made orally between the
parties is not then included in the written document, the court will generally infer that it
was not intended to form part of the contract but is a mere representation.

Implied Terms

Generally, the parties to a contract will be deemed to have included as express terms of
the contract all of the various obligations by which they intend to be bound. There are,
however, occasions when terms will implied into a contract, even though they do not
appear in a written agreement or in the oral negotiations that have taken place leading up
to the contract. Implied terms are terms which, though not expressly stated, by the parties
by words or conduct, are implied to give effect to the presumed intention of the parties.
The three ways through which terms may be implied into the contract are by:

1. Custom: By custom we mean an established practice or usage in a trade,

profession, locality, type of transaction, or between parties. It is a well settled principle of
91
law that a contract may be subject to the terms that are sanctioned by custom though
they have not been expressly stated or mentioned by the parties.

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

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

The terms implied in fact, also known as tacit terms, are those terms which are so
●
obvious that the parties must have intended them to be included into the contract. In order
to give ‘business efficacy’ to the contract, the implied term must be both obvious and
necessary. Therefore, courts will not imply a term into a contract merely because it is
reasonable to do so.

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

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

Classification of Terms

There is a very important distinction between those terms of a contract which entitle an
innocent party to terminate (rescind, or treat as discharged) a contract in the event of a
breach, and those which merely enable a person to claim damages. Terms of a contract
may be classified into three categories namely:

1. Conditions: These are statements of fact or promises which form the essential
terms of the contract. A condition as a term of the contract is so important that failure to
perform or fulfil the condition would render the contract meaningless and destroy the
92
whole purpose of the contract. Consequently, anything that is accepted as being a
condition is said to ‘go to the root of’ a contract. Where a condition is unfulfilled or not
satisfied, the injured party enjoys various remedies namely sue for damages or claim
damages and terminate, repudiate or treat as discharged the contract. Repudiation or
termination as a remedy is the right of the injured party or victim of the breach to consider
the contract ended as a result of the other party’s breach of the contract. This may be
particularly important as it may mean that the claimant can contract with an alternative
party and treat himself as relieved of his obligations under the contract, without fear of the
defendant successfully alleging a breach by the claimant instead.

2. Warranties: Warranties are considered as minor terms of the contract or those

terms where the contract might still continue despite their breach. A warrant is therefore
any term of the contract which does not go to the root of the contract. Warranties are a
residual category of terms dealing with obligations that are either ancillary or secondary
to the major purpose of the contract. Consequently, the remedy for a breach of warranty
is merely an action for damages. There is no right for the injured party to repudiate for a
breach of a warranty. If the party who is the victim of the breach of a warranty tries to
repudiate his obligations then this itself is an unlawful and actionable repudiation.

3. Innominate or Intermediate Terms.

Exemption or exclusion clauses are terms which exclude or limit, or purport to exclude or
limit, a liability which would otherwise arise at common law, or by statute, or under the
terms of the contract. Such a clause may exclude or limit a liability to a specific sum or
amount, which would otherwise arise under the express or implied terms of the contracts.
Exemption clauses perform a number of useful functions which include the following:

1. They help in the allocation or distribution of risks to the parties under the contracts.

2. They help reduce litigation costs by making clear the division of responsibility
between the parties to the contract.

3. They are often used in standard from contracts, which helps reduce the costs of
negotiations and making of contract especially those dealing with numbers of customers
or clients.

Exemption clauses can also perform a function which is socially harmful in that it may be
used by those with ‘strong bargaining power’ such as suppliers of goods and services to
exclude liability towards the weaker party thereby leaving the weak without a remedy. It
is this socially undesirable function of exemption clauses that has led to both parliament
and courts impose some restrictions on exemption clauses. A party relying on the
exemption clause must show that:
93
1. The exemption clause has been incorporated as a term of the contract.

2. The exemption clause covers the event (s) or loss which has/have a reason or
occurred.

3. The exemption clause has not been rendered unenforceable or invalidated by the
rule of law.

Incorporation of Exemption Clauses

An exemption clause can be incorporated in the contract by the following means:

1. By Signature: As a general rule, if a person signs a contractual document, he will

be bound by its terms even if he has not read the document.

2. By Notice: If the exemption clause is set out or referred to in a document, it will

only be incorporated in the contract if reasonable notice of its existence is brought to the
attention of the party adversely affected by it. Whether such notice has been given
depends on the following factors namely:

Nature of the document: An exemption clause is incorporated in the contract if the

●
document in which it is set or is referred to be intended to have contractual force.

Degree of notice: Where a term is unexpected or unusual, the party seeking to

●
enforce it must show that he has taken steps to bring it to the attention of the other party.

Time of notice: An exemption clause will not be effective or incorporated in the

●
contract unless it is adequately brought to the attention of the other party before the
contract is made.

3. By Course of Dealing: Where there has been a previous course dealing between
the parties, an exemption clause will be deemed to be so incorporated into a contract
even though it was not specifically referred to at the time the contract was read. What
constitutes a ‘regular’ course of dealing depends upon the facts of a particular case.

Construction or Interpretation of Exemption Clause

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

clause, the question that must be determined is whether the clause used is appropriately
worded to cover what has happened. The traditional approach of the courts to the
interpretation of contracts was a literal one.

However, in recent years there has been a fundamental shift in the approach in the court’s
interpretation of contracts. Thus the courts have moved away from the literal approach
94
towards a purposive approach of interpretation, with particular emphasis being laid upon
the adoption of an interpretation which has regard to the commercial purpose of the
transaction.

Rectification

Once the contract has been interpreted, one of the parties may argue that the written
contract or document, as interpreted, fails to reflect accurately the agreement which the
parties had actually reached. In such a case, the court may be called upon to rectify the
document so that it accurately reflects the agreement which the parties did in fact reach.

There is a distinction between interpretation and rectification. Interpretation is the process

of considering a meaning to a term of the contract. Rectification, on the other hand, is the
process whereby a document, the meaning of which has already been ascertained, is
rectified so that it gives effect to the intention of the parties. Rectification is, therefore, a
remedy which is concerned with defects not in the making, but in the recording, of a
contract. Rectification is an equitable remedy, and as such it is only available at the
discretion of the court. In deciding whether to rectify a document, the court will have
regard to the following considerations:

1. A court will not rectify a document where “convincing proof” is provided that the
document fails to record the intention of the parties.

2. The document must fail to record the intention of both parties.

3. The document must have been preceded by a concluded contract or by a

‘continuing common intention’.

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

Contra Proferentum Rule

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

Liability for Negligence

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In determining whether the exemption clause covers negligence liability, the courts apply
the three stage test laid down in Canada Steamship Lines Ltd v R [1952] AC 192, at p.208
by Lord Morton of Henryton, which are as follows:

1. If a clause contains language which expressly exempts the party relying on the
exclusion clause from the consequences of his own negligence then effect must be given
to the clause.

2. If there is no express reference to negligence, the court must consider whether the
words used are wide enough, in their ordinary meaning, to cover liability for negligence;
any doubt must be resolved against the party in breach.

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

The first test may be fulfilled by using a word which is a synonym for negligence such as
‘any act, omission, neglect or default’.

Limitation of Liability

Exemption clauses which totally exclude liability are construed differently from those
clauses which merely limit liability.

Inconsistent Terms

If an exemption clause is inconsistent with another express term of the contract or oral
undertaking given at or before the time of contracting, then the exemption clause will be
overridden by that term or undertaking.

Fundamental Breach

The doctrine of fundamental breach was developed to prevent anyone relying on an

exemption clause if he had failed to perform or carry out the basic purpose of the contract.
A ‘fundamental’ breach is more serious than a breach of condition or warranty, and as
such an exemption clause which protects a party against a breach of a condition or
warranty, could not shield him from the consequences of a fundamental breach of the
contract. Although the doctrine of fundamental breach has been developed by the courts
into an extremely effective way of combating exemption clauses, there are subjects to
two qualifications namely:

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1. Waiver of the breach: An innocent party to contract may elect to waiver the
fundamental breach and treat a contract as subsisting.

2. Excluding liability for a fundamental breach: An exemption clause can be framed

or drafted in such wide terms so that it covers even a fundamental breach or excludes
liability even for a fundamental breach.

Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
1. INTRODUCTION
a set of commands of him or them that have coercive power?
2.a set OBJECTIVES
of rules of conduct imposed and enforced by the sovereign?

3.a body of principles

WHAT recognised and applied by the State in the administration of
IS ‘LAW’?
justice?
a system adopted for the resolution of disputes, with the sanction of the State?
Reflection
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?

Cases
Carlill v. Carbolic Smoke Ball Co Ltd [1893] 1 QB 256
●
Carbolic Smoke Ball Co. (D) manufactured and sold The Carbolic Smoke Ball. The
company placed ads in various newspapers offering a reward of 100 pounds to any
person who used the smoke ball three times per day as directed and contracted influenza,
colds, or any other disease. After seeing the ad Carlill (P) purchased a ball and used it as
directed. Carlill contracted influenza and made a claim for the reward. Carbolic Smoke
Ball refused to pay and Carlill sued for damages arising from breach of contract.
Judgment for 100 pounds was entered for Carlill and Carbolic Smoke Ball appealed.
97
Issue: Does one who makes a unilateral offer for the sale of goods by means of an
advertisement impliedly waive notification of acceptance, if his purpose is to sell as much
product as possible?

Holding and Rule (Lindley): Yes. One who makes a unilateral offer for the sale of goods
by means of an advertisement impliedly waives notification of acceptance if his purpose
is to sell as much product as possible.

The court held that a person who makes an offer may decline to require notice of
acceptance if he or she wishes. One who makes an offer dispenses with the requirement
of notice of acceptance if the form of the offer shows that notice of acceptance is not
required. To accept an offer, a person need only follow the indicated method of
acceptance. If the offeror either expressly or impliedly intimates in his offer that it will be
sufficient to act without giving notice of acceptance, performance is sufficient acceptance
without notification. The court held that an advertisement is considered to be an offer
when it specifies the quantity of persons who are eligible to accept its terms. If such an
advertisement requires performance, the offeree is not required to give notice of his
performance. The court addressed the issue of whether the ad was intended to be a
promise or whether it was merely “puffing”. The court pointed to Carbolic Smoke Ball’s
claim in the advertisement that it had deposited 1000 pounds with Alliance Bank, which
the court decided was intended to demonstrate the company’s sincerity in paying the
reward.

Bisset v. Wilkinson [1927] AC 177

●
Mr Wilkinson and Mr Bisset entered into a contract in May, 1919, whereby Mr Bisset would
purchase two adjoining blocks of land called Homestead and Hogan’s, in Avondale, New
Zealand.[2] The two blocks comprised 2062 and 348 acres (1.41 km2) respectively, the
two parties reaching agreement, for 13,260l. During negotiations Mr Wilkinson stated that
he believed the land would hold 2000 sheep, if cultivated and used correctly.
Subsequently, it was discovered the land did not hold 2000 sheep, and the claimant
brought an action for misrepresentation.[3]

Held: The Privy Council advised that the statements made by Mr Wilkinson were not
intended to be a serious representation, qualified by any knowledge. It was known to both
the parties at the time of contracting that the defendant had not used the land for sheep
farming, and thus any statement as to the capacity would surely be an estimate. Lord
Merrivale stated that important considerations were the ‘material facts of the transaction,
the knowledge of the parties respectively, and their relative positions, the words of
representation used, and the actual condition of the subject-matter spoken of…’ Then he
said, “ In ascertaining what meaning was conveyed to the minds of the now respondents
by the appellant's statement as to the two thousand sheep, the most material fact to be
98
remembered is that, as both parties were aware, the appellant had not and, so far as
appears, no other person had at any time carried on sheep-farming upon the unit of land
in question. That land as a distinct holding had never constituted a sheep-farm.[4] ” In
addition, it was noted that the ‘defendants failed to prove that the farm if properly managed
was not capable of being occupied by two thousand sheep.’

Esso Petroleum Co Ltd v. Marden [1976] QB 801

●
Mr Mardon was buying a petrol station franchised by Esso Petroleum Co Ltd. Esso told
him they had estimated that the throughput of a petrol station in Eastbank Street,
Southport, would be 200,000 gallons a year; however, the local council had made a
decision regarding planning permission which meant that there would be no direct access
from the main street and therefore fewer customers. The estimate provided by Esso did
not take this into account despite their knowledge of the decision. Mr Mardon bought the
petrol station and business did not go well. From 1964, Mr Mardon negotiated a lower
rent with Esso but was still losing money. Esso then brought an action for possession
against Mr Mardon, who counterclaimed for damages of Esso’s breach of warranty or
negligence under Hedley Byrne. Lawson J held there was no contractual warranty and
damages for negligent misstatement were limited to losses before 1964. Mr Mardon
appealed.

Judgment: Lord Denning MR held there was a contractual warranty and damages were
not limited. “Now I would quite agree… it was not a warranty - in this sense - that it did
not guarantee that the throughout would be 200,000 gallons. But, nevertheless, it was a
forecast made by a party - Esso - who had special knowledge and skill. It was the
yardstick… by which they measured the worth of a filling station. They knew the facts.
They knew the traffic in the town. They knew the throughput of comparable stations. They
had much experience and expertise at their disposal. They were in a much better position
than Mr Mardon to make a forecast. It seems to me that if such a person makes a forecast,
intending that the other should act upon it - and he does act upon it, it can well be
interpreted as a warranty that the forecast is sound and reliable in the sense that they
made it with reasonable care and skill. It is just as if Esso said to Mr. Mardon: “Our forecast
of throughput is 200,000 gallons. You can rely upon it as being a sound forecast of what
the service station should do. The rent is calculated on that footing.” If the forecast turned
out to be an unsound forecast such as no person of skill or experience should have made,
there is a breach of warranty.

Lord Denning MR distinguished Bisset v Wilkinson because each party was ‘equally able
to form an opinion.’ The damages awarded were for the loss suffered, not the loss of a
bargain. He went on and said, if there had been no warranty (which there was) there
would still be negligent misrepresentation liability in tort. It was argued that when a

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contract resulted, there was no tort liability, relying on Clark v Kirby-Smith,[1] when
Plowman J said a negligent solicitor was not liable in tort, only contract, based on Sir
Wilfrid Greene MR in Groom v Crocker.[2] But these were old and the tort duty ‘is
comparable to the duty of reasonable care which is owed by a master to his servant, or
vice versa’.[3] There is a duty to negotiate with care, “ if a man, who has or professes to
have special knowledge or skill, makes a representation by virtue thereof to another…
with the intention of inducing him to enter into a contract with him, he is under a duty to
use reasonable care to see that the representation is correct, and that the advice,
information or opinion is reliable.’ Esso did profess special knowledge and had it. Their
negligent misstatement was a ‘fatal error... A professional man may give advice under a
contract for reward; or without a contract, in pursuance of a voluntary assumption of
responsibility, gratuitously without reward. In either case he is under one and the same
duty to use reasonable care: see Cassidy v Ministry of Health. In the one case it is by
reason of a term implied by law. In the other, it is by reason of a duty imposed by law. For
a breach of that duty, he is liable in damages; and those damages should be, and are,
the same, whether he is sued in contract or in tort.

Oscar Chess Ltd v Williams [1957] 1WLR 370

●
In June 1955 the defendant sold a second hand Morris car to the plaintiffs, car dealers,
for £290. The registration book which was examined by the plaintiffs’ representative
showed that the car was first registered in 1948, and the defendant honestly believed that
it was a 1948 model. The purchase price was calculated on this basis. In January 1956,
the plaintiffs discovered from the manufacturers that the car was a 1939 model, so the
price was £175, and claimed for breach of warranty.

It was held that the defendant was not liable to the plaintiffs in damages for breach of the
term of the contract because, as the plaintiffs knew, the defendant had no personal
knowledge of the date of the manufacture of the car and the plaintiffs were in at least as
good a position to know this. The defendant had made an innocent misrepresentation,
that is, non-fraudulent. Lord Denning stated at p.375: “It is sometimes supposed that the
tribunal must look into the minds of the parties to see what they themselves intended, that
is a mistake… the question of whether a warranty was intended depends on the conduct
of the parties, on their words and behaviour rather than on their thoughts. If an intelligent
bystander would reasonably infer that a warranty was intended that would suffice.”

Birch v. Paramount Estates (Liverpool) Ltd (1956) 16 EG 396

●
Birch alleged that by an oral warranty he was induced to purchase for £1,825 a house to
be built by Paramount Estates. He claimed that he was told his house would be of the
same standard of workmanship as the company's show house. In fact the paintwork of
his house was inferior to that in the show house and deteriorated faster. Paramount

100
Estates denied any warranty. The issue before the court was whether Paramount Estates
had given a collateral warranty to Birch which became contractually binding when Birch
agreed to buy the house.

Denning LJ: In 1954 Mr. Birch visited a show house on the estate in question and then
went to an incomplete house which he thought he might like to buy. A representative of
the builders told him that the house would be just as good as the show house and would
be built of materials of the same standard. On July 2, 1954, he signed a contract, a clause
in which stated that the house would be built fit for occupation and habitation. The house
was, however, very badly painted, much worse than the show house: and the builders
had refused to repaint it. [Counsel for the builder] had argued that there was no oral
contract and that everything was in the written contract. He had suggested the paintwork
was completed by the date of the contract and that, however bad it was, Mr. Birch could
not complain. The judgment of the learned County Court judge was however
unassailable. It did not matter whether the house was completed on July 2 or not. The
oral contract was collateral with the written contract and the builders were liable.

Morris LJ: The very purpose of having a show house was that a prospective purchaser
might be attracted by what he saw and might have the opportunity of knowing what he
was to get.

Couchman v. Hill [1947] KB 554;

●
The plaintiff bought the defendant’s heifer (a young female cow, usually one that has not
yet had a calf) at an auction, but no warranty was given as to its condition. Before the
sale, or prior to the making of the contract the plaintiff asked the both the auctioneer and
defendant to confirm that the heifer was unserved (meaning not yet having been used for
breeding), and they both assured him that it was. Relying on these assurances, he bought
the heifer. However, approximately seven weeks after the purchase, he discovered that
the heifer was having a calf, and suffered a miscarriage and died. The plaintiff brought an
action for breach of contract.

It was held that the statement that the heifer was not in calf was held to be a term of the
contract because of the importance attached to the statement. The plaintiff asked for and
received an assurance that a heifer had not been served. Despite the fact that the printed
conditions stated that no warranties were given and the oral evidence contradicted a
written document the Court of Appeal held that the statement was a contract condition
and amounted to a collateral contract.

Bannerman v. White [1861] 10 CBNS 844

●
Brewers were refusing to use hops contaminated with sulfur. Bannerman offered hops to
White, and White asked if any sulfur had been used in the growth or treatment of hops.
101
Bannerman said “No” and White said that he would not even ask the price if sulfur had
been used. A contract was made for the sale of hops. But later it was found that sulfur
had in fact been used in growing a small portion of hops.

It was held that it was a term of the contract that sulfur had not been used in growing of
hops. It had been clear to both parties that the question of the use of sulfur was very
important to White and that he would not have contracted without the assurance that no
sulfur had been used on Bannerman’s hops. White was therefore, entitled to terminate
the contract for breach. The plaintiff was a buyer of hops and asked whether sulphur had
been used in their cultivation. He added that if it had that he would not even bother to ask
the price. The seller, the defendant, duly assured him that sulphur had not been used. It
later transpired that sulphur had been used and the Claimant brought an action for breach.
This assurance was held to be a condition of the contract because it was of such
importance that without it, the buyer would not have contracted.

Ecay v Godfrey [1947] 80 Lloyds LR 286

●
A seller of a boat stated that the boat was sound but advised the buyer to have it surveyed.
The seller’s statement was held not to be a term of the contract but a mere representation.

The more robustly a statement is made the more likely the courts will regard it as a term.
Here the seller informed the buyer that the boat was in good condition but advised him
not to take his opinion - greatly weakening the strength of what he had said. The
statement made was merely a representation not a term as the buyer was advised to
have the boat surveyed.

Schawel v Reade [1913] 2 IR 64

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

The House of Lords held that the defendant’s statement was a term of the contract, and
as such the defendant was in breach of the contract. The defendant told the plaintiff, who
required a horse for stud purposes, that the animal was 'perfectly sound'. A few days later
the price was agreed and, three weeks later, the plaintiff bought the horse. The statement
was held to be a term of the contract, but here the defendant, who was the owner of the
horse, would appear to have had special knowledge.

102
 Hopkins v Tanqueray [1854] 15 CB 130
●
The plaintiff purchased the defendant’s horse at auction. The previous day the defendant
had found the plaintiff examining the horse’s legs and had said, “You need not examine
his legs: you have nothing to look for. I assure you that he is perfectly sound in every
respect.”

The Court held that the defendant’s statement was not a term of the contract only a
representation.

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
●
Where the maker of the statement was in the better position to establish its truth, the
statement was found to be a term of the contract. The facts of the case were: The plaintiff,
Dick Bentley, asked the defendants, Harold Smith Ltd, who were car dealers, to find him
“a well vented” Bentley car. A car was found. The defendants informed the plaintiff that
they were in a position to find out the history of cars and this car had been fitted with a
replacement engine and gear box and had done only 20,000 miles since then when in
fact the car had done 100,000 miles. The defendants relied on the odometer reading and
had not checked the details. The plaintiff bought the car and discovered that this
representation as to the mileage was untrue. The plaintiff sued the defendants seeking
damages for breach of contract.

