LAW OF CONTRACT- VITIATING FACTORS

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 INTRODUCTION TO VITIATING FACTORS

A contract can be defined as ‘a promise or set of promises which the law will enforce'
(Pollock Principles of Contract (13th Edn) 1).The agreement will create rights and
obligations that may be enforced in the courts. However there are situations where the
parties have reached agreement but the question arises whether the existence or non-
existence of some fact, or the occurrence or non-occurrence of some event, destroys the
basis upon which that agreement was reached so that the agreement is discharged or in
some other way vitiated. There are five vitiating factors, misrepresentation, mistake,
duress, undue influence, and illegality.

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 TOPIC 1
MISTAKE

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MISTAKE

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 Mistakes that do not affect the validity of the contract

The following types of mistake will not affect the validity of a

contract:
(1) A mistake of law. There is a general presumption that
everyone knows the law. The rule ‘ignorantia juris hand excusat’
(ignorance of law excuses no one) rules out of all mistakes of law
except foreign law (law of other countries).
(2) An error of judgment about the value or quality of the subject
matter of the contract, unless a misrepresentation was made.
In Leaf v. International Gallaries [1950] 1 All ER 693: Mr. Leaf bought a
painting of ‘salisbury cathedral’ from International galleries for 85
pounds. The Gallery attributed the painting to John Constable. When
Leaf tried to sell the painting five years later, he was informed that it
was not by constable.
Both the buyer and seller had made a mistake about the quality and
value of the painting but this did not affect the validity of the
contract.
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 MISTAKES THAT DO NOT AFFECT THE VALIDITY OF THE CONTRACT

 (3) A mistake about the meaning of a trade

term.
• See Harrisson & Jones Ltd v. Bunten &
Lancaster Ltd [1953]:

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 OPERATIVE MISTAKES

Notwithstanding the above stated types of mistakes which cannot

invalidate a contract, there are some kind of mistakes which affects
the validity of the contract.
Such mistakes are called operative mistakes, and they render the
contract void.
The following are the various types of operative mistakes:
(a) Mistaken Signing of a written Document
(b) Mistake as to the Identity of a Party
(c) Mistake as to the Subject matter of the Contract

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 MISTAKEN SIGNING OF A WRITTEN DOCUMENT

In Saunders v. Anglia Building Society [1971] AC 1004: Mrs Gallie, a 78

year old widow signed a document which a Mr. Lee had told her was a
deed of gift of her house to her nephew. She did not read through the
document since at the time of signing her glasses were broken. The
document which she signed was in fact an assignment of her
leasehold interest in the house to Mr. Lee. The Anglia Building Society
advanced 2,000 pounds to Lee on the strength of the deed. Mrs Galie
brought an action against Lee and the building society claiming that
the deed was void. She pleaded non est factum.
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 MISTAKEN SIGNING OF A WRITTEN DOCUMENT

• The House of Lords held that the plea of non est factum must fail. Although her signature had
been induced by fraud, the document she signed was not fundamentally different from that
which she thought she signed. Moreover, persons wishing to plead non est factum must show
that they exercised reasonable care in signing. Mrs. Gallie had not taken the trouble to read
the document
Also in Lloyds Bank PLC v. Waterhouse (1990) Lloyds Bank obtained a guarantee from a
father as security for a loan to his son. The father was illiterate, which the bank did not
know, but he did ask what was the extent of guarantee, and concluded that it covered
the mortgage on his son’s farm only. In fact it was worded to guarantee all the son’s
indebtedness to the bank. The son defaulted and the bank sought to recover the full
debts, less the amount realized by the sale of the farm.

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 MISTAKEN SIGNING OF A WRITTEN DOCUMENT

It was held that the father had not been careless, and had been led
into signing something more than what he believed.

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 MISTAKE AS TO THE IDENTITY OF A PARTY

Mistake as to the identity of one of the parties is usually unilateral, where only one of the
parties is mistaken about the identity of the other party to the contract. When this
happens the contract will be void if the mistaken party can show that the question of
identity was material to the entering into the contract, and that the other part knew or
ought to have known of the mistake.
In Cundy v. Lindsay (1878) 3 App cas 459: Lindsay & Co, Belfast linen manufacturers,
received an order for a large quantity of handkerchiefs from a rogue called Blenkarn. The
rogue had signed his name in such a way that it looked like ‘Blenkiron & Co’, a well-known,
respectable firm. Lindsay & Co despatched the goods on credit to Blenkarn who resold 250
dozen to Cundy. Blenkarn did not pay for the goods and was later convicted of obtaining
goods by false pretences. Lindsay & Co sued Cundy for conversion

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 MISTAKE AS TO THE IDENTITY OF A PARTY

The House of Lords held that the contract between Lindsay & Co and Blenkarn was void for
mistake. Lindsay & Co intended to deal with Blenkiron & Co, not the rogue, Blenkarn.
Cundy was liable for conversion.

Similarly, in Ingram v. Little (1960) 3 All ER 332: The plaintiffs, who were two sisters and a
third person, advertised for sale the car of which they were joint owners. A man called on
them, and agreed to buy the car for 717 pounds. In order to persuade the plaintiffs to accept
a cheque in payment the man said that he was H, and gave an address in Surrey. Having
checked the name and address in the telephone directory, the plaintiffs accepted the cheque
and parted with the car. The man, who was not H, sold the car to the defendant and then
disappeared, his cheque being dishonoured. The plaintiffs sought to recover the car or its
value from the defendant who had bought it in good faith.

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 MISTAKE AS TO THE IDENTITY OF A PARTY

It was held that the plaintiff’s offer to sell on payment by cheque was made only to H, and
could not be accepted by the man representing himself to be H; no contract had been
formed, therefore, and plaintiffs were entitled to recover the car or damages from the
defendant.
Where the parties deal face to face, mistake about identity of the other party will be more
difficult to establish. In face to face dealings the contract will be valid until one party avoids
the contract for a fraudulent misrepresentation.
In Phillips v. Brooks Ltd (1919) 2 KB 243: A man entered the claimant’s shop to buy some
jewellery. He selected various items of jewellery to the value of 3,000 pounds and offered to pay
by cheque. While writing the cheque the man said, “you see who I am, I am Sir George
Bullough”. He gave an address in St James’ square. The claimant knew of a Sir George Bullough
and after checking in a directory that Sir George had an address in St James’ square, he asked if
the man would like to take the jewellery with him. The man replied that the jeweller had better
let the cheque clear first but he would like to take the ring as it was his wife’s birthday the
following day. The cheque was dishonoured. The man, who was in fact a rogue called North,
pledged the ring with the defendant pawnbrokers. The claimant sued the defendants for 13 the
It was held that the contract between the claimant and the rogue North
was not void for mistake but voidable for fraud. At the time the contract
was made the claimant intended to deal with the person physically in his
shop and his identity was immaterial. As the claimant had not rescinded
the contract by the time North pledged the ring, the defendants obtained
good title (rights of ownership).

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 MISTAKE AS TO THE IDENTITY OF A PARTY

Also in Lewis v. Avery [1971] 3 ALL ER 907: Lewis sold his car to a man who claimed he was
Richard Green, the star of a popular television series, ‘Robin Hood’. The man paid by cheque,
producing a pass to Pinewood Studios as proof of his identity. He resold the car to Avery. The
cheque had been taken from a stolen cheque book and was later dishonoured. Lewis sued
Avery in the tort of conversion.
The court held that Lewis intended to deal with the man actually in front of him,
despite his fraudulent claim to be Richard Greene. The contract between Lewis and
the rogue was not void for mistake, but rather voidable for a fraudulent
misrepresentation. Since Lewis had not avoided the contract by the time the rogue
sold the car to Avery, Avery acquired good rights of ownership. He was not liable in
conversion.

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 MISTAKE AS TO THE SUBJECT MATTER OF THE CONTRACT

The parties to a contract may be mistaken as to the identity of the subject matter.
If a seller makes an offer in respect of one thing and the buyer accepts, but is thinking of something
else, the parties are clearly talking at cross-purposes and there is no contract.
In Raffles v. Wichelhaus (1864) 2 H & C 906: The defendant agreed to buy cotton which was described as
‘arriving on the peerless from Bombay’. There were two ships called the peerless sailing from Bombay,
one in October and the other in December.
It was held that there was no binding contract between the parties as the defendant meant one ship
and the claimant the other.

Where unknown to both parties the subject matter of the contract has never existed, or has ceased to
exist at the time when the contract is made, the contract will be void. This situation is known as res
extincta.
In Couturier v. Hastie (1852) 8 Exch 40: A contract was made for the sale of Indian corn which the parties
believed to be on board a ship bound for the United Kingdom. Unknown to the parties, the corn had
fermented during the voyage and had been landed at the nearest port and sold before reaching its
destination.

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 MISTAKE AS TO THE SUBJECT MATTER OF THE CONTRACT

The House of Lords held that this was a case of res extincta. The contract
contemplated that there was an existing something to be sold and bought and capable
of transfer but as the corn had already been sold at the time of the sale by the
defendants this was not the case and the defendants were not liable. The contract was
void, and consequently no bad debt.

Also in Galloway v. Galloway (1914) 30 TLR 531: The defendant, assuming his wife to be
dead, married the claimant. The defendant and the claimant later separated and
entered into a deed of separation under which the defendant promised to pay a weekly
allowance to the claimant. The defendant subsequently discovered that his wife was still
alive and fell into arrears.
When the claimant sued to recover the arrears it was held that she could not do so
because the separation agreement was void on the ground that it was entered into
under the common mistake that the parties were, in fact, married.

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TYPES OF MISTAKE

The various types of mistakes are classified as

follows:

(1) Unilateral Mistake

(2) Mutual / Bilateral Mistake
(3) Common Mistake

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 UNILATERAL MISTAKE

Unilateral mistake occurs when in a contract, only one of the parties to the contract is
mistaken about a matter of fact relating to the contract, and the other party knows of his
mistake.
The effect of a unilateral mistake upon a contract depends on the surrounding
circumstances.
Where for instance, one of the parties knows or should have known that the other party is
mistaken in his belief as to a fact that is material to the contract and enters into contract
because of that mistaken belief, the contract is avoided.
In Hartog v. Colin & Shields [1923] 3 ALL ER 566: The defendants contracted to sell 30,000
Argentine hare skins to the plaintiff, but by mistake they were offered at a price per pound
instead of per piece. In the pre-sale negotiations reference had always been made to the
price per piece and never to the price per pound, and there was expert evidence that
Argentine hare skins were generally sold at prices per piece.
It was held that since the plaintiff could not reasonably have supposed that the offer
contained the offeror’s real intention, there was no binding contract.

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 MUTUAL MISTAKE

A mutual mistake occurs where both parties are under a certain mistake or should have
misunderstood each other and are completely at cross-purposes. Where there is a mutual
mistake the contract will be void.
In Raffles v. Wichelhaus (1864) 33 LJ (NS) 160: The defendants agreed to buy ‘125 bales of
surat cotton to arrive ex peerless from Bombay’. It appeared that the ship mentioned in the
agreement was intended by the defendants to be the peerless, which sailed from Bombay in
October, whereas the plaintiff ordered 125 bales of surat cotton from another ship called the
peerless which sailed from Bombay in December.
It was held that there was no binding contract between the parties as the defendant meant
one ship and the plaintiff another. There was no consensus ad idem between the parties.

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 COMMON MISTAKE
Common mistake occurs where both parties are mistaken about the same thing.
An example of a common mistake was illustrated by the case of Couturier v. Hastie (1952) 8
Exch 40: A contract was made for the sale of some wheat which at the time was being carried
on aboard a ship. Unknown to both parties, when they made the agreement the wheat had
already been sold by the ship’s captain because during the voyage it had started to overheat.
The court held the contract to be void, since it was a contract of impossibility.
There are, however, some exceptions to this type of claim.
At common law relief from a contract affected by a common mistake will not available where:
(i) The mistake occurs after the contract is made. See Amalgamated Investments & Property
Co. Ltd v. John Walker & Sons Limited [1977] 1 WLR 164
(ii) The mistake as to quality. See Bell v. Lever Brothers Ltd [1923] AC 161

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 MISTAKE IN EQUITY

In certain circumstances equity will relieve a party from the effects of his mistake where the
common law would hold him to the contract.
There are three equitable remedies that a court may grant, namely:
(a) Rescission,
(b) Rectification, and
(c) Specific Performance.
(A) RECISCISSION
The court may set aside an agreement, provided the parties accept the conditions imposed
by the court for a fairer solution to the problem.
In Grist v. Bailey [1966] 2 ALL ER 575: Bailey agreed to sell a house to Grist for 850 pounds.
The price was based on both parties’ belief that the house had a sitting tenant. The value of
the house with vacant possession would have been 2,250 pounds. Unknown to the parties,
the tenants had died and their son did not stay on in the property.
The court held that the contract was not void at common law but he was prepared to set
the contract aside provided Bailey offered to sell the property to Grist for the proper
market price of 2,250 pounds. 22
 MISTAKE IN EQUITY

If a document does not accurately record the true contract between the parties the writing ma
be subject to rectification in equity. Similarly, where parties to a contract have been in error, the
equitable remedy of rectification may enable the court to rectify a written document executed
by the parties so that it accords their true agreement.
For rectification to operate the following must be present:
(i) The terms were clearly agreed between the parties
(ii) The agreement continued unchanged up to the time it was reduced into writing; and
(iii) The writing fails to express the agreement of the parties.
In Craddock Bros v. Hutt (1923): An oral agreement for the sale of a house expressly excluded an
adjoining yard and yet the later written agreement and conveyance included the yard.
The court ordered a rectification of the documents in order to express the parties true origina
intention.

