OFFER

Introduction
Offer is the first crucial step to a valid contract. There are certain parameters
for determining its nature and existence which you must know to avoid
confusing it with what is popularly understood as offer among lay men. This
lecture is to acquaint you with the basic rule of distinguishing an offer when
you see one.

This section will begin by giving an overview of what an offer is and its
principles with relevant case law illustrations.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand the importance of offer to a contract

 To understand what offer is
 To understand the distinguishing features of an offer.

Objectives for this section

 To be able to define an offer

 To be able to distinguish between an offer and an invitation to treat.
 To be able to determine when an offer is validly made
 To be able to explain the different types of
 To be able to recognise how and when an offer can be withdrawn.

What is an offer?
The first requirement of a legally binding agreement (contract) is offer.

An offer is an expression of willingness to contract on specific terms, made

with the intention that it is to become binding as soon as it is accepted by
the person to whom it is addressed. The maker of the offer is the offeror, and
the person to whom it is made is the offeree. An offer accepted by the
offeree unconditionally makes a binding contract.

For an offer to be valid it must be:

a. communicated. Taylor v Laird (1856 25 LJ Ex 329. It may be

communicated in writing, orally or by conduct. It may be
communicated or made to a particular person, to a group of persons,
or to the whole world (Carlill v Carbolic Smoke Ball Co.)
 b. It must be definite in substance. It must be distinguished from an
invitation to treat.

The case of Storer v Manchester City Council [1974] 1 WLR 1403 outlines
that an offer is:

1. An expression of willingness to contract on specified terms

2. With the intention that it is to be binding once accepted

Storer v Manchester City Council confirmed that in assessing whether these

conditions have been met, the courts will take an objective approach.
Therefore, the courts will enquire whether from the conduct of the offeror as
a whole, a reasonable person will reach the conclusion that the offeror has
expressed a willingness to contract on specified terms with the intention that
it is to be binding once accepted. This is called the ‘reasonable man’s test”.
It is an objective standard. It will not matter if even the offeror did not intend
his conduct to amount to an offer at all, the Courts may still find contractual
intent amounting to an offer based on this test.

Offer v Invitation to Treat

An important distinction to make in contract law is that between an offer and

an invitation to treat. An invitation to treat can be defined as an indication
that a party is open to negotiation.

The case of Gibson v Manchester City Council [1979] 1 WLR 294 held the
following statement to be an invitation to treat

“May be prepared to sell the house to you”

There was clearly no display of contractual intent, due to the words “may be
prepared”, which suggest the Council were open to negotiation, and
therefore the statement was construed as an invitation to treat, rather than
an offer.

Here are some key distinctions between an offer and an invitation to treat.

Offer:

 Certain promise to be bound

 Clear and specified terms
 The conduct or words of the party show certainty
 There is no room for negotiation

Invitation to treat:
  There is room for negotiation
 There is an invitation for offers
 There is a request for information
 Lack of certainty

Presumptions

Throughout the history of contract law, there has been various disputes over
the distinction between an offer and an invitation to treat. Therefore, in order
to provide consistency, a number of presumptions which are applied to
certain types of conduct.

Display of goods

The case of Pharmaceutical Society of Great Britain v Boots Cash

Chemists [1953] 1 QB 401 confirms that a display of goods is considered to
be an invitation to treat. The specific approach taken is as follows:

 The display of goods in a shop/self-service shop are an invitation to treat

 The customer makes the offer to the cashier by presenting the goods at the
service desk
 The cashier accepts the offer by scanning the goods and requesting payment

 Note the instance given by Omololu – Trying to buy a pen from a Shop
at Dugbe but the owner of the Shop refused because that was the only
one left for sample.
 Note Adebowale’s attempt to buy a drug at a Pharmacy Store but was
refused because he did not tender Doctor’s prescription
 Online marketing/e-commerce.

Reasons why a display of goods is an invitation to treat: There are a

multitude of reasons for which the court construed the display of goods in
this way. It is evident that there would be various issues with the display of
goods constituting an offer. If a display of goods was an offer, the
acceptance would occur when the customer removes the goods from the
shelves. The type of problems that may occur are:

 The shopkeeper has no choice whether or not to sell to somebody once they
have removed an item from the shelves, preventing the shopkeeper’s ability
to choose their customers
 The acceptance has occurred at the price specified for the goods, meaning
there can be no negotiation between the buyer and seller. This is not
particularly relevant in most shops where negotiation is not possible, but it is
still a relevant issue in some cases, and particularly if an item is mispriced
 A customer couldn’t choose to exchange the item for another once they have
removed it from the shelf, or replace the item, as acceptance has already
occurred. Otherwise, they would be in breach of contract
Display of goods in a shop window

The case of Fisher v Bell [1961] QB 394 is the legal precedent that confirms
the display of goods in a shop window is an invitation to treat. In this case,
the defendant had a knife in the window of their shop with a price tag
attached, which was held to be an invitation to treat.

 Sale of harmful products. E.g. snipper, tramadol, etc

Reasons why a display of goods in a shop window is an invitation to

treat: This presumption is based upon the rules from the above case
of Pharmaceutical Society v Boots Cash Chemists, in that if it was considered
an offer, the shopkeeper could not pick and choose his customers.

There is a further consideration for display of goods in a shop window; the

shop may have a limited stock of the item, therefore if two individuals saw
the ‘offer’ at the same time and there was only one available item, the
shopkeeper would be in breach of contract to one of the individuals.

Advertisements

As a general rule, the case of Partridge v Crittenden [1968] 2 All ER 421 rules
that an advertisement is an invitation to treat. The reason for this is the
“multi-acceptance” principle.

The multi-acceptance principle: If an advertisement is considered an

offer, theoretically, an unlimited amount of people could accept that offer,
which causes obvious problems when the advertisement is for a limited
amount of goods, as the seller would be in breach of contract to each
individual whom they could not provide goods for.

Theory behind the multi-acceptance principle: Following this

consideration, it is obvious that an advertisement does not fulfil the
requirement from Storer v Manchester City Council, as there is clearly no
unequivocal display of contractual intent; the reasonable person would
recognise that the individual who placed the advertisement never intended
to contract with everybody who responds to the advert.

Exceptions to advertisements as invitations to treat:

 One theoretical argument suggests that an advertisement from a

manufacturer may be construed as an offer, as the manufacturer would be
able to make more of the item in question in response to all of the
 acceptances. This is not a rule, but may be a factor in a court’s
decision!
 Advertisements which negate the ‘multi-acceptance’ problem. Lefkowitz v
Great Minneapolis Surplus Stores Inc(1957) 86 NW 2d 689 did this by stating
“3 coats for sale, first come first served”, making it clear only the first three
individuals would be sold the coat.
 Unilateral contracts. A Unilateral contract is formed where the offeror makes
a promise in exchange for an act by any offeree. An example of this would be
where an individual puts a poster up, offering money to anybody who finds
their lost dog. A practical example of this is seen in Carlill v. Carbolic
Smoke Ball Co Ltd [1893] 1 QB 256

In the Carlill case an advertisement promised a £100 reward to anybody who

contracted influenza after using the Carbolic Smoke Ball in a certain way
over a fixed period of time. This is a unilateral contract as there is only
obligations for one of the parties – i.e anybody could choose to use the
smoke ball, but they didn’t have to, but the seller had to pay the £100 if
anybody met the requirements.

The defendant had deposited £1,000 with a bank for the purpose of paying
these £100 rewards. Therefore, the court decided that as the terms were
certain, and there was a clear display of intent displayed via the deposit of
£1,000 for the reward payments, the advertisement should be construed as
an offer.

It is important to note that not every unilateral contract is an offer, only

ones where clear intent and certainty is shown.

This can be a rather complex differentiation to make, but again, it essentially

requires a consideration of the rule from Storer v Manchester City Council; is
there an unequivocal display of contractual intent? The objective evidence in
this case was the £1,000 deposit.

Tenders

A tender is where an individual seeks specific goods or services and

advertises their need for them. This is construed as an invitation to treat,
and any response to the tender will be an offer.

Automated machines

The operation of an automated machine is considered an offer, as the

machine cannot negotiate the price – if an individual inserts the correct
amount of coins, the contract will be formed. Acceptance is considered to
take place when the offeror inserts the coins and chooses an option
(Thornton v Shoe Lane Parking [1971] 2 QB 163)

Auctions

Auction without reserve: Where an auction is “without reserve” (i.e there

is no minimum priced bid required to win the auction) each bid is an offer,
and when the auctioneer ends the bidding, this is the acceptance. Therefore,
each bidder may revoke their offer at any time before the end of the bidding.

The auctioneer could, in theory, refuse to accept the offer, however, in the
case of auctions, there is a collateral contract, this is between the
auctioneer and the highest bidder, which involves the obligation to accept
the highest bidder, meaning any refusal of a highest bid would amount to a
breach of contract (Barry v Davies [2000] 1 WLR 1962).

Damages for a breach of collateral contract: The court will consider the
position the bidder would have been in if his bid was accepted. For example,
if the auctioneer declined a highest bid of £10 for an item worth £100, the
price difference between the bid and the market price of the item would be
awarded – in this case, £90.

Auction with reserve: Where an auction is “with reserve”, (i.e the owner of
the goods has set a minimum price) the auctioneer is only obliged to accept
any bids which are above the minimum price.

Advertisement of an auction: An advertisement of an auction is

considered to be an invitation to treat, meaning an individual who intended
to bid on items cannot bring an action against the auctioneer who does not
auction the item. In the case of Harris v Nickerson(1872) LR 8 QB the
claimant attempted to claim for travel expenses and the time spent
travelling for the auction.

Types of Offer

We can classify “offers” into two categories, namely, unilateral offer and
bilateral offer. The distinction between unilateral and bilateral arrangements
is important with regard to advertisements, communication of acceptance
and revocation of offers.

A bilateral offer is a two-sided offer in which both parties are committed to

the transaction and have a contractual obligation to perform in accordance
with their respective promises. They are usually considered invitations to
treat on the grounds that they may lead to further bargaining. It is more
common and general rules on contract usually apply on them. These general
rules related here are, to name but a few, advertisements of a bilateral
nature are generally invitation to treat only, acceptance must be
communicated to the offeror.

Acceptance for bilateral contract cannot be offer. It can be illustrated by

Partridge v Crittenden [2] . In this case, a person who placed an
advertisement for sale of Bramblefinch was charged with unlawfully offering
for sale a wild bird which was against the Protection of Birds 1954. However,
the conviction was quashed on the grounds that the advertisement was not
an offer but an invitation to treat. It is argued that if an advertisement is an
offer, then the trader will have to supply the quantity ordered when the stock
available to do so is limited. Similarly, in Grainger & Son v Gough [3] , Lord
Herschell said that the transmission of a price-list does not amount to an
offer to supply an unlimited quantity of the wine described at the price
named, since if it were an offer the so-called “offeror” might find himself
involved in any number of contractual obligations which he would be quite
unable to carry out, for his stock of wine being necessarily limited.

A unilateral offer is a one-sided offer whereby the offeror makes a promise in

return for the performance of a stipulated act, without the offeree’s having
made any counter-promise to perform the required act or forbearance. The
offer is accepted by the performance of the requested action. Since the
acceptance is the performance of the stipulated act and performing this act
may be a continuous act, the general principle is that the offer may be
revoked at any time before the act is completely performed. However, it may
not be possible to revoke a unilateral offer once the offeree has started to
perform. (Errington v Errington [4] )

To illustrate unilateral offers, the landmark case Carlill v Carbolic Smoke Ball
is always valuable. In this case, Mrs. Carlill accepted the unilateral offer by
using the carbolic ball and therefore a binding contract is concluded. In this
case, several characteristics of a unilateral offer were stated. For example,
the offeror may waive the normal requirement of communication of
acceptance, wither expressly or impliedly. Also, Lord A.L. Smith LJ stated that
there was no express requirement that acceptance be notified. Moreover,
Lord Lindley LJ and Lord A.L. Smith LJ considered that the promise by the
company is supported by consideration in the sense of a benefit to the
offeror company and/or a detriment to the offeree.

From this case, there are several points about unilateral offers can be
concluded. Firstly, although generally an advertisement is an invitation to
treat, if the advertisement requests the performance of an act (which
constitutes good consideration for the promise by itself) then the
advertisement will be an offer. Secondly, in a unilateral offer, acceptance is
made by fully performing the required act and it needs not be communicated
to the offeror in advance unless there has been an express indication that
notification is required. Thirdly, as it is impractical to communicate the
revocation of an offer to the whole world since it is not possible to identify
the potential offerees, it is considered sufficient if the revocation is
communicated by a notice “having the same notoriety” (using the same
channel used to communicate the original offer). (Shuey v US) [5]

Therefore, we can differentiate unilateral and bilateral offers in

advertisements, communication of acceptance and revocation of offers.
While an advertisement of a unilateral nature is more likely to be an offer
that of a bilateral nature is generally invitation to treat only. Also, prior
notice from the offeree to accept the offer is not required as no one is legally
obliged to perform, or even attempt the act. Moreover, unilateral offers may
be made to the whole world, and we may have to consider whether a
revocation can take place as the offeree may have started to perform the
acceptance.

Revocation of an offer

How to revoke an offer: An offeror may revoke an offer at any point prior
to acceptance (Routledge v Grant [1828] 4 Bing 653). In order to be
effective, the revocation must be communicated. An offer may also be
revoked if there is a fixed time for acceptance; once this period is over, there
is an automatic revocation of the offer.

Automatic revocation of an offer: An offer will automatically be revoked

after a reasonable lapse of time. ‘Reasonable’ is assessed on a case-by-case
basis. In Ramsgate Victoria Hotel v Montefiore(1866) LR 1 Ex 109 an offer
was accepted by the claimant six months after the offer, but the courts held
that this offer had been revoked due to the lapse of time.

Third-party revocation: A third-party may also revoke the offer by

communicating this to the offeree. In order for the revocation to be effective,
the third-party must be objectively reliable (Dickinson v Dodds(1875) 2 Ch D
463).

Revocation of unilateral contracts: Unilateral contracts pose a different

issue, as there are any number of potential offerees to communicate
revocation to. In the case of unilateral contracts, the courts require the
offeror to take reasonable steps to communicate the revocation. Shuey v
USA (1875) 92 US 73 suggests revocation should occur in the same manner
that it was offered. For example, if the offer was made via a post on a
website, the revocation should also be posted on the website.

Revocation of unilateral contracts when the offeree has begun

performance: As previously explained, unilateral contracts require the
performance of an act for acceptance. The current judicial precedent
from Dahlia v Four Millbank Nominees [1978] Ch 231 is that the unilateral
contract cannot be revoked once the offeree has embarked on performance.

Counter offers: A counter-offer from the offeree has the effect of revoking
the original offer (Hyde v Wrench (1840) 49 ER 132).

Offer - Example
The following scenario aims to test your knowledge of what constitutes an
offer and the effect on the potential contract. The answers can be found at
the bottom of the page. Try to think about the relevant principles, cases and
the outcomes of the scenario.

There is also a full written answer to the questions at the end of this section,
which would be how you may approach a question such as this in an exam.
Don’t be discouraged if you can’t identify the issues at first – applying the
law is very different than learning about it! Referring back to the notes for
this section should be able to help you. This section should help you see how
questions regarding offers will be structured. Think about everything this
section has taught you, and remember not all of the content you have learnt
will be included in this question.

The sensible approach to a problem question regarding an offer is:

 Can I identify any of the presumptions (If you can identify a presumption, you
won’t need to consider the objective test to decide whether the conduct
constitutes an offer, simple!)
 If there is no presumption, is there an objective intention to create
contractual relations
 Has there been a revocation of the offer?

After completion of this section, you may wish to create your own scenario
with similar issues, or issues that have not been included in this question,
which will help you further with your understanding.

Scenario

Roger is a successful businessman who has just moved to London, he has an

unfurnished apartment which needs renovating and furnishing. Roger
decides to travel into town and make some purchases for his house.

1. Roger goes into a hardware store and spots a chainsaw for £20, he
desperately needs to get rid of some trees in his garden so he considers
purchasing it. After a quick check online, he is surprised to find that in fact,
the chainsaw is worth £250. He rushes to the till in order to make his
purchase but the cashier explains that the price was a misprint, and it should
have been £280. Roger explains to the cashier that they must sell it to him
 for £20, otherwise it is false advertising, but the cashier still refuses to sell
the chainsaw.

Can Roger insist on the sale for £20?

2. Roger leaves the store and attempts to ring his friend to vent his frustration,
but he realises that he has lost his phone and thinks he probably dropped it
whilst rushing to the cash desk with the chainsaw. Roger searches high and
low in the store but can’t find it. He is about to give up when he notices a
notice board for buying and selling. He quickly grabs some paper from the
cashier and puts up two different adverts

1. Lost phone! iPhone 12, if anybody can return it to me I will reward them £50.
2. Looking for a chainsaw, will not pay any more than £150.

Subsequently, days later, Glen, a young boy, returns his phone to him and
demands the £5,000 reward. Roger laughs and gives him £5 instead. Roger
is also contacted by Joe who says he has a chainsaw he will sell to him for
£149

What type of contract did Roger form when he put the advert for his lost
phone up, and can the young boy enforce this contract against him?

What presumption does advert b fall under? The chainsaw seller is

demanding Roger buy the chainsaw for £149, does he have to buy it?

3. Roger’s business isn’t doing too brilliantly, and he can’t afford brand new
furniture for his house. He sets off to the auction house on a Monday
morning. Unbelievably, he is the only person at the auction hall. The first
auction is for a sofa, and the bidding is started at £1. Roger bids £1 and wins
the bid. Following, the auctioneer says “this sofa is worth £1,000, I can’t take
a bid for £1!” and tells him to leave.

Can Roger make the auctioneer give him the sofa?

4. The following year, Roger’s business is back on track, and he has now
completed the renovation of his house. In celebration, he is hosting various
charity events. At one of his events, he announces he has posted online a
challenge for charity, if somebody can swim the channel between England
and France in under 12 hours, he will donate £500,000 to a charity of their
choice. After six months, Roger’s friend, Alex, asks Roger if he is still offering
the £500,000 reward, Roger tells him he isn’t. The following week, it comes
to Roger’s attention that an Olympic swimmer, Ryan, has taken up his
challenge and is already half-way across the channel in under 4 hours.
Roger’s investments have taken a huge dive and he no longer has the
£500,000, so before Ryan completes the challenge, Roger quickly posts
online that the £500,000 reward has been revoked.
Was Roger’s revocations of the offer valid, if not, is there any other way the
offer may have been revoked?

Answers

The legal issue here is whether or not the display of the chainsaw was an
offer, and by picking up the goods, did Roger accept the offer and form a
binding contract? Essentially, does the cashier have the negotiation power to
refuse the sale?

The case of Pharmaceutical Society of Great Britain v Boots Cash

Chemists [1953] 1 QB 401 applies – the display of goods in an invitation to
treat. This means that Roger makes the offer when he brings the chainsaw to
the desk, and the cashier has every right to refuse the sale.

Outcome: Roger cannot purchase the chainsaw for £20.

The advertisement for the return of Roger’s lost phone constitutes a

unilateral contract – anybody who finds Roger’s phone can accept the offer.
The offer is clear and fits the criteria laid out in Carlill v Carbolic Smoke Ball
Co Ltd [1893] 1 QB 256, therefore, Glen will be able to enforce the £50
reward payment.

Advert b falls under the ‘tender’ presumption. Roger does not have to buy
the chainsaw for £149 from Joe, as a tender is a mere invitation to treat.

This outcome will be dependent on the type of auction. If the auction is

without reserve, Roger is entitled to the sofa, and if the auctioneer refuses to
give him the sofa, he would be entitled to damages of £999 (Market value
minus the bid - £1,000 minus £1).

If the auction was with reserve, and the reserve was more than £1, the
auctioneer would not have breached a contract by declining the bid.

This offer from Roger amounts to a unilateral contract, to revoke the

contract, Roger must take reasonable steps to communicate the revocation.

Roger telling Alex the offer was revoked would not be reasonable steps, as
he has only informed one person. As per Shuey v USA (1875) 92 US 73, the
offer should be revoked in a similar fashion that it was offered, in this case,
the offer was made online.

Therefore, when Roger revokes the offer online, this will suffice, but, as
Ryan, an offeree, has begun performance, he cannot revoke the offer at this
time (Dahlia v Four Millbank Nominees [1978] Ch 231).
Roger may suggest that the offer has been revoked due to a lapse of time.
Roger must argue that six months is a long enough period to automatically
revoke the offer.

Full model answer

This scenario involves various contractual issues pertaining to whether or not

there has been an offer made. An offer can be defined as an unequivocal
display of contractual intent (Storer v Manchester City Council). This requires
an objective assessment using a ‘reasonable man’ test, and does not take
into consideration any subjective intentions of the parties.

The chainsaw

The first legal issue in this scenario is whether or not Roger can purchase the
chainsaw for £20, this is a question of whether or not there has been a
contract formed when Roger picks up the chainsaw. In order for a contract to
be formed, there must first be offer and acceptance. Roger may attempt to
assert that the display of the chainsaw priced at £20 amounted to an offer,
and by taking the chainsaw to the till he had accepted that offer, therefore
forming a binding contract which would mean the cashier was unable to
refuse the sale.

Legal precedent has developed ‘presumptions’ of what will amount to an

offer, and instead of applying the test from Storer v Manchester City
Council these presumptions can be followed. The case of Pharmaceutical
Society of Great Britain v Boots Cash Chemists asserts that a display of
goods, such as the chainsaw, does not amount to an offer, instead it will be
considered an invitation to treat. This is distinct from an offer as it essentially
invites others to make an offer or negotiate with the party (Gibson v
Manchester City Council).

Therefore, when Roger takes the chainsaw to the till, he has not accepted an
offer, he is responding to an invitation to treat. This means taking the
chainsaw to the till amounts to an offer from Roger, meaning the cashier
then has the discretion of whether to accept that offer or not. Following, it is
clear that the cashier may refuse the sale, and Roger cannot enforce the sale
for £20.

Reward poster

The next legal issue is whether Roger must give the Glen, who returned his
iPhone, £50 as stipulated in his reward poster. The case of Partridge v
Crittenden rules that the presumption is that advertisements would amount
to an invitation to treat, unless the offer is for a unilateral contract with clear
intention to create legal relations as per Storer v Manchester City County
Council.

Roger’s poster would amount to a unilateral contract, as there is only an

obligation on one party – Roger must pay the £50 reward if somebody
returns his phone, but there is no obligation on anybody to find the phone. A
unilateral contract will be for the performance of an act, acceptance takes
place on performance of the act, and there is no requirement to
communicate an intention to perform the act, the performance alone is
sufficient as acceptance.

Applying the subjective reasonable man test to Roger’s poster, it is clear

there is an intention to create legal relations, as the £50 reward is a
reasonable amount for the return of an expensive possession. If the reward
had been, for example, £5,000, the courts would rule that the reasonable
man would not consider Roger’s advert to express an unequivocal intention
to create legal relations, as £5,000 is an absurd amount and probably more
than the cost of the actual phone – it would be seen as a marketing device,
or a ‘mere puff’ as suggested in Carlill v Carbolic Smoke Ball Co Ltd.

Therefore, as there is an offer, it is clear that when the boy returns Roger’s
phone, he has performed the requisite act that constitutes acceptance,
meaning a binding contract had been formed and Roger would have to pay
the whole £50 as promised in his reward poster.

Tender for chainsaw

The next legal issue is whether Roger must buy the £149 chainsaw in light of
his poster which states he is looking to buy a chainsaw for any price below
£150. This poster amounts to a tender, which is where an individual seeks
specific goods or services, advertising their requirement for them. Roger is
seeking the purchase of a chainsaw, therefore this amounts to a tender.

A tender has a presumption that it will be an invitation to treat, as parties

will then contact the owner of the tender to negotiate/offer their
goods/services. Therefore, when Roger is contacted by Joe, this amounts to
an offer, meaning Roger can decline the offer, and is subsequently not bound
to buy the chainsaw for £149.

The sofa

The legal issue with the sofa is whether there has been offer and acceptance
between Roger and the auctioneer which would result in a binding contract.
A definitive decision cannot be made on the facts given, as it is not clear
whether the auction is with reserve or without reserve. Following, both
scenarios will be considered and explained.
If the auction is without reserve, the case of Barry v Davies is precedent that
the presumption is that each bid is an offer, and that acceptance occurs
when the auctioneer ends the bidding. This suggests that the auctioneer
may refuse bids, but as there is a collateral contract between the auctioneer
and the bidders to accept the highest bid, any refusal of a highest bid would
amount to a breach of contract. Therefore, the auctioneer cannot decline
Roger’s bid, and must allow Roger to buy the sofa for £1.

If the auctioneer refuses to allow Roger to take the sofa, he will be awarded
damages which amount to the difference between the market value of the
sofa and his bid. The market value of the sofa is £1,000; therefore, the
damages will amount to £999.

If the auction is with reserve, an auctioneer is only obliged to accept any bids
which are above the minimum reserve price. Therefore, if the reserve price is
higher than £1, the auctioneer can legally prevent Roger from purchasing
the Sofa.

The reward for swimming the channel

The legal issue here is whether Roger’s offer would amount to an offer, and if
so, can Roger revoke the offer so to not be required to pay the reward to
Ryan.

For identical reasoning as the reward poster regarding the return of the
phone, the promise of a £500,000 donation for somebody to swim the
channel in under 12 hours will amount to a unilateral contract. Whether or
not it would amount to an offer is dependent on whether the requisite
intention is clear from the view of the objective reasonable person.

Roger may attempt to argue his original offer was in fact not an offer, as no
reasonable person would objectively consider it to be an intention to create
legal relations, as the challenge was absurd and practically an impossibility.
Evidently, this argument would fail as it is in fact a clear possibility if Ryan is
able to complete half of the swim in under 4 hours. This may also involve a
consideration of past successful swims/attempts at swimming the channel –
has anybody been close to beating 12 hours or actually beat it? This
argument is tenuous at best given the facts and would likely fail.

In the same vein as above, he may argue the reasonable person would not
identify an intention to create legal relations due to the extremely high
reward of £500,000. This would depend on the public’s perception of Roger,
if it was known he was extremely wealthy and charitable the reasonable
person would consider his offer to have clear intent. The fact he was hosting
various charitable events would give weight to this suggestion, if he had
donated similar amounts previous this would also support this assertion.
However, if his wealth was unknown to the public, the reasonable person
would likely consider such an offer to be some kind of joke, meaning it would
lack the required objective intention.