It was held that the defendants’ statement as to the car mileage was a term of the contract;
and the defendants, being car dealers, were in a better position than the plaintiff to know
their statement was true.

Routledge v. Mckay [1954] 1 WLR 615

●
A motor cycle had actually first been registered in 1939. However, on a new registration
book being issued this was wrongly stated as 1941. In 1949 the current owner, who was
unaware of this inaccuracy, was selling the motor cycle and in response to a prospective
buyer’s inquiry as to the age gave the age in the registration documents. The prospective
buyer then bought the motor cycle a week later, in a written contract that made no mention
of the age. When he discovered the true age and tried to sue for breach of a term, he
failed.

The court held that the lapse of time was too wide to create a binding relationship based
on the statement. The statement was not incorporated. Since the written agreement made
no mention of the age of the motor cycle, the court held that it had not been considered
important enough to be a term.

103
 Hutton v Warren [1836] 1M & W
●
In this case a long standing local custom was to the effect that on termination of an
agricultural lease the tenant of a farm would be entitled to an allowance for seed and
labour on the land. This was an important custom at a time when the majority of the
population was engaged in subsistence agriculture.

It was held that the tenant was entitled to an allowance for the seeds and labour on
leaving. There was no express term to that effect, but he was so entitled on the basis of
a local custom. Baron Parke, in explaining the rationale of implying terms in the contract
on the basis of custom had the following to say (at p.475): “It has long been settled that,
in commercial transactions, extrinsic evidence of custom and usage is admissible to
annex incidents to written contracts in matters with respect to which they are silent. The
same rule has also been applied to contracts in other transactions of life, in which known
usages have been established and prevailed; and this has been done upon the principle
of presumption that, in such transactions the parties did not mean to express in writing
the whole of the contract by which they intended to be bound but to contract with reference
to those known usages.”

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

It was held that the conditions of the hire were part of the contract and the defendants
knew that the conditions were in common use in the business and they are always
applied.

London Export Corporation Ltd v Jubilee Coffee Roasting Company [1958] 1

●
WLR 661
Lord Jenkins at p.675 stated: “An alleged custom can be imported or incorporated into a
contract only if there is nothing in the express or necessarily implied terms of the contract
to prevent such inclusion and further that a custom will only be imported into a contract
where it can be so imported consistently with the tenor of the document as a whole.”

Afffreteurs Reunis Societe Anonyme v Walford [1919] AC 801

●

104
A charter party provided that commission was to be paid to the Charterers Brokers on the
signing of the Charter whereas by custom commission was payable only when the hire
had actually been earned.

It was held that the commission was payable on the signing of the charter as custom was
entirely inconsistent with the plain words of the agreement and thus, in the circumstances
of the case of no effect. The Charterers would enforce this provision against the ship
owners.

Cunliffe-Owen v Teather & Greenwood [1967] 1WLR 1421

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

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

Shirlaw v Southern Foundries Ltd [1939] 2 KB 206

●
Mr Shirlaw had been the managing director of Southern Foundries Ltd, which was in the
business of iron castings. But then another company called ‘Federated Foundries Ltd’
took over the business. The new owners had altered article 8 of Southern Foundries Ltd's
constitution, empowering two directors and the secretary (who were friends of Federated
Foundries) to remove any director. Then they acted on it, by sacking Mr Shirlaw. Mr
Shirlaw's contract, signed in 1933 stated that he was to remain in post for ten years. Mr
Shirlaw sued the company for breach of contract, claiming for an injunction to stay in
office or substantial damages.

Judgment: Humphrey's J in the High Court awarded £12,000 to Mr Shirlaw for breach of
contract. Court of Appeal: The Court of Appeal held (Sir Wilfred Greene MR dissenting
on this point) that it was an implied term in the 21 December 1933 agreement that the
company would not remove Mr Shirlaw from his directorship for the time in which he was
appointed as managing director. Furthermore it was held that it was an implied term that
the company would not alter its articles to create a right of removal and there was no case
for reducing the damages awarded by the High Court. At the end of his judgment
MacKinnon LJ read out this famous passage. “I recognize that the right or duty of a Court
to find the existence of an implied term or implied terms in a written contract is a matter
to be exercised with care; and a Court is too often invited to do so upon vague and
uncertain grounds. Too often also such an invitation is backed by the citation of a
sentence or two from the judgment of Bowen LJ in The Moorcock.[2] They are sentences
from an extempore judgment as sound and sensible as all the utterances of that great
105
judge; but I fancy that he would have been rather surprised if he could have foreseen that
these general remarks of his would come to be a favourite citation of a supposed principle
of law, and I even think that he might sympathize with the occasional impatience of his
successors when The Moorcock is so often flushed for them in that guise.

BP Refinery (Western Port) PTY Ltd v Shire of Hastings [1978] ALJR 20

●
Lord Simon laid down the requirements for terms implied in fact as follows (at p.26): “For
a term to be implied, the following conditions (which may overlap) must be satisfied:

(i) It must be reasonable and equitable;

(ii) It must be necessary to give business efficacy to the contract, so that no term will be
implied if the contract is effective without it;

(iii) It must be so obvious that ‘it goes without saying’;

(iv) It must be capable of close expression;

(v) It must not contradict any express term of the contract.”

Moorcock [1889] 14 PD 16
●
The defendant owned a wharf on the Thames and made a contract with the plaintiff ship
owner for him to unload his vessel at their wharf. Both parties knew that the vessel was
such that, while at the wharf, it must ground at low tide. The vessel grounded and was
damaged.

It was held to be an implied term of the contract that the defendant had taken due care to
ascertain that the bed of the river adjoining the wharf was not such as to damage the
vessel when it grounded. The defendants were in breach of the implied term that the
wharf was safe.

Liverpool City Council v Irwin [1977] AC 239

●
The defendant let a flat in an upper floor of a block of flats to the plaintiff tenant. A term
was implied by the court into a tenancy agreement between the plaintiff and the defendant
that the defendant had an obligation to keep in repair the stairs and the lift in the block of
flats which they owned, thereby insuring that the plaintiff could gain access to his property.

Baylis v Barnett [1988]

●
The plaintiff lent the defendant a sum of money. The defendant knew this involved the
plaintiff in borrowing the money from the bank. Although the parties did not discuss the
question of interest the court held there was an implied term that the defendant would
indemnify the plaintiff for any interest he owed to the bank.

106
 Poussard v. Spiers and Pond (1876) 1 QBD 410
●
An actress was contracted to perform the lead role in an operetta for a full season. The
actress, who was taken ill, was unable to attend for the early performance, by which time
the producers had given her role to the understudy. The actress sued for breach of
contract but lost.

It was held that she had in fact breached the contract by turning up after the first night.
As a lead singer, her presence was crucial to the production and so was a condition
entitling the producers to repudiate and terminate her contract for non-attendance at the
early performances.

Bettini v. Gye [1876] 1 QBD 183

●
A singer was contracted to appear at a variety of theatres for a season of concerts. His
contract included a term that he should attend rehearsals for six days prior to the
beginning of the actual performances. In the event, he was absent for the first three days
of rehearsals and on his return his role had been replaced. When the singer sued, the
producers’ claim that the obligation to attend rehearsals was a condition failed.

It was held that the requirement was only ancillary to the main purpose of the contract
which was appearing in the actual production. In consequence, the court held that the
breach only entitled the producers to sue for damages and not to end the contract and
replace the singer as they had done.

L’Estrange v Graucob Ltd [1934] 2 K.B 394

●
The plaintiff, Miss L’ Estrange, bought an automatic cigarette vending machine from the
defendants. She signed the order form which, contained the following term in small print,
‘any express or implied condition, statement or warranty, statutory or otherwise not stated
herein is hereby excluded.’ When the machine was delivered it did not work satisfactorily
and the plaintiff sought damages for breach of the implied statutory term that the machine
was fit for the purpose for which it was sold. The defendants sought to rely on the
exemption clause, but the plaintiff argued that she had not read the order form and did
not know what it contained.

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

Springs v Sotheby Parke Bernet and co. Ltd [1984]

●
The plaintiffs deposited a diamond with the Sotheby’s to be auctioned. He signed a
document, without reading it, and put it straight into his wallet. The document contained

107
details of the agreement and a declaration in bold type immediately above the space for
the plaintiff’s signature. The declaration “I have read and agreed to the instructions for
sale as detailed on the reverse of this form”. On the reverse of the form there was an
exclusion clause.

It was held that the clause had been validly incorporated into the contract.

Curtis v Chemical Cleaning Co [1951] 1 KB 805

●
The plaintiff took a white satin wedding dress to the defendants shop to be cleaned. The
shop assistant asked her to sign a ‘receipt’, which in fact contained a condition excluding
the defendants’ liability for any damage however arising. When the plaintiff asked why
she had to sign, the assistant told her that the defendant would not accept liability for
damage to the beads and sequins with which the dress was trimmed. The plaintiff signed,
and when the dress was returned it was stained. The defendants argued that the clause
excluded liability.

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

Chapelton v Barry Urban District Council [1940] 1 KB 532

●
The plaintiff wished to hire a deck chair to sit on the bench. The defendant council had
left a pile of deck chairs with a notice giving the hire charge and stating that tickets were
obtainable from the deck chair attendant. The notice itself contained no exempting
conditions. The plaintiff obtained two chairs from the attendant and received two chairs
from the attendant and received two tickets. The plaintiff did not know that tickets
contained conditions because he simply glanced at them and put them into his pocket. In
fact, on the reserve side of the ticket were the words: ‘The council will not be liable for
any accident or damage arising from the hire of the chair’. Due to the negligence of the
defendant council, the canvas on the plaintiff’s chair gave way when he sat on it. The
council argued that the clause on the ticket exempted them from liability.

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

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

●
The plaintiff, an elderly lady, obtained an excursion ticket which contained a notice on its
reverse side stating that it was issued subject to the conditions in the defendant’s
timetables. The timetables, which could be obtained for 6d, stated that the ticket was

108
issued subject to the condition that ‘no action would lie against the company in respect of
the injury, fatal or otherwise, however caused.’ The plaintiff, who could not read, was
injured when she got off the train when, due to the defendant’s negligence, it was not safe
to do so. She sued claiming damages and the defendant company relied on the
exemption clause.

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

Parker v South Eastern Railway [1877] 2 CPD 416

●
The plaintiff deposited his bag in the defendant’s cloakroom, paid 2d and received a ticket.
On the face of the ticket the words ‘see back’ were printed, and on the back a notice
stated that the company would not be responsible for the value of any package in excess
of £10. A notice containing the same condition was displayed in the cloakroom. The
plaintiff’s bag was lost or stolen and he claimed its value, which was more than £10. He
argued that he had taken the ticket without reading it and thought it was only a receipt for
2d or evidence that the company had possession of his bag. He had not seen the notice
in the cloakroom.

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

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

It was held that if the condition is a particularly onerous or unusual one which would not
generally be known to the other party, then the party seeking to enforce it had to show
that it had fairly and reasonably been brought to the other party’s attention. Condition 2
was unreasonable and extortionate, and the plaintiffs had not brought it to the attention

109
of the defendants. Instead, the plaintiffs were entitled to an award of £3.50 per
transparency per week.

Olley v Marlborough Court Hotel Ltd [1949] 1 KB 532

●
The plaintiff booked at the defendant’s hotel. When she went to her room she saw a notice
on the wall stating that the hotel would not be liable for articles lost or stolen unless they
were deposited for safe custody. The plaintiff left some furs and jewelry in the bedroom,
closed the self-locking door, and hung the key on a board at the reception. The furs were
stolen.

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

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163

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

The court held that the exclusion clause was ineffective because it had been introduced
after the contract was concluded. Lord Denning, at p.169, stated as follows: “The
customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money
back. He may protest to the machine, even swear at it. But it will remain unmoved. He is
committed beyond recall. He was committed at the very moment when he put his money
into the machine. The contract was concluded at that time. It can be translated into offer
and acceptance in this way: the offer is made when the proprietor of the machine holds it
out as being ready to receive the money. The terms of the offer are contained in the notice
placed on or near the machine stating what is offered for the money. The customer is
bound by these terms as long as they are sufficiently brought to his notice before-hand,
but not otherwise. He is not bound by the terms printed on the ticket if they differ from the
notice, because the ticket comes too late. The contract has already been made.”

Spurling v Bradshaw [1956] 2 All ER 121, [1956] WLR 461

●
The plaintiffs were warehouse men who had dealt with the defendant for many years and
always on the plaintiffs standard contractual terms. The defendant delivered eight barrels
of orange juice for storage. A few days later the defendant received from the plaintiff a
110
document acknowledging the receipt of the eight barrels and referring on its face to
clauses printed on the back. One such clause exempted the plaintiffs ‘from any loss or
damage occasioned by the negligence, wrongful act or default’ by themselves or their
servants. When the defendant came to collect the barrels, they were found to be empty.
The defendant refused to pay the storage charges and the plaintiff sued.

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

McCutcheon v David Macbrayne Ltd [1964] 1 WLR 125

●
David MacBrayne Ltd.’s ferry sank, losing Mr McCutcheon’s car en route between Islay
and the mainland. Usually, David MacBrayne Ltd would have got its customers to sign a
risk note. The claimant’s brother in law (Mr McSporran) had made the shipping
arrangements, and he did not sign it. Mr McCutcheon had signed a risk note on four
occasions and Mr McSporran had done so sometimes before too. Both said they knew
notes contained conditions but not what the conditions were. David MacBrayne Ltd
argued that even though it was not signed, the term letting Mr McCutcheon assume the
risk of an accident had been incorporated into their contract through a course of dealing.

Judgment: The House of Lords held, reversing the decision of the Court of Session, that
there was no regular course of dealing with McCutcheon and no consistent course of
dealing with McSporran, and therefore David MacBrayne Ltd could not say that its term
shifting the risk of an accident had been incorporated. Lord Reid explained that the term
could not be incorporated through reasonable notice or a signature on this occasion
alone, and went on. “The only other ground on which it would seem possible to import
these conditions is that based on a course of dealing. If two parties have made a series
of similar contracts each containing certain conditions, and then they make another
without expressly referring to those conditions it may be that those conditions ought to be
implied. If the officious bystander had asked them whether they had intended to leave out
the conditions this time, both must, as honest men, have said "of course not". But again
the facts here will not support that ground. According to Mr. McSporran, there had been
no consistent course of dealing; sometimes he was asked to sign and sometimes not.
And, moreover, he did not know what the conditions were. This time he was offered an
oral contract without any reference to conditions, and he accepted the offer in good faith.

Henry Kendale Ltd v William Lillico Ltd [1969] 2 AC 31

●
The sellers had sold goods to the buyers under an oral contract .The next day the sellers
had sent the buyers a ‘sold note’ containing a clause stating that the buyer took
111
responsibility latent defects in the goods. There had been three or four contracts a month
between the parties over a three year period using the same ‘note’, though the buyers
never read the clause.

It was held that 100 similar contracts over a period of three years constituted a course of
dealing.

Hollier v Rambler Motors (AMC) Ltd [1972] l2 QB71

●
The plaintiff had his car repaired at the defendant’s garage on three or four occasions
over a five year period. On at least two of these occasions he had signed a form
containing an exemption clause which he had not read. The exemption stated that ‘the
company is not responsible for damage caused by fire to customers’ cars on the
premises.

The court held that the exemption clause had not been incorporated because there was
not a consistent course of dealing. The defendant was therefore liable.

Lavell & Christmas Ltd v Wall [1911] 104 LT 85

●
The claimant asked the court to adopt a particular interpretation of the contract and, when
that argument failed, sought to have the document rectified. Cozens Hardy MR stated: “It
is the duty of the court…to construe the document according to the ordinary grammatical
meaning of the words used therein.”

Deutshe Genossenschaftsbank v Burnhope [1995] 1 WLR 1580

●
Lord Steyn, at p.1589, stated: “Parallel to the shift during the last two decades from a
literalist to a purposive approach to the construction of statutes there has been a
movement from a strict or literal method of construction of commercial contracts towards
an approach favouring a commercially sensible construction.”

Ferederick E. Rose (London) Ltd v William H. Pim Junior and Co. Ltd [1953]
●
2 QB 450
The buyers asked the plaintiff to supply them with ‘Moroccan Horsebeans described as
feveroles’. The plaintiffs did not know what feveroles were but were informed by the
defendants that they were to supply them with ‘horsebeans’ which the plaintiffs would
then sell to the buyers, both parties believing that feveroles were just horsebeans. In fact,
‘feveroles’ were a superior type of horsebean, and the buyers had claimed damages from
the plaintiffs for not supplying ‘feveroles’. The plaintiffs wanted to have their written
contracts with the defendants rectified by the insertion of the word ‘Feveroles’ so that the
defendant would have been in breach in supplying the wrong goods.

The Court of Appeal refused to rectify the contract since the parties had agreed on the
sale of horsebeans and the agreement correctly reflected this. The Court of Appeal
112
observed that this is not a case in which the document failed to record the intention of the
parties. The document did reflect their prior agreement; it was simply the case that the
parties were under a shared misapprehension that ‘horsebeans’ were ‘feveroles’.

Joscelyne v Nissen [1970] 2 QB 86

●
A father agreed with his daughter that she would buy his business and in return pay his
home gas, electricity and coal bills. The contract did not express this ‘continuing common
intention’. Russell, Sachs and Phillimore LJJ held that there could be rectification,
because there was ‘convincing proof’ (98) of the intention.

A. Roberts & Co. Ltd v Leistershire County Council [1961] Ch. 555
●
The court considered the circumstances required for rectification of a contract after a
unilateral mistake. Pennycuick J held p. 570 that "a party is entitled to rectification of a
contract upon proof that he believed a particular term to be included in the contract, and
that the other party concluded the contract with the omission or a variation of that term in
the knowledge that the first party believed the term to be included".

Andrew’s Brothers (Bournemouth) Ltd v Singer & Co. Ltd [1934] 1 KB 17

●
The plaintiff agreed in writing to buy a ‘new Singer car’. The contract contained a clause
which excluded the defendant’s liability for breach of “all conditions, warranties and
liabilities implied by statute, common law or otherwise”. The plaintiff car delivered to the
plaintiff had in fact done a considerable number of miles.

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

Baldry v Marshall [1925]

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

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

Houghton v Trafalger Insurance CO. Ltd [1954] QB 247

●
A car insurance policy excluded liability for damage ‘caused or arising while the car is
conveying any load in excess of that for which it was constructed’. At the time of an
accident there were six people in a car with a sitting capacity of five and the insurers
113
denied liability claiming that this was a load in excess of that for which the car was
constructed.

It was held that the word ‘load’ only covered cases where there was a specified weight
which must not be exceeded, as in the case of Lorries or Vans. Romer LJ stated as
follows: “…I think that it would be most regrettable if the provision of this kind were held
to have a force for which the defendants contend. It would be a serious thing for a motorist
involved in a collision if he were told that the particular circumstances of the accident
excluded him from the benefit of the policy. I think that any clause or provision that
purports to have that effect ought to be clear and unambiguous so that the motorist knows
exactly where he stands. This provision is neither clear nor unambiguous.”

Canada Steamship Lines Ltd v R [1952] AC 192

●
At p.208 by Lord Morton of Henryton, which are as follows:

(1) If a clause contains language which expressly exempts the party relying on the
exclusion clause from the consequences of his own negligence then effect must be given
to the clause;

(2) If there is no express reference to negligence, the court must consider whether the
words used are wide enough, in their ordinary meaning, to cover liability for negligence;
any doubt must be resolved against the party in breach;

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

The first test may be fulfilled by using a word which is a synonym for negligence such as
‘any act, omission, neglect or default’.

Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698
●
Loose paving blocks had damaged one of the plaintiff’s Airline’s Aircraft as it was
preparing to take off from the airport. When the plaintiff sued to recover damages for
negligence and/or breach of duty under section 2 of the Occupiers Liability Act 1957, the
defendant sought to rely on clause 10 of its standard conditions which excluded the
liability of the airport, its servants and agents for any damage to aircraft “arising or
resulting directly or indirectly from any acts, omissions, neglect or default unless done
with intent to cause damage or recklessly and with knowledge that damage would
probably result”. The plaintiff submitted that this clause did not cover the liability which
occurred since it did not cover negligence liability.
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It was held that the clause excluded liability for negligence and any breach of statutory
duty unless the negligence or breach was caused either with intent to cause damage or
recklessly and with knowledge that damage would probably result. In any event, the
words “neglect or default” were synonymous with negligence.

White v John Warwick & Co. Ltd [1953] 1 WLR 1285

●
The plaintiff contracted with the defendant for the hire of a tradesman’s tricycle. The
tricycle supplied under the agreement had a defective saddle. The plaintiff was thrown off
the tricycle when the saddle tripped up, and was injured. Clause 11 of the agreement
provided that “nothing in this agreement shall render the owners liable for any personal
injury to the riders or the machines hired.” The plaintiff sought damages alleging (i) that
the defendants were strictly liable in supplying a tricycle which was not reasonably fit for
the purpose for which it was required, and (ii) they were negligent in that they had failed
to take care to ensure that the tricycle supplied was in a proper state of repair and in
working condition.

It was held that the exemption clause should be construed as merely applying to the strict
liability under the contract and not the liability for negligence.

