Formation: Offer and Acceptance
How do we know if a contract exists? Þ Offer and acceptance Þ Consideration Þ Intention to be legally bound Þ Certainty of the contract and its terms Þ Some contracts need to be in a certain form Þ Capacity to enter into contract, e.g. a young person cannot enter into a contract
Offer: Intention to contract is unequivocal.
Agreement: a consensus (meeting of the minds) amongst all parties about the arrangement. There must be objective evidence of the agreement à Not subjective, there is no agreement if you don’t say or indicate clear agreement/undertaking.
Making a commitment: There is an immediate readiness to be bound/undertake obligation/assume responsibility à e.g. language showing commitment or conduct
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Invitation to Treat (Invitation to Make Offers)
Harvey v Facey [1893] Provision of information, not an offer.
Fisher v Bell [1961] Shop window invites offers but is not an offer itself. Only providing an example of things they sell, could be out of stock which is unfair on the shop. A shop is a place of bargaining, not of definite sales, and you can haggle about the price (outdated in modern conditions).
‘Snapping-up’ cases Ex. Online shopping at Argos The price + description of a TV set is put on the website £2.99. Customer bought 200 units, and Argos confirmed payment + delivery. Q: Is the website the same as the shop window? ‘Add to basket’ = offer, payment confirmation = acceptance One party knows/should have known about the other’s mistake.
In selling, the customer makes the offer. All points above show an immediate readiness to be bound.
Pharmaceutical Society v Boots Cash Chemists [1953] Self-service system is invitation to treat, allows customer to change their mind.
Spencer v Harding [1870] General advertising circular (e.g. newspaper adverts) is an invitation to treat, not a commitment or offer. However not all adverts are just invitations to treat, it depends on the wording and context.
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Ex: Customer sits down, looks at menu and orders. Waiter takes down order + gives to Gordon. Give wine list to customer who thinks it is too expensive and leaves restaurant. Is there an immediate readiness to assume obligation? Menu is an invitation to treat, not an offer.
Q: When is the offer made? A: Customer looking at the menu is an offer to buy. Waiter takes down order and confirms with customer, but what if your dish has run out? Is the restaurant in breach of contract?
Q: When is there acceptance? 3 options – When waiter takes the order, when chef cooks food, when food arrives at table. Commercial problems with these options: Waiter accepting à The customer can’t change mind, if a food is out of stock the restaurant would be in breach of contract. Food arriving à Wasting time and materials, customer can walk out at any time. A: There is acceptance when the chef begins cooking. This is the best solution/most commercially sensible/most reasonable. The restaurant has committed and everybody is bound.
Ex: Jim, a student, went into the university refectory to eat lunch. As he passed along the counter an attendant gave him a plate of meat and vegetables which he put on a tray. He then selected an apple from a glass case and also put it on his tray. As he was proceeding to the cash desk at the end of the counter he reflected that examinations were due to begin in a week's time. He no longer felt hungry and therefore told the cashier that he wished to return the food on his tray. The cashier insisted that he must pay for it.
Does Jim have a binding contract to pay for the lunch?
Apple in the case is an invitation to treat. His picking it up is an offer to treat, but he has the option to go back and change his mind. The invitation was made to everybody. The hot food is an offer made to him only. The dinner lady giving him the food is an offer and when Jim takes it he is accepting the offer. The payment is just deferred. The food cannot be put back because it is hot, the make-up is bespoke, and there is an issue about hygiene.
What would be the position if Jim had taken a bite out of the apple before he reached the cashier?
Obligation à bailment: one party trusts the other to handle goods. There is a duty to take care of the goods of somebody else. In this problem, Jim is the bailee, and must mind the apple. In tort law, there is a duty not to take somebody’s goods and covert them into your own – civil wrong of theft.
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Things that are likely to be an offer: • Offer for reward – for the capture of a criminal, for the return of a lost item etc. • Advertisement for auction sale without reserve
Generally, in an auction, the auctioneer asks for bids. The offer is the bidder naming a price/placing a bid, and the acceptance is when the hammer goes down, i.e. it is “knocked down” to the highest bidder. Most auctions have a reserve price, the stated price in the catalogue. If it does not reach that price then there is no sale, in order to protect the seller.
Barry v Davies [2001] An auction “without reserve” means the items go for any price, and it is recognised by the court as an offer, not an invitation to treat. This is because the customer must believe that they will get a good deal so they travel a long way. The person who makes the highest bid accepts the offer.
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Acceptance
1. The offeree needs to accept the exact terms proposed.
Counter-offers:
Hyde v Wrench (1840) Offerall A (Wrench) makes offer to offeree B (Hyde). B makes a counter-offer, which is not an acceptance. It also extinguishes the offer first made by A, i.e. the first offer no longer exists and B can no longer accept it.
Stevenson v McLean (1880) Sometimes B’s response does not count as a counter-offer, but is rather a request for information, and doesn’t extinguish the first offer. This is up to an examination of the language and conduct.
2. Acceptance by conduct is possible.
Brogden v Metropolitan Railway Co (1877) Must be an overt, “unequivocal act of acceptance” with very clear conduct to be an acceptance.
3. The offeree must accept in the method prescribed by the offerall. Manchester Diocesan Council for Education v Commercial Investments Ltd [1969] Where the offerall has stipulated/set out a method of acceptance but has not said that it is the only method of acceptance, then the offeree may accept in another manner as long as it does not prejudice the offerall’s position, i.e. there is no urgency about it, such as with perishable commodities. e.g. A tomato sale should be accepted by email, it might be too late if accepted by letter.
Ex: John wants to sell his BMW, says he must get a letter of acceptance. A student send a letter and give him a phone call accepting to show intention to contract, where John says yes. John reconsiders. However his affirmation by telephone is him waiving the original insistent on only accepting by letter.
4. The offeree must know of the offer.
Does the offeree need to rely on the offer?
Ex: John says to Wayne Rooney, “If you score more than 15 goals for Man U I will give you £10.” Wayne claims this, John says no. He knows of the offer, but doesn’t rely on it à He has a salary, and doesn’t always think about the £10, no consideration.
Do you have to be induced to fulfil the offer? Yes, but motive doesn’t matter.
5. “Battle of the Forms”
An offer + acceptance problem: The issue is not whether there is a contract, but what are the terms of the contract. Which form is more valid?
Butler Machine Tool Co v Ex-cello Corporation [1979] Identify the subject matter of the contract. Signed tear-off is the key document, accompanying letter is only a covering letter.
Tekdata Interconnection Ltd v Amphenol Ltd [2009] The traditional offer and acceptance analysis had to be adopted unless the documents passing between the parties and their conduct showed that their common intention was that some other terms were intended to prevail.
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Communication of Acceptance
Entores Ltd v Miles Far East Cpn [1955] Acceptance is communicated when it is received.
Exception 1: Waiver of notification, e.g. Carlill v Carbolic Smoke Ball Co [1893] where a waiver is implied by the nature of the transaction or language of the offer.
Felthouse v Bindley (1862) The offerall cannot compel the offeree to take positive steps to reject the offer by providing that the offeree’s silence should constitute acceptance, i.e. cannot impose/deem your silence to mean acceptance.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) Must look at the whole of the conduct of the referee. If there is an unequivocal act of acceptance by conduct, there is a contract even if they are just continuing what they have been doing before. See which principle the facts come into.
Q: What if someone is selling a car and says to accept you must stay silent, and you want the war so you do what the offerall asks and stay silent? A: Probably not commercially friendly
Exception 2: Failure of communication by fault of the offerall.
In Entores Ltd v Miles Far East Cpn, Denning LJ makes up a number of hypothetical situations, such as if there was no ink in the printer. “But, suppose that he does not know that his message did not get home. He thinks it has. This may happen if the listener on the telephone does not catch the words of acceptance, but nevertheless does not trouble to ask for them to be repeated: or the ink on the teleprinter fails at the receiving end, but the clerk does not ask for the message to be repeated: so that the man who sends an acceptance reasonably believes that his message has been received. The offeror in such circumstances is clearly bound, because he will be estopped from saying that he did not receive the message of acceptance. It is his own fault that he did not get it. But if there should be a case where the offeror without any fault on his part does not receive the message of acceptance - yet the sender of it reasonably believes it has got home when it has not - then I think there is no contract.”
The Brimnes [1975] The offerall must adopt reasonable business methods in respect to taking notes for communications. If the failure to communicate is the fault of the offerall, there is still a contract.
Postal Rule
Postal rules are an exception, don’t need communication.
Henthorn v Fraser [1892] Where the post is in the contemplation of the parties as a means of communication à Is it reasonable for the offeree to use the post in this situation? It is an acceptance as soon as the post is sent. e.g. If John sends an offer by email, it is not reasonable for the offeree to reply by post.
Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) Communication is implied on the posting. The post office is a common agent for both parties.
Other qualifications:
Holwell Securities Ltd v Hughes [1974] Offerall stipulated in his offer that he would like to receive notice in writing and the contract will not be complete until they receive the notice – express terms that they need actual communication. The rule can lead to manifest absurdity (i.e. if letter gets lost in the post). In this case, there is no contract because it is an absurd situation. The postal rule does not apply if, when looking at all the circumstances, it is apparent that the parties could not have intended a binding agreement until notice of acceptance was communicated to the offerall.
Q: In a broken-up engagement, who keeps the ring? A: Whoever has it already.
Email: Don’t know if there is a problem of the line, unlike a telephone call etc. where you know if the line has gone dead. Therefore, acceptance is when the email is received.
Ex: Smith v Jones
On 11 March, Jones visited Smith's Winery in the South West of England, sampled Smith's wines and purchased two dozen bottles of wine which he took with him on his return to his home in London. Jones had told Smith that he was much impressed with the quality of his wines and hoped to deal with him again in the future. Jones tells Smith that if a good buy came up, he would be interested in having some delivered to London.
On 14 March, Jones returned home after work to find that during the day a carrier had delivered a case of twelve bottles of vintage port, which had been sent by Smith. Jones' wife had accepted delivery, thinking that her husband must have ordered the port. Inside the case was a letter from Smith in the following terms:
"Following our recent conversation I have no hesitation in assuming that you will greatly appreciate the opportunity of purchasing one dozen of our 1975 vintage ports: 1975 was an exceptionally good year and limited supplies of this vintage have just become available to favoured customers at only £93 per dozen. I feel so confident that you will wish to take advantage of this offer that I shall assume, unless I hear to the contrary by 21 March, that you wish to take them.
Jones put the case in his pantry after opening it and reading the letter.
Is there an offer? Yes, unequivocal intention to contract. Terms of the contract: 12 bottles of port à If there is not this, then there is a breach of contract. “1975 was an exceptionally good year” – wine merchant (of learned opinion) warranting that this is a good vintage. Smith sending to Jones is not unsolicited. Jones also knows that Smith is selling.
What are the respective rights of Jones and Smith assuming that:
(i) Jones when he put the case in his pantry had decided not to buy the port but did nothing further. On 22 March, Smith demands the £93. No contract. Felthouse v Bindley tells us that for an acceptance to be good, it must be communicated. Reasonable to put port in pantry for safekeeping? Manchester Diocesan Council v General Investments says when there is a specified mode of acceptance, other modes are acceptable as long as they are not less advantageous to the offeror.
(ii) Jones decided to buy the port, put the bottles in his pantry, and did nothing further. On 22 March, Smith repents of his offer, visits Jones, and demands the return of the bottles. No contract. Distinguishable from Felthouse v Bindley because trying to withdraw offer. Like Carlill, waived right of communication by sending to doorstep? Offord v Davies (1862) Offer can be withdrawn within a time limit, must inform of withdrawal.
(iii) Jones had decided not to buy the port and put the bottles in the pantry but did nothing further. On 20 March, Smith repents of his offer, visits Jones, and demands the return of the bottles. No contract.
(iv) Jones had decided not to buy the port and had told his wife of this fact but two days later made a present of six of the bottles to his son. Yes contract. Jones’ act is inconsistent with Smith’s ownership. Acceptance by conduct (Brogden).
(v) Jones had decided not to buy the port and had written a letter to Smith advising him of this fact: but forgot to post the letter. However, on 17 March, it was announced that Smith's 1975 vintage port had been awarded a Gold Medal at a number of shows in consequence of which the port was now worth £180. Jones destroyed his original letter and wrote and posted a letter to Smith on 22 March accepting the offer. Does sending port by post imply that he can reply by post? Not necessarily… Didn’t send letter of refusal so irrelevant. But the offer is not open anymore after 21 March so no contract.
Cases
Harvey v Facey [1893] AC 552 (Bur 5)
Q: Is this an offer to sell the property? Y: Consent can be inferred from language or context. Is it definite language replying to both questions? i.e. “Yes, I will sell for $900.” N: Harvey’s initial telegram shows no commitment to buy. Facey is only providing information, doesn’t answer both questions. A: Facey – not an offer, merely a provision of information.
Fisher v Bell [1961] 1 GB 394 (Bur 7)
Ex: Suit in the window of Harrods with price tag £1500. Customer “I want to buy it” (acceptance to buy, immediate readiness), seller “No you can’t”. Q: Is the suit + price tag a commitment? Y: The purpose of a shop and advertisements. N: Only providing an example of things they sell, could be out of stock which is unfair on the shop. A shop is a place of bargaining, not of definite sales, and you can haggle about the price (outdated in modern conditions). A: Seller – invites offer, but is not an offer itself, aka invitation to treat.
Partridge v Crittenden [1968] 1 WLR 1204
Adverts are generally not offers. “There is business sense in construing advertisements and circulars, unless they come from manufacturers, as invitations to treat and not offers for sale.” Lord Parker CJ
Grainger & Son v Gough [1896] AC 325
‘The transmission of such a price-list does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited.’ Lord Herschell
Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] 1 QB 401 (Bur 8)
In an action brought by the plaintiffs alleging an infringement by the defendants of section 18 (1) (a) (iii) of the Pharmacy and Poisons Act, 1933 , which requires the sale of poisons included in Part I of the Poisons List to be effected by or under the supervision of a registered pharmacist:- Held, that the self-service system did not amount to an offer by the defendants to sell, but merely to an invitation to the customer to offer to buy; that such an offer was accepted at the cashier's desk under the supervision of the registered pharmacist; and that there was therefore no infringement of the section.
Spencer v Harding [1870] LR 5 CP 561
The defendants sent out a circular, as follows:—“We are instructed to offer to the wholesale trade for sale by tender the stock in trade of A., amounting, &c., and which will be sold at a discount in one lot: payment to be made in cash: the tenders will be received and opened at our offices,” &c.:— Held, that this did not amount to a contract or promise to sell to the person who made the highest tender.
Barry v Davies (t/a Heathcote Ball & Co.) [2001] 1 All ER 944 (Bur 15)
An advert for an auction to do with car mechanics, “without reserve” Barry goes for two engine analysers, market value of £14,000 each. He bids £200 cash, accepting the “without reserve” promise. Davies refused, but court recognised “without reserve”. Barry gets damages for breach of contract, not the goods. Barry sued for £27,600 (£28,000 less what he would have paid for them).
Warlow v Harrison [1859] 120 ER 925
Recognised “without reserve”, and auction should be won by the highest bonafide bidder.
Sale of Goods Act 1979 s 57 Auction Sales
(1) Where goods are put up for sale by auction in lots, each lot is prima facie deemed to be the subject of a separate contract of sale. (2) A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner; and until the announcement is made any bidder may retract his bid. (3) A sale by auction may be notified to be subject to a reserve or upset price, and a right to bid may also be reserved expressly by or on behalf of the seller. (4) Where a sale by auction is not notified to be subject to a right to bid by or on behalf of the seller, it is not lawful for the seller to bid himself or to employ any person to bid at the sale, or for the auctioneer knowingly to take any bid from the seller or any such person. (5) A sale contravening subsection (4) above may be treated as fraudulent by the buyer. (6) Where, in respect of a sale by auction, a right to bid is expressly reserved (but not otherwise) the seller or any one person on his behalf may bid at the auction.
Hyde v Wrench (1840) 3 Bea 334 (Bur 54)
Offerall A (Wrench) makes offer to offeree B (Hyde). B makes a counter-offer, asking if £950 instead of £1000 is okay. Not an acceptance, and extinguishes the original offer of £1000 so B can no longer accept it.
Stevenson v McLean (1880) 5 QBD 346 (Bur 54)
B: “Please wire would you accept 40s for delivery over two months, or if not, the longest period you are willing?” If this is a counter offer, the first offer is gone. Court held it was only a request for information, open to subsequently accept the offer for cash. A later sells to another and sends telegram to B about this, but B accepts before they receive this. B sues A for non-delivery. A loses because a revocation of the offer has no effect until it is actually communicated to the person to whom the original offer was made.