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 RECTIFICATION (CONTD)

However, the equitable remedy of rectification will not be available where

one party to the contract has made a miscalculation and the agreement
entered into does not express his intention.
In Riverlate Properties v. Paul [1975] Ch. 133, [1974] 3 W.L.R. 564: The
plaintiff granted a long lease of a maisonette to the defendant and had
intended that the lessee should pay half the cost of exterior and structural
repairs that were required. The lease however, put the entire burden on the
plaintiff. The defendant believed that she was not responsible for those
repairs and the plaintiff claimed for rectification or rescission of the lease.
It was held that a unilateral mistake of this kind could have no impact on the
terms of the lease agreed by the parties. There was no justification for
equity to disrupt the transaction actually entered into and the mistake was
inoperative. The error of failing to include a suitable term in the lease was
the plaintiffs.

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 SPECIFIC PERFORMANCE

A party to a contract may ask the court for an order for specific performance to compel the
performance of the contract. Specific performance is an equitable remedy and as such
discretionary. Thus where damages would be an adequate remedy, the court will not order
specific performance.
If there has been a mistake in a contract which is sufficiently serious, the court can refuse to
order specific performance.
In Grist v. Bailey [1967] Ch. 532: a common mistake case, Goff J. held the contract was not void
at common law but was made under a ‘mutual fundamental misapprehension’ for which the
Court refused to grant specific performance.
In the case of unilateral mistake, if one party contributes to the other’s mistake, albeit
innocently, he may be refused specific performance.
In Denny v. Hancock (1870) LR 6 Ch. App 1: The court refused to grant specific performance
where the purchaser’s mistake over the boundary of the property being sold at auction had
been caused by an innocent mistake on the vendor’s part.

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END OF Topic 1

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 Topic 2
MISREPRESENTATION

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 INTRODUCTION

Misrepresentation is one of the elements or factors that may vitiate or invalidate the
agreement between the parties.
The other facts are mistake, duress, undue influence, and illegality.
The consequence of a contract having been formed on the basis of a misrepresentation
is for the contract to be voidable at the request of the party who is the victim of the
misrepresentation.
It is not void because this denies that party the right to continue with the contract if
that is in their interest.

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 DEFINITION OF MISREPRESENTATION

Misrepresentation occurs when a false statement or representation of fact is made by

one party to the other party before or at a time of contract, which has the effect of
inducing the other to enter into a contract.
The statement may be expressed in any form.
It may be in writing, such as a company prospectus containing details of the company’s
trading activities, or it can be verbal or implied from the conduct.
There are a number of essential elements that must be satisfied in order to claim the
false statement as an actionable misrepresentation.
Misrepresentation can therefore be defined according to these essential elements:
a statement of material fact
made by one party to a contract to the other party to the contract
during the negotiations leading up to the formation of the contract
which was intended to operate and did operate as an inducement to the other party
to enter the contract
but which was not intended to be a binding obligation under the contract
and which was untrue or falsely or at least incorrectly stated.
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 (A) STATEMENT ALLEGED TO BE MISREPRESENTATION MUST BE A STATEMENT OF
MATERIAL FACT
Misrepresentation must be a statement of fact. Therefore a statement expressed as an opinion cannot
become or amount to misrepresentation.
In Bisset v. Wilkinson [1927] AC 177: During the course of negotiation of the sale of a farm the owner of the farm
told a prospective purchaser that he believed the farm would support 2,000 sheep.
It was held that on the evidence the statement was merely a statement of opinion which the vendor or seller
honestly but mistakenly held, and so it could neither be relied upon nor actionable as a misrepresentation.
The evidence was that the owner was not in any better position than the purchaser to know the farm’s true
capacity since the land had not been used as a sheep farm before.
The purchaser was aware that the vendor could do no more than state his belief. There was therefore no
misrepresentation.

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 THE MISREPRESENTATION MUST BE A STATEMENT OF A MATERIAL FACT

However, in Esso Petroleum Co. Ltd v. Mardon [1976] 2 All ER 5, Mardon took a tenancy of a
filling station owned by Esso, having been given a forecast by an experienced Esso sales
representative of the quantity of the petrol the station could be expected to sell annually. The
quantity was never reached during the four years Mardon remained as tenant and the business
ran at a loss. Mardon sued for misrepresentation.

It was held that the company had made a misrepresentation, since the sales representative’s
knowledge of such matters made the forecast a statement of fact rather than opinion, and
the sales representative was acting in the capacity of an agent of the company. Mardon’s
claim for damages for misrepresentation was successful.
The above case demonstrates that it is not possible to avoid liability for a statement which is
expressed as, or is subsequently claimed to be an opinion, when the knowledge and
experience of the representor in the matter is far greater than that of the representee.

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 THE STATEMENT MUST BE A MATERIAL FACT (CONTD)

A statement of intention will not normally amount to a misrepresentation because a

representation is a statement about existing facts or past events.
However, if a person misrepresents what he intends to do in the future, he may be liable for
misrepresentation.
In Edgington v. Fitzmaurice (1885) 29 ChD 459: the directors of a company invited members of
the public to lend money to the company. The directors stated that the money would be used to
improve the company’s buildings and extend the business. The director’s real intention was to
pay off the company’s existing debts.
It was held that the directors’ statement was a fraudulent misrepresentation.
Silence will generally not amount to a misrepresentation since no statement has been made.
However, silence would in the following circumstances amount to misrepresentation:
(i) When a statement made in the course of negotiations subsequently becomes false and is
not corrected.
(ii) When silence distorts a literally true statements.

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In R v. Kylsant (1831) a company when inviting the public to subscribe for its shares, stated
that it had paid regular dividend throughout the years of the depression. This clearly implied
that the company had made a profit during those years. This was not the case since the
dividends had been paid out of the accumulated profits of the pre-depression years.
The company’s silence as to the source of the dividends was held to be misrepresentation
since it distorted the true statement that the dividends had been paid.

(iii) Where the contract is of utmost good faith (uberrimae fidei)

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 The Statement alleged to be a Misrepresentation must have been made by one party to the contract to
the other party
There will be no misrepresentation where the statement is made by a third party, unless that third
party is the agent of the party against whom the misrepresentation is alleged.
In Peyman v. Lanjani [1985] 2 WLR 154: The defendant took the lease of premises under an agreement
requiring the landlord’s permission. The defendant did not attend the meeting at which the agreement
was struck but sent an agent who he thought would create a better impression with the landlord. He
later decided to sell the lease on to the claimant and again this would require the landlord’s permission.
Once more he sent his agent. The claimant discovered the deception after he had paid over 10,000
pounds under the agreement with the defendant. He then successfully applied to rescind the contract.
Using the agent was a misrepresentation of the legitimacy of the lease which had never been agreed
between the defendant and the landlord.
In order to operate on the mind of the representee and induce him to enter the contract, the
representation must have been made either before or at the time that the contract was formed.
If the statement was made after the agreement was reached then it cannot be actionable as a
misrepresentation because it had no effect on the formation of the contract.

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 The Statement alleged to be a misrepresentation must have been made before or at the time of the
contract

In Roscorla v. Thomas (1842) 3 QBD 234: After a deal had been struck for the sale and
purchase of a horse, the seller then represented to the buyer that the horse was ‘sound and
free from vice’.
In fact, the horse was unruly and also had a quite vicious character.
However, the purchaser could not claim
In Roscorla v. Thomas (1842) 3 QBD 234: After a deal had been struck for the sale and
purchase of a horse, the seller then represented to the buyer that the horse was ‘sound and
free from vice’.
In fact, the horse was unruly and also had a quite vicious character.
However, the purchaser could not claim since the promise was made after the agreement.
since the promise was made after the agreement.
An actionable misrepresentation is one that destroys or vitiates the consent of the party
who relied on it in entering the contract.
Therefore it must have been of material significance to the making of the contract in order
to have any effect in law.
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 (d) The Statement alleged to be a misrepresentation must be an inducement to enter
into the contract
An actionable misrepresentation is one that destroys or vitiates the consent of the party who
relied on it in entering the contract.
Therefore it must have been of material significance to the making of the contract in order to
have any effect in law.
In investigating the company prior to the take over the claimant relied on the company’s
accounts which in fact had been negligently prepared. There could be no claim of
misrepresentation since the purpose of taking over the company was to secure the services of
the directors.
The accounts therefore could not have acted as an inducement. They were not material to the
real purpose of the contract.

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 (d) The Statement alleged to be a misrepresentation must be an inducement to enter into
the contract

However, in contrast, it will not matter the representation would not generally
considered as an inducement, provided that it did in fact induce the claimant to
enter into the contract. In that case it will be actionable.
In Museprime Properties Ltd v. Adhill Properties Ltd [1990] EGLR 196: Three
properties were sold by auction. In advance of the auction there was a
misrepresentation concerning the existence of an outstanding rent review which
could result in increased rents and therefore increased revenue, making it a more
attractive proposition. The defendants unsuccessfully challenged the claimants’
claim for rescission, arguing that the statement could realistically induce nobody to
enter the contract.
The Court of Appeal rejected their defence and applied a subjective test. It held
that it was not important whether or not a reasonable bidder would have been
induced by the representation; the question was merely whether or not the
claimant in the case had been induced by the representation to enter the
contract.
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 (e) The statement alleged to be a misrepresentation must not have
been intended to form part of the contract
If the statement were intended to be contractually binding then, if anything, it would be
a warranty of the contract rather than a misrepresentation. The appropriate action in this
case would be for breach of contract, not for misrepresentation.
In Couchman v. Hill [1947] KB 554: The claimant bought a heifer (a young female cow) at an
auction. The heifer was described in the catalogue as being ‘unserved’ (in other words, that
it had not mated with a bull). The printed conditions also stated that ‘The lots are sold with
all faults, imperfections, and errors of descriptions, genuineness, or authenticity of, or any
fault or defect in any lot, and giving no warranty whatever’. The heifer was in fact pregnant
at the time of the auction and died two months later through a miscarriage.
The statement that the heifer was ‘unserved’ could not be a misrepresentation because
of the significance attached to it. It was a term incorporated into the contract despite the
attempted exemptions applied to it.
(F) THE REPRESENTATION MUST HAVE BEEN FALSELY MADE
The overriding requirement for the statement to be actionable is that it must have been
falsely made, whether or not this was innocent or deliberate.
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 Topic 3
TYPES OF MISREPRESENTATION

02/28/2024 Cavendish 39
 TYPES OF MISREPRESENTATION

There are three types of misrepresentation namely:

(1) Innocent Misrepresentation,
(2) Fraudulent Misrepresentation, and
(3) Negligent Misrepresentation.
In each case the contract is not void but voidable.

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 INNOCENT MISREPRESENTATION

An innocent misrepresentation is a false statement made by one person who had

reasonable grounds to believe that it was true, not only when it was made, but also when
the contract was entered into.
The basic remedy is rescission of the contract in equity.
See Redgrave v. Hurd (1881) 20 Ch D 1

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 FRAUDULENT MISREPRESENTATION

A fraudulent misrepresentation is one made dishonestly, knowing it to be false.

Fraudulent misrepresentation was defined in the case of Derry v. Peek (1889) 14 App cas 337, by
Lord Herschell as a false statement “made knowingly or without belief in its truth or recklessly,
careless whether it be true or false”.
Thus according to Lord Herschell the requirements of the action for fraud are that a false
representation has been made (i) knowingly; (ii) without belief in its truth, or (iii) recklessly or
carelessly as to whether it is true or false.
In Derry v. Peek, the Playmouth Devonport and District Tramways Company was authorised to make certain
tramways by special Act of Parliament which provided that the carriages might be moved by animal power
and, with the consent of the Board of Trade, by steam or any mechanical power for fixed periods and subject
to the regulations of the Board. The company issued a prospectus stating that ‘one great feature of this
undertaking, to which considerable importance should be attached, is that by special Act of Parliament
obtained, the company has the right to use steam or mechanical motive power, instead of horses’. The
plaintiff bought shares on the faith of this statement but the Board of Trade afterwards refused their consent
to the use of steam power and the company was wound up. At the time of issuing the prospectus the
company honestly believed that consent would be granted as a matter of course.
It was held that the plaintiff’s action in deceit must fail, as the statement contained in the prospectus was
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 FRAUDULENT MISREPRESENTATION

In a fraudulent misrepresentation the injured party may rescind the contract and also sue for damages for
the tort of deceit.
In Smith New Court Securities Ltd v. Scrimgeour Rickers [1996] 4 All ER 769: The plaintiff, Smith New Court,
was induced by a fraudulent misrepresentation made by the defendants’ employee to buy shares in Ferranti
at 82.25 pound per share. At the time of purchase, the shares were trading at about 78 pounds per share.
Unknown to either party, the shares were grossly overvalued because Ferranti was the victim of a fraud
totally unconnected with the current case. When the fraud became known the shares slumped. The question
for the court was whether the plaintiff could recover the difference between the price it had paid ( the
contract price) and the market price (4.25 pound per share) or the difference between the contract price and
the value of the shares had it known the fraud (44 pounds per share).
The House of Lords held that the plaintiff was entitled to recover for all the damage resulting from the
transaction. The loss suffered by the plaintiff was 10,764,005 pounds, which represented the difference
between the contract price and the value of the shares with knowledge of the fraud.