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

It was held that the limitation clause operated to limit liability to £1,000. Limitation were
not to be construed by the exacting standards applicable to exclusion clauses and since
this clause was clear and unambiguous, it was wide enough to cover liability in
negligence. Lord Wilberforce, at p.966, stated: “Whether a clause limiting liability is
effective or not is a question of construction of that clause in the context of the contract
as a whole. If it is to exclude liability for negligence, it must be most clearly and
unambiguously expressed, and in such a contract as this, must be construed contra
preferentem. I do not think that there is any doubt so far. But I venture to add one further
qualification, or at least clarification: one must not strive to create ambiguities by strained
construction, as I think that the appellants have striven to do. The relevant words must be
given, if possible, their natural, plain meaning. Clauses of limitation are not regarded by
the courts with the same hostility as clauses of exclusion. This is because they must be
related to other contractual terms, in particular to the risks to which the defending party

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may be exposed, the remuneration which he receives and possibly the opportunity of the
other party to insure.”

Mendelssohn v Normand Ltd [1970] 1 QB 177

●
The plaintiff, wishing to park his car, was told by the car park attendant that the rules
required the car to be unlocked. The plaintiff explained that he had a suitcase in the car
containing valuables, and the attendant agreed to lock the car as soon as he had moved
it. The plaintiff was then given a ticket exempting the garage from responsibility for loss
or damage to the vehicles or their contents, however caused. On his return the plaintiff
found the car unlocked and later discovered that his suitcase was missing.

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

Harling v Eddy [1951] 2 KB 739

●
Mr. Eddy had put a heifer up for sale at an auction. When the heifer came into the ring
nobody bid for her until Mr. Eddy said there was nothing wrong with her and he would
absolutely guarantee her in every respect. Mr. Harling then bid for and purchased the
heifer. Within three months the heifer was dead from tuberculosis. Mr. Eddy sought to
defend himself from a claim for breach of contract by relying on condition 12 of the printed
conditions of sale at the auction. Conditions 12 said “No animal….is sold with a warranty
unless specifically mentioned at the time of offering, and no warranty so given shall have
any legal force or effect unless the terms thereof appear on the purchaser’s account”. The
statement Mr. Eddy had made as to the heifer’s condition had not appeared on Mr.
Harling’s account.

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

Chanter v. Hopkins [1838] 4 M & W 399

●
Lord Abinger stated at P 404, “If a man offers to buy peas of another, and sends him
beans, he does not perform his contract. But that is not a warranty; there is no warranty
that he should sell him peas; the contract is to sell peas, and if he sends him anything
else in their stead, it is a non-performance of it”.

Karsales (Harrow) Ltd v. Wallis [1956] 2 ALL E.R 866

●
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The defendant inspected a car owned by Z, found it in good order and wished it on hire
purchase. Z thus sold it to the plaintiffs, and they resold it to a hire-purchase company.
The defendant made a contract with his company. The contract contained a term that ‘no
condition or warranty that the vehicle is road-worthy or as to its condition or fitness for
any purpose is given by the owner or implied therein’. On attempted delivery the car was
seen to have changed dramatically to be a virtual wreck incapable of moving. The
defendants refused delivery or pay the hire-purchase installment. However, the car was
towed to his place of business. When sued the defendant pleaded the state of the so
called car towed to his business premises. In reply to this, the plaintiffs relied on the
excluding term.

The court held that there has been a fundamental breach of the contract. There was such
a substantial difference between the contract as formed and the contract as performed
that the breach went to the root of the contract, the central purpose of the contract was
defeated by the breach and the claimant was unable to rely on the exclusion clause to
avoid liability.

Suisse Atlantique Societe’ D’ Armement maritime SA v. Rotterdamsche

●
kolen Centrale [1967] 1 AC 361
The case involved the charter of a ship for two years’ consecutive voyages between US
and Europe. The ship was to be loaded at a specified rate. The owners were to be paid
according to the number of voyages made during the two-year period. If the time taken
for loading and unloading was longer than required, the charterers were to pay $1000 per
day by way of demurrage. The charterers were taking many extra days in loading and
unloading but were allowed to continue to have the use of the ship for the remainder of
the two years. Eight round trips were made. However, the owners alleged that the
charterers delay in loading and unloading had made a further six trips impossible and
sued for damages. The owners claimed that they were not bound by that clause because
the charterers by their extraordinary delays had committed a fundamental breach of the
contract. The total demurrage, at $1000 per day, was $150,000. Because of a fall in freight
rates upon the re-opening of the Suez Canal, after the contract had been made, it may
have been more efficient from the charterers' point of view to delay loading and unloading,
and therefore breach their contract, than to carry it out by making more voyages.

Judgment: Lord Reid said, notably, “In the ordinary way the customer has no time to read
them, and if he did read them he would probably not understand them. And if he did
understand and object to any of them, he would generally be told he could take it or leave
it. And if he then went to another supplier the result would be the same. Freedom to
contract must surely imply some choice or room for bargaining.” The House of Lords held
that the contract did not in fact prescribe a minimum number of voyages. Therefore, there

117
was no breach by the charterers merely by undertaking only eight voyages instead of the
14-17 voyages that the owners claimed were possible. The owners had also argued that
the delays were so significant as to constitute a fundamental breach of the provision of
the contract regarding time spent loading and unloading. Their Lordships held that the
delays by the charterers were not a fundamental breach. Rather, as a matter of
construction, the contract contemplated the possibility of delay and fixed damages
("demurrage") to compensate the owners for that delay. Therefore, the ship owners were
only entitled to claim the demurrage of $1000 per day, not their actual damages. Their
Lordships distinguished the present case from the "deviation" cases. In a typical deviation
case, a party would take a ship off the pre-agreed route. Upon doing so, that would take
the party's conduct outside that contemplated by the contract, and so the party could not
rely on a clause in the contract limiting their liability for damages. Their Lordships
distinguished the present case on the grounds that the delays were contemplated by the
contract.

Photo Production Ltd v. Securicor Transport Ltd [1990] AC 827

●
In this case a Securicor Transport security guard was put in charge of guarding Photo
Production's building. The agreement between Securicor and Photo Productions
contained an exclusion clause that absolved Securicor from any liability for "injurious act
or default by any employee of the company." While the security guard was on patrol of
the Photo Productions building he intentionally started a fire that destroyed the whole
building. Could Securicor rely on the exclusion clause to escape liability for their
employee's conduct? Photo Productions argued that the clause could not apply under the
doctrine of fundamental breach. That is, the breach of the contract was so huge that it
invalidated the whole agreement.

At the Court of Appeal, Lord Denning found that the doctrine of fundamental breach did
apply. However at the Court Of Appeal, Lord Wilberforce, overturned Denning and found
that the exclusion clause could indeed be relied upon. Lord Wilberforce explicitly rejected
Denning's application of the doctrine of fundamental breach and opted for a "rule of
construction" approach. Exemption clauses were judged to be interpreted the same as
any other term regardless of whether a breach has occurred and the scope of the
exclusion must be determined by examining the construction of the contract. On the facts,
Lord Wilberforce found that the exclusion clause precluded all liability - even when harm
was caused intentionally.

Hong Kong Fir v. Kawasaki.

●
Hong Kong Fir Shipping hired out their ship under a two-year time charter-party to
Kawasaki Kisen Kaisha. It was to sail from Liverpool to collect a cargo at Newport News,
Virginia, and then to proceed via Panama to Osaka. A term in the charter-party (the hire

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agreement) required the ship to be seaworthy and to be "in every way fitted for ordinary
cargo service." However the crew were both insufficient and incompetent to deal with her
old fashioned machinery; and the chief engineer was a drunkard. On the voyage from
Liverpool to Osaka, the engines suffered several breakdowns, and was off-hire for a total
of five weeks, undergoing repairs. On arrival at Osaka, a further fifteen weeks of repairs
were needed before the ship was seaworthy again. By this time, only seventeen months
of the two-year time-charter remained. Once in Osaka, freight rates happened to fall, and
Kawasaki terminated the contract for Hong Kong's breach. Hong Kong responded that
Kawasaki were now the party in breach for wrongfully repudiating the contract.

At first instance, it was held that although the ship was a seaworthy vessel on delivery in
Liverpool, Hong Kong Fir had not exercised due diligence to maintain the vessel in an
efficient and seaworthy state. However, the trial judge found that this breach was not
substantial enough to entitle the charterer to repudiate the contract. Kawasaki appealed.

The Hong Kong Fir held that the meaning of the term "seaworthiness" has a very broad
meaning ranging from trivial defects like a missing life preserver or a major flaw that would
sink the ship. Accordingly, it is impossible to determine ahead of time what type of term it
is. Thus, the type of breach must be determined by the judges. "Seaworthiness" is defined
both by common law and by statute. In McFadden v Blue Star Lines [1905] 1 KB 607 it
was stated that, to be seaworthy, a vessel must have the degree of fitness that an
ordinarily careful and prudent shipowner would require his vessel to have at the
commencement of a voyage, having regard to all possible circumstances. And the Marine
Insurance Act 1906 s 39(4) provides that "a ship is deemed to be seaworthy when she is
reasonably fit in all respects to encounter the ordinary perils of the adventure insured."

In the Hong Kong case, the issue was not whether the unseaworthiness was "serious" or
"minor"; rather the question was whether the undoubtedly serious unseaworthiness had
had an effect sufficiently grave to allow the charterer to repudiate. On the facts, given that
the charterer had had the "substantial benefit" of the contract for some 80% of the time
period, the court held that the breach was adequately remedied by damages.

The Hong Kong Fir decision was met with some alarm in the shipping world, where
certainty is crucial. The problem was the delay element; one had to "wait and see" the
effect of the breach. The enormous costs involved in chartering mean that parties cannot
afford to leisurely loiter, whilst pondering the consequences of the breach. Soon after, in
The Mihailis Angelos [1971] 1 QB 164, it was held the impossibility of the shipowner to
meet the "expected ready to load" date, ipso facto entitled the charterer to repudiate for
anticipatory breach of condition. (The charterer was relieved to be able to cancel, as his
proposed cargo of apatite had not materialised!) PS. Lord Denning used the word
"warranty" in a very different way.
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 UNIT FIVE

ENFORCEABILITY OF CONTRACT

Introduction
Mistake

The term mistake may be defined as an erroneous opinion about something. In business
transactions the quality, nature and range of the mistakes vary. A mistake may be of a
serious or insignificant nature, depending upon the nature of the promises made. It may
be made by both parties (mutual) or by one party only (unilateral), and may be a mistake
of fact or law. The general rule of common law is that a mistake does not affect the validity
of a contract. The guiding principle is caveat emptor, meaning ‘let the buyer beware’.

Mistakes that affect the Validity of the Contract

The following types of mistake will not affect the validity of a contract:

1. A mistake of law. There is a general presumption that everyone knows the law.
The rule ‘ignorantia juris hand excusat’ (ignorance of law excuses no one) rules out of all
mistakes of law except foreign law (law of other countries).

2. An error of judgment about the value or quality of the subject matter of the contract,
unless a misrepresentation was made.

3. A mistake about the meaning of a trade term.

Operative Mistakes

Notwithstanding the above stated types of mistakes which cannot invalidate a contract,
there are some kind of mistakes which affects the validity of the contract. Such mistakes
are called operative mistakes, and they render the contract void. The following are the
various types of operative mistakes:

1. Mistaken Signing of a Written Document: The general rule is that a person who
signs a document is assumed to have read, understood and agreed to its contents.
However, a person may plead or rely on the defence known as non est factum (not my
deed). If the contract is to be avoided three elements must be present, namely, that:

The signature must have been induced by fraud.

●
The document signed is fundamentally or radically different from that thought to be
●
signed.

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 The signatory exercised reasonable care or signatory must have acted negligently.
●
2. Mistake as to the Identity of a Party: Mistake as to the identity of one of the parties
is usually unilateral, where only one of the parties is mistaken about the identity of the
other party to the contract. When this happens the contract will be void if the mistaken
party can show that the question of identity was material to the entering into the contract,
and that the other part knew or ought to have known of the mistake.

3. Mistake as to the Subject Matter of the Contract: The parties to a contract may be
mistaken as to the identity of the subject matter. If a seller makes an offer in respect of
one thing and the buyer accepts, but is thinking of something else, the parties are clearly
talking at cross-purposes and there is no contract. Where unknown to both parties the
subject matter of the contract has never existed, or has ceased to exist at the time when
the contract is made, the contract will be void. This situation is known as res extincta.

Types of Mistake

The various types of mistakes are classified as follows:

1. Unilateral Mistake: Unilateral mistake occurs when in a contract, only one of the
parties to the contract is mistaken about a matter of fact relating to the contract, and the
other party knows of his mistake. The effect of a unilateral mistake upon a contract
depends on the surrounding circumstances. Where for instance, one of the parties knows
or should have known that the other party is mistaken in his belief as to a fact that is
material to the contract and enters into contract because of that mistaken belief, the
contract is avoided.

2. Mutual / Bilateral Mistake: A mutual mistake occurs where both parties are under
a certain mistake or should have misunderstood each other and are completely at cross-
purposes. Where there is a mutual mistake the contract will be void.

3. Common Mistake: Common mistake occurs where both parties are mistaken about
the same thing. There are, however, some exceptions to this type of claim. At common
law relief from a contract affected by a common mistake will not available where:

The mistake occurs after the contract is made.

●
The mistake as to quality.
●
Mistake in Equity

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In certain circumstances equity will relieve a party from the effects of his mistake where
the common law would hold him to the contract. There are three equitable remedies that
a court may grant, namely:

1. Rescission: The court may set aside an agreement, provided the parties accept
the conditions imposed by the court for a fairer solution to the problem.

2. Rectification: If a document does not accurately record the true contract between
the parties the writing may be subject to rectification in equity. Similarly, where parties to
a contract have been in error, the equitable remedy of rectification may enable the court
to rectify a written document executed by the parties so that it accords their true
agreement. For rectification to operate the following must be present:

The terms were clearly agreed between the parties.

●
The agreement continued unchanged up to the time it was reduced into writing.
●
The writing fails to express the agreement of the parties.
●
However, the equitable remedy of rectification will not be available where one party to the
contract has made a miscalculation and the agreement entered into does not express his
intention.

3. Specific Performance: A party to a contract may ask the court for an order for
specific performance to compel the performance of the contract. Specific performance is
an equitable remedy and as such discretionary. Thus where damages would be an
adequate remedy, the court will not order specific performance. If there has been a
mistake in a contract which is sufficiently serious, the court can refuse to order specific
performance. In the case of unilateral mistake, if one party contributes to the other’s
mistake, albeit innocently, he may be refused specific performance.

Misrepresentation

Misrepresentation is one of the elements or factors that may vitiate or invalidate the
agreement between the parties. The other facts are mistake, duress, undue influence,
and illegality. The consequence of a contract having been formed on the basis of a
misrepresentation is for the contract to be voidable at the request of the party who is the
victim of the misrepresentation. It is not void because this denies that party the right to
continue with the contract if that is in their interest.

Definition of Misrepresentation

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Misrepresentation occurs when a false statement or representation of fact is made by one
party to the other before or at a time of contract, which has the effect of inducing the other
to enter into a contract. The statement may be expressed in any form. It may be in writing,
such as a company prospectus containing details of the company’s trading activities, or
it can be verbal or implied from the conduct. There are a number of essential elements
that must be satisfied in order to claim the false statement as an actionable
misrepresentation. Misrepresentation can therefore be defined according to these
essential elements:

1. Statement alleged to be Misrepresentation must be a Statement of Material Fact:

Misrepresentation must be a statement of fact. Therefore a statement expressed as an
opinion cannot become or amount to misrepresentation. A statement of intention will not
normally amount to a misrepresentation because a representation is a statement about
existing facts or past events. However, if a person misrepresents what he intends to do
in the future, he may be liable for misrepresentation. Silence will generally not amount to
a misrepresentation since no statement has been made. However, silence would in the
following circumstances amount to misrepresentation:

When a statement made in the course of negotiations subsequently becomes false

●
and is not corrected.

When silence distorts a literally true statements.

●
Where the contract is of utmost good faith (uberrimae fidei)
●
2. The Statement alleged to be a Misrepresentation must have been made by one
party to the contract to the other party: There will be no misrepresentation where the
statement is made by a third party, unless that third party is the agent of the party against
whom the misrepresentation is alleged.

3. The Statement alleged to be a misrepresentation must have been made before or

at the time of the contract: In order to operate on the mind of the representee and induce
him to enter the contract, the representation must have been made either before or at the
time that the contract was formed. If the statement was made after the agreement was
reached then it cannot be actionable as a misrepresentation because it had no effect on
the formation of the contract.

4. The Statement alleged to be a misrepresentation must be an inducement to enter

into the contract: An actionable misrepresentation is one that destroys or vitiates the
consent of the party who relied on it in entering the contract. Therefore it must have been
of material significance to the making of the contract in order to have any effect in law.
However, in contrast, it will not matter the representation would not generally considered
123
as an inducement, provided that it did in fact induce the claimant to enter into the contract.
In that case it will be actionable. The misrepresentation must induce the person to enter
into the contract. There can be no inducement in cases where the other party is unaware
of the representation or does not believe the statement, or has relied on his own skill and
judgment.

5. The statement alleged to be a misrepresentation must not have been intended to

form part of the contract: If the statement were intended to be contractually binding then,
if anything, it would be a warranty of the contract rather than a misrepresentation. The
appropriate action in this case would be for breach of contract, not for misrepresentation.

6. The Representation must have been falsely made: The overriding requirement for
the statement to be actionable is that it must have been falsely made, whether or not this
was innocent or deliberate.

Types of Misrepresentation

There are three types of misrepresentation namely:

1. Innocent Misrepresentation: An innocent misrepresentation is a false statement

made by one person who had reasonable grounds to believe that it was true, not only
when it was made, but also when the contract was entered into. The basic remedy is
rescission of the contract in equity.

2. Fraudulent Misrepresentation: A fraudulent misrepresentation is one made

dishonestly, knowing it to be false. In a fraudulent misrepresentation the injured party may
rescind the contract and also sue for damages for the tort of deceit.

3. Negligent Misrepresentation: A negligent misrepresentation is a false statement

made honestly, but without reasonable grounds for belief in its truth. Damages may be
awarded in tort for a negligent misstatement under the principle laid down in Hedley Berne
& Co Ltd v. Heller and Partners Ltd (1923) AC 465.

In each case the contract is not void but voidable.

Non-Disclosure

Though the general rule is that silence is not a misrepresentation, there is a duty in certain
contracts, discussed hereunder, to disclose relevant information.

1. Contracts of Uberrimae Fidei: Contracts of uberrimae fidei are those in which only
one party possesses full knowledge of all the material facts, and the other being unable
to obtain them from any other source. The law therefore requires that uberrimae fidei

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(utmost good faith) from the first party. The examples of uberrimae fides contracts are
contracts of insurance, contracts to take shares from companies and family
arrangements. A duty to disclose also arises in fiduciary relationships such as principal
and agent.

2. Contracts to take shares from Companies: Under section 124 of the Companies
Act, Chapter 387 of the Laws of Zambia, an omission of a fact from a company’s
prospectus may constitute a misrepresentation. Section of 124 of the said Act states that
a prospectus must not contain any untrue or misleading statement.

3. Family Arrangements.

4. Fiduciary Relationships: This is a relationship of trust which normally exists

between solicitor and client, doctor and patient, principal and agent, religious superior
and inferior, trustee and beneficiary, parent and child, and guardian and ward. If any party
to a contract uses his influence, obtained through confidence necessarily reposed in him
or her by the other, to obtain an advantage at the expense of the confiding party,
rescission will be allowed for non-disclosure, or misrepresentation.

Remedies for Misrepresentation

There are two remedies available for misrepresentation, namely, rescission, and
damages.

1. Rescission or Setting aside Contract: Rescission or setting aside of a contract is

the remedy that is available for all types of misrepresentation namely innocent, fraudulent,
and negligent misrepresentation. The effect of rescission is to ‘wipe out’ the existence of
the contract entirely and return the parties to the positions they were in before the contract
was made. Rescission has been developed in equity decisions and is limited by general
principles common to all the equitable doctrines and remedies namely rescission,
rectification, injunction and decree or order of specific performance. Rescission, being a
discretionary remedy, the court may in certain circumstances refuse to grant this remedy,
for instance where the plaintiff has been guilty of inequitable conduct, such as dishonest.
The remedy of rescission will lost or will not be available to a party in the following
circumstances:

Lapse of Time: Where the plaintiff becomes aware of the misrepresentation, he

●
will be barred to rescind the contract if he unreasonably delays in seeking rescission.

Affirmation: The representee or innocent party cannot rescind the contract after
●
expressly or impliedly affirming the contract with full knowledge of the true facts.

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 Restitution in Integrum is Impossible: If restoration of the parties to the pre-contract
●
state of affairs is impossible, because for example the subject matter of the contract has
ceased to exist or has changed its identity, rescission cannot be granted.

Intervention of Third Party Rights: In equity the rule has always been to protect a
●
person who has in good faith and for value acquired rights in property. The effect of a
misrepresentation of any kind is to make the contract voidable at the option of the person
or party misled, and if he has transferred property under it to the misrepresentation, the
title to it will pass to the latter under the voidable contract, and from him to any third party
who acquires it in good faith and value.