If the courts find that the required intention is clear, and the advertisement
is considered an offer, the legal issue here is whether Roger has successfully
revoked the offer in order to prevent him having to pay the £500,000.

Roger’s first attempt at revocation comes when he tells his friend, Alex, that
the offer is revoked. Reasonable steps must be taken to revoke a unilateral
contract, which Shuey v USA suggests would involve a revocation in a similar
fashion to the way in which the offer was made. In this case, the offer was
posted online, meaning an online post would amount to revocation. It is clear
that privately telling Alex would not constitute ‘reasonable steps’, meaning
the revocation is ineffective at this point.

However, Roger does at a later point post his revocation online.

Unfortunately, as per Dahlia v Four Millbank Nominees, a unilateral offer
cannot be revoked once an offeree has begun performance. At this point,
Ryan has already started on performance, as he is half way across the
channel, meaning this revocation is ineffective, and once Ryan completes
performance, Roger will be bound to pay the £500,000.

Roger may attempt to argue that the offer has been automatically revoked
due to a lapse of time. The time required is a ‘reasonable time’. In the case
of Ramsgate Victoria Hotel v Montefiore 6 months was held to be a
reasonable time, but this was due to the subject matter of the contract being
shares, which had volatile prices and it would be unfair to leave such an offer
open. In Roger’s case, the difficulty of swimming the channel would not
fluctuate and could not be considered ‘volatile’, meaning it is likely the
courts would rule in favour of Ryan, that the offer had not been revoked due
to a lapse of time. The only argument Roger may assert is that the difficulty
of swimming the channel is volatile dependent on the time of year – perhaps
the offer was made in the winter and it is considerably easier to swim the
channel six months later, in the summer, therefore, the lapse of time to the
summer would revoke the offer. However, this is not clear from the facts, but
is one potential argument Roger may use.

Conclusions

Concluding: Roger would not be able to buy the chainsaw for £20; he must
give the £50 reward to Glen; he would not have to purchase a chainsaw from
Joe; the outcome of the sofa is dependent on whether the auction was with
or without reserve; Roger would probably be bound to pay the £500,000 to
Ryan if he completes the swim in under twelve hours, but his strongest
potential counter-argument being with regards to the £500,00 being an
extremely high reward and no objective reasonable person would take the
offer seriously, although this is dependent on his previous conduct and public
perception.

Acceptance

Introduction
Acceptance means accepting an offer to make a valid contract. There are
different ways an offer can be accepted. Being able to differentiate between
the different rules that govern acceptance is very important.

This section will begin by giving an overview of the relevant principles that
apply to acceptance. Each principle will be explored with the relevant case
law illustrating important acceptance aspects.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand the importance of an acceptance to a contract

 To understand what an acceptance is
 To understand the different principles governing acceptance

Objectives for this section

 To be able to define an acceptance

 To be able to distinguish between a counter offer and an invitation to treat.

 To be able to determine when acceptance has been communicated

 To be able to explain what happens when the offeror stipulates the method of
communicating acceptance.
 To be able to demonstrate the importance of communicating acceptance.
 To be able to recognise when the need to communicate acceptance does not
apply.
 To be able to describe the postal acceptance rule and when it applies.
 To be able to recognise when the postal acceptance rule does not apply.

 To be able to recognise when the parties are free to withdraw from

negotiations.
 To be able to distinguish between instantaneous and non-instantaneous
forms of communicating acceptance, and when they are valid.
 To be able to State how and when an offer expires.
What is acceptance?

According to Currie v Misa [6] , a valuable consideration in the eyes of the

law may consist of either some right, interest, profit or benefit to one party;
or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other.

Consideration must move from the “promisee”. It generally means that the
party wishing to enforce the other party’s promise must prove that he has
personally provided something of value in return. In Tweddle v Atkinson [7] ,
the plaintiff cannot sue the estate of Guy because he himself did not provide
consideration to enforce Guy’s promise to pay him the money for marrying
Guy’s daughter. The one who provided consideration is in fact the plaintiff’s
father.

Consideration needs to be sufficient but need not be adequate. As it is for

the parties themselves to make their own bargain, the consideration need
only have “some value in the eyes of the law”. The value of the
consideration may be slight as £1 was held to be good consideration for an
option to buy a house in Mountford v Scott [8] .

Traditionally, performance of an existing duty like a duty imposed by law or

an existing duty owed to the other party have no value in the eyes of law.
The promise, in such situations, has suffered no legal detriment since he has
done only what he was already obliged to do; the promisor gets no legal
benefit from the performance to which he was already entitled. Therefore,
this could not provide sufficient consideration in return for the promise of
additional reward. However, does it mean it will never amount to
consideration?

Performance of a duty imposed by law (Public duty)

Performance of a duty imposed by law is generally not a good consideration.

In Collins v Godefroy [9] , Lord Tenerden CJ held that a promise to pay a fee
to witness who has been properly subpoenaed to appear in court was made
without consideration as the witness had a public duty to attend.

However, if a promise has done more than he was legally obliged to do, that
will constitute consideration for a promise to pay. This can be well illustrated
in Ward v Byham [10] . In this case, the father of an illegitimate child
promised to pay the child’s mother up to £1 a week allowance for her
provided that she can prove that the child will be well looked after and
happy. Lord Denning LJ held that the promise was supported by
consideration and therefore enforceable. The majority considered that
although the mother was required by statute to maintain her child, she had
gone beyond her statutory duty by complying with the father’s quest.
Therefore, Lord Denning LJ considered that the factual benefit to the father
was sufficient for his promise to be supported by consideration.

Performance of a contractual duty owed to the promisor

This arises in the context of a promise to alter an existing contract between

parties. In Stilk v Myrick [11] , two sailors deserted a ship during a voyage
and the captain was unable to find replacements. The remaining crew
members were promised extra wages for sailing the ship back to London but
the captain refused to pay on arrival. The court held that the crews were
already bound by their contract to meet the normal emergencies of the
voyage and that there was no consideration as the sailors had already
contracted to work the ship home.

However, the case is different in Hartley v Ponsonby [12] . In this case,

nearly half the crew deserted. The Queen’s Bench held that the crew was so
reduced that it was dangerous to life to sail and unreasonable for the master
to require his crew to do so. This discharged the contracts of the remaining
sailors and so the sailors were free to make a new bargain as they were in
the same position as any other free seamen, so the captain’s promise to pay
additional wage was enforceable. Also, in Williams v Roffery [13] Bros, the
court held that if a party to an existing contract later agrees to pay an ‘extra
bonus’ in order that the other party performs his obligations under the
original contract, then the new agreement is binding if the party agreeing to
pay the bonus has obtained new practical or factual advantage or avoided a
disadvantage.

Performance of an existing contractual duty to a third party

The courts have long recognized that mere performance of an existing duty
owed to a third party can be good consideration for the promisor’s promise
of “reward”. One case that illustrates this is Scotson v Pegg [14] . In this
case, Scotson contracted to supply a cargo of coal to a third party, X, or to
anyone X nominated. Scotson sued Pegg, a third party, claiming that their
promise to deliver coal to him was consideration for his promise to unload it.
Peg claimed that this could not be consideration since Scotson as already
bound to supply the coal under contract with X. The court upheld Scotsons’
claim because their agreement with the defendant may be a detriment to
them, and in that it prevented them from choosing to break their contract
with X.

Part payment of a debt

The basic rule here is that payment of a smaller sum will not discharge the
duty to pay a higher sum. In Pinnel’s Case [15] , the Court held that in such
circumstances the debtor must provide consideration for the creditor’s
promise to release him as part payment constitutes no good consideration.
Traditionally, the factual benefit that might accrue to the creditor from
securing some payment rather than nothing at all was not regarded as
sufficient and some separate consideration was required. As in Foakes v
Beer [16] , the House of Lords held that on its true construction, their
agreement merely gave Foakes time to pay or was intended to cover interest
as well. However, if the payment is settled in a different form, for instance,
part payment plus some other form of consideration, or payment before the
due date, sufficient consideration may then be constituted.

Based on the above analysis, I believe that, even though some cases may be
controversial, I do NOT agree that performance of an existing duty will never
amount to consideration

Acceptance proceeds an offer as the second requirement for a legally

binding contract. It can be defined as the instance in contractual formation
where the parties’ intentions as to the terms of the contract are the same
or unequivocal. This intent must then be effectively communicated to the
offeror to complete the acceptance of the offer.

Unequivocal is one of the key terms relevant when dealing with issues with
acceptance. It is defined as “leaving no doubt” and is often strictly
interpreted - Hyde v Wrench [1840] 3 Beav 334.

Communication is the second key word. Although the moment intent has
been communicated effectively is often obvious in certain situations, issues
can be easily overlooked.

Acceptance must mirror the offer

Often in situations it will seem as though an offeree has effectively

communicated their acceptance of an offer to the offeror. If this acceptance
however has modified conditions attached as to the terms of the offer, then
can it be considered unequivocal?

Counter-offers

In Hyde v Wrench [1840] 3 Beav 334, the above issue was raised in the
Court. The facts of the case are as follows;

An offeror made an offer to sell land at £1000 and the offeree responded by
attempting to accept the offer at £950. This was subsequently rejected by
the offeror. An attempt was by the offeree to accept the original offer of
£1000.
The Court found that the original offeree was now unable to accept the
original offer of £1000. This was due to the fact that the previous
“acceptance” of the offer at £950 had fundamentally changed the
relationship of the parties. Why? When the original offeree changed the
conditions of the offer by changing the terms of its price, they in fact created
a counter-offer.

Counter-offers revoke any previous offers and a revoked offer is not capable
of being accepted.

Requests for information

Often counter-offers are confused with simple requests for information due
to them both involving terms of existing offers in a similar way.

The distinction between them was made apparent in the case of Stevenson
Jaques& Co. v McLean (1880) 5 QBD 346;

In this instance the offeree made an inquiry as to whether the offeror would
allow a particular method/time of delivery, of the goods concerned in the
offer.

It was found by the Court that asking question to clarify the existing terms of
an offer was not in-fact a counter-offer but a simple request for information.

Cross-offers

While incredibly rare, there are instances where two parties both send
complimentary offers to one-another at the same time. The question is, if
this occurs has the contract been accepted?

Tinn v Hoffman (1873) 29 LT 271 – Such instances are not sufficient to

amount to acceptance of either offer i.e. offers and acceptance must be
communicated separately.

Remember:

 Without an offer there can be no acceptance.

 A counter-offer will revoke existing offers;
 Requests for information do not revoke offers.
 To determine whether something communicated by the offeree is either a
counter-offer or request for information. Always examine whether to give
effect to the communication, the terms of the offer have to change, as that is
the key distinction.
 Cross-offers cannot amount to acceptance.
Acceptance must be effectively communicated

Communication as mentioned earlier can present itself in a variety of forms.

Some of which can cause difficulties determining whether the offerees’
intended acceptance is in fact sufficiently effective to form a contract.

The postal rule

The basic principle of the postal rule was defined in Henthorn v Fraser [1892]
2 Ch 27;

Where postage is considered a prescribed means of communication

between the parties, effective acceptance occurs at the moment of postage.

Although this seems odd, as the offeree may not be aware of the acceptance
when it occurs, the Courts’ reasoning can be considered logical/fair.
Offerees have no control over an acceptance letter once it is posted.
Therefore, it would place an undue burden on an offeree to count on the
postal service to deliver the letter. This burden is instead placed on the
offeror; the Court contends that by not excluding the postal rule as a means
of acceptance (which is within an offerors power - Household Fire insurance
v Grant [1879] 4 Ex D 216), they have willingly acknowledged and agreed to
host this burden.

Issues to consider with the postal rule

Acceptance occurring at the moment of postage raises a number of

questions, the first;

Can an offer still be accepted if the acceptance letter itself does not arrive?

In Adams v Lindsell [1818] 1B &Ald 681 it was established that even in

situations where a letter is destroyed, delayed or lost, acceptance is still
effectively communicated at the moment of postage. As the burden of the
letters arrival has passed to the offeror.

The second question is;

If the letter does not arrive due to the fault of the offeree, is the
acceptance still effectively communicated?

The case of LJ Korbetis v Transgrain Shipping BV [2005] EWHC 1345

establishes that, in situations where the acceptance does not arrive due to
the fault of the offeree, for example, instances where a letter is
misaddressed. The burden of the letters arrival does not pass at the
moment of postage and as such, any acceptance is not considered
effectively communicated.

The final question is;

Can the offeror exclude the postal rule from being applicable to their
offer?

First it should be determined whether the post is a prescribed means of

communication between the parties. If it is not, then the postal rule will not
apply - Henthorn v Fraser [1892] 2 Ch 27.

To reiterate a point made earlier, if an offeror can willingly consent to

accepting the postal rules’ burden, can they refuse it?

Household Fire insurance v Grant [1879] 4 Ex D 216 makes it evident that if

an offeror expressly or impliedly rescinds the effect of the postal rule, then
acceptance will not occur at the moment of postage.

Remember:

 It must be reasonable to accept the offer through the post.

 If all the formalities surrounding the letter and its correct postage are met,
then whether it arrives is immaterial.
 The offeror can exclude postage as a communication method.
 The offeror can expressly/impliedly rescind the postal rule.

Instantaneous methods of communication

Clearly as time has progressed, postage being used as a method of

communicating acceptance has become less frequent. Various
other instantaneous methods of communication (e.g. emailing) have instead
replaced this older method of communication.

So does the postal rule apply to other methods of communication?

The short answer is no. The rules surrounding instantaneous methods of

communication focus on the receipt of the acceptance i.e. the moment it
arrives at the offerors’ end of the relevant communicative technology.

The Courts will also closely examine the facts surrounding the typical
contractual practices the parties adhere to, to determine whether the
methods of communication relative to the receipt are in fact prescribed.

When does acceptance occur?

Tenax Steamship Co v Owners of the Motor Vessel Brimnes [1974] EWCA Civ
15, also highlights that similarly to the postal rule, the actual acceptance
itself does not need to be acknowledged by the offeror for effective
communication to be established. It merely needs to be received!

The rationale surrounding this, similarly to the postal rule, is based on the
Court attempting to balance the positions of the parties relative to the
potential contract.

In Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34 it was contended that if

acceptance were limited to situations in which the offeror had the
acceptance brought to their attention, it would convolute typical business
arrangements. Due to working hours being restricted and the relevant
personnel not being directly contactable at all hours.

What happens if the acceptance is sent but it is not received?

Entores v Miles Far East Corp [1955] 2 QB 327 informs us that in situations
where the offeror is at fault for the lack of receipt then the acceptance is still
deemed to be effectively communicated. If however there is no fault by
either party for the lack of receipt, then the acceptance is not considered
effectively communicated.

Remember:

 The postal rule does not apply to methods of instantaneous methods of

communication.
 Acceptance only occurs on receipt. If there is no receipt, then there is no
effective communication, unless;
 The lack of receipt is the fault of the offeror.
 Always review the specific facts of the case! If contractual offers between
parties have always been accepted by email and the offeree sends a fax
instead, is the method of communication considered prescribed?

Silence

Silence alone is not considered communication - Felthouse v Bindley [1862]

EWHC CP J35.

If silence however, is also accompanied with particular types of conduct,

then it could potentially amount to communication. This is known
as implied acceptance. A type of situation where this could occur is best
illustrated through a case example.

In Brogden v Metropolitan Railway (1877) 2 App Cas 666, a situation arose

where parties had been dealing with each other for a long time on an
informal basis. It was decided by the parties that they should write-up a
formal contract, the parties did not actually do this. However, they did
continue to operate as if the contract had been formalised with no objection
as to this ‘contracts’ terms. No express acceptance as to the contracts
terms could therefore be found. The Court however did not contend that
there had been no acceptance. The Court believed that as the parties has
been acting in a manner than affirmed the contract existed through their
conduct, then the contract must have been impliedly accepted.

Remember:

 Silence does not equal acceptance. There must be communication, unless;

 The conduct of the parties indicates otherwise and acceptance can therefore
be implied.
 Always pay attention the particular facts of a scenario, situations of implied
acceptance are often difficult to notice.

Unilateral Contracts

Unilateral offers as defined in Carlill v Carbolic Smoke Ball Company [1893] 1

QB 256 CA have a completely different method for effectively
communicating acceptance (for more information on unilateral offers consult
Chapter 1).

Communication is not in fact necessary to accept unilateral offers. Due to

the fact unilateral offers usually require some form of specific performance
to be accepted. Which means to effectively communicate acceptance in
these situations, the conduct of the offeree is normally sufficient.

The best example of this type of acceptance occurs in the case of Carlill v
Carbolic Smoke Ball Company [1893] 1 QB 256 CA. Mrs. Carlil by using the
“smoke ball” as prescribed by the term of the offer, provided the conduct
necessary to accept the contract.

Things to consider when reviewing communication

The test to determine whether or not someone has accepted an offer is

objective i.e. compared to standard of the reasonable man - Day Morris
Associates v Voyce [2003] EWCA Civ 189.

In Scammell and Nephew v Ouston [1941] AC 251 HL, it was established that
if the terms of an offer are not sufficient then it cannot be accepted, again an
objective approach is adopted by the Courts in these situations.

The “Battle of the Forms”

Often in commercial contracts, the parties involved will employ standard
terms whenever contacting. This is done for obvious reasons, namely to
save time, money etc. If both parties have standard terms, then clearly a
problem will arise. If the parties continually agree to each other’s standard
terms during their course of dealings, then which terms will the Court bind
the parties to? This is known as the “battle of the forms”.

It was decided in BRS v Arthur V Crutchley Ltd [1968] 1 All ER 811, that the
Court would follow the last shot principle. Simply defined as, the last set of
terms agreed to by the parties would be the ones applied by the Court. In
this case, a party had agreed to deliver goods to the other. On receipt of the
goods a party signed a delivery note with terms attached. The Court agreed
these terms should be the ones that binds the parties, acknowledging that
the previously agreed upon terms had been overridden by this acceptance.

Remember:

 Always examine who the last person to accept contractual terms was.
 Make sure to look at the actual terms agreed to and consider whether there
are in fact other issues, such as the terms being a counter-offer - Butler
Machine Tool v Ex-Cell- O Corporation [1979] 1 WLR 401 (CA).

End of acceptance period

Offers are not infinite i.e. all offers have different expiration periods, after
which they cannot be accepted.

In Routledge v Grant [1828] 4 Bing 653 it was established that even if an

offeree is given a timeframe in which they can accept the offer. The offeree
can still revoke the offer during that time as long as the revocation is
communicated effectively.

Essentially, an offeror can revoke an offer at any point unless acceptance

has been communicated - Hare v Nicholl (1966) 1 All ER 285. Note that, in
the case of unilateral offers, the offer cannot be revoked if the conduct of the
parties has objectively evidenced communication.

An offers revocation also does not need to be communicated by the offeror,

a reliable third party (objectively accessed) can sufficiently communicate
said revocation - Dickinson v Dodds (1876) 2 Ch D 463.

What if the offeree changes their mind?

What would happen if the offeree decides that they want to revoke their
acceptance of an offer? It is important to note there is no English/Welsh case
law surrounding this topic area so all case decisions discussed here are
persuasive.

It was held in Dunmore v Alexander (1830) 9 Sh 19 (a Scottish case) that

postal acceptance can be revoked by a faster means of communication.
Clearly this decision contrasts with the idea that acceptance occurs at the
moment of postage, and should therefore be discussed with caution.

A case from New Zealand that provides the opposing view – Wenkheim v
Ardnt (1873) 1 JR 73. In this case a postal acceptance was not revoked
through the use of a telegram (a faster means of communication).

The presumption so far in the UK, although not affirmed. Is that a revocation
of acceptance through a faster means of communication will only be possible
if it would not be unjust to the offeror to allow said revocation.

Death of the offeror

If either party dies before contract formation is complete then it cannot be

accepted Dickinson v Dodds (1876) 2 Ch D 463. As such, an offer cannot be
accepted posthumously Bradbury v Morgan [1862] 158 ER 877.

Remember:

 Normally offers can be revoked before acceptance is communicated or

evidenced.
 There is no EW case law on the relevant areas of revocation of acceptance,
so approach this area with caution.
 If one of the parties dies before acceptance, then the contract cannot be
formalised.

Acceptance Lecture - Hands on Example

The following scenarios will test your knowledge and understanding of the
various principles that have been outlined above. Some are purposely
complex, so that you can become more familiar with the process of breaking
difficult scenarios into distinct events, which can then be assessed both
individually and collectively. The answers at the end will enable you to
compare your approach and conclusions to determine where you may need
to refer back to the principles outlined above. The scenarios may appear
confusing at first, but do not be discouraged, apply the guidance you were
given on breaking down scenarios into manageable sections and you will be
surprised at how simple the scenario actually is!

SCENARIO 1
Anna has recently encountered financial problems and realises that she
cannot pay the next instalment on her mortgage. In a bid to gather funds,
she decides to sell her large collection of rare bone china plates. She places
an advertisement on the internet, offering to sell all 50 of them for £5000.
China Ltd is a company that deals in rare crockery, and emails Anna, asking
whether the plates are in good condition. Anna responds, stating “They are
in good condition, I will remove the advertisement and you can pay by
Paypal if you prefer”. The next day, China Ltd informs Anna that it is ready
to send the £5000 via Paypal, but adds that the plates must be in their
original boxes, and accompanied by their display brackets, else it will only
pay £4000. Anna informs China Ltd that she does not have the original
boxes or the brackets and states that she has found another buyer. China
Ltd states that it accepts her original offer of £5000 but Anna has already
agreed to sell the plates to another buyer.

Advise Anna.

SCENARIO 2

Peter writes a letter to Bob, offering to sell him 50 shares in Greko Ltd. In his
letter, which arrives at Bob’s address on Tuesday, Peter asks that Bob let
him know by next Sunday whether he accepts his offer. Bob posts a reply
letter stating his acceptance of peter’s offer on Thursday. However, Bob
hears of a more lucrative deal from another friend and changes his mind
about the shares in Greko Ltd. On Friday evening he telephones Peter to
reject his offer. Peter was absent but Bob left a message on his answering
machine stating that he withdraws his acceptance of the offer. On Monday
morning, Peter opens Bob’s letter of acceptance, then checks his
answerphone messages and hears Bob’s withdrawal message.

Advise Peter.

Scenario 1 Answer

This scenario focuses on the issue of request for information and counter
offers. Begin by breaking the scenario down into specific events:

1. Anna offers 50 plates for £5000.

2. China Ltd asks if the plates are in good condition.

3. Anna confirms good condition.

4. China Ltd adds that plates must be in original boxes and with brackets,
otherwise offers £4000.
5. Anna tells China Ltd that she does not have the boxes or the brackets,
finds another buyer.

6. China Ltd accepts original offer of £5000.

7. Anna sells plates to another buyer.

Each event can then be labelled according to whether it is acceptance, a

counter offer or a request for information:

1. Anna’s original offer.

2. China Ltd’s request for information.

3. Anna’s response to request for information.

4. China Ltd’s counter offer.

5. Anna’s rejection of counter offer.

6. China Ltd’s acceptance of original offer.

We can now observe the events more clearly and determine that a
contractual agreement has not been formed between Anna and China Ltd. It
is important to address the point at which the agreement cannot be formed.
The request for information does not affect the agreement – it is merely a
query regarding the condition of the plates and not the addition of any major
terms into the agreement (Stevenson Jaques& Co. v McLean (1880) 5 QBD
346 ). However, when China Ltd adds the term that the plates must be in
their original boxes and with brackets, otherwise it will only pay £4000, this
is clearly a counter offer. China Ltd is changing the terms of the agreement.
Refer to Hyde v Wrench [1840] 3 Beav 334. Anna is then free to accept or
reject China Ltd’s counter offer, which she rejects. China Ltd’s counter offer
also represents a rejection of Anna’s original offer, so its acceptance of her
original offer following her rejection of its counter offer is not valid. There is
therefore no contract and Anna is not in breach of any contract with China
Ltd.

Scenario 2 Answer

This scenario concerns communication, the postal rule and expiration of

offer.

Bob will argue that he is not required to purchase the shares because there
is no contract. Break down the scenario:
1. P offers B shares via letter, states that offer is open until Sunday.

2. B posts acceptance letter Thursday.

3. B phones P on Friday to withdraw acceptance. Leaves answerphone

message.

4. P opens B’s acceptance letter on Monday, then hears answerphone

message.

The main question is whether B’s letter of acceptance or phone call

withdrawing acceptance has been effectively communicated.

Note firstly that P is not obliged to keep the offer open until Sunday – he can
withdraw it, provided he communicates this to B – Offord v Davies.

B posted his letter of acceptance – does the postal rule apply?

Consider Adams v Lindsell – acceptance is binding once it is posted. You
should recognise also that P commenced negotiations via post, meaning that
post is a reasonable method of communication – Henthorn v Fraser. It does
not matter that the letter arrived on Monday (remember that the offer
expired on Sunday): when B posted the letter of acceptance on Thursday, a
contract was formed.

However, P asked B to ‘let him know by Sunday’, which suggests that P

excluded the postal rule in stating that acceptance must be actually received
- Household Fire insurance v Grant, Bramwell LJ’s statement that offeror can
exclude postal rule by requiring that communication be received. Also
consider Holwell Securities v Hughes. Address the fact also that
since Holwell, the courts have proven reluctant to uphold the postal rule.

If the postal rule applies, B’s change of mind is irrelevant because a contract
was formed when he posted the letter. However, the fact that P reads/hears
both of B’s messages almost simultaneously on Monday means that this
would be an unreasonable outcome – remember the objective approach
adopted by the courts in Scammell and Nephew v Ouston and Sudbrook
Trading Estate v Eggleton. Also refer to Dunmore v Alexander – faster
means of communication may be used to withdraw postal acceptance. It is
important to note that this is not a binding decision in England. It is
therefore unlikely that the court would rely on the postal rule to bring about
an unfair and unreasonable result. Apply instantaneous communication
rules in Entores v Miles Far East and Brinkibon to suggest that the telephone
call prevails and that there is no contract. Finally, P is no worse off because
he received the acceptance and rejection messages at the same time. It
ultimately appears clear that there is no contract and B is not obliged to
purchase the shares.
Certainty & Intention to Create Legal Relations
Lecture - Introduction
Welcome to the second lesson of this module guide – certainty and intention
to create legal relations! An agreement may not qualify as a valid and
enforceable contract if it lacks certainty, and not all agreements are legally
binding or have an intention to create legal relations. It is for these reasons
that this topic is of importance, as these elements must be proven for a
successful contract.