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 (Bur 26)
Brogden is a coal merchant, supplier for steam trains. MRC send a formalised agreement about their arrangement. B changed a term and sent it back à counter offer. MRC carried out exactly as stipulated in the updated contract. This was considered sufficient acceptance of the counter-offer. When some complaints of inexactness in the supply of coals, according to the terms stated in the paper, were made MRC, there were explanations and excuses given by B, and the “contract” was mentioned in the correspondence, and matters went on as before.
Manchester Diocesan Council for Education v Commercial Investments Ltd [1970] 1 WLR 241
MDC (B) was selling schools that need a lot of repair. Commercial Investments Ltd (A) wanted to buy them to develop into flats etc. B called for tenders. A put in offer of £28,000 à If B wants to accept, they must do it in writing to a designated business address. B accepted informally by a letter to the solicitor of A, so didn’t do it in the prescribed way. “It may be that an offeror, who by the terms of his offer insists upon acceptance in a particular manner, is entitled to insist that he is not bound unless acceptance is effected or communicated in that precise way, although it seems probable that, even so, if the other party communicates his acceptance in some other way, the offeror may by conduct or otherwise waive his right to insist upon the prescribed method of acceptance. Where, however, the offeror has prescribed a particular method of acceptance, but not in terms insisting that only acceptance in that mode shall be binding, I am of opinion that acceptance communicated to the offeror by any other mode which is no less advantageous to him will conclude the contract.” Buckley J B’s acceptance was valid even though it was not the prescribed method.
Butler Machine Tool Co Ltd v Ex-cello Corporation (England) Ltd [1979] 1 WLR 401 (Bur 27)
Butler makes machinery, they are discussing a price. Price variation clause in relation to materials à Price of steel may go up over the five years, for example. 23 May: Revised offer from Butler to Ex-cello, a document containing a price variation clause. 27 May: Ex-cello reply is a counter-offer (because there is a big change, buyers want fixed price). Send documents back without a price variation clause. 5 June: A tear-off slip says that the person accepting (Butler) accepts the offer “on the erms and conditions thereon”, i.e. without a price variation clause. (1) Butlers signs this and sends it back. – very unhelpful (2) Butlers also sends a letter saying “we accept in accordance with our revised quotation of May 23” (counter-offer) trying to show that they didn’t accept on the Ex-cello offer. They only accept in accordance with the terms of their revised offer. Butler claim to have signed the acknowledgement clause as a receipt of the document, and claim the letter is the superior document because it was properly drafted, they put pen to paper à performative. Ex-cello claim that the signature is the totality of acceptance, unequivocally an acceptance. The problem against them is that the letter, “in accordance with our revised quotation of 23 May…” is a counter-offer. à Identify subject matter of the contract. The key document is the tear-off acknowledgement clause. Butler argues that Ex-cello accepted the counter-offer in the letter when the machinery was accepted. Court held that Ex-cello wins, the letter is only a covering letter.
Tekdata Interconnection Ltd v Amphenol Ltd [2009] EWCA Civ 1209
Tekdata generated the first “form” with their purchase order under their terms and conditions. Amphenol’s acknowledgement state that their terms and conditions apply. While delivery times and quality control were essential to the good relationship of the parties, this was true for many commercial relationships and was no more than a background factor. On a traditional analysis, without further documentation and if Tekdata took delivery, Amphenol’s terms apply. ‘It is not possible to lay down a general rule that will apply in all cases where there is a battle of the forms. It always depends on an assessment of what the parties must objectively be taken to have intended. But where the facts are no more complicated than that A makes an offer on its conditions and B accepts that offer on its conditions and, without more, performance follows, it seems to me that the correct analysis is what Longmore LJ has described as the ‘traditional offer and acceptance analysis’, i.e. that there is a contract on B’s conditions.’ Pill LJ
Entores Ltd v Miles Far East Cpn [1955] 2 QB 327 (Bur 33)
The method of communication was a Telex, like a fax machine. The jurisdiction whose law the contract would be subject to depends on where the contract is formed. The acceptance was sent from the Netherlands but received in England, so the contract is under English law.
“The problem can only be solved by going in stages. Let me first consider a case where two people make a contract by word of mouth in the presence of one another. Suppose, for instance, that I shout an offer to a man across a river or a courtyard but I do not hear his reply because it is drowned by an aircraft flying overhead. There is no contract at that moment. If he wishes to make a contract, he must wait till the aircraft is gone and then shout back his acceptance so that I can hear what he says. …
Now take a case where two people make a contract by telephone. Suppose, for instance, that I make an offer to a man by telephone and, in the middle of his reply, the line goes "dead" so that I do not hear his words of acceptance. There is no contract at that moment. The other man may not know the precise moment when the line failed. But he will know that the telephone conversation was abruptly broken off: because people usually say something to signify the end of the conversation. If he wishes to make a contract, he must therefore get through again so as to make sure that I heard. Suppose next, that the line does not go dead, but it is nevertheless so indistinct that I do not catch what he says and I ask him to repeat it. He then repeats it and I hear his acceptance. The contract is made, not on the first time when I do not hear, but only the second time when I do hear. If he does not repeat it, there is no contract. The contract is only complete when I have his answer accepting the offer.
Lastly, take the Telex. Suppose a clerk in a London office taps out on the teleprinter an offer which is immediately recorded on a teleprinter in a Manchester office, and a clerk at that end taps out an acceptance. If the line goes dead in the middle of the sentence of acceptance, the teleprinter motor will stop. There is then obviously no contract. The clerk at Manchester must get through again and send his complete sentence. But it may happen that the line does not go dead, yet the message does not get through to London. Thus the clerk at Manchester may tap out his message of acceptance and it will not be recorded in London because the ink at the London end fails, or something of that kind. In that case, the Manchester clerk will not know of the failure but the London clerk will know of it and will immediately send back a message "not receiving." Then, when the fault is rectified, the Manchester clerk will repeat his message. Only then is there a contract. If he does not repeat it, there is no contract. It is not until his message is received that the contract is complete.”
The decision is Entores is supported by Brinkibon Ltd v Stahag Stahl GmbH [1983] 2 AC 34 (Bur 35).
Felthouse v Bindley (1862) 11 CBNS 869 (Bur 41)
Negotiations about price between uncle and nephew for the sale of a horse. Uncle writes a letter saying, let’s agree on a price and split the difference. If I hear no more I’ll consider the horse mine at that price. Nephew auctions the horse. Wants to withdraw and tells the auctioneer. The auctioneer’s father was to bid for the horse to help the sale, “for the sake of the sale” to get a higher price by showing that it is more valuable. This would make his auction more popular because everything would seem to be sold and for higher prices. However, the auctioneer’s father fell asleep and the horse was knocked down to a real bidder. Q: Was there a contract between the uncle and nephew? A: No, but acceptance by conduct and waived notification of acceptance could be silent.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523
A formal contract fives architects higher, more secure pay. 1. Late August: “Get the contracts to him” Empirnall, so they can see. 2. 14 September: Abraham says “Eric does not sign contracts.” Eric = managing director, Abrahams = agent 3. Late September: Progress claim paid by Empirnall. 4. 3 October: Machon sent letter enclosing contracts to Empirnall à not complete, a little bit missing. 5. 18 October: Progress claim paid by Empirnall but no acknowledgement of contract. 6. 19 October Send another letter, “we are proceeding on the understanding that the conditions of the contract are accepted by you.” 7. Another progress payment paid by Empirnall. Q: Are they acting on the contract? Y: On behalf of Machon Paul: - Unequivocal act of acceptance by conduct (fact 7) - Said it’s okay to have a contract (fact 1) - Waived communication of acceptance (fact 6) N: On behalf of Empirnall: - Fact 7 is not an overt act of acceptance because they have been doing the same as before. A: Yes, there was a contract. It was a sufficient act of acceptance. “Look at the whole of the conduct of the referee.”
The Brimnes [1975] QB 929
Brandon J held here that the notice of withdrawal was sent during ordinary business hours, and that he was driven to the conclusion either that the charterers' staff had left the office on April 2 "well before the end of ordinary business hours" or that, if they were indeed there, they "neglected to pay attention to the Telex machine in the way which they claimed it was their ordinary practice to do". Communication of withdrawal of an offer by telex is effective when it could be read, rather than when it is in fact read.
Henthorn v Fraser [1892] 2 Ch 27 Travelling from Birkenhead to Liverpool by ferry. Received offer to sell two houses, needed a reply within 14 days. Put letter in on the 13th day. Held that the contract was complete when the letter was put in the post.
Holwell Securities Ltd v Hughes [1974] 1 WLR 155 (Bur 39)
This overrides the usual postal rule. Ordinarily, a contractual offer can be deemed to be accepted when it leaves the offeree and enters the postal system. In this case, the original offer clearly stipulated the method by which acceptance was to take place, and this superseded the normal operation of postal rule. Held that the postal acceptance rule does not apply in every case, even if the parties involved consider the post to be an acceptable means of communication.
Offord v Davies (1862) 12 CBNS 748
“... promise by itself creates no obligation. It is in effect conditioned to be binding if the plaintiff acts upon it, either to the benefit of the defendants, or to the detriment of himself. But, until the condition has been at least in part fulfilled, the defendant has a power of revoking it.”
Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) LR 4 Ex D 216
Mr Grant applied for shares in the Household Fire and Carriage Accident Insurance Company. The company allotted the shares to the defendant, and duly addressed to him, posting a letter containing the notice of allotment. The letter was lost in the post and he never received the acceptance. Later the company went bankrupt, and asked Mr Grant for the outstanding payments on the shares, which he refused saying there was no binding contract. The liquidator sued. Q: Have Mr Grant's offer for shares been validly accepted, and was he legally bound to pay? A: Held that there was a valid contract, because the rule for the post is that acceptance is effective even if the letter never arrives.
Tinn v Hoffman (1873) 29 LT 271 Dresdner Kleinwort Ltd v Attrill [2012] EWCA Civ 394
Formation: Consideration
Consideration is a promise in exchange for a promise. Each party of a contract must themself incur a detriment or confer a benefit on the other party. Detriment: Doing something you wouldn’t otherwise do apart from this arrangement. A promise to incur detriment is a detriment itself.
Ex: Promise to sell a car for £30,000 on 1st December. Offerall promises to incur detriment to hand over the car on 1st December. Offeree promises to give money à this is the detriment = consideration.
Consideration is at the same time as the offer + acceptance, it is a mutual exchange of promises.
Unilateral contract (e.g. offer for reward from criminal conviction, Carlill): Consideration doesn’t need to be explicit and can be implied. The consideration is the act in the unilateral contract. vs Bilateral contract
There is no difference in the adequacy of consideration in this doctrine, if it is small or undervalued etc. In the following examples, B is the one whose consideration we are examining.
Þ Past consideration is no consideration If the alleged consideration takes place before the promise is made, then there is no consideration. e.g. Unilateral contract where the terms were carried out beforehand à doesn’t count. In a contract, must be induced by the promise. Qualification: If there had been a prior request to perform the required act of consideration that, that is fine even if the promise is made after the consideration is performed.
Lampleigh v Brathwait (1615) A common form of commercial transaction today: A à guarantee à B à loan à C B is a bank that gives loan to C, usually a small company. B takes a guarantee from A. A promises B that if C doesn’t repay the loan, A will step in and pay it, often the director of the company. A promises to pay B if C can’t. In a lot of these cases, they mess up the documentation and B enters into the agreement with C before A makes guarantee. This is past consideration, so the promise has occurred before. Therefore B loses the security. However, this can be saved if A requested the loan.
Þ Insufficient consideration (illusory consideration) Where B is promising nothing. Ex: A offers to buy B’s car for £10,000. B promises to sell his car on a certain day, but puts in a qualification that essentially says, only if he feels like it. He is promising effectively to do nothing. Ex: A promises to pay for an airline ticket. B, the airline, promises to take you where you want to go. A clause in the ticket says B can take you anywhere. But provided there is a promise to do something, that’s fine.
Þ Consideration must be measurable It cannot be unmeasurable, such as love in White v Bluett (1853). Consideration doesn’t always have to be in monetary terms.
Þ Rule: Consideration must move from the promisee The person who receives the benefit of the promise must provide the consideration.
Overlapping + separate rule called ‘Third Party Rights’: only a person who is a party to a contract can sue on it.
Ex1:
A ¾ C A promises C to pay £200 to B if C promises to service his car è for two years. C promises. There is probably some relationship B between B and C, e.g. C owes B money. There is an obvious contract between A and C.
B might not be a party to this contract and might not know anything about this. Then you can take advantage of the Third Parties Rights rule. Even if he is a party to the contract, e.g. put his name on a written document, he still can’t sue because of the rule that consideration must move from the promisee to the promisor. B was promised £200 but he did not provide consideration. The person who provided consideration was C.
Ex2 commercial illustration: A (insurance company) promises C (building contractor) that A will insure C on any accidents that happen on site. C’s consideration is paying an insurance premium. A says they will not only insure C, but also B (their subcontractors). B cannot take advantage of this, because B does not pay the premium. B doesn’t provide any consideration. Rule that consideration must move from the promisee and that third parties cannot sue of the contract is commercially inconvenient.
This got changed by a statute – Contracts (Rights of Third Parties) Act 1999 Provision s 1(1): A person who is not a party to a contract B may, in his own right, enforce a term of a contract if either: 1. The contract between A and C expressly provides that he may. 2. The term purports to confer a benefit upon him. This sections effectively abolishes both rules.
Two limitations: 1. s 1(2) B cannot enforce a term if on a proper construction of the contract it appears that A and C did not intend for the contract to be enforceable by B. 2. As the contract is between A and C as the primary obligation, they can change or cancel the contract without reference to B, unless: - B communicates his assent (acceptance) to the term by telling the promisor A - Or the promisor A knows or should have known that the third party B has relied upon the term (if there was no assent from B) and B had indeed relied on the term.
Ex: John renovates a house, employs a builder called Kevin. He had a contract to finish by 15 December so John can move in by Christmas, agreed a contract price for £50,000. In late November, they met on site, Kevin said he probably can’t finish on time unless John gives him £5000 extra. When he finishes on time, John refuses to pay the extra £5000. Kevin drives off angrily and crashes accidentally. Was this reasonable, or was John’s behaviour improper? Should law enforce this extra little contract? 1. Main contract 2. 5k extra to complete the work on time A promise to fulfil the existing/original contractual duty is not consideration. Also, law of duress à Kevin threatened not to prioritise this job.
Stilk v Myrick (1809) The performance of an existing contractual duty = no legal detriment occurring. Only looked at legal detriment à essentially still good law, but needs refinement and limitation.
Williams v Roffey [1991] If a promisee confers a factual (practical) benefit, should pay/accept agreement which vary the initial contract. There will be consideration. Didn’t overturn Stilk v Myrick but recognised the principle and added to it. Start off with Stilk v Myrick, then identify any factual benefit. Finally, look at the possibility of duress.
Ex: B owes A £1000 payable on 1st December. B is not doing well, so A lets B off £400, asks for the promisee to pay only £600 on the due date. If this is not carried out, A can sue for the full £1000.
Foakes v Beer (1884) – HL case Qualification: A promise to pay the debt itself or less than the full debt is not good consideration, just Stilk v Myrick. But paying a smaller sum early before the due date it would be good consideration. From Williams v Roffey, factual benefit for A is that he will get some money at least. But in the instant case, it was decided that Foakes would be performing less than his contractual duty.
Re Selectmove Ltd (1995) You cannot apply Williams v Roffey where there is a promise to waive a debt, not because there may not be a factual benefit, but because of the doctrine of precedent. In the HL case of Foakes, they said that a promise to pay a lesser amount cannot be good consideration. You cannot apply the factual benefit analysis (Williams v Roffey argument) where there is a promise to waive a debt to allow the debtor to pay a lesser amount.
Problem question approach: 1. Is this a Stilk v Myrick situation – a promise to perform or performance of an existing contractual duty? Prima facie, that is not good consideration. 2. Look at the qualification because of Williams v Roffey which applies in most cases. There will be good consideration if you can find from the facts that there is a factual benefit conferred by the promisee on the promisor. 3. If there is a waiver of debt situation where one promises to waive part of a debt, then you cannot apply the factual benefit analysis principle. 4. Possibility of duress. 5. Law will support voluntary variation on an existing contract.
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Deferral of debt
Waiver of part of the debt: Stilk v Myrick B is just promising to perform less than his contractual duty vs Defer the debt by paying in instalments: Still promising to perform less than his contractual duty
Has B conferred a practical benefit on A, if there a commercial advantage? Re Selectmove couldn’t use the practical benefit argument from Williams v Roffey.
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] The position now seems to be: 1. Where there is a promise to defer a debt, you can look at if there is a practical benefit, apply Williams v Roffey. 2. The practical benefit must be something more than the advantage to the promisor of just getting in the money by itself.
Shadwell v Shadwell (1860) A promise to perform an existing contractual duty to a third party has always been good consideration, Stilk doesn’t apply. This rule stands separately on its own.