Damages in Liu of Rescission: Under section 2(2) of the 1967 Misrepresentation

●
Act, the Court may declare the contract subsisting, if it would be equitable to do so, having
regard to the nature of misrepresentation, and the loss that would be caused by it if the
contract were upheld, as well as to the loss that rescission would cause to the other party.
Instead the court will award damages to the victims of the innocent or negligent
misrepresentation.

2. Damages: Damages is another remedy that is available for misrepresentation

where the misrepresentation is fraudulent or negligent. Where misrepresentation is
fraudulent the damages may be recovered in the tort of deceit. The purpose of an award
of damages in deceit is to put the claimant to the position he would have been in had the
tort not been committed. The defendant is also liable for all the damage directly flowing
from the fraudulent inducement which was not rendered too remote by the plaintiff’s own
conduct, whether or not the defendant could have foreseen such consequential loss. In
case of negligent misrepresentation, the misrepresetor has committed a tort and
damages can therefore be claimed. Like in the fraudulent misrepresentation, the award
of damages in negligent misrepresentation.

Duress

Duress is actual or threatened violence to, or restraint of the person of, a contracting
party. In other words, duress is when a person is compelled or coerced to enter into a
contract by the use of force (physical compulsion) or through threats of bodily harm or
harm to property. It is the overcoming of the free will of a party to enter into contract by
causing fear in that party. A contract made through duress is voidable at the option of the
party whose consent was obtained under duress. Although the common law doctrine of
duress was only limited to violence and threats of violence to the person, the courts in
recent years have recognised economic duress as a factor which may invalidate consent
thereby rendering a contract voidable. Economic duress requires:

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1. Compulsion or Coercion of the will: In Pau On v. Lau Yiu Long [1980], Lord
Scarman listed the following indications of compulsion or coercion of the will:

Did the party coerced have an alternative course open to him?

●
Did the party coerced protest?
●
Did the party coerced have independent advice?
●
Did the party coerced take steps to avoid the contract?
●
2. Illegitimate Pressure: There must be some element of illegitimacy in the pressure
exerted, for example, a threatened breach of contract. The illegitimacy will normally arise
from the fact that what is threatened is unlawful. Economic duress is often pleaded
together with lack of consideration in cases where a breach of contract is threatened by
the promisor, unless he receives additional payment. The following threats are not
illegitimate:

A threat not to enter into a contract.

●
A threat to institute civil proceedings.
●
A threat to call the police.
●
Not all threatened breaches of contract will amount to economic duress.
●
It will only do so when the threatened party has no reasonable alternative open to
●
him.

The normal response is to sue for damages.

Remedies for Duress

Duress renders a contract voidable. Rescission will normally be sought from the courts.

Undue Influence

Due to the narrow application of duress under the common law, equity found it necessary
to develop the principle of undue influence where free will or judgment had been
excessively influenced without threats to the person. Therefore undue influence is an
equitable doctrine. Undue influence is the improper use of power, which deprives a party’s
ability to exercise a free choice because of the domination of another.

This usually happens when one party to a contract is in a superior position over the other
and can therefore influence the other to enter into a transaction, which had there not been

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such relationship might not happen. The difference between duress and undue influence
is that with undue influence there is no use of force or threats of injury, but a stronger
personality dominates the will of the weaker party. Undue influence is based on the
misuse of a relationship of trust or confidence between the parties. Where undue
influence is found, it renders a contract voidable. The innocent party will need to apply to
the court for rescission of the contract. Contracts induced by undue influence are of two
kinds:

1. Contracts where undue influence is presumed: Contracts where undue influence

is presumed include the following (where there is a fiduciary relationship, or one party is
in a position of dominance over the offer). E. g. Parent and Child, Trustee and Beneficiary,
Solicitor/Lawyer and Client, Doctor and Patient, Religious Adviser and Disciple / Follower.
The stronger party can rebut the presumption of undue influence by showing that:

Full disclosure of all material facts was made.

●
The consideration was adequate.
●
The weaker party was in receipt of the independent legal advice.
●
Contracts where actual undue influence must be proved. The burden of proof lies
●
on the claimant to show that such influence did exist and was exerted.

The rules relating to undue influence are as follows:

2. The plaintiff must prove undue influence if there is no special relationship between
the parties.

3. Where there is a special relationship between the parties then it is up to the

defendant or dominant partly to disapprove or rebut the presumption of undue influence.

The effect of undue influence is to render the contract voidable at the option of the injured
party, that is, they can set it aside if they choose.

Objectives

What is …?

Reflection

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 Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
a system adopted for the resolution of disputes, with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?

Cases
Barton v. Armstrong [1976] AC 104
●
Armstrong was the Chairman and Barton the managing director of an Australian
company. Armstrong threatened to have Barton killed if he did not sign an agreement to
buy out Armstrong’s interest in the company on very favourable terms.

The Privy Council held that the agreement was signed under duress and could be avoided
by Barton.

North Ocean Shipping Co Ltd v. Hyundai Construction Co Ltd [1979] QB 705

●
The defendant shipbuilders agreed to build a tanker for the claimant ship owners. The
price was payable in the US dollars in five instalments. After the first instalment had been
paid, there was a sharp fall in the value of the US dollar and the defendants threatened
to break the contract unless the plaintiff paid an extra 10 percent on each of the remaining
instalments. The plaintiffs had already entered into a lucrative contract to charter the
tanker on its completion and, anxious to take delivery, they reluctantly paid the increased
instalments. Eight months later they brought an action to recover the excess over the
original contract price.
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It was held that the contract was voidable on the grounds of economic duress, but that
the plaintiffs could not recover the excess because they had affirmed the contract by
failing to protest before they did.

Atlas Express Ltd v. Kafco (Importers and Distributors) Ltd [1989] All ER 641
●
Atlas, a road carrier, entered into a contract with Kafco, a small company importing and
distributing basketware, to deliver cartons of basketware which Kafco had sold to
Woolworths. Atlas’ manager had quoted a price of 1.10 pounds per carton based on an
assumption that each load would contain between 400 and 600 cartons. However, the
first load contained only 200 cartons. Atlas’ manager refused to carry any more cartons
unless Kafco agreed to pay a minimum of 440 pounds per load. Kafco was anxious about
maintaining a good relationship with Woolworths but was unable easily to find another
carrier. Accordingly, Kafco agreed to the new terms but later refused to pay.

It was held that Kafco was not liable as Kafco’s agreement to the new terms had been
obtained by economic duress.

Pau On v. Lau Yiu Long [1980]

●
Fu Chip Investment Co Ltd, a newly public company majority owned by Yiu-Long Lau and
his younger brother Benjamin (the defendants), wished to buy a building called 'Wing On',
owned by Tsuen Wan Shing On Estate Co. Ltd., whose majority shareholder was On Pao
and family (the claimants). Instead of simply selling the building for cash, Lau and Pao
did a swap deal for the shares in their companies. Tseun Wan would get 4.2m $1 shares
in Fu Chip, and Fu Chip bought all the shares of Tsuen Wan. To ensure the share price
of Fu Chip suffered no shock, Pao agreed to not sell 60% of the shares for at least one
year. Also, in case the share price dropped in that year, Lau agreed to buy 60% of the
shares back from Pao at $2.50. But then Pao realised, if the share price rose over $2.50
in the year, the price would stay fixed and he would not get the gains. So he demanded
that instead of that, Lau would merely indemnify Pao if the share price fell below $2.50.
Pao made clear that unless he got this "guarantee agreement", he would not complete
the main contract. It was signed on 4 May 1973. But as it turned out the shares did slump
in value. Pao tried to enforce the guarantee agreement. Lau argued the guarantee
agreement was not valid (1) because there was no consideration, only in the past and
under a pre-existing duty, and (2) because it was a contract procured by duress.

Advice: Lord Scarman, giving the Privy Council’s advice first disposed of the question
about past consideration, because a promise to perform a pre-existing contractual
obligation to a third party can be good consideration.[1] The question of whether
consideration can be invalidated ‘if there has been a threat to repudiate a pre-existing
contractual obligation or an unfair use of a dominating bargaining position’ was rejected
because ‘where businessmen are negotiating at arm’s length it is unnecessary for the
130
achievement of justice’. On the point of duress, Lord Scarman held the following. “There
must be present some factor ‘which could in law be regarded as a coercion of his will so
as to vitiate his consent.’ This conception is in line with what was said in this Board's
decision in Barton v Armstrong [1976] AC 104, 121 by Lord Wilberforce and Lord Simon
of Glaisdale - observations with which the majority judgment appears to be in agreement.
In determining whether there was a coercion of will such that there was no true consent,
it is material to inquire whether the person alleged to have been coerced did or did not
protest; whether, at the time he was allegedly coerced into making the contract, he did or
did not have an alternative course open to him such as an adequate legal remedy;
whether he was independently advised; and whether after entering the contract he took
steps to avoid it. All these matters are, as was recognised in Maskell v Horner [1915] 3
KB 106, relevant in determining whether he acted voluntarily or not. ” This was
commercial pressure and no more, since the company really just wanted to avoid adverse
publicity. For a general doctrine of economic duress, it must be shown ‘the victim’s
consent to the contract was not a voluntary act on his part… provided always that the
basis of such recognition is that it must amount to a coercion of will, which vitiates
consent.’

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 Williams v. Bayley (1866) LR 1 HL 200
●
A son forged his father’s signature on certain promissory notes. When the forgery, which
the son did not deny, was discovered the bankers arranged a meeting with his father and
issued veiled threats to the effect that if some settlement was not made the son would be
prosecuted. The father thereupon executed an agreement to make an equitable mortgage
of his property and the forged promissory notes were returned to him.

It was held that the agreement was invalid as in these circumstances the father could not
be said to have entered into it freely and voluntarily.

Lancashire Loans Ltd v. Black (1934) 1 KB 380

●
A daughter married at 18 and after the marriage went to live with her husband. Sometime
after the daughter came of age her mother, who was very extravagant and a frequent
borrower from moneylenders, requested her daughter to raise certain money to pay off
her debts, sign promissory notes and give a second charge on a vested interest in
remainder without which the moneylender refused to make any further loans. The only
advice which the daughter received was from a solicitor who acted for the mother and the
moneylenders. The moneylenders sued to enforce a promissory note given by the
daughters.

It was held that so far as the daughter was concerned, the transaction must be set aside.
She had given the note under her mother’s influence and as the moneylenders had notice
of the fact that the mother had exercised undue influence they were in no stronger position
than she was.

Lloyds Bank Ltd v. Bundy [1974] 3 All ER 757

●
An elderly farmer, inexperienced in business matters, mortgaged his home and only asset
to the bank to guarantee his son’s business overdraft. The Court of Appeal set aside the
guarantee and charge. The farmer had placed himself in the hands of the bank and had
looked to the assistant bank manager for advice. It was clearly in the bank’s interest that
the farmer provided the guarantee.

It was held that the presumption of undue influence applied. The bank had failed to rebut
the presumption since the farmer had not been advised to seek independent advice.

Barclays Bank v. O’Brien [1994] 1 AC 180

●
Mr. O’ Brien was a shareholder in a company and arranged an overdraft for the company
with the company’s bank on the basis that Mr O’ Brien would guarantee the company’s
indebtedness and that it would be secured by a second charge over the matrimonial home
which was jointly owned by husband and wife. Though the manager gave instructions
that both husband and wife should be made aware of the nature and effect of the

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documents they were signing and should be advised to take independent advice, the
bank staff had not followed those instructions. Mrs O’ Brien had signed the charge
document at the bank without reading it. When the company’s indebtedness exceeded
the agreed overdraft the bank bought proceedings to enforce the guarantee. Mrs O’ Brien
refused to leave the house claiming that she had signed the charge document because
of her husband’s undue influence and that he had misrepresented the nature of the
document so that she thought she was signing a charge up to only 60,000 pounds, when
in fact the charge was 135,000 pounds.

The House of Lords held that the bank must have known that there was a strong
possibility that undue influence might have been brought upon Mrs O’ Brien to sign, and
they should have acquainted her with the full facts in a private interview without the
presence of her husband, and should have recommended that she takes separate legal
advice. The bank’s request for possession of the property was dismissed.

Bisset v. Wilkinson [1927] AC 177

●
During the course of negotiation of the sale of a farm the owner of the farm told a
prospective purchaser that he believed the farm would support 2,000 sheep.

It was held that on the evidence the statement was merely a statement of opinion which
the vendor or seller honestly but mistakenly held, and so it could neither be relied upon
nor actionable as a misrepresentation. The evidence was that the owner was not in any
better position than the purchaser to know the farm’s true capacity since the land had not
been used as a sheep farm before. The purchaser was aware that the vendor could do
no more than state his belief. There was therefore no misrepresentation.

Esso Petroleum Co. Ltd v. Mardon [1976] 2 All ER 5

●
Mardon took a tenancy of a filling station owned by Esso, having been given a forecast
by an experienced Esso sales representative of the quantity of the petrol the station could
be expected to sell annually. The quantity was never reached during the four years
Mardon remained as tenant and the business ran at a loss. Mardon sued for
misrepresentation.

It was held that the company had made a misrepresentation, since the sales
representative’s knowledge of such matters made the forecast a statement of fact rather
than opinion, and the sales representative was acting in the capacity of an agent of the
company. Mardon’s claim for damages for misrepresentation was successful.

Edgington v. Fitzmaurice (1885) 29 ChD 459

●
The directors of a company invited members of the public to lend money to the company.
The directors stated that the money would be used to improve the company’s buildings

133
and extend the business. The director’s real intention was to pay off the company’s
existing debts.

It was held that the directors’ statement was a fraudulent misrepresentation.

R v. Kylsant (1831)
●
A company when inviting the public to subscribe for its shares, stated that it had paid
regular dividend throughout the years of the depression. This clearly implied that the
company had made a profit during those years. This was not the case since the dividends
had been paid out of the accumulated profits of the pre-depression years.

The company’s silence as to the source of the dividends was held to be misrepresentation
since it distorted the true statement that the dividends had been paid.

Peyman v. Lanjani [1985] 2 WLR 154

●
The defendant took the lease of premises under an agreement requiring the landlord’s
permission. The defendant did not attend the meeting at which the agreement was struck
but sent an agent who he thought would create a better impression with the landlord. He
later decided to sell the lease on to the claimant and again this would require the
landlord’s permission. Once more he sent his agent. The claimant discovered the
deception after he had paid over 10,000 pounds under the agreement with the defendant.
He then successfully applied to rescind the contract.

Using the agent was a misrepresentation of the legitimacy of the lease which had never
been agreed between the defendant and the landlord.

Roscorla v. Thomas (1842) 3 QBD 234

●
After a deal had been struck for the sale and purchase of a horse, the seller then
represented to the buyer that the horse was ‘sound and free from vice’. In fact, the horse
was unruly and also had a quite vicious character. However, the purchaser could not
claim since the promise was made after the agreement.

JEB Fasteners Ltd v. Marks Bloom & Co [1983] 1 All ER 583

●
The claimant engaged in a take-over of another company. This was done for the purpose
of obtaining the services of two of the directors of the other company, rather than for any
commercial advantage in the take-over.

Museprime Properties Ltd v. Adhill Properties Ltd [1990] EGLR 196

●
Three properties were sold by auction. In advance of the auction there was a
misrepresentation concerning the existence of an outstanding rent review which could
result in increased rents and therefore increased revenue, making it a more attractive
proposition. The defendants unsuccessfully challenged the claimants’ claim for

134
rescission, arguing that the statement could realistically induce nobody to enter the
contract.

The Court of Appeal rejected their defence and applied a subjective test. It held that it
was not important whether or not a reasonable bidder would have been induced by the
representation; the question was merely whether or not the claimant in the case had been
induced by the representation to enter the contract.

Attwood v. Small [1838] 7 ER 684

●
During the course of negotiations for the sale of a mine, the vendor made exaggerated
statements of its capacity. The buyers subsequently appointed their own experts to
investigate the mine, and the agents reported back to the buyers that the vendor’s
statements were true. As a result the buyers purchased the mine, only to discover that
the statements were inaccurate.

The House of Lords held that an action by the buyer to rescind the contract must fail
because the buyer had relied on his agent’s report rather than the seller’s statements.
There was therefore no misrepresentation.

Couchman v. Hill [1947] KB 554

●
The claimant bought a heifer (a young female cow) at an auction. The heifer was
described in the catalogue as being ‘unserved’ (in other words, that it had not mated with
a bull). The printed conditions also stated that ‘The lots are sold with all faults,
imperfections, and errors of descriptions, genuineness, or authenticity of, or any fault or
defect in any lot, and giving no warranty whatever’. The heifer was in fact pregnant at the
time of the auction and died two months later through a miscarriage.

The statement that the heifer was ‘unserved’ could not be a misrepresentation because
of the significance attached to it. It was a term incorporated into the contract despite the
attempted exemptions applied to it.

Redgrave v. Hurd (1881) 20 Ch D 1

●
Mr Redgrave, an elderly solicitor, advertised for a partner to join the business and buy the
accompanying house. He said in an interview with Mr Hurd that the practice brought in
£300 pa, when it was only £200 pa. Mr Redgrave showed him summaries that came to a
£200 pa average income and said that the rest of the £300 figure was borne out by other
papers in the office that he could check (in fact they showed no business). Mr Hurd did
not inspect the papers, until he realised the truth just before completion of the agreement.
He had signed the contract but he refused to go through. Mr Redgrave sued for specific
performance and Mr Hurd counterclaimed for rescission based on fraudulent
misrepresentation. Fry J held that because Mr Hurd had not taken the opportunity to

135
check through the papers, he could not be taken to have relied on them. Mr Hurd
appealed.

Judgment: Sir George Jessel MR held that Mr Hurd’s counterclaim for fraudulent
misrepresentation failed because there was no pleas that Mr Redgrave knew his
statements were untrue. Therefore there was no entitlement to damages. Nevertheless,
Fry J’s decision was reversed, and the contract was rescinded on grounds of innocent
misrepresentation. He held that relying on the representation was enough and there was
no duty to inspect the papers. For rescission, he noted the difference of law (knowledge
was necessary) and equity, where the approach was ‘A man is not to be allowed to say…
that when he made it he did not know it to be false; he ought to have found that out before
he made it’ and ‘no man ought to seek to take advantage of his own false statements’. If
a man is induced to enter a contract by a false representation it is not a sufficient answer
to him to say, ‘If you had used due diligence you would have found out that the statement
was untrue. You had the means afforded you of discovering its falsity, and did not choose
to avail yourself of them... If it is a material representation calculated to induce him to
enter into the contract, it is an inference of law that he was induced by the representation
to enter into it’ and so it is for the person alleging otherwise to show it.

Derry v. Peek (1889) 14 App cas 337

●
Lord Herschell as a false statement “made knowingly or without belief in its truth or
recklessly, careless whether it be true or false”. Thus according to Lord Herschell the
requirements of the action for fraud are that a false representation has been made (i)
knowingly; (ii) without belief in its truth, or (iii) recklessly or carelessly as to whether it is
true or false.

Derry v. Peek, the Playmouth Devonport and District Tramways Company was authorised
to make certain tramways by special Act of Parliament which provided that the carriages
might be moved by animal power and, with the consent of the Board of Trade, by steam
or any mechanical power for fixed periods and subject to the regulations of the Board.
The company issued a prospectus stating that ‘one great feature of this undertaking, to
which considerable importance should be attached, is that by special Act of Parliament
obtained, the company has the right to use steam or mechanical motive power, instead
of horses’. The plaintiff bought shares on the faith of this statement but the Board of Trade
afterwards refused their consent to the use of steam power and the company was wound
up. At the time of issuing the prospectus the company honestly believed that consent
would be granted as a matter of course.

It was held that the plaintiff’s action in deceit must fail, as the statement contained in the
prospectus was not a fraudulent misrepresentation as the company entertained an honest
belief that it was true.
136
 Smith New Court Securities Ltd v. Scrimgeour Rickers [1996] 4 All ER 769
●
The plaintiff, Smith New Court, was induced by a fraudulent misrepresentation made by
the defendants’ employee to buy shares in Ferranti at 82.25 pound per share. At the time
of purchase, the shares were trading at about 78 pounds per share. Unknown to either
party, the shares were grossly overvalued because Ferranti was the victim of a fraud
totally unconnected with the current case. When the fraud became known the shares
slumped. The question for the court was whether the plaintiff could recover the difference
between the price it had paid ( the contract price) and the market price (4.25 pound per
share) or the difference between the contract price and the value of the shares had it
known the fraud (44 pounds per share).

The House of Lords held that the plaintiff was entitled to recover for all the damage
resulting from the transaction. The loss suffered by the plaintiff was 10,764,005 pounds,
which represented the difference between the contract price and the value of the shares
with knowledge of the fraud.

Hedley Berne & Co Ltd v. Heller and Partners Ltd (1923) AC 465
●
Hedley Byrne was a firm of advertising agents. A customer, Easipower Ltd, put in a large
order. Hedley Byrne wanted to check their financial position, and creditworthiness, and
subsequently asked their bank, National Provincial Bank, to get a report from Easipower’s
bank, Heller & Partners Ltd., who replied in a letter that was headed, "without
responsibility on the part of this bank" It said that Easipower was, "considered good for
its ordinary business engagements". The letter was sent for free. Easipower went into
liquidation and Hedley Byrne lost £17,000 on contracts. Hedley Byrne sued Heller &
Partners for negligence, claiming that the information was given negligently and was
misleading. Heller & Partners argued there was no duty of care owed regarding the
statements, and in any case liability was excluded.