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 NEGLIGENT MISREPRESENTATION

A negligent misrepresentation is a false statement made honestly, but without reasonable

grounds for belief in its truth.
Damages may be awarded in tort for a negligent misstatement under the principle laid down in
Hedley Berne & Co Ltd v. Heller and Partners Ltd (1923) AC 465: (state the facts)
In Esso Petroleum Co Ltd v. Marden [1976] 2 All ER 5: Marden entered into a three year tenancy
agreement with Esso in respect of a newly developed petrol filling station. During the
negotiations an experienced dealer representative employed by Esso told Marden that the
station would have an annual throughout of 200,000 gallons by the third year. Despite Marden’s
best efforts, the throughout only reached 86,000 by the third year. Marden lost a consideration
sum of money and was unable to pay for petrol supplied by Esso. Marden counterclaimed for
rescission of the tenancy agreement and damages for negligence.
The Court of Appeal applied the principle established in Hedley Byrne & Co Ltd v. Heller and
Partners Ltd.
When Esso’s representative forecast the station’s potential as part of the pre-contractual
negotiations, a duty of care arose. Esso was in breach of the duty of care because of the error
made by its representative. Esso was liable in damages for negligence.
44
 NON-DISCLOSURE

Though the general rule is that silence is not a misrepresentation, there is a duty in certain
contracts, discussed hereunder, to disclose relevant information.
(i) Contracts of Uberrimae Fidei
Contracts of uberrimae fidei are those in which only one party possesses full knowledge of all
the material facts, and the other being unable to obtain them from any other source. The law
therefore requires that uberrimae fidei (utmost good faith) from the first party.
The examples of uberrimae fides contracts are contracts of insurance, contracts to take shares
from companies and family arrangements. A duty to disclose also arises in fiduciary relationships
such as principal and agent.
In Locker and Woolf Ltd v. Western Australian Insurance Co. Ltd (1936) 1 KB 408: When
proposing for fire insurance in respect of their premises the plaintiffs failed to disclose that an
insurance on their motorcars had been declined by another company on the grounds of
misrepresentation and non-disclosure.
It was held that the non-disclosure of this previous refusal was a material fact in the proposal
for fire insurance which entitled the respondents to avoid the policy.
45
 NON DISCLOSURE
In Locker and Woolf Ltd v. Western Australian Insurance Co. Ltd (1936) 1 KB 408: When proposing for fire insurance in
respect of their premises the plaintiffs failed to disclose that an insurance on their motorcars had been declined by another
company on the grounds of misrepresentation and non-disclosure.
It was held that the non-disclosure of this previous refusal was a material fact in the proposal for fire insurance which
entitled the respondents to avoid the policy.
(ii) Contracts to take shares from Companies
Under section 124 of the Companies Act, Chapter 388 of the Laws of Zambia, an omission of a fact from a company’s
prospectus may constitute a misrepresentation.
Section of 124 of the said Act states that a prospectus must not contain any untrue or misleading statement.
(iii) Family Arrangements
This is explained by the case of Gordon v. Gordon (1821) 3 Swan 400: Where an agreement between two brothers, the elder
of whom was believed to be illegitimate, for the division of the family estates. It turned out that the younger brother, who
had obtained an advantage because of his belief, had known all along that his brother was legitimate.
It was held that even after a lapse of 19 years, the agreement should be rescinded, because family arrangements of this
sort are uberrimae fidei.

46
 NON DISCLOSURE
(iv) Fiduciary Relationships
This is a relationship of trust which normally exists between solicitor and client, doctor and
patient, principal and agent, religious superior and inferior, trustee and beneficiary, parent
and child, and guardian and ward.
If any party to a contract uses his influence, obtained through confidence necessarily reposed
in him or her by the other, to obtain an advantage at the expense of the confiding party,
rescission will be allowed for non-disclosure, or misrepresentation.
In Tate v. Williamson (1886) 2 Ch App 55: Tate was a spend thrift Oxford undergraduate. He
relied upon Williamson, his cousin, for financial advice as Tate was estranged from his father
because of his extravagance. Williamson, who had been recommended by Tate’s great-uncle,
advised Tate to sell his estate for 7500 pounds to Williamson, when its true value was 20,000
pounds, and he duly sold it as advised.
It was held that Williamson’s non-disclosure was a misrepresentation and so the sale was set
aside.

47
 REMEDIES FOR MISREPRESENTATION
• There are two remedies available for misrepresentation, namely, rescission, and damages.

(a) Rescission or Setting aside Contract

• Rescission or setting aside of a contract is the remedy that is available for all types of
misrepresentation namely innocent, fraudulent, and negligent misrepresentation.
• The effect of rescission is to ‘wipe out’ the existence of the contract entirely and return the
parties to the positions they were in before the contract was made.
• Rescission has been developed in equity decisions and is limited by general principles common to
all the equitable doctrines and remedies namely rescission, rectification, injunction and decree
or order of specific performance.
Rescission, being a discretionary remedy, the court may in certain circumstances refuse to grant this
remedy, for instance where the plaintiff has been guilty of inequitable conduct, such as dishonest.
• The remedy of rescission will lost or will not be available to a party in the following
circumstances:

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 RECISCISSION: EXCEPTIONS

(i) Lapse of Time

• Where the plaintiff becomes aware of the misrepresentation, he will be
barred to rescind the contract if he unreasonably delays in seeking rescission.
• In Leaf v. International Galleries (1950) 1 All ER 693: The plaintiff bought an oil
painting of salisbury cathedral for 85 pounds and accepted it as a genuine
constable on the representations of the sellers, the defendants. Five years
after the sale the plaintiff discovered that the pianting was not by constable
and he claimed rescission on the grounds of innocent misrepresentation.
• It was held that this claim must fail as the action had not been commenced
within a reasonable time, and further the mistake in question was not one
which would entitled the plaintiff to avoid the contract.

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 RECISCISSION: EXCEPTIONS

(ii) Affirmation
• The representee or innocent party cannot rescind the contract after expressly
or impliedly affirming the contract with full knowledge of the true facts.
• In Long v. Lloyd (1958) 2 All ER 402: The defendant advertised for sale a motor
lorry which he described as being in ‘exceptional condition’ and told the
plaintiff, who purchased it, that it was capable of 40mph and did 11 miles to
the galon. Two days later certain defects appeared and the plaintiff accepted
the defendant’s offer to pay half the cost of a reconditioned dynamo. On the
following day the plaintiff’s brother set out to drive the lorry to Middlesbrough
but it broke down on the way and an expert found that it was not in a
roadworthy condition. The defendant’s representations concerning the vehicle
were untrue, although honestly made, and the plaintiff sought to rescind the
contract on the ground of the defendant’s innocent misrepresentation.
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• It was held that (i) the representations as to the condition of the lorry were
innocent; (ii) the journey to Rochester was not affirmation because the
plaintiff had to have an opportunity to test the vehicle in a working capacity;
and (iii) the acceptance of the offer to pay half of the cost of the dynamo,
and the subsequent journey to Middlesbrough, did amount to affirmation
and therefore rescission could not be granted.

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(iii) Restitution in Integrum is Impossible
• If restoration of the parties to the pre-contract state of affairs is impossible,
because for example the subject matter of the contract has ceased to exist or
has changed its identity, rescission cannot be granted.
• In Vigers v. Pike (1842) 3 CL & Fin 562: B had agreed in his lifetime to lease
mines in return for 165,000 pounds. The mines were operated and a part of the
payment made. Pike, B’s executor, sued the managing director of the company
operating the mine for the rest of the money. In defence it was claimed that a
number of misrepresentations had been made to induce the lease. It was held
that the lease could not be set aside since the mines had substantially been
worked and the parties could not be restored to their original positions.

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(iv) Intervention of Third Party Rights
• In equity the rule has always been to protect a person who has in good
faith and for value acquired rights in property.
• The effect of a misrepresentation of any kind is to make the contract
voidable at the option of the person or party misled, and if he has
transferred property under it to the misrepresentation, the title to it will
pass to the latter under the voidable contract, and from him to any third
party who acquires it in good faith and value.
• This was the case in Phillips v. Brooks (1919) and Lewis v. Averay (1971),
discussed above.

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(v) Damages in Liu of Rescission
• Under section 2(2) of the 1967 Misrepresentation Act, the Court may
declare the contract subsisting, if it would be equitable to do so, having
regard to the nature of misrepresentation, and the loss that would be
caused by it if the contract were upheld, as well as to the loss that
rescission would cause to the other party.
• Instead the court will award damages to the victims of the innocent or
negligent misrepresentation.

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 DAMAGES

• Damages is another remedy that is available for misrepresentation where

the misrepresentation is fraudulent or negligent.
• Where misrepresentation is fraudulent the damages may be recovered in
the tort of deceit.
• The purpose of an award of damages in deceit is to put the claimant to the
position he would have been in had the tort not been committed.
• The defendant is also liable for all the damage directly flowing from the
fraudulent inducement which was not rendered too remote by the
plaintiff’s own conduct, whether or not the defendant could have foreseen
such consequential loss.

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 DAMAGES

• In case of negligent misrepresentation, the misrepresentor

has committed a tort and damages can therefore be claimed.
Like in the fraudulent misrepresentation, the award of
damages in negligent misrepresentation.
• representation is to put the plaintiff in the position which he
would have been in had the tort not been committed. The
representor will be liable for all loses which are reasonably
foreseeable consequence of the misrepresentation.

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END OF TOPIC 3

57
 TOPIC 4
ILLEGALITY & PUBIC POLICY

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 INTRODUCTION

• The general principle of law is that the courts will not

enforce or uphold an agreement or a contract which is
illegal or contrary to public policy.
• The court will also not allow the recovery of benefits
conferred under such a contract.

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 TYPES OF ILLEGAL CONTRACTS

• The contracts which are considered illegal at common

law include the following:
 (a) Contracts to Commit Crimes or Civil Wrongs
 (b) Contracts Promoting Sexual Immorality
 (c) Contracts Promoting Corruption in Public Life
 (d) Contracts Prejudicial to the Administration of Justice
 (e) Contracts Prejudicial to the Interests of the State

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 CONTRACTS TO COMMIT CRIMES OR CIVIL WRONGS

Where the purpose of a contract between the parties is to commit a crime, or a tort, or a fraud against
another party, then that contract will be illegal and unenforceable.
Thus in Alexander v. Rayson [1936] 1 KB 169, the plaintiff, Alexander, and defendant, Rayson entered into an
agreement whereby the agreed rent was split into two parts, one part declared to be rent and the other
declared to be for services to the flat concerned. The object was to reduce the assessment for rates.
It was held that since the plaintiff intended to use the lease and service agreement for an illegal purpose,
the plaintiff could not enforce either the lease or the service agreement.

• Similarly, in Foster V Driscoll (1929) 1 KB 470, a contract made to smuggle whisky into the United States
during prohibition was held to be illegal and void.

61
 CONTRACTS PROMOTING SEXUAL IMMORALITY

A contract which seeks to promote or encourage sexual immorality will be held to be illegal as a principle
of common law.
In Pearce V. Brooks (1886) LR 1 EX 213, the plaintiff let a coach out on hire to a prostitute (Brooks), knowing
that it would be used by her to ply her trade.
It was held that the plaintiff could not recover the hire charge when the defendant refused to pay it.
Lord Pollock stated (at P218) as follows:

“I have always considered it as settled law that any person who contributes to the performance of an illegal
act by supplying a thing with the knowledge that it is going to be used for that purpose, cannot recover the
price of the thing so supplied… nor can any distinction be made between an illegal and an immoral
purpose; the rule which is applicable to the matter is ex turpi causa non oritur action (no action arises from
a base or wrongful cause), and whether it is an immoral or an illegal purpose in which the plaintiff has
participated, it comes equally within the terms of that maxim, and the effect is the same; no cause of action
can arise out of either the one or the other”.

62
 CONTRACTS PROMOTING SEXUAL IMMORALITY (CONTD)

Lord Pollock stated (at P218) as follows:

“I have always considered it as settled law that any person who contributes to the
performance of an illegal act by supplying a thing with the knowledge that it is going to be
used for that purpose, cannot recover the price of the thing so supplied… nor can any
distinction be made between an illegal and an immoral purpose; the rule which is applicable
to the matter is ex turpi causa non oritur action (no action arises from a base or wrongful
cause), and whether it is an immoral or an illegal purpose in which the plaintiff has
participated, it comes equally within the terms of that maxim, and the effect is the same; no
cause of action can arise out of either the one or the other”.

63
 CONTRACTS PROMOTING CORRUPTION IN PUBLIC LIFE

An agreement for the sale or purchase of public offices or honours is

unlawful as such practices encourage corruption.

In Parkinson V College of Ambulance Ltd and Harrison (1925) 2 KB 1,

Colonel Parkinson was told by Harrison, the secretary of the defendant
charity that the charity would arrange for him to be granted a
knighthood if he made a substantial donation. Harrison had told
Parkinson of the charity’s royal patronage. Parkinson paid ₤3,000 to the
college of Ambulance on the understanding that he would receive a
knighthood and he also promised further payment to the charity in the
future. When Parkinson did not receive a knighthood and realized that
he had been duped, he brought an action against the charity to recover
back the money that he had paid.

64
The court held that the contract was for the purchase of the title, it was contrary to public
policy and was an illegal contract.
Despite the fact that the plaintiff had been defrauded; he knew that he was entering into an
improper agreement and he could not recover back the money he had paid to the charity;
nor could he recover damages from the charity or its secretary.
ee stages of Memory

65
 CONTRACTS PREJUDICIAL TO THE ADMINISTRATION OF JUSTICE

• Contracts which are prejudicial to the administration of justice are

illegal. Therefore a contract to prevent a prosecution may be illegal
and a contract under which one party promises to give false
evidence in criminal proceedings is illegal.
• In R.V. Andrews (1973) QB 422, the defendant witnessed a road traffic
accident between a motor car and a moped, as a result of which
criminal proceedings against the car driver were contemplated. The
defendant invited the car driver to pay him to give false evidence at
the prospective prosecution, and the driver offered him a sum of
money but no agreement was made. The defendant was convicted
on a charge of inciting the motorist to pervert the course of justice.
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 CONTRACTS PREJUDICIAL TO THE INTERESTS OF THE STATE
• Contracts which are prejudicial to the interests of the state, such as trading
with an enemy during war time, are illegal.
• In Ragazzoni V. KC Sethia Ltd (1957) 3 ALL ER 286, an ordinance issued by the
government of India prohibited the export of goods from India if they were
destined for any part of South Africa, or were intended to be taken to South
Africa despite being initially destined for another country. KC Sethia Ltd, an
English company, agreed to sell and deliver to Polissino Regazzoni 500,000
bags of jute. To the knowledge of both contracting parties the jute was to be
shipped from India to Genoa, Italy so that it might there be resold to a South
Africa buying agency in contravention of the Indian ordinance.

