Essentials of Law Questions and Answers Section B Part 1

SECTION B 2. “The factor which distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties.” (Treitel, The Law of Contract, 13th Edition) Discuss this statement with reference to ‘offer’ and ‘acceptance’. Use appropriate examples from case law to illustrate your answer. A contract is an agreement between two or more persons which is legally binding. The agreement consists of an ‘offer’ and an ‘acceptance’. An offer is a clear statement of the terms on which the offeror is prepared to do business with the offeree. To be legally binding, an offer must be: (i) Clear: a statement which is too vague will not be a valid offer (Guthing v Lynn); (ii) Communicated: the communication of an offer may be written, spoken or by conduct, but a person cannot accept an offer of which he is not aware (Bloom v American Swiss Watch Co.); (iii) Distinguished from other types of statement: a. A mere statement of intent cannot form the basis of an offer, even if the other party acts on it (Re Fickus); b. A party which is merely responding to a request for information is not making a binding offer: (Harvey v Facey); c. An invitation to treat is not an offer. It is an invitation to negotiate or a pre-offer whereby party A is asking party B if they would like to make an offer. (Gibson v Manchester City Council). Examples of invitations to treat include displays of goods in shop windows and on self-service shelves, tenders and auctions. Acceptance is a final and unqualified expression of assent to the terms of the offer. Acceptance must be: 3. (i) A mirror image of the offer: any introduction of new terms will be construed as a counter offer. (ii) Unconditional; and (iii) Communicated: Silence cannot amount to acceptance (Felthouse v Bindley), but acceptance must be communicated by the offeree, or by authorized person (Powell v Lee). There are two exceptions to this rule: unilateral contracts and contracts where the postal rules apply. Can the performance of an existing contractual duty amount to good consideration? Discuss how the law has developed in this area. Consideration can be defined as ‘the price of the other party’s act or promise.’ Consideration is an essential part of a binding contract. English law does not enforce gratuitous promises, unless made under a deed. In respect of existing contractual duties, if a party to a contract takes on additional obligations that are beyond those in his original contract, then that is good consideration for a new promise with the same party (Hartley v Ponsonby). Traditionally, it was held that a promise to perform an existing contractual duty was not good consideration (Stilk v Myrick), however, this rule has been modified by Williams v Roffey Bros. Where there has been an agreement to pay additional sums for an originally agreed amount of work, the courts may allow a practical benefit gained to be consideration for the promise to pay extra money. In Williams v Roffey Bros , the defendant, Roffey, was a building company who had a contract to refurbish a building for a housing association. The contract contained a delay clause under which Roffey was required to pay money if the work was not completed on time. Roffey subcontracted carpentry work to Williams, who later ran into financial difficulties and told Roffey that he would be unable to continue. Roffey promised him extra money to complete the contract on time. Roffey then refused to honour the promise, claiming that Williams was only doing what he was contractually obliged to do. The Court of Appeal in Williams found Roffey’s promise of additional payment to be binding. The ratio of the decision was that Roffey had gained had gained a practical benefit because they were able to avoid the late completion payments on the other contract, and they did not have to meet the expense of engaging other contractors. Also, there had been no economic duress or fraud by Williams. 4. What are the factors to be considered in distinguishing whether a statement is a term of the contract or a representation? The terms of a contract are the contents of the contract, and state the parties’ legal duties and obligations to each other. When parties are negotiating a contract, not all the statements made will necessarily be terms of the contract. Some statements may be representations, i.e. pre-contractual statements inducing a party to enter a contract. There are a number of factors to be considered in assessing whether a statement is a term or a representation: (i) The importance of the statement to the parties. If the statement is of major importance to either party and that party would not have entered the agreement without it, that statement will be a term (Bannerman v White). (ii) The time between that the statement and the contract. If there is a lengthy time gap between that statement and contract, the statement is usually a representation (Routledge v Mckay). (iii) Oral statements and written contracts. The general rule is that an oral statement is usually a representation if the contract is written. (iv) The knowledge and skill of the party making the statement. A statement made by one party who has specialist skills or knowledge, to a party who is relying on those specialist skills is more likely to be treated as a term of the contract (Dick Bentley Productions Ltd v Harold Smith). Conversely, if a statement is made by one party without any specialist knowledge, the statement is less likely to be construed as a term of the contract, particularly if it is made to a person with expertise (Oscar Chess v Williams). 