Judgment: The court found that the relationship between the parties was "sufficiently
proximate" as to create a duty of care. It was reasonable for them to have known that the
information that they had given would likely have been relied upon for entering into a
contract of some sort. This would give rise, the court said, to a "special relationship", in
which the defendant would have to take sufficient care in giving advice to avoid
negligence liability. However, on the facts, the disclaimer was found to be sufficient
enough to discharge any duty created by Heller's actions. There were no orders for
damages. Lord Morris of Borth-Y-Gest, “ I consider that it follows and that it should now
be regarded as settled that if someone possessing special skill undertakes, quite
irrespective of contract, to apply that skill for the assistance of another person who relies
upon such skill, a duty of care will arise. The fact that the service is to be given by means
of or by the instrumentality of words can make no difference. Furthermore, if in a sphere

137
in which a person is so placed that others could reasonably rely upon his judgment or his
skill or upon his ability to make careful inquiry, a person takes it upon himself to give
information or advice to, or allows his information or advice to be passed on to, another
person who, as he knows or should know, will place reliance upon it, then a duty of care
will arise. ...in my judgment, the bank in the present case, by the words which they
employed, effectively disclaimed any assumption of a duty of care. They stated that they
only responded to the inquiry on the basis that their reply was without responsibility. If the
inquirers chose to receive and act upon the reply they cannot disregard the definite terms
upon which it was given. They cannot accept a reply given with a stipulation and then
reject the stipulation. Furthermore, within accepted principles... the words employed were
apt to exclude any liability for negligence.

Locker and Woolf Ltd v. Western Australian Insurance Co. Ltd (1936) 1 KB
●
408
When proposing for fire insurance in respect of their premises the plaintiffs failed to
disclose that insurance on their motorcars had been declined by another company on the
grounds of misrepresentation and non-disclosure.

It was held that the non-disclosure of this previous refusal was a material fact in the
proposal for fire insurance which entitled the respondents to avoid the policy.

Gordon v. Gordon (1821) 3 Swan 400

●
Where an agreement between two brothers, the elder of whom was believed to be
illegitimate, for the division of the family estates. It turned out that the younger brother,
who had obtained an advantage because of his belief, had known all along that his brother
was legitimate.

It was held that even after a lapse of 19 years, the agreement should be rescinded,
because family arrangements of this sort are uberrimae fidei.

Tate v. Williamson (1886) 2 Ch App 55

●
Tate was a spend thrift Oxford undergraduate. He relied upon Williamson, his cousin, for
financial advice as Tate was estranged from his father because of his extravagance.
Williamson, who had been recommended by Tate’s great-uncle, advised Tate to sell his
estate for 7500 pounds to Williamson, when its true value was 20,000 pounds, and he
duly sold it as advised.

It was held that Williamson’s non-disclosure was a misrepresentation and so the sale was
set aside.

Leaf v. International Galleries (1950) 1 All ER 693

●

138
The plaintiff bought an oil painting of salisbury cathedral for 85 pounds and accepted it as
a genuine constable on the representations of the sellers, the defendants. Five years after
the sale the plaintiff discovered that the pianting was not by constable and he claimed
rescission on the grounds of innocent misrepresentation.

It was held that this claim must fail as the action had not been commenced within a
reasonable time, and further the mistake in question was not one which would entitled the
plaintiff to avoid the contract.

Long v. Lloyd (1958) 2 All ER 402

●
The defendant advertised for sale a motor lorry which he described as being in
‘exceptional condition’ and told the plaintiff, who purchased it, that it was capable of
40mph and did 11 miles to the galon. Two days later certain defects appeared and the
plaintiff accepted the defendant’s offer to pay half the cost of a reconditioned dynamo. On
the following day the plaintiff’s brother set out to drive the lorry to Middlesbrough but it
broke down on the way and an expert found that it was not in a roadworthy condition. The
defendant’s representations concerning the vehicle were untrue, although honestly made,
and the plaintiff sought to rescind the contract on the ground of the defendant’s.

It was held that (i) the representations as to the condition of the lorry were innocent; (ii)
the journey to Rochester was not affirmation because the plaintiff had to have an
opportunity to test the vehicle in a working capacity; and (iii) the acceptance of the offer
to pay half of the cost of the dynamo, and the subsequent journey to Middlesbrough, did
amount to affirmation and therefore rescission could not be granted.

Vigers v. Pike (1842) 3 CL & Fin 562

●
B had agreed in his lifetime to let mines in return for 165,000 pounds. The mines were
operated and a part of the payment made. Pike, B’s executor, sued the managing director
of the company operating the mine for the rest of the money. In defence it was claimed
that a number of misrepresentations had been made to induce the lease.

It was held that the lease could not be set aside since the mines had substantially been
worked and the parties could not be restored to their original positions.

Phillips v. Brooks Ltd (1919) 2 KB 243

●
A man entered the claimant’s shop to buy some jewellery. He selected various items of
jewellery to the value of 3,000 pounds and offered to pay by cheque. While writing the
cheque the man said, “you see who I am, I am Sir George Bullough”. He gave an address
in St James’ square. The claimant knew of a Sir George Bullough and after checking in a
directory that Sir George had an address in St James’ square, he asked if the man would
like to take the jewellery with him. The man replied that the jeweller had better let the

139
cheque clear first but he would like to take the ring as it was his wife’s birthday the
following day. The cheque was dishonoured. The man, who was in fact a rogue called
North, pledged the ring with the defendant pawnbrokers. The claimant sued the
defendants for the return of the ring or its value.

It was held that the contract between the claimant and the rogue North was not void for
mistake but voidable for fraud. At the time the contract was made the claimant intended
to deal with the person physically in his shop and his identity was immaterial. As the
claimant had not rescinded the contract by the time North pledged the ring, the defendants
obtained good title (rights of ownership).

Lewis v. Avery [1971] 3 ALL ER 907

●
Lewis sold his car to a man who claimed he was Richard Green, the star of a popular
television series, ‘Robin Hood’. The man paid by cheque, producing a pass to Pinewood
Studios as proof of his identity. He resold the car to Avery. The cheque had been taken
from a stolen cheque book and was later dishonoured. Lewis sued Avery in the tort of
conversion.

The court held that Lewis intended to deal with the man actually in front of him, despite
his fraudulent claim to be Richard Greene. The contract between Lewis and the rogue
was not void for mistake, but rather voidable for a fraudulent misrepresentation. Since
Lewis had not avoided the contract by the time the rogue sold the car to Avery, Avery
acquired good rights of ownership. He was not liable in conversion.

Saunders v. Anglia Building Society [1971] AC 1004

●
Mrs Gallie, a 78 year old widow signed a document which a Mr. Lee had told her was a
deed of gift of her house to her nephew. She did not read through the document since at
the time of signing her glasses were broken. The document which she signed was in fact
an assignment of her leasehold interest in the house to Mr. Lee. The Angalia Building
Society advanced 2,000 pounds to Lee on the strength of the deed. Mrs Galie brought an
action against Lee and the building society claiming that the deed was void. She pleaded
non est factum.

The House of Lords held that the plea of non est factum must fail. Although her signature
had been induced by fraud, the document she signed was not fundamentally different
from that which she thought she signed. Moreover, persons wishing to plead non est
factum must show that they exercised reasonable care in signing. Mrs. Gallie had not
taken the trouble to read the document.

Lloyds Bank PLC v. Waterhouse (1990)

●

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Lloyds Bank obtained a guarantee from a father as security for a loan to his son. The
father was illiterate, which the bank did not know, but he did ask what was the extent of
guarantee, and concluded that it covered the mortgage on his son’s farm only. In fact it
was worded to guarantee all the son’s indebtedness to the bank. The son defaulted and
the bank sought to recover the full debts, less the amount realized by the sale of the farm.

It was held that the father had not been careless, and had been led into signing something
more than what he believed.

Cundy v. Lindsay (1878) 3 App cas 459

●
Lindsay & Co, Belfast linen manufacturers, received an order for a large quantity of
handkerchiefs from a rogue called Blenkarn. The rogue had signed his name in such a
way that it looked like ‘Blenkiron & Co’, a well-known, respectable firm. Lindsay & Co
despatched the goods on credit to Blenkarn who resold 250 dozen to Cundy. Blenkarn
did not pay for the goods and was later convicted of obtaining goods by false pretences.
Lindsay & Co sued Cundy for conversion.

The House of Lords held that the contract between Lindsay & Co and Blenkarn was void
for mistake. Lindsay & Co intended to deal with Blenkiron & Co, not the rogue, Blankarn.
Cundy was liable for conversion.

Ingram v. Little (1960) 3 All ER 332

●
The plaintiffs, who were two sisters and a third person, advertised for sale the car of which
they were joint owners. A man called on them, and agreed to buy the car for 717 pounds.
In order to persuade the plaintiffs to accept a cheque in payment the man said that he
was H, and gave an address in Surrey. Having checked the name and address in the
telephone directory, the plaintiffs accepted the cheque and parted with the car. The man,
who was not H, sold the car to the defendant and then disappeared, his cheque being
dishonoured. The plaintiffs sought to recover the car or its value from the defendant who
had bought it in good faith.

It was held that the plaintiff’s offer to sell on payment by cheque was made only to H, and
could not be accepted by the man representing himself to be H; no contract had been
formed, therefore, and plaintiffs were entitled to recover the car or damages from the
defendant.

Shongun Finance Ltd v. Hudson [2004] 1 ALL ER 215

●
Where the Court declared that the transaction concluded on face to face to be a nullity.
In this case a fraudster named R obtained P’s driving licence by dishonest means. R
visited the showrooms of a car dealer, where he introduced himself to the sales manager
as Mr Durlabh Patel. R agreed to buy a mitsubishi shogun car for 22,250 pounds, subject

141
to obtaining hire-purchase finance. R completed a hire-purchase proposal form in the
name of Mr Patel. The Sales Manager contacted Shogun Finance’s sales support team,
which ran a check on the details of Mr Patel provided by R. Shogun was satisfied with the
information provided and it accepted the hire-purchase proposal.

R paid a 10 percent deposit on the purchase price, partly in cash and partly by cheque.
The cheque was subsequently dishonoured. The Sales Manager handed over the car
with full documentation. R sold the car to Mr Hudson for 17,000 pounds. Hudson bought
the car for his own use and not as a dealer. R disappeared without a trace. Shogun
Finance Ltd was claiming the return of the car or its value from Hudson. Hudson argued
that he had obtained good title to the car by virtue of the provisions of section 27 of the
High Purchase Act 1964.

The House of Lords held by a majority of three to two, that Shogun Finance Ltd was
entitled to recover the car.

Raffles v. Wichelhaus (1864) 2 H & C 906

●
The claimant entered into a contract to sell "125 bales of Surat cotton, guarantied middling
fair merchant's Dhollorah" to the defendant at the rate of 17 1⁄4 d. per pound. The contract
specified that the cotton would be arriving in Liverpool on the ship Peerless from Bombay
("to arrive ex Peerless from Bombay"). It so happened that there were two British ships
named Peerless arriving in Liverpool from Bombay, one departing in October and another
departing in December. The defendant, according to statements presented in court,
thought the contract was for cotton on the October ship while the plaintiff thought the
contract was for the cotton on the December ship. When the December Peerless arrived,
the claimant tried to deliver it, however the defendant repudiated the agreement, saying
that their contract was for the cotton on the October Peerless. The claimant sued for
breach of contract, arguing that the date of the ship was not relevant and the only purpose
of specifying the name of the ship is that in the contingency that the ship sink en route,
the contract could be voided. The issue before the Court was whether the defendant
should be bound by the agreement to buy the cotton of the plaintiff's Peerless.

Judgment: Though courts will strive to find a reasonable interpretation in order to preserve
the agreement whenever possible, the court in Raffles could not determine which ship
named Peerless was intended in the contract. Consequently, as there was no consensus
ad idem (as defendant alleged), the two parties did not agree to the same thing and there
was no binding contract. Therefore, the defendants prevailed, and did not have to pay.

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 Couturier v. Hastie (1852) 8 Exch 40
●
A contract was made for the sale of Indian corn which the parties believed to be on board
a ship bound for the United Kingdom. Unknown to the parties, the corn had fermented
during the voyage and had been landed at the nearest port and sold before reaching its
destination.

The House of Lords held that this was a case of res extincta. The contract contemplated
that there was an existing something to be sold and bought and capable of transfer but
as the corn had already been sold at the time of the sale by the defendants this was not
the case and the defendants were not liable. The contract was void, and consequently no
bad debt.

Galloway v. Galloway (1914) 30 TLR 531

●
The defendant, assuming his wife to be dead, married the claimant. The defendant and
the claimant later separated and entered into a deed of separation under which the
defendant promised to pay a weekly allowance to the claimant. The defendant
subsequently discovered that his wife was still alive and fell into arrears.

When the claimant sued to recover the arrears it was held that she could not do so
because the separation agreement was void on the ground that it was entered into under
the common mistake that the parties were, in fact, married.

Hartog v. Colin & Shields [1923] 3 ALL ER 566

●
The defendants contracted to sell 30,000 Argentine hare skins to the plaintiff, but by
mistake they were offered at a price per pound instead of per piece. In the pre-sale
negotiations reference had always been made to the price per piece and never to the
price per pound, and there was expert evidence that Argentine hare skins were generally
sold at prices per piece.

It was held that since the plaintiff could not reasonably have supposed that the offer
contained the offeror’s real intention, there was no binding contract.

Amalgamated Investments & Property Co. Ltd v. John Walker & Sons Limited
●
[1977] 1 WLR 164
John Walker Ltd sold to Amalgamated Investment Co Ltd a bonded warehouse and
bottling factory for £1,710,000 for occupation or redevelopment. Amalgamated asked
whether the building was designated historic or of architectural interest. John Walker said
it was not. Unfortunately, on 22 August 1973 the Department of Environment listed the
property. The contract was signed on 25 September 1973. Then the Secretary of State
wrote to John Walker that it had been listed, taking effect on that day. The property value
dropped to £200,000 (because a listed property which one cannot easily develop is often

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worth less money). Amalgamated asked for the contract to be set aside for common
mistake, or for frustration, depending on whether the listing took effect before or after 25
September.

Judgment: The Court of Appeal said the listing took effect on 27 September, when the
Secretary signed the listing papers. However the contract was not frustrated. It held that
Amalgamated had taken on the risk that the building could be listed. This was shown by
the nature of their pre-contractual enquiries. So the listing did not make the contract
something radically different from that contemplated by the parties.

Bell v. Lever Brothers Ltd [1923] AC 161

●
Lever Brothers Ltd (which merged in 1930 to become Unilever) was a company which
traded in Niger, through a 99% owned subsidiary called the Niger Company (formerly the
Royal Niger Company). The Niger trade was in trouble. Lord Leverhulme, the owner of
Lever Bros, hired D'Arcy Cooper (a Quaker and senior partner of his Uncle's accountant
firm, Cooper Brothers) to be the chairman and manage the crisis. Cooper negotiated a
loan from Barclays Bank, which insisted that a professional management run the Niger
subsidiary. So, Cooper hired his friend, Ernest Hyslop Bell, a senior Barclays manager in
1923 as chairman of the subsidiary. Mr Snelling, a tax consultant that had successfully
got Lever Bros a big tax refund in 1921, was appointed as vice chairman. They did well,
and turned a profit. The company was then merged with a former competitor (African and
Eastern Trade Corporation) to form the United Africa Company in 1929. Bell had wanted
to run the new United Africa Company, because he was too old at 54 to have a job in the
City, and he had left his Barclays position. At lunch in the Savoy Grill he agreed with
Cooper that he would get a big compensation package (£30,000) and retire. A similar
"golden parachute" of £20,000 was given to Mr Snelling. However, shortly after, it was
revealed that Bell and Snelling had been part of a regional cocoa cartel, and used
information on future price reductions to sell cocoa from their personal accounts. Lever
Brothers Ltd therefore brought a claim for rescission of the compensation package on
grounds of mistake of fact.

Judgment: Trial-The jury found that Bell and Snelling's illicit dealings breached the
employment contract and that if the Lever Brothers had known they would not have
entered into the agreement. Furthermore, the jury found that at the time of the agreement
Bell and Snelling did not have in mind their illicit acts. Wright J therefore held the
compensation agreements were void. House of Lords-On appeal, the House of Lords
found that there was no mistake and the contract could not be rescinded nor was it void
on mistake. The Court identified the mistake as a common mistake. “ A mutual mistake
as to some fact which, by the common intention of the parties to a contract, whether
expressed or implied, constitutes the underlying assumption without which the parties

144
would not have made the contract they did, and which, therefore, affects the substance
of the whole consideration, is sufficient to render the contract void. ” Effectively, the
mistake must nullify or negative consent of the parties in order for the agreement to be
void. In order for the contract to be void by common mistake the mistake must involve the
actual subject-matter of the agreement and must be of such a "fundamental character as
to constitute an underlying assumption without which the parties would not have entered
into the agreements". From the facts the Court found that the mistake was not sufficiently
close to the actual subject-matter of the agreement. The parties got exactly what they had
bargained for.

Grist v. Bailey [1966] 2 ALL ER 575

●
Bailey agreed to sell a house to Grist for 850 pounds. The price was based on both
parties’ belief that the house had a sitting tenant. The value of the house with vacant
possession would have been 2,250 pounds. Unknown to the parties, the tenants had died
and their son did not stay on in the property.

The court held that the contract was not void at common law but he was prepared to set
the contract aside provided Bailey offered to sell the property to Grist for the proper market
price of 2,250 pounds.

Craddock Bros v. Hutt (1923)

●
An oral agreement for the sale of a house expressly excluded an adjoining yard and yet
the later written agreement and conveyance included the yard.

The court ordered a rectification of the documents in order to express the parties true
original intention.

Riverlate Properties v. Paul [1975] Ch. 133, [1974] 3 W.L.R. 564

●
The plaintiff granted a long lease of a maisonette to the defendant and had intended that
the lessee should pay half the cost of exterior and structural repairs that were required.
The lease however, put the entire burden on the plaintiff. The defendant believed that she
was not responsible for those repairs and the plaintiff claimed for rectification or rescission
of the lease.

It was held that a unilateral mistake of this kind could have no impact on the terms of the
lease agreed by the parties. There was no justification for equity to disrupt the transaction
actually entered into and the mistake was inoperative. The error of failing to include a
suitable term in the lease was the plaintiffs.

Denny v. Hancock (1870) LR 6 Ch. App 1

●

145
The court refused to grant specific performance where the purchaser’s mistake over the
boundary of the property being sold at auction had been caused by an innocent mistake
on the vendor’s part.

Scriven Bros v Hindley (1913)

●
The defendants bid at an auction for two lots, believing both to be hemp. In fact Lot A was
hemp but Lot B was tow, a different commodity in commerce and of very little value. The
defendants declined to pay for Lot B and the sellers sued for the price. The defendants'
mistake arose from the fact that both lots contained the same shipping mark, "SL", and
witnesses stated that in their experience hemp and tow were never landed from the same
ship under the same shipping mark. The defendants' manager had been shown bales of
hemp as "samples of the 'SL' goods". The auctioneer believed that the bid was made
under a mistake as to the value of the tow.

Lawrence J said that as the parties were not ad idem the plaintiffs could recover only if
the defendants were estopped from relying upon what was now admittedly the truth. He
held that the defendants were not estopped since their mistake had been caused by or
contributed to by the negligence of the plaintiffs.

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 UNIT SIX

INVALIDITY – VOID AND ILLEGAL CONTRACTS

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

Types of Contracts Illegal at Common Law

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

1. Contracts to Commit Crimes or Civil Wrongs: Where the purpose of a contract

between the parties is to commit a crime, or a tort, or a fraud against another party, then
that contract will be illegal and unenforceable.

2. Contracts Promoting Sexual Immorality: A contract which seeks to promote or

encourage sexual immorality will be held to be illegal as a principle of common law.

3. Contracts Promoting Corruption in Public Life: An agreement for the sale or

purchase of public offices or honours is unlawful as such practices encourage corruption.

4. Contracts Prejudicial to the Administration of Justice: Contracts which are

prejudicial to the administration of justice are illegal. Therefore a contract to prevent a
prosecution may be illegal and a contract under which one party promises to give false
evidence in criminal proceedings is illegal.

5. Contracts Prejudicial to the Interests of the State: Contracts which are prejudicial
to the interests of the state, such as trading with an enemy during war time, are illegal.

Consequences of Illegality

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

1. A party or claimant may be able to recover money paid or property transferred

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

2. Where a parties are not in pari delicto, that is, where they are not equally guilty.

147
3. Where a party withdraws or repents before the contract has been substantially
performed.

Contracts Void at Common Law

The types of contracts that are void at common law are:

1. Contracts to Oust the Jurisdiction of the Courts: It is a general principle of law that
a contract which purports or seeks to oust the jurisdiction of the courts is void.

2. Contracts Prejudicial to the Status of Marriage: A contract which is prejudicial to

the status of marriage is void. An example of such contracts is one which seeks to restrict
a person’s freedom to marry whoever he wishes. Another type of agreement which is
considered to undermine the status of marriage is the “the marriage brokerage” contract,
this is, an agreement for reward to procure marriage. Such agreements are considered
as contrary to public policy and therefore void.