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 Contracts which are prejudicial to the interests of the state

KC Sethia Ltd failed to deliver the jute and Polissino Regazzoni claimed damages in an
English court for breach of contract. KC Sethia Ltd defended the action by claiming that
the contract was to Polissino’s knowledge, an illegal contract and therefore un
enforceable as it’s breach of the Indian ordinance was harmful to the interests of the
state.
The House of Lords held that, as a matter of public policy, the contract was
unenforceable in England. Its performance would have involved, as the parties were
well aware, doing an act in a friendly foreign country which violated the law of India
and would have been harmful to the interests of the state.

68
 Topic 5
• CONSEQUENCES OF ILLEGALITY

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 Consequences of Illegality

The general principle of law is that a contract which is illegal from the start will be void and
unenforceable. Thus money or property transferred under the contract is not usually
recoverable.
This general rule, however, is subject to three exceptions:
(i) A party or claimant may be able to recover money paid or property transferred
under an illegal contract if he can establish his right to the money or the property without
relying on the illegal contract.

70
 Consequences of illegality

• In Bowmarkers Ltd V. Barnet Instruments Ltd (1945) KB 65, the plaintiffs had been
supplied with machine tools which they leased them to the defendants under three hire-
purchase contracts. War-time regulations provided that no person was to pay or receive
any price for any machine tool provided in the United Kingdom until a maximum price
had been issued by the Ministry of Supply. All three contracts were deemed to
contravene these regulations. The defendants failed to make hire-purchase payments
due and sold the tools they had acquired under two of the contracts. The refused to
return the tools held under the third contract. The defendants argued that the plaintiffs
had no remedy because the contracts were in breach of the regulations and therefore
illegal. The plaintiffs brought an action for conversion of the tools.
• It was held that this action could succeed because it was not based on founding a
claim on the contracts which were illegal but on the plaintiff’s proprietary right to
their own goods.

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 CONSEQUENCES OF ILLEGALITY
• (ii) Where parties are not in pari delicto, that is, where they are not equally
guilty.
• In Kiriri Cotton Ltd V Dewani (1960) AC 192, KC Ltd leased a flat in Uganda for a
term of seven years to Dewani, who paid a premium of 10,000 shillings. Although
neither party realized they were breaking the law, the taking of the premium was,
in fact, a breach of a government ordinance. This ordinance did not make any
express provision that an illegal premium was recoverable by the tenant. Dewani
brought an action to recover the premium.
• It was held, by the Privy Council, that the premium was recoverable by the
tenant, despite the lack of an express provision in the ordinance permitting this.
It was clear that the statute was aimed at protecting a particular class of person
from another, namely prospective tenants from landlords.

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 CONSEQUENCES OF ILLEGALITY

• (iii) Where a party withdraws or repents before the contract has been substantially
performed.
• In Kearley V Thomson (1890) 24 QBD 742, the defendants were solicitors who were
acting on behalf of a creditor petitioning against a bankrupt person. The plaintiff, a friend
of the bankrupt, agreed to pay the defendants their legal costs if they did not appear at
the public examination of the bankrupt and if they did not oppose the order of discharge
against the bankrupt. The money was paid and the solicitors did not appear at the public
examination. However, before the application to discharge the bankrupt, the friend
changed his mind and sought the return of his money from the defendants.
• It was held that the plaintiff could not recover. The contract was illegal since it
interfered with the administration of justice, and as the defendants had partly
performed this contract, the plaintiff’s repentance was too late.

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 CONTRACTS WHICH ARE VOID AT COMMON LAW

• The types of contracts that are void at common law

are:
• (a) Contracts to Oust the Jurisdiction of the Courts;
• (b) Contracts Prejudicial to the Status of Marriage;
and
• (c) Contracts in Restraint of Trade.

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 (a) Contracts to Oust the Jurisdiction of the Courts

• It is a general principle of law that a contract which purports or seeks to oust the
jurisdiction of the courts is void.
• This general rule is well illustrated by the case of Barker V Jones (1945) 1 WLR 1005.
In this case an association, which controlled the sport of weightlifting in the United
Kingdom, by its rules vested the government of the association in a central council
consisting of the officers and a number of members. The association empowered its
central council to be the sole interpreters of the rules and to act on behalf of the
association concerning any matter not dealt with by the rules. In all circumstances, the
decision of the council was to be considered as final.
As a result of disagreements between the members, two libel actions were brought
against certain officers and council members. The central council authorized the
payment of two sums of ₤100 to solicitors, out of the association’s funds, towards the
defendant’s legal costs. A member of the association challenged this decision of the
council by seeking a declaration that this Cavendish
02/28/2024
use of the association’s fund was improper.
75
 CONTRACTS TO OUST THE JURSIDICTION OF THE COURTS

• It was held that the provision in the rules giving the central council the sole
right to interpret the rules of the association was contrary to public policy and
void. The judge further explained that though, in theory, the parties to a
contract may make any contract that they like, this is subject to certain
limitations imposed by public policy. One of these limitations is that the
jurisdiction of the courts cannot be ousted by the agreement of the parties.

• He cited with approval the statement of Lord Denning in Lee V Showmen’s guild
of Great Britain (1952) 2 QB 329 at p 342;
• “If parties should seek, by agreement, to take the law out of the hands of the
courts and put it into the hands of a private tribunal, without any recourse at all
the courts in case of error of law, then the agreement is to that extent contrary
to public policy and void”.
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 CONTRACTS PREJUDICIAL TO THE STATUS OF MARRIAGE
• A contract which is prejudicial to the status of marriage is void.
• An example of such contracts is one which seeks to restrict a person’s freedom to marry whoever he wishes.
• In Lowe V Peers [1768] 4 Burr 2225, a man promised the plaintiff, under seal, that he would not marry any other person except
her. He stated that if he broke this promise to her, he would pay her ₤2000.
• His promise was held to be void, as it restricted his freedom of choice without there being any reciprocal promise from the
plaintiff. Another type of agreement which is considered to undermine the status of marriage is the “the marriage
brokerage” contract, this is, an agreement for reward to procure marriage.
• Such agreements are considered as contrary to public policy and therefore void.
• In Hermann V Charlesworth [1905] 2 KB 123, the plaintiff saw an advertisement in the defendant’s paper, the matrimonial post
and fashionable marriage advertiser, and later signed an agreement with the defendant in the following terms: In consideration
of being introduced to or put in correspondence with a gentleman through the influence of the proprietor of the paper entitled
“The matrimonial post and fashionable marriage advertiser”, and in the event of a marriage taking place between such
gentleman and myself, I hereby agree to pay to the said proprietor the sum of ₤250 on the date of my said marriage”.

• The plaintiff also paid the defendant a ‘special fee’ of ₤52. The plaintiff was introduced to several men by the defendant, who also
interviewed and wrote to other on her behalf, but no marriage or engagement followed. She sued the defendant to recover back the ₤52.
• It was held that the transaction of this case came within the rule which invalidates marriage brokerage contracts. Accordingly, the
plaintiff was entitled to recover back the money paid under this contract, even though the defendant had brought about introductions
and incurred expense in doing so.

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 Contracts prejudicial to the status of marriage
• The plaintiff also paid the defendant a ‘special fee’ of ₤52. The plaintiff was
introduced to several men by the defendant, who also interviewed and wrote to
other on her behalf, but no marriage or engagement followed. She sued the
defendant to recover back the ₤52.
• It was held that the transaction of this case came within the rule which
invalidates marriage brokerage contracts. Accordingly, the plaintiff was entitled
to recover back the money paid under this contract, even though the defendant
had brought about introductions and incurred expense in doing so.

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 CONTRACTS IN RESTRAINT OF TRADE

• A contract in restraint of trade is one that contains an undertaking, which

restricts the future freedom of one person to freely carry on or exercise his
business, trade or profession.
• A contract in restraint of trade is contrary to public policy and void unless it can
be shown to be reasonable, and is not contrary to public interest.

In Nordenfelt V Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535, the seller of a gun
and ammunition manufacturing business agreed with the buyer not, directly or indirectly, to engage in the
business of a manufacturer of guns or ammunition anywhere in the world, or compete in any way, for a
period of twenty five years. Though the undertaking not to compete in any way was considered
unreasonable by the court as being too wide, the provision not to manufacture guns and ammunition
was held to be valid because even though it was a worldwide restriction, there was only a limited number
of consumers so that the restriction was not wider than was necessary to protect the company and it was
not injurious to the public interest.
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 CONTRACTS IN RESTRAINT OF TRADE

• Lord MacNaghten [at p 565] laid the following principle:

• “The public have an interest in every person’s carrying out his trade freely; so
has the individual. All interference with individual liberty of action in trading,
and all restraints of trade themselves, if there is nothing more, are contrary to
public policy, and therefore void: That is the general rule. But there are
exceptions: restraints of trade and interference with individual liberty of action
may be justified by the special circumstances of a particular case. It is a
sufficient justification, and indeed it is the only justification, if the restriction is
reasonable-reasonable, that is, in reference to the interests of the parties
concerned and reasonable in reference to interests of the public, so framed and
so guarded as to afford adequate protection to the party in whose favour it is
imposed, while at the same time it is in no way injurious to the public”.
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 CONTRACTS IN RESTRAINT OF TRADE

• Restraints take many forms, but among the most important are the following:

• (i) Restraints in the contract of employment;

• (ii) Restraints on the sale of business;
• (iii) A ‘solus’ agreement by which a trader agrees to restrict his orders from
one supplier.
• (iv) Price fixing agreements and agreement which seek to regulate or limit
supplies of goods.
• (v)Restraints Protecting other Interests

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 (I) RESTRAINT IN THE CONTRACT OF EMPLOYMENT

• Often contracts of employment contain an express term or covenant which

purports to restrict the freedom of the employee, on the termination of
employment, from engaging in a competing business or working for a
competitor for a certain period.
• So long as such a clause is inserted to protect legitimate proprietary interests of
the employer and is reasonable in extent, the covenant will be valid and
enforceable.
• In determining the validity of the restraint clause in employment contract two
important factors must be considered namely:
• (1) The restraint clause must seek to protect some legitimate proprietary
interest of the employer such as clientele, confidential information, trade
secrets, trade connection.
• (2) The restraint clause must be reasonable in the circumstances.
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 RESTRAINT IN THE CONTRACT OF EMPLOYMENT

• The first factor is that the restraint clause must seek to protect some legitimate
proprietary interest of the employer such as clientele, confidential information,
trade secrets, trade connection.
• In Forster & Sons Ltd V Suggett (1918) 35 TLR 87, the defendant was employed as the
plaintiff’s works manager and had been instructed in their confidential manufacturing
processes for glass. The contract of employment contained a covenant whereby the
defendant was not to divulge any trade secrets and was not to carry on or be
interested in glass manufacture or any business connected with glass making carried
on by the plaintiffs for five years after the termination of his employment.

• The court granted an injunction to restrain the divulging of the trade secrets,
namely the confidential manufacturing process, since this restriction was
reasonable to protect the company’s interests, even though it extended to the
whole country and lasted for five years.
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• Similarly, in Littlewoods Organisation limited V Harris [1978] 1 ALL ER 1026,
the defendant, Paul Harris, was employed as a director by the plaintiff,
Littlewoods, a large company which competed with great Universal stores
Ltd (GUS) for the major share of the mail order business in the United
Kingdom. A clause in the defendant’s contract of employment provided
that, in the event of termination of his contract, he should not at any time
within twelve months enter into a contract of employment with GUS Ltd or
any of its subsidiary companies or be involved in the trading or business of
GUS Ltd or its subsidiaries. The defendant resigned from his job with
Littlewoods, informing them that he had accepted an offer of employment
from GUS Ltd. Littlewoods sought an injunction to restrain the defendant.
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 RESTRAINTS IN THE CONTRACTS OF EMPLOYMENT
• A distinction must, however, be made between protecting trade secrets or confidential
information, which is protectable interest, and preventing an employee from making use of
knowledge and skills which he has acquired in the course of his employment, which is not
protectable.
• In Herbert Morris Ltd V Saxelby [1916] 1 AC 688, a seven year restraint on the employee was held
by the House of the Lords to be void as being simply an attempt to prevent the employee making
use of the technical skill and knowledge which he acquired with his employer if he took up
employment with a rival company. The acquired skills and knowledge were not owned by the
employer.
• In this case the plaintiff company employed the defendant as a draftsman and then as an engineer
on a two year contract. The terms of this contract contained a covenant by the defendant that he
would not, during a period of seven years from ceasing to be employed by the company, either
in the United Kingdom or Ireland, carry on either as principal, agent, servant or otherwise, alone
or jointly or in connection with any other person, firm or company, or be concerned or assist,
directly or indirectly, whether for reward or otherwise, in the sale or manufacture of pulley
blocks, hand overhead runways, electric overhead runways, or hand travelling cranes.