5. Niall visits Harry, a clothing manufacturer, at his office to discuss a contract to purchase ‘glow in the dark’ T-shirts for a music festival that Niall is promoting. Harry and Niall believe that the T-shirts are safely stored in Harry’s warehouse a few miles away. Just after the contract is signed, the warehouse burns down due to the actions of an arsonist. What is the effect, if any, on the contract? Would your answer differ if the warehouse had burnt down moments before the contract was concluded? In the first scenario, the subject matter of the contract was destroyed after the contract had been made, but before it had been performed. Accordingly, it is likely that the contract has been discharged by ‘frustration’. Discharge of a contract means that the obligations of the contract come to an end, and all the duties which arose under the contract are terminated. A contract may be discharged by frustration if, between formation and performance of the contract, events outside that parties’ control render further performance impossible, illegal, or radically different from what the parties had agreed. The origin of the doctrine of frustration can be found in Taylor v Caldwell. Caldwell agreed to rent a music hall from Taylor. After the contract was agreed, but before the concerts had taken place, the music hall was destroyed by an arsonist, and the contract was therefore frustrated. The Law Reform (Frustrated Contracts) Act 1943 covers situations where a contract has been frustrated and the parties have not made their own provisions in the contract for such an event. For example, under s1(2) Niall could recover any money that he had paid in advance for the t-shirts. In the alternative scenario, the t-shirts are destroyed prior to the contract being formed. If at the time of making the contract the subject matter did not exist, then the contract is likely to be void for operative mistake, as neither party could contract for something that is non-existent (Couturier v Hastie). 6. What is an innominate term? Illustrate your answer with examples from case law. The terms of a contract are the contents of the contract, and state the parties’ legal duties and obligations to each other. Every breach of contract gives rise to a right to claim damages, but not every breach entitles the innocent party to terminate the contract: it depends on the nature of the term broken and upon the consequences of the breach. Contractual terms fall into the following categories: (i) Conditions: these are the major terms of the contract. If a condition is breached, the innocent party can end the contract and claim damages, or choose to continue with the contract and claim damages. (ii) Warranties: these are minor terms of the contract and give rise to a claim for damages only if they are breached. (iii) Innominate terms: those which cannot be clearly identified as either conditions or warranties until the term has been breached. The concept of innominate terms originated in Hong Kong Fir Shipping v Kawasaki, where the defendants chartered a ship from the claimants for 24 months. The contract stated that the ship would be ‘in every way fitted for cargo service’. The ship broke down and 20 weeks’ use was lost. The defendants purported to terminate the contract. The court held that the term in question was an innominate term and breach of it was not sufficiently serious to terminate the contract. The importance of the term had to be judged in relation to the actual damage resulting from it. The Hansa Nord developed criteria by which the courts may interpret the status of an innominate term, including the following factors: 7. (i) The express intention of the parties is paramount: if the contract specifies that a particular breach will entitle a party to terminate the contract, that is conclusive (see Lombard North Central plc v Butterworth). (ii) The use of the words ‘condition’ and ‘warranty’ to describe a term is of evidential value only – it is not conclusive (see Schuler AG v Wickman Machine Tool Sales). (iii) If a party has a statutory right to terminate the contract if a term is breached, the term is a condition. (iv) Consistently established commercial practice will determine the status of a term (see The Mihalis Angelos). (v) The innocent party may only terminate a contract if the damage resulting from the breach is so extensive that it substantially deprives