3. Contracts in Restraint of Trade: A contract in restraint of trade is one that contains

an undertaking, which restricts the future freedom of one person to freely carry on or
exercise his business, trade or profession. A contract in restraint of trade is contrary to
public policy and void unless it can be shown to be reasonable, and is not contrary to
public interest. Restraints take many forms, but among the most important are the
following:

Restraints in the contract of employment: Often contracts of employment contain

●
an express term or covenant which purports to restrict the freedom of the employee, on
the termination of employment, from engaging in a competing business or working for a
competitor for a certain period. So long as such a clause is inserted to protect legitimate
proprietary interests of the employer and is reasonable in extent, the covenant will be
valid and enforceable. In determining the validity of the restraint clause in employment
contract two important factors must be considered.

The first factor is that the restraint clause must seek to protect some legitimate proprietary
interest of the employer such as clientele, confidential information, trade secrets and trade
connection. A distinction must, however, be made between protecting trade secrets or
confidential information, which is protectable interest, and preventing an employee from
making use of knowledge and skills which he has acquired in the course of his
employment, which is not protectable.

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

employment is that it must be reasonable in the circumstances. An employer is not
generally entitled to restrain an employee from carrying on a business which is different

148
from that in which he was employed. Likewise, the restraint must not be too excessive or
wide in area of coverage than is necessary to protect the employer’s interest. The restraint
must also be reasonable in terms of time. Where the restraint is excessive as regards
time of operation it will be unenforceable.

Restraints on the sale of business: A contract for the sale of a business often
●
contains a clause under which the seller of the business agrees or undertakes not to set
up a competing or similar business. This kind of restraint is more likely to be upheld by
the courts than a restraint on an employee since the buyer and the seller of the business
will be negotiating on equal footing. For a restraint to be valid two requirements must be
satisfied. Firstly, there must be genuine sale of the good will of the business. Secondly,
the restraint clause must not be too wide in its scope. Thus the restraint will not be valid
if it purports to give protection on the purchaser that goes beyond the actual business
sold to the seller.

A ‘solus’ agreement by which a trader agrees to restrict his orders from one
●
supplier: Solus agreement is the name given to a contract by which a trader agrees to
restrict his orders to one supplier. The reasonableness of a Solus agreement is
determined in terms of duration of the restraint and if the restraint is not contrary to public
policy.

Price fixing agreements and agreement which seek to regulate or limit supplies of
●
goods: These agreements are often contrary to public interest and regulated to protect
the consumers and public at large.

Restraints protecting other Interests: Restraints clauses may also be used in

●
circumstances which do not exactly fall within the categories discussed above.

Consequences

A clause which is a restraint of trade is void and unenforceable. However, it may be

possible to sever the void parts of the contract. In other words the court may sever the
void or illegal part from the rest of the restraint clause in a contract.

Contracts Prohibited by Statute

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

illegal. Examples of contracts which are prohibited by the statute include:

1. Wagering contracts: Section 18 of the Gaming Act 1845 provides that ‘all contracts
or agreements, whether by parole or in writing by way of saving or wagering shall be null
and void.’ The section 18 further provides that no action can be maintained in any court
for recovery of ‘any money or valuable thing alleged to be won upon any wager’.
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2. Restrictive trade agreements: These are agreements where producers or suppliers
restrict the manufacture, supply or distribution of goods by, for instance, fixing a maximum
selling price for goods or regulating the supply of goods. See Competition and Unfair
Trading Act

Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
a system adopted for the resolution of disputes, with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?

Cases
Alexander v. Rayson [1936] 1 KB 169
●
The plaintiff, Alexander, and defendant, Rayson entered into an agreement whereby the
agreed rent was split into two parts, one part declared to be rent and the other declared
to be for services to the flat concerned. The object was to reduce the assessment for
rates.

It was held that since the plaintiff intended to use the lease and service agreement for an
illegal purpose, the plaintiff could not enforce either the lease or the service agreement.

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 Foster V Driscoll (1929) 1 KB 470
●
A contract made to smuggle whisky into the United States during prohibition was held to
be illegal and void.

Pearce V. Brooks (1886) LR 1 EX 213

●
The plaintiff let a coach out on hire to a prostitute (Brooks), knowing that it would be used
by her to ply her trade.

It was held that the plaintiff could not recover the hire charge when the defendant refused
to pay it. Lord Pollock stated (at P218) as follows: “I have always considered it as settled
law that any person who contributes to the performance of an illegal act by supplying a
thing with the knowledge that it is going to be used for that purpose, cannot recover the
price of the thing so supplied… nor can any distinction can be, made between an illegal
and an immoral purpose; the rule which is applicable to the matter is ex turpi causa non
oritur action (no action arises from a base or wrongful cause), and whether it is an immoral
or an illegal purpose in which the plaintiff has participated, it comes equally within the
terms of that maxim, and the effect is the same; no cause of action can arise out of either
the one or the other”.

Upfill V Wright (1911) 1 KB 506

●
The plaintiff, through his agent, let a flat in London to Defendant, an unmarried woman.
The agent knew that the defendant was the mistress of a certain man and he assumed
that the rent would be paid as a result of her being a ‘kept woman’; that is, it would come
from the man whose mistress she was. Eventually, plaintiff’s agent gave the defendant
notice to quit. The defendant failed to pay the rent for the last half year of the tenancy.
The plaintiff sued for the rent which was still owed to him.

It was held that the plaintiff was not entitled to recover the rent because the flat was let
for an immoral purpose.

Parkinson V College of Ambulance Ltd and Harrison (1925) 2 KB 1

●
Colonel Parkinson was told by Harrison, the secretary of the defendant charity that the
charity would arrange for hire to be granted a knighthood if he made a substantial
donation. Harrison had told Parkinson of the charity’s royal patronage. Parkinson paid
₤3,000 to the college of Ambulance on the understanding that he would receive a
knighthood and he also promised further payment to the charity in the future. When
Parkinson did not receive a knighthood and realized that he had been duped, he brought
an action against the charity to recover back the money that he had paid.

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The court held that the contract was for the purchase of the title, it was contrary to public
policy and was an illegal contract. Despite the fact that the plaintiff had been defrauded;
he knew that he was entering into an improper agreement and he could not recover back
the money he had paid to the charity; nor could he recover damages from the charity or
its secretary.

R.V. Andrews (1973) QB 422

●
The defendant witnessed a traffic accident between a motor car and a moped, as a result
of which criminal proceedings against the car driver were contemplated. The defendant
invited the car driver to pay him to give false evidence at the prospective prosecution, and
the driver offered him a sum of money but no bargain was in fact struck. The defendant
was convicted on a charge of inciting the motorist to pervert the course of justice.

Ragazzoni V. KC Sethia Ltd (1957) 3 ALL ER 286

●
An ordinance issued by the government of India prohibited the taking of goods out of India
if they were destined for any part of South Africa, or were intended to be taken to South
Africa despite being initially destined for another country. KC Sethia Ltd, an English
company, agreed to sell and deliver to Polissino Regazzoni 500,000 bags of jute. To the
knowledge of both contracting parties the jute was to be shipped from India to Genoa so
that it might there be resold to a South Africa buying agency in contravention of the Indian
ordinance. KC Sethia Ltd failed to deliver the jute and Regazzoni claimed damages in an
English court for breach of contract. Sethia defended the action by claiming that the
contract was; to Ragazzoni’s knowledge, an illegal contract and therefore unenforceable
as it’s breach of the Indian ordinance was harmful to the interests of the state.

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

Bowmarkers Ltd V. Barnet Instruments Ltd (1945) KB 65

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

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

Kiriri Cotton Ltd V Dewani (1960) AC 192

●
KC Ltd let a flat in Uganda for a term of seven years to Dewani, who paid a premium of
10,000 shillings. Although neither party realized they were breaking the law, the taking of
the premium was, in fact, a breach of a government ordinance. This ordinance did not
make any express provision that an illegal premium was recoverable by the tenant.
Dewani brought an action to recover the premium.

It was held, by the Privy Council, that the premium was recoverable by the tenant, despite
the lack of an express provision in the ordinance permitting this. It was clear that the
statute was aimed at protecting a particular class of person from another, namely
prospective tenants from landlords.

Kearley V Thomson (1890) 24 QBD 742

●
The defendants were solicitors who were acting on behalf of a creditor petitioning against
a bankrupt. The plaintiff, a friend of the bankrupt, agreed to pay the defendants their costs
if they did not appear at the public examination of the bankrupt and if they did not oppose
the order of discharge against the bankrupt. The money was paid and the solicitors did
not appear at the public examination. However, before the application to discharge the
bankrupt, the friend changed his mind and sought the return of his money from the
defendants.

It was held that the plaintiff could not recover. The contract was illegal since it interfered
with the administration of justice, and as the defendants had partly performed this
contract, the plaintiff’s repentance was too late.

Barker V Jones (1945) 1 WLR 1005

●
In this case an association, which controlled the sport of weightlifting in the United
Kingdom, by its rules vested the government of the association in a central council
consisting of the officers and a number of members. The association empowered its
central council to be the sole interpreters of the rules and to act on behalf of the
association concerning any matter not dealt with by the rules. In all circumstances, the
decision of the council was to be considered as final. As a result of disagreements
between the members, two libel actions were brought against certain officers and council
members. The central council authorized the payment of two sums of ₤100 to solicitors,
out of the association’s funds, towards the defendant’s legal costs. A member of the
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association challenged this decision of the council by seeking a declaration that this use
of the association’s fund was improper.

It was held that the provision in the rules giving the central council the sole right to interpret
the rules of the association was contrary to public policy and void. The judge further
explained that though, in theory, the parties to a contract may make any contract that they
like; this is subject to certain limitations imposed by public policy. One of these limitations
is that the jurisdiction of the courts cannot be ousted by the agreement of the parties. Lord
Denning in Lee V Showmen’s guild of Great Britain (1952) 2 QB 329 at p 342; “If parties
should seek, by agreement, to take the law out of the hands of the courts and put it into
the hands of a private tribunal, without any recourse at all the courts in case of error of
law, then the agreement is to that extent contrary to public policy and void”.

Scott V Avery (1855) 5 HLC 811

●
Where a contract between a ship owner and the underwriters made it clear that no action
should be brought against the insurers until the arbitrators had dealt with any dispute
arising between the parties.

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

Lowe V Peers [1768] 4 Burr 2225

●
A man promised the plaintiff, under seal, that he would not marry any other person except
her. He stated that if he broke this promise to her, he would pay her ₤2000. His promise
was held to be void, as it restricted his freedom of choice without there being any
reciprocal promise from the plaintiff.

Hermann V Charlseworth [1905] 2 KB 123

●
The plaintiff saw an advertisement in the defendant’s paper, the matrimonial post and
fashionable marriage advertiser, and later signed an agreement with the defendant in the
following terms: In consideration of being introduced to or put in correspondence with a
gentleman through the influence of the proprietor of the paper entitled “The matrimonial
post and fashionable marriage advertiser”, and in the event of a marriage taking place
between such gentleman and myself, I hereby agree to pay to the said proprietor the sum
of ₤250 on the date of my said marriage”.The plaintiff also paid the defendant a ‘special
fee’ of ₤52. The plaintiff was introduced to several men by the defendant, who also
interviewed and wrote to other on her behalf, but no marriage or engagement followed.
She sued the defendant to recover back the ₤52.

It was held that the transaction of this case came within the rule which invalidates
marriage brokerage contracts. Accordingly, the plaintiff was entitled to recover back the

154
money paid under this contract, even though the defendant had brought about
introductions and incurred expense in doing so.

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

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

Lord MacNaghten [at p 565] laid the following principle: “The public have an interest in
every person’s carrying out his trade freely; so has the individual. All interference with
individual liberty of action in trading, and all restraints of trade themselves, if there is
nothing more, are contrary to public policy, and therefore void: That is the general rule.
But there are exceptions: restraints of trade and interference with individual liberty of
action may be justified by the special circumstances of a particular case. It is a sufficient
justification, and indeed it is the only justification, if the restriction is reasonable-
reasonable, that is, in reference to the interests of the parties concerned and reasonable
in reference to interests of the public, so framed and so guarded as to afford adequate
protection to the party in whose favour it is imposed, while at the same time it is in no way
injurious to the public”.

Forster & Sons Ltd V Suggett (1918) 35 TLR 87

●
The defendant was employed as the plaintiff’s works manager and had been instructed
in their confidential manufacturing processes for glass. The contract of employment
contained a covenant whereby the defendant was not to divulge any trade secrets and
was not to carry on or be interested in glass manufacture or any business connected with
glass making carried on by the plaintiffs for five years after the termination of his
employment.

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

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

●

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

The court of appeal held that the plaintiffs were entitled to the protection of a reasonable
covenant restraining Harris from going to work for a rival company in the mail order
business within a limited period of leaving their employment. Lord Denning at p. 1034
stated: “It seems to me that this really was a case where Littlewoods had a great deal of
confidential information which Paul Harris had acquired in the course of his service with
them and which they were entitled to protect by a reasonable covenant against his going
away and taking it to their rivals (GUS Ltd) in trade…….”

Herbert Morris Ltd V Saxelby [1916] 1 AC 688

●
A seven year restraint on the employee was held by the House of the Lords to be void as
being simply an attempt to prevent the employee making use of the technical skill and
knowledge which he acquired with his employer if he took up employment with a rival
company. The acquired skills and knowledge were not owned by the employer.

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

Flitch V Dewes [1921] 2 AC 158

●
A lifelong restraints on solicitor’s managing clerk was held by the House of Lords to be
valid and enforceable. Whilst working in Tamworth, the managing clerk agreed with his
employer that he would not practice within seven miles of Tamworth town hall, after
leaving his employment. This covenant was enforceable, despite that the restriction was
of unlimited duration. It was adjudged reasonable, given the nature of the profession
concerned. The defendant would have acquired an influence over his employer’s clientele
and a limited time restraint would not have given the required protection to the employer.
156
 Lucas T and company V Mitchell [1974] Ch 129
●
The defendant salesman contracted that he should not for one year after the
determination of his employment solicit orders within his trading area from present
customers and those whom his employer supplied during the previous twelve months;
and to deal in the same or similar goods to those that he sold.

In an action for breach of contract, the court held the first clause not to solicit orders to be
valid and enforceable; but held the second clause of dealing to be unreasonable and void.

SW Strange Ltd V Mann [1965] 1 ALL ER 1069

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

Mason V Provident clothing and supply Company Limited [1913] AC 724

●
Provident Clothing Limited employed Mason as a local canvasser in its Islington branch
in London. His job was to obtain members and collect their instalments. He had no duties
outside his assigned district. Mason covenated not to enter into similar employment within
five miles of London for a period of three years.

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

Commercial plastics Ltd V Vincent [1965] 1 QB 623

●
The plaintiff companies (CP) were manufacturers thin PVC calendered plastic sheeting,
a rapidly developing section of the plastic sheeting. The plaintiff company had five
principal United Kingdom competitors with whom they shared most of the market, but the
plaintiff’s pre-eminence was in the field of manufacturing thin PVC calendar sheeting for
adhesive tape. The plaintiff company employed the defendant, Vincent, a plastic
technologist, to coordinate research and development in the production of thin PVC
calendered sheeting for adhesive tape. It was a condition of the defendant’s employment
that he would not seek employment with any of CP’s rival in the PVC calendered sheeting
field for one year after leaving the plaintiff’s employment. The defendant and the plaintiff
sought an injunction.
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The plaintiff company action failed because the clause in restraint of trade was too wide.
The clause was worldwide, whereas the plaintiff did not require the protection outside the
United Kingdom. Besides, it extended to their competitors in the whole PVC calendaring
field, when the plaintiff required protection from the defendants only in relation to
competitors in the plastics/adhesive tape industry. Accordingly, the court of appeal held
the restraint clause to be unreasonable and consequently void and unenforceable.

Fellows and Sons V Fisher [1976]

●
Conveyancing clerk employed by the firm in Walthamstow agreed that for five years after
the termination of employment he would not be employed or concerned in the legal
profession anywhere within the postal district of Walthamstow and Chingford or solicit any
person who had been a client of the firm when he had worked there.

The court held that the five year restraint was too long and as such was void and
unenforceable.

Vancouver Malt and sake brewing Co Ltd V Vancouver Breweries Co Ltd

●
[1943] AC 181
A company that was licensed to brew beer, but which did not in fact brew any, agreed to
sell it business, and to refrain from manufacturing beer for 15 years. Since the company
was not actually brewing the beer the purchaser could only have paid for the tangible
assets, that is, goodwill to sell. The purchaser had not therefore bought the promise not
to brew beer, and so he could not enforce it.

British reinforced Concrete Engineering Co Ltd V Schelff [1921] 2 Ch 563

●
The plaintiff company manufactured and sold “BRC” road reinforcements throughout the
United Kingdom. The defendant had a smaller, more local business, selling “Loop” road
reinforcements, but he was not involved in manufacturing these products. The plaintiff
company bought the defendant’s business, and the defendants covenanted that he would
not enter into competition with them, either in business or in the employment of a rival, in
the manufacture or sale of road reinforcements. The defendant was later employed by a
road reinforcement company and was sued by the plaintiff company for breach of his
agreement with them.

The court held that had the clause been confined to ‘sales’ it would have been valid, but
to include ‘the manufacture of reinforcements’ made the restraint wider than was
necessary, and therefore void. The plaintiffs were entitled to the protection of their
proprietary interest in the defendant’s business, which they had just bought, but they were
not entitled to protection in respect of their wider business interests. The defendant’s
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business was concerned with the sale, not the manufacture, of a particular type of road
reinforcement. It was not reasonable to restrict the defendant’s future activities in such an
extensive way.

ESSO Petroleum V Harper’s garage (Stourport) Ltd (1968) AC 269

●
The parties entered into agreements relating to the supply of ESSO petrol to two garages
belonging to Harper. By these agreements Harper agreed to purchase petrol only from
ESSO, and in return they obtained a small discount on the price. For the first garage the
tie was to last for four years and five months, but for the second garage a loan of £7,000
was made and the tie was to last for 21 years while the mortgage repayments were made
on this loan. An injunction was sought to prevent Harper from buying petrol from another
supplier.

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

Petrofina Ltd V Martin (1965)

●
The defendant broke the agreement by selling other makes of petrol, and the plaintiff
sought to enforce it by means of an injunction preventing the defendant from doing so.

It was held that the restraint was invalid because its 12 years duration was unreasonable.

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

Silverton Records V Mountfield (1993) EMLR 152

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

159
their objections to it. Accordingly, the company sought a declaration that the agreements
were enforceable against the group.

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

Goldsoll V Goldman (1915) 1 Ch 292

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

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

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 UNIT SEVEN

PERFORMANCE AND BREACH

Introduction
The discharge of a contract means in general that parties are freed from their mutual
rights and obligations. The parties are discharged or freed from their contractual
obligations in four ways namely, Performance, Agreement, Frustration and Breach.

Performance

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

Exception to the Rule

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

1. Divisible/severable contracts: Most contracts are said to be ‘entire’, that is

indivisible. The obligations of the parties are interdependent and concurrent, and as such
neither party is entitled to demand performance from the other, either in whole or in part,
until he himself has completely fulfilled, or is ready and willing to fulfil, his own obligations.
Thus a party is not entitled to payment until he has completely performed his part of the
contract. However, where a contract may be divided or split into several parts or stages,
then payments for parts or stages that have been completed can be claimed. Whether a
contract can be severable or not depends on the intention of the parties. In the absence
of evidence as to intention the courts are reluctant to construe the contract so as to require
complete performance before any payment becomes due.

2. Acceptance of partial/ part performance: If one part to a contract partially performs

his obligations and the other party accepts the benefit of the partial performance, then he
is obliged to pay a reasonable price for it. If however, the party receiving the benefit of
161
partial performance does not have the option of whether or not to accept or reject the
partial performance, then he is not obliged to pay for it.

3. Prevention of performance: Where a party is prevented from completely

performing his obligations under the contract by the action of the other party he can either
bring an action for damages for breach of contract or he can bring a quantum meruit
action to claim for the work done.

4. Substantial performance: Where a party to a contract has substantially performed

his obligations he is entitled to claim the contract price less a reduction for defects or
deficiencies. This exception only applies when the defect relates to the quality of the
performance.

5. Time of performance: At common law a person who failed to perform his

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

Agreement

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

Bilateral Discharge

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

1. Variation of the existing contract.

2. Rescission plus agreement on the terms of a new contract.

162
3. Rescind or termination of the existing contract.

Unilateral Discharge

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

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

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

Novation

There are two further situations where parties can discharge the contract by agreement,
namely,

1. Novation: Novation happens when two existing contracts are replaced by a new
one.

2. Condition Subsequent: A contract may include provision for its own discharge by
imposing a condition precedent, which prevents the contract from coming into operation
unless the condition is satisfied. Alternatively, the contract may impose a condition
subsequent by which a contract is discharged on the later happening of an event.

Frustration

A contract may be discharged by frustration if something happens which is not the fault
of the parties and was not contemplated by them, and prevents them from performing the
contract. Originally, the common law did not take such a lenient view of changes in
circumstances and required that the parties to a contract should provide for all
eventualities or unforeseen contingencies. If, however, because of the happening of an
unforeseen event performance of an obligation became impossible, the party required to
perform the impossible obligation would be liable to pay damages for non-performance.