02/28/2024 Cavendish 85
• Besides the protection of trade secrets or confidential information, the employer
is entitled to protect his customer connections by preventing employees from
soliciting or enticing his customers away from him.
• A restraint of this will only be valid of the nature of the employment is such that
the employee has personal contact with customers and some influence over them.
• In Flitch V Dewes [1921] 2 AC 158, a life long restraints on solicitor’s managing clerk
was held by the House of Lords to be valid and enforceable. Whilst working in
Tamworth, the managing clerk agreed with his employer that he would not practice
within seven miles of Tamworth town hall, after leaving his employment. This
covenant was enforceable, despite that the restriction was of unlimited duration.
• It was adjudged reasonable, given the nature of the profession concerned. The
defendant would have acquired an influence over his employer’s clientele and a
limited time restraint would not have given the required protection to the
employer.
02/28/2024 Cavendish 86
 (ii) Restraints on the sale of business

• A contract for the sale of a business often contain a clause under which the seller of
the business agrees or undertakes not to set up a competing or similar business.
• This kind of restraint is more likely to be upheld by the courts than a restraint on an
employee since the buyer and the seller of the business will be negotiating on
equal footing.
• For a restraint to be valid two requirements must be satisfied.
• Firstly, there must be genuine sale of the good will of the business.
• In Vancouver Malt and sake brewing Co Ltd V Vancouver Breweries Co Ltd [1943] AC
181, a company that was licensed to brew beer, but which did not in fact brew any,
agreed to sell it business, and to refrain from manufacturing beer for 15 years. Since
the company was not actually brewing the beer the purchaser could only have paid
for the tangible assets, that is, goodwill to sell. The purchaser had not therefore
bought the promise not to brew beer, and so he could not enforce it.

02/28/2024 Cavendish 87
 RESTRAINTS ON THE SALE OF BUSINESS

• Secondly, the restraint clause must not be too wide in its scope. Thus the
restraint will not be valid if it purports to give protection on the purchaser
that goes beyond the actual business sold to the seller.
• In British reinforced Concrete Engineering Co Ltd V Schelff [1921] 2 Ch 563, the
plaintiff company manufactured and sold “BRC” road reinforcements
throughout the United Kingdom. The defendant had a smaller, more local
business, selling “Loop” road reinforcements, but he was not involved in
manufacturing these products. The plaintiff company bought the defendant’s
business, and the defendants covenanted that he would not enter into
competition with them, either in business or in the employment of a rival, in the
manufacture or sale of road reinforcements. The defendant was later employed
by a road reinforcement company and was sued by the plaintiff company for
breach of his agreement with them.
02/28/2024 Cavendish 88
• The court held that had the clause been confined to ‘sales’ it would have
been valid, but to include ‘the manufacture of reinforcements’ made the
restraint wider than was necessary, and therefore void.
• The plaintiffs were entitled to the protection of their proprietary interest in
the defendant’s business, which they had just bought, but they were not
entitled to protection in respect of their wider business interests.
• The defendant’s business was concerned with the sale, not the manufacture,
of a particular type of road reinforcement.
• It was not reasonable to restrict the defendant’s future activities in such an
extensive way.

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 A ‘SOLUS’ AGREEMENT
• Solus agreement is the name given to a contract by which a trader agrees to restrict his orders
to one supplier.
• The reasonableness of a Solus agreement is determined in terms of duration of the restraint
and if the restraint is not contrary to public policy.
• In ESSO Petroleum V Harper’s garage (Stourport) Ltd (1968) AC 269: The parties entered into
agreements relating to the supply of ESSO petrol to two garages belonging to Harper. By these
agreements Harper agreed to purchase petrol only from ESSO, and in return they obtained a
small discount on the price. For the first garage the tie was to last for four years and five
months, but for the second garage a loan of £7,000 was made and the tie was to last for 21
years while the mortgage repayments were made on this loan. An injunction was sought to
prevent Harper from buying petrol from another supplier.
• It was held that the exclusive dealing agreements were within the restraint of trade doctrine
because Harper had given up a right to sell other petrol. Though the restraint which operated
for four and a half years were not longer than was necessary to afford adequate protection to
ESSO’s legitimate interests in maintaining a stable system of distribution, the tie of 21 years
went beyond a reasonable period, and therefore that restraint agreement was void.
02/28/2024 Cavendish 90
 A ‘SOLUS’ AGREEMENT

• Similarly, in Petrofina Ltd V Martin (1965), the defendant broke the

agreement by selling other makes of petrol, and the plaintiff sought to
enforce it by means of an injunction preventing the defendant from doing so.
• It was held that the restraint was invalid because its 12 years duration was
unreasonable.
• However, the above two cases should be contrasted with the case of Alec
Lobb (garages) Ltd V Total Oil (GB) Ltd (1985) 1 WLR 173, where the court of
appeal upheld a 21 year restraint tied to a loan agreement as reasonable in
the circumstances. The loan was part of a rescue package which greatly
benefited the garage. There were also opportunities for the garage to break
the arrangement after seven and 14 years.
02/28/2024 Cavendish 91
 (iv) Price fixing agreements & Agreement to Limit Supply or Output

• These agreements are often contrary to public

interest and regulated to protect the consumers and
public at large.

02/28/2024 Cavendish 92
 (v) Restraints protecting other interests

• Restraints clauses may also be used in circumstances which do not exactly fall within the categories discussed
above.
• In Schroeder Music Publishing Co Ltd V Macaulay (1974) 3 ALL ER 616, Ton Macaulay, a young and unknown song
writer, entered into an agreement with the defendant music publishing company, whereby the defendants engaged
his exclusive services. Under this agreement, Macaulay gave the company the copyright of all his compositions for
the next five years, with a further five year option, and in return was to receive royalty payments. The company
could end the contract by giving Macaulay one month’s written notice, but there was no corresponding provision to
allow Macaulay to do the same.

• The company was not even under any obligation to publish any of Macaulay’s songs. Though this agreement was
not a contract of employment as such, Macaulay sought a declaration that it was contrary to public policy, as being
unreasonable restraint of trade, and void. The company argued that the doctrine of restraint of trade was
inapplicable to its standard form contract.

• The House of Lords held that the restrictions in the agreement between Macaulay and Schroeder Music Publish
Company Limited were not fair and reasonable in that they combine a lack of obligation on the company’s part,
with a total commitment on the part of Macaulay. If the company, for instance, chose not to publish his work he
would be unable to earn his living as a song writer. Therefore, the contract was in unreasonable restraint of trade
and Macaulay was entitled to a declaration.
02/28/2024 Cavendish 93
• Lord Reid, at p. 622, stated as follows:

• “Any contract by which a person engages to give his exclusive services to another for a period necessarily involves
extensive restrictions during that period of common law right to exercise any lawful activity he chooses in such
manner as he thinks best. Normally the doctrine of restraint of trade has no application to such restrictions: they
require no justification. But if contractual restriction appears to be unnecessary or to be reasonably capable of
enforcement in an oppressive manner, then they must be justified before they can be enforced.”

• Similarly, in Silverton Records V Mountfield (1993) EMLR 152, the agreements made between the record company
and members of a pop group, gave the company, inter alia, the option of the group’s service for six further periods
beyond the duration of the original contract. The group claimed that the agreement were one-sided and
represented an unreasonable restraint of trade. The company claimed that it had been made clear to the group that
the agreements were one-sided and represented an unreasonable restraint of trade. The company claimed that it
had been made clear to the group that the agreements were a package and that the group members had waived
their objections to it. Accordingly, the company sought a declaration that the agreements were enforceable against
the group.
• The court held that the whole agreement was objectionable, as there was a large inequality of bargaining power
between the parties at the time it was entered into.

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 CONSEQUENCES

• A clause which is a restraint of trade is void and unenforceable. However, it may be possible to
sever the void parts of the contract.
• In other words the court may sever the void or illegal part from the rest of the restraint clause in a
contract.
• In Goldsoll V Goldman (1915) 1 Ch 292, the plaintiff and the defendant were both in business as
dealers in imitation jewelry in London.
• The defendant sold his business to the plaintiff and covenanted that the two years he would not
“either solely or jointly with or as agent or employee for any person or persons or company directly
or indirectly carry on or be engaged or concerned or interested in or render services to the business
of a vendor of or dealer in real or imitation jewellery in the county of London, England, Scotland,
Ireland, Wales, or any part of the United Kingdom of Great Britain and Ireland and Isle of man or in
France, the USA, Russia or Spain.”
• The plaintiff sought an injunction when the defendant committed breaches of the agreement.
• It was held that the restraint clause was too wide in terms of subject matter since it referred to real jewellery
when the defendant had not traded in real jewellery.
• It was also too wide in geographical areas since the defendant had not traded abroad. However, these
restrictions were severable from the rest of the promise, leaving the restraint clause that the defendant
would not carry on the business of dealing in imitation jewellery in the UK or Isle of Man. This restriction was
02/28/2024 necessary for the plaintiff’s protection, and
reasonably Cavendish
hence was enforceable. 95
 END OF TOPIC 5

02/28/2024 Cavendish 96
 TOPIC 6
PRIVITY OF CONTRACT

97
 PRIVITY OF CONTRACT- BASIC RULE

The basic rule of the doctrine of privity of contract is that any person who is not a party to
the contract can neither sue on the contract nor can they be sued under it.
In summary:
(1) only a party to a contract can sue on a contract - Price v. Easton [1833] 110 ER 518;
Tweddle v. Atkinson [1861]
(2) Only a party to a contract can be sued on a contract – Dunlop Pneumatic Tyre Co. Ltd v.
Selfridge & Co. Ltd [1915] AC 847
Summary of the basic operation of the doctrine of privity of contract:
• A makes a promise to B which involves doing something or giving something to C
• B makes a promise to A which involves doing something or giving something to C
• C cannot take advantage of the promise as he is not a party to the agreement
between A and B

02/28/2024 Cavendish 98
In Price v. Easton [1833] 110 ER 518, the court stated that no one would be entitled to or
bound by the terms of a contract to which he is not an original party.
Easton had agreed with another party that if that party did specified work for him he would pay
£19 to Price, a third party to the contract. While the work was completed by the other party,
Easton nevertheless failed to pay Price who then sued to try to enforce the contract.
Price’s claim was unsuccessful. He had given no consideration for the arrangement and was
not therefore a party to the contract either and gained no enforceable rights under it.
In Tweddle v. Atkinson [1861] here even though the claimant was named in a written
agreement he was unable to claim and enforce a third party right as he had provided no
consideration for the original contract.
In other words the claimant could not seek to enforce a contract to which he was not an
actual party even though he was named in the contract as a potential beneficiary of the
agreement.

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 THE CASE OF DUNLOP V SELFRIDGE

The plaintiff’s father and Mr Guy had agreed together that they would each pay a sum of money
to the plaintiff. Mr Guy died before the money was paid, and the plaintiff sued his executors.
The action was dismissed because the plaintiff was not a party to the contract, which was
made between the two fathers.
Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd [1915] AC 847: In a contract dated October
12, 1911 Dew & Co, who were wholesalers, agreed to buy tyres from Dunlop, who were tyre
manufacturers. They did so on an express undertaking in the contract that they would not sell
the tyres below certain prices fixed by the manufacturers.
Dew & Co also undertook to obtain the same price-fixing agreements from clients to whom they
sold on. Dew & Co then sold tyres to Selfridge on these terms.
However, Selfridge broke the agreement and sold the tyres at discount prices.
Dunlop sued Selfridge, the third party, and sought an injunction. It failed for lack of privity.
It was held that Dunlop could not sue Selfridge for breach of contract as they were not parties
to the contract, nor had they given consideration to Selfridge.
02/28/2024 Cavendish 100
 JUSTIFICATION FOR THE RULE

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

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 EXCEPTIONS TO THE BASIC RULE

The exceptions to the basic rule of the doctrine of the privity of the contract are:
(1) Statutory Exceptions
(2) Trust Law
(3) Restrictive Covenants
(4) Assignment
(5) Leases
(6) Agency
(7) Negotiable Instruments

02/28/2024 Cavendish 102

 (1) STATUTORY CASES

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

02/28/2024 Cavendish 103

 TRUST LAW

Where a trust has been created, the beneficiary under the trust can sue the trustees even if
he was not a party to the original agreement.
In Gregory & Parker v. Williams (1817) 3 Mer 582: Parker owed money to both Gregory and
Williams. Since he could see no way of organizing settlement of his debts himself, he assigned
all of his property to Williams on the understanding that Williams would then pay off the debt
to Gregory. Williams failed to pay over the money to Gregory. Gregory, of course, was not a
party to the agreement between Parker and Williams and as a result was unable to sue on it in
contract law.
However, the court was nevertheless prepared to accept Gregory’s argument that a trust of the
money had been created in Gregory’s favour, which was then enforceable against Williams.
There was never any intention that Williams should keep all of the money, a beneficial interest
was created in Gregory’s favour and Williams held the sum of the debt owed to Gregory by
Parker only as a trustee.
Williams was therefore bound to return this money to Gregory.
02/28/2024 Cavendish 104
 RESTRICTIVE COVENANTS

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

In Tulk v. Moxhay [1848] 41 ER 1143: Tulk owned certain land in London that he sold with an
express undertaking that it would never be used to build property on. The land was then resold
on a number of occasions, each time subject to the same undertaking, until Moxhay eventaully
bought it. Moxhay bought it knowing of the limitation but nevertheless intended to build on it.
Tulk sought an injunction to prevent this building from taking place and was successful.
The court accepted that it would be against conscience for Moxhay to buy, knowing of the
restriction, and it was prepared to grant the injunction and enforce the original agreement
even though Moxhay had never been a party to it.
02/28/2024 Cavendish 105
 ASSIGNMENTS

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

02/28/2024 Cavendish 106

 LEASES

• Where an owner of land creates a lease in favour of another person the

terms of the lease are in effect contractual obligations, and these terms
(known as covenants) of the lease and are enforceable by both parties
because there is privity between them.
• However, the landowner will able to enforce the covenants also against
anybody to whom the holder of the lease then assigns their lease.

02/28/2024 Cavendish 107

 AGENCY

A principal can sue and be sued on contracts made on

his behalf.

02/28/2024 Cavendish 108

 NEGOTIABLE INSTRUMENTS

Negotiable instruments namely a cheque is transferable and the person to

whom it has been transferred can sue on it.