----- Ex: Fred, a builder, entered into a contract with Arthur, a haulage contractor, for the transportation of building materials from Wales to Manchester. By the terms of the contract the first delivery had to be made to the building site in Manchester by 1 August. Arthur was having mechanical difficulty with his lorries since he had taken on too much work and was forced to overload them. He told Fred that he would not be able to make delivery by August 1st, but could do something if Fred paid him another £1,000 in addition to the contract price of £3,000. Fred agreed to this proposal, but subsequently refused to pay the additional £1,000. Can Arthur recover this sum from Fred?
Contract initially. In order to make Fred’s £1000 enforceable, must prove that it is a contract. Stilk v Myrick says it needs fresh consideration. The mariners brought cargo from London to the Baltic and got paid £5 per month. Their contract was to complete the voyage as much as they could, doing everything necessary. Performance of a pre-existing duty cannot be considered consideration. Williams v Roffey says practical benefit is consideration.
P 13: There is, however, another legal concept of relatively recent development which is relevant, namely, that of economic duress. Atlas Express v Kafco says economic duress means contract is not enforceable. Economic duress – consent is involuntary If there is economic duress, in Stilk v Myrick it is said that if the second promise has the same consideration, it is not a contract. If there is economic duress, there is no practical benefit. Opal v Phillips: only in absence of economic duress can there be practical benefit. First thing is to see if there is duress. Lord Glidewell in Williams v Roffey sets criteria pp 15-16 Glidewell held Williams had provided good consideration. The test for understanding whether a contract could legitimately be varied was set out as follows: - A has a contract with B for work - Before it is done, A has reason to believe B may not be able to complete - A promises B more to finish on time - A "obtains in practice a benefit, or obviates a disbenefit" from giving the promise - There must be no economic duress or fraud
The practical benefit of timely completion, even though a pre-existing duty is performed, constitutes good consideration. Cannot use promissory estoppel because (Baird Textile Holdings v Marks & Spencer plc) it cannot be a cause of action. Arthur can claim £1000 from Fred because it follows Glidewell’s criteria and there is a new contract.
Cases
Lampleigh v Brathwait (1615) 80 ER 255
Brathwait murdered some people and wanted a pardon from the king. Asked Lord Lampleigh, and Lampleigh got the pardon. Brathwait then tells Lampleigh that he would give him 100 guineas. Where a past benefit was conferred at the beneficiary's request, and where a reward would reasonably be expected, the promisor would be bound by his promise.
White v Bluett (1853) 23 LJ Ex 36
A father, John Bluett (A) and his son William Bluett (B), a university student who liked gambling and wasted all his money. He borrowed money from his father for these purposes → There is a debt from B to A. A says that he will forgive the debt if B promises to show “natural love and affection”. Court decided it’s unmeasurable.
Stilk v Myrick (1809) 2 Camp 317; 170 ER 851 (Bur 106) Ship in the Baltic in winter. Come sailors deserted at a port, crew is shorn out. Captain tells the remaining sailors that he will give them extra money if they get the ship back to London. Court held that he didn’t have to pay – the sailors were already bound to do that with their original employment contract. They were not conferring a legal benefit on the captain.
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 WB 1 (Bur 107)
C ---- A ⎯ B A = builder, B = subcontractor, C = owner of the building A says to B, “I will pay you another £10,300 if you get the job done on time.” This is a factual benefit for A, because C wants the job done on time, so they must pay B.
Foakes v Beer (1884) 9 App. Cos 605 (Bur 112)
Beer agreed to waive the interest on Foakes’ debt if he paid her back on a particular date. When she later sued for the interest, she lost because she knew Foakes was in financial difficulty and she had a factual benefit by being able to recover the money. However, the promise to pay a debt was deemed not to be sufficient consideration as there was no additional benefit moving from Foakes to Beer that was not already owed to her.
This decision was held in Re Selectmove Ltd (1995) 1 WLR 474 (Bur 115).
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553
Rock Advertising paid fees to MWB for use of premises operated by MWB. 1. Rock isn’t doing too well, can’t pay licence fees, accumulate debt of £12,000. 2. Come to an arrangement whereby Rock will pay off the debt by instalments (promise to defer the debt). They will make an immediate payment and pay smaller payments in the start to get their business back on its feet, and pay larger payments towards the end. 3. Rock allowed to remain licensee of the premises, can stay there. Re Selectmove says they were performing less than their contractual duty. However, there were practical benefits (para 48): 1. MWB get some money promptly. 2. It was to MWB’s advantage commercially to retain them as a licensee and have their premises occupied by somebody whose business might get better. This additional benefit that they retain Rock as a licensee is crucial. It is peculiar to the facts of the instant case.
Shadwell v Shadwell (1860) 9 CBNS 159, 42 ER 62 (Bur 100)
B is a lawyer struggling at the bar with no money. A (B’s uncle) says if B promises to marry C (Ellen Nichol), A will give B an allowance of 100 guineas a year to help him until his practice gets better. B is already engaged to C, so when he promises A that he will marry C, he is already contractually bound. B is simply promising to perform not as in Stilk a contractual duty to the other party in the contract, but promising to perform a contractual duty to a third party.
Atlas Express v Kafco (Importers & Distributors) Ltd [1989] QB 833
Kafco Ltd had a contract with Atlas to supply Woolworths with baskets. They had a ‘trading agreement’ with Atlas Express for at least six months to do the deliveries. Atlas Express realised it had underestimated the size of cartons to be carried. So it was costing more to deliver. Kafco would not vary the price. Atlas sent an empty truck to Kafco, with a letter saying if a higher charge was not agreed to, the truck would leave empty. Kafco would go broke without the contract and had no other option, so they signed. Later, Kafco refused to pay, and argued there was economic duress (illegitimate pressure), and also no new consideration. Atlas had given no consideration for its promise to pay more money because Atlas was merely performing an existing contractual duty. Tucker J held there was economic duress in this situation, which meant the contract was voidable. When Kafco’s Mr Armiger signed, he did so ‘unwillingly and under compulsion (...) He had no bargaining power. He did not regard it as a genuine arm’s length re- negotiation in which he had a free and equal say and, in my judgement, that view was fully justified.’
Definition of consideration: Currie v Misa (1875) LR 10 Ex 153, 162 Consideration need not be adequate Past consideration: Pao On v Lau Yiu Long [1980] AC 614 (Bur 93) Consideration must move from the promisee: Tweddle v Atkinson (1861) 121 ER 762 (Bur 498)
Performance or promised performance of existing duty: Public duty Collins v Godefroy (1831) 109 ER 1040 Glasbrook Ltd v Glamorgan CC [1925] AC 270 To a third party New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154 (Bur 512)
Forbearance to Sue and Compromise (non-examinable): Callisher v Bischoffsheim (1870) LR 5 QB 449
Formation: Promissory Estoppel
Estoppel
Are there any situations where the law comes to the aid of the promisee?
The Judicature Act 1873-5 gave judges in all the divisions of the new court the power to administer the rules of both the common law and equity. In the event of a conflict between the two, equity would prevail. This was a logical necessity, as equity was always secondary to common-law, so if common-law had been given precedence, equity would have disappeared. Equity remains in the modern legal system mainly in the form of equitable remedies – e.g. injunction, specific performance. Common Law can only award ‘damages’ – sums of money (liquidated [a known amount] or unliquidated [a guess]).
A ¬debt¾ B No consideration according to Williams v Roffey when there is no practical benefit other than getting some money.
Basic principle: Applies where a promise is made, intended to create legal relations, which, to the knowledge of the person making the promise, is going to be acted upon by the person to whom the promise was made.
To change or vary a contract, there must be consideration, and consideration must move both ways A à B, B à A Promissory estoppel instead suspends rights of the promisor under a contract, i.e. the promisor promises not to ask for enforcement of the rights in the pre-existing legal relationship. The promissor is estopped (prevented) from claiming rights under the contract.
Þ Must have a pre-existing legal relationship for there to be promissory estoppel. e.g. Thomas is sued by student, must pay £10,000. The legal action creates a legal relationship. The promissory estoppel is an agreement to pay in instalments.
Ex: A ¬debt¾ B B is a business who owes A £1000. A asks for only £600. B committed the funds elsewhere, e.g. bought machinery with the £400. æ General notion/result of the promise, reliance? However, A doesn’t request the act to be done specifically, i.e. “I will let you off if you buy machinery”, so no consideration from A.
D & C Builders v Rees [1966] Must be inequitable for the promisor to go back on his promise, must be reasonable to go back on it. Unless B behaved badly, and induced the promise from A.
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Estoppel is not like a contract and has limitations:
1. Under traditional view, open for promisor to go back on his promise if there is a reasonable notice of period of time to resume the former position. This is so even if A makes an irreparable promise like “I will let you off £400 forever”. However, Collier v P&MJ Wright [2007]
2. Stilk v Myrick facts applied to estoppel: Captain made an unambiguous representation of promise and the sailors relied on it. But the limitation is that estoppel cannot be a cause of action, and can only be used as a defence (shield). This arises from the case Combe v Combe [1951]. In the debt example above, when A sues B for the £400, estoppel is B’s defence.
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Conditions for promissory estoppel to apply
Hughes v Metropolitan Railway (1877)
1. Pre-existing legal/contractual relationship, e.g. landlord/tenant lease 2. Unequivocal (unambiguous, clear intention) promise, e.g. letter + negotiations (implicit from behaviour) 3. Reliance/change in position by promisee because of promise. The promisee must rely on the representation, and do something or stop doing something, i.e. they are in a worse position if the promisor goes back on his promise. Þ Weak condition because it is easy to satisfy, only need a very small change in the promisee’s position. Can be any change, doesn’t have to be a detriment. 4. Inequity if promisor goes back on their promise, e.g. Hughes’ promise meant Metropolitan Railway didn’t do repairs, if H didn’t make the promise then MR would have plenty of time to make repairs. Þ The court has discretion for inequity. Taking advantage of the promisee is inequitable.
Consequences
The promisor (H) is estopped/precluded/prevented from claiming his relevant rights in the contract (repairs within 6 months, right to eject afterwards, no other rights of the contract affect).
Central London Property v High Trees [1947] There was an unambiguous representation, intention to effect legal relations. Promissory estoppel was not in the ratio decidendi but in the obiter dicta, creating a precedent even though it was only applied to a hypothetical situation. Q: Could CLP claim back rent to January 1940? N: Promissory estoppel
1. In an exam, first find whether there was a contract. a. Offer + Acceptance? Yes, see agreement b. Consideration? CLP à HTH reducing rent is detriment to CLP + benefit to HTH HTH à CLP no consideration, must live up to agreement of lease anyway (Collins v Godefrey, Foakes v Beer) Williams v Roffey is a practical benefit, e.g. timely completion è Not a strong argument, practical benefit has strong requirement. If there was a contract, CLP wouldn’t be able to get back rent or full rent in future.
2. Was the contract varied? a. Pre-existing legal relation: 1937 lease b. Unequivocal promise: Jan 1940 agreement c. Reliance: Didn’t pay full rent (didn’t make effort to get, or put money elsewhere) d. Inequity if going back on promise: None, in Jun 1945 went back to full occupancy so why shouldn’t HTH pay full rent? Not inequitable. If CLP asked for back rent to Jan 1940, inequity would be fulfilled for period before full occupancy.
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How to avoid promissory estoppel
Must give sufficient advance notice. The conditions why the promise was made have ended.
How do the requirements of promissory estoppel differ from requirements for a valid contract? - Promissory estoppel does not require consideration. This is why you apply promissory estoppel – in situations with no consideration. - Equity/inequity shown in promissory estoppel, characterised by protecting people in inequitable situations. In a contract, the contract is valid no matter if it is equitable or not.
Waltons Stores (Interstate Ltd) v Maher (1988) Australian case Contract was never formalised, so no valid contract. The promisee successfully used promissory estoppel to sue the promisor à use it as a cause of action, i.e. as the basis of his claim. In Australia, you don’t have to show pre-existing legal relations, can use promissory estoppel as a cause of action. Þ Unpredictable because too much under inequity.
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Susan is a freelance writer with four young children. She has to finish the book she is writing by 15 September to meet her publishers’ deadline, otherwise she stands the risk of having to repay part of her advance fee. At the beginning of June, she employs a live-in “Mothers Help”, Angela, for £2000 per month to look after the children while she gets the book finished. By the end of June it is clear that Susan is behind schedule, and she asks Angela if she can cover evenings and Saturdays as well, saying “I will see you are all right if you do.” Angela agrees.
In the middle of August, Susan says to Angela, “Because it has been difficult with the children off school I will give you a £750 bonus at the end of this month.” On the strength of Susan’s promises, Angela puts down the deposit on a new high quality sound system.
However, at the end of August Susan informs Angela that she has had some unexpected additional expenses, and can only afford to pay her £1500 for that month. Angela reluctantly agrees to accept the £1500 as “full and final payment” for August.
Susan manages to finish the book on time, and the publishers are so pleased they gives her an additional bonus of £4000.
Advise Angela as to whether she has any claim against Susan for the evening and Saturdays worked, and for the £750 “bonus”, and whether she is bound by her promise to accept £1500 in ‘full and final settlement’.
“I’ll see that you’re alright” lacks certainty. Foakes v Beer – part payment of the debt is never satisfaction of the whole. Re Selectmove says practical benefit is not applicable here, promissory estoppel is, but unlikely to be successful. Apply MWB v Rock? Inequity hard to enforce due to Angela’s conduct. D&C Builders v Rees “he who comes with equity must come with clean hands.” Cases
Hughes v Metropolitan Railway (1877) 2 App Cas 439 (Bur 118)
Huges: Appellant = Landlord Metropolitan Railway: Defendant = Tenant
22/10/74: Notice to repair Landlord gave notice to a tenant that he would be evicted in six months if he doesn’t do repairs on the property.
28/11/74 – 30/12/74: Negotiations Landlord then starts negotiations with the tenants for the purchase of the lease à Need to buy out the tenant to get back the lease, otherwise the tenant is entitled to stay there. Tenant stops doing repairs, implied by the landlord that he doesn’t need to if he buys back the lease. Negotiations break down.
22/04/75: Notice to eject Six months from the first notice, landlord relies on the original eviction. Could eject if MR breached the contract. There was a representation of promise by the landlord that the tenant didn’t have to do repairs. Tenant is obviously in a worse position here, stopped repairs and now might be evicted.
June 1875: Finished repairs
1. Offer? Yes, suspend repairs 2. Acceptance? Yes 3. Consideration? H à Later repairs by MR is detriment to H + benefit to MR MR à H doesn’t provide consideration \ The contract is not varied, new contract not made. But Hughes cannot eject because of promissory estoppel.
Central London Property v High Trees [1947] KB 130 (Bur 119)
CLP: Plaintiff = Landlord HTH: Defendant = Tenant CLP won, awarded the full rent/back rent for the last two quarters of the year (from end of Jun ‘45 to end of Dec ’45).
1937: Lease Sept 1939: War Jan 1940: ½ rent agreement (didn’t say how long it would last) because occupancy was low. Jan 1945: Full occupancy Aug 1945: End of war 21 Sept 1945: Claimed the difference – back rent
Collins v Godefrey (1831) 1 B & Ad 950
The claimant, Collins, had been subpoenaed to attend court as a witness in separate court case involving the defendant, Godefrey. Godefrey had sued his attorney for malpractice and Collins was required by the court to attend as an expert witness. In fact Collins never gave evidence but was required to be on standby for six days in case he was called. After the trial Collins gave Godefrey an invoice to cover his time spent at court and demanded payment by the next day. Held that Collins was under a public duty to attend court due to the subpoena. Where there exists an existing public duty this can not be used as consideration for a new promise. Godefrey was not required to pay him.
D & C Builders v Rees [1966] 2 QB 617 (Bur 147)
D&C owed £700 by Mrs Rees. Allowed Rees off half the debt because Rees threatened that D&C wouldn’t get anything. Pretended she was poor but she was actually rich. D&C can go back on this promise because Rees behaved inequitably.
Collier v P&MJ Wright (Holdings) Ltd [2007] 1 WLR 643 (Bur 121)
Mr Collier was one of three partners of a property developer. They had assented to a court order to pay £46,000 to Wright Ltd in monthly installments of £600, and were jointly liable. In 2000, swore Mr Collier, there was a meeting where Wright Ltd said he would be severally liable (for £15,600), rather than jointly (as a partner). The other two partners went bankrupt in 2002 and 2004. In 2006, when Mr Collier had finally made his payments (totalling exactly one third of the debt) Wrights served on him a statutory demand for the 'balance of the debt'. Mr Collier applied under rule 6.4 of the Insolvency Rules 1986 (because the debt was disputable on ‘substantial grounds’ (r.6.5(4)(b)); so he only needed to show there was a ‘genuine triable issue’ in which case the court would set aside the demand. He alleged the variation agreement was binding, or if not that Wright Ltd was estopped from enforcing the full payment. Held that promissory estoppel could aid Mr Collier. Where he had been assured that he could repay only part of the debt, he had relied on the assurance by making his payments, Wright Ltd resiling from the promise ‘would of itself be inequitable’. However, there is a need for a ‘meaningful reliance’.