The common law justification for this harsh principle or rule is that a party to a contract
can always guard against unforeseen contingencies by express stipulations, if he
voluntarily undertakes an absolute and unconditional obligation he cannot complain
merely because events turn out to his disadvantage. Under the doctrine of frustration the
parties are discharged from their contract if circumstances or events occur which makes

163
it impossible for the parties to perform their obligations under the contract. For the doctrine
of frustration to occur three requirements must be satisfied; namely:

1. An event has taken place which could not have been foreseen by the parties when
they entered into the contract.

2. None of the parties to the contract is in any way responsible for the event.

3. If the contract was to be performed now despite the event, the contract would be
fundamentally different from the one originally entered into.

Frustrating Events

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

1. Destruction of the subject matter: A contract may be frustrated by the destruction

or non-availability of the subject matter of the contract, that is, a thing essential to the
performance of the contract or attainment of the fundamental object which the parties had
in view.

2. Personal incapacity to perform a contract of personal service: If the presence of a

particular person is necessary for the execution of the contract, illness, insanity or death
of that person will discharge a contract of personal service. However, in long term
contracts, the courts are reluctant to find that illness frustrates the contracts.

3. Non-occurrence of an event if it is the sole purpose of the contract: Where the

parties make a contract on the basis of some forth coming event, and if the event fails to
take place, and as a result, the main purpose of the contract cannot be achieved, the
doctrine of frustration will apply.

4. Supervening Illegality: Where the performance of the main object of the contracts
subsequently becomes illegal, the contracted will be discharged. An example is where
there is a change in the law which makes the performance of the contract illegal.

5. Government interference: Government or administrative interference in the

activities of one or both of the parties to the contract is a common cause of frustration,
more especially in time of war. If the maintenance of the contract in such a case imposes
upon the parties a contract that is fundamentally different from that which they made, the
contract is discharged.

Non-Frustrating Events

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

164
1. Where parties have expressly provided for in the contract for the event or
contingency which has occurred. It is a means by which risk is allocated and loss
apportioned between the parties in circumstances which neither party has seen.

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

perform to one of the parties.

3. Where one party is responsible for the frustration event. This is also referred to as
‘self-induced’ frustration. The onus of proving that the frustration was self-induced rests
upon the party raising the allegation.

Consequences of Frustration of Contracts

Once a contract is frustrated the common law position is that it abruptly and automatically
comes to an end. The contract is not void ab initio, that is from the outset or beginning,
but only from the time the frustrating event occurred. Therefore, if before the frustrating
event has happened work had been done or money transferred, the common law rule is
that losses lie where they fall. It is therefore possible to recover money due or paid before
frustrating event unless there is a total failure of consideration.

Breach

A breach of contract occurs if a party to a contract fails to comply with his obligations
under it or performs his obligations in a defective manner. It may also occur where one
party to a contract fails to comply with the terms of the contract. Breach of contract gives
rise to a secondary obligation to pay damages to the innocent party who has suffered as
a result of the breach.

However where the breach falls into one of the two categories, the primary obligation to
perform the contract’s terms remains. The said two categories of breach, which will entitle
an innocent party not only to claim damages but also to treat the contract as discharged
are:

1. Where the party in default has repudiated the contract either before performance
is due or before it has been fully performed.

2. Where the party in default has committed a fundamental breach.

Anticipatory Breach

The anticipatory breach occurs where, one party indicates to, or informs the other either
by words (express) or by conduct (implicit) that he will not honour or perform his
contractual obligations. This type of breach will normally be repudiatory, since the contract

165
is renounced or the party incapacitates himself from performing the obligations under the
contract. An anticipatory breach gives the injured party two options namely:

3. He can elect to treat the contract as repudiated by the other, recover damages for
breach or for reasonable remuneration for the work which he has performed and treat
himself as being discharged from his primary obligation under the contract.

4. He can elect to affirm the contract, that is, allow the contract to continue until there
is an actual breach.

If the innocent party elects to treat the contract as still subsisting despite the other party’s
anticipatory breach, then the innocent party may lose the right to sue for breach of
contract if the contract is discharged for frustration or illegality. In other words a party in
default will be discharged from his obligations or liability in case of the contract being
discharged by frustration or illegality.

Termination by Anticipatory Breach

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

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

be sued on them.

2. He need not accept nor pay for further performance.

3. He can refuse to pay for partial defective performance already received.

4. He can claim back the money paid to the defaulter if he can and does reject
defective performance.

5. He is not discharged from the contractual obligations, which were due at the time
of termination.

Besides, the innocent party may also claim damages from the party in default for losses
sustained by him in respect of contractual obligations not performed at the time of the
default; and losses sustained by him regarding contractual obligations, which were due
in future. Finally an innocent party who began to perform his contractual obligations and
was prevented from completing them by the other party in default, he can claim
reasonable remuneration on a quantum meruit basis.

Actual Breach

166
Actual breach of a contract may occur through the following three ways namely:

1. Non-performance, that is, the due date of the performance arrives and the other
party does not perform his obligation or part of the bargain.

2. Defective performance, that is, the performance is not precise and exact.

3. Untruth as regards a term of the contract, for instance, where the promise made
by a party has deliberately concealed the true intensions.

Whether an actual breach discharges the parties from their contractual obligations
depends on whether the breach is fundamental. The breach is fundamental if the term of
the contract that has been broken is of importance to the parties, and goes to the root of
the contract that it makes further performance impossible. The terms of the contract may
be divided into those terms which are important (conditions) and those less important
(warranties).

A breach of a condition does not automatically terminate the contract. It gives the injured
party the option of either treating the contract as discharged or he may wish to continue
with the contract and then claim damages for breach. On the other hand, breach of a
warrant does not discharge the contract. It merely entitles the injured party to sue for
damages, and in all respects the contract continues as before.

Objectives

What is …?

Reflection

Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice? 167

a system adopted for the resolution of disputes, with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?
Cases
British Russian gazette and Trade Outlook Ltd V. Associated Newspapers
●
Ltd [1933] 2 K. B. 616
Mr. Talbot agreed to compromise two actions of libel, which had been commenced by
him and by the British Russian gazette, in respect of certain articles in the Daily Mail. His
promise was expressed in a letter in which he stated as follows: “I accept the sum of one
thousand guineas on account of costs and expenses in full discharge and settlement of
my claim……. And I will forthwith instruct my solicitors to serve notice of discontinuance;
or to take other steps….. to end the proceedings now pending.” Before payment of the
thousand guineas had been made, Talbot disregarded this compromise and proceeded
with the action.

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

Aberfoyle Plantations Ltd V. Cheng [1906] A.C. 115

●
The parties agreed in 1955 to sell and buy a plantation, which included 182 acres in
respect of which the leases had expired in 1950. The vendor had tried without success in
the intervening years to obtain a renewal of the leases. Clause 4 of the agreement
provided that “the purchase is conditional on the vendor obtaining a renewal” of the
leases. If he proved “unable to fulfill this condition, this agreement shall become null and
void”. The vendor failed to obtain the renewal.

It was held that the purchaser could not recover the deposit he had paid.

Head v Tattersall [1871] LR 7Ex ch 7

●
The plaintiff bought from the defendant guaranteed “to have been hunted with Bicester
hounds,” with the understanding that he could return it up to the following Wednesday, if
it did not answer the description. While in the plaintiff’s possession, but without fault on
168
his part, the horse was injured, and was then found never in fact to have been hunted
with a Bicester hounds. The plaintiff returned it within the time limit and sued for the price
he had paid.

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

Mersey Steel & Co [1884], 9 APP cas 434

●
Lord BLACKBURN stated as follows: “Where there is a contract to be performed in the
future, if one of the parties has said to the other in effect ‘if you go on and perform your
side of the contract I will perform mine,’ that in effect, amounts to saying ‘I will not perform
the contract.’ In that case the other party may say, ‘You have given me distinct notice that
you will not perform the contract. I will not wait until you have broken it, but will treat you
as having put an end to the contract, and if necessary I will sue you for damages, but at
all events I will not go on with the contract,”

White and Carter (councils) Ltd V. McGregor [1961] 3 ALL ER 1178

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

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

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

●
The defendant engaged the plaintiff as a courier to accompany him ton a European tour
commencing on 1 June. On May 11 the defendant wrote to the plaintiff to say that he no
longer required his services. On 22 May the plaintiff commenced legal proceedings for
anticipatory breach of contract. The defendant objected that there was no actionable
breach until 1 June.
169
It was held that the plaintiff was entitled to sue as soon as the anticipatory breach occurred
on 11 May.

Avery V. Bowden (1885) 5 E & B 714

●
A ship was required to load cargo at Odessa within 45 days. The ships master was told
before the expiry of these lay days that no cargo would be available. He elected to affirm
the contract and remained in port hoping that a cargo would be provided. Before the expiry
of the 45 day period the contract was frustrated by the outbreak of war, which made it
illegal to load a cargo at an enemy port.

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

Paradine v Jane [1647]

●
Aleyn, 26, the defendant was lessee of land and when sued for arrears of rent he
contended that he was not liable to pay as the land in question had been occupied by a
German Prince who had invaded the realm with an hostile army of men; therefore
preventing the defendant from receiving the profits from the land.

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

Taylor V. Caldwell [1863], 3B & s. 826

●
A hall was let to the plaintiff for a series of concerts on specified dates. Before the date of
the first concert the hall was accidentally destroyed by fire. The plaintiff sued for damages
for failure to let him have the use of the hall as agreed.

It was held that the destruction of the subject matter rendered the contract impossible to
perform and discharged the defendant from his obligations under the contract.

Robinson v Davison [1871] LR 6 Ex 269

●
The defendant contracted to play in a concert on a particular day but fell ill.

It was held that the performer’s illness on that particular day was sufficient to frustrate the
contract.

Condor v Barron Knights Ltd [1966] 1 WLR 87

●
The plaintiff aged 16 contracted to perform a drama in a pop group. His duties, when the
group had won were to play on every night of the week. He fell ill and his doctor advised
170
him that he should restrict his performances to four nights per week. The group terminated
his contract.

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

Storey v Fulham Steel Works [1907] 24TRL 89

●
The plaintiff was employed by the steel works for five years as manager. After working
for two years he became ill and needed time away from work. Six months later he
recovered, but during his illness his employment had been terminated. The plaintiff sued
for breach of contract and the defendant claimed that the plaintiff’s illness discharged the
contract.

It was held that the plaintiff’s absence for six months did not go to the root of the five year
contract and termination could not be allowed.

Krell v Henry [1903] 2 KB 740

●
A room belonging to the plaintiff and overlooking the root of the coronation procession of
Edward VII was let for the day of the coronation for the purposed of viewing the
procession. However, the coronation was postponed owing to the illness of the King. The
owner of the rooms sued for the agreed fee which was payable on the day of coronation.

It was held that the contract was made for the sole purpose of viewing the procession, as
the event did not occur, the contract was frustrated.

Herne Bay Steamboat Co. v Hutton [1903] 2 KB 683

●
The court refused to declare the contract to be discharged by frustration. A steam boat
was hired for two days to carry passengers, for the purpose of viewing the naval review
at Spithead and for a day’s cruise around the fleet. The review was, however, cancelled
due to the illness of the king but the steam boat could have taken passengers for a trip
around the assembled fleet, which remained at Spithead.

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

Baily v De Crespigny [1869], LRF 4 QB 180

●
A landlord covenanted that neither he nor his successors in the title would permit building
on paddock which adjourned the land let. The paddock was then compulsorily acquired
for a railway, and a station was built.

171
It was held that the landlord was not liable for breach of the covenant because it was
impossible for him to secure performance of it.

Denny, Mott and Dickson Ltd v Fraser and Company Ltd [1944] AC 265
●
The two parties made an agreement relating to the sale of timber and the option to
purchase or lease a timber yard. Both parties agreed that the sale of timber was frustrated
in 1939 by timber control orders. However, in 1941, Denny, Mott and Dickson attempted
to exercise their option to purchase the timber yard.

The House of Lords held that a contract for the sale of timber was frustrated because the
subsequent passage of various control of timber orders rendering performance of the
contract, trading in timber, illegal. Lord Macmillan, at p.272, stated: “It is plain that a
contract to do what it has become illegal to do cannot be legally enforceable. There cannot
be default in not doing what the law forbids to be done.”

Metropolitan Water Board v Dick, Kerr and Co. Ltd [1918] AC 119
●
In July 1914 the appellants contracted to construct a reservoir in six years. The agreement
contained a proviso which stated that time should be extended if delays were caused by
difficulties, impediments or obstruction howsoever occasioned. War broke out and in 1916
the Minister of Munitions ordered the respondents to stop work and to disperse and sell
the plant. This prohibition was still in force in November 1917. The appellants claimed
that the order had put an end to the contract.

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

Tamplin Steamship Co. Ltd v Anglo-Mexican Petroleum Products Co. Ltd

●
[1916] 2AC 397
A tanker was hired or chartered for five years from December 1915, to December 1917,
to be used by the charters for the carriage of oil. In February, 1915, the tanker was
requisitioned by the Government and used as troop ship. The charters were willing to pay
the agreed freight to the owners, but the latter, desirous of receiving the much larger sum
paid by the Government, contended that the requisition had frustrated the commercial
object of the venture and therefore put an end to the contract.

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

172
 Tsakirolou & Co Ltd V. Noblee and Thorl Gmbh [1962] AC 93
●
In October 1956 sellers agreed to deliver ground nuts from Port Sudan to buyers in
Hamburg, Germany, shipment to take place in November/December 1956. On November
2, 1956 the Suez Canal was closed to traffic. The sellers failed to make the shipment and,
when sued for damages, claimed that the contract had been frustrated.

The House of Lords held that this was not sufficient to discharge the contract for
frustration. It had not become impossible to carry out the contract, as shipment could have
been made via the Cape of Good Hope, a longer and much more expensive operation.

Davis Contractors Ltd V. Fareham Urban District Council [1956] A.C 696
●
The plaintiffs contracted to build the defendants 78 council houses within eight months
for a fixed price through no fault of the plaintiffs there was scarcity of skilled labour and
the work took 22 months to complete at a cost of £115,000. The plaintiff claimed that by
reason of the scarcity of labour the contract had been frustrated and that they were
entitled to recover a sum in excess of the contract price on the basis of a quantum meruit.

It was held that the plaintiff’s claim should fail. Hardship, material loss or inconvenience
did not amount to frustration; the obligation must change such that the thing undertaken
would, if performed, be a different thing from that contracted for. Lord RADCLIFFE, at
pp728-9, stated: “…. That frustration occurs whenever the law recognizes that without
default of either party a contractual obligation has become incapable of being performed
because the circumstances in which performance is called for would render it a thing
radically different from that which was undertaken by the contract.”

173
 Maritine National Fish Ltd V. Ocean Trawlers Ltd [1935] ALL E.R Rep. 86
●
The appellants entered into a contract for the hire or charter of a trawler for use in Otter
trawling from the respondents. They had four other trawlers of their own. They applied to
the Canadian Minister of Fisheries for the necessary licences for five trawlers but were
granted only three licences. They nominated three of their own trawlers for the licences
and argued that the contract for the charter of the fifth trawler had been frustrated since
it could not lawfully be used.

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

Joseph Constantine Steamship Line, Ltd V. Imperial Smelting Corporation,

●
Ltd [1941] 2 ALL E.R 165
The day before chartered ship was due to load her cargo an explosion of such violence
occurred in her auxiliary boiler that the performance of the charter-party became
impossible. The cause of the explosion could not be definitely ascertained, but only one
of three possible reasons would have imputed negligence to the ship-owners.

It was held by the House of Lords that, since the characters were unable to prove that the
explosion was caused by the fault of the owners, the defence of frustration succeeded
and the contract was discharged.

Chandler V. Webster [1905] 1 KB. 493

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

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

Fibrosa V. Fairbairn [1942] 2 ALL E.R. 122

●
The plaintiff placed an order for the machinery to be delivered to Poland within three or
four months. He paid £100 of the contract price of £4,800 with this order. Shortly
afterwards the Second World War broke out and Germany army occupied Poland. The
contract therefore was frustrated. The plaintiff sued to recover the £1000, which had been
paid.

174
It was held that the deposit was repayable since the plaintiff had received absolutely
nothing for it. There had been a total failure of consideration.

Appleby V. Myers [1867] L.R 2 C.P 651

●
In that case the plaintiffs, in consideration of a promise to pay £459, agreed to erect
machinery on the defendant’s premises, and to keep it in order for two years from the
date of completion. When the erection was nearly complete an accident al fire entirely
destroyed the premises together with all they contained. An action brought by the
plaintiff’s to recover £419 for word done and materials supplied failed.

Re Moore & Co. and Landaver & Co [1921] 2KB 519

●
The buyer ordered a consignment of tinned fruit, to be packed in cases of 30 tins each.
The correct amount was delivered, but about half was in cases of 24 tins each.

It was held that the buyer was entitled to reject the whole consignment. There was an
agreement for the sale of 3,000 tins of canned fruit packed in cases of 30 tins. When
delivered it was discovered that half the cases contained only 24 tins although the total
number of tins was still 3,000. The market value was not affected. The Court of Appeal
held that notwithstanding that there was no loss to the buyer, he could reject the whole
consignment because of the breach of s13 of the Sale of Goods Act (goods must
correspond with the description).

Bolton V Mahadeva [1972] 2 ALL ER 1322

●
Mr Walter Charles Bolton installed central heating for £560 in Mr T Mahadeva’s house. It
was too cold, the heat came unevenly and it all gave off fumes. Bolton refused to correct
it, which would cost £174. Mahadeva refused to pay any money at all. Bolton sued. The
Brentford Deputy County Court judge, Sir Graeme Finlay, held that the contract price
needed to be paid, minus a sum for the cost of putting the heating system right (a total of
£446, including labour).

Judgment: Sachs LJ held that Bolton was entitled to nothing because there had been no
substantial performance at all. At 1015 he said, ‘It is not merely that so very much of the
work was shoddy, but it is the general ineffectiveness of it for its primary purpose that
leads me to that conclusion.’

Roberts V. Havelock [1832], 3 B & Ad. 404

●
The defendant’s ship was sailing from Cardiff to Alexandria with a cargo of iron when it
was damaged and forced to dock at Milford Haven to allow necessary repairs to be carried
out. The plaintiff, a shipwright, was employed and undertook to put the ship into thorough
repair. Before the work was completed the plaintiff asked for payment in respect of that

175
part which he had carried out, but when payment was refused he sued to recover the
amount to which he maintained he was entitled at that stage.

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

Sumpter V. Hedges [1898] 1 QB 673

●
The plaintiff, a builder, contracted to build two houses and stables upon the defendant’s
land for the sum of ₤565. The plaintiff did part of the work, amounting in value to about
₤333, and then abandoned the contract. The defendant completed the buildings and the
plaintiff claimed payment in respect of that part of the work which he had carried out

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

Planche V. Colburn (1831)

●
The plaintiff had agreed to write a book on costume and ancient Armour which was to
appear in serial form in the defendants periodical. The plaintiff was to be paid ₤100 on
completion of the book. After the plaintiff had done some research, and written some of
the book, but before he had completed it, the defendant stopped publishing the periodical.

It was held that the plaintiff had been wrongfully prevented from performing the contract
and he was entitled to 50 guineas as reasonable remuneration on a quantum meruit basis.

Hoeing V. Isaacs [1952] ALL ER 176

●
The defendant employed the plaintiff to decorate and furnish his flat at a total price of
₤750. There were defects in the furniture, which could be put right at a cost of ₤56. The
defendant argued that the plaintiff was only entitled to reasonable remuneration.

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

Charles Richards, Ltd V. OppenHeim [1950] 1 KB 616

●
Early in 1947 the defendant ordered from the plaintiffs a Rolls Royce chassis, and in July
the plaintiffs agreed that a body should be built for it within “six or at most seven months”.
The body was not completed seven months later, but the defendant agreed to wait
another three months. At the end of this extended period the body was still not built. The
defendant then gave a final notice that if the work were not finished within a further period
of four weeks he would cancel the order. The body was not finished within this period and
the defendant cancelled the order. The completed body was tendered to the defendants
three months later, but he refused to accept it.

176
It was held that the defendant could not have refused delivery merely because the original
date had not been met, but he could do so upon giving the plaintiff a reasonable time to
deliver. Here the notice did given a reasonable time, so the defendant was justified in
refusing delivery.

177
 UNIT EIGHT

REMEDIES FOR BREACH OF CONTRACT

Introduction
If a party to a contract fails to perform his contractual obligations, the courts, at the request
of the aggrieved or injured party, will impose conditions upon the defaulting party. These
conditions are aimed not at punishing the party in default but to provide a remedy for the
injured party. In this respect, therefore, the law of contract is quite unlike criminal law, as
remedies are designed to compensate, and not to penalize. The remedies that are
available for the break of contract fall into two groups namely common law remedies, and
equitable remedies. The common law remedies are:

1. Repudiation of the contract.

2. Action for the price or agreed sum.

3. Quantum meruit.

4. Damages.

The equitable remedies are specific performance, Rescission and injunction.

Repudiation of the Contract

Where there has been anticipatory breach or breach of a vital condition of the contract,
the injured party has the option of repudiating the contract that is treating it as ended or
terminated. Where the injured party opts to repudiate the contract he will do nothing
further on the contract. Besides he will escape from all further contractual obligations and
in addition will sue for damages.

Action for the Price or Agreed Sum

If one party has performed his contractual obligations and the other party’s breach
consists of a failure to pay the contractual price or other agreed sum, the performing party
can claim this agreed (liquidated) sum rather than damages.