02/28/2024 Cavendish 109

 SUB THEME

AGENCY IN PRIVITY OF CONTRACT

02/28/2024 Cavendish 110

 AGENCY IN PRIVITY OF CONTRACT

The law recognises that it is impossible for any individual person to act on his behalf all the
time. Acting through ‘middlemen’ is a familiar practice that mankind has employed from time
immemorial.
In the area of business and commerce, activity would grand to a halt if businessmen could not
employ the services of other people with expertise such as factors, brokers, forwarding agents,
auctioneers and the like, and were expected to do everything themselves.
Besides agents may possess special skills, knowledge, experience or expertise necessary for
the making of sound business decisions.
Since the agent is primarily engaged to negotiate and conclude a contract with a third party
on behalf of another person called the principal, such specialized knowledge or skill may be
essential.
For instance, stockbrokers, estate agents, insurance brokers, travel agents, and so on, all use
their special skills or expertise in advising the person engaging them to decide whether or not
to enter into a contract.
Agents may also be used to market and sell goods and services in order to maximize profits.
111
 INTRODUCTION

The common law position that he who can act for himself may act through an agent is
summed up in the Latin maxim qui facit per alium facit per se.
There are however, two exceptions to the said Latin maxim namely:
Where personal performance is required; and
Where the parties involved expressly or by necessary implication prohibit delegation.

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

112
 DEFINITION OF AGENCY

An agency involves three very specific parties namely:

(i) Principal
(ii) Agent
(iii) Third Party
The Principal is the person on whose behalf the contract is made. It is a person on whose
behalf the agent acts.
The Third Party is the party with whom the agent contracts on behalf of the principal and who
as a result of the very special rules enjoys a series of mutual rights and obligations with the
principal, but there is no contractual relationship with the agent.
In law the word ‘agent’ is used to refer to a person who has legal authority to bind another by
entering into contract with a third person on that other’s behalf.
An agent is a person employed to do any act for another, or to represent another in dealing
with third parties or persons.
The important feature of the relationship is that the agent has power to bind his principal to a
contractual relationship with a third party without the agent himself becoming a party to the
contract.
113
• In other words the agent is the party who is actually a party to the
formation of the contract with a third party with whom he has a direct
relationship, but the agent merely makes the contract on behalf of the
principal and not on his own behalf.
• The relationship between the principal and agent is called agency, and
may be created by an express or implied agreement.

02/28/2024 Cavendish 114

• In other words the agent is the party who is actually a party to the formation of
the contract with a third party with whom he has a direct relationship, but the
agent merely makes the contract on behalf of the principal and not on his own
behalf.
• The relationship between the principal and agent is called agency, and may be
created by an express or implied agreement.
• In other words the agent is the party who is actually a party to the formation of
the contract with a third party with whom he has a direct relationship, but the
agent merely makes the contract on behalf of the principal and not on his own
behalf.
• The relationship between the principal and agent is called agency, and may be
created by an express or implied agreement.
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 ESSENTIAL & LEGAL RULES FOR A VALID AGENCY
The essential features for a valid agency are as follows:
(1) There should be an agreement between the principal and the agent.
According to this element, the agency must be created by an agreement between the principal
and agent.
Therefore there must be an agreement by which a person is appointed as an agent by the
other.
The agreement may be express (that is, by words of mouth or in writing), or implied (that is, it
may arise by the conduct of the parties, by necessity or circumstances of the cases).
(2) The agent must act in the representative capacity.
The agent must represent his principal and act on his behalf.
Moreover, the agent must have the power to create legal relationship of his principal with third
parties.
Therefore, the true nature of the relationship should be seen.
If the agent acts in representative capacity and had the power to bind his principal with third
parties, the relationship is that of ‘agency’.

116
(3) The principal must be competent to contract.
The principal must be competent or have capacity to enter into a valid contract, that is, he must of sound
mind, and have attained the age of majority.
Therefore, a minor or a person of unsound mind (insane) cannot appoint an agent to act on his behalf.
An appointment of an agent, made by an incompetent person is void.
(4) The agent need not be competent to contract or have capacity to contract.
As a general rule there is no requirement that an agent must have full contractual capacity when he acts
on behalf of the principal.
This is because the contract is that of the principal, and not the agent.
The principal must, however, have contractual capacity at the time the contract in question is entered into.
It is therefore legally possible for a minor to act on behalf of an adult principal in bringing about a binding
contractual relationship with a third party who has contractual capacity.
However, the agency contract between the principal and agent will not be binding on the agent because of
the agent’s minority.
For the same reasons the law denies minors from entering into contractual relations of any kind, minors
are generally not engaged as agents for persons with full contractual relations.

117
 CLASSIFICATION OF AGENTS

• (ii) General Agents - A general agent is an agent who is appointed to perform all
acts relating to a particular trade or business for which he is appointed.
• He has authority to enter into any contract on behalf of his principal which are
normally within the scope of the trade or profession in which the agent is
employed.
• For example, an agent appointed to manage a property would have implied authority
to enter into tenancy agreements and cleaning contracts on behalf of the principal.
• (iii) Universal Agents – A universal agent is an agent who is appointed to do all the
various trades or business of his principal.
• In other words, he is an agent who is authorized to do all the acts which his principal
can lawfully do under the law.
• As a matter of act, the universal agent has more powers than those enjoyed by
special or general agents.
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 KINDS OF AGENTS
• Though agents are of several kinds, the two most important ones are:
• (a) Commercial or Mercantile Agents , and
• (b) Non-Commercial or Non-Mercantile
Agents
• (a) Commercial or Mercantile Agents
• A commercial agent is an agent who has authority either to sell the goods, or to consign the goods for the
purpose of sale, or to buy the goods or to raise the money on the security of the goods on behalf of his
principal.
• Therefore, a commercial or mercantile agent is an agent who deals in the buying and selling of goods.
• The following are some of the important commercial agents:
• (i) Factor – A factor is a commercial agent to whom the possession of the goods is given for the purpose of
selling the same.
• (ii) Broker – A broker is a commercial agent who is appointed to negotiate and make contracts for the sale or
purchase of goods on behalf of his principal.
• (iii) Auctioneer – An auctioneer is a commercial agent who is appointed to sell the goods at a public auction,
that is, to sell the goods to the highest bidder in public competition.

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 KINDS OF AGENTS
• (iv) Commission Agent – A commission agent is one who buys and sells the goods on behalf of the principal and receives
commission for his charges. His only interest in the transaction is the commission which he receives from his principal.
• (v) Del Credere Agent – A ‘del credere agent’ is an agent who, in addition to his work of bringing about a contract
between his principal and third parties, also undertakes to be liable to the principal for the default of the third party to
perform the contract. In other words, he also guarantees to his principal the performance of the contract by the third
party. He gets extra commission for this extra risk taken by him. Such commission is called the ‘del credere commission’.
• (vi) Banker – Generally, the relationship between a banker and customer is that of a creditor and debtor. However, when
the banker buys or sells securities, collects cheques, dividends, etc, on behalf of his customer, he also acts as an agent.
• (b) Non-Commercial or Non-Mercantile
Agents
• Non-mercantile or non-commercial agent is an agent who does not usually deal in the buying or selling of goods. He is
appointed by the principal to do some acts which are not done by commercial agents.
• The following are some of the important non-commercial agents:
(i) Insurance Agents – who is an agent appointed to effect insurance policies on behalf of his principal. He receives
commission for his services.
(ii) Counsel or advocate – who is engaged to conduct legal proceedings on behalf of his principal (client). He receives fees
for his services.

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 PRINCIPLES OF AGENCY
• The agency relationship is based upon the following two established principles:
• (1) Whatever a person can lawfully do himself, he may also do the same through
an agent.
• This however, subject to certain exceptions, for example, contracts involving
personal services or skills such as painting, singing, marriage, or where delegation
is prohibited.
• (2) He who acts through another is considered to have acted personally, that is,
the acts of the agent are considered the acts of his principal.

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 CREATION OF AGENCY

• An agency relationship may arise or be created in any of the following

ways namely:
• (1) Express Agreement
• (2) Implied Agreement
• (3) Operation of Law
• (4) Agency by Estoppel
• (5) Ratification

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 AGENCY BY EXPRESS AGREEMENT
• An agency may be created by express agreement.
• In this case, an agent is appointed by an agreement in writing or by words of
mouth.
• It may, however, be noted that no particular form or set of words is required for the
appointment of an agent.

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 AGENCY BY IMPLIED AGREEMENT
• An agency may also be created by an implied agreement.
• In this case, a person becomes an agent of the other due to the conduct of the parties
or the course of dealing between the parties or the situation of the particular case, for
example, when one person places another in such a situation in which the other person
is understood to represent or act on his behalf, he becomes an implied agent.
• In Hely-Hutchinson v. Brayhead Ltd [1967] 3 All ER 98: The directors of a company
allowed the chairman to act as though he was in fact the Managing Director, although he
had never been appointed to that role and so had no express authority to bind the
company.
• The company was held to be bound by transactions entered into by the Chairman as a
result.
• Similarly, in Mullens v. Miller (1882) 2 Ch D 194: An estate agent was held to have implied
authority to give details and make warranties in respect of properties that he was selling.
• See also Watteau v. Fenwick (1893) 1 QB 346

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 AGENCY BY OPERATION OF THE LAW

• In certain instances agency will arise without the parties expressly

stating that such a relationship has come into existence between them
or indeed that they desire such a relationship be created.
• The following are the circumstances under which the an agency
relationship will be deemed to have come into existence by operation of
the law:
• (a) Agency of necessity
• (b) Agency by Cohabitation
• (c ) Agency under Statutory Provisions

02/28/2024 Cavendish 125

 • END OF TOPIC 6

02/28/2024 Cavendish 126

 TOPIC 7
DISCHARGE BY AGREEMENT

127
 INTRODUCTION

The basic legal principle is that ‘what has been created by agreement may be extinguished
or discharged by agreement’.
Therefore the parties to an existing contract may agree to discharge or abandon the contract
before it has been completely performed on both sides.
However, the agreement to discharge the existing contract is in itself a binding new contract
which must either be made under seal or supported by consideration.
The difficulties raised by consideration in the discharge of the contract by agreement depend
on whether discharge is bilateral or unilateral.

128
 BILATERAL DISCHARGE

Bilateral discharge occurs when both parties to the contract have some right to surrender.
Thus, if there are unperformed obligations of the original contract on both parties, each party
provides consideration by agreeing to release his rights under the contract in consideration of
a similar release by the other party.
The discharge is therefore called bilateral, in that each party surrenders something of value.
The agreement for bilateral discharge can be reduced to one of three possible situations which
the parties might have intended namely:
(i) Variation of the existing contract;
(ii) Rescission plus agreement on the terms of a new contract;
(iii) Rescind or termination of the existing contract.

129
 UNILATERAL DISCHRGE

• Unilateral discharge happens where only one party to the contract has rights to
surrender.
• Where one party has completely performed his side of the contract, that is, it is
wholly executed on one side, any release by him of the other party must be
either by deed or supported by fresh consideration.
• Unilateral discharge supported by consideration, that is, where there is a release
supported by fresh consideration, is called accord and satisfaction.
• The accord is the agreement for the discharge of the original contract and the
satisfaction is the consideration conferred upon the party who has performed his
obligations.

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 UNILATERAL DISCHARGE

In British Russian gazette and Trade Outlook Ltd V. Associated Newspapers Ltd [1933] 2 K. B.
616, Mr. Talbot agreed to compromise two actions of libel, which had been commenced by him
and by the British Russian gazette, in respect of certain articles in the Daily Mail. His promise
was expressed in a letter in which he stated as follows: “I accept the sum of one thousand
guineas on account of costs and expenses in full discharge and settlement of my claim……. And
I will forthwith instruct my solicitors to serve notice of discontinuance; or to take other steps…..
to end the proceedings now pending.” Before payment of the thousand guineas had been
made, Talbot disregarded this compromise and proceeded with the action.
It was held that the letter recorded an agreement in which the consideration was a promise
for a Promise: “In consideration of your promise to pay a thousand guineas,” The defendants
were, therefore, entitled to enforce the accord by way of counterclaim.

131
 NOVATION

There are two further situations where parties can discharge

the contract by agreement, namely,
(1)Novation and
(2) Condition Subsequent.

Novation happens when two existing contracts are replaced

by a new one.

132
 CONDITIONS SUBSEQUENT

A contract may include provision for its own discharge by imposing a condition precedent, which prevents the contract
from coming into operation unless the condition is satisfied. Alternatively, the contract may impose a condition
subsequent by which a contract is discharged on the later happening of an event.
In Aberfoyle Plantations Ltd V. Cheng [1906] A.C. 115, the parties agreed in 1905 to sell and buy a plantation, which
included 182 acres in respect of which the leases had expired in 1950. The vendor had tried without success in the
intervening years to obtain a renewal of the leases. Clause 4 of the agreement provided that “the purchase is conditional
on the vendor obtaining a renewal” of the leases. If he proved “unable to fulfill this condition, this agreement shall
become null and void”. The vendor failed to obtain the renewal.
It was held that the purchaser could not recover the deposit he had paid.
A contract may include provision for its own discharge by imposing a condition precedent, which prevents the contract
from coming into operation unless the condition is satisfied. Alternatively, the contract may impose a condition
subsequent by which a contract is discharged on the later happening of an event.
In Aberfoyle Plantations Ltd V. Cheng [1906] A.C. 115, the parties agreed in 1905 to sell and buy a plantation, which
included 182 acres in respect of which the leases had expired in 1950. The vendor had tried without success in the
intervening years to obtain a renewal of the leases. Clause 4 of the agreement provided that “the purchase is conditional
on the vendor obtaining a renewal” of the leases. If he proved “unable to fulfill this condition, this agreement shall
become null and void”. The vendor failed to obtain the renewal.
It was held that the purchaser could not recover the deposit he had paid.