The chapter begins with an introduction to the concept of certainty, before

considering the issues of vagueness and incompleteness. Intention to create
legal relations is then outlined in light of the developed case law. The test of
reasonableness is discussed. The chapter further moves on to the
presumptions under social, domestic and commercial agreements and their
effects on the intention to create legal relations. Finally, intention is
contrasted with consideration.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand what certainty is

 To understand what intention to create legal relations is
 To understand their importance to the successful creation of a contract

Objectives for this section

 To understand the need certainty

 To understand the need for intention to create legal relations
 To understand the issues of vagueness and incompleteness with regard to
certainty
 To be able to use the test of reasonableness
 To understand the case law surrounding intention to create legal relations
 To be able to determine which agreements are legally binding and have an
intention to create legal relations
 To be able to distinguish between social and domestic agreements and those
made in the commercial context

Certainty & Intention to Create Legal Relations

Lecture
Certainty

Once an offer and acceptance are considered valid, an agreement is formed.

Certainty Is the next requirement to make the agreement legally
enforceable. If an agreement is not considered certain and thereby lacks
this requirement, then it will not be enforceable - Gunthing v Lynn (1831) 2
B7 Ad 232.

Every case involved with a dispute as to whether a contract lacks certainty is

heavily fact based and individual. As such, it is always important to pay
close attention to the facts surrounding the agreement, and any clauses or
wording relating to said agreement.

The two areas that need to be considered when reviewing whether an

agreement is certain can be broadly placed into two categories: (a)
vagueness of the agreement and (b) whether it is incomplete.

Vagueness

If an agreement is considered too vague or abstract, and without altering the

agreements’ terms, or without adding new terms it could not be reconciled,
no effect will be given to the agreement - Mileform Ltd v Interserve Security
Ltd [2013] EWHC 3386.

In G Scammell& Nephew v Ouston [1941] AC 251 it was held that an

agreement concerning goods subject to a hire purchase clause could not be
given effect as the terms of this clause were not actually specified.

As considering all vague agreements to be contractually unenforceable

would not be realistically appropriate, the Court has various methods at its
disposal, that can provide certain agreements with legally enforceability.

Methods for resolving vagueness

1. Use of business customs and trade usages: In the interest of contractual and
commercial certainty, a Court will often give effect to vague agreements by
filling their gaps in with business, customs and trade usages - Courtney v
Fairbairn Ltd v Tolaini Bros (Hotels) Ltd [1975] 1 All ER 453. If a party
however is not used to any such business, customs and trade usages the
Court may not find it appropriate to use this method of curing vagueness
- Hollingworth v Southern Ferries [1977] 2 Lloyd’s Rep 70.
2. Reasonableness: Where a contract would fail through virtue of an
uncertainty the Court will apply an objective standard to the agreement to fix
the issue. A great case example to illustrate this fact, would be Hillas& Co v
Arcos Ltd (1932) 147 LT 503. In this case, a contract was made for the
supply of goods described as “fair”. As “fair” in terms of goods is not an
adequate description, the Court applied an objective assessment and
determined that “fair” in the context of the agreement could be adequately
defined.
3. Doctrine of severability: If a clause is irreconcilable with the agreement due
to how vague it is the Court may completely strike it from the agreement so
 the rest of said agreement can be legally enforced. In Nicolene Ltd v
Simmonds [1953] 1 QB 543, an agreement was subject to “usual conditions
of acceptance”, as the Court considered this phrase meaningless they
excluded them from the agreement. Similarly, if a phrase contradicts itself
then the Court may remove it from the agreement - ERJ Lovelock v
Exportles [1968] 1 Lloyd’s Rep 163.
4. The contract itself: The contract itself may also be able to resolve any
ambiguity in the work. In Foley v Classique Coaches Ltd [1934] 2 KB 1, all
disputes concerning the potential vagueness of the contract were to be
resolved by an arbitrator.

Remember:

 Look out for terms that are ambiguous e.g. lots, many, large, -ish (the suffix).
 Make sure the type of contract is reviewed e.g. commercial or private.
 Are the parties aware of each-others’ needs?
 Is there a clause that seems contradictory or meaningless within the terms?
 Check whether the contract contains terms within itself to resolve disputes.

Incompleteness

An agreement does not require every minute detail to be addressed for it to

be capable of legal enforceability. Every vital/essential piece of information
however is required - Grow With Us Ltd v Green Thumb (UK) Ltd [2006]
EWCA Civ 1201.

The degree to which a term is considered vital/essential within an agreement

varies depending of the facts surrounding the agreement. Where in one
case a period of a lease and the property being conveyed are essential terms
within the agreement (Harvey v Pratt [1965] 1 WLR 1025) in another the
price of goods being sold may not actually be considered important
(Bushwall Properties v Vortex Properties [1976] 1 WLR 591).

It is always prudent then to pay direct attention to the facts when making a
conclusion based on potential incompleteness of a contract, the key thing to
consider is the extent to which a term is in fact vital to the agreement. The
other important things to consider are the other methods in which a
contracts’ potential incompleteness can be resolved.

Methods of resolving incompleteness

1. Determination by a contracting party: If a term within a contract is missing

e.g. price of goods to be sold, there may be a clause in the contract that
permits a particular party to resolve the issue - Bulk Trading Co v Zenziper
Grains and Feedstuffs [2001] 1 Lloyd’s Rep 357.
2. Determination by a third party of mechanism: If a situation arises where a
contact is incomplete through a lack of terms due to a third party
requirement or mechanism needing to be activated, such as an independent
 valuation. The Court themselves may ensure that this term is given effect in
order to ensure the contract is provided with its missing terms - Sudbrook
Trading Estate v Eggleton [1983] 1 AC 444. This however can be contrasted
by cases where the third party assistance or mechanism is itself essential to
the agreement, such as a very specific third party needing to value a
particular thing. The Court in these situations is unable to give effect to the
agreement themselves - Gillatt v Sky Television, [2001] 1 All ER 461.

Remember:

 Always look at the specific facts of the case. Incompleteness and vagueness
are often difficult to distinguish.
 Is the missing term vital to the contract? Remember this requirement is
debatable depending on the facts.
 Make sure to check whether there is a method the Court can employ to
resolve the incompleteness or would they be over-stepping to do so?

Intention to create legal relations

The intention to create legal relations, simply, is the requirement that parties
to an agreement wish to be legally bound to said agreement.

There is a large controversy surrounding the concept of requiring intention to

create legal relations. Williston a leading academic, argues that objectively,
providing consideration for an agreement is evidence enough of the parties’
intention to contract. While the other side, namely academics such as
Treitel, submits that it must be subjectively determined that a party
contemplated to be legally bound by the agreement.

In terms of academic debate, this issue is a large source of controversy. The

Courts in response have adopted an objective based test of reasonableness
to determine whether parties intended to be legally bound by an
agreement. However present within the test are a number of presumptions
that provide it with a subjective element. A balance of the previous
academic opinion is thereby provided as result.

The test of reasonableness

The test of whether there was intent present to create legal relation on
formation of an agreement is one of fact. This means the Court does not
review the subjective opinions of the parties, only an objective assessment of
the situation in which the agreement arose. This objective standard is
determined by the “reasonable man” - Smith v Hughes (1871) LR 6 QB 597.
The test therefore is whether or not the parties would have reasonably
believed themselves to be entering into a contract, of which failure to adhere
would have legal repercussions - Albert v Motor Insurer’s Bureau [1972] AC
301.
Situations where a promise is uncertain will often cause an agreement to be
non-legally binding, such as agreements made under serious emotional
influence - Licenses Insurance Corporation v Lawson (1896) 12 TLR 501.

This test is only ever applicable where the facts suggest there may have
been no form of contractual intent.

As mentioned previously, there are a number of presumptions applicable to

the test of reasonableness.

Exceptions and presumptions

1. Domestic agreements: Domestic agreement are presumed to be non-

contractually binding - Balfour v Balfour, [1919] 2 KB 571. Understandably
this is due the public policy concerns related to governing marital and
household arrangements. Although this presumption seems obvious in its
applicability, it itself has rebuttals;

 Lack of cohabitation – In situations where the parties normally considered to

be close enough in proximity for the purposes of the rule to apply e.g.
husband and wife, the rule can be rebutted if they lack the necessary degree
of cohabitation - Merritt v Merritt [1970] 1 WLR 1211.
 Commercial attributes – If a domestic agreement is commercial in nature,
then it will rebut the domestic agreement presumption - Granatino v
Radmacher, [2010] UKSC 42. Commercial attributes also extend to situations
like sharing a bank account and owning property.
 One party has acted on a promise to a detriment – If a party acts on an
agreement to a detriment then the agreement may in fact be contractually
binding. An example to illustrate this point is best demonstrated by Tanner v
Tanner [1975] 1 WLR 1346. In this case a party was induced to sell their
property based on the promise that the other party (with whom they
cohabited) would allow them to stay the property currently being cohabited
in. When this promise was not acted upon, the Court found the detriment
caused by selling the house was sufficient to make the agreement
contractual.
 Executed agreements – Agreements that require execution to be binding are
given even less legal weight in domestic situations; if parties to an
agreement are both sufficiently proximate and they have not performed any
of the obligations under the agreement, the Court will not view the existence
of a contract favourably - Rob Purton Richwood Interiors v Kilker Projects
Limited [2015] EWHC 2624.

2. Social agreements: In a similar fashion to domestic agreements, social

arrangements will often not exhibit the necessary intention required to form
legal relations – Lens v Devonshire Club (1914) The Times, December
4. Agreements such as carpooling between colleagues, even if one
party pays the cost (Wyatt v Kreglinger&Fernau [1933] 1 KB 793) and sharing
of a house (Monmouth BC v Marlog) for example are not enforceable. Like
domestic agreements, social agreements also have rebuttals.
  Simpkins v Pays [1955] 1 WLR 975– Third parties can rebut the presumption
of an agreement forming a contract such as the addition of a lodger in a
contract between a granddaughter and grandmother.

3. Commercial agreements: In contrast to the other two presumptions, this

presumption rests in favour of presuming intent to form legal relations. In
the Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1
WLR 1 this was firmly established. Although in this case it was later found
that respondent did not in fact intend to create legal relations. It was their
duty to prove this was so. It could be said then that the burden of proof in
these instances is to prove there is no intent to create legal relations.

This presumption is so strong that even in cases where an agreement is

executed as an “honourable arrangement” the Court may infer an intent to
create legal relations (Home and Overseas Ins Co v Mentor Ins Co (UK),
[1989] 1 Lloyd’s Rep 473).

Much like the other presumptions, this presumption also has a series of
rebuttals;

 Collective agreement between trade union and an employer – Collective

agreements between a trade union and an employer are not enforceable. For
example, a statement of aims placed into a contract from an employer at the
request of a trade union is not legally binding - Kaur v MG Rover [2005] IRLR
40.
 Honour clause – Honour clauses are terms within agreements that highlight
that an agreement is never intended to cause legal relations to form a great
example is contained within the case of Rose and Frank Co v JR Crompton
and Bros Ltd [1925] AC 445. The clause stated;

“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 ..., but it is only a definite expression and record of the purpose
and intention of the three parties concerned to which they each honourably
pledge themselves”

The Courts as such, did not find that the agreement intended to give rise to
legal relations.

 Pre-contractual promise, comfort letter or letter of intent – Contractual intent

may be negated in cases where the promise is made at a pre-contractual
stage. Letters of intent and comfort letters (letters providing basic
reassurances) will also not be held as giving rise to legal relations by Courts
- Kleinwort Benson Ltd v Malaysian Mining Corporation [1989] 1 WLR 379.
However, a letter of intent sent that has then been acted upon over a long
period of time and has cost indispensable monies can in fact cause legally
binding relations to rise - Turriff Construction Ltd v Regalia Knitting
Mills (1971) 22 EG 169.
Finally, in certain situations where a formally written agreement or record
has not been kept when it should normally/reasonably be done so. Any
intent to form legal relations may be negated - Meates v Westpac Corp The
Times (5 July 1990).

Intention versus consideration

While in a number of other jurisdictions consideration and intent are not

separate entities. The English/Welsh position on this matter is entirely
different. Consideration will be discussed further in the next chapter.

A large number of academics and other common law legal systems have
found that the concept of intention when forming contractual legal relations
is nonsensical. It is often argued to be an unnecessary step placed into the
usual offer-acceptance-consideration process. It is also proposed that the
concept of consideration actually evidences any intention relevant to a
contracts formation and as such, searching independently for intention is not
required.

In the English/Welsh system however intent to create legal relations has

been isolated as its own separate and distinct requirement for the formation
of a contract. Therefore, both intent and consideration should be discussed
as separate entities if a question arises concerning contractual formation.
Do not however be disheartened if the two doctrines seem to overlap, this is
common and as such is nothing to worry about.

Certainty & Intention to Create Legal Relations

Lecture - Hands on Example
The following scenario seeks to assess your understanding of the concepts of
“contractual certainty” and “intention to create legal relations” on a practical
standpoint.

In answering the issues, you should apply the theory and principles,
alongside the cases discussed above. While referring back to the notes may
be helpful, not all of the content will be relevant here. Hence, you should be
able to identify the applicable heads and related case law. Further, given
that the notes do not (and cannot possibly) capture all decided cases until
date, you should be able to research on, review and understand other
relevant cases on the subject, and apply them to the scenario. This however
should be done once you have obtained a thorough conceptual
understanding, for which the notes should help.

While the solutions may be quite subjective and case-specific, probable

answers are provided at the bottom of the page. Start by identifying the
legal issues involved in each problem.
Scenario

The facts concern the following two transactions between Anthony and
Xylem Ltd, a UK registered company:

1.Anthony paid £20,000 to Xylem Ltd in anticipation of entering into a share

subscription agreement towards investing and issuance of shares of the
company. The monies were advanced against a term sheet executed
between Anthony and Xylem Ltd, which contained a clause-

“9.1 This term sheet will have no binding effect on the parties, except the
provisions relating to dispute resolution, exclusivity, and severability,
provided in clauses… “

Further, as regards the number of shares to be issued, valuation, transfer

restrictions, pre-emption rights, and dividend rights, the term sheet referred
to the future subscription agreement to be executed between the parties.

Later, Xylem Ltd, owing to change in business plans, did not issue the shares
to Anthony, who brought a claim for breach of contract against Xylem
Ltd. Can Anthony succeed in his claim?

2.Anthony and Xylem Ltd were shareholders in Trident Ltd, a London based
company, operating in the consumer sector. Prior to its demerger, Anthony
and Xylem Ltd orally agreed to apportion certain proceeds from the
demerger amongst themselves in 1:2 ratio, without elaborating further upon
the mechanism of such payment. Following this, the demerger was
undertaken pursuant to a written contract, which however did not mention
the apportionment at all.

After the demerger, Anthony sought to recover his share of proceeds, failing
which he brought an action of breach against Xylem Ltd. Does Xylem Ltd
have a binding obligation to abide by the apportionment (1:2) of the
proceeds?

Answers

1.The issue is whether the term sheet in anticipation of the investment and
share subscription agreement constitutes a binding contract. The issue
needs to be appraised in two stages: (i) whether the clauses in the term
sheet are clear and certain as regards the essential aspects of the
transaction, and (ii) only if so, whether the parties contemplated the term
sheet to have legal effect and consequences.

Considering that the term sheet was of the nature of an “agreement to

agree” in future upon the most vital terms of the share issuance (including
the number of shares and valuation, aside to other related matters of
transfer, pre-emption, dividend- normally decided at the stage of share
subscription itself), it cannot be reckoned as clear and certain enough so as
to constitute a valid and binding contract. An agreement cannot be
implemented or enforced if it lacks certainty as regards the essential and
vital terms, left to be agreed in future. This position is well-established
through cases like Barbudev v Eurocom Cable Management Bulgaria, [2011]
EWHC 1560, and Dhanani v Crasnianski, [2011] EWHC 926, (discussed in the
notes).

This is more so, as the term sheet contains an express non-binding clause,
hinting at the intention of the parties to not effectuate any legal
consequences out of it. This is notwithstanding that the term sheet was a
document of commercial character, and carried a presumption of being
intended to have legal effect. Nonetheless, Anthony may seek restitution
and recover £20,000 already being paid to Xylem Ltd, owing to the failed
share issuance and subscription. The conclusion can be traced to the recent
case of Kowalishin v Roberts, [2015] EWHC 1333.

2.The issue is whether an oral agreement, not confirmed in a subsequent

written one executed between the parties, can be enforced as a valid and
binding contract. Again, the issue needs to be appraised in two stages: (i)
whether the oral agreement can be reckoned to be so certain and clear on
the essential attributes so as to be enforced as on a stand-alone basis, and
(ii) only if so, whether the parties contemplated such oral agreement on the
apportionment to have legal effect and consequences.

Firstly, as regards certainty, the oral agreement only provided a sketch of

the proposed apportionment without detailing the payment mechanism- a
vital requirement for the apportionment to be implemented. Thus, the
agreement was incomplete and uncertain.

Moreover, given that the parties did not incorporate the apportionment in
the final documented and executed demerger agreement, it is clear that
they never intended to legally effectuate it, regardless of any presumption in
favour of it being so as a commercial arrangement. This finds support from
the recent ruling in Barnsley v Noble, [2014] EWHC 2657, in which the court
held that it is not enough for the parties to merely agree on some matter.
Rather, it must be proved (or disproved in commercial agreements) that they
intended their agreement to have the status of a legally binding and
enforceable contract. Considering that neither party intended so, and there
was no express agreement following the oral one (which was abstract and
incomplete on essential aspects), the presumption and the contractual claim
must fail.
Consideration & Promissory Estoppel - Introduction
Share this:

Welcome to the second lesson of this module guide – consideration and

promissory estoppel! This chapter will examine and analyse two principles of
contract law. The first is consideration, whichalong with the offer, acceptance
and intention to create legal relations, helps form a legally bindingcontract.
Promissory Estoppel is a related principle which can act as the exception to
one of the mainrules of consideration – that for consideration to be valid, it
must have economic value and involve anexchange of benefit/detriment
between the parties. This chapter will ensure you understand the rulesof
consideration and when exactly promissory estoppel can operate.

This chapter will begin by examining what consideration is, as well as the
types and whether the exchange of a benefit or detriment can constitute as
it. Following this the requirements and limitations of consideration will be
outlined and discussed. The chapter will then move on to consider
promissory estoppel, specifically how it operates and its interplay with
consideration.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand what consideration and promissory estoppel are

 To understand the importance of consideration to a contract
 To understand the different principles governing consideration

Objectives for this section

 To be able to define consideration

 To understand the different types of consideration
 To understand the requirements of consideration and its limits
 To understand and be able to apply the legal principles of consideration to a
scenario
 To understand when and how the principle of promissory estoppel operates

Consideration & Promissory Estoppel

What is consideration?

Whether consideration has been provided by the parties is one of the

fundamental steps in determining the legally enforceability of a contract.

Consideration was defined aptly in the case of Currie v Misa(1874) LR 10 Ex

153 and is summed as;
“A valuable consideration, in the sense of the law, may consist either in
some right, interest, profit, or benefit accruing to the one party, or some
forbearance, detriment, loss, or responsibility, given, suffered, or undertaken
by the other.”

Essentially, consideration is the exchange of benefits/detriments between

parties.

Does the exchange of the promise to a benefit/detriment constitute

valid consideration?

It is a mistake to believe that the consideration must itself transfer to form a

binding agreement. A promise to transfer such consideration is often
sufficient.

This assertion was confirmed in Dunlop v Selfridge Ltd [1915] AC 847, where
Lord Dunedin stated that promises were indeed considered enforceable.

Types of consideration

There are two types of consideration:

1. Executory consideration: This type of consideration is formed when there has

been an exchange of promises between parties otherwise known as a
bilateral contract.
2. Executed consideration: This type of consideration is found in unilateral
contract where one party makes a promise in exchange for an act or conduct
to be performed by another party. When this performance occurs the
consideration is considered executed.

Remember:

 Executory consideration is yet to be executed, unlike executed consideration

only promises of said consideration have been exchanged.

The requirements of consideration

There are a number of things to remember with consideration, namely the

most important are:

1. Consideration does not need to be adequate.

2. Consideration must have economic value.

Consideration need not be adequate

Consideration does not need to be adequate. You may be asking yourself

what this means. Essentially it means that the consideration provided by
either party does not need to be equivalent to the other party’s
consideration. Sometimes this means that situations arise where the
consideration provided by both parties is vastly dissimilar.

In Thomas v Thomas(1842) 2 QB 851 a situation arose where a rental

property was let for £1 consideration, said property’s regular rent cost could
have afforded much higher rates. The courts affirmed in this case that
adequate consideration is not necessary, simply some consideration.

The reason the court affirmed this decision, is due to the fact the court is
unwilling to interfere with bad bargains, as parties to a contract are typically
free to bargain on whatever terms they wish - Chappell & Co Ltd v Nestle Co
Ltd [1960] AC 97.

Consideration must have economic value

As mentioned earlier, Thomas v Thomas(1842) 2 QB 851 confirmed that

although consideration need not be sufficient, it must have economic value.

To demonstrate this the case of White v Bluett(1853) 23 LJ Ex 36 will be

examined. In this case a father waived a debt owed to him by his son, in
return for his son to stop complaining about his will. When this situation was
reviewed by the court it was found that this was not valid consideration. An
agreement to not complain in this instance was viewed as not having any
economic value.

In Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 it was found that sweet
wrappers being returned to Nestle in an attempt to win a prize were
considered to have economic value. In contrast however in Lipkin Gorman v
Karpnale Ltd [1991] 2 AC 548 it was found that casino chips did not suffice in
having economic value.

The important thing to remember about the two above cases is the recipient
of the consideration. In Nestle, the goods were considered by the Court to
have economic value to Nestle. This should be kept in mind when
considering whether or not something will be considered to have economic
value.

Limits of consideration

There are also numerous things that the Court have decided will not suffice
to amount to consideration.

Performance of an existing duty

There are three different circumstances that can arise if the consideration is
the performance of an existing duty.

1. Performance of legal obligation which are independent of any contract.

Collins v Godefroy(1831) 1 B & Ad 950 – Typically the performance of a legal

obligation such as the jobs of the public service e.g. fireman, will not provide
adequate consideration for an agreement.

Exception - Glasbrook Bros v Glamorgan County Council [1925] AC 270 – If

the obligation extends beyond that which is beyond that of ordinary duties
then the obligation can amount to valid consideration. In this case a police
force dedicated officers to an event for an entire day when they didn’t have
the resources in return for financial remuneration. Said obligation carried
out by the police force was considered sufficient for the purposes of
consideration because it extended beyond what was ordinary[AL1].

2. Performance of a duty already promised in a different contract.

Stilk v Myrick (1809) 2 Camp 317, 170 ER 1168 – Performing duties already
required under an existing contract is not sufficient to amount to
consideration.

Exception - Hartley v Ponsonby [1857] 7 EL BL 872 – Extending beyond the

duty required under a contract will amount to valid consideration.

Exception - Williams v Roffey [1991] 1 QB 1 – This case provides a set of

circumstances in which performance under an existing duty under a contract
will amount to valid consideration.

 If A has entered into a contract with B to do work for, or to supply goods or

services to, B in return for payment by B; and
 At some stage before A has completely performed his obligations under the
contract B has reason to doubt whether A will not, or will be able to, complete
his side of the bargain; and
 B thereupon promises A an additional payment in return for A’s promise to
perform his contractual obligations on time; and
 As a result of giving his promise, B obtains a benefit, or obviates a disbenefit;
and

B’s promise is not given as a result of economic duress or fraud on the part
of A.

The emphasis of this case is the concept of a “practical benefit”. It is also

important to remember that this case did not overrule Stilk v Myrick (1809) 2
Camp 317, 170 ER 1168.
 3. Performance of a duty owed to a third party

This limitation of consideration is similar to that of above example, however,

in this case, the duty will be owed to a third party, and not the same party.

New Zealand Shipping Co Ltd v AM Satterthwaite& Co Ltd (The

Eurymedon) [1975] AC 154 – The facts have been listed below because this
case is quite complex.

 Party A, the shippers, had a contract of carriage with Party B, the carriers.
 This contract included an exemption clause whereby the carriers would not
be liable for any damage as a result of the unloading of the goods
 Party B then entered a contract with Party C, the stevedores, to unload the
goods.
 Subsequently, Party A promises Party C that they can take benefit of the
exemption clause they offered to party B

Therefore, the general rule created is that performance of an existing duty

owed to a third party may be valid consideration if it allows the party to
enforce a direct obligation against the other.

Past consideration

Past consideration is insufficient to form a legally binding agreement. Only

consideration which is given at the time or after the promise for which it is
given will be enforceable. Promises given after the consideration has been
completed are unenforceable.

Re McArdle [1951] Ch 669 provides the authority for the above assertion.

Exception - The case of Pao On v Lau Yiu Long [1980] AC 614 affirmed the
judgement in Lampleigh v Braithwaite (1615) Hob 105 that stated if certain
criteria met the requested performance of the parties may be sufficient to
amount to consideration.

 The consideration which is ‘past’ would have operated as valid consideration

if the act was done at the promisor’s request.
 There was an understanding there would be the conferment of some kind of
reward, payment or benefit for the act.
 The consideration would have been valid had it been promised in advance of
the act.

Part-payment of a debt

Foakes v Beer (1883) LR 9 App Cas 605 – Part-Payment of a debt (alone) is

never valid consideration. This is due to the ability of a party to exploit
another party in a difficult financial position.
Pinnel’s Case (1602) 5 Co Rep 117 does provide however for 2 exceptions to
this rule.

 Part-payment of a debt will constitute valid consideration if it is accompanied

by another form of consideration such as goods.
 Payment of a debt may also be sufficient if it has been given in a different
form, time, or place. These exceptions should however be reviewed with
caution as they are all fact based and subject to heavy scrutiny.

Promissory estoppel

Promissory estoppel is an equitable remedy that prevents a party from

‘going-back on’ or rescinding a promise. Clearly the concept is not simple as
just preventing the rescission of a promise.

How does promissory estoppel operate?

To determine whether promissory estoppel will apply in a situation where a

promise has been rescinded the test laid out in the Central London Property
Trust Ltd v High Trees House Ltd [1947] KB 130 must be examined.

The requirements of the test are:

1. There must have been an existing legal relationship between the parties

Promissory estoppel generally only operates when there is a pre-existing

relationship between the parties and will not work to create new ones, as
affirmed by Lord Denning in Combe v Combe [1951] 2 KB.

2. There must have been a reliance on the promise

The promisee must rely on the promisors’ promise in order to attempt to

apply promissory estoppel. This means that by relying on the promise the
actions of the promisee have changed.