Waltons Stores (Interstate Ltd) v Maher (1988) 164 CLR 387 (Bur 132)
Maher owned some property with buildings on it and was negotiating with a department store company called Waltons Stores for a lease of the land. They wanted an existing building to be demolished and a new one erected. In reliance on representations made before a contract was completed, Maher demolished the building and started to erect a new one, but the contract never came to completion because Waltons Stores did not sign the lease. Waltons told their solicitors to slow the deal while they did further investigations as to whether the transaction would be good business, but allowed Maher to remain under the impression that the deal would be completed. Because Maher had acted to his detriment, in reliance on the encouragement of Walton Stores, which had acted unconscionably, equity would intervene.
Ogilvy v Hope Davies [1976] 1 All ER 683 Combe v Combe [1951] 2 KB 215 (Bur 123)
Crabb v Arun District Council [1976] 1 Ch 170 (Bur 125)
Promissory estoppel cannot be used as a cause of action: Baird Textile Holdings v Marks & Spencer plc [2001] EWCA Civ 274
Formation: Intention to be Legally Bound, Privity and Rights of Third Parties
Intention to be Legally Bound
This problem doesn’t exist in any commercial relationship. However, a party can put a clause in to sya there is no intention.
Rose & Frank v Crompton Bros [1925] Sometimes it will not be phrased as a contractual commitment à instead, expressed as policy or a letter of intention.
In family cases, there is a presumption against intention to be legally bound. Rule: When an arrangement is made between close relatives, there is a presumption that there is no intention to be reinforced. This can be rebutted or reinforced on evidence of the facts.
Jones v Padavatton [1969] 1. Informal and casual setting reinforces the presumption. 2. How certain are the terms? If very clear and concise, this rebuts the presumption. 3. Closeness of the relationship à estranged? Would rebut the presumption. 4. Degree of reliance on the promise à the more extreme the steps taken, can rebut the presumption.
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Privity
Ex: Maureen, who is a mature student, has a daughter, Kate (aged 18). Maureen has been offered a place to study engineering at the University of London, but is hesitant to accept because of family and financial commitments. Maureen’s mother, Eve, writes to Maureen in these terms. Dear Maureen I was delighted to hear about the offer and you should accept. I have come into some money lately and I am prepared to offer you a sum of £10,000 if you take up the place, and also a sum of £5000 to Kate, who will be going to university soon. I know we have had our differences, but I want you to know I mean it. With love Eve Maureen is somewhat reassured about her financial position and accepts the place. Eve subsequently refuses to pay either Maureen or Kate. Advise Maureen and Kate.
Beswick v Beswick [1968] Probate is worse than divorce, people are greedy!
The rule tells Kate that she cannot sue because she is a third party. However, the Third Parties Act 1999 doesn’t say that she can’t enforce it. Ss 3, 4 intention à promisor gets all the same defences. Kate must first prove that the contract between Maureen and Eve is enforceable.
Balfour v Balfour [1919] Promise between husband and wife not binding.
Meritt v Merrit [1970] This is different to Jones and Balfour because the husband and wife are not in amity. They “bargain keenly” and Mrs Meritt requires the husband to write down everything they agreed on.
Cases
Rose & Frank v Crompton Bros [1925] AC 445
Jones v Padavatton [1969] 1 WLR 328 (Bur 82)
Mother said to daughter: I will give you this allowance if you study to become a lawyer in London. Later, the arrangement changed from a bank transfer of allowance to staying with no rent in mother’s house, and she could get money from renting out rooms. Jones, the daughter, gives up a comfortable job in Washington to come to dark London and take up this offer. Took longer than the “reasonable time” to become qualified, says Salmon LJ. A lot of uncertainties so no contract.
Beswick v Beswick [1968] AC 58 (Bur 517)
A ¬K® B A = nephew, promisor, B = uncle, promisee ½ C C = aunt, third party
Nephew promised uncle he would take care of aunt when uncle died, in return for the uncle’s business. The aunt could not sue the nephew, but got specific performance because she was named in charge of the uncle’s estate.
Balfour v Balfour [1919] 2 KB 571 (Bur 81)
Wife ran husband’s household. Comes back to England for operation, and is advised by doctor to stay. Husband promises to pay her an allowance. Male judges thought these promises weren’t binding.
Meritt v Merrit [1970]1 WLR 1211
Contracts (Rights of Third Parties) Act 1999 s 3
3 Defences etc. available to promisor.
(1) Subsections (2) to (5) apply where, in reliance on section 1, proceedings for the enforcement of a term of a contract are brought by a third party.
(2) The promisor shall have available to him by way of defence or set-off any matter that— (a) arises from or in connection with the contract and is relevant to the term, and
(b) would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee.
(3) The promisor shall also have available to him by way of defence or set-off any matter if— (a) an express term of the contract provides for it to be available to him in proceedings brought by the third party, and (b) it would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee.
(4)The promisor shall also have available to him— (a) by way of defence or set-off any matter, and (b) by way of counterclaim any matter not arising from the contract, that would have been available to him by way of defence or set-off or, as the case may be, by way of counterclaim against the third party if the third party had been a party to the contract.
(5) Subsections (2) and (4) are subject to any express term of the contract as to the matters that are not to be available to the promisor by way of defence, set-off or counterclaim.
(6) Where in any proceedings brought against him a third party seeks in reliance on section 1 to enforce a term of a contract (including, in particular, a term purporting to exclude or limit liability), he may not do so if he could not have done so (whether by reason of any particular circumstances relating to him or otherwise) had he been a party to the contract.
Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38 (Bur 543)
Intention to effect legal relations in commercial relationships: Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 379
Formation: Incomplete and Uncertain Agreements
Failure to specify subject matters
Mercantile Credits Ltd v Harry [1969] Didn’t specify subject matter.
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Certainty of terms
Take the general facts from these cases.
Hillas v Arcos Ltd (1832) Sale of timber of “fair specification”.
Sudbrook v Eggleton [1983] Machine breaks down because one party did not get a valuer.
Nicolene v Simmons [1953] “Usual conditions of acceptance” context has no meaning, superfluous and doesn’t add anything. The court deletes meaningless terms, doesn’t make it uncertain.
RTS Flexible Systems v Molkerei [2010] Illustrates determining whether a contract is certain à Has it been partially fulfilled/partially performed? This provides a background/context to the contract.
Sale of Goods Act 1979 ss 8(2), 9 If there is no price, a reasonable price will be put on à mechanism for resolving uncertainties.
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Agreement to agree
The principle sets out that this is meaningless, then there has not been a completed agreement. However, it does make a different in court if the contract is partially performed.
Foley v Classique Coaches Ltd [1934] 1. Contract partially performed 2. Agreement to agree only on one term of the contract, didn’t have to agree on everything. Þ Held to be certain.
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Agreement to negotiate
There is no duty to negotiate on good faith.
Walford v Miles [1992] Promise not to negotiate with someone else.
Ex: Want to buy a flat. Agree on price and buying. Special contractual procedure where no contract until formal exchange of contract. Buyer will get solicitor and surveyor, + organise mortgage. Seller can still negotiate with other people to get a better price and pull back from this firt agreement à ‘gazumping’ facilitated by the contractual procedure.
Sometimes to avoid this, seller makes a promise not to negotiate with a third party or accept offers within a stipulates fixed period. Þ Must have this to be effective. The buyer promises something in return as the consideration.
Pitt v PHH Asset Management Ltd [1994] Agreement not to negotiate with a third party à “lockout” agreement
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Agreement “subject to contract”
Head a letter with “subject to contract” to stop yourself from entering a contract, i.e. there is no binding arrangement unless a formal contract is drawn up. Þ Inclusion of this prevents from contracting.
Branca v Cobarro [1947] “This is a provisional agreement until a fully legalised agreement is drawn up.” à bad practice Q: Is this present agreement immediately binding or are contractualised obligations postponed until a second agreement/fully legalised contract is made? “fully” suggests/implies that the present agreement is already partially legal. A: Held to be a contract. Cases
Mercantile Credits Ltd v Harry [1969] 2 NSWR 248
B and C have two leases in place between them. A says they will guarantee the lease, but not which lease. A B æ ½ 2 leases C
Hillas v Arcos Ltd (1832) 147 LT 503 (Bur 61)
Sale of Goods Act 1979
8 Ascertainment of price. (1) The price in a contract of sale may be fixed by the contract, or may be left to be fixed in a manner agreed by the contract, or may be determined by the course of dealing between the parties. (2) Where the price is not determined as mentioned in sub-section (1) above the buyer must pay a reasonable price. (3) What is a reasonable price is a question of fact dependent on the circumstances of each particular case.
9 Agreement to sell at valuation. (1) Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party, and he cannot or does not make the valuation, the agreement is avoided; but if the goods or any part of them have been delivered to and appropriated by the buyer he must pay a reasonable price for them. (2) Where the third party is prevented from making the valuation by the fault of the seller or buyer, the party not at fault may maintain an action for damages against the party at fault.
Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444 (Bur 68)
Nicolene Ltd v Simmons [1953] 1 QB 543
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14
Foley v Classique Coaches Ltd [1934] 2 KB 1
Walford v Miles [1992] 2 AC 128 (Bur 71)
Pitt v PHH Asset Management Ltd [1994] 1 WLR 327
Branca v Cobarro [1947] KB 854
Certainty of terms: British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 (Bur 75)
Agreement to agree: May & Butcher v The King [1934] 2 KB 17 (Bur 66)
Agreement “subject to contract”: Masters v Cameron (1954) 91 CLR 353 Carlton Communications and Granada Media plc v The Football League [2002] EWHC 1650 (Comm)
Vitiating Factors: Mistake in Common Law
Vitiating element: There is a dissensus, no agreement. è Destroy a binding agreement by negating or nullifying consent. Þ Mistake – parties suffering from misapprehension Þ Misrepresentation – fraudulent, innocent, negligent Þ Duress – one party forces another to contract, the means by which the affirmation was gotten Þ Undue influence – relationship between the parties. Nature of the relationship, one party takes advantage or appears to take advantage of the other’s trust/confidence à equitable doctrine Þ Unconscionability – inequality of bargaining power
What is the effect of a vitiating element? Third parties? Adjust rights? a. The contract is void à a paradox, the contract looks like a contract but is not. b. The contract is voidable à contract which one party has the right to rescind (set aside). If this is not exercised or is lost, then there is a contract.
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Mistake
Leading case = Bell v Lever Brothers Ltd [1931] Hard facts make bad law. Lord Atkin tries to offer a rationale for mistake à negates or nullifies consent. Then sets out categories of mistake: 1. Identity of the contracting parties 2. Existence of the subject matter at the date of the contract 3. Quality of the subject matter Types of mistake: 1. Mistake of fact – parties mistaken about factual matter 2. Mistake of law – e.g. Think this woman owns the car, but she doesn’t è Recognised in Brennan v Bolt Burdon [2004] Mistake can claim relief à Did one party have a legal claim with another? Rule: an assumption that everyone knows every law was swept aside by this case.
Two distinctions: 1. Recognisable ‘operative’ mistake that law will give effect to à mistake in fact or law. 2. Mistake in common law and mistake in equity (concerning morality, unconscientious to enforce a contract with mistake) è Before 1875, common law and equity were two separate legal systems. Court of common law: problem – procedurally based system Court of equity: led to by ‘appeal to the King’, system based on conscience, offered discretionary relief. Can have more powerful procedures + remedies. Remedies à rescind K on terms, refuse specific performance, ratify mistakes when recording the terms. Division: Unilateral mistake vs bilateral mistake è è one party is mistaken both parties are mistaken a. Parties share same mistake b. Parties have different mistakes
Sanctity of contract vs reasonable expectations à courts must make a choice, generally attempt to uphold contract.
Neither party has reasonable expectations of the contract Unilateral mistakes: a. Mistake as to a promise b. Snapping-up cases, e.g. mistaken price posted online à English law says not binding c. Mistake of identity
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Absence of genuine agreement
Bilateral mistake, but parties do not share the same mistake, i.e. have different mistakes.
Raffles v Wichelhaus (1864) Benjamin J says where neither party has a reasonable expectation, the mistake makes the contract void. Parties cross purposes, both had been mistaken about different things.
Scriven Bros & Co v Hindley & Co [1913] One party thought it was tow, the other thought it was hemp, no contract.
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Mistake as to the existence of the subject matter
Couturier v Hastie (1852) When the cargo was sold it had already rotten, so no longer existed.
McRae v Commonwealth Disposals Commission (1951) Failure of consideration? Mistake cannot be negligently introduced by a party who then seeks to rely upon it to avoid contractual liability. Whoever is responsible for the mistake cannot rely on it.
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Mistake as to the possibility of performance – no contract
Sheikh Bros Ltd v Ochsner [1957] Physical impossibility: assumption of risk Cooper v Phibbs (1867) Legal impossibility: Cannot rent what you already own Contract rescinds on terms.
Griffith v Brymer (1903) Commercial impossibility: How do you characterise the contract? If the character is gone, is the contract still valid?
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Mistake as to quality of the subject matter
There can be a mistake in law about one party’s legal rights, which can found that the mistake can negate consensus to the contract. Intersections in the law of mistake mean that the distinction between mistake in fact and mistake in law no longer matters. Mistake at common law vs equity.
Bell v Lever Brothers Ltd [1931] The quality of the subject matter is the terminability of the employment contract. When taking action, claimed fraud but when collapsed they were pushed back to pleading mistake for formation. Should have been mistake for payment? Wright J tells jury they can find the contract does not exist if there is: a. Fraud – jury merciful for not finding this, because if fraud it would affect their trading in future b. Mistake – rendered contract void
In HL, Atkin LJ tries to set out a clarification for the doctrine of mistake in English law. Said mistake made a contract void. @p 218: “Mistake as to the quality of the thing contracted for raises more difficult questions. In such a case, mistake will not affect assent unless: 1. It is the mistake of both parties 2. It is to the existence of some quality which makes the thing without the quality essentially different from the thing it was believed to be.” @p 220: Whether Lever could have done what he set out to do for free (i.e. in another way) is immaterial, same goal reached.
Established parameters to all of mistake. Atkin LJ says the quality is not sufficiently fundamental. à Wrong! The quality is important. Mistake must be judged on an objective basis, however while we know what the reasonable man might think because of the jury trial for finding of fact, in the objective position Lever would win!
Look at context of when these cases come out. Bell v Lever Bros took place just after the Gold Standard was removed, currency becomes more awkward and contracts are more volatile. Judges trying to diminish contract volatility by establishing sanctity of contract in this case.
There are some cases that indicate operative mistake to subject matter. Application of the test to the facts of Bell v Lever Bros but it does recognise the existence of mistake in the quality of subject matter.
Mistake in the quality of the subject matter: Galloway v Galloway (1914) and Scott v Coulson [1903]
Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] Steyn J explores mistakes in law vs equity: - Courts should seek to uphold apparent contracts. - Mistake is to deal with sudden + unexpected circumstances on apparent contracts. - Reaffirmed that both parties must be mistaken à lack of reasonable expectation. - Essentially + radically different from the contract agreed. This is all said in obiter dicta, superseded by Great Peach Shipping.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] Wrong information from third party. Lord Phillips reasserts Lord Atkin’s criteria for quality of subject matter. He also says there is no mistake in equity. In addition to Bell v Lever Bros, 3. (continued from above) The non-existence of a particular state of affairs is not attributable to either party à Neither party has warranted that the subject matter has this particular quality. 4. The non-existence of this state of affairs rendered this contract impossible to perform à doctrine of impossibility is a higher bar than mistake. 5. “State of affairs” may be as to the existence or a vital attribute of the subject matter. He describes this as the consideration provided, or to circumstances subsisting which allow for the performance of the contract. Great Peace added criteria, making it so difficult to establish mistake that there may never be a sufficiently fundamental mistake in the quality of subject matter.
Fundamental mistake going to the root of the contract is recognised by Lord Atkin in Bell v Lever Bros. Steyn J says it doesn’t have to be so fundamental as to remove the consideration provided.
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Unilateral Mistake: Mistake as to the promise
In unilateral mistakes, the court seeks to uphold legitimate expectations of the non- mistaken party. Rarely awards relief. The court doesn’t do this when the non-mistaken party has no reasonable or legitimate expectation and is fully aware of the other party’s mistake. Hartog v Colin & Shields [1939] à snapping-up cases, knows it is a mistake + seeks to take advantage of this. If one party snaps at the mistake of another, knowing they made a mistake and intending to take advantage of this, the court will not enforce the contract.