133
End of Topic 7

134
 Topic 8
DISCHARGE BY FRUSTRATION

135
 INTRODUCTION

A contract may be discharged by frustration if something happens which is not the fault of the parties and
was not contemplated by them, and prevents them from performing the contract.
Originally, the common law did not take such a lenient view of changes in circumstances and required that
the parties to a contract should provide for all eventualities or unforeseen contingencies.
If, however, because of the happening of an unforeseen event performance of an obligation became
impossible, the party required to perform the impossible obligation would be liable to pay damages for
non performance.
The common law justification for this harsh principle or rule is that a party to a contract can always guard
against unforeseen contingencies by express stipulations, if he voluntarily undertakes an absolute and
unconditional obligation he cannot complain merely because events turn out to his disadvantage.
The rule of absolute contracts was laid down in Paradine v Jane [1647]: Aleyn, 26, the defendant was lessee
of land and when sued for arrears of rent he contended that he was not liable to pay as the land in question
had been occupied by a German Prince who had invaded the realm with an hostile army of men; therefore
preventing the defendant from receiving the profits from the land.

136
It was held that the plaintiff was entitled to recover as the defendant had covenanted to pay the rent and
if he had wished to be excused he should have inserted a term to that effect in the contract.
“Where a party by his own contract creates a duty or charge upon himself, he is bound to make it good,
notwithstanding any accidents by inevitable necessity, because he might have provided against it by his
contract.”
Starting with the case of Taylor V. Caldwell [1863], 3B & s. 826, the courts developed the doctrine of
frustration as an exception to the rule about absolute contracts laid in Paradine V. Jane discussed above.
Under the doctrine of frustration the parties are discharged from their contract if circumstances or events
occur which makes it impossible for the parties to perform their obligations under the contract.
For the doctrine of frustration to occur three requirements must be satisfied; namely:
(1) An event has taken place which could not have been foreseen by the parties when they entered into
the contract.
(2) None of the parties to the contract is in any way responsible for the event.
(3) If the contract was to be performed now despite the event, the contract would be fundamentally
different from the one originally entered into.
1

137
 FRUSTRATING EVENTS

.
The doctrine of frustration has been held to apply in the following circumstances:
(1) Destruction of the subject matter
(2) Personal incapacity to perform a contract of
personal service
(3) Non-occurrence of an event if it is the sole purpose of the contract
(4) Supervening Illegality
(5) Government interference

138
 DESTRUCTION OF THE SUBJECT MATTER
• A contract may be frustrated by the destruction or non availability of the subject
matter of the contract, that is, a thing essential to the performance of the
contract or attainment of the fundamental object which the parties had in view.
• Thus in Taylor v Caldwell, a hall was let to the plaintiff for a series of concerts on
specified dates. Before the date of the first concert the hall was accidentally
destroyed by fire. The plaintiff sued for damages for failure to let him have the use
of the hall as agreed.
• It was held that the destruction of the subject matter rendered the contract
impossible to perform and discharged the defendant from his obligations under
the contract.

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 (2) Personal incapacity to perform a contract of personal service

If the presence of a particular person is necessary for the execution of the contract, illness,
insanity or death of that person will discharge a contract of personal service.
In Robinson v Davison [1871] LR 6 Ex 269: The defendant contracted to play in a concert on a
particular day but fell ill.
It was held that the performer’s illness on that particular day was sufficient to frustrate the
contract.
Similarly, in Condor v Barron Knights Ltd [1966] 1 WLR 87: The plaintiff aged 16 contracted to
perform a drama in a pop group. His duties, when the group had won were to play on every
night of the week. He fell ill and his doctor advised him that he should restrict his performances
to four nights per week. The group terminated his contract.
It was held that a contract of personal service is based on the assumption that the employee’s
health will permit him to perform his duties. If that is not so, the contract is discharged by
frustration.

140
 (2) Personal incapacity to perform a contract on personal service

• However, in long term contracts, the courts are reluctant to find that
illness frustrates the contracts.
• In Storey v Fulham Steel Works [1907] 24TRL 89: The plaintiff was
employed by the steel works for five years as manager. After working for
two years he became ill and needed time away from work. Six months
later he recovered, but during his illness his employment had been
terminated. The plaintiff sued for breach of contract and the defendant
claimed that the plaintiff’s illness discharged the contract.
• It was held that the plaintiff’s absence for six months did not go to the
root of the five year contract and termination could not be allowed.

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 (3) Non-occurrence of an event if it is the sole purpose of the contract

• Where the parties make a contract on the basis of some forth coming event, and if the event fails to
take place, and as a result, the main purpose of the contract cannot be achieved, the doctrine of
frustration will apply.
• Thus in Krell v Henry [1903] 2 KB 740, a room belonging to the plaintiff and overlooking the root of the
coronation procession of Edward VII was let for the day of the coronation for the purpose of viewing
the procession. However, the coronation was postponed owing to the illness of the King. The owner of
the rooms sued for the agreed fee which was payable on the day of coronation.
• It was held that the contract was made for the sole purpose of viewing the procession, as the event
did not occur, the contract was frustrated.
• However, in Herne Bay Steamboat Co. v Hutton [1903] 2 KB 683: the court refused to declare the
contract to be discharged by frustration. A steam boat was hired for two days to carry passengers, for
the purpose of viewing the naval review at Spithead and for a day’s cruise around the fleet. The review
was, however, cancelled due to the illness of the king but the steam boat could have taken passengers
for a trip around the assembled fleet, which remained at Spithead.
• It was held that the royal review of the fleet was not the sole occasion of the contract and so the
contract was not discharged. The owner of the steam boat was therefore entitled to the agreed hire
charge less what he has earned from the normal use of the vessel over the two day period.
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 SUPERVENING ILLEGALITY
• Where the performance of the main object of the contracts subsequently becomes illegal,
the contract will be discharged.
• An example is where there is a change in the law which makes the performance of the
contract illegal.
• In Baily v De Crespigny [1869], LRF 4 QB 180: A landlord covenanted that neither he nor his
successors in the title would permit building on paddock which adjourned the land let. The
paddock was then compulsorily acquired for a railway, and a station was built.
• It was held that the landlord was not liable for breach of the covenant because it was
impossible for him to secure performance of it.

• Similarly, in Denny, Mott and Dickson Ltd v Fraser and Company Ltd [1944] AC 265, in 1929:
the two parties made an agreement relating to the sale of timber and the option to
purchase or lease a timber yard. Both parties agreed that the sale of timber was frustrated
in 1939 by timber control orders. However, in 1941, Denny, Mott and Dickson attempted to
exercise their option to purchase the timber yard.
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• The House of Lords held that a contract for the sale of timber was
frustrated because the subsequent passage of various control of timber
orders rendering performance of the contract, trading in timber, illegal.
• Lord Macmillan, at p.272, stated: “It is plain that a contract to do what it
has become illegal to do cannot be legally enforceable. There cannot be
default in not doing what the law forbids to be done.”

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 GOVERNMENT INTERFERENCE
• Government or administrative interference in the activities of one or both of the parties to
the contract is a common cause of frustration, more especially in time of war.
• If the maintenance of the contract in such a case imposes upon the parties a contract that
is fundamentally different from that which they made, the contract is discharged.
• Thus in Metropolitan Water Board v Dick, Kerr and Co. Ltd [1918] AC 119, in July 1914 the
appellants contracted to construct a reservoir in six years. The agreement contained a
proviso which stated that time should be extended if delays were caused by difficulties,
impediments or obstruction howsoever occasioned.
• War broke out and in 1916 the Minister of Munitions ordered the respondents to stop work
and to disperse and sell the plant. This prohibition was still in force in November 1917. The
appellants claimed that the order had put an end to the contract.
• It was held that the provision for extension of time did not cover such a substantial
interference with the performance of the work as this, and that the contract was
completely discharged. The interruption was likely to be so long that the contract, if
resumed, would be radically different from that originally made.

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 GOVERNMENT INTERFERENCE
• This case should however be contrasted with Tamplin Steamship Co. Ltd v Anglo-
Mexican Petroleum Products Co. Ltd [1916] 2AC 397: A tanker was hired or
chartered for five years from December 1915, to December 1917, to be used by the
charters for the carriage of oil. In February, 1915, the tanker was requisitioned by
the Government and used as troop ship. The charters were willing to pay the
agreed freight to the owners, but the latter, desirous of receiving the much larger
sum paid by the Government, contended that the requisition had frustrated the
commercial object of the venture and therefore put an end to the contract.
• It was held that the commercial objects of the contract was not frustrated since
there may have been months during the remaining period during which the ship
would be available to fulfil substantial part of the contract, and also the charters
were still prepared to pay the agreed price.

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 NON FRUSTRATING EVENTS
• Similarly, in Davis Contractors Ltd V. Fareham Urban District Council [1956] A.C 696:
The plaintiffs contracted to build the defendants 78 council houses within eight
months for a fixed price through no fault of the plaintiffs there was scarcity of
skilled labour and the work took 22 months to complete at a cost of £115,000.
• The plaintiff claimed that by reason of the scarcity of labour the contract had been
frustrated and that they were entitled to recover a sum in excess of the contract
price on the basis of a quantum meruit.

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 NON FRUSTRATING EVENTS

• It was held that the plaintiff’s claim should fail. Hardship, material loss or inconvenience did not amount
to frustration; the obligation must change such that the thing undertaken would, if performed, be a
different thing from that contracted for.
• Lord RADCLIFFE, at pp728-9, stated: “…. That frustration occurs whenever the law recognizes that
without default of either party a contractual obligation has become incapable of being performed
because the circumstances in which performance is called for would render it a thing radically different
from that which was undertaken by the contract.”

• (c) Where one party is responsible for the frustration event. This is also referred to as ‘self induced’
frustration.

• In Maritine National Fish Ltd V. Ocean Trawlers Ltd [1935] ALL E.R Rep. 86: The appellants entered into a
contract for the hire or charter of a trawler for use in Otter trawling from the respondents. They had four
other trawlers of their own. They applied to the Canadian Minister of Fisheries for the necessary licences
for five trawlers but were granted only three licences. They nominated three of their own trawlers for the
licences and argued that the contract for the charter of the fifth trawler had been frustrated since it could
not lawfully be used.
02/28/2024 Cavendish 148
• It was held by the Privy Council that the contract was not frustrated as the appellants had decided quite
deliberately not to nominate the respondents’ trawler and were, therefore, responsible for the
frustrating event.

• The onus of proving that the frustration was self-induced rests upon the party raising the allegation.

• Thus in Joseph Constantine Steamship Line, Ltd V. Imperial Smelting Corporation, Ltd [1941] 2 ALL E.R 165:
The day before chartered ship was due to load her cargo an explosion of such violence occurred in her
auxiliary boiler that the performance of the charter-party became impossible. The cause of the explosion
could not be definitely ascertained, but only one of three possible reasons would have imputed negligence
to the ship-owners.

• It was held by the House of Lords that, since the characters were unable to prove that the explosion was
caused by the fault of the owners, the defence of frustration succeeded and the contract was discharged.

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 CONSEQUENCES OF FRUSTRATION OF CONTRACTS
• Once a contract is frustrated the common law position is that it abruptly and automatically comes to an
end.
• The contract is not void ab initio, that is from the outset or beginning, but only from the time the
frustrating event occurred.
• Therefore, if before the frustrating event has happened work had been done or money transferred, the
common law rule is that losses lie where they fall.
• It is therefore possible to recover money due or paid before frustrating event unless there is a total
failure of consideration.

• In, Chandler V. Webster [1905] 1 KB. 493: The defendant agreed to let a room in Pall Mall to the plaintiff
for the purpose of viewing the coronation procession in 1902. The price was £141.15 s payable
immediately. The plaintiff paid £100, but he still owed the balance when the contract was discharged on
June 24 1902 owing to the abandonment of the procession because of the King’s illness. The plaintiff sued
for the return of his £100 and the defendant’s counter claimed for the unpaid amount of £41.15s.
• It was held that, not only that the plaintiff had no right to recover the sum of £100, but also that he was
liable for the balance of £41.15s. The obligation to pay rent had fallen due before the frustrating event.

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 LAW REFORM (FRUSTRATED CONTRACTS) ACT, Cap 73

3. (1) Where a contract which is governed as to its essential validity by the law of Zambia has
become impossible of performance or been otherwise frustrated, and the parties thereto
have for that reason been discharged from the further performance of the contract, the
following provisions of this section shall, subject to the provisions of section four, have effect
in relation thereto.
(2) All sums paid or payable to any party in pursuance of the contract before the
time when the parties were so discharged (in this Act referred to as "the time of
discharge") shall, in the case of sums so paid, be recoverable from him as money received
by him for the use of the party by whom the sums were paid, and, in the case of sums
so payable, cease to be so payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses
before the time of discharge in, or for the purpose of, the performance of the contract, the
court may, if it considers it just to do so having regard to all the circumstances of the case,
allow him to retain or, as the case may be, recover the whole or any part of the sums so
paid or payable, not being an amount in excess of the expenses so incurred.
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 LAW REFORM (FRUSTRATED CONTRACTS) ACT, Cap 73
• (3) Where any party to the contract has, by reason of anything done by any other party thereto in, or
for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment
of money to which subsection (2) applies) before the time of discharge, there shall be recoverable from
him by the said other party such sum (if any) not exceeding the value of the said benefit to the party
obtaining it, as the court considers just, having regard to all the circumstances of the case, and, in
particular-
• (a) the amount of any expenses incurred before the time of discharge by the benefited party in, or
for the purpose of, the performance of the contract, including any sums paid or payable by him to any
other party in pursuance of the contract and retained or recoverable by that party under subsection (2);
and
• (b) the effect, in relation to the said benefit of the circumstances giving rise to the frustration of
the contract.