This requirement has a very low threshold and although there has been
argument that a detriment may be required to establish reliance both the
cases of Central London Property Trust Ltd v High Trees House Ltd [1947] KB
130 and Central London Property Trust Ltd v High Trees House Ltd [1947] KB
130, dispute this.

3. Promissory estoppel can only be used as a defence

This is where the famous equitable maxim applies, promissory estoppel can
only be used as a “shield not a sword” - Combe v Combe [1951] 2 KB.
Essentially this means promissory cannot be used as a cause if action, only a
defence. This decision makes sense considering the purpose of equity.

4. It must be inequitable to allow the promisor to go back on the promise

The courts of equity are remedies which attempt to ‘fill the gap’ where the
common law produces unfair results. Therefore, it would be illogical to not
allow the promisor to go back on the promise where it is in fact equitable.
The law of equity, unlike the common law, affords discretion to the courts to
decide whether it is fair or not to impose the principles of equity.

A case which provides a good example of this is The Post Chaser [1982] 1 All
ER 19, in which the promise was revoked within a few days, due to this small
lapse in time, the promise would not have relied upon their promise or
changed their position, therefore, it was equitable to allow the promisor to go
back on the promise.

5. The doctrine is generally suspensory and does not extinguish rights

A contractual modification supported by consideration will create the effect

of a permanent set of obligations for the duration of the contract. Promissory
estoppel operates slightly differently, only suspending the rights where
relevant.

The operation of this principle is clear in High Trees. Promissory estoppel

suspended the rights of Party B to claim £2,500 during the time of the war,
but the right to charge the full £2,500 was reintroduced following the end of
the war.

Consideration & Promissory Estoppel - Hands on

Example
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Now you have a comprehensive understanding of what consideration is, the

limitation to it, and how it can be applied, you can attempt a problem
scenario which will test your knowledge. The answers can be found at the
bottom of the page. Each of the questions will have a specific legal issue it
focuses on.

Problem questions which involve consideration and promissory estoppel will

usually be limited only to those principles, however, be aware that
sometimes these will be paired with issues of offer, acceptance and intention
to create legal relations. In the event it is a problem question focused just on
consideration and promissory estoppel, here is a suggested approach.
  First, consider the requirements of consideration – is it adequate, and does it
have economic value?
 Second, is the consideration being used subject to any of the limitations of
consideration (performance of existing duty, past consideration, or part-
payment of a debt)
 Finally, is there any element of promissory estoppel?

With this approach, you should be able to identify the general issues you
should be focusing on. You will then need to use your more in-depth
knowledge to tackle to specifics, ensuring to apply the correct authority and
come to sensible conclusions.

Scenario

Jeff is the director of a successful business who specialise in selling fridge

freezers. Unfortunately, after a few disagreements with his legal team, he
has decided he doesn’t need their advice anymore. He has made various
different contracts the past week with no issues, but is concerned about the
validity of some of them.

1. Jeff’s supplier of refrigerator parts, Freeze4lyfe, are in some financial

difficulties. Jeff, being the diligent businessman that he is, sees this as a
golden opportunity. His business owes Freeze4lyfe £100,000, but this isn’t
payable until next year. He is aware that Freeze4lyfe may be willing to accept
a lesser amount now in order to get out of their difficulties. He contacts
Freeze4lyfe and offers them £40,000 and 5 new fridge freezers to waive the
debt. Freeze4lyfe reluctantly accept the offer and waive the debt.

Is this contract valid or will Jeff have to pay the full £100,000?

2. Jeff is selling 20 fridge freezers to a Houses4u, who are refurbishing some

houses which they wish to rent out. Houses4u have some viewings in one
week, however, Jeff has let them know they might not be ready by then.
Houses4u offer Jeff £5,000 to ensure they are delivered before the viewings,
Jeff accepts and does so, then Houses4u refuse to pay the extra £5,000.

Can Jeff force Houses4u to pay the extra £5,000?

3. Jeff’s main customer, Chilly Food, are aware of a brand new fridge freezer
supplier who offer goods for a lower price. As a show of good faith, Chilly
Food would like to maintain their agreement with Jeff for 10 fridge freezers a
week, but would like to reduce the price slightly. Jeff agrees to a 25% price
reduction.

Was there valid consideration for this contract? If not, how could this be
resolved?
 1. The legal issue to identify here is a limitation to consideration. Jeff has offered
a part-payment of a debt in order to waive the full debt. As per Foakes v
Beer, the part payment of a debt is not considered to be valid consideration.
Therefore, it would seem the contract would not be valid, and Jeff will have to
pay the full debt.

However, one of the exceptions to the rule from Foakes v Beer is in

operation. In Pinnel’s case, if the part-payment is accompanied by or
replaced with something other than money, this can be valid consideration.
Therefore, as there are fridge freezers offered alongside the cash payment,
this will constitute valid consideration.

2. This issue pertains to whether the performance of an existing duty owed to

the same party can constitute valid consideration. Stilk v Myrick is the
authority which rules that this will not form valid consideration; therefore,
Houses4u will not have to pay the extra £5,000.

One exception which may apply is suggesting that Jeff has to go above and
beyond his contractual obligations, as was the case in Hartley v
Ponsonby. However, it would be difficult to argue that Jeff would have to go
above and beyond his obligations by delivering the fridge freezer by a
certain date.

The exception to this principle from Williams v Roffey may be applied to this
scenario. The scenario clearly fits Glidewell LJ’s criteria – there is a contract
for the supply of goods, before the contract is complete, Houses4u fear the
contract may not be completed in time, and therefore offer some extra
payment, this promise to complete the contract in time produces a practical
benefit for Houses4u, as they have the fridge freezers in time for their house
viewings, which may result in sales. Finally, there is no duress from the
parties.

Therefore, Jeff will be able to enforce the £5,000 payment on the grounds of
the ‘practical benefit’ principle from Williams v Roffey.

3. This issue is similar to the above issue, there is a performance of an existing

duty owed to the same party, and as per Stilk v Myrick, this is not valid
consideration.

In this circumstance, the first option is that Jeff renegotiates a whole new
contract. However, alternatively, Jeff could go ahead with the contract at a
reduced cost. This is a viable option for both parties, as although there is no
strict consideration for the promise, the equitable doctrine of promissory
estoppel would apply to the agreement. If Jeff attempted to claim Chilly
Foods were required to pay the full amount, due to the lack of consideration,
Chilly Foods would be able to use promissory estoppel as a defence to
prevent this. Both parties clearly have an existing legal relationship, and
have relied upon the cost reduction (paying less, and using the saved costs
elsewhere). Finally, it would be inequitable for Jeff to go back on his promise.

Therefore, applying the High Trees case, the requirements of promissory

estoppel are made out.

Privity of Contract – Introduction

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Welcome to the third lesson of this module guide – privity of contract! Privity
of contract is a very nuanced doctrine, while there are no straight-jacket
solutions, certain principles have evolved over time in common law and
statutes, which attempt to provide a direction to the issue. These will be
explored further within this chapter.

The chapter begins with a discussion of the general doctrine, as well as the
rule of consideration and right of action. The next sections concern the
exceptions to this doctrine, specifically the statutory exceptions as well as
common law exceptions.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand the nature of the doctrine of ‘privity of contract’

 To be able to define and apply the doctrine

Objectives for this section

 To understand the need for privity of contract

 To understand the general rule of the doctrine
 To understand both the rule of consideration and the right of action
 To understand the exceptions to the doctrine, including statutory and
common law exceptions
 To understand the case law in this area and be able to apply it in context

Privity of Contract Lecture

General Rule

The Doctrine

The general rule at common law states that a contract creates rights and
obligations only as between the parties to such contract. As a corollary, a
third party neither acquires a right nor any liabilities under such contract.
This is what the proclaimed doctrine of “privity of contract” enunciates and
establishes as the overarching rule underlying any contractual relation.

Rule of Consideration

Consideration must flow from the promise. In other words, “if a person with
whom a contract has been made is to be able to enforce it consideration
must have been given by him to the promisor”- Dunlop Pneumatic Tyre Co
Ltd v Selfridge Ltd [1915] AC 847, 853. Thus, while this rule of consideration
is distinct and separate from the doctrine of privity, as upheld in Kepong
Prospecting Ltd v Schmidt [1968] AC 810, it yields the same result so as to
be closely connected.

Right of Action

It is worthwhile to highlight that what the doctrine prohibits is the right of

action or enforcement in favour or against a third party, and not beyond.
That is, a contract may bestow benefits to a third party, although such
imposition of liabilities remains a bar. In the former case, a breach may be
enforced by the other contracting party for and on behalf of the third party,
by way of remedies such as specific performance, stay of proceedings, and
damages, as discussed below.

Specific Performance

Lloyd’s v Harper (1880) 16 Ch D 290 - Where a contract is made with A for

the benefit of B, A can bring an action for benefit of B, and recover all dues
as if the contract was made with B himself. The contracting party may, singly
or jointly with the third party, have the contract performed by way of a court
order for specific performance. Accordingly, the claim of the wife as the
administrator (as a contracting party) succeeded to obtain an order for
specific performance by way of payment of all dues and arrears.

Stay of Proceedings

This remedy is relevant where a contract provides for a covenant not to sue
the third person. Where a party institutes a legal action against the third
person in breach of such covenant, the other contracting party may seek to
discontinue such proceedings by way of a stay order.

Having said that, the following conditions must be satisfied to obtain a

stay- Gore v Van Der Lann [1967] 2 QB 31:

(i) The contract must provide for an undertaking by the promisor not to sue
the third person, and
(ii) The promisee must have a sufficient interest in the enforcement of the
promise.

Damages

As a general rule, a contracting party can sue for damages only in respect of
his own loss, and not for losses suffered by a third person - Alfred McAlpine
Construction Ltd v Panatown Ltd [2001] 1 AC 518.

This rule, however, has been applied with exception where the third person
had no alternate course of remedy available to make good the loss,
commonly referred to as a situation of “legal black hole” Darlington Borough
Council v Wiltshier Northern Ltd [1995] 1 WLR 68, 79.

Exceptions to the Doctrine

Statutory Exceptions

Some of the earliest statutory right of third person to enforce contractual

obligation of another can be found in section 56(1) of the Law of Property Act
1925 (invoked in Beswick v Beswick), section 11 of the Married Women’s
Property Act 1882, section 14(2) of the Marine Insurance Act 1906, and
section 148(7) of the Road Traffic Act 1988 (all of the above relating to policy
of assurance/insurance for benefit of family or third persons). Also, section 2
of the Carriage of Goods by Sea Act 1992 bestows a holder of bill of lading
with all rights of legal action permissible under the contract of carriage,
notwithstanding that he was not a party to it when originally drafted.

The Contracts (Rights of Third Parties) Act 1999

The most frequently invoked statutory exception lies in the Contracts (Rights
of Third Parties) Act 1999 (1999 Act).

The 1999 Act prescribes a two-fold test to allow a third person action or
enforcement of contract, namely (section 1) -

1. Where the contract expressly provides for it, or

2. Where the contract purports to confer a benefit on such third person.

For either of the conditions, the third person must be clearly identifiable.
Notably, such identification must be specific and express, ruling out any
scope for identification by construction or inference- (Avraamides v
Colwill [2006] EWCA Civ 1533).
Further, the test (i) if satisfied, also covers negative rights as specified in
section 1(6), such as right of exclusion or limitation of liability (Himalaya
clause) - the subject matter of much dispute in common law.

The position as regards test (ii) however remains controversial. This is

because it indicates towards an implied case of third person right, where no
express stipulations exist in the contract. This leaves much scope for
subjectivity and lack of predictability, as under the common law
exceptions- Trident General Insurance Co Ltd v McNiece Bros (1988) 165 CLR
107.

Also, the condition does not enable a third person action where the intention
of the contracting parties appears to the contrary in the contract (section
1(2)). This rebuttal was invoked in the case of Nisshin Shipping Co Ltd v
Cleaves & Co Ltd [2003] EWHC 2602, where it was asserted on the ground
that the third person had a right of action otherwise, so that such right under
the 1999 Act was not necessary.

Moreover, the 1999 Act prevents the variation or rescission of a contract

where such third person right to action is established, except by way of
consent of the third person (section 2).

All in all, the 1999 Act (although an exception) does not abrogate the
doctrine of privity of contract, which continues to remain the predominant
overarching rule governing contractual relations. Additionally, the 1999 Act
does not alter the legal position, including the exceptions, under common
law, which continue to be applied by courts alongside.

Common Law Exceptions

Collateral Contracts

This exception is much conflicted as it depends upon the finding of the court
of a contract in existence where the claimant is an actual contracting party,
and not a third person. Whether or not such collateral contract exists
depends upon evidence of the generally applicable constituents of a valid
contract, namely - offer, acceptance, intention to create legal relations and
consideration- Gravy Solutions Ltd v Xyzmo Software GmbH [2013] EWHC
2770. Where any of such elements is absent, the exception enabling third
person action will not be triggered- Independent Broadcasting Authority v
EMI Electronics (1980) 14 Build LR 1.

Trust

The way for this exception was paved by the ruling in Dunlop Pneumatic
Tyre Company Ltd v Selfridge and Company Ltd [1915] AC 847, 959, where it
was held that although privity of contract does not allow third person action,
such a “right may be conferred by way of property, as for example, under a
trust”. This was affirmed in Les AffreteursReunis v Walford [1919] AC 801.
In this case, Walford (broker) negotiated a contract between the charter
party and the ship owner, containing a stipulation as regards certain
commission payable to Walford. Upon failure of such payment, Walford sued
the ship owner. The court found a trust to have been created owing to
Walford receiving benefit under the agreement.

Caution should, however, be exercised to not confuse this exception with

that of a simple contract executed for benefit of a third person. Not in every
such contract involving third person beneficiary is a trust of contractual right
created. This was highlighted in the case of Re Schebsman [1944] Ch 83,
89. Schebsman employment was terminated with a company, following
which he entered into an agreement with the company for certain payments
against such termination. The payments, in the event of his death, were to
be made to his wife and daughter. Upon his death and failure of payments by
the company, it was argued that the contract between Schebsman and the
company created a trust in favour of the wife and daughter.

Assignment

A contracting party can assign his rights (not liabilities, except by way of
consent) under the contract to a third person. Having said that, a mere right
to litigate or sue for damages cannot be so assigned, unless the third person
has a commercial interest in assuming such right, as enunciated in Trendtex
Trading Corporation v Credit Suisse [1982] AC 679. Moreover, defences of
the promisor and the extent of remedy available to the third person would be
as what was contemplated and applicable under the original contract - Offer
Hoar v Larkstore Ltd [2006] EWCA Civ 1079.

Agency

This exception can be traced from the Dunlop Pneumatic Tyre Company
Ltd case, i.e., a principal not named in the contract may sue upon it if the
promisee really contracted as his agent, and consideration was directed
personally or via the promisee in the capacity of an agent. In other words,
the real right of action then rests with the principal as the contracting party,
as the agent (promisee) then moves out of the arrangement so as not to sue
or be sued- Wakefield v Duckworth [1915] 1 KB 218.

Action in Tort

In the event of a breach of duty of care, an independent claim for negligence

can be instituted by the person having suffered the loss, regardless of any
contractual arrangement otherwise. This can be best asserted through the
case of Donoghue v Stevenson [1932] AC 562, where despite the claimant
having no contractual relation with the ginger beer manufacturer, a claim in
tort could be successfully sustained.

Restrictive Covenants

In an example of sale and purchase of land, any terms of conveyance will

generally be confined to the seller and the buyer, and not extend to
subsequent buyers/owners. Having said that, a restrictive or negative
covenant such as bar on use of the land for commercial purposes or on
constructing permanent fixtures on the land, may be carried forward with the
land and enforced by the seller against subsequent owners. This was upheld
in Tulk v Moxhay [1848] 41 ER 1143.

Exclusion/Limitation/Himalaya Clause

The question whether or not a third party could take benefit of an exclusion
or limitation clause (popularly known as the Himalaya clause) in a contract,
more particularly, in a contract of carriage, has been subject to much judicial
bargain- E McKendrick, Contract Law (Oxford University Press 2012).

In the early case of Elder Dempster v Paterson Zochonis [1924] AC 522,

where oil was damaged by bad stowage in relation to a contract between the
claimant and the carrier, the court extended the exclusion in the bill of lading
to the ship owner, notwithstanding the absence of any direct contract of the
ship owner with the claimant. This was so because the clause expressly
mentioned ship owners, reckoned to have operated as the agent of the
carrier. This stance was, however, soon refuted in Scruttons Ltd v Midland
Silicones Ltd [1962] AC 446, which enumerated several requirements for
such an extension of exclusion clause to a third person, such as stevedore,
namely- (i) declaration of agency in the clause itself that the carrier had
contracted as agent of the stevedore for the purpose of securing the benefit,
and (ii) carrier must have the authority from the stevedore to do so (even if
by later ratification). In this case, drums of chemicals were damaged by
stevedore during carriage under a contract between the carrier and the
claimant. The court ruled that, as the stevedores were not parties to the
carriage contract, they could not avail the exclusion clause.

Privity of Contract Lecture – Hands on Example

The following scenario seeks to assess your understanding of the concept of
“privity of contract” and “third person action or enforcement” on a practical
standpoint.

In answering the issues, you should apply the theory and principles,
alongside the cases discussed above. While referring back to the notes may
be helpful, not all of the content will be relevant here. Hence, you should be
able to identify the applicable heads and related case law. Further, given
that the notes do not (and cannot possibly) capture all decided cases until
date, you should be able to research on, review and understand other
relevant cases on the subject, and apply them to the scenario. This,
however, should be done once you have obtained a thorough conceptual
understanding, for which the notes should help.

While the solutions may be quite subjective and case-specific, probable

answers are provided at the bottom of the page. Start by identifying the
legal issues involved in each problem.

Given that you have now gained expertise on the topic, go ahead solving the
problem. A few guidelines may help:

 Is the claimant a party to the contract? Does consideration flow from the
claimant?
 Whether the contract expressly allows a third person action?
 Does the contract purport to confer any benefit to a third person?
 If yes, whether the parties still intended in the contract to not allow third
person action?
 Did the third person have trust of contractual right? Was the promisee an
agent of the third person in the context of the execution of the contract?
 Is there any collateral contract, express or implied, between the third person
and the promisor?

Scenario

The facts concern the following two transactions between Panaroma Ltd (P),
Lily Ltd (L), and Motion Line Ltd (M), all companies registered in the UK:

1. P acquired another company Crossword Ltd (C) in the services sector from L.
In the share purchase agreement, a non-compete covenant was included as
follows-

“7.1L will not engage in any competing business or transactions for a period
of five years from the closing of the share purchase deal. Competing
business will mean the business of C, or related business in which any of P’s
affiliate companies is engaged. For the purpose of this clause, “affiliate” shall
include all of P’s subsidiaries and group companies.”

L nevertheless starts a joint venture with Stephen (as a second shareholder)

next year for the construction of flats- akin to the business of M engaged in
residential building construction, in the same locality. M is a wholly owned
subsidiary of P. As a result, M suffers significant losses in terms of
cancellation of flat bookings against construction already commenced.
M sues L for breach of the non-compete clause 7.1, and losses suffered. Can
M succeed in its claim? In the alternate, would P be able to seek remedy for
M?

2. P owns a land, on which certain construction is to be undertaken by L. For

certain logistics and taxation purposes, P routes the contract via M, such that
the contract is executed between M and L. L undertakes the work on site and
produces periodic invoices to M. M fails in making part payment of the bills,
following which L terminates the contract and sues P for restitution against
benefits already accrued to P from the portion of construction already
completed. P denies L’s claim stating that the contract between M and L is
not binding on P, which is not privy to the agreement. Would L be able to
enforce the contract and the claim for restitution against P?

Answers

1. The issue is whether M (as a third person to the share purchase agreement)
can enforce clause 7.1 against L.

At the outset, the agreement does not expressly provide for such right of
enforcement to M. Hence, the first condition of the test under the 1999 Act
is not fulfilled in the given facts.

Next, on the second condition of benefit being conferred upon M, it is clear

that the non-compete sought to purport the protection to not only C, but also
to the business of any of its other group companies. Thus, although M is not
expressly stated, it is identified by way of description as an
affiliate/subsidiary company. Accordingly, the protection extended to M- a
100% subsidiary of P.

Now being a beneficiary under the agreement, M has a right to seek

enforcement of the clause in its own capacity under section 1(1)(b) of the
1999 Act, if not otherwise intended by the contracting parties (section 1(2)).
In the absence of such contrary intention, it may be concluded that M has a
right of action against L.

In the alternate, M, through P, can seek an order of specific performance by

way of divesture of L’s joint venture. P, as the promisee, may sue L for such
an order, alongside damages for the losses suffered by M. The above results
may be affirmed by the case of Axon Well Intervention Products Holdings AS
v Craig [2015] CSOH 4.

2. The issue is whether L may have an enforceable claim of restitution against

P, which is not a party to the contract under which the claim arises. Inferring
from the case of MacDonald Dickens & Macklin v Costello [2011] EWCA Civ
930, it may be concluded that such a claim would fail. This is because,
although P benefitted from the work done by L on its site, allowing such a
 direct claim would undermine the foundation of contractual arrangements
premised on free will and voluntary intention between the parties. The fact
that L agreed to contract with M, and not P, clarifies the intention of both
parties, more particularly, the knowledge of L regarding its counter party.

This conforms to the general rule of party autonomy in contract law as per
which parties define, allocate and restrict their mutual obligations by way of
an agreement- a sound policy towards legal and commercial certainty, as
upheld in Pan Ocean Shipping Co Ltd v Creditcorp Ltd (The Trident
Beauty) [1994] 1 WLR 161 and Lumbers v W Cook Builders Party Ltd (In
Liquidation) [2008] BLR 581. Thus, L may bring an action against M (and not
P directly) to claim restitution, and recover damages. In such a suit,
discretion however lies upon the court to pierce the corporate veil and reach
out to P, if situation so warrants.

Terms of a Contract – Introduction

Welcome to the fourth lesson of this module guide – the terms that form a
contract! The terms of a contract are important to examine how the parties’
agreements are to be interpreted. An understanding of how to identify terms
and how the courts may interpret them is vital to this subject area. Terms
may sound deceptively simple but can come at a variety of stages in a
contract as well as in several forms.

Terms, if incorporated into a contract, are important to determine the extent

of damages, for example. It is therefore important to understand what
constitutes a term, whether it has been incorporated successfully and
whether they are express or implied.

This section will begin by examining whether statements made pre-contract

are terms or merely representations as this can substantially affect the form
of remedy a party may receive. The differences between these two forms of
statement are then further explored in light of the presumptions and
guidance which the courts consider. Following this, it is examined how terms
may be incorporated successfully into a contract, before discussing their
different types. Finally, terms may be incorporated either expressly or
impliedly and the distinction between the two methods will be considered.

Below are some goals and objectives for you to refer to after learning this
section:

Goals for this section

 To understand the importance of terms to a contract

 To understand what terms are
 To understand what constitutes a term and their different types
Objectives for this section

 To be able to define a term

 To determine whether statements made pre-contract are terms or
representations
 To understand what a ‘puff’ is
 To understand the difference between a term and a representation as well as
the presumptions the courts will take into account
 To understand how terms may be incorporated and the main ways this may
be accomplished
 To be able to distinguish between terms incorporated expressly or impliedly
 To be able to distinguish between the various ways in which terms may be
implied
 To understand the different types of terms: conditions, warranties and
innominate.

Terms of a Contract Lecture

Are statements made pre-contract terms or representations?

Pre-contractual statements can be categorised as one of the following:

 Puffs
 Terms
 Representations

A puff

A puff is a statement which cannot give rise to legal consequences, as they

are never meant to be taken literally and there is no intention to be legally
bound. The advertisement in Carlill v Carbolic Smoke Ball Co [1893] 1 QB
256 was argued to be a puff unsuccessfully.

TERM OR REPRESENTATION? WHY DOES IT MATTER?

Both terms and representations provide a remedy for the aggrieved party,
therefore, why does it matter which of the two a statement is? The
significance is the form of remedy, as the remedies are different for the two.
First, it is helpful to define the two.

Term: A promise as to the truth of a statement

Representation: There is no promise, but the statement induces the

making of the contract

The ability to claim damages

Term: On a breach of a term, there is automatically a right to claim for
damages

Misrepresentation: Allows for a claim for damages if it can be proven that

the statement was made fraudulently or negligently. An innocent
representation will not result in a claim for damages unless it comes under
the exception under Section 2(2) of the Misrepresentation Act 1967.

The measure of damages

Term: Damages will be based on an expectation measure – the claimant will

be put into the position they would have been in had the contract been
properly performed. Damages will be recoverable based on the remoteness
rule from Hadley v Baxendale(1854) 9 Exch 341

Misrepresentation: Damages will be limited – the claimant will be put into

the position they were in before the contract was made and will allow for a
claim for all direct loss by the claimant, irrespective of foreseeability.

The difference between a term and a representation

This section will examine the key differences between a term and a
representation, and how the courts will make a decision on the matter. Some
presumptions and guiding factors which the courts will consider will be
examined, these are as follows:

1. Is the statement in writing?

2. Is there any specialist skill or knowledge from one party?
3. Is there reliance on the statement, or importance placed on the statement?
4. How long was the lapse of time between the statement being made and the
formation of the contract?
5. Could the party relying on the statement have verified it?

Is the statement in writing?

If a statement is in writing, there will be a presumption that it will form a

term of the contract. There are a variety of different rules related to this.

The parol evidence rule

Even if there is a written contract, parties may claim there are other terms in
the contract, perhaps ones in another document, or ones from an oral
agreement. Claims pointing to other documents or oral agreements will
usually be ignored. This is known as the ‘parol evidence’ rule.

Collateral contracts
The parol evidence rule can be circumvented by the use of a collateral
contract. The courts may hold that the oral statements following the
formation of a written contract may represent a collateral contract which
runs alongside the written contract.

This interesting device used by the courts can only be found to exist if the
promise contains a term which is different to the ones in the written contract,
and does not contradict them at all – Henderson v Arthur [1907] 1 KB 10

The presumption is also limited by statute, any terms which fall foul of the
Unfair Contract Terms Act and similar legislation will be void.

The document being signed also must be one which would be expected to
contain contractual terms - Grogan v Robin Meredith Plant Hire [1996] CLC
1127.

Is there any specialist skill or knowledge from one party?

If the individual making the statement has some specialist skill/knowledge of

the contractual subject matter, or claims to have such knowledge, the
presumption is that the statement is more likely to be a term.