Smith v Hughes (1871) Unilateral mistake only arises where the seller (1st party) is aware of the buyer (2nd party)’s mistake. The mistake must be as to a promise made by the 1st party. In this case the seller is not mistaken. The court allows relief here on the basis that the non-mistaken party is fully aware of the other party’s mistake and aware the mistake pertains to the non-mistaken promise.
Needs two conditions: 1. The 1st party has to be aware of the 2nd party’s mistake. 2. The mistake is as to the 1st party’s promise. The promise here is a mistake as to the age of the oats. Problem à Must prove 2 mental states which is very difficult - Prove the buyer has a mistake as to the promise - Prove the seller knows of this Judges were following the work of Benjamin. This criteria was removed from Louisiana law. Rationale for this reasoning: A seller has a legitimate expectation to protect.
Ex: Catharine wants to buy a fibre-optic Christmas tree with light blinking patterns she could control. Finds one she thinks can do so in the shop and buys it without asking sales assistant for confirmation of this feature. Turns out she can’t control the lighting patterns. This was not a mistake the seller could know about. They thought legitimately that they had made a sale.
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Mistake as to identity
Often a fraud. This is where a party has in contemplation a definite and identifiable person with whom he intends to contract. At the time the contract is made, one party must regard the identity of the other as a matter of vital importance. Fraudulent misrepresentation renders a contract between A and B voidable (valid) but rescission is no longer possible once the goods have passed into the hands of an innocent purchaser C. If A can show that there was a mistake of identity which rendered his contract void (invalid), then B acquired no title to the goods and so could not transfer title to C.
Boulton v Jones (1857) One party is not trying to perpetrate fraud. But offer was not addressed to him, so no contract. An offer can be accepted only by the person to whom it is addressed
Upton-on-Severn RDC v Powell How would a reasonable person in the position of the offeree have interpreted the offer? If A makes offer to B in mistake for C, B accepts while reasonably believing that the offer is intended for him, then A is bound.
Hardman v Booth [1863]
A ¾K1® ‘B’ ¾K2® C original sale claims to be plans to enter another 3rd party owner B, actually rogue contract, resale
In many cases we don’t know who B is, or if he even exists. C is the innocent third party, a bona fide purchaser for value without notice. Usually A v C, ‘B’ has disappeared.
A wins if K1 is void à mistake of identity C wins if K1 is voidable à fraud has arisen
If K1 is fraud, it is voidable but A may choose to stay in the contract or give up the right to rescind the contract, or no longer able to void. If one buys stolen goods, they haven’t bought anything. This fraud is really theft, called larceny of identity à If the goods are stolen, the thief has no title that they could pass onto the third party.
Larceny Act 1831 and 1861: if you prosecute somebody for perpetrating this kind of fraud or give evidence, you own the good.
Cundy v Lindsay (1878) Fraud perpetrated at a distance. No contract will be formed if a person accepting an offer believes on reasonable grounds that he is accepting an offer from someone other than the person by whom it has in fact been made, and this fact is known to the offeror.
Mistake as to attributes is insufficient. There is a need for an identifiable third person. If A’s mistake is not about the identity of the other party, then the fact that he would not have entered into the contract if he had not been labouring under some mistake regarding the personality of the other party will not prevent the formation of the contract. Glanville Williams says: error of identity = misapprehending the attributes of two or more persons error of attributes = misapprehending the attributes of a single person.
King’s Norton Metal Co v Edridge (1897) When rogue pretends to be a non-existent company and is successful, it is a fraud and ‘B’ can pass title onto C. In order to establish mistake as to identity, the party contracting must prove that she did not intend to contract with the person with whom the apparent contract was concluded, and that there was a third identifiable person with whom there was an intention to contract.
Mistake as to identity: 1. Identity has to be material à in painting a portrait, want to engage a particular artist, not any will do. Not necessarily about skill – if they are not who they say they are, they are less likely to pay. 2. Mistake has to be as to an existing person. 3. Mistake has to be as to identity, not attributes (e.g. ability to pay etc.)
Phillips v Brooks Ltd [1919] Court says, where the parties are imer praesentes (“face to face”) there is a presumption that the party intended to deal with the person in front of them. This is supported by Lewis v Averay [1972].
When parties deal face to face, there is a presumption that each intended to deal with the other and not with someone else. This is a ‘strong’ presumption. Contracts concluded face-to-face raise different questions to those concluded at a distance and written contracts.
Ingram v Little [1961] Rebuts the presumption from face to face contract. Now considered not to be good law.
Shogun Finance Ltd v Hudson [2003] Although rogue was there in person, the contract was formed at a distance. Shogun says the identity of the named individual is essential. In a written contract, the identity of the parties to the contract was to be determined by an objective interpretation of the document itself. - When selling to someone, don’t really care who they are. - Will only care about the identity of the person to make sure they can pay back credit, e.g. Pub only cares about the age of the purchaser because they need to comply with law. Shogun tries to reconcile Phillips v Brooks and Cundy v Lindsay. This case also impliedly overrules Ingrim v Little.
Imer praesentes presumption unsatisfactory: 1. Innocent parties decide liability based on how the rogue perpetrates the fraud. If a contract is void it can prejudice an innocent third party. 2. Why does the presumption arise, how to rebut? Never explained. Perhaps you can interrogate the person in front of you if they are who they claim to be. 3. Which party is more responsible than the other for this situation arising? A thought they would make profit, here this doesn’t assume risk because the buyer has documents and credit rating. C has assumed risk, doesn’t know where the car comes from and has no means to check the contract.
Lord Millet said: “it is surely fairer that the party who was actually swindled and who had an opportunity to uncover the fraud should bear the loss rather than the party who entered the picture only after the swindle had been carried out and had [no opportunity].”
Modern methods of technology also make it unclear whether things are face-to-face. Þ Is Skype dealing face-to-face or at a distance?
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Ex: Chaucer writes a column on book collecting for the Sunday Moon. One Sunday he writes that his greatest wish is to obtain a first edition copy of Sir Walter Scott’s “Ivanhoe” which he needs to complete his collection of that author’s work.
Dickens, a keen fan of Chaucer’s column, sends a letter addressed to Chaucer (whom he has never met) at the office of the Sunday Moon. In this he writes that he has a first edition copy of “Ivanhoe” and that, while he would not dream of parting with it to anyone else, he would like Chaucer to have it at the bargain price of £2500.
This letter is intercepted and opened by Snoop, an office clerk at the Sunday Moon. Snoop then visits Dickens and introduces himself as Chaucer. He tells Dickens that he would like to buy the book and is allowed to take it against a cheque for £2500, signed in Chaucer’s name. The cheque is later dishonoured.
The day after Snoop’s visit, Dickens telephones Chaucer to enquire how he is enjoying the book. He then discovers the fraud. Dickens immediately informs the police and the Secretary of the local Booksellers’ League.
A few hours later Snoop sells the book for £2000 to Swift, a local bookseller. Snoop is later arrested and imprisoned for fraud.
Advise Dickens as to whether he is likely to succeed in an action based on mistake.
Dickens (collector) v Swift (bookseller) K1: Dickens and Snoop (rogue office clerk, ‘Chaucer’) à dishonoured cheque in Chaucer’s name K2: Snoop v Swift (innocent third party) à Swift buys for £2000. Swift has possession of the book, but does he have title?
If you apply Ingrim v Little, contract is void for mistake. è The identity starts at a distance.
Cases
Brennan v Bolt Burdon [2004] EWCA Civ 1017
Raffles v Wichelhaus (1864) 2 H & C 906
Obscure case. Sale of cotton, 1864 cotton market in Liverpool was very volatile because of the American civil war. Looking for an alternative, went to Indian cotton. Raffles is cotton broker. Cotton ex ‘Peerless’, Bombay à deals with quality, time Wichelhaus had bad bargain. Two ships called ‘Peerless’, one in October and one in December. Takes advantage of new ruling, agreed facts.
Scriven Bros & Co v Hindley & Co [1913] 3 KB 564
Couturier v Hastie (1852) 5 HLC 673
Sold cargo of corn that didn’t exist. Some wheat fermented on ship.
McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)
The defendants sold an oil tanker described as lying on Jourmand Reef off Papua. The plaintiffs incurred considerable expenditure in sending a salvage expedition to look for the tanker. There was in fact no oil tanker, nor any place known as Jourmand Reef. The plaintiffs brought an action for (1) breach of contract, (2) deceit, and (3) negligence.
In the present case, there was a contract, and the Commission contracted that a tanker existed in the position specified. Since there was no such tanker, there had been a breach of contract, and the plaintiffs were entitled to damages for that breach.
Sheikh Bros Ltd v Ochsner [1957] AC 136
Cooper v Phibbs (1867) LR 2 HL 149
Cooper à one male heir, Phibbs à trustee for the five spinister sisters Cooper thought the girls owned the right to fish.
Griffith v Brymer (1903) 19 TLR 434
Rented a room to watch a coronation which was cancelled. The room no longer has a view.
Bell v Lever Brothers Ltd [1931] AC 161
Viscount William Level buys a company, Niger Co. in Africa – prime commodities in palm oil for soap and cocoa. The company was running at a loss, and to get a loan, must put professional manager Cooper in. Cooper recommended Ernest Bell + Edward Snelling. Hired the two men to run the company à each has an employment contract with Lever Bros. K1 B / S ¾K1® LB They turn around the fortunes of Niger Co. They enter into a series of cocoa purchases and a cartel to agree to only spent certain amounts to buy cocoa. This deprives farmers of profit. In cartel agreement, must report purchases to COs and directors. The men take part in insider trading, in breach of cartel + employment agreement, making the contract terminable. Snelling and other managers decide to pay some amount several months in advance, to forward-sell cocoa. Enter into arrangement with Fontannaz. Might be thinking of pushing the purchase onto the company, not enough money. Made a small profit but withdrew. Lever Bros enter into termination of contract for other reasons, not knowing about the insider trading. Amalgamation could give the two a lot of money for doing their job right à Niger Co. merged with United Africa Company. Termination contract made with Cooper. B / S ¾ K2 ® LB 30k, 20k termination (letters) Quality of subject matter à terminability of K1 employment contracts Lever entitled to fire both of them for breaching contract – committing fraud on Lever Bros. LB didn’t lose money, but sued to set aside termination contract. HL found the termination contract not void for mistake and subsists, but by a 3 : 2 split.
Cooper is not about money, but about controlling the behaviour of employees, and wants to set aside the contracts as a matter of principle. Never attempted to settle and paid almost £50,000 in fees.
Nicholson & Venn v Smith-Marriot (1947) 177 LT 189
The defendants, as executors of a will, put the contents of the deceased’s residence up for auction. The items included a set of linen napkins and tablecloths, bearing a royal coat of arms, which, by error or misunderstanding on the part of all concerned, there being no suggestion of ill-faith, were described in the sale catalogue as "all with the crest and arms of Charles I and... the authentic property of that monarch." The conditions of sale in the catalogue included the following provision, "As the whole is on view the genuineness or authenticity of any lot is not guaranteed, and no warranty is given or to be implied by the description in the catalogue. No allowance whatsoever will be made for errors of description." The plaintiffs were entitled, by way of damages, to a sum equal to the difference in value of the goods if as described in the catalogue and their value in fact. As the plaintiffs had acquired Georgian linen when they had contracted to buy linen of the reign of Charles I, they had acquired an article "essentially different from the thing as it was believed to be”.
Quality of the linen depended on who they thought the linen belonged to. Martyr element might be particularly relevant to someone.
Galloway v Galloway (1914) 30 TLR 531 (KBD)
Mrs Galloway no. 1 left. Mr Galloway remarried, when it came to separation agreement with Mrs Galloway no. 2, Q: quality of their marriage agreement. Marriage was a nullity, void for common mistake.
Scott v Coulson [1903] 2 Ch 249 (CA)
Concerned sale of insurance policy. AT Death was the person who was to be insured. Bother the person buying and the person selling the insurance assumed Death to be alive, but in fact he was already dead. Voidable because of mistake of parties.
Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255
Somebody is a paid guarantor. AJB K1 Bennett ¬sells machines ¾ ¾ leases it back® This setup has tax advantages. AJB thinks the machines exist, Bennett is making a fraud. AJB ¾K2¾ CdN guarantee Bennett takes money from sale + disappears. CdN says they did not agree to guarantee fraud. Steyn J says in obiter dicta K2 is void for quality of the subject matter à existence of the machines. The existence or non-existence goes materially to Bennett’s ability to pay for the lease.
Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407; [2002] 4 All ER 689 (CA)
Want to help a ship in distress, charters Great Peace thinking it is closest to the wreckage but in fact it is not and another ship is closer. Great Peace wants to get costs from Tsavliris for loss caused by the detour, not for the temporary charter fee.
Smith v Hughes (1871) LR 6 QB 597
Farmer goes to racehorse trainer to sell oats. Gives him a sample and leaves it with the trainer. Trainer doesn’t look at them carefully, though he was buying old oats but the farmer was actually selling new oats. Trainer assumed they were old because of the high price. Case arises in Surrey. Can’t feed horses new oats, must age them. Trainer refuses the delivery of oats. The court allows relief here on the basis that the non-mistaken party is fully aware of the other party’s mistake and aware the mistake pertains to the non-mistaken promise.
Hartog v Colin & Shields [1939] 3 All ER 566
Boulton v Jones (1857) 157 ER 232
The defendant sent a written order for goods to a shop owned by Brocklehurst and which was addressed to him by name. Unknown to the defendant, Brocklehurst had earlier that day sold and transferred his business to Boulton. Boulton fulfilled the order and delivered the goods to the defendant without notifying him that he had taken over the business. The defendant accepted the goods and consumed them in the belief that they had been supplied by Brocklehurst. When he received Boulton’s invoice he refused to pay it, claiming that he had intended to deal with Brocklehurst personally, since he had dealt with him previously and had a set-off on which he had intended to rely. Held: The defendant was not liable for the price. There was no contract. Pollock CB said: ‘Now the rule of law is clear, that if you propose to make a contract with A, then B cannot substitute himself for A without your consent and to your disadvantage, securing to himself all the benefit of the contract.’
Upton-on-Severn RDC v Powell [1942] 1 All ER 220
The appellant's farm was in the Upton police district, but in the Pershore, and not the Upton, fire district. A fire broke out on the farm, and the appellant telephoned to the police inspector at Upton and asked for the fire brigade to be sent. The Upton fire brigade was informed, and it went in the form at once. The appellant was entitled to the services of the Pershore fire brigade without charge, but the Upton brigade, if it .... went to a fire outside its own area, was entitled to contract for payment for its services. At the time when the brigade was summoned, all the parties concerned were under the impression that the farm was in the Upton fire district. For the Upton fire brigade, it was contended that a contract had been created by implication, under which it was entitled to be remunerated for its services. Held that the appellant must be treated as having asked for the Upton fire brigade to be sent to his farm, and the fact that at the time the parties thought that the fire was in, its area did not prevent there being a contractual relationship. The appellant was, therefore, liable under an implied contract to pay for the brigade's services.
Hardman v Booth [1863] 1 H & C 803, 158 ER 1107
At the time, most businesses were run by individuals. Thomas Gandall was an elderly man too ill to run his business, handed over day-to-day running to his son Edward. Edward is not competent, couldn’t run his own business because he had declared bankruptcy. Hardman is a merchant who sells wool packing lining to pack crates, went to the premises to contract. Edward indicated that he was the Gandall whose name was over the door, so Hardman thought he was dealing with the owner of the shop, Thomas. Edward gave over the packing lining to Booth, his partner in another business, and they sell it off without paying. Father refuses to pay the merchant because doesn’t have the packing linings. The son goes out of his way to deceive him. Court says there’s no contract.
Cundy v Lindsay (1878) 3 App Cas 459
A man by the name of Alfred Blenkarn pretends to be ‘Blenkiron & Co’, a reputable firm. Writes to a Belfast company for samples of linens, then puts through order on credit. L (linen merchants) received order from Blenkarn who imitated the respectable firm of similar name and address. Alfred Jr goes to Cheapside, London + sells to genuine haberdashers C who then sell to customers separately. Belfast firm pursues the real company, L sues C for conversion of the goods. If contract between L and B is voidable for fraudulent misrepresentation, C would be entitled to retain the goods as they had taken them in good faith and for value. HL held that there was no contract because there was no agreement, B acquired no title to the goods from L, so could not pass title to C. They never heard of the rogue, so never intended to deal with him. There was never consensus of the mind which could lead to any agreement or any contract. Cundy bases decision on Hardman v Booth. A wins because mistake of identity.