• (4) In estimating, for the purposes of the foregoing provisions of this section, the amount of any expenses incurred
by any party to the contract, the court may, without prejudice to the generality of the said provisions, include such
sum as appears to be reasonable in respect of overhead expenses and in respect of any work or services performed
personally by the said party.

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(5) In considering whether any sum ought to be recovered or retained under the
foregoing provisions of this section by any party to the contract, the court shall not take
into account any sums which have, by reason of the circumstances giving rise to the
frustration of the contract, become payable to that party under any contract of insurance
unless there was an obligation to insure imposed by an express term of the frustrated
contract or by or under any enactment.

(6) Where any person has assumed obligations under the contract in consideration of
the conferring of a benefit by any other party to the contract upon any other person,
whether a party to the contract or not, the court may, if in all the circumstances of the
case it considers it just to do so, treat for the purposes of subsection (3) any benefit so
conferred as a benefit obtained by the person who has assumed the obligations as
aforesaid.
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• End of topic 8

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 TOPIC 9
DISCHARGE BY BREACH

155
 INTRODUCTION
• A breach of contract occurs if a party to a contract fails to comply with his obligations under
it or performs his obligations in a defective manner.
• It may also occur where one party to a contract fails to comply with the terms of the
contract.
• Breach of contract gives rise to a secondary obligation to pay damages to the innocent party
who has suffered as a result of the breach.
• However where the breach falls into one of the two categories, the primary obligation to
perform the contract’s terms remains.

• The said two categories of breach, which will entitle an innocent party not only to claim
damages but also to treat the contract as discharged are:
• (1) Where the party in default has repudiated the contract either before performance is
due or before it has been fully performed.
• (2) Where the party in default has committed a fundamental breach.
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 ANTICIPATORY BREACH

The anticipatory breach occurs where, one party indicates to, or informs the other either by words
(express) or by conduct (implicit) that he will not honour or perform his contractual obligations.
This type of breach will normally be repudiatory, since the contract is renounced or the party
incapacitates himself from performing the obligations under the contract.
In Mersey Steel & Co [1884], 9 APP cas 434, Lord BLACKBURN stated as follows:
“Where there is a contract to be performed in the future, if one of the parties has said to the other in
effect ‘if you go on and perform your side of the contract I will perform mine,’ that in effect, amounts to
saying ‘I will not perform the contract.’ In that case the other party may say, ‘You have given me distinct
notice that you will not perform the contract. I will not wait until you have broken it, but will treat you as
having put an end to the contract, and if necessary I will sue you for damages, but at all events I will not go
on with the contract,”
An anticipatory breach gives the injured party two options namely:
(a) He can elect to treat the contract as repudiated by the other, recover damages for breach or
for reasonable remuneration for the work which he has performed and treat himself as being discharged
from his primary obligation under the contract; or
(b) He can elect to affirm the contract, that is, allow the contract to continue until there is an
actual breach.
157
 ANTICIPATORY BREACH

Similarly, in White and Carter (councils) Ltd V. McGregor [1961] 3 ALL ER 1178, the respondent’s sales manager,
acting within his authority, entered into a contract with the appellants for the fixing to litter-bins of plates
advertising the respondent’s business. On the same day, upon hearing of the contract the respondent wrote to
the appellants to cancel the agreement, but the appellants refused to accept his cancellation and went ahead
to display the advertisements. The contract was for a period of 156 weeks and, under the terms of the contract,
if any installment was unpaid for four weeks, the whole of the amount due for the 156 weeks, or the remainder
of that period, became payable. The respondent did not pay the first installment within the time allowed and
the appellant sought to recover the whole price.
It was held that the respondents were entitled to succeed. ‘If one party to a contract repudiates it the other
party, the innocent party, has an option. He may accept that repudiation and sue for damages for breach of
contract whether or not the time for performance has come; he may if he chooses disregard or refuse to
accept it and then the contract remains in full effect.’
In Hochetster V. De La Tour [1840-60] ALL E.R Rep. 12, the defendant engaged the plaintiff as a courier to
accompany him to a European tour commencing on 1 June. On May 11 the defendant wrote to the plaintiff to
say that he no longer required his services. On 22 May the plaintiff commenced legal proceedings for
anticipatory breach of contract. The defendant objected that there was no actionable breach until 1 June.
It was held that the plaintiff was entitled to sue as soon as the anticipatory breach occurred on 11 May.

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 TERMINATION BY ANTICIPATORY BREACH
Where the innocent party elects to treat the contract as discharged or terminated he must notify or
make his decision known to the party in default.
The effects of such a termination to the innocent party are as follows:
(i) He is not bound by his future or continuing contractual obligations, and cannot be sued on them;
(ii) He need not accept nor pay for further performance;
(iii) He can refuse to pay for partial defective performance already received.
(iv) He can claim back the money paid to the defaulter if he can and does reject defective performance.
(v) He is not discharged from the contractual obligations, which were due at the time of termination.
Besides, the innocent party may also claim damages from the party in default for losses sustained by
him in respect of contractual obligations not performed at the time of the default; and losses sustained
by him regarding contractual obligations, which were due in future.
Finally an innocent party who began to perform his contractual obligations and was prevented from
completing them by the other party in default, he can claim reasonable remuneration on a quantum
meruit basis.

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 ACTUAL BREACH
Actual breach of a contract may occur through the following three ways namely:
(1)Non-performance, that is, the due date of the performance arrives and the
other party does not perform his obligation or part of the bargain.
(2)Defective performance, that is, the performance is not precise and exact.
(3)Untruth as regards a term of the contract, for instance, where the promise
made by a party has deliberately concealed the true intensions.
Whether an actual breach discharges the parties from their contractual
obligations depends on whether the breach is fundamental.
The breach is fundamental if the term of the contract that has been broken is of
importance to the parties, and goes to the root of the contract that it makes
further performance impossible.

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 ACTUAL BREACH

• The terms of the contract may be divided into those terms which
are important (conditions) and those less important (warranties).
• A breach of a condition does automatically terminate the contract.
• It gives the injured party the option of either treating the contract
as discharged or he may wish to continue with the contract and
then claim damages for breach.
• On the other hand, breach of a warrant does not discharge the
contract.
• It merely entitles the injured party to sue for damages, and in all
respects the contract continues as before.
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 End of topic 9

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 TOPIC 10
DISCHARGE BY PERFORMANCE

02/28/2024 Cavendish 163

 INTRODUCTION
The normal way in which a contract is discharged is that both parties perform their obligations under it.
If only one party performs his obligations, then he alone is discharged, and he acquires the right of action against the
other.
The general rule is that performance of the contract must be precise and exact. In other words the law will not regard a
person to have discharged the contract unless he has completely and precisely performed the exact thing that he agreed
to do under the contract.
The strictness of this general rule is demonstrated by the following cases discussed hereunder.
In Cutter V Powell [1875], 6 Term. Rep 320: The plaintiff, Cutter, agreed to serve on a ship sailing from Jamaica to
Liverpool. He was to be paid 30 guineas on arrival at Liverpool. The ship sailed on 2 August, arriving in Liverpool on 9
October, but Cutter died at sea on 20 September.
It was held that his widow could not recover anything for the work he had done before he died. Cutter was obliged to
complete the voyage before he was entitled to payment.
Also in Re Moore & Co. and Landaver & Co [1921] 2KB 519, the buyer ordered a consignment of tinned fruit, to be packed
in cases of 30 tins each. The correct amount was delivered, but about half was in cases of 24 tins each.
It was held that the buyer was entitled to reject the whole consignment.
Similarly, in Bolton V Mahadeva [1972] 2 ALL ER 1322, Bolton installed a central heating system in Mahadeva’s house for
an agreed price of ₤560. The work was carried out defectively and it was estimated that it would cost
₤179 to put matters right.
It was held that since Bolton had not performed his side of the contract, he could recover
02/28/2024 Cavendish 164
nothing for the work he had done.
 EXCEPTIONS TO THE RULE

The obligation to the general rule that places on the contracting party to provide precise and
complete performance of the contract before the contractual obligation can be treated as
discharged, can obviously produce injustice and hardship as demonstrated by the three cases
discussed above.
In each of the above cases, one party has profited from the failure of the other party to provide
complete performance.
The injustice, thus, created by the rule has led to the adoption of exceptions to the rule so as to
ensure that the interests of both parties are protected.

The exceptions to the rule are as follows:

(1) Divisible/severable contracts
(2) Acceptance of partial/ part performance
(3) Prevention of performance
(4) Substantial performance
(5)Time of performance
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 (1) Divisible/Severable Contracts

• Most contracts are said to be ‘entire’, that is indivisible. The obligations of the parties are interdependent and
concurrent, and as such neither party is entitled to demand performance from the other, either in whole or
in part, until he himself has completely fulfilled, or is ready and willing to fulfill, his own obligations.
• Thus a party is not entitled to payment until he has completely performed his part of the contract.
• However, where a contract may be divided or split into several parts or stages, then payments for parts or
stages that have been completed can be claimed.
• Whether a contract can be severable or not depends on the intention of the parties. In the absence of
evidence as to intention the courts are reluctant to construe the contract so as to require complete
performance before any payment becomes due.
• In Roberts V. Havelock [1832], 3 B & Ad. 404, the defendant’s ship was sailing from Cardiff to Alexandria with a
cargo of iron when it was damaged and forced to dock at Milford Haven to allow necessary repairs to be
carried out. The plaintiff, a shipwright, was employed and undertook to put the ship into thorough repair.
Before the work was completed the plaintiff asked for payment in respect of that part which he had carried
out, but when payment was refused he sued to recover the amount to which he maintained he was entitled at
that stage.
• It was held that the plaintiff would succeed as there was no agreement to the effect that the plaintiff would
make no demand for payment until all the repairs were completed.

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 (2) Acceptance of Partial/ Part Performance

If one part to a contract partially performs his obligations and the other party accepts
the benefit of the partial performance, then he is obliged to pay a reasonable price for
it.
If however, the party receiving the benefit of partial performance does not have the
option of whether or not to accept or reject the partial performance, then he is not
obliged to pay for it.
Thus in Sumpter V. Hedges [1898] 1 QB 673, the plaintiff, a builder, contracted to build two
houses and stables upon the defendant’s land for the sum of ₤565. The plaintiff did part of
the work, amounting in value to about ₤333, and then abandoned the contract. The
defendant completed the buildings and the plaintiff claimed payment in respect of that
part of the work which he had carried out
It was held that the plaintiff could not recover ₤333 because though the defendant
‘accepted’ the plaintiff’s part performance the defendant had no option to reject.
It was impossible to reject a half–built house since the status quo cannot be restored.
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 (2) Acceptance of Partial/ Part Performance

• It was held that the plaintiff could not recover ₤333 because though the
defendant ‘accepted’ the plaintiff’s part performance the defendant had no
option to reject.
• It was impossible to reject a half–built house since the status quo cannot be
restored.

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 PREVENTION OF PERFORMANCE

Where a party is prevented from completely performing his obligations under the
contract by the action of the other party he can either bring an action for damages for
breach of contract or he can bring a quantum meruit action to claim for the work done.
The leading authority for this rule is Planche V. Colburn (1831), 8 Bins. 14. The plaintiff had
agreed to write a book on costume and ancient Armour which was to appear in serial form
in the defendants periodical. The plaintiff was to be paid ₤100 on completion of the book.
After the plaintiff had done some research, and written some of the book, but before he
had completed it, the defendant stopped publishing the periodical.
It was held that the plaintiff had been wrongfully prevented from performing the contract
and he was entitled to 50 guineas as reasonable remuneration on a quantum meruit
basis.

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 SUBSTANTIAL PERFORMANCE

Where a party to a contract has substantially performed his obligations he is entitled to claim the
contract price less a reduction for defects or deficiencies. This exception only applies when the
defect relates to the quality of the performance.
In Hoeing V. Isaacs [1952] ALL ER 176, the defendant employed the plaintiff to decorate and furnish
his flat at a total price of ₤750. There were defects in the furniture, which could be put right at a
cost of ₤56. The defendant argued that the plaintiff was only entitled to reasonable remuneration.
It was held that the plaintiff was entitled to the full contract rate, less the cost (₤56) of making the
defects good, since he had substantially performed the contract.
In contrast in Bolton V. Mahadeva [1972] 2 ALL ER 1322, the plaintiff, a heating contractor agreed to
install a central heating system in the defendant’s house for ₤560. On completion of the work the
system proved to be so defective that it would cost ₤174 to repair. The defendant refused to pay the
plaintiff any of the cost of the work and the plaintiff sued.
It was held that in the circumstances the plaintiff had not substantially performed the contract and
he was not therefore entitled to recover any of the cost of the work.

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 TIME OF PERFORMANCE
At common law a person who failed to perform his obligations under the contract within a given time was
in breach of contract.
The equitable rule, which now prevails, is that time is only of essence if the parties expressly state; or if a
party who has been guilty of undue delay is notified by the other party that unless he performs his
obligations within a reasonable time, the contract will be regarded as breached or broken.

Thus in Charles Richards, Ltd V. OppenHeim [1950] 1 KB 616, early in 1947 the defendant ordered from the
plaintiffs a Rolls Royce chassis, and in July the plaintiffs agreed that a body should be built for it within “six or
at most seven months”.
The body was not completed seven months later, but the defendant agreed to wait another three months. At
the end of this extended period the body was still not built. The defendant then gave a final notice that if the
work were not finished within a further period of four weeks he would cancel the order. The body was not
finished within this period and the defendant cancelled the order. The completed body was tendered to the
defendants three months later, but he refused to accept it.
It was held that the defendant could not have refused delivery merely because the original date had not
been met, but he could do so upon giving the plaintiff a reasonable time to deliver. Here the notice did
given a reasonable time, so the defendant was justified in refusing delivery.
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 END OF TOPIC 10

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 Topic 11

REVISION
BY STUDENT PRESENTATIONS &
PAST PAPERS

173
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