Is there reliance on the statement, or importance placed on the statement?

If the individual relying on the statement makes it clear that the statement
was of such importance that they would unlikely have contracted without
that guarantee, the presumption is that the statement will be a term. This is
a two-part test.

1. Is the statement so important that the party would not have entered into the
contract but for the statement?
2. Is the above importance clear to the statement maker at the time this
statement is made, either by an express statement or it would be clear from
the contractual circumstances

How long was the lapse of time between the statement being made and the
formation of the contract?

The first presumption relating to a lapse of time is that if a party makes a

statement, and soon after, the contract is reduced to writing without
inclusion of the statement in writing, that statement would not form a term
of the contract, and would only be a representation – Heilbut, Symons and
Co. v Buckleton [1913] AC 30.

These presumptions can be rebutted if the parties’ intentions are clear

through another means.
Could the party relying on the statement have verified it?

There are two presumptions which fall under this heading. First, if a
statement maker accepts responsibility for the truth of a statement, the
statement will be a term. This was seen in Schawel v Reade [1913] 2 IR 81.

The second presumption is that where a statement is made, but that party
advises or tells the other party to verify that statement, the statement will be
a representation, not a term - Ecay v Godfrey(1947) 80 Lloyd’s Rep 286.

Incorporation of terms

Once a statement has been identified as a term of a contract, it is not the

case that this will always be binding on the parties; the term must have been
successfully incorporated into the contract. There are three main ways by
which this may be done:

1. Signature - L’Estrange v E. Graucob Ltd [1934] 2 KB 394

2. Notice
3. Previous course of dealings

Notice

In order for a term to be incorporated into the contract, the party who it
confers obligations upon must be or ought to be aware of its existence. In
light of this, there are two requirements.

1. The term must be included in a document in which contractual terms would

normally be found
2. There has been reasonable notice of the existence of these terms before or at
the time of contracting - Parker v South Eastern Railway (1877) 2 CPD 416

Documents

See Chapelton v Barry Urban District Council [1940] 1 KB 532. Here are the
two main factors to consider when assessing a document to decide whether
it is contractual:

1. What the document is called is not conclusive – the document does not have
to be specifically identified as a contract
2. This document must be delivered before the contract or at the time of the
contract - Olley v Marlborough Court Ltd [1949] 1 KB 532.

Previous course of dealings

There are some occasions where notice of terms will not be required to be
given. This will be on the basis that the parties have had a previous course of
dealings, and therefore will be aware of all the relevant terms – Hardwick
Game Farm v Suffolk Agricultural Poultry Producers Association [1969] 2 AC
31.

The two requirements are:

1. There must be sufficient notice of the term - Spurling v Bradshaw [1956] 1

WLR 461
2. The previous dealings must have been sufficiently consistent - McCutheon v
David MacBrayne Ltd [1964] 1 WLR 125.

Nature of terms – express or implied?

A term may be incorporated into the contract either expressly or impliedly.

Express terms are those which have been explicitly communicated between
the parties orally or in writing. The intention of the parties is clear and there
is little discussion to be had of these.

Implied terms are those terms which fill the gaps in the contract. Terms can
be implied in the following ways:

1. Custom
2. Law
3. Fact

Terms implied by custom

The main three requirements are:

1. The term is clearly established and ‘notorious’ in that trade context

2. The term is not inconsistent with any of the express terms
3. Both parties must be involved in the trade context in such a way that they
would be expected to be aware of the term being custom in that context

Terms implied by law

Terms in law can be implied irrespective of the intentions of the parties, they
relate to legal obligations imposed either by the courts or by statute.

Terms implied by the courts

The basic requirements for a term to be implied by courts are:

1. The term is implied in all contracts of that type, as a policy matter

2. The term must be necessary
3. The term must be reasonable to imply
See Liverpool City council v Irwin [1977] AC 239.

Terms implied by statute

Where it has been deemed necessary by the legislature, certain terms have
been implied into contracts by statute. The most obvious example of this
relates to the sale or supply of goods.

Terms implied by fact

Courts should not interfere and imply terms – Attorney-General of Belize v

Belize Telecom Ltd [2009] UKPC 10. There are two methods of implication at
fact:

1. The ‘officious bystander’ test - Shirlaw v Southern Foundries (1926)

Ltd [1939] 2 KB 206
2. The ‘business efficacy’ test has two grounds - SABIC UK Petrochemicals Ltd v
Punj Lloyd Ltd [2013] EWHC 2916 (TCC)

Different types of terms

Contractual terms can be classified as one of three different types of terms:

1. Conditions
2. Warranties
3. Innominate

Conditions and warranties

If a condition of a contract is breached, the aggrieved party can choose to

bring all contractual obligations to an end, and will have the right to sue for
damages. A condition will be typically described as being of fundamental
importance to the contract.

In contrast, a warranty is of less importance to the contract. The result of a

breach of warranty is the innocent party can claim damages for that specific
breach of contract, but will not be able to bring the contract to an end.

There are three main ways the classification can be presumed:

1. Statutory presumption
2. Identified by parties
3. The importance of the term to the contract

Statutory presumption
As we are now aware, there are some terms of contracts which are implied
by statute, for example the Sale of Goods Act.

Identification of the term by parties

The parties may imply a term to be a condition or a warranty - L Schuler AG

v Wickman Machine Tools Sales Ltd [1974] AC 235.

Importance of the term to the contract

In the absence of statutory or party intention, a holistic overview of the

contract will be required in order to ascertain the importance of the term to
the contract. The presumption being the more important the term is to the
contract, the more likely the term will be a condition. Subsequently, if a term
is less important to the contract, it will more than likely be a warranty.

See Poussard v Spiders(1875) LR 1 QBD 410 and Bettini v Gye(1875) LR 1

QBD.

Innominate terms

An innominate term is one which strikes a middle ground between a

condition and a warranty. The result of such a term is that the courts will
classify the term upon breach of it - Hongkong Fir Shipping Co Ltd v
Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.

The question the courts ask is:

 Will the breach deprive the innocent party of a substantial part of their
bargain?

If yes, the term is likely to be a condition, if no, the term is likely to be a

warranty.

Terms of a Contract Lecture – Hands on Example

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The following section will test your knowledge of terms in the context of
contract law – what they are, how they are implied into contracts, and the
different ways in which they can be classified. After studying the previous
sections, you should have the ability to identify the issues in these questions
and apply the law appropriately. The answers for the questions can be found
at the very bottom of this page.

A question involving the terms of contract can usually be identified by there

being some kind of breach in a contract, and there is a question as to
whether the term breached has been successfully incorporated into the
contract, from this point, there can be questions of the classification of the
term. The below example should allow you to get a general idea of how
questions involving terms of a contract may appear.

When addressing an issue involving the terms of a contract, this would be a

recommended approach.

 Is the statement a puff, a term, or a representation?

 Has the term been successfully incorporated into the contract?
 Is the term express or implied? If implied, how has it been implied?
 What type of term is it?
 What does this mean for the breach of the term?

This step-by-step approach will cover all of the issues and ensure you do not
miss one. You will need to have knowledge of the relevant legal principles
and relevant cases once you manage to identify the issues.

Scenario

John repairs computers for a living, and also sells various computers and
related electrical goods. He has recently formed a number of contracts which
he needs some legal advice on. For his repair service, he has a fixed contract
which he issues to the customer at the time the contract is made.

1. James has had his computer repaired by John, and is angry about two things.
Firstly, outside the shop, there is a sign which says “get your computer
running faster than it ever has before!” and James claims his computer is not
as fast as it was when he purchased it after the repair.

Is there a claim James could have here?

2. Secondly, James enquired about which operating system John would install on
the computer, as he has “no clue what they are and how they work”. John
told James that the best operating system there is, Doors 10, which was
worth £1,000, would be installed on his repaired computer. James later finds
out that Doors 98 has been installed instead, which is free from the Doors
website.

Is this statement a term or a representation? What is the significance of this

differentiation?

3. The term stating Doors 10 will be installed with all repairs is found in the
standard repair terms and conditions document. When James made the
contract for his computers repair, John issued him with a ticket which stated
“this is a contractual document”, and included a few terms of the contract. It
did not include anything about the promise to include Doors 10, but it did
state “contract subject to all other standard repair terms and conditions”
Has the term been successfully incorporated into the contract?

1. The statement “get your computer running faster than it ever has before!” is
clearly a puff, and not intended to form a term of the contract. It is obvious
this is an advertising gimmick and not to be taken literally. The case of Carlill
v Carbolic Smoke Ball Co is good authority for this.

2. The question of whether this statement is a term or a representation is one

related to specialist skill. Clearly, in this case, it has been made clear that
James has no knowledge or specialist skill in the area of operating systems,
as he states “he has no clue what they are and how they work”. Therefore, as
John has held himself out to have specialist knowledge of the operating
system, by virtue of him working on computer repairs, this statement would
be held to be a term. The case of Dick Bentley Productions Ltd v Harold Smith
(Motors Ltd) would be authority for this.

The significance in this distinction is that the statement being a term means
James would have a right to claim for damages automatically. If the
statement was only a term, James would have to prove that John made the
statement fraudulently or negligently. James would also be able to claim
damages on an expectation measure, rather than only a tortious measure.

3. The term in question has clearly not been incorporated by signature, and
there is no previous course of dealings between the two, therefore it is an
issue of notice. The first requirement is that the term is included in a
document in which contractual terms would normally be found. A ticket would
suffice, especially since the ticket clearly states “this is a contractual
document” – although not conclusive, this statement along with the fact it
was issued at the time of the contract means it amounts to a contractual
document (Parker v South Eastern Railway)

The second requirement is, there must have been reasonable notice of the
existence of the term, which means before or at the time of contracting
(Olley v Marlborough Court Ltd). In this case, notice of the term was given at
the time of the contract on the ticket. However, the term regarding Doors 10
was included in the standard repair terms and conditions, not in the ticket
terms. The ticket terms only referred James to the standard repair terms and
conditions. A referral can amount to incorporation, but only where the
document is ‘readily available’ (Sterling Hydraulics Ltd v Dichtomatik Ltd). In
this case, therefore, it is a question of whether those standard terms and
conditions were readily available. If they were, for example, clearly stated on
a poster in the shop, they would likely be incorporated. This is a question of
fact and more details would be required to make a definitive decision.

Exclusion Clauses – Introduction

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Welcome to part two of the fourth lesson of this module guide – exclusion
clauses! During this module guide we have already referred to a number of
exemption clauses. An exemption clause in a contract is a term which either
limits or excludes a party’s liability for a breach of contract, and these are
often used in many of today’s contracts. There are a number of particular
rules in this area that determine whether an exclusion clause is binding and
operable and these are important to understand.

It can be suggested that exclusion clauses are nonsensical in the context of

contract law; why would you exclude a party’s liability for a promise they
have made? However, it is evident that the exemption clause is a vital tool in
allocating the risk of contracts between the parties and allows for
commercial efficacy. It is therefore important to understand the different
types, how they may be successfully incorporated as well as how courts may
interpret them.

This section will begin by examining the different types of exclusion clauses.
How they are constructed and incorporated will be discussed next, as well as
the various rules to remember as to how courts will interpret them. Exclusion
clauses can be limited, and this is also considered. Finally, the two main
statutes affecting these clauses are detailed in-depth, with the important
“reasonableness” test highlighted.

Goals for this section

 To understand the importance of exclusion clauses

 To understand what exclusion clauses are and their types
 To understand how courts will interpret and limit exclusion clauses

Objectives for this section

 To understand what it takes for an exclusion clause to be binding and

operable
 To be able to distinguish between the different types of clause
 To understand the ways in which they may be incorporated into a contract
 To understand how they may be constructed
 To understand the limitations placed upon exclusion clauses
 To understand how the courts have and will interpret exclusion clauses
 To become familiar with the various provisions of UCTA and CRA that affect
exclusion clauses
 To understand and be able to apply the “reasonableness” test

1.
Modules
2. Contract Law
3. Construction
4. Exclusion Causes
Print Reference Study Level

4.2.2 Exclusion Clauses Lecture

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An exemption clause in a contract is a term which either limits or excludes a

party’s liability for a breach of contract. In order for an exclusion clause to be
binding and operable upon the parties, the clause must:

1. The clause must be incorporated into the contract as a term.

2. The clause must pass the test of construction.
3. The clause must not be rendered unenforceable by the statutory provisions in
the Unfair Contract Terms Act 1977 or the Consumer Rights Act
2015 (enacting the Consumer Rights Bill 2013-14).

Exclusion clauses and the freedom of contract

The common law provides no rule whereby an exclusion clause would be

declared unenforceable on the grounds that it is unfair or unreasonable
– Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.

Different types of exclusion clauses

Exclusion clauses can be created in a multitude of ways, and are able to

exclude whatever liability the parties to the contract wish to, except for
those restricted by legislation.

Requirement 1- Incorporation

The three ways in which a term may be incorporated are:

1. Signature – (L’Estrange v E. Graucob Ltd [1934] 2 KB 394).

2. Notice – (Chapelton v Barry Urban District Council [1940] 1 KB 532.
3. Previous course of dealings

Requirement 2 – Construction

An exclusion clause must only be construed on its natural and ordinary

meaning - George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC
803. Here are the various rules to remember:

 The courts will not infer a greater exclusion than that which is present in the
exclusion clause.
 Exclusion clauses are interpreted ‘contra proferentum’.
 Exclusion clauses will limit the scope of the clause to contractual matters.
 Limitation clauses will be construed more favourably.
  If the exclusion clause is inconsistent with an oral agreement, the clause will
not apply.

The courts will not infer a greater exclusion than that which is present in the
exclusion clause

The courts are very strict in their interpretation of exclusion clauses

- Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17.

Exclusion clauses are interpreted ‘contra proferentum’

The contra proferentum rule is that where a term of a contract is uncertain

and ambiguous, the term is to be construed against the party attempting to
rely on the clause. In the context of exclusion clauses, this means the
exclusion clause would be inapplicable - Houghton v Trafalgar Insurance Co.
Ltd [1954] 1 QB 247.

Exclusion clauses will limit the scope of the clause to contractual matters

The courts are unwilling to give effect to exclusion clauses which exclude
liability for liabilities other than contractual matters e.g. negligence.

The case of Canada Steamship Lines v The King [1952] AC 192 created a
test which the courts will consider when assessing whether an exclusion
clause excluding liability for negligence will be valid:

1. Where the clause contains language which expressly excludes liability for
negligence.
2. Where the clause does not expressly exclude liability for negligence, but
excludes damage which would be considered to be negligent damage.

Where the clause contains language which expressly excludes liability for
negligence

If the clause language explicitly refers to exemption from liability of the

consequences of negligence, the courts will uphold this type of exclusion
clause. A strict interpretation of this is required - Monarch Airlines Ltd v
London Luton Airport Ltd [1997] CLC 698.

Where the clause does not expressly exclude liability for negligence, but
excludes damage which would be considered to be negligent damage

If the wording of the clause must be construed to cover negligent liability, if

the only liability that arises on the facts is negligent may the exemption
clause be given effect - Alderslade v Hendon Laundry Ltd [1945] 1 KB 189.
The words attempting to exclude liability must also be clear and
unambiguous - Hollier v Rambler Motors AMC Ltd [1971] EWCA Civ 12.

Limitation clauses will be construed more favourably

In order for a clause to limit negligent liability, the requirement is that the
clause should be ‘clearly and unambiguously expressed’ - Ailsa Craig Fishing
Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964.

The potential liability of the contract and the actual limitation of the clause
must be considered when deciding whether it is a simple limitation clause or
in reality it is fully excluding liability (Darlington Futures Ltd v Delco Australia
Pty Ltd (1986) 161 CLR 500).

If the exclusion clause is inconsistent with an oral agreement, the clause will
not apply

J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078
established that any oral agreement that contradicted an exclusion clause
would have priority, and the exemption clause would not apply.

Limitations of exclusion clauses

Misrepresentation and fraud

An exclusion clause will not be operable and able to be relied upon if the
person attempting to rely on the clause had induced the other party to enter
the contract by misrepresenting the effect of the clause - Curtis v Chemical
Cleaning and Dyeing Co [1951] 1 KB 805.

Exclusions of fundamental breaches of the contract

A fundamental breach of the contract refers to a breach of the purpose or

key term of the contract - Photo Production Ltd v Securicor Transport
Ltd [1980] AC 827.

Requirement 3 - The clause must not be rendered unenforceable by

statutory provisions

There are various statutory provisions which prevent the effect of certain
exclusion clauses. This section will examine and analyse two of the most
relevant pieces of legislation.

1. The Unfair Contract Terms Act 1977

2. The Consumer Rights Act 2015
Unfair Contract Terms Act 1977 (UCTA)

The UCTA is a piece of legislation which prevents the exclusion of liability in

certain circumstances. It applies both to exclusions of contractual and
tortious liability in contracts relating to (mostly) things done or to be done in
the context of business liability.

Business liability

Section 1(3) of UCTA defines business liability as arising in things done or to

be done in the ‘course of business’. Business is defined loosely in Section 14.

Dealing as a consumer

Parties who deal as a consumer will not be subject to some the restrictions in
UCTA. Dealing as a consumer is defined in Section 12 as any contract not
made in the course of business - R&B Custom Brokers Co Ltd v United
Dominions Trust Ltd [1998] 1 WLR 321. The test to apply is whether or not
the contract forms an integral part of the business.

Key sections of UCTA

The following are the sections which impact the validity of exclusion clauses:

 Section 2: negligence liability

 Section 3: contractual liability
 Section 6: implied terms in contracts for the sale of goods and hire purchase
 Section 7: implied terms in contracts for the supply of goods and services
 Section 8: terms excluding liability for misrepresentation
 Section 11: the reasonableness test

Scope of UCTA, Exclusions and limitations

Section 13 of UCTA extends the definition of exclusion clauses to exemption

clauses making the enforcement of liability subject to compliance with a
certain condition, clauses excluded or limiting rights/remedies and clauses
restricted or excluding rules of evidence/procedure. See Stewart Gill Ltd v
Horatio Myer & Co Ltd [1992] 1 QB 600.

 Contracts of insurance, intellectual property, land, securities and contracts

related to companies are exempt from Sections 2, 3, 4 and 7 of UCTA
 Contracts for marine salvage, carriage of goods by sea and charterparties
and exempt from UCTA
 Contracts of employment are exempt from UCTA
 International supply contracts are exempt from UCTA

Dealing on another party’s written standard terms of business

A succinct definition of this requirement can be found in Yuanda (UK) Co Ltd
v WW Gear Construction Ltd [2010] EWHC 720 (TCC).

A further clarification of this general rule can be found in St Albans City and
District Council v International Computers Ltd [1996] 4 All ER 481. Where a
standard form contract has been submitted and subsequently negotiated
and amended, it will still be considered standard for the purpose of Section 3
so long as there has been no amendment to the relevant exclusion clauses
and there is no significant difference between the terms suggested and the
terms agreed on. This can be described as the ‘significant difference’ test.

The test of reasonableness

This can be found, enshrined in section 11 of UCTA.

Section 11(1) defines the test, as whether or not the term is a fair and
reasonable one to have included in the contract, in light of all circumstances
known at the time of contracting.

Section 11(5) rules that the burden of proving this reasonableness relies on
the party attempting to use the clause.

The factors to assess reasonableness are as follows:

1. Factors identified by legislation.

2. Factors identified by courts.

Factors identified by legislation

Section 11(2) directs us to Schedule 2 of UCTA for some guidelines which will
be considered when assessing reasonableness.

Factors identified by courts

In the context of commercial contracts, Adams and Brownsword (1988) 104

LQR 94 explained the two separate approaches the court could take:

1. The freedom of contract approach where commercial entities have the

options of allocating risk and insurance cover – Watford Electronics Ltd v
Sanderson CFL Ltd [2001] EWCA Civ 317.
2. The interventionist position – George Mitchell (Chesterhall) Ltd v Finney Lock
Seeds Ltd [1983] 2 AC 803.

When deciding upon which approach to use, the courts should consider these
factors:
  Equality of bargaining positions.
 Is the clause commonplace in that particular industry?
 Does the clause allocate risk between the parties appropriately?

The case of Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649 clarified
the courts approach.

In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803
the interventionist approach was considered. The interventionist approach is
first reluctantly used if there has been a decision of a lower court to not
interfere.

In the context of consumer contracts, the decisions will mostly be based on

the equality of the bargaining positions between the parties - Smith v Eric S
Bush [1990] 1 AC 831.

The effect of finding unreasonableness in the clause

If it is held that a term is unreasonable, the exclusion clause in question will

not be enforceable. However, there comes some difficulty when the
unreasonable term is part of a composite term which includes a variety of
exclusion clauses - J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC
3024 TCC

Consumer Rights Act 2015

It mostly brings together and consolidates the existing law protecting

consumers. However, there are some interesting developments which relate
to the use of exclusion clauses which should be considered. The Consumer
Rights Act will be applicable to contracts between a “consumer” and a
“trader”.

Definitions of “trader” and “consumer”

Section 2(2) of the act defines a trader.

Exclusion of negligence liability

Section 65(1) is identical to Section 2(1) of UCTA, rendering all clauses

attempting to exclude or restrict liability for personal injury void.

Section 65(1) also excludes the restriction or exclusion of liability for any
other loss or damage arising from negligence. UCTA excludes this term
unless it passes the test of reasonableness. In the Consumer Rights Act, if
the clause is fair under the fairness test of Section 62 such a clause will be
valid.
Both sections remain important as UCTA still applies to business to business
contracts, whereas the Consumer Rights Act applies to contracts involving a
consumer.

Exclusion of contractual liability

Section 31 of the Consumer Rights Act will apply to contracts which attempt
to exclude liability of any of the provisions contained within Ss. 9-14. Any
clause which excludes liability for any of the above will be void.

Fairness of an exclusion clause

As mentioned above, when a party is attempting to exclude or limit liability

for loss and damage other than personal injury and death, the exclusion will
be valid so long as the term is considered fair - Section 62(4).

Exclusion Clauses Lecture – Hands on Example

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After reading the detailed version of this chapter, you should be completely
familiar with what an exclusion clause is, how they can be incorporated into
contracts, and their limitations. This section will provide you with a problem
style question in which you can test your knowledge. Don’t be discouraged if
you are unsure of the answers at first, just attempt to identify the relevant
issues and if required you can refer back to the detailed version in order to
consolidate your knowledge.

A question involving an exclusion clause should usually be very easy to

identify. There will be a contract which includes one or multiple terms aiming
to limit or exclude liability of some sort. In order to address a question
involving exclusion clauses, a proposed approach would be:

 Has the clause been incorporated into the contract?

 Has the clause passed the test of construction?
 Is there any legislation which will render the clause unenforceable?

The most significant consideration is whether or not the clause has passed
the test of construction. As we have already explored incorporation into the
contract in the previous chapter, this problem scenario will focus solely on
the construction and the limiting legislation.

Scenario

Heather owns a bakery business; she sells an assortment of cakes, biscuits

and pastries and delivers them. Heather is new to the business and has
attempted to draft her own contracts. She included a number of clauses in
her different contracts excluding various types of liability.

1. Contract one is with Shirley, who wants an assortment of cakes for her
birthday party. When Shirley viewed the cakes, she was concerned about the
delivery, as the road to Shirley’s house is extremely bumpy. When Shirley
questioned the delivery, Heather said “Don’t worry! If any of the cakes are
damaged I will replace them”. All of the cakes were damaged during delivery.
Heather is attempting to rely on a clause in the contract which states “The
seller excludes liability for all damage to the product during delivery”.

Focusing only on matters of construction, can Heather rely on this exclusion

clause?

2. Contract two is with Ben, who has purchased a number of biscuits. Ben
shared the biscuits with a friend. Tragically, Ben’s dog died after being fed
the biscuits. An autopsy revealed there was a deadly poison present in the
biscuits. Ben decides to sue Heather for negligence, but there is a clause in
the contract which states “the seller is not liable for any death or personal
injury arising due to the negligence of the seller”.

Focusing only on matters of construction, can Heather rely on this exclusion

clause at all? If so, will it exclude liability relating to the death of a dog?

3. Contract three is with another business, ThriftClothes. Heather is selling a

variety of her old clothes to them in order for them to sell them on. Heather
has included an exclusion clause which excludes liability for the quality of the
clothes. ThriftClothes are unhappy with the clothes as they are unsellable due
to poor quality.

Focusing on limiting legislation, can Heather rely on this exclusion clause?

1. The issue with this exclusion clause is that it is inconsistent with an oral
agreement; Heather’s agreement to replace any cakes damaged during
delivery. The case of J Evans & Son (Portsmouth) Ltd v Andrea Merzario
Ltd [1976] 1 WLR 1078 is authority that states the oral agreement takes
precedent, therefore the exclusion clause would not apply and Heather could
not rely upon it. This means Heather will have to replace the damaged cakes.

2. There are two issues to address in this question. Firstly, is it even possible
that Heather can exclude liability for negligence? As per the case of Canada
Steamship Lines v The King, if a clause excludes liability for negligence
expressly, using the word ‘negligence’ or a synonymous word, the exclusion
clause will be valid. Therefore, this exclusion clause is valid as negligence is
expressly referred to.

The second issue is whether the damage caused is actually damage that is
covered under the exclusion clause. The exclusion clause is silent as to
whether it refers to death or personal injury of humans only, or it could
extend to animals too. The fact that the clause is silent as to this means it is
ambiguous. Therefore, the court will apply the ‘contra proferentum’ rule, and
interpret the clause against the party relying on the clause, Heather in this
case. As a result, the clause will be presumed only to exclude liability for the
death or personal injury of humans, and not dogs, meaning Heather could
not rely on the exclusion clause.

3. The first step in answering this question is to determine whether the contract
has been made in the course of business, as per Section 1(3) of the Unfair
Contract Terms Act 1977. The test to apply is from R&B Custom Brokers Co
Ltd v United Dominions Trust Ltd, ‘does the contract form an integral part of
the business?’ In this case, Heather is selling clothes; therefore the contract
is clearly not integral to her bakery business, meaning she is acting a
consumer.

Heather is attempting to exclude liability for the quality of the clothes. This
would be an exclusion clause limiting a contractual liability, which is dealt
with under Section 6 of UCTA. The law is that if the party attempting to
enforce liability is not a consumer, the exclusion clause may be valid if it is
reasonable. ThriftClothes are the party attempting to enforce liability;
therefore the exclusion clause may be relied upon by Heather so long as it is
‘reasonable’.