King’s Norton Metal Co v Edridge (1897) 14 TLR 98
Long firm fraud à rogue pretends to be a non-existent company. KN gets letter from ‘Hallam & Co’ (non-existent) which consisted of fraudster Wallis, who sold wire to D (defendant). CA held that KN intended to contract with the writer of the letter, although it would not have done so if it had known what sort of person the writer was. The contract made was not void on the ground of mistake, but only voidable for fraud. AL Smith LJ said “if it could have been shown that there was a separate entity called Hallam & Co and another entity called Wallis then the case might have come within the decision in Cundy v Lindsay.” AL Smith LJ said K1 is affirmed as ‘B’ can pass title onto C. It is a fraud, C wins.
Phillips v Brooks Ltd [1919] 2 KB 243
Rogue goes into jewellers on Oxford St. North selected pearls and a ring at P’s shop. Wrote a cheque for £3000 claiming to be Sir George Bullough (person of credit whose name was known to P, P also confirmed address with reference to a directory). North took away the ring and pledged to D for £350. D didn’t know about the fraud. Held, claimant believed he was handing the ring to Sir George, but contracted to sell and deliver it to the person who came into his shop. His intention was ‘to sell to the person present and identified by sight and hearing’. Contract only voidable on the ground of fraud. Attribute of creditworthiness. Jeweller loses even though it is a mistake of identity. Therefore C wins.
Ingram v Little [1961] 1 QB 31
Three sisters advertised their car for sale in the newspaper, located in Bournemouth (seaside town – holiday destination during August bank holiday). Rogue who called himself ‘PMJ Hutchinson’ offered to buy the car and arranged a time to go buy it. When the rogue applies to offer to buy the car, he gives name and hotel. The sisters call him about the problem and hotel affirms man tere by that name. Had the image of PGM Hutchinson in their minds beforehand à They had made dealings at a distance/from afar already. Sisters refused to accept cheque and insisted on payment by cash. However, went to post office and ascertained from the telephone directory that there was such a person at the address, and rogue claimed to be a respectable businessman. They got a worthless cheque. Rogue takes car and drives to Blackpool, another holiday resort, and sells it to a car dealer, D, who took it in good faith. CA held that the contract between the ladies and the rogue was void for mistake, the vehicle was still their property. The circumstances (particularly the investigation of the directory) indicated that it was with Hutchinson that the claimants intended to deal and not with the rogue who was physically present before them. Presumption from face to face contract rebutted. A wins, never made an offer that can be accepted by the rogue so contract is void.
Lewis v Averay [1972] 1 QB 198
L advertised car for sale. Richard Green is an actor who plays Robin Hood on TV. Rogue is a lookalike, offers to buy the Bristol student’s car. Wrote a cheque claiming to be the actor, showed proof using special pass of admission to Pinewood studios. L satisfied and allowed the rogue to take the car without waiting for the cheque to be cleared. Rogue sold the car to A who bought it in good faith. CA held that L intended to contract with the person actually present before him, so contract only voidable for fraud – A acquired the property in the car as against L. Only mistake as to attribute of creditworthiness, or fraud of identity only applicable to the cheque.
Shogun Finance Ltd v Hudson [2003] UKHL 62
A man looks at car in Leicester car dealership. Enters hire purchase agreement, where car dealer acts as agent for finance company. The contract would be between the finance company and the purchaser. car dealer ® finance company ¾ K ® purchaser = agent
A ¾K1® ‘B’ ¾K2® C original named ‘Patel’ Norman Hudson owner shows drivers license (normal) (Shogun Finance)
Finds Hudson has the car + sues him. Under s 27 of the Hire-Purchase Act 1964 a private purchaser of a motor vehicle from the debtor under a hire-purchase agreement can acquire title to the vehicle as long as he purchases in good faith and without notice of the hire-purchase agreement. The defendant’s claim to title therefore turned on the validity of the hire-purchase agreement. Hudson wanted to prove voidable contract by fraud à face to face. HL 3 : 2 split held that the contract was void by mistake, contract was formed at a distance. HL held the hire-purchase agreement was void – it could have been made only between the company and Mr Patel, and this was not possible because Mr Patel knew nothing of it and had not signed the agreement. D did not obtain title to the car. A wins, contract void for mistake of identity. Minority dissent says the fraud made K1 void à It’s unclear why you would make C bear the risk of loss.
The distinction between mistakes of fact and mistakes of law: Kleinwort Benson v Lincoln City Council [1998] 4 All ER 513
Catharine Macmillan, “How Temptation Led to Mistake: An Explanation of Bell v Lever Bros”, (2003) 119 Law Quarterly Review 625. Catharine MacMillan, ‘Mistake as to Identity Clarified?’, [2004] 120 LQR 369. Catharine MacMillan, ‘Rogues, Swindlers and Cheats: the Development of Mistake of Identity in English Contract Law’, (2005) 64 Cambridge Law Journal 711.
Vitiating Factors: Mistake in Equity
Leading case: Solle v Butcher [1950] Shows the impact of WWII on English contract law. In law, the contract would be good, but in equity (refers to Cooper v Phibbs (1867)) a contract is also liable to be set aside if: 1. The parties were under a common misapprehension either as to the facts or as to their relative and respective rights, provided… 2. That the misapprehension was fundamental, and… 3. That the party seeking to set it aside was not himself at fault. [p 693] à This last extra part is what sets mistake in equity apart. Lord Denning found that a contract can be rescinded, and can be rescinded on terms. This is followed in Grist v Bailey [1967].
Clarion v National Provident Institution [2002] Mistake can’t be as to the risk the parties are entering into.
In Great Peace [2002], Lord Phillips says in obiter that common law never recognised the independent doctrine of mistake in equity. Pitt v Holt [2013] says Great Peace is accepted in English law, overturned Solle v Butcher. Great Peace adds another layer of criteria to the decision in Bell v Lever Bros as to when a common mistake as to a quality of the subject matter would render a contract void.
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Equitable Relief
The court has three options of relief in its power.
1. Recission à sometimes upon terms, leaving the party to a suit for damages. This was done in Cooper v Phibbs – contract voidable Solle v Butcher – rescind contract upon terms Overturned by Great Peace? Magee v Pennine Insurance [1969] Lord Denning says: Although the acceptance by the plaintiff of the insurance company’s offer constituted a contract of compromise binding at law, the parties were acting under a common and fundamental mistake in that they thought the original policy was good and binding. Therefore the contract was voidable in equity.
2. Refuse an order for specific performance Malins v Freeman (1837) Tamplin v James (1880) Where a contract has been formed on a mistake, courts will refuse to order specific performance, i.e. refuse to order one party to specifically perform/go ahead on a contract formed in mistake. Instead, leave the party to claim damages for any losses suffered.
3. Recification (reform) Concerned with mistakes in the drafting/writing of contracts, not mistakes in formation. In the old days, court of law could not look past the written terms of the contract, but court of equity could, and could rectify/physically amend contract terms to accord with what the parties meant (“reform”).
Ex: Discussed throughout the price of the contract in US dollars. When they entered the contract, mistakenly the document records the currency in Italian lira, giving one party a much better contract than they ever intended. The court reforms/rectifies this.
FE Rose (London) Ltd v William Pim Jnr & Co [1953] In regard to rectification, court not concerned with making of the agreement contract, but with recording of the agreement. Lord Denning said rectification is concerned with not the formation of the agreement, but with the written terms of the contract according with what the parties agreed.
Chartbrook Ltd v Persimmon Ltd [2009] Many later cases that have applied Chartbrook are instances where Counsel has recognised that the possibility of receiving relief for a mistake as such are really quite minimal, or that while there is a mistake there that is of fundamental importance, the parties would prefer to preserve the agreement but effectively to have it reformed akin to a form of rescission on terms, in terms of the practical effect, to accord with what they expected or what the reasonable expectations were. Q: HL is taken up with how to interpret contracts and whether courts should interpret them in light of previous dealings between the parties.
Parole evidence rule: The wording of the document itself is to be authoritive as to the agreement between the parties, and the court won’t go behind that.
However, a claim for rectification means that the court has to look behind the wording of the document because one or both parties alleges that the document itself doesn’t reflect their agreement.
Court comes to the conclusion that a number of factors have to be shown in order to establish a claim for rectification. The decision tells us not that the parties had to have a prior oral agreement which is then mistakenly recorded, but rather: Þ Common continuing intention as to what the terms of the contract would be à this common continuing interpretation is to be judged on objective basis: detached objectivity (what would a reasonable person watching this situation unfold would come to the conclusion of what was present). It is not necessary to have had a complete antecedent agreement. Þ Outward expression of accord. Þ This common continuing intention continues up to the point at the document is executed. It must carry on up to the point at which the instrument sought to be rectified is executed. Þ By some mistake this common continuing intention is not reflected in the instrument itself. Then the court will rectify the agreement.
This case opened up a whole new field of litigation in mistake cases. The problem that exists, pointed out by McLauchlan, is that if you take this objective basis looking for the common continuing intention as it appears to an outward party, you may end up imposing on these parties to rectification of a contract that neither of them would subjectively have wanted. Courts however are very reluctant to take themselves too deeply into this area of rectification because of the large amount of discovery of documents required for the ligitation. In some of the later cases, it is actually a mistake in the formation of the contract, but because there is really no relief for that if you render the contract void, it has the effect of pushing these cases into rectification.
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Ex: In June 1992 Artemus sells to Bruce for £15,000 a book written by the famous Eighteenth Century author Dean Swift. Early in the negotiations preceding that sale Artemus told Bruce that “although he wasn’t an expert, he thought that the book was a first edition.” He had an honest belief in the truth of that statement and reasonable grounds for that belief. Artemus also makes it clear to Bruce (in a letter written just before the sale) that Bruce “must make his own inquiries as to the authenticity of the book”.
In June 1994 Bruce sells the book to Clare for £20,000 both parties assuming it to be a first edition. No express statement to that effect is made, the book merely being described as “by Dean Swift”.
In September 1995 Clare, now a pensioner, takes the book for valuation, for purposes of a new pensions assets test, to Rabalais, a local antique bookseller and a world renowned expert on Eighteenth Century authors. Rabalais examines it and tells Clare that the book is in fact a second edition, not a first, and as such is worth only £1,000.
Does either Clare or Bruce have any remedy in respect of any mistake which may have been made?
1. Rectification doesn’t apply here because it is not a written contract, so can’t fix a mistake in the recording of the contract. 2. Refusal of specific performance (when Court orders you to do something) irrelevant because the conveyances already happened. 3. Must be rescission?
Why might rescission be considered? Problem question from mid-90s. Afterwards Great Peace has put new light on rescission. Lord Denning in Solle v Butcher ratio is that equity had a remedy for mistake to rescind contract, sometimes under terms. Said Lord Phillips in Great Peace is wrong. Mistake makes a contract void, rescinding a contract is when it is voidable. Great Peace wrongly decided because mistake in equity exists. The only future for mistake in contract law is finding a contract with mistake to be voidable. Void is too harsh, can do at equity but not at law. An operative mistake renders the contract void. If A – B contract is void (no transfer of proprietary interest), then B doesn’t own the book and therefore there is no B – C contract. B needs title or right to give title in order to sell. Difference in quality of subject matter in A – B. Great Peace upholds Lord Atkins’ criteria and adds that you have to see where responsibility for the quality is allocated. Doesn’t make book substantially different, still the same book. Quality must be the defining point. A – B had no fraudulent misrepresentation, and no negligence. Not warranting that this is a first edition, careful to take out of misrepresentation. Great Peace criteria: The contract must be impossible to perform. This is all obiter dicta and speculation.
In Smith v Hughes, Blackburn J said that the mistaken party will have a remedy if the other party gave a warranty in the contract about the subject matter, or if the mistake was induced by the other party’s misrepresentation.
Examples given by Lord Atkin pp. 535-536 of mistakes as to the quality of the subject matter of the contract which would not suffice, in his opinion, to entitle a party to set aside the contract. In the case of the sale of a picture which both parties mistakenly believe to be ‘the work of an old master’, in his view the buyer in such case has no remedy in the absence of a misrepresentation or a contractual warranty as to the provenance of the picture. à Leaf v International Galleries Ltd [1950]
Cases
Solle v Butcher [1950] 1 KB 671
Beckenham Cricket Club has a large house beside it. A big electromagnetic mine was dropped on Maywood House, it exploded and had many damages. Right to lease out flats to builder Butcher. Solle was the estate agent in charge of renting out, and Butcher reconditioned the property. Renting out has great demand, and it was easy to rent out. Rent Restriction Act says must charge the same rent as what was on 1 Sept 1939 unless you serve certain notices. Solle tells Butcher he got legal advice à Since Butcher refurbished, it was as if the houses were new to the market, i.e. they don’t need to serve notices. Solle takes the nicest flat for himself and pays £250 (market rent). However, this is 2x what was paid in 1939. Solle and Butcher have a disagreement after a few years, Solle sues for overcharging rent. è At that time, misrepresentation as to the law could not render a contract voidable so parties were pushed to mistake. Butcher loses in county court, but Lord Denning in appeal says: At common law, the rule is set in Bell v Lever Bros. Q: Whether the Act applied to the flat or not. A: Solle has license to stay in the property until new notice is served. If he doesn’t wish to stay, must vacate/leave the property. Once notice is served, then the market rent can be charged.
Cooper v Phibbs (1867) LR 2 HL 149
A nephew leased a fishery from his uncle. His uncle died. When the lease came up for renewal the nephew renewed the lease from his aunt. It later transpired that the uncle had given the nephew a life tenancy in his will. The lease was held to be voidable for mistake as the nephew was already had a beneficial ownership right in the fishery. This is an instance of res sua. Normally where a contract is found to have been entered under a common mistake the contract will be rendered void as oppose to voidable. The lease was held to be voidable rather than void as the claim was based in equity as it related to beneficial ownership as oppose to legal ownership.
Grist v Bailey [1967] Ch 532
Clarion v National Provident Institution [2002] 2 All ER 265
Pitt v Holt; Futter v Futter [2013] UKSC 26
Malins v Freeman (1837) 2 Keen 25, 48 ER 537
Tamplin v James (1880) 15 Ch D 215
Decided after the enactment of the Judicature Acts in the 19th century.
FE Rose (London) Ltd v William Pim Jnr & Co [1953] 2 QB 450
Both parties convince themselves that horse beans are feveroles, but in fact they are not. When one of the parties figured out they purchased something they didn’t want, the went and sought the rectification of this contract.
Chartbrook Ltd v Persimmon Ltd [2009] UKHL 38
Dealt with the building of property. Both parties are experienced commercial parties, the contract is very length. Parties had agreement to develop property on Wandsworth High Street that has both residential + commercial functions. Came up with a mechanism to calculate consideration for the residential properties, determine price. Calculations considered two factors, Additional Residence Payment and Total Residential Land Value. Contract doesn’t contain an absolute price but a formula by which they would calculate this. Purpose of the structure of the contract was to allow the development to defer payment and pay it from the proceeds from the disposal of the properties developed. Defendant P à calculated £89k Plaintiff C à calculated £4.5m
Magee v Pennine Insurance [1969] 2 All ER 891
The plaintiff signed a proposal form filled in by his son for the insurance of a motor car. There were a number of misstatements in the proposal, in particular it was misstated that the plaintiff held a driving license. The proposal was accepted by the defendant insurance company. The car was accidentally damaged and the plaintiff made a claim in respect of it. The insurance company offered £385in settlement of the claim which the plaintiff accepted. The insurance company then discovered the misstatements and refused to pay. CA held that on its true construction, the insurance company’s letter was an offer of compromise and not merely an offer to quantify the claim. Judgement given for the defendant insurance company. The contract was set aside because in the circumstances it was not equitable to hold the insurance company to it.
The effect of mistake in equity: Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters [2006] EWHC 607 Graves v Graves [2007] EWCA Civ 660
Equitable relief – rescission: Grist v Bailey [1966] 2 All ER 875
Equitable relief – rectification: Cases that have applied Chartbrook v Persimmons.
Vitiating Factors: Misrepresentation
Fraud à a form of misrepresentation Misrepresentation: One party enters into a contract on the basis of something that another party has told them, and this is not in fact true. From the outset, distinguish between misrepresentation (false statement of fact/law that induces a contract) and contractual term.
Difference between misrepresentation and warranty (a contractual term):
Warranty a. A term in the contract between the parties b. A separate contract between the parties
Leading decision on difference between representations and warranties: Heilbut, Symons & Co v Buckleton [1913] If you give a contractual promise a warranty, whether it is a term of an existing contract or forms the basis of a separate contract, and it is in fact not good, then the contract is broken and you can seek damages. If however, the statement is merely a representation, if it’s not true you don’t get damages for breach of contract. At most you can establish that the representation is actionable as a misrepresentation.
Lord Moulton on warranties: “animus contrahendi (intention to contract)” Þ Importance of the statement, the more important the statement the more likely for it to be a contractual form. Þ Reliance put on this statement by the parties. Þ Relative knowledge of the two parties, where a more experience + knowledgeable party makes a statement that he knows the other is relying upon, it is more likely for this to be a contractual term.