Quantum Meruit

The common law provides a convenient remedy when the injured party seeks, not a
precise sum alleged to be due to him, but a reasonable remuneration for services
rendered. He is then said to sue on a quantum meruit. Quantum Meruit is classified as a
claim in quasi-contract. In some circumstances where there is no contract the law seeks
to achieve a just result by treating the person concerned as if they had entered into a
178
contract on the appropriate terms. Quasi-contract relates only to the payment of money
on the ground that retention of certain funds would be unjustified enrichment.

The term ‘Quntum Meruit’ literally means ‘how much it is worth’. It is a measure of the
value of contractual work, which has been performed. The aim of such an award is to
restore the plaintiff to the position he would have been in if the contract had never been
made. It is a restitutory award. By contrast an award of damages aims to put the injured
party in the position he would have been in if the contract had been performed. It is a
compensatory award. Quntum Meruit may be claimed in the following circumstances:

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

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

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

Damages

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

Remoteness of Damages

It is important to note the distinction between damage and damages. Damage is the loss
suffered a party, whilst damages are the financial compensation awarded to the party.
The consequences of a contractual breach can often extend well beyond the immediate,
obvious losses. For example, failure to deliver goods may result in the buyer being unable
to complete the work on a particular job, which will in turn put him in breach with the party
who had contracted him to carry out the job. That party may in turn suffer consequences,
thus the original breach leads to a chain of events which become increasingly remote
from it.

179
The courts take the view that it is unfair to make a party in default responsible for damages
caused as a result of circumstances of which he was not aware. In other words the injured
party cannot be compensated for all the consequences that logically result from the other
party’s breach, otherwise there might be no end to liability. Some losses therefore will be
too remote.

Measure of Damages

1. Loss of Expectation: Once the cause for which the injured party may receive
damages has been established the issue to be then determined is the size of those
damages, that is, how to express the loss suffered in terms of money.

Difference in value: One way in which expectation of loss may be measured is to

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

Cost of cure: Where the breach of contract consists of defective performance of a

●
building contract, the courts have sometimes based the award of damages on the
difference between the value of the building contracted for and the defective building, and
sometimes on the cost of curving the defect.

2. Reliance Loss: The injured party may claim for reliance loss (wasted expenses),
that is, the expenses incurred in preparing to perform or performing the contract which
have been wasted as a result of the breach.

3. Inconvenience and Annoyance: At one time damages could not be recovered for
any non-financial loss arising from the breach of the contract. In some recent cases,
however, damages have been recovered for mental distress, inconvenience or
annoyance.

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

Mitigation of Damages

180
The law imposes a duty on the injured party to take all reasonable steps to mitigate the
loss caused by the breach of contract, and prevents him from claiming compensation for
any part of the damage which, may arise due to his negligence.

Liquidated Damages and Penalties

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

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

Secondly, the amount may be in the nature of a threat held over the other party in terrorem
(to frighten the other party)-a security to the promisee that the contract will be performed.
A sum of this nature is called a ‘penalty’, and is designed to compel the other party to
perform the contract.

Liquidated damages are enforceable, and penalty clauses are not enforceable beyond
the amount of the injured party’s actual loss. Thus the party who brings an action for the
enforcement of the penalty can recover compensation only for the damage that he in fact
suffered, and as such he is not entitled to recover the amount stated in the contract if he
has not in fact suffered so much loss. Whether a particular sum is a liquidated damages
or penalty is a matter of construction and depends on the intention of the parties.

Unlimited Damages

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

Objectives

What is …?

Reflection
181
 Is law:

a set of rules of conduct which are enforced by the duly constituted courts?
a set of commands of him or them that have coercive power?
a set of rules of conduct imposed and enforced by the sovereign?
a body of principles recognised and applied by the State in the administration of
justice?
a system adopted for the resolution of disputes, with the sanction of the State?
a technique for the regulation of social power?
the embodiment of social, moral and sometimes theological constructs?

Cases
White and Carter (councils) Ltd V. McGregor
●
P was advertising contractor, advertising on litter bins. One contract with D expired in
June 1957. Sales manager for D signed new contract and then purported to cancel on
the same day (this was a wrongful repudiation). P did not accept repudiation and
continued to prepare and exhibit the advertising plates. D refused to pay and P sought to
recover the amount for the whole period (which by a clause in the contract would fall due
if payment outstanding for 4 weeks.

HELD Lord Reid-Where one party repudiates the other party has an option. May accept
and sue for damages for breach, whether or not time for performance has come. May
disregard it and contract remains in full effect. In most cases the innocent party cannot
complete contract without the other party's cooperation. Even where possible, argued that
it is contrary to public interest to allow it. Merely allows the party to extort a greater
payment [like expert preparing a report which the party commissioning has stated is
unnecessary]. But there is no requirement that a contract be enforced only in a reasonable
way. Impossible to say that the party should be deprived of their right to complete and
claim the contract price.
182
 De Bernardy V. Harding [1853], 8 Exch. 822
●
The defendant proposed to erect and let seats to view the funeral of the Duke of
Wellington. He agreed that the plaintiff should advertise the seats outside England and
sell tickets, and that he should receive commission on all the tickets thus sold. the plaintiff
prepared advertisements and paid printers, but, before he had sold any tickets, the
defendant wrongfully revoked his authority.

It was held that the plaintiff could sue in quantum meruit for the work already done

Panché V. Coldurn [1824-34] ALL ER Rep 9481

●
The plaintiff was commissioned by the publisher, defendants, to write a book on customes
and armour for £100. After he had done the necessary research and written part of the
book, the publisher repudiated the contract.

It was held that the plaintiff was entitled to £50 as reasonable remuneration on a quantum
meruit basis.

Craven Ellis V. Canons Ltd [1936] 2 K.B.403

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

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

British Steel Corporation V. Cleveland Bridge & Engineering Co Ltd [1984]

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

183
reasonable value of the steel. The plaintiff was, therefore, entitled to a quantum meruit
payment.

C & P Haulage V. Middleton [1983] 3 ALL ER 94

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

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

Hadley V. Baxendale [1843-60] ALL R.R Rep 461

●
The claimants, Mr Hadley and another, were millers and mealmen and worked together
in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned grain,
ground it into meal and dressed it into flour, sharps, and bran. A crankshaft of a steam
engine at the mill had broken and Hadley arranged to have a new one made by W. Joyce
& Co. in Greenwich. Before the new crankshaft could be made, W. Joyce & Co. required
that the broken crankshaft be sent to them in order to ensure that the new crankshaft
would fit together properly with the other parts of the steam engine. Hadley contracted
with defendants Baxendale and Ors, who were operating together as common carriers
under the name Pickford & Co., to deliver the crankshaft to engineers for repair by a
certain date at a cost of £2 sterling and 4 shillings (current value of about £240.00)[1].
Baxendale failed to deliver on the date in question, causing Hadley to lose business.
Hadley sued for the profits he lost due to Baxendale's late delivery, and the jury awarded
Hadley damages of £25 (present value about £2500). Baxendale appealed, contending
that he did not know that Hadley would suffer any particular damage by reason of the late
delivery. The question raised by the appeal in this case was whether a defendant in a
breach of contract case could be held liable for damages that the defendant was not
aware would be incurred from a breach of the contract.

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Judgment: The Court of Exchequer Chamber, led by Baron Sir Edward Hall Alderson,
declined to allow Hadley to recover lost profits in this case, holding that Baxendale could
only be held liable for losses that were generally foreseeable, or if Hadley had mentioned
his special circumstances in advance. The mere fact that a party is sending something to
be repaired does not indicate that they would lose profits if it were not delivered on time.
The court suggested various other circumstances under which Hadley could have entered
into this contract that would not have presented such dire circumstances, and noted that
where special circumstances exist, provisions can be made in the contract voluntarily
entered into by the parties to impose extra damages for a breach. Alderson B said the
following.“

Horne V. Midland Railway Co [1873] LR 8 C P 131

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

Victoria Laundry (Windsor) Ltd V. Newman Industries Ltd [1949] 2 K B 528

●
Newman Industries Ltd was meant to deliver a boiler for Victoria Laundry (Windsor) Ltd.
The delivery was five months late. As a result of not having enough laundry capacity,
Victoria Laundry lost a lucrative cleaning contract from the Ministry of Supply. Victoria
Laundry sued for the ordinary profit that it had forgone through not having the boiler on
time. The question was whether it could also claim the extraordinary profit it would have
made, had it been able to take advantage of the lucrative Ministry of Supply contract.

Judgment: Asquith LJ in the Court of Appeal held that Newman Industries only had to
compensate for the ordinary, not the extraordinary loss of profits. He distinguished (at p
543) losses from “particularly lucrative dyeing contracts” as a different type of loss which
would only be recoverable if the defendant had sufficient knowledge of them to make it
reasonable to attribute to him acceptance of liability for such losses. The vendor of the
boilers would have regarded the profits on these contracts as a different and higher form
of risk than the general risk of loss of profits by the laundry. The defendants contracted
to sell stated as follows, at p. 539 “In cases of breach of contract, the aggrieved party is
only entitled to recover such part of the loss actually resulting as was at the time of the
contract reasonably foreseeable as liable to result from the breach. What was at the time
reasonably so foreseeable depends upon the knowledge then possessed by the parties

185
or, at all events, by the party who commits the breach. For this purpose knowledge
‘possessed’ is of two kinds; one imputed, the other actual. Everyone, as a reasonable
person, is taken to know the ‘ordinary course of things’ and consequently what loss is
liable to result from a breach of contract in that ordinary course.

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

●
Charterers chartered a ship from the owners for the carriage of sugar from Constanza to
Bashrah. The shipowners new that the charterers were sugar merchants and that there
was a sugar market at Barsrah but did not actually know that the charterers intended to
sell the sugar promptly on arrival at Basrah. In breach of the charter party, the ship
deviated from the voyage, so that instead of arriving at Basra on 22 November. The
market price of sugar at Basrah had fallen in this period from £32.10 s per ton to £31.2s
9d per ton.

It was held that the charterers were entitled to recover the difference price caused by
delay. Knowledge was imputed to them that it was likely that the sugar would be sold on
arrival and that market prices fluctuate.

Thompson (W.L.) Ltd V. Robinson (gun makers) Ltd [1955] Ch 177

●
The defendant company refused to accept delivery of a ‘Vanguard’ motor car which they
had contracted to buy from the plaintiffs, who were motor dealers. The ‘Vanguard’ car
was readily available. Although the dealers took the car back, the plaintiff contended that
they were still entitled to the lost profit on the repudiated sale, namely £61. The
defendants, relying on section 50 (3) of the sale of goods Act contended that the plaintiffs’
loss was only nominal.

It was held that there was no available market for the goods within section 50 (3), as the
supply of the ‘Vanguard’ model exceeded the demand, and therefore the loss of the
bargain meant a loss of profit. In the words of UPJOHN, at p. 183: ‘A part altogether from
authority and statute it would seem to me on the facts which I have to consider to be quite
plain that the plaintiffs’ loss in this case is the loss of their bargain. They have sold one
Vanguard less than they otherwise would. The plaintiffs, as the defendants must have
known, are in the business as dealers in Motor-cars and make their profit in buying and
selling motor-cars; what they have lost is their profits on the sale of this Vanguard.”

Charter V. Sullivan [1957] 1 ALL E. R 809

●
The defendant refused to accept delivery of a ‘Hillman Minx’ car that he had bought from
the plaintiff. The plaintiff claimed £97 as loss of profits. The plaintiffs claim for the recovery
of loss of profits of £97 failed, because the demand for Hillman Minx cars exceeded the
supply. The plaintiff could therefore sell every car that he could obtain from the makers
and had accordingly not lost a scale.
186
 Watts V Morrow [1991] WLR 1421
●
The plaintiff purchased a country house for £177,500 in reliance of the defendant’s
survey, in which he stated that overall the dwelling house was sound, stable and in good
condition, although there were minor defects. When the plaintiff took possession, they
discovered that there were substantial defects not mentioned in the report which required
urgent repair, including renewal of the roof, windows and floor boards. The true value of
the house at the date of the purchase was therefore only £162,500, a difference in value
of £15,000. The plaintiff carried out the repair at a cost of nearly £34,000 brought an
action to recover those costs. At first instance the cost of repair was awarded.

It was held by the court of appeal that although it was reasonable for the plaintiffs to retain
the property and carry out the repairs, the proper measure of damages was the amount
required to put the plaintiffs into the position that they would have been in had the survey
been carried out properly and the true value of the house paid. If they would be recovering
damages for breach of warrant as to the condition of the house when no such warrant
had been given.

Anglia Television Ltd V. Reed [1972] 1 QB 60

●
The defendant, an American actor, contracted with the plaintiffs to play the leading male
role in a television play from 9 September to 11 October. On 3 September, the defendant
repudiated. The plaintiff could not get a substitute and abandoned the production. The
plaintiffs, instead of claiming the profit they would have made, sued the defendant for
damages of £2,750, being their total wasted expenditure on the production. The
defendant argued that they could only recover the expenditure incurred after they made
the contract (£854).

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

Mc Rea V. Commonwealth Disposal Commission [1951] 84 CLR 377

●
The Commission invited tenders “for the purchase of an oil tanker lying on Jourmaund
Reef. The vessel is said to contain oil.” The plaintiff’s tender of £285 was accepted. The
plaintiff spent money in fitting out a salvage expedition but there was no tanker at the
location.

It was held that the Commission were in breach of contract since they had promised that
there was an oil tanker at the location given. The amount that the plaintiff was entitled to
187
recover was £285, being the purchase price, and damages of £3,000 being the cost of
salvage expendition which was wasted in valiance on the promise that the oil tanker was
at the stated location. The salvage expedition was within the reasonable contemplation
of the parties. However, since the commission had not promised to deliver any oil or a
tanker of any specialized size, the claim for the loss of profit on the tanker and the oil was
too speculative.

Jarvis V. Swans Tours Ltd [1973] QB 233

●
The plaintiff, a solicitor, paid for a two-week winter sports holiday in Switzerland. The
defendants’ brochure described the holiday as a ‘House party’ and stated that the hotel
had its own ‘Alphutte Bar’ which would be open several evenings a week. It was also
stated that a welcome party, afternoon tea and cakes, a fondue party and Yodeller
evening were included in the price. The holiday was a considerable disappointment, and
in the second week the plaintiff was the only guest in the hotel and no one could speak
English. The bar was only open evening and the skiing did not correspond to the claims
in the brochure.

It was held that the plaintiff was entitled to be compensated for his disappointment and
distress at the loss of his holiday and the loss of the facilities which had been promised
in the brochure.

Heywood v. Wellers [1976] QB 446

●
The plaintiff employed the defendant solicitors to secure a method of preventing the
plaintiff’s former male friend from pestering her. The solicitors sought a non-Molestation
injunction but were negligent in making the application so that the injunction was effective,
and the plaintiff was molested on three or four further occasions, causing her mental
distress and upset.

The court of appeal awarded damages which included a sum to compensate her for the
anxiety and distress she had suffered in consequence of the continued molestation, since
this was a direct and foreseeable consequence of the solicitor’s failure to obtain the relief
which it was the very purpose of the contract to secure.

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

Barclays Bank plc. V. Fairclough building ltd [1955] QB 214

●
The defendant contractor was in breach of a contract to clean roofs containing asbestos,
in that it had failed to execute the work in an expeditious, efficient and workmanlike
manner and had failed to comply with statutory requirements relating to asbestos. The
defendants argued that the plaintiff had failed to supervise the work and therefore
damages should be reduced for this contributory negligence under the 1945 act.

It was held that contributory negligence was held not a defence to claim for damages
based on a breach of a strict contractual obligation, even where the defendant might have
also had a parallel liability in tort.

Brace V. Calder [1895] 2 QB 253

●
The defendants, a partnership of comprising of four members, agreed to employ the
plaintiff as manager of a branch of the business for two years, five months two of the
partnership was dissolved by the retirement of two of the members, and the business was
transferred to the other two, who offered to employ the plaintiff on the same terms. He
rejected the offer and sued for breach of contract and claimed as damages the salary for
the remainder of the two year contract period.

It was held that the plaintiff was entitled to nominal damages only because it was his duty
to mitigate his loss which he could easily have done by accepting re-employment.

Darbishire V. Warran [1963] 1 WLR 1067

●
The plaintiff owned a car of which he was particularly proud. Though it was old he
maintained it in excellent condition. It had a market value of about £85. The car was
damaged by the defendant’s negligence and the plaintiff was advised it would cost him
£192 to get it repaired. The plaintiff went ahead with repairs and claimed £192 from the
defendant, less the money he had received from his insurance company, and plus the
cost of hiring a car while the repairs were carried out. The plaintiffs claim failed.

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

189
 Payzu Ltd V. Saunders [1919] 2 K.B. 581
●
The parties had entered into a contract for the supply of goods to be delivered and paid
for by instalments. The plaintiffs failed to pay for the first instalment when due, one month
after delivery. The defendant declined to make further deliveries unless the plaintiffs paid
cash in advance with their orders. The plaintiffs refused to accept delivery on those terms.
The price of the goods rose, and they sued for breach of contract. It was held in the first
place that the seller liable in damages, since the circumstances did not warrant his
repudiation of the contract.

On the other hand, it was held that plaintiffs should have mitigated their loss by accepting
the seller’s offer of delivery against cash payment, and that the damages recoverable
were not to be measured by the difference between the contract and market price, but by
the loss that plaintiff would have suffered if they had paid cash and acquired the goods at
the contract price, that is, the loss of one month’s credit which had originally applied under
the contract. The court also held that the question of whether the steps were reasonable
was a question of fact in each case.

Law V. Redditch Local Board [1892] 1 QB 127, at p. 132

●
Lopez J stated at p. 132 “The distinction between penalties and liquidated damages
depends on the intention of the parties to be gathered from the whole of the contract. If
the intention is to secure performance of the contract by the imposition of a fine or penalty,
then the sum specified is a penalty; but if, on the other hand, the intention is to asses the
damages for breach of the contract, it is liquidated damages.”

Dunlop Pneumatic Tyre Co Ltd V. New garage and Motor Co Ltd [1915] A.C.
●
79
The appellants, manufacturers of motor tyres, supplied goods to the respondents under
a contract which provided that the respondents would not sell tyres at less than the
appellants list price. It was further provided that if the respondent sold a tyre in breach of
this agreement they would pay £5.

It was held that since the sum was not extravagant, it was a genuine attempt by the parties
to estimate the damage which price undercutting would cause the appellants. The £5
would be regarded as liquidated damages and not as a penalty.Lord Dunedin, at p. 86,
laid down certain rules for guidance in the determination of whether an agreed or
stipulated sum is liquidated damages or a penalty.

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

comparison with the greatest loss that could possibly follow from the breach.

190
(ii) If the obligation of the promise or under the contract is to pay a certain sum of money,
and it is agreed that he fails to do so he shall pay a larger sum, this larger sum is a penalty.
The reason is that, since damage arising from breach is capable of exact definition, the
fixing of a large sum cannot be a pre-estimate of the probable damage.

(iii) If a single lump sum is made payable upon the occurrence of one or more or all of
several events, some of which may occasion serious and others mere trifling damage,
there is a presumption that it is a penalty.

(iv) Where a precise pre-estimate of the consequence of the breach is impossible the
court may regard the lump sum as a genuine pre-estimate, and thus a liquidation
damages.

Kemble V. Farren [1829] 6 Bing 141

●
An actors contract provided that if either he or the theatre management broke their
contract then the party in breach must pay the other £1,000 as ‘liquidated damages’.

This was held to be a penalty clause because it was disproportionate both to the actor’s
daily fee of £3 6s 8d, and the greatest possible loss that would result from the breach.

Ford Motors Co. (England) Ltd V. Armstrong (1915) 31 T.L.R. 267

●
A dealer, the defendant, agreed to sell the plaintiffs motorcars and, in the event of his
selling any car or parts below list price, to pay £250 for every breach of such undertaking
such sum being the agreed damages which the manufacturer will sustain.

It was held that the sum of £250 was a penalty and not liquidated damages.

Hochster v. De la Tour (1953)

●
In April, De La Tour agreed to employ Hochster as his courier for three months from 1
June 1852, to go on a trip around the European continent. On 11 May, De La Tour wrote
to say that Hochster was no longer needed. On 22 May, Hochster sued. De La Tour
argued that Hochster was still under an obligation to stay ready and willing to perform till
the day when performance was due, and therefore could commence no action before.

Judgment: Lord Campbell CJ held that Hochster did not need to wait until the date
performance was due to commence the action and awarded damages.

The Mihalis Angelos (1971)

●
The owners of the ship, The Mihalis Angelos, chartered the ship to the defendant to use
for the carriage of some cargo. A clause in the agreement stated the ship was expected
ready to load on 1st July. In fact the owners had no grounds for believing the ship would
be ready to load on that date as it was in Hong Kong at the time and would not be ready
until at least the 14th of July and in fact it was not ready at that date. The defendant
191
cancelled the contract on 17th of July. The cargo that they expected to be carrying had
not arrived due to the bombing of a railway in Vietnam. The ship owners brought an action
against the defendants for anticipatory breach. The defendants argued that the claimant
was in breach of condition of the contract by not be ready to load on the specified date.

Held: The expected ready to load clause was a condition despite the fact it had caused
no loss to the defendant. The classification as a condition was said to be because of the
need for commercial certainty in shipping contracts.

192