Section 11 defines ‘reasonable’ as whether the term was fair and reasonable
to have been included in the contract in light of all circumstances known at
the time of contracting. To this effect, the court will consider factors such as
bargaining positions of the parties, inducement to the agreement, whether or
not the parties were aware of the existence of the term and if the goods
were made specifically at the request of the buyer.

The facts are not conclusive on this point, but it would be suggested that due
to the bargaining position of the parties,it would be reasonable for Heather
to exclude liability for the quality of the clothes. She is unsure of the required
quality, and therefore the onus should be on the company to ensure they are
protected under circumstances such as this.

Misrepresentation – Introduction
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Welcome to the fifth lesson of this module guide, misrepresentation!

Misrepresentation, in a nutshell, is a false statement which induces a party to
enter into a contract. If shown to have occurred, a misrepresentation will
allow the contract to be set aside by the representee (made voidable). This is
an important aspect of contract law and will affect other areas of this module
guide, so an understanding of this is important.
There are several types of misrepresentation, each of which has effect as to
the type of damages awarded and the factors considered by a court. After
completion of the section, you should be comfortable with being able to
identify malpresentations and understand how they relate to the contracts.

This section will begin by defining what a misrepresentation is, before

moving on to an examination of what makes one actionable. Next, the
different types of misrepresentation will be considered, namely: fraudulent
misrepresentation, negligent misstatement, negligent misrepresentation and
innocent misrepresentation. Each of these are explored in turn before finally
turning to the specific damages available under them.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section:

 To understand the importance of misrepresentation and its relationship to the

elements of contract law
 To understand what a misrepresentation is
 To understand what will constitute a misrepresentation and the approaches
the courts will take

Objectives for this section:

 To be able to define a misrepresentation

 To understand what makes a misrepresentation actionable
 To be able to discern the type of misrepresentation that has been made
 To understand the different remedies available depending on the type of
misrepresentation
 To be able to effectively apply the law surrounding misrepresentation to a
scenario
 To gain an understanding of the various statutory and common law rules
governing misrepresentation

Misrepresentation Lecture

1. Defining a misrepresentation

A misrepresentation is a false statement made prior to the contract being

formed. There are two types of statement that can be made before a
contract forms, these will either:

1. Form part of the contract

2. Not form part of the contract, therefore becoming a representation.
Intention

The courts will attempt to give effect to the parties’ intention insofar as this
is possible. This will be an objectively applied standard. There are a number
of presumptions related to when or how a statement is made which will help
the courts when they are attempting to ascertain whether a statement is a
term or a representation (Heilbut, Symons & Co v Buckleton [1913] AC 30).

Statement is reduced to writing

If a statement has been reduced to writing, there will be a strong

presumption that this will form a term of the contract, as opposed to a
representation (L’Estrange v F Graucob Ltd [1934] 2 KB 394).

Specialist skill or knowledge

If the statement is made by a party who has, or claims to have, specialist

skill or knowledge, there will be a presumption that this statement is a term
- Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
and Oscar Chess v Williams [1957] 1 WLR 370.

Lapse of time

As a general rule, if there is a longer lapse of time between the statement

and the formation of the contract, the greater the presumption will be that
the statement is a representation.

2. What makes a misrepresentation actionable?

Unambiguous, false statement

False and unambiguous

The degree of falsity is a relevant consideration. Avon Insurance plc v Swire

Fraser Ltd [2000] 1 All ER (Comm) 573 ruled that the test to apply is whether
or not the statement is “substantially correct”.

Whether or not the false statement is unambiguous refers to how the

claimant interpreted the statement. If, on a reasonable construction, the
statement was true, however, the claimant interpreted the statement in a
different way which rendered the statement false, the statement would not
be unambiguously false, and the claim would fail - McInerny v Lloyds Bank
Ltd [1974] 1 Lloyd’s Rep 246.

Statement
‘Statement’ does not just refer to a verbal statement; it has been held that
conduct can amount to a statement for the purpose of misrepresentation
- Curtis v Chemical Cleaning & Dyeing co Ltd [1951] 1 KB 805 outlined this
fact.

Silence or non-disclosure will not amount to a statement, it is clear that there

must be some kind of positive conduct to constitute a statement - Gordon v
Selico.

Half-truths

A misleading half-truth will amount to a misrepresentation. A misleading

half-truth is a true statement which is misleading due to all relevant
information not being revealed - Nottingham Patent Brick & Tile Co v
Butler(1885) LR 16 QBD.

Change of circumstances

If a statement is made which is true at the time of making, but subsequently

becomes untrue, there is a positive duty on the statement maker to ensure
to inform the relevant party of this - With v O’Flanagan [1936] Ch 575.

False statement of fact

Statements of opinion

It is irrelevant whether the statement of opinion made is unreasonable, or

whether the statement maker could subsequently check the validity of the
opinion and update the other party as to whether the statement was true or
not (Hummingbird Motors Ltd v Hobbs [1986] RTR 276).

The question to ask is whether the statement maker is in a better position to

know the truth than the plaintiff? If not, and the plaintiff is aware of this, it
will likely be classified as an opinion.

If the statement maker holds themselves out to have reasonably grounds to

make a statement, when in fact this is not true, it will amount to a statement
of fact for the purposes of proving misrepresentation - Smith v Land & House
Property Corporation(1884).

Statements of intention

A misrepresentation as to future intention is usually not actionable for

misrepresentation, as it will not amount to a statement of fact. The
statement of future intent will not be held to be a fact even if the defendant
intentionally changes their mind as to their intentions (Inntrepreneur Pub Co
v Sweeney [2002] EWHC 1060 (Ch)).

A statement of future intention made with absolutely no intention at the time

of the statement, however, will amount to a misrepresentation - Edgington v
Fitzmaurice(1885) 24 Ch D 459.

Statements of law

A statement of law which is incorrect will amount to a false statement of fact

for the purpose of misrepresentation - Pankhania v Hackney London
Borough [2002] NPC 123.

Inducement of the claimant

There are three requirements of inducement:

1. The representation made must be material

2. The representation must be known to the representee
3. The representation must be acted upon

The representation must be material

The representation must not be an inconsequential statement which is of

irrelevance to the plaintiff -Smith v Chadwick(1884) 9 App Cas 187.

The test for whether or not a representation is an objective one is contained

within JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583.

The representation must be known to the representee

A representation will not be actionable and will not have induced the
representee unless the representee was aware of the
representation - Horsfall v Thomas(1862) 1 H & C

A representation made to one party which then induces a third party may be
amount to a misrepresentation under Yianni v Edwin Evans and Sons [1981]
3 All ER 593.

The representation must be acted upon

The representor may attempt to prove the representee was induced by

another factor, and not the misrepresentation - PeekayIntermark Ltd v
Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386.
If the statement is made fraudulently and is material, there is a strong
presumption that this statement has been relied upon – Barton v County
Natwest Ltd [1999] Lloyd’s Rep Bank 408

If the representee chooses to validate the truth of the representor’s

statement, unless the representation was made fraudulently, the statement
will not act as a misrepresentation - S Pearson & Son Ltd v Dublin
Corporation [1907] AC 351.

3. What type of misrepresentation has been made?

There are four different types:

1. Fraudulent Misrepresentation – Common Law Tort of Deceit

2. Negligent Misstatement – Common Law via Hedley Byrne v Heller
3. Negligent Misrepresentation – Statutory under the Misrepresentation Act
1967
4. Innocent Misrepresentation - Statutory under the Misrepresentation Act 1967

Fraudulent misrepresentation

The significance of a misrepresentation being classified as a fraudulent one

is that the measure of damages may be greater under certain
circumstances. There are two remedies available for fraudulent
misrepresentation: recession and damages.

Representees should attempt a claim for fraudulent misrepresentation with

caution, as the courts impose a much higher standard of proof due to the
serious allegations. There may also be penalties in the event the claim is not
made out.

A fraudulent misrepresentation was defined in Derry v Peek(1889) 14 App

Cas 337 as a false statement which is ‘made knowingly, or without belief in
its truth, or recklessly, careless whether it be true or false’.

In order to assess whether a statement has been made fraudulently, you

should consider whether:

1. The statement maker knows that the statement he has made is false
2. The statement maker has reasonable grounds to believe his statement is true
even if it is false

In the case of a, there will clearly be a fraudulent statement.

In the case of b, if the statement maker has made a false statement, but has
reasonable grounds to believe his statement, it will not amount to a
fraudulent statement, as it has not been made recklessly or carelessly. A
statement made recklessly or carelessly needs to be a statement made
which the statement maker has no belief in the truth of (but does not know
for sure that it is true or false).

Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 clarified that
where a statement is made where the statement maker has no idea whether
or not it is true or false, this statement would be fraudulent due to the
recklessness asserting it is true when it may not be.

True statements which become false

In With v O’Flanagan [1936] Ch 575 it was suggested that misrepresentation

as a result of a change of circumstances might result in either a fraudulent
misrepresentation or a negligent one. Here are the circumstances in which
this can happen:

Fraudulent: The statement maker is aware there is a duty to notify the

representee of a change in circumstances (Banks v Cox (No 2) unreported)

Negligent: The statement maker is not aware there is a duty to notify the
representee of a change in circumstances.

Negligent misrepresentation

Negligent misstatement

A claim for a negligent misrepresentation that is based in tort under the

common law is usually referred to as a ‘negligent misstatement’ - Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. See Caparo Industries
plc v Dickman [1990] 2 AC 605 for the test for duty of care.

Subsequent case law which considered negligence of misrepresentations in

the context of duty of care concluded there would be a duty of care owed if
there was an ‘assumption of responsibility’ on the part of the statement
maker (Henderson v Merrett Syndicates Ltd [1995] 2 AC 145). Whether or
not there is an ‘assumption of responsibility’ considers determining whether
the statement maker has held themselves out as possessing expertise or
special skill, and is aware the other party will rely on this information. It is
irrelevant whether or not the statement maker is an actual expert, only that
they hold themselves out to be one.

Negligent misrepresentation

An alternative approach to a claim for negligent misrepresentation is to

pursue the claim under statute. The Misrepresentation Act 1967 Section 2(1)
allows for such a claim and contains the key components.
The significance of a negligent misrepresentation claim under statute is that
the burden of proof from the common law claim is reversed. The representor
cannot escape liability simply by proving that he was not negligent, it must
be proven that he had reasonable grounds to believe the statement -Howard
Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB
574.

Innocent misrepresentation

With the development of the Misrepresentation Act the claim for innocent
misrepresentation is extremely limited. A claim for innocent
misrepresentation will arise when a claim for negligent misrepresentation
under the Misrepresentation act has failed. The remedy for an innocent
misrepresentation will usually be rescission of the contract.

4. The remedies for misrepresentation

Rescission

When a contract has been induced by misrepresentation of any kind, the

contract does still confer obligations upon the parties, but the contract will
be voidable. Voiding the contract as this stage is using the remedy of
rescission. There are a number of restrictions to the use of this remedy.
These are known as ‘bars’ to rescission.

Affirmation

Affirmation refers to an affirmation of the contract, whereby despite the

misrepresentation, the representee had held themselves out to be happy
with the contract as it is, therefore affirming the misrepresentation (Long v
Lloyd [1958] 2 All ER 402.

In the event of a misrepresentation, it is expected that the representee, if

they are not happy with the contract, will take action to remedy the contract.

Lapse of time

There is a differing approach by the courts for different types of

misrepresentation.

In the case of fraudulent misrepresentation, the lapse of time will begin at

the time the fraud was either discovered, or could have been discovered.

As for misrepresentation which is negligent or innocent, the lapse of time will

begin from the date of the contract - Leaf v International Galleries [1950] 2
KB 86.
Restitutio in integrum

This bar to rescission refers to where a rescission of the contract is no longer

possible. This is the case where the goods under the contract have been
used, consumed or have perished - Clarke v Dickson (1858) 120 ER 463.

In the event that the goods have only been partially consumed rescission is a
more complicated issue - TSB Bank plc v Camfield [1995] 1 WLR 430. In De
Molestine v Ponton [2002] 1 All ER (Comm) 587 this approach was rejected,
and it was argued a partial rescission may be possible where you can split
the contract into multiple parts.

Third party interests

Where rescission would encroach on the rights of a third party, the remedy
will be unavailable - Crystal Palace Football Club (2000)Ltd v Dowie [2007]
EWHC 1392

Damages

The measure of damages differs for each of the types of misrepresentation,

therefore each will be considered in turn.

Fraudulent misrepresentation

A fraudulent misrepresentation requires a high standard of proof. Doyle v

Olby (Ironmongers) Ltd [1969] 2 QB 158 is authority to the effect that
damages are awarded on a tortious basis, aiming to put the aggrieved party
in the position they would have been if the misrepresentation was true.

This standard is usually subject to a test of ‘reasonable forseeability’, where

a loss will only be claimable if the statement maker could have reasonably
foreseen that the fraudulent statement would have resulted in such a loss.

Negligent misrepresentation under the common law

Negligent misrepresentation claimed under Hedley Byrne v Hellerand the

tort of deceit are extremely limited in comparison to those for fraudulent
misrepresentation. Unlike damages for fraudulent misrepresentation, under
the tort of deceit the damages are limited by the test of remoteness.

The test of remoteness, from Overseas Tankship (UK) Ltd v Morts Dock &
Engineering Co (The Wagon Mound))[1961] AC 388, only allows damages to
be claimed that are “reasonably foreseeable”.
If the claimant has also been negligent to some extent, damages may be
reduced by way of contributory negligence, apportioning some of the blame
to the claimant.

Negligent misrepresentation under the Misrepresentation Act

Under Section 2(1) of the Misrepresentation Act, damages are awarded on

exactly the same basis as fraudulent misrepresentation. Therefore, the
statement maker will be liable in damages for all consequential losses as a
result of the statement, irrespective of their foreseeability - Sharneyford
Supplies Ltd v Edge [1987] Ch 305.

Section 2(2) of the Misrepresentation Act clarifies the relationship between

rescission and damages. The courts have identified that rescission can often
result in unfair consequences, and therefore, damages may be awarded as
an alternative to rescission. This means that there cannot be a claim for
rescission and damages; it must be one or the other.

Can liability from misrepresentation be excluded in the contract?

In order for liability for misrepresentation to be excluded, Section 8 of

the Unfair Contract Terms Act 1977 rules that the term must be:

1. Reasonable
2. Clear and precise as to the exclusion of misrepresentation

Misrepresentation Lecture – Hand on Example

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The following section will be a test of your knowledge and understanding of

the principles of misrepresentation. After studying the detailed notes, you
should be able to recognise a misrepresentation, identify when one is
actionable, identify what type of misrepresentation has been made, and
explain the remedies available for that type of misrepresentation. The
problem scenario will include a mix of these issues, and the answers can be
found at the bottom of the page.

The key characteristic of a problem question relating to misrepresentation is

a statement made by a party, not found in the contractual terms, which
turns out not to be true. This will indicate that there has been a potential
misrepresentation. Be careful, because if the statement is found in the
contractual terms, it will be a breach of contract issue, not
misrepresentation.

The following method to approaching a problem question on

misrepresentation should allow you to answer the question fully:
  Does the statement form part of the contract or not – Is it a representation of
a term?
 Does the statement amount to an actionable misrepresentation? (Is it an
unambiguous, false statement of fact which induced the contract)
 Is the misrepresentation fraudulent, negligent, or innocent?
 What remedies are available?

This approach will cover all of the issues and ensure you do not miss any out.
This problem scenario will not include any issues from the first bullet-point,
as these have been covered in the ‘terms’ chapter. This will allow this
problem question to focus on issues of misrepresentation itself.

Scenario

Lewis has recently had a big win on the lottery and has decided to purchase
a company. He is extremely disappointed with the result of the contract and
would like to know if there is anything that can be done about them.

Contract one was with John, for the purchase of the company. During
negotiations for the contract, Lewis enquired about the state of the accounts
of the company, specifically, whether the company was profitable. John said
this – “I’m unsure, but it is my opinion that the company is profitable.
However, I will check the accounts in the next week, if you do not hear from
me you can assume all is well”. After a week, Lewis hears nothing. The
contract is then signed, but when Lewis receives the accounts he is upset to
find the company has not profited in the last 6 months.

Would Lewis’ conduct amount to a misrepresentation? If so, is it actionable,

and could you ascertain what type of misrepresentation has been made?

Answer: The first issue is whether Lewis’ conduct could amount to a

representation. It is clear from Curtis v Chemical Cleaning & Dyeing co
Ltd that a misrepresentation need not be made verbally; it can be implied
from the conduct of a party. In this case, the fact John promised he would
contact Lewis if the company was not profitable, and did not contact him,
would amount to a representation that the company was profitable.

For a representation to be actionable it must be an unambiguous, false

statement of fact, which induced the claimant to enter the contract. There is
no question as to whether the statement is false, the representation that the
company was profitable was not “substantially correct” as per Avon
Insurance plc v Swire Fraser Ltd, as the company had not profited in 6
months. As for whether it was a statement of fact, John did state that it was
only his opinion that the company was not profitable. However, this
was before he had checked the accounts, which he had promised to do. A
statement can only be considered an opinion if the statement maker holds
themselves out as having no expertise related to the statement, but in this
case, John has stated he will check the state of the accounts, therefore
suggesting he will have expertise once he checks the accounts. Therefore,
the actual misrepresentation in question (not contacting Lewis), could not
amount to an opinion.

There may be a question of whether John’s statement would amount to a

statement of intention and therefore not be actionable. However, the actual
misrepresentation was not a statement of intention, it was a statement of
fact regarding the accounts. The fact there was a statement of intention to
check those facts is not damning on Lewis’ argument.

Next, it needs to be considered whether the statement induced Lewis into

the contract. To do so, the statement must be material, made to the
representee, and acted upon. It is clear the representation was objectively
material. The accounts of a company will be one of the most important
factors in a purchase, and there is no indication from Lewis that he had any
other interest in the company. However, if Lewis was purchasing the
company for reasons unrelated to the accounts, it representation would not
be material (JEB Fasteners Ltd v Marks Bloom & Co. The fact that Lewis took
positive action to query the accounts of the company suggests it was
material.

Lewis was not expressly aware of the representation, but John not contacting
Lewis has made that representation by conduct, therefore it would be known
to Lewis. Lewis also clearly acted upon the representation, as because he
has not heard from John in the promised week time-frame, he assumes the
company’s accounts are fine, and therefore goes on to sign the contract for
the purchase. Therefore, it is clear the misrepresentation is actionable as it is
a false statement of fact which induced Lewis to enter the contract.

As for the type of misrepresentation, this is dependent on the particular facts

and the intentions of John. The misrepresentation was made via the conduct
of John, when he did not conduct Lewis. If John had checked the accounts,
but decided to purposely withhold this information, this would amount to a
fraudulent misrepresentation. As per Derry v Peek, his conduct would
amount to a statement that John knows it false.

If John did not bother to check the accounts, or forgot, this would therefore
amount to a negligent misrepresentation, which could either be pursued
under the tort of deceit or the Misrepresentation Act 1967.

Under the tort of deceit, it is clear there would have been a breach of
reasonable care and skill, as John was on a duty to check the accounts,
either by forgetting or intentionally not checking he has breached this duty,
as he knew the importance of it to the contract. (Hedley Byrne & Co Ltd v
Heller & Partners Ltd. John had held himself out as having the expertise to
check the accounts, which Lewis relied upon (Henderson v Merrett
Syndicates Ltd).

Under Section 2(1) of the Misrepresentation Act, we have already established

that if the statement was made fraudulently it would be actionable as
fraudulent misrepresentation. Therefore, the only defence John will have, is
to prove he had reasonable grounds to believe the statement was true. The
fact that John says he ‘unsure’ about the accounts of the company suggests
he had no reasonable grounds to believe it was profitable, and needed to
check.

Mistake Lecture – Introduction

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Welcome to the fifth lesson of this module guide – mistake! The law of
mistake refers to where both parties have entered a contract under the same
fundamental mistake, which will render the contract void as if it never
existed. This is different to when a contract becomes voidable, which will be
explored within this chapter. There are three main categories of mistake
which will be discussed; non-agreement, mutual agreement and unilateral
mistake.

The chapter begins with an examination of non-agreement mistake,

considering mistake as to subject matter, ownership and quality. The chapter
then moves on to discuss mutual agreement mistake and the relevant test.
Finally, unilateral mistake is considered as well as the surrounding case law.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand what mistake is

 To understand the difference between ‘void’ and ‘voidable’
 To understand and be able to distinguish between the different types

Objectives for this section

 To understand the need for the doctrine of mistake

 To be able to distinguish between the three main types of mistake
 To understand the distinction between mistake and frustration
 To be able to apply and understand the case law surrounding mistake

Mistake Lecture
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Mistake is a remedy which can arise either through the common law or
equity, however, the decision in Great Peace Shipping Ltd v Tsavliris Salvage
International) Ltd [2003] QB 679 has limited mistake mostly to the common
law.

There are three broad categories of mistake which this chapter will explore:

1. Non-Agreement mistake
2. Mutual agreement mistake
3. Unilateral mistake

Non-Agreement mistake

A non-agreement mistake refers to where the parties have reached a valid

agreement, but would like nullify this agreement due to a mistake as to the
terms or subject of the agreement. This is often referred to as a ‘common’
mistake, as a claim for non-agreement mistake requires that both parties
made the same mistake. The two main requisites for non-agreement mistake
are as follows:

1. The mistaken matter must be one which is fundamental to the parties’

decision to enter into the agreement
2. The party wishing to rely on common mistake must have reasonable grounds
for their belief

This type of mistake will operate where one of the parties wishes to negate
the agreement for mistake, but the other party denies this mistake.

For the purpose of requirement ‘a’ the courts have pre-determined a number
of categories which will be presumed to be fundamental to the parties’
decision to enter the contract. We will now examine each of these in turn.

Res Extincta – Mistake as to the subject matter

The case of Strickland v Turner(1852) 7 Ex 208 confirmed that a mistake as

to the subject matter would amount to one which is fundamental to the
decision to enter the agreement.

Perishing of specific goods

The perishing of specific goods will amount to a fundamental mistake, as per

Section 6 of the Sale of Goods Act 1979.

Non-existent goods
Section 6 of the Sale of Goods Act 1979 requires that the goods have
perished, therefore, they will have needed to exist at some point
- Associated Japanese Bank (International) Ltd v Credit du Nord [1989] 1 WLR
255.

Exceptions – has one party taken responsibility for non-existence?

If there is a term in the contract which allocates the risk to one party in the
event of non-existence or non-delivery of the goods, any breach of this will
amount to a breach of contract, meaning a claim for mistake would not be
able to be made - McRae v Commonwealth Disposals Commission(1951) 84
CLR 377.

The distinction between mistake and frustration

The key distinction is where the impossibility of the contract occurs. If the
impossibility, unknown to the parties, is present before the creation of the
contract, this will amount to mistake. Where the contract becomes
impossible subsequent to the creation of it, this will amount to frustration
- Amalgamated Investment & Property Co Ltd v John Walker & Sons
Ltd [1977] 1 WLR 164.

Res Sua – Mistake as to ownership

This category of fundamental mistake refers to where two parties contract

for the purchase of some kind of property, but unknown to both of these
parties, the purchaser of the property already owns the property - Cooper v
Phibbs (1867) LR 2 HL 149.

Mistake as to quality of the subject matter

Mistake as to the quality of a subject matter is a fairly straightforward

concept; it refers to where both parties believe the subject matter is of a
certain quality, or has a certain quality, whereas in reality it does not.

Is a mistake as to the quality sufficiently fundamental to a contract?

The law of mistake is concerned with the impossibility of a contract being

completing, therefore, this suggests that mistake as to the quality of a
subject matter would not be sufficiently fundamental to a contract, as it
would not render the contract impossible.

A claim for mistake or a breach of the satisfactory quality term?

The distinction between these two principles is very important - Section

14(2) of the Sale of Goods Act 1979.
A mistake as to quality refers to a mistake of ‘some quality which makes the
thing essentially different from the thing it was believed to be’ - Bell v Lever
Bros Ltd [1932] AC 161.

The test of ‘essential difference’

Lord Atkin in Bell v Lever Bros Ltd stated the goods must be essentially
different in order to amount to a claim for mistake. Later in his judgment he
clarified this approach and outlined its scope and limitations. It can be
concluded that it has an extremely narrow scope.

The limited exception to the ‘essential difference’ rule

There is one extremely limited exception to the ‘essential difference’ rule,

which will allow a claim for mistake to be as to the quality of the subject
matter. This rule was created in Associated Japanese Bank v Credit Du Nord
SA [1989] 1 WLR 255

Mutual agreement mistake

An agreement mistake is one in which a fundamental mistake has been

made relating to the terms of the contract which prevent the formation of a
legally binding contract. This is often referred to as an ‘offer and acceptance’
mistake. The parties will subjectively believe they have formed a legally
binding contract, but in reality have not done so. See Raffles v
Wichelhaus(1864) 2 Hurl & C 906 for an example.

Test for mutual agreement mistake

The courts will apply an objective test to the question of whether there is an
agreement, considering whether one party’s interpretation was more
reasonable than the others - Smith v Hughes.

The most reasonable approach to the contract was the one of the
defendants, who believed the agreement was formed based on the sample
oats.

The doctrine of fault in mutual agreement mistake

The courts have identified a doctrine of fault in the law of mutual agreement
mistake. Even where there can been a valid agreement, if one party is
responsible for the mistake of the other party, the court will decide the case
in favour of the aggrieved party - Scriven Bros and Co. v Hindley and
Co. [1913] 3 KB 564.
The doctrine of fault is also evident in Smith v Hughes, it was the fault of the
buyer that they did not expressly indicate that old oats were required. If the
seller was aware of this, the case would have been decided differently.
Therefore, the doctrine of fault can work for or against either party in the
contract; it is not always the buyer or always the seller.

Unilateral mistake

This form of mistake applies when only one of the parties to the contract is
mistaken as to part of the contract. Unilateral mistake is limited, but will
usually operate in circumstances where one party is mistaken as to part of
the contract, and the other party is aware of this fact and takes advantages
of it.

Unilateral mistake as to the terms of the contract

The three requirements that will render a contract void for unilateral mistake
in relation to the terms of a contract are:

1. One party is mistaken as to a term of the contract, and would not have
entered the contract but for this mistake
2. The mistake is known or reasonably ought to be known to the other party
3. The mistaken party is not at fault

Requirement one is fairly straightforward, the courts will consider whether, if

the mistaken party had known the real truth as to their mistake, they still
would have entered into the contract. If they would have, this cannot amount
to an actionable claim for mistake.

The third requirement is fairly straightforward and obvious and is given its
literal meaning; if the mistake made is unreasonable they would be
considered to be at fault.