Oscar Chess Ltd v Williams [1957] Lord Denning: How you determine whether something is a warranty or a representation is done on an objective basis, doesn’t look into the minds of the parties but decides whether or not it would appear that they intended the statement to be a warranty.
Breach in warranty sounds in damages. Representation is not a contract but can claim damages. To get damages in representation, you must show that it is misrepresentation.
English law is hesitant to impose positive duties on people. Only occurs in a limited number of contracts, e.g. insurance – must disclose all relevant details. Mentality from idea that if you make a statement, you assume liability.
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When approaching exam questions: Q: Is this statement a warranty or representation? Þ Importance Þ Reliance Þ Relative knowledge If a contractual term is breached, it is a warranty. Is it a term of the contract? If no, then consider whether it is a representation.
If warranty: This will take you down a contractual route. You’re looking to see if it’s a term in the contract, and if so, has it been breached?
1. Is this statement a term? What is the nature of this term? Is it a term of the principle contract, or does it form a collateral contract on its own right? If no, no remedy.
2. Work out what the substance of this term was.
3. Has this term been breached?
4. If yes, are damages available + how to calculate? Calculate damages – measured on an expectation basis (put you in the position you would have been in if the contract had been performed) If the answer is no damages available, then it is not a warranty. Look instead at whether it is actionable as a misrepresentation.
If representation: Misrepresentation is a separate area of law; damages are calculated in tort. Different from damages for breach of contract. If a contract is entered in misrepresentation, the contract can be rescinded. Calculation of damages on tortious principles.
1. Is the statement actionable as a misrepresentation? Applicable criteria* must be applied. If not actionable as a misrepresentation, there is no remedy.
2. If yes misrepresentation, what type? o Fraudulent o Innocent o Negligent o Statutory* à Misrepresentation Act 1967 (too generous in contract to mistake) To establish which type of misrepresentation: a. Proof of which type b. Different remedies
3. What remedies are available? Determined by the type of misrepresentation. o Rescission o Indemnity (payment of expenses necessary to return party to their original position) o Damages
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Criteria for Actionable Misrepresentation*
1. Representation is false.
With v O’Flanagan [1936] The statement must be continuingly true. It cannot be true at the time of negotiation but not true when entering the contract.
Conlon v Simms [2006] Duty to disclose, failure of which is false.
2. Representation is statement of fact, not of opinion
Bisset v Wilkinson [1927] Vendor said how many sheep the land could hold. Was wrong but no damages because it was just opinion. "If a reasonable man with the vendor's knowledge could not have come to the conclusion he stated, the description of that conclusion as an opinion would not necessarily protect him against rescission for misrepresentation, but what was actually the capacity in competent hands of the land the purchasers purchased had never been, and never was practically ascertained."
Two exceptions:
a. Professional opinion on the basis of skill or expertise à Esso Petroleum Ltd v Mardon [1976] Having taken the position of and expert giving their opinion so it takes this out of the general principle that the representation must be one of fact, not of opinion. b. Opinion based on fact or exclusive knowledge à Smith v Land and House Property Corp (1884) "the facts are equally known to both parties, what one says to the other is frequently nothing but an expression of opinion . . . But if the facts are not equally well known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of material fact, for he impliedly states that he knows facts which justify his opinion." Bowen LJ
3. Representation is one of fact, not of intention
Wales v Wadham [1977] Statement of future intention is not actionable as a misrepresentation. Statement of intention = something you intend to do in the future.
Exception: Cannot misstate your current intention. Edgington v Fitzmaurice [1885] Current intention is a fact, but whether it occurs in future is not actionable under misrepresentation. "there must be a misstatement of an existing fact; but the state of a man's mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact."
4. Representation may be one of law
Pankhania v Hackney London Borough Council [2002] If the representation is one of law then it is actionable.
5. Representation is addressed to the party misled
Must be result of communications between misrepresentor + misrepresentee. This can occur through a third party à Commercial Banking Co of Sydney v Rh Brown and Co [1972]
6. Representation is intended to be acted upon, not “mere puff”
“Sales talk” is restricted à e.g. ‘whiter than white’, Ironbru slogan
7. Representation induces the contract, i.e. is material to the agreement
JEB Fasteners v Marks, Bloom and Co [1983] The statement was a factor which induced the contract.
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Types of Misrepresentations
What is necessary for proof?
A. Fraudulent
Derry v Peek (1889) 1. Knowledge of its falsity; 2. Have no belief in the truth of the statement; or 3. Made recklessly If one of these criteria is met it is actionable. Followed in East v Maurer [1991].
If proven fraudulent, there are generous damages available. Cannot receive double recovery. Fraud is hard to prove. Unlikely that it is a fraudulent misrepresentation. Courts don’t like the find fraud, the criteria is more rigorous because of the criminal implications of fraud.
B. Innocent
Easier to prove, a statement was made but it was wrong. Difficulty is no right to damages, the most you would get is indemnity. Innocent misrepresentation might get rescission of contract + indemnity.
C. Negligence
In the 1960s, things changed in the law of misrepresentation.
Hedley Byrne & Co Ltd v Heller Partners Ltd (1964) Standard of proof: Þ Duty of care Þ Assumption of responsibility. "if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise." [at 502-503]
Esso v Mardon was also negligent. "if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another - be it advice, information or opinion - with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side into a contract with him, he is liable in damages." [at 16]
Caparo Industries plc v Dickman [1990] Court tried to limit the number of people to which this duty can be passed.
Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761 “if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services.” [at 776]
Concurrent duties in tort and contract, cannot recover on both of them. Decide by the proof required + statute of limitations period of time in which it is actionable.
D. Statutory Misrepresentation
Many countries did not adopt this Act. Section 1 removes some bars to rescission. S 2(1): When a person has entered into a contract after a misrepresentation of the other party, this reverses the burden of proof. Maker of the statement must show: 1. Reasonable ground to believe the statement was true 2. The statement was true or believed to be true… 3. At the time the contract was made.
Howard Marine and Dredging Co v Ogden & Sons Ltd [1978] Just need to show that one party entered the contract because of the statement.
Spice Girls v Aprilia World Service BV [2002] Spice Girls making a statement as a group when they signed on to represent Aprilia motorbikes, although they knew already one member was leaving. Supported by Gordon v Sellico (1986).
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REMEDIES FOR MISREPRESENTATION
Damages: Fraudulent misrepresentation à recover all losses. Innocent misrepresentation à rescission + indemnity
Is a representation actionable? 1. Are the criteria for actionable representation met? If not: Consider if there is a breach of contract. But generally the end, no relief. If yes… 2. What type of misrepresentation is it? There is different elements of proof involved. Some are more difficult than others, e.g. fraudulent is difficult to prove, negligent or statutory is easier. 3. What sort of remedy is available? Some are more desirable than others. Þ Damages: Calculated differently according to type of misrepresentation Þ Indemnity: Rescission of contract + certain monetary adjustments as though the contract was not entered into.
Whittington v Seal Hayne (1900) In innocent misrepresentation, indemnity is used to set the parties back to where they were before. Can have rescission of contract + damages as long as there is no double recovery.
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Fraud
Provides the most powerful remedy in damages.
Zurich Insurance Co plc v Hayward [2016] Fraudulent misrepresentation was a contributing factor to the settlement.
Doyle v Olby (Ironmongers) Ltd [1969] Lord Denning on awarding damages: Þ Purpose of the award of damages à Object of damages in break of contract is to put the plaintiff in as good a position as if the contract was performed, so the object is one of expectation. Þ In tort (fraudulent misrepresentation is tort) à To compensate for the wrong and restore the party to the position they would have been in but for the wrong, so the purpose is to compensate for the wrong. Þ Remoteness of the loss limits the damages that can be claimed.
Palsgraf v Long Island Railway Co (1928) says if a loss is too remote and unforeseeable, cannot claim damages for it.
However, fraudulent misrepresentation/deceit is a deliberate tort. Lying is a deliberate wrongful act, therefore the person who lied is responsible for all loss flowing from this act. Lying is bad, and the law punishes people who are bad. A lie means you assume all responsibility for all loss, foreseeable or not.
Smith New Court Securities Ltd v Citibank NA [1997] in the Supreme Court proved Lord Denning’s statement on fraudulent misrepresentation + damages available.
Clef Aquitaine Sarl v Sovereign Chemical Industries Ltd [2000] Approved the test of remoteness. No requirement that the fraudulent misrepresentation create a loss-making situation. If you can show that you would have invested in a more profitable venture if not for the fraudulent misrepresentation, you can claim loss of profits.
Standard Chartered Bank v. Pakistan National Shipping Corporation [2002] A director can be personally liable for making fraudulent representations on behalf of his company - and contributory negligence is not a defence to a claim for fraudulent misrepresentation. Defendant arguments: The payment would be made for other reasons à Court said this doesn’t matter Contributory negligence? “No one can escape liability for his fraud by saying I wish to make it clear that I’m committing this fraud on behalf of someone else…” Lord Hoffman
4 Eng Ltd v Harper and Simpson [2008] There are damages in deceit available for loss of a chance.
In Hedley Byrne & Co Ltd v Heller Partners Ltd: Unforeseeable loss is irrecoverable for careless misstatement. Negligent misstatement can only be liable for “reasonably foreseeable” losses (Esso v Mardon)
The court doesn’t hold person who does not reach the requisite duty of care with as much liability.
IFE Fund SA v GSI International [2007] Where there is a contract between parties and there is a claim under the Misrepresentation Act s 2(1) and under HB v H, they are meant to sue under s 2(1). è This is said in obiter, not clear why.
Misrepresentation Act 1967 reverses the burden of proof.
Question about s 2(1) is should we take fraudulent standard or negligent standard. Claimant must prove that they entered the contract because of the misrepresentation. Then the burden of proof shifts to the other party to show that the representation was true at the time of entering the contract.
Naughton v O'Callaghan [1990] Decided the standard was a tortious one, need to return parties to the original position.
Royscot Trust v Rogerson [1991] The extent of damages available under s 2(1) for negligent misrepresentation makes for the most advantageous claim for misrepresentation. Under the Act, the appropriate measure of damages was the same as that for common law fraud, or damages for all losses flowing from a misrepresentation, even if unforeseeable. "in view of the wording of the subsection it is difficult to see how the measure of damages under it could be other than the tortious measure and, despite the initial aberrations referred to above, that is now generally accepted."
Limitation of s 2(1): This is only applicable when another party to the contract makes the representation. Negligent misrepresentation can be made by anyone.
Forest International Gaskets Limited v. Fosters Marketing Limited [2005] [at paras 11-17] Approved the measure of damages in Royscot Trust v Rogerson. Question whether or not to grant leave of appeal. Said damages were too small to allow.
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] Lost profit from alternative investment is available as part of reliance measure to be awarded as damages.
Taberna Europe CDO II plc v Selskabet AF (formerly Roskilde Bank A/S) [2016] Talks about s 2(1) in obiter dicta. 1. Reaffirmation that K1 is what matters, even though there is a K2. 2. Contributory negligence is an available defence.
S 2(2) sets up the possibility of recovering damages in lieu of rescission.
Þ How do you calculate these damages? William Sindall plc v Cambridgeshire County Council [1994] The damages under s 2(2) are a discretionary award according to Lord Hoffman, and may be less than those under s 2(1). Damages under s 2(2) should never exceed those available for a breach of a warrantee.
Þ What happens if you have lost the right to rescind, can you still claim damages? Zanzibar v British Aerospace Ltd [2000] and Queensferry Ltd v Shand Construction Ltd (No3) [2000] say yes, but this is overturned in Salt v Stratstone Specialist Ltd in the Court of Appeals in obiter.
S 3 provides that where there is a business, this can only be don’t to the extent that the limitation is reasonable under s 11 of the Unfair Contract Terms Act.
S 62 of the Consumer Rights Act 2015 provides the means to determine whether a term is unfair.
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Rescission
Rescission is where the contract is voided ab initio, parties returned to the original position. è Car & Universal Finance Co Ltd v Caldwell [1965]
Inntrepreneur Pub Co (CPC) Ltd v Sweeney [2002] If a contract is rescinded, all of the contract falls, and cannot claim benefit of any part.
If you lose the right to rescind, the contract must exist to the end. Misrepresentation does not make a contract void, but makes it voidable because you could lose the right to rescind.
Bars on right to rescind:
Erlanger v New Sombrero Phosphate Co (1873) [at 1278] Þ If you wish to rescind K for misrepresentation, must be able to restore any benefit you have received. e.g. Modified a car bought under misrepresentation. Restoration doesn’t have to be exactly precise but must be able to restore.
Þ Lapse of time Salt v Stratstone Specialist Ltd [2015] Lapse of time in this case was not long enough. Also, the party who made the misrepresentation kept fobbing off Salt.
Long v Lloyd [1958] Affirmed K by words or actions (still using the lorry after finding out there was a misrepresentation about how good its condition was), lose the right to rescind the contract.
Peyman v Lanjani [1985] Do you need to understand the wrong? You need to understand that this wrong means you have the right to set aside the contract. If you don’t understand, you have lost the ability to rescind. Controversial.
Third Party Rights: If a third party (bona fide purchaser for value without notice of the misrepresentation) has entered the picture before the discovery of the thing that allows you to rescind the contract, the third party’s rights prevent the injured party in the original misrepresentation from setting aside the contract, and the contract is then good. In Phillips v Brooks, the jeweller is the original owner. The rogue’s entering into the second contract with the third party means the first contract can no longer be set aside. Intervention of the third party’s rights have occurred, so voidable contract has lost right to rescind. This allows rogue to pass title on to the third party.
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Summary
Type Contract Response Tort Response Innocent Rescission, maybe indemnity Nothing Fraudulent Rescission, maybe indemnity = Damages for deceit (Archer says cannot have both, no double recovery) Negligent Rescission, maybe indemnity Damages for negligent HB v H [1963] misstatement Statutory Statutory rescission Statutory damages (1967) s 2(1)
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Problem Questions re-examined
Problem 1: Artemus, Bruce and Clare
Is there a contract term? Is there a representation? Is it a misrepresentation? à False statement of fact, expert opinion or opinion to whom knowledge is exclusive to. Þ Identify which statement is a misrepresentation.
No statement is made between Bruce and Clare.
Artemis makes a statement of opinion to Bruce. Is it actionable under Esso v Mardon? No, not actionable as misrepresentation à No expert opinion and no exclusive knowledge. According to IFE v GSI must sue on s 2(1), not on negligence case law. Rebut to s 2(1) using reasonable grounds: Not fraudulent à honest belief Not negligent à reasonable grounds \ Innocent misrepresentation Remedy = rescission + indemnity, there is a problem because the book is now in Clare’s hands. Consumer Rights Act?
Problem 2: Chaucer, Dickens, Snoop and Swift
Misrepresentation is that Snoop pretends to be Chaucer à fraudulent misrepresentation. Not negligent because not done carelessly but rather, done deliberately. Damages in tort but Snoop is in prison (humanitarian vs practical reasons). Problem with rescission à Must collect from 3rd party. è Contract already rescinded earlier, Dickens acted immediately when he discovered the fraud and this was before the second contract was made.
Mistake à so fundamental, prevents any consensus between parties. Cundy v Lindsay contract void. Better criterion? Between 2 innocent parties, which of the two is more responsible for the loss.
What do you have to prove? What do you want to get? Misrepresentation – for before it is handed ot the third party Mistake – for after the third party gets it, to try to make the first contract void and get the thing back.
Ex: Gordon comes to Frank’s premises and expresses interest in a Ford Escort. Frank encourages Gordon to purchase it, saying that it is a “great little motor”, and “should give him years of trouble-free transport”. Frank knows that the car has a history of bad mechanical problems. Gordon buys the car but it suffers a serious mechanical breakdown as he is driving it home. He telephones Frank who agrees to pay for repairs. The day after the repairs are completed, it breaks down again and Gordon demands his money back. Advise Gordon.
Sue for damages, bring action under s 2(1) easier than fraud. Can he rescind the contract? No because Long v Lloyd.
Cases
Heilbut, Symons & Co v Buckleton [1913] AC 30
A firm of stock brokers are bringing out an issue of rubber shares. A prospective purchaser asks if the shares are any good. Firm replies, well they are bringing them out, assertion that they must be good. Q: Have the brokers warranted these shares to be good? (Contractual promise that these are good shares.) "They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shown." Lord Moulton A: Yes, it is a warranty so contract is broken.
Oscar Chess Ltd v Williams [1957] 1 WLR 370
"It is sometimes supposed that the tribunal must look into the minds of the parties to see what they themselves intended. That is a mistake. . . The question of whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended that will suffice." Lord Denning
With v O’Flanagan [1936] Ch 575
Sale of dentistry practice. Statement of the practice’s turnover during negotiation was no longer true when they entered the contract.