them of the benefit of the contract (see Rearden Smith-Line v Hansen-Tangen). A rogue enters a car dealership and claims that she is ‘Miss Moneypenny’. She completes hire purchase forms for the purchase of a BMW which are then scanned and emailed to the finance company. She uses a false address and produces a fake ‘M16’ staff card to confirm her identity. She pays a 15% deposit, takes the BMW, and then sells it on to Mr Tumble, an innocent party. She then absconds with the cash. The finance company tries to reclaim the car from Mr Tumble. Which case are they likely to rely on? Would Mr Tumble have a better chance of keeping the car if the rogue had contracted face to face with the finance company? This scenario concerns a unilateral mistake as to identity: the finance company believed that they were contracting with Miss Moneypenny, rather than the rogue. There are two alternative consequences: (i) The contract is void for operative mistake (i.e. it never existed), OR (ii) The contract is voidable for misrepresentation (and steps must be taken to set it aside). In determining whether the contract is rendered void or voidable, the courts take into account whether the contract has been reduced to writing, and if the written agreement states the name of the party the rogue is impersonating (i.e. the claimant must prove that they intended to deal with someone other than the rogue). If so, the contract is more likely to be void for mistake, than if it were made orally and face to face. In the present case, the finance company are likely to rely on the case of Shogun Finance Ltd v Hudson which had similar facts and involved a rogue impersonating a real person called ‘Mr Patel’. The contract had not been carried out face to face, but had been completed by fax. The identity of the customer was crucial to the contract, and at all times the claimant intended to deal with the real ‘Mr Patel’. Accordingly, the contract was void for mistake, and the finance company could recover the car from the third party to whom the rogue had sold it. If, on the other hand, the rogue in the present case had contracted face to face with the finance company, it would be presumed that the parties intended to deal with the person physically present (Phillips v Brooks), and therefore, the contract would not be void for operative mistake, but instead would be voidable for misrepresentation (The case law has not been entirely consistent on this point: see Ingram v Little). If the contract between the finance company and the rogue is simply voidable, and the finance company failed to set aside the contract before the rogue sold the car to Mr Tumble, Mr Tumble will gain good title, and will be able to keep the car. 8. What is a ‘breach of contract’? Briefly outline some of the remedies available to the innocent party. A breach of contract consists of a failure, without lawful excuse, to perform a contractual obligation. A breach can take different forms, such as a refusal to perform, defective performance or late performance. Every breach of contract gives rise to a right to claim damages, but not every breach entitles the innocent party to terminate the contract: it depends on the nature of the term broken and upon the consequences of the breach. Contractual terms fall into the following categories: (iv) Conditions: these are the major terms of the contract. If a condition is breached, the innocent party can end the contract and claim damages, or choose to continue with the contract and claim damages. (v) Warranties: these are minor terms of the contract and give rise to a claim for damages only if they are breached. (vi) Innominate terms: it depends on the seriousness of the breach as to whether it is treated as a condition or a warranty. Damages are the most commonly sought remedy for a breach of contract, but are restricted to losses that are not too remote (Hadley v Baxendale). The claimant must take steps to reduce his losses. He cannot claim damages for losses he could have avoided (Bruce v Calder). In addition to damages, there are a number of other possible remedies for breach of contract, including: (i) Action for an agreed price: the amount claimed is the amount stated in the contract. (ii) Specific performance: this is an equitable remedy whereby a court order is given to the party in breach to perform his obligations under the contract. An order for specific performance will not be granted if damages would be an adequate remedy, or if the order would require continuing supervision by the court (Co-op Insurance Society v Argyll Stores). (iii) Injunction: this is an equitable remedy. A prohibitory injunction prohibits the defendant from performing certain acts which would other amount to a breach of contract. In a mandatory injunction the defendant is order to do something. Neither type of injunction would be granted if damages are an adequate remedy. (iv) Quantum meruit: a party is awarded a sum representing ‘as much as he has earned’ (Planche v Colborn).