This type of mistake seems fairly straightforward to prove on a cursory

examination, but the requirements have proven fairly difficult to meet
- Hartog v Colin and Shields [1939] 3 All ER 566.

Unilateral mistake as to identity

The most common form of unilateral mistake that is actually actionable is

where there has been a mistake of identity.

To understand the significance of a claim for mistake as to identity, the

result of a claim under fraudulent misrepresentation in this example should
be examined. As you will know, the two remedies for misrepresentation are
damages and rescission. In the case of damages, as Party B has
disappeared, Party A will have nobody to direct the claim for damages to,
and will have no chance of recovering anything. As for rescission, as Party B
passed property to the goods to Party C, who were unaware of the
misrepresentation, there will be a bar to rescission in the form of third party
rights. As you can see, fraudulent misrepresentation is not an ideal claim to
bring where the statement maker cannot be traced.

A claim for unilateral mistake as to identity provides a remedy in this

situation. Due to the mistake, the contract is void at the time of creation,
therefore, Party B would never have title in the goods, and therefore could
never pass title to Party C. This means that Party A has one of two remedies;
they may recover the goods from Party C, or sue Party C under the tort of
conversion.

Unfortunately, there is a clear issue here, Party A and Party C are both
innocent, yet one will be subject to an unequitable result. Lord Denning
in Lewis v Averay [1972] 1 QB 198 suggested in the event of mistake as to
identity, the contract should be void, not voidable.

Lewis v Averay – What is a mistake as to identity?

The decision in Lewis v Averay made a distinction between ‘true mistakes as

to identity’ and mistakes as to attributes. Mistake as to the attributes of a
party is not sufficient for an actionable claim of mistake, for example, the
creditworthiness of a party. The mistake must be as to the actual identity of
the party.

Interestingly, in respect of mistake as to identity, the courts have

differentiated between contract that are made face-to-face, and written
contracts.

Mistake as to identity in written contracts

The courts will presume that when a contract is in written form the parties
only intend to contract with the parties named in the contract. Therefore, if
the contract turns out to be with anyone other than the individuals named in
the contract, it will be void for mistake - Cundy v Lindsay(1877) App Cas 459.

Face-to-face contracts

The current authority is Shogun Finance Ltd v Hudson [2003] UKHL 62. The
recognised exception to this rule is where an innocent party intends to
contract with a company, and the individual they contract with holds
themselves out to be an agent of that company, but in reality has no
authority to act – Hardman v Booth(1863) 1 H & C 803
The decision in Shogun Finance v Hudson

The case was decided on a 3 to 2 majority to the effect that the innocent
third party, Party D, was not protected. There were varying opinions of the
judges as to the judicial reasoning behind this decision.

To summarise the arguments against the difference, there seems to be little

logic in distinguishing between the two approaches. It seems in most
situations the fact that the contract is made face-to-face or via written
correspondence does not have an impact on the outcome of the contract.

Documents signed by mistake

A party may be released from a contract where they can prove that they
have signed the document by mistake. This arises where they sign a
contractual document which is fundamentally different to the contract they
believe it to be.

Saunders v Anglia Building Society [1971] AC 1004 is authority for this form
of mistake. It should be noted that the party signing the document must not
be careless when signing the document. In Saunders v Anglia Building
Society, the party did not read the document before signing it, this was held
to amount to carelessness, meaning their claim for mistake was not valid.

Mistake Lecture – Hands on Example

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The following section will provide you with a problem scenario which involves
issues relating to the law of mistake. This will test your understanding and
knowledge of what you have learnt and allow you put the law into practice.
You should now understand the law of mistake, be able to identify the
different categories of mistake, and the limitations to each. The problem
scenario will cover a variety of issues, and the answers can be found at the
bottom of the page.

In order to identify a problem question relating to mistake, you should look

out for situations in which one or both of the parties are mistaken as to
either some of the terms of the contract, the agreement, or the identity of
the individual they are contracting with.

Here is a suggestion approach when tackling a problem scenario on the law

of mistake which should allow you to answer the question fully and spot all
the relevant issues:

 Have both parties made the same mistake?

 If so, is the mistake as to the terms of the contract or to the agreement?
  If the mistake is as to the terms, does the term fall under any of the pre-
determined rules that are fundamental to a contract
 If the mistake is as to the agreement, consider the reasonableness of the
interpretation and the fault doctrine
 If only one party has made the mistake, is it in relation to the terms or the
identity of a party?
 Apply the corresponding tests for the above

Attempt to apply this approach to the problem scenario below; hopefully it

should work for you. Remember, if you are struggling, just refer back to the
detailed version in this chapter and refresh your knowledge.

Scenario

Steve is a car dealer who has recently entered into a number of contracts.
He is concerned that some of the agreements he has entered into seem to
be slightly different than what he was expecting. Focusing only on the
principles from the law of mistake, analyse these contracts to see whether if
there is anything Steve can do about these contracts.

The first contract Steve is concerned about was for a vintage 1970s Aston
Martin. He had negotiated for the car and purchased it for a price of £10,000.
Prior to this, he had bid on a ‘lucky dip’ auction online, where he would
receive five mystery, pre-determined cars. After he had purchased the Aston
Martin, he discovered that one of the five mystery cars was the exact Aston
Martin he had negotiated for, he feels cheated because he has essentially
paid twice for the same car.

1. Would this purchase amount to a mistake of any kind?

The second contract Steve is questioning is a contract for the purchase of a

world famous racing driver’s old race winning car. The price is particularly
high due to the popularity of the race driver and it is considered a collector’s
item. Unfortunately, a few weeks later, Steve discovers it is not actually one
of the race driver’s old cars, meaning it is worth 10% of he paid. The seller
had no idea of this fact either.

2. What type of mistake has been made here, and is it actionable?

The third contract Steve entered into was with a fraud. The fraud wanted
purchase a car and to pay on credit and Steve was concerned about his
creditworthiness. The fraud claimed to be the son of a famous footballer, and
Steve was happy with this after a quick check of his name and address, and
let him take the car away. Subsequently, the fraud sold the car to a third
party and has disappeared.
 3. What type of mistake has been made here, and does Steve have any remedy
under the law of mistake?

Answer 1: The fact that Steve has purchased property that he already owns
indicates it is a non-agreement mistake, under the Res Sua issue, mistake as
to ownership. This is a form of non-agreement mistake, whereby a party
purchases some property that they already have ownership of. Steve already
had ownership of the car through his ‘lucky dip’ auction purchase, and then
went on to negotiate for the car on its own. The case of Cooper v Phibbs is
authority for the fact a purchase of property already owned would amount to
a fundamental mistake as to the terms of a contract, and therefore the
contract would be void for mistake.

There is a question of whether or not the seller of the car would have known
Steve already owned the property or not, as for the Res Sua exception to
apply, both parties must be unaware of the fact the property is already
owned by the purchaser; but this is unlikely due to the nature of the auction
with the cars being randomly chosen. If the seller was in fact aware that
Steve already owned the car, the contract would not be void for mistake.

Answer 2: The type of mistake is a mistake as to the quality of the subject

matter. A parallel can be drawn with the example from Lord Atkin in Bell v
Lever Bros Ltd. His example was a painting which was painted by a famous
painter, but unbeknown to both parties this was not true. This type of
mistake will only amount to a mistake if it makes the contract ‘essentially
different’ that it was before the discovery of the mistake.

As per Leaf v International Galleries, the discovery of the true owner of the
car would not make the contract ‘essentially different’; Steve had contracted
to purchase a racing car, and had purchased a racing car. Steve’s remedy
should lie in breach of contract as long as one of the terms was as to the car
being previously owned by the famous racing car driver.

Answer 3: This mistake was a unilateral mistake as to the identity of a party.

The leading authority on face-to-face contracts is Shogun Finance Ltd v
Hudson, which confirmed that there is a presumption that in a face-to-face
contract, the identity of a party would not be fundamental to the contract,
instead the mistaken party would be concerned with the creditworthiness of
the buyer.

In Steve’s case, he was clearly concerned about the creditworthiness of the

buyer, which he even expressed. Unfortunately, therefore, Steve would have
no remedy in the law of mistake, as he mistaken to an attribute of the fraud
(his creditworthiness), and not his actual identity.
Duress and Undue Influence – Introduction
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Welcome to the fifth lesson of this module guide – duress and undue
influence! These doctrines both provide a means for an individual to avoid an
already concluded contract. These doctrines operate where the individual
has been forced or coerced into a contract by threats, unfair pressures or
unreasonable influences. The effect of these doctrines on a contract is that it
makes the contract voidable at the request of the aggrieved party.

The chapter begins with an examination of the doctrines of duress and

undue influence, taking each in turn. The different types of duress are
considered, as well as the requirements for it to be present. Following these,
the types of undue influence are outlined and the evidential burdens
established. Finally, the different relationships that may constitute presumed
undue influence are discussed.

Below are some goals and objectives for you to refer to after learning this
section.

Goals for this section

 To understand the effects of duress and undue influence

 To be able to distinguish between duress and undue influence
 To be able to define duress and undue influence

Objectives for this section

 To understand the need for duress and undue influence within the contract
 To understand the evidential burdens of each
 To be able to differentiate between the types of undue influence and duress
 To understand and be able to apply the evidential burdens to scenarios
 To understand the different relationships under presumed undue influence

 Order

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1.
2. Modules
3. Contract Law
4. Vitiating Factors
5. Duress And Undue Influence

Print Reference Study Level

5.3.2 Duress and Undue Influence Lecture

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Duress

In the context of contract law, this refers to where a party uses duress against the other party in
order for them to enter into a contract which they either do not want to, or where the terms of the
contract are unfavourable to them.

Duress by threat of violence

If a party is able to prove they were coerced into a contract due to a threat of violence, the
contract will be voidable. There are two main requirements of duress by threat of violence:

1. The nature of the threat must be sufficient to amount to duress

2. The effect of the threat must have been that it forced the claimant into the contract

The nature of the threat

The threat made must be sufficient in its nature to amount to duress. Usually, the indicator the
courts have used is whether the threat is illegal - Barton v Armstrong [1976] AC 104.

Effect of the threat

The distinction to make when ascertaining the effect of the threat is whether there is a threat
which results in a claimant voluntary entering the contract, or whether the claimant involuntary
entered the contract - Northern Ireland v Lynch [1975] AC 653.

Economic duress
The doctrine of economic duress was established in the case of Pao On v Lau Yiu Long [1980]
AC 614. Lord Scarman set out these two requirements:

1. Coercion of the will that vitiates consent

2. The pressure or threat must be illegitimate

In DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530, Dyson J altered the first
requirement to be:

1. Pressure
2. The practical effect of the pressure is that there is compulsion, or lack of practical choice for the
victim
3. The pressure is illegitimate
4. The pressure is a significant cause in inducing the claimant to enter the contract

Lack of practical choice

A practical example of this principle in operation can be found in B & S Contracts & Design Ltd
v Victor Green Publications Ltd [1984] ICR 419.

Illegitimate pressure or threat

It is difficult to distinguish between an illegitimate and a legitimate one, as there is expected to

be a certain amount of pressure in commercial bargaining. (DSND Subsea Ltd v Petroleum Geo
Services ASA).

A threat to break a contract would be regarded as illegitimate - Kolmar Group AG v Traxpo

Enterprises Pvt Ltd [2010] EWHC 113 (Comm).

The test to apply was confirmed in R v Attorney-General for England and Wales. Two things
should be examined:

1. The nature of the pressure

2. The nature of the demand

Can duress be lawful?

It has been established in CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714 that
duress may be lawful under certain circumstances, despite the unreasonableness of the demands.

These requirements are difficult to meet, when parties are dealing as commerce, it is rare they
will be dealing at ‘arm’s length’.

The consideration of whether the parties have dealt in good or bad faith.
Good faith on the part of the party pressuring the other party seems to be relevant for proving a
lawful threat falls under the ambit of lawful duress - CTN Cash and Carry Ltd v Gallagher Ltd.

Was the pressure a significant cause in inducing the claimant to enter the contract?

The case of Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620 is the leading
case for the degree to which the pressure must have induced the contract to the party in relation
to economic duress. It must be a ‘decisive or clinching’ inducement. The correct test to apply in
this context would be the ‘but for’ test; but for the duress, would the claimant have entered the
contract on those terms?

The requirement of protest

In order for there to be an actionable claim for duress, the victim of the duress must take action
to remedy or protest the duress at the time of the duress or shortly after - North Ocean Shipping
Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979] QB 705.

This requirement of protest is not required at the time of the contract formation. The courts have
correctly recognised that in some cases it would be impossible to protest until performance is
complete. Therefore, it is a requirement that if protest would not have been viable at the time of
the contract being made, it must be made immediately after (Kolmar Group AG v Traxpo
Enterprises Pvt Ltd [2010] EWHC 113.

In the event there is continuing duress, the protest may come at any point during the duress or
after it has stopped, it is irrelevant whether duress continues long after the contract formation, as
long as the protest is made when possible after the duress ceases (Antonio v Antonio [2010]
EWHC 1199 (QB)).

Undue influence

The types of undue influence

Two distinct classes of undue influence in Barclays Bank Plc v O’Brien [1994] 1 AC 180:

1. Actual undue influence

2. Presumed undue influence which can be categorised as

1. Protected relationships – pre-determined presumptions as to relationships which will give rise

to a presumed influence
2. Other cases – relationships in which influence can be presumed, but is not automatically done
so

The evidential burdens of the different types

In relation to category ‘2a’, protected relationships, the claimant must simply prove that that
party exploited the nature of this relationship.
In category ‘2b’, only if the relationship is one where influence cannot be proved will the
claimant have to provide evidence that the relationship was one where influence arose.
Following, the courts will assess whether the conduct amounts to undue influence.

In category 1, the claimant does not have to prove there is an existence of any special
relationship. The evidential burden they are subject to is proving that their free will to enter a
particular contract was overcome - Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s
Rep 620.

Actual undue influence

There is no need for an existing relationship between the parties to prove actual undue influence.
Furthermore, the contract attempting to be voided for undue influence does not have to be of
manifest disadvantage to the claimant - CIBC Mortgages plc v Pitt [1994] 1 AC 200.

Presumed undue influence

Turkey v Awadh [2005] EWCA Civ 382:

1. Do the facts give rise to either the existence of a protected relationship, or a relationship in
which evidence could prove that one party exerted influence on the other?
2. If so, could the transaction be shown to be one that could not be explained by ordinary motives,
therefore suggesting some kind of undue influence resulted in the transaction.
3. Can the defendant rebut this presumption by establishing there was no abuse of trust?

Category 2A – Protected relationships

The law has deemed certain relationships special, meaning influence between them can
automatically be presumed in the absence of any other facts - Royal Bank of Scotland plc v
Etridge (No 2).

Once the existence of one of these relationships has been established, the claimant must prove
that the influence exerted was undue.

Category 2B – Other cases

If it can be shown that the relationship was based on trust and confidence, it may be presumed to
be a relationship of influence. The difference in comparison with Category 2A is that this
presumption is rebuttable by the other party if they prove there was no trust or confidence.

Husband and Wife

In Barclays Bank plc v O’Brien [1994] 1 AC 180 it was confirmed that the relationship of
Husband and Wife may amount to a relationship which satisfies the requirements of category 2B.
Whether or not this relationship gives rise to one where there is presumed influence is dependent
on the closeness of the relationship and whether total trust and confidence has been put in each
other

Due the nature of the husband and wife relationship, it is not enough to merely show that there
has been influence relating to a transaction which is not to the claimant’s advantage. The
‘manifest disadvantage’ test may apply here, putting a higher evidential burden on the claimants.

Other cohabitees

The application of the husband and wife presumption was also said to extend to other cohabitees
who were in an emotional relationship with each other, this is applicable regardless of marriage
status or sexuality. See Massey v Midland bank plc [1995] 1 All ER 929.

Bank and customer

The relationship between a bank and a customer is one which is possible to fall under category
2B. The presumption was successfully proven in Lloyds Bank Ltd v Bundy [1975] QB 326.

Therefore, it would seem the test for whether a bank and customer relationship could fall under
category 2B is based first on the previous dealings between the two, considering whether there
was evident trust and confidence. Secondly, the courts will assess whether the transaction was in
the interests of the customer or not.

Commanding officer and solider in the army

See R v HM Attorney-General for England and Wales [2003] UKPC 22 – a relationship between
a soldier and officer can fall under 2B.

Evidential burdens in relationships of presumed influence

The requirement that a transaction must be a ‘manifest disadvantage’ to the claimant

The new focus and the current test is whether the transaction is ordinary and explainable in the
context of the relationship between the parties, or whether there was some concern for the
legitimacy of the contract due to its suspicious nature. It should be noted that whether the
contract was of a ‘manifest disadvantage’ may be considered as evidence to show that the
contract is not ordinary and explainable, but it is no longer a requirement (Thompson v
Foy [2009] EWHC 1076 (Ch).

Rebutting the presumption of undue influence

Once it has been proven by the claimant that there was influence of an undue nature, the
defendant may rebut the presumption of undue influence by proving that the claimant entered
into the contract freely without influence.
The most common way in which this presumption may be rebutted is where the claimant has
undertaken independent advice with regards to the transaction in which undue influence has been
claimed - Howard v Howard-Lawson [2012] EWHC 3258 (Ch).

However, receiving independent advice may not always be conclusive. The facts of each case
will need to be assessing to consider whether the undue influence was still the inducing factor or
whether the independent advice was significant in this regard (Royal Bank of Scotland v Etridge
(No 2).

Can undue influence be actionable against a third party?

It has been confirmed that undue influence by a third party on a claimant may give rise to a claim
for undue influence, which can result in the contract between the claimant and the party they are
contracting with being voidable.

The case of Barclays Bank v O’Brien [1994] 1 AC 180 confirmed this rule, making reference to
the ‘doctrine of notice’. The first category of notice is actual notice and the other category is
constructive notice. Constructive notice court considerations:

1. Whether the contracting party has been “put on inquiry”

2. If “put on inquiry”, has the contracting party avoided notice of the undue influence?

Have the contracting party been “put on inquiry”?

Being “put on inquiry” refers to where the contracting party should be aware that the contract
seems unusual, and therefore should make inquiries as to the nature of the transaction.

If on inquiry, has the contracting party avoided notice?

In order to avoid notice, and make the relevant inquiries, it is suggested that the contracting party
should privately meet with the claimant, or that the contracting party should advise the claimant
to seek independent advice of some kind. This would absolve the contracting party of liability
(Banco Exterior Internacional v Mann(1955) 27 HLR 329).

If the contracting party can absolve themselves via one of these two considerations, the contract
will not be voidable for any undue influence.

Duress and Undue Influence Lecture – Hands on

Example
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Congratulations for reaching the end of this chapter! The following section
will be a test of your knowledge in relation to duress and undue influence,
how well you can spot relevant issues, and how you apply the legal principles
and case law. You should now have a full understanding of the topic and be
able to identify different types of duress, assess whether these may be
actionable claims, identify different types of undue influence and also assess
the merits of these claims.

You should be able to identify a problem question relating to duress and

undue influence by looking for a party that enters a contract unwillingly.
Whether it is duress or undue influence will be dependent on how they are
coerced into the contract, but the starting point should be an unwillingly
entered contract.

Here is a suggested approach which will ensure you do not miss any issues
and answer the question correctly

 Is the pressure to enter the contract by means of duress, or undue influence?

 If it is duress, which category of duress?
 Is the pressure illegitimate, and did it induce the contract?
 If undue influence, which category of undue influence?
 Dependent on the category, was the contract of ‘manifest disadvantage’, or
was the contract of a suspicious, unexplainable nature?

The following problem scenario will prompt you with questions which should
help you recognise the issues and aid your understanding. If you are
struggling remember to refer back to the detailed version in order to refresh
your memory!

Scenario

Evan is a successful business man. Owing to his success and large wealth, he
is often subject to pressure when negotiating his business deals, as other
parties are aware that he can often afford to pay large sums. Evan accepts
that this is part of business, but is particularly concerned in relation to a few
contracts.

Contract one is for the sale of some of his goods. Jeff has sent Evan a
personal email which states “You must sell me five of your tractors for £1
each or there will be blood spilt, I know who your daughter is”. Evan went
ahead and did what Jeff asked, because he felt like he had no other
alternative but to do so in order to protect his daughter.

1. Does Evan have any remedy in relation to duress or undue influence?

Contract two is between Evan and his Lawyer. Evan’s lawyer has been
persuading Evan to enter into a contract which he feels isn’t very
advantageous to him. Evan’s lawyer has pestered Evan over a sustained
period of time and Evan has felt pressure to take the contract in order to
keep a good working relationship with his lawyer.
 2. Does Evan have any remedy in relation to duress or undue influence?

Contract three is between Evan and one of his suppliers. Evan desperately
needs the goods from the contract in order to use them in another contract.
The suppliers are refusing to give Evan the goods unless he pays them
double the price. There are no other suppliers of these goods, therefore Evan
pays the price.

3. Does Evan have any remedy under the economic duress principles?

Answer one: This is clearly an issue of duress, specifically, duress by threat

of violence. The requirement for an actionable claim of duress in this context
is that the nature of the threat must be sufficient to amount to duress, and
the threat must have forced the claimant into the contract.

The nature of the threat being sufficient has been established under case law
as meaning it is an illegal threat under the criminal law (Barton v
Armstrong). In this case, there is clearly either a threat of harm, serious
harm, or murder to his daughter will would all be illegal and therefore
sufficient in nature. To force the claimant into the contract, the threat must
result in the claimant not having any other realistic option (Northern Ireland
v Lynch). In this case, Evan expressly said he felt like he had no other option,
and it is clear choosing his business over his daughter’s wellbeing would not
be a realistic option, therefore, it will amount to an actionable claim for
duress and the contract would be voidable.

Answer two: This is a classic case of undue influence. There has been no
threat that would amount to duress, but the pressure Evan’s lawyer has
exerted on him has made him enter into a contract. The relationship
between Evan and his lawyer falls under a protected relationship for the
purposes of undue influence, meaning there is an irrebuttable presumption
that Evan’s lawyer had influence over Evan. Evan must prove this influence
was undue in order to have an actionable claim.

In order to prove that the influence was undue, as per Goodchild v

Bradbury [2006] EWCA Civ 1868, the contract must be suspicious and
unexplainable. Therefore an examination of the actual contract would be
required. The fact the contract may held the courts rule in Evan’s favour, and
especially as he recognises that the only reason he entered into the contract
was the fact he wanted to maintain a good working relationship with his
Lawyer.

Answer three: The requirements for economic duress were outlines in DSND
Subsea ltd v Petroleum Geo Services ASA. The first requirement is that there
must be pressure. In this case, there is clearly pressure, as the suppliers are
pressuring Evan into paying double the price for the goods.
The second requirement is there must be a lack of practical choice for the
victim. In this case, there is no alternative way in which Evan can get these
goods. This is similar to Atlas Express Ltd v Kafco (Importers & Distributors)
Ltd, where the withholding of shipping of goods was held to result in a lack of
practical choice where there was no alternative for delivery. Furthermore,
Evan needs the goods for another contract, therefore he cannot choose to
wait and find a remedy under a breach of contract, as he needs the goods as
soon as possible. In conclusion, there was no practical choice for Evan but to
pay the price demanded.

The next requirement is that the threat must be illegitimate. In order for to
establish this, the courts will examine the nature of the pressure and the
nature of the demand. In this case, the pressure was overwhelming as Evan
had no choice, and the nature of the demand was sufficient as it was a threat
to break a contract (non-delivery if he did not pay the price), this rule has
been seen in Kolmar Group AG v Traxpo Enterprises Pvt Ltd.

Finally, the pressure must be a significant cause in inducing the claimant to

enter the contract. The test for this is that the pressure must be ‘decisive or
clinching’, as per Huyton SA v Peter Cremer GmbH & Co. This requires an
application of the ‘but for’ test. It is clear here that ‘but for’ the pressure,
Evan would not have paid double price for the goods. Evan must also have
protested with regards to the duress at the time of the contract or soon after
it. This is unclear from this facts, therefore whether or not an actionable
claim for duress will be possible is dependent on whether Evan protested
(North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic
Baron).

Illegality Lecture – Introduction

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Welcome to the fifth lesson of this module guide – illegality! This is the last of
the core vitiating factors key to contract law. There are two types to be
aware of; statutory illegality and common law illegality. The consequence of
either of these types of illegality can be varied, therefore the consequences
for a contract that is found to be illegal must be understood.

The chapter begins with a discussion of the statutory prohibition of contracts,

including express and implied prohibitions. The relevant case law is
examined as well as the effect of statutory penalties. The chapter then
moves on to consider the different types of common law prohibitions; public
policy and restraint of trade. Finally, the effects and recovery are discussed.

Below are some goals and objectives for you to refer to after learning this
section.
Goals for this section

 To understand the difference between statutory and common law prohibitions

 To understand the consequences of either of these types of illegality
 To understand what illegality is in terms of contract

Objectives for this section

 To be able to differentiate between statutory and common law illegality

 To be able to define the concept of illegality
 To understand and be able to apply the case law in this area
 To understand the effects of illegality
 To understand how recovery under illegal contracts works
 To understand the ‘blue pencil’ test and how to apply it
 To be able to determine whether a contract is reasonable

Illegality Lecture
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The last of the vitiating factors of contracts we will cover is illegality. This
chapter will first explore the two different types of illegality; statutory
illegality and common law illegality. The consequence of either of these
types of illegality can be varied, therefore the final section will examine the
consequences for a contract that is found to be illegal.

Statutory prohibition of contracts

A contract may be prohibited by a statute either expressly or impliedly. This

is an important distinction to make as whether or not a party may enforce
the contract is dependent on this.

Express Prohibitions

If a statutory prohibition expressly prohibits a type of contract or term, there

is no question as to the illegality of the contract. Neither party will be able to
enforce the contract, irrespective of the innocence of either or both parties.

The case of Re MahMoud and Ispahani [1921] 2 KB 716 involved the example
of a statute prohibited unlicenced dealing in linseed oil. The purchaser of the
oil claimed he had a licence to purchase the oil, but in fact did not. When the
sellers delivered the oil, the purchaser refused delivery, explaining he did not
actually have a licence. Despite the fact the seller of the oil was completely
innocent, the contract could not be enforced due to the statutory provision.

Implied prohibitions
Implied prohibitions are much more difficult to identify, and there are two
tests the courts may apply to determine whether the contract made is
impliedly prohibited. The tests applied and the decisions made are very fact
dependent, so try and be aware of the tests and make a sensible decision as
to which one you apply if faced with a problem-scenario.

In order to determine whether an implied prohibition is operable, the court

must ascertain whether the objective of the legislation is to forbid the
contract. Here is the first rule:

1. If the sole object of the statute is to increase national revenue, the contract
itself is not illegal

This rule covers examples such as statutes which requires individuals to

have a licence to trade in a particular area or with particular goods. Take for
example a fishing licence. There is no other reason for a licence to be
imposed other than to increase national revenue.

Case in focus: Smith v Mawhood(1845) 14 M & W 452

In this case, Smith, a tobacconist, sold an amount of tobacco to Mawhood. It

was subsequently found that Smith did not have the required licence to sell
the tobacco, and therefore statute required he paid a penalty for £200.
Smith then attempted to recover the price of the tobacco he had delivered to
Mawhood.

It was held that the contract was not illegal, and he could claim the price of
the tobacco back. This was because the statute’s primary purpose was
revenue. Parke B stated ‘Looking at the act of Parliament, I think its object
was not to vitiate the contract itself, but only to impose a penalty upon the
party offending, for the purpose of revenue’.

It should be noted that the above must relate to the sole object of the
statute. If there are other objectives, such as public policy, this rule will not
operate. An example of this would be individuals requiring a licence to trade
with certain dangerous types of animal. The requirement of the licence may
be to raise revenue, but it is also for the public benefit as the licence can
ensure dangerous animals are not introduced into the country in the
incorrect way.

Exam consideration: Can you think of any other examples of requirements

for licences that would go beyond having revenue as its only objective?

2. Does the statute contemplate that the prohibited act will be done in the
performance of a contract?
This is a confused concept best examined with an example. Take a fictitious
act which has these provisions:

Section 1 – It is a criminal offence to…

1. Sell chickens
2. Keep chickens as pets

Option (a) will always involve a contract, therefore it is clear that the statute
would contemplate this prohibited act would take place in the performance
of a contract, and would therefore be an implied illegal contract.

Option (b) may involve a contract, but more often than not, will not. You may
purchase a chicken for the purpose of keeping it as a pet, but you would not
contract with somebody to keep a chicken as a pet. Therefore, the statute
does not contemplate this prohibited act to take place in the performance of
a contract, and would not be an implied illegal contract.

Contracts which are not illegal, but have been performed in an illegal
manner

A contract may well be legal, but the way in which one party has undertaken
their obligations amounts to illegality.

Case in Focus: Archbolds (Freightage) Ltd v Spanglett Ltd [1961] 1

QB 374

In this case, a contract was formed for the shipping of a consignment of

whisky to London. Unknown to the claimants, the shippers did not have the
required licence to use the transportation vehicle. The consignment of
whiskey was then stolen. In order to avoid liability, the shippers attempted to
argue that the contract was illegal in the first place, and therefore damages
could not be claimed.

The courts held that the contract itself was not illegal (to ship a consignment
of whiskey), the method used was illegal (using that particular vehicle).
Therefore, because the claimants were not aware of the illegal method of
transport being used, they were able to enforce the contract.

Whether the contract is legal or not is dependent on whether the ‘innocent’

party is aware of the illegal performance of the contract or is involved in it.
In Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd [1973] 1 WLR 828 one
party carried goods which exceeded the statutory maximum weight for lorry
transportation. The fact the other party were present at the loading and did
not object to the illegality meant they could not claim damages under the
contract when some of the goods were damage. Therefore, the general rule
is: The party or parties who are aware of the illegal performance of the
contract cannot enforce any terms of the contract.

The general rule above may be restricted where the purpose of the
legislation is not undermined by the illegal performance. The case
of Anderson Ltd v Daniel [1924] 1 KB 138 provides a clear example of this. In
this case, a landlord failed to provide a tenant with a rent book, which was a
statutory requirement. If the general rule was applied, the landlord would not
be able to claim any rent under the contract. The statutory purpose of the
provision was not to allow the tenant to avoid paying rent, it was to ensure
he had a rent book; therefore the landlord was able to claim rent.

Recent case law has added more complexity to this area of law.
In ParkingEye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338. This case
concerned the installation of a monitoring system of a car park that would
charge customers for overstaying. The defendants ended the 15-month
contract early and the claimants who were making revenue from the charges
claimed damages from the defendants for loss of revenue. The defendants
claimed the contract was illegal due to the illegality of the letters the
claimants sent to customers to induce them to pay.

The court held that when deciding whether the illegal performance would
render the contract unenforceable they would consider these things:

1. The object and intent of the party attempting to enforce the contract;
2. The gravity of the illegality in the context of the claim; and
3. The nature of the illegality.

In this case, the court decided a repudiation of the contract would be

disproportionate. Instead the defendant should have informed the claimants
that their letter was illegal so they could have made the necessary
amendments. Therefore, each situation will be fact-dependant. Just
remember to apply these factors and come to a well reasoned conclusion.

The effect of statutory penalties

In some cases, the performance of an illegal contract will be subject to a

statutory penalty. The courts have held that where the penalty is
proportionate and sufficient to the breach, the contract is enforceable by
either party.

In St Johns Shipping Corporation v Joseph Rank [1957] 1 QB 267 the

statutory breach in question was the overloading of a ship. There was a fine
imposed for this breach, but the defendants attempted to withhold the goods
as it was an illegal contract. It was held the fine was sufficient punishment,
and the contract would be enforceable.
Exam consideration: Have a think about exactly why the courts allowed the
contract to be enforceable. What does the statute actually prohibit and what
does it not prohibit?

Common law prohibition of contracts – Public Policy

Contracts may be prohibited via the common law, on grounds of public policy
or morality. There is a lot of uncertainty in this area, and the when the court
can prevent a contract from operating is often unclear. The courts approach
this area of law with a consideration of the common values of society – if the
contract breaches common values of society it will be void for common law
illegality.

Contracts to commit crimes

The case of Bigos v Boustead [1951] 1 All ER 92 confirms a contract which

includes an obligations to commit a crime will be illegal. Furthermore, a
criminal or criminal’s estate may not benefit from the crime (Beresford v
Royal Insurance Co Ltd [1938] 586).

Other examples of contracts which would fall under this area are:

 Tax fraud contracts (Alexander v Rayson [1936] 1 KB 169)

 A third party claiming damages from the guilty party after a criminal offence
(Gray v Thames Trains Ltd [2009] UKHL 33)

Contracts which prevent the administration of justice

Despite the law of contract mostly being self-regulatory, in the event of a

dispute, the courts will intervene. Contracts which preclude parties to the
contract accessing justice, or prevent the courts interfering with a contract,
may be illegal on the ground that they prevent the administration of justice.
Here are some of the main examples:

 Agreements between husband and wife where one agrees not to apply to the
court for maintenance (Hyman v Hyman [1929] AC 601). Note that this does
not invalidate the whole agreement, only the term that prevents the court
application (Section 34 of the Matrimonial Causes Act 1973)
 Contracts that preclude the jurisdiction of the courts, unless the
administration of justice is replaced with arbitration (Scott v Avery (1855) 5
HL Cas 811)

Contracts which are sexually immoral

Sexually immoral contracts refer to those relating to contracts for sexual acts
or services. An example of this can be found in Pearce v Brooks(1865) LR 1
Ex 213, where a contract for the hire of a carriage used for prostitution was
held to be illegal due to public policy.

However, this approach has evolved along with societies views. As

mentioned before, the public policy laws will consider the values of society at
that point in time. More recently, there have been a number of cases which
have taken the opposite view and allowed contracts for sexual acts and
services to be enforced.

In Sutton v Mishon de Reya [2003] EWHC 3166 (Ch) a contract outlining an

agreement between two people in a master/slave sexual relationship was
held to be valid and not contrary to public policy. This is an excellent
example of how the courts are less likely to rule that a contract is illegal
under grounds of public policy.

Exam consideration: If you have studied the case of R v Brown [1994] 1 AC

212 in Criminal Law, do you think a contract involving sadistic terms would
be invalid on the grounds that they were illegal acts, or valid due to the
relaxed attitude to sexual contracts that can be seen in Sutton v Mishon de
Reya?

Contracts which involve public corruption

Some contracts are invalid because they involve corruption. The most
common examples of contracts which are corrupt are contracts for public
office or honours.

In Parkinson v College of Ambulance Ltd [1925] 2 KB 1, one party to a

contract paid £3,000 to a charity because some of the charity officials had
persuaded him they may be able to get him a knighthood if he donated. This
was not in fact true, and was therefore invalid due to corruption (the promise
to get him a false knighthood). It should be noted that the contract was also
invalid due to statutory illegality.

The most common examples of contracts which are corrupt are contracts for
public office or honours.

Common law prohibition of contracts – restraint of trade

As we know, contract law is governed by the principle of contractual

freedom, that parties can agree to any contracts and terms they wish. In
some circumstances this freedom may be abused. An example of such abuse
is where a term in a contract prevents somebody from working for somebody
else, or trading with somebody else. To ensure there is a continuing freedom
of contract, contracts that restrain trade can be void for illegality.
Lord Macnaghten famously summed up this principle by stating the public
has ‘an interest in every person’s carrying on his trade freely’. This
statement was made in Nordenfelt v Maxim Nordenfelt Guns and
Ammunition Co Ltd [1894] AC 535. In this case, a contract prevented a seller
from engaging in the business of ammunition and arms for a period of
twenty-five years.

In assessing whether the restraint on trade is enforceable, the courts will

focus on whether the contract between the two parties is reasonable, and if
the limitation would not be in the public’s interest.

Is the contract reasonable?

The case of Herbert Morris Ltd v Saxelby [1916] AC 688 is the leading
authority for the assessment of reasonableness in this area of law. This case
involved an employment contract that included a term that restricted the
defendant from carrying on any related trade for seven years in the event he
left the plaintiff’s employment. The defendant left the job and the plaintiff
attempted to enforce this term. The courts held that this term was not
enforceable. In this House of Lord judgment, the courts identified general
presumptions for deciding whether or not a contract may be illegal due to a
disproportionate restraint on trade.

1. Employment contracts that restrict former employees from being employed

by competitors would not normally be valid
2. Employment contracts that prevent the loss of trade secrets or stealing of
custom would normally be valid
3. Terms in a contract for the sale of a business preventing the seller setting up
another business in competition with the purchaser’s business are normally
valid

Once one of these presumptions has been identified, the duration and the
geographical extent of the limitations made by the contract will be
considered. These limitations should not be disproportionate. For example, a
contract which prevents the seller of a business setting up a competing
business in the same area would likely be valid, but not one preventing the
seller setting up a similar business anywhere in the world. Some further case
examples can be found below.

In Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 one term in the
defendant’s contract of employment stipulated that he must not enter into a
similar business within 25 miles of London. The employment was in Islington,
and therefore the restraint was too wide to be proportionate and reasonable.

The case of Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526 a term in
an agreement prevented a milkman from selling milk or dairy produce to any
former customers he dealt with in the course of his employment. This
restraint was reasonable, so long as ‘dairy produce’ was limited to the type
of goods he dealt with in his employment.

Case in focus: Nordenfelt v Maxim Nordenfelt Guns and Ammunition

Co Ltd [1894] AC 535

This case is the leading authority for the assessment of restrictions in the
sales of businesses. In this case, Nordenfelt, an arms manufacturer, sold his
business to Maxim. The contract included a term preventing Nordenfelt from
selling guns or ammunition anywhere in the world for twenty-five years, and
to not compete with Maxim in anyway.

The court held that this clause was partially valid. The part preventing
competition ‘in any way’ was not valid due to its complete restriction on
trade. However, the rest of the clause was valid due to these reasons:

 A substantial fee had been paid which reflects the fact he could not compete
for 25 years
 The amount of customers willing to buy arms and ammunition was limited,
therefore the restriction not to sell ammunition anywhere in the world was
valid because it was no wider than necessary to protect Maxim.
 The restriction was not damaging to the public interest

Reasonableness as to the public interest is a further important consideration

for the courts. The public interest consideration will be invoked where a
contract will have an effect on the competitive structure of a certain market.
It is admitted that these situations are rare because of the diversity and
competition in business, but it is important to consider if it may occur. The
case of Herbert Morris Ltd v Saxelby [1916] AC 688 is an example of this. In
this case, two companies agreed not to compete with each other, which on
the face of it would seem a reasonable agreement. Despite this, the public
would be likely to suffer due to the inflated prices as a result of the lack of
competition; therefore the contract was not valid.

Exclusivity dealing contracts

Exclusivity dealing contracts, also known as ‘tie agreements’, are those

between parties at different stages in a commercial chain which force a
closer ties between the parties that a mere contract. The best way to
understand and identify these agreements is by reference to the leading
authority in this area.

In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

the parties involved were two garages and a seller of petrol. These are
clearly parties involved in different stages of the commercial chain relating
to petrol. One garage agreed to only buy petrol from the seller for a term of
over five years in return for a discount. The second garage agreed the same,
but for a term of twenty-one years.

The courts held that only the contract providing for exclusivity for five years
was valid. The courts held that for each exclusivity contract there must be an
investigation as to whether there is a legitimate interest protected by the
exclusivity, and whether the restraints are reasonable. The twenty-one year
term was seen to be extremely disproportionate due to the sheer amount of
time it tied the parties together for.

Exclusive service agreements

An exclusive service agreement is similar to an exclusive dealing contract,

but instead it relates to where a person provides services for only one
recipient. Here are some common examples of these:

 A singer agreeing only to appear at certain festivals

 A footballer agreeing to only appear in adverts for one company
 A celebrity agreeing to only sell their stories to one news outlet

As you can see, these mostly relate to professional entertainers and sports
stars. These contracts do not usually involve a contract of employment, only
a contract of restriction. Generally, these courts will apply the same rules as
those for contracts of employment – that generally these agreements are not
valid, dependent on the geographical restraint and duration of the term.

The case of Creig v Insole [1978] 1WLR 302 involved organizers of

international and county cricket attempting to exclude players who played in
private games promoted by a certain company. The courts held this ban was
not valid as it restricted the freedom of employment of players subject to the
ban.

Another similar case is Eastham v Newcastle United Football Club Ltd [1964]
Ch 413. A term in this contract prevented large clubs (Newcastle in this
case), from poaching the best players from smaller clubs. It was suggested
these types of contracts may be valid due to the public’s interest in watching
a good level of sport at all clubs. However, the courts held the contract
restricted the freedom of employment for certain members of the club,
therefore making the contract invalid.

The court will also take into consideration whether the individual subject to
the contract has been treated fairly, has undertaken independent legal
advice, and whether they have been taken advantage of. Their age, the
fairness of the contract, and the duration of the contract will be helpful in
assessing this.
In Proactive Sports Management Ltd v Rooney [2011] EWCA Civ 1444 a
contract that provided for exclusivity of image rights of a sportsman was
considered to be invalid. This was in light of the fact Rooney had not
undertaken any legal advice, was 17 years-old at the time, the contract was
for eight years, and was a flat-rate of twenty percent of all of his earnings.

The effect of illegality

The case of Holman v Johnson(1775) 1 Cowp 341 is authority for the general
principle of illegality – that the illegal contract will be unenforceable.
However, as we have seen, dependent on the circumstances, one or none of
the parties may enforce the contract, and on occasion only part of the
contract will be unenforceable. This section will consider the different effects
of illegality, separating them into distinct categories that should be easy for
you to remember.

Severable illegal contracts

As we touched on in Nordenfelt v Maxim, the courts have the power to

enforce a contract, but only when the illegal parts of the contract have been
removed. There is a three-part test to apply when attempted to sever parts
of the contract. The test comes from Sadler v Imperial Life Assurance Co of
Canada Ltd(1988) IRLR 388:

1. The ‘blue pencil’ test – can the illegal provision be removed without
modifying the words of the remaining terms. These remaining terms must be
grammatically and verbally separated. It is referred to as the ‘blue pencil’
test as the best way to assess this is simply by crossing out the illegal terms.
If it still makes sense, the illegal provision can be removed.

Case in focus: Goldsoll v Goldman [1915] 1 Ch 292

This case involved a defendant who was competing with the plaintiff in the
business of imitation jewellery. The defendant’s agreed to no longer compete
with the plaintiff in a contract for two years in any capacity. The clause
covered ‘London, England, Scotland, Ireland, Wales, or any part of the United
Kingdom of Great Britain and Ireland and the Isle of Man or France, the
United States of America, Russia, Spain, or within twenty-five miles of
Potsdamerstrasse, Berlin, or St StefansKirche, Vienna’.

The courts decided that the contract was valid, except for the geographical
restraints that were unreasonable. The ‘blue pencil’ rule was used to remove
the words following ‘or France’, so that the limitation only applied to the
United Kingdom.
Exam consideration: You should attempt to draft some fictional complex
contractual terms and consider what parts of the contract the ‘blue pencil’
rule will allow you to remove. Remember it must make sense both
grammatically and verbally.

2. The remaining terms following the ‘blue pencil’ rule must be supported by
consideration

This part of the test is fairly straightforward. You may need a re-cap on your
knowledge of consideration, but here is a simple example of this test in
operation:

‘You will be paid £250 per month to not compete with the company in any
capacity in the United Kingdom and the United States of America’.

If the ‘and the United States of America’ was removed as part of the blue
pencil rule, the £250 part would still be included in the contract, and
therefore the contract would still include some valid contract. However, if the
contract was drafted in this manner:

1. You must not compete with the company in any capacity in the United
Kingdom
2. You must not compete with the company in any capacity in the USA, and in
consideration for not competing in the USA, you will be paid £250 per month.

Now if we attempt to use the blue pencil rule to remove the part of the
clause relating to the US, it is evident that the term that includes the
payment of £250 would have to be removed. This means only term ‘a’ would
remain, and there is a lack of consideration in the contract.

This is an extremely simple example, and in practice the contract is likely to

be much more complex. However, just remember to ensure there remains
some form of consideration following the removal of any illegal terms.

3. Following the blue pencil rule, the contract must continue to be the same sort
of contract that the parties entered into in the first place. It cannot be
changed to the extent that it changes the character of the contract.

The final requirement is a question of fact, and can be difficult to assess. The
case of Attwood v Lamont [1920] 3 KB 571 provides a good example to
further your understanding.

Case in focus: Attwood v Lamont [1920] 3 KB 571

In this case, one party owned a tailoring business, whilst the other
party was an employee. The contract of employment prevented the
employee from working for any other tailor within ten miles of the
store in the context of being a ‘tailor, dressmaker, draper, milliner,
hatter, haberdasher, gentlemen’s, ladies’ or children’s outfitter’.
The important fact in this case was that the employee was only a
cutter in the tailoring department.

The courts held this restriction was far too wide, as the employees
only skill was as a tailor. However, the clause could not be severed,
as to sever it would change the scope and intention of the
agreement.

Collateral contracts

Where there is one illegal contract, but there is a collateral contract that
allows a recovery of all or part of the contract, this may be enforceable, but
only if providing for a remedy under the collateral contract is not equal to
enforcing the illegal contract.

Fisher v Bridges(1854) 3 El &Bl 642 is one such example of this. In this case,
a collateral contract providing for security of an illegal contract was made.
This collateral contract is ‘tainted’ by the illegality of the illegal contract, and
can therefore not be enforced.

A collateral contract must have the effect of protecting an innocent party to

whom a promise or misrepresentation has been made.

Claims based on an illegal contract

The general rule is any claim based upon an illegal contract is invalid, unless
the claim is related to an unrelated part or transaction of the contract which
the illegality does not affect. In Euro-Diam Ltd v Bathurst [1990] 1 QB 1, a
contract for the exportation of diamonds was illegal due to the falsely
invoiced tax evasion.

Recovery under illegal contracts

The final assessment to make when considering an illegal contract is

whether or not any money or property may be recovered subject to the
contract.

Both parties are guilty

When both parties are guilty in relation to the illegal contract, the general
rule from Holman v Johnson (1775) 1 Cowp 341 is that there can be no
recovery of any kind of money or property.
This rule has been challenged as being contrary to Article one of the Human
Rights Act – ‘no one shall be deprived of his possessions except in the public
interest’. In the case of Shanshal v Al-Kishtaini [2001] EWCA Civ 264 this
argument was dismissed, as it was held to be in the public interest to
prevent the recovery of property from illegal contracts.

One party unfairly induced into the illegal contract

If both parties are guilty of entering an illegal contract, but one party has
been forced into the contract as a result of duress or undue influence, the
contract will not be enforced, but the victim may successfully recover money
or property they have passed subject to the contract, as per Hughes v
Liverpool Victoria Legal Friendly Society [1916] 2 KB 482.

One party withdraws from the contract

If one party withdraws prior to the illegal part of the contract coming into
effect, the doctrine of locus poenitentiae comes into effect. The result of this
is that the party who withdrew may recover any money or property subject
to the contract. It should be noted that the withdrawal does not need to be
with genuine regret or sorry, the fact one party has withdrew will suffice
– Tribe v Tribe [1996] Ch 107. This has been justified as providing a strong
incentive for the claimant to withdraw from an illegal contract.

There has been some debate as to when the withdrawal from the contract
must occur. The two conflicting cases on this matter are Taylor v
Bowers(1876) 1 QBD 291 and Kearley v Thomson(1890) 24 QBD 742.
In Taylor it was suggested that withdrawal is allowed at any time before the
completion of the contract, whereas in Karley it was suggested once the
illegal part or purpose of the contract has started, withdrawal cannot occur.
Obiter statements in Collier v Collier [2002] EWCA Civ 1095 confirm the
approach in Kearley to be correct and therefore although Taylor is worth
mentioning, you should apply the law in Kearley.

The withdrawal from the contract needs to be voluntary, as shown in Bigos v

Boustead [1951] 1 All ER 92.

Illegality Lecture – Hands on Example

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The following section will test your knowledge of illegality in the context of
contract law – in what ways a contract can be illegal, how this is assessed
and the exceptions, and the effect of illegality. After studying the detailed
version of illegality you should be able to identify the issues in these
questions and apply the law correctly. The answers for the questions can be
found at the very bottom of this page.
A question involving illegality can usually be identified by there being a
mention of a statutory prohibition on a type of contract, a contract which
places restraints on someone’s freedom to trade, or one of the discussed
contracts contrary to public policy arising. The below example should allow
you to get a general idea of how questions involving illegality of a contract
may appear.

When addressing an issue involving the illegality of a contract, this would be

the appropriate method:

 Is the contract expressly illegal through a statutory provision?

 Is the contract impliedly illegal through a statutory provision?
 Has the contract been performed in an illegal manner?
 Is the contract subject to illegality due to any public policy reasons, such as
preventing the administration of justice?
 Does the contract set a restraint on trade?
 Once you have identified which type of illegality applies to the contract, how
will the illegality affect the contract?

This step-by-step approach will cover all of the potential illegalities and
ensure you do not miss one. You will need to have knowledge of the relevant
legal principles and relevant cases once you manage to identify the type of
illegality.

Scenario

Gareth owns a motorbike garage and deals in buying and selling race
motorbikes. He also has a number of lucrative sponsorship contracts with
famous racers. He has been accused of making a few illegal contracts and
would like some advice on these.

1. Gareth has two types of licence to sell motorbikes; one to sell generic bikes
and the other to sell dangerous, race specification superbikes. Gareth’s
licence to sell the regular motorbikes recently ran out. He had forgotten to
renew it but was planning on doing so in a few weeks. He sold a motorbike to
Ben, who agreed to pay six months later. Now Ben has discovered that
Gareth sold the motorbike without a licence he is refusing to pay Gareth.

Is this contract illegal, and if so, what happens as a result?

2. A member of the royal family approached Gareth wanting to buy a particular

motorbike which Gareth was planning on selling to somebody else. The
member of the royal family promised Gareth he would get him a knighthood
as part of the deal.

Is this contract illegal?

 3. One of Gareth’s former employees, Rob, has begun working at another
motorbike garage in America. In Rob’s termination of employment contract
with Gareth there was a term that stated ‘After the term of employment
ends, you shall not work for any competitors anywhere in the world for five
years’. Rob was not paid anything on termination of his employment.

Is this contract enforceable or is it illegal?

4. There is a statutory prohibition on selling ‘Tamaya’ motorbikes to people

under 25. Gareth has formed a contract with John, who is 22, which includes
the clause:

‘John will purchase 2 Tamaya motorbikes along with 1 Londa

motorbike’

If this contract is illegal, can Gareth enforce the promise to buy the Londa
motorbike?

1. This contract is subject to an implied prohibition. The case to apply here

is Smith v Mawhood (1845) 14 M & W 452. It is clear that a licence is required
to sell generic motorbikes only as a way to increase the national revenue,
and is not for any public policy reasons (whereas the license to sell
dangerous superbikes might be for public policy reasons).

2. This contract is illegal under public policy as it involves public corruption. The
case of Parkinson v College of Ambulance Ltd [1925] 2 KB 1 can be applied
due to the similar facts. Therefore this contract is illegal and invalid.

Therefore, as the sole purpose of a statute is to increase the national

revenue, the contract itself is not illegal, meaning Gareth can enforce the
contract and force Ben to pay him the price for the bike.

3. This contract will amount to a contract which imposes a restraint on trade.

Whether or not the contract is valid is dependent on the reasonableness of
the terms. The leading case to apply is Herbert Morris Ltd v Saxelby [1916]
AC 688, which states generally that employment contracts restricting former
employees from being employed by competitors are not valid.

In order to make a complete decision, the duration and the geographical

extent of the limitations must be assessed. In the case of Mason v Provident
Clothing & Supply Co Ltd [1913] AC 724, a term preventing employment
within 25 miles of London when the employment was in Islington was held to
be disproportionate and therefore illegal. Therefore, it is clear that a clause
preventing employment in the rest of the world would also be illegal. The
duration of five years is also extremely excessive.

4. The principle issue here is the effect of illegality, and whether the illegal part
of the contract is severable from the legal part of the contract. The test
 from Sadler v Imperial Life Assurance Co of Canada Ltd (1988) IRLR 388 must
be applied.

The first step is the ‘blue pencil’ test, where it is considered whether the
illegal provision can be removed without modifying the words of the
remaining terms. If the illegal provision is removed, the contract will read
‘John will purchase along with 1 Londa motorbike’. It is clear that once the
illegal provision has been removed, the remainder of the clause does not
make grammatical or verbal sense, and therefore the test fails at the ‘blue
pencil’ stage.

If the clause had passed the blue pencil test, it would be considered whether
the remaining terms were still supported by consideration, and whether the
contract was still of the same character.

In conclusion, Gareth cannot enforce any part of this contract due to the
failure of the ‘blue pencil’ test.