Conlon v Simmes [2006] EWHC 401
Bisset v Wilkinson [1927] AC 177
W agreed to purchase land from B for sheep-farming, in reliance on B’s statement that his ‘idea was that [the land] would carry two thousand sheep’. Neither party had at any time carried out sheep-farming on the land in question. B claimed for balance of the purchase price, W counter-claimed rescission of the contract on ground of misrepresentation. Judicial Committee of the Privy Council held that this statement was merely B’s honest opinion so claim for rescission failed.
Esso Petroleum Ltd v Mardon [1976] QB 801; 2 WLR 583; 2 All ER 5
Sale of a petrol station. Provided a forecast for sales form expertise. Misgauged so Mardon sued. Court found Esso had special knowledge and skill, so misrepresentation.
Caparo Industries plc v Dickman [1990] 2 AC 605
Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761
Smith v Land and House Property Corp (1884) 28 Ch D 7
L bought a hotel as an investment at an auction form S. In the auction particulars, S stated that it was let to a ‘most desirable tenant’. However the tenant was in significant financial difficulty and had paid his last quarter’s rent only ‘by driblets under pressure’. S claimed specific performance of the contract, L counter-claimed for rescission. Held that the statement about the tenant was a misrepresentation, L’s claim to rescind succeeded.
Wales v Wadham [1977] 1 WLR 199
Mrs Wales when divorced, said she will never marry again. Met Mr Wadham and changed this. Not a misrepresentation. Criticism of this judgement because Mrs Wales had already met Wadham at the time, but did not then correct earlier intention.
Edgington v Fitzmaurice [1885] 29 Ch D 459
Pankhania v Hackney London Borough Council [2002] EWHC 2441 (Ch)
Applies the House of Lords’ decision in Kleinwort Benson Ltd v Lincoln City Council (1999) to contract law. Status of how land is used is a matter of law. Selling land, Council told purchaser that a person using the car park was a licensee (has less rights then a tenant so more desirable to purchaser) but actually he was a tenant.
Commercial Banking Co of Sydney v Rh Brown and Co [1972] 2 Lloyd’s Rep 360
JEB Fasteners v Marks, Bloom and Co [1983] 1 All ER 583
Vendors showed the purchasers the wrong accounts. The takeover was a flop. Said the purchase was induced by badly prepared accounts.
Derry v Peek (1889) 14 App Cas 337
Sale of trams.
East v Maurer [1991] 2 All ER 733
Seller said he had no intention of setting up a rival business à fraudulent
Hedley Byrne & Co Ltd v Heller Partners Ltd (1964) AC 465; [1963] 3 WLR 101; [1963] 2 All ER 375
Advertising firm HB trying to decide whether or not to advance credit to Easypower. Phones Heller (bank) to ask if they were credit-worthy. Reply: “In confidence and without responsibility on our part” Negligent misstatement of tort made them enter into a contract, because Easypower was not good for the credit. Law implies a duty of care on the party who makes the statement. Purely economic loss in tort, not tied to physical injury. Assumption of responsibility on Heller’s part.
Howard Marine and Dredging Co v Ogden & Sons Ltd [1978] 2 WLR 514; QB 574; 2 All ER 355
Third party Lloyds made a mistake about the dead weight of a ship.
Spice Girls v Aprilia World Service BV [2002] EWCA Civ 15, EMLR 27
Shooting advertising campaign as a girl band, gave the impression that they were staying together as a group.
Gordon v Sellico (1986) 278 EG 53
Whittington v Seal Hayne (1900) 82 LT 49
Land tax + loss of poultry from disease on the property. Could recover expenses, e.g. rates + property taxes (that otherwise the vendor would have had to pay anyway).
Zurich Insurance Co plc v Hayward [2016] UKSC 48
H injured at work, claimed against employer. Seemingly exaggerates injuries. Neighbours made witness statements to the insurer about this. Z went ahead and settled claim anyway, found later that they settled for 10x more than they could have. H at Z’s challenge, said Z always had doubts. Court held that the fraudulent misrepresentation was a contributing factor to the settlement. This allowed the statement to be actionable.
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158
Palsgraf v Long Island Railway Co (1928) 248 NY 339, 162 NE 99
Railway conductor pulls a man onto the train. Man drops a package full of fireworks, which explode and cause a scales to fall on to of P. P loses, it was too unforeseeable so the law does not allow for it.
Smith New Court Securities Ltd v Citibank NA [1997] AC 254
Clef Aquitaine Sarl v Sovereign Chemical Industries Ltd [2000] 3 All ER 493
Standard Chartered Bank v. Pakistan National Shipping Corporation [2002] UKHL 43
Fraudulent bills of lading had been issued in order to rely upon letters of credit issued by the bank. The director signing the bills sought to avoid personal liability, saying it was the Act of the company. The defendant company also appealed on the basis that the claimant bank had itself been at fault and contributorily negligent. Held: In the case of a plaintiff, ‘fault’ meant ‘negligence, breach of statutory duty, or other act or omission’ which would give rise to a common law defence of contributory negligence. Under Edgington, if a fraudulent representation was relied upon, other reasons for making the payment were irrelevant. As to the liability of the director his representation was also that of the company, but he did not escape personal liability.
4 Eng Ltd v Harper and Simpson [2008] EWHC 915 (Ch)
IFE Fund SA v GSI International [2007] EWCA Civ 811
Taberna Europe CDO II plc v Selskabet AF (formerly Roskilde Bank A/S) [2016] EWCA Civ 1262
Taberna is an Irish investment company. They bought, on the promotion of Deutsche Bank a form of security note (investment vehicle, a contractual document) from regional Danish bank Roskilde. Roskilde could not function and went into bankruptcy. Taberna looked like they weren’t going to get any money at all, so they settled on another way à sue Roskilde for misrepresentation under s 2(1).
CA found that the way in which the security notes were sold, it’s clear the seller Deutsche Bank and Roskilde weren’t making any representations about the product. Court follows decision in IFE v GSI. This is a standard term in these kinds of contracts – you’re selling a financial product but you say you’re not representing or warranting anything about the performance of this particular investment product. Not an exclusion of liability for misrepresentation, saying you’re not making any representations. (a) Court looks at Royscot Trust v Rogerson in order to make the determination which contract is intended. Follows their measure of damages.
(b) Law Reform (Contributory Negligence) Act 1945 s 1 e.g. If you contributed to your injuries and increased them because you weren’t wearing a seatbelt, your damages are reduced to the extent which the court finds you proportionately responsible for this. If 25% of your injuries were contributed to by yourself, the damages will be reduced accordingly. Whether or not you could reduce damages on the basis that the other party was contributorily negligent? Para 48 of the judgement: In principle, such a defence should be available.
1. Reaffirmation that K1 is what matters, even though there is a K2. 2. Contributory negligence is an available defence.
Naughton v O'Callaghan [1990] 3 All ER 191
Royscot Trust v Rogerson [1991] 2 Q.B. 297
Andrew Rogerson wanted to get a second hand car on hire purchase. Maidenhead Honda Centre Ltd. They agreed to sell Mr Rogerson a car for £7600. Mr Rogerson paid a £1200 deposit. To finance the rest, Mr Rogerson got the help of a finance company called Royscot Trust Ltd. On Mr Rogerson's behalf, Maidenhead did the application forms. But it falsely stated (i.e. misrepresented) that the cost of the car was £8000 and the deposit being paid was £1600. Royscot approved the loan. Had accurate figures been stated, Royscot would not have done this as its policy was only to lend money for hire purchase if 20% of the total cost was paid in the deposit. Rogerson ran into financial difficulties and sold the car off dishonestly. He stopped paying instalments in September 1988, with £3,625·24 left to pay. Held, that whether or not the dishonest sale was foreseeable, the loss to the finance company of the unpaid instalments was recoverable from the car dealer under section 2(1) of the 1967 Act. The car dealer was liable for all the consequences of his misrepresentation, and therefore had to pay off the debts owed to Royscot Trust Ltd. Mr Rogerson's wrongful sale of the car was foreseeable and not a break in the chain of causation.
Forest International Gaskets Limited v. Fosters Marketing Limited [2005] EWCA Civ 700
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB); [2013] 1 All ER (Comm) 1321
William Sindall plc v Cambridgeshire County Council [1994] 3 All ER 932
County Council wants to sell land of school playing field to WS for development at high property value. Market crashes and it becomes a bad deal. Discovers sewage pipe beneath the field that was not disclosed because Council did not need planning permission when they built it so no records.
Salt v Stratstone Specialist Ltd (t/a Stratstone Cadillac Newcastle) [2015] EWCA Civ 745
Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525
Caldwell (D) owned a Jaguar car. Sold to Norris for £975 in return for a £10 deposit and cheque for £965 (dishonoured the following day – 13th January). D immediately informed police and Automobile Association. Norris sold car to Motobella Co Ltd and then car changed hands multiple times. Plaintiff bought it in good faith. Car was seized by police a uthorities, interpleader proceedings followed (determining a matter of claim or right to property held by a third party). One of the issues was whether D had validly rescinded the contract for the sale of the car on the 13th of January. CA held that he had done so. They decided that the loss should be borne by the plaintiff purchaser on the basis that the seller had taken all reasonable steps to notify the fraudster of his decision to rescind the contract and on the ground that the fraudster did not wish to receive any communication from the defendant seller. Caldwell appears to be an example of rescission operating as a proprietary restitutionary remedy in the sense that the effect of rescission was to revest ownership of the car in Mr Caldwell.
Inntrepreneur Pub Co (CPC) Ltd v Sweeney [2002] EWHC 1060
Erlanger v New Sombrero Phosphate Co (1873) 2 App. Cas. 1218
Long v Lloyd [1958] 1 WLR 753
Long was induced to purchase Lloyd’s lorry in that it was in ‘exceptional’ and ‘first class’ condition. On the first journey after the sale, the dynamo broke and Long noticed several other serious defects. Lloyd was informed of these and offered to pay half the cost of some of the repairs. On the next long journey the lorry broke down completely. Long realised it was in a deplorable condition and claimed to rescind the contract. The second journey constituted an affirmation after becoming aware of the misrepresentation because Long knew then that the representation was untrue.
Peyman v Lanjani [1985] 2 WLR 154; [1984] 3 All ER 703
Person who suffered the wrong didn’t speak English.
Misrepresentation Act 1967
2 Damages for misrepresentation.
(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.
(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the 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.
(3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1).
(4) This section does not entitle a person to be paid damages in respect of a misrepresentation if the person has a right to redress under Part 4A of the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277) in respect of the conduct constituting the misrepresentation.
(5) Subsection (4) does not prevent a debtor from bringing a claim under section 75(1) of the Consumer Credit Act 1974 against a creditor under a debtor-creditor-supplier agreement in a case where, but for subsection (4), the debtor would have a claim against the supplier in respect of a misrepresentation (and, where section 75 of that Act would otherwise apply, it accordingly applies as if the debtor had a claim against the supplier).
3 Avoidance of provision excluding liability for misrepresentation.
(1) If a contract contains a term which would exclude or restrict— (a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or (b) any remedy available to another party to the contract by reason of such a misrepresentation, that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the M1 Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.
(2) This section does not apply to a term in a consumer contract within the meaning of Part 2 of the Consumer Rights Act 2015 (but see the provision made about such contracts in section 62 of that Act).
Cremdean Properties Ltd v Nash [1977] 244 EG 547
Cremdean Properties Ltd contracted to buy some property from Nash. They relied on representations by Nash’s agents that there was planning permission for 17,900 square feet (1,660 m2) of offices. The true figure was much lower. Nash sought to rely on a footnote clause in the invitation to tender document that said although statements (like the planning permission) ‘are believe to be correct their accuracy is not guaranteed’ errors would not annul the sale and pre-contract statements did not form part of the offer. Also, any purchaser should satisfy himself. Cremdean Properties Ltd argued that the exclusion fell within MA 1967 s 3 and was unreasonable. Bridge LJ held that the footnote was an exclusion clause within s 3.
Walker v Boyle [1982] 1 W.L.R. 495
Mr Walker negotiated with Mrs Boyle to purchase a house. During negotiations Mr Walker sent enquiries to Mr Boyle asking, ‘Is the vendor aware of any disputes regarding the boundaries, easements, covenants or other matters relating to the property or its use?’ Mrs Boyle asked her husband who answered ‘no’. But really there had been a long running dispute with the neighbour, which Mr Boyle incorrectly thought had been settled. Condition 17(1) of the contract said that, ‘no error, misstatement or omission in any preliminary answer concerning the property shall annul the sale’. Mr Walker brought an action for rescission based on misrepresentation. The question was whether Mr and Mrs Boyle could rely on the exclusion clause and whether it was reasonable under MA 1967 s 3. Dillon J held the condition fell foul of s 3 MA 1967. He held Mrs Boyle had not shown that the exclusion satisfied s 11 of the Unfair Contract Terms Act 1977 in this case. Neither party's solicitors directed their minds to condition 17, so it was not one which ‘ought reasonably to have been known to or in the contemplation of the parties’.
Concept of misrepresentation: Clark Goldring & Page Ltd v ANC Ltd (2001)
Requirements of an actionable misrepresentation: Lambert v Co-Operative Insurance Society Ltd [1975] 2 Lloyd's Rep 485
The representation must be false: Dimmock v Hallet [1860] LR 2 Ch App 21
The representation must be one of fact, not of intention: Limit No2 Ltd v Axa Versicherung AG [2008] EWCA Civ 1231
The representation must be intended to be acted upon: Peek v Gurney [1873] L.R. 6 HL 377 Andrews v Mockford [1896] 1 QB 372
The representation must induce the contract and it must \9in that sense) be material: Horsfall v Thomas (1862) 1 H & C 90 Smith v Chadwick (1884) 9 App Cas 187 Atwood v Small (1838) 6 Cl & F 232 Redgrave v Hurd (1881) 20 Ch D 1 Smith v Eric S Bush [1990] 1 AC 831
Fraudulent misrepresentation: Archer v Brown [1984] 2 All ER 267
Innocent misrepresentation: Newbiggin v Adam (1866) 34 Ch D 582
Negligent misrepresentation – the assumption of responsibility principle: Williams v Natural Life Health Foods Ltd [1998] 1 W.L.R. 830 Customs and Excise Commissioners v Barclays Bank Plc [2006] UKHL 28 Thomson v Christie Manson & Woods Ltd [2004] EWHC 1101
Concurrent duties in tort and contract: Henderson v Merrett Syndicates Ltd Williams v Natural Life Health Foods Ltd Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146
Statutory misrepresentation: Resolute Maritime Inc v Nippon Kaiji Kyokai [1983] 2 All ER 1
Misrepresentation Act 1967 s 2(1): Foster v Action Aviation Ltd [2013] EWHC 2439 (Comm); appeal allowed [2014] EWCA Civ 1368 Cemp Properties (UK) Ltd v Dentsply Research and Development Corp [1991] 2 EGLR 197 BG Plc v. Nelson Group Services (Maintenance) Ltd [2002] EWCA Civ 547 CA Webster v Liddington [2014] EWCA Civ 560
S 2(2): Witter Ltd v TBP Industries [1996] 2 All ER 573. For a critique of the decision, see Beale, Points on Misrepresentation, (1995), 111 LQR 385. Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] 2 All ER 1167 Erlanger v New Sombrero Phosphate Co (1873) 2 App. Cas. 1218 at 1278 T.S.B. Bank plc v Camfield [1995] 1 W.L.R. 430 Leaf v International Galleries [1950] 2 KB 86
S 3: Raiffeisen Zenbtralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm) AXA Sun Life Services plc v Campbell Martin Ltd [2011] EWCA Civ 133 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank, Chase Manhattan Bank v HIH Casualty & General Insurance Ltd [2003] UKHL 6, [2003] 1 All E.R. (Comm) 349
Vitiating Factors: Duress
A form of wrongdoing that the court recognises. This sets aside the resulting contract.
Courts are reluctant to set aside a contract between parties of unequal bargaining power solely on the basis of the inequality. At the same time, however, courts will not allow the strong to push the weak to extract agreement and, in certain circumstances, courts will set aside apparent contracts. Law and equity developed different responses to the use of illegitimate pressure. Courts of equity would set aside a contract where one party had unduly influenced the other to enter into a transaction. Courts of common law were slower to develop a response to the use of illegitimate pressure but do now recognise, under the doctrine of duress, to render a contract voidable where one party has employed illegitimate pressure during the contractual process.
Duress: Legal doctrine concerned with wrongful presume brought to bear on contracting party. è Nature of this pressure means K is not a contract.
The theory of duress is established in: Universe Tankships of Monrovia v International Transport Workers Federation [1983] "The rationale is that his [the party under duress] apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind." [at 384] Þ Must show after the pressure is removed that you do not agree to the contract. The theory is one of no consent à have not consented to the contract, simply attempting to avoid the force. Because of that, your consent is conditional.
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Forms of Duress
1. To the person Threaten to harm them or their family members Barton v Armstrong [1976] Privvy Council says that where a threat to a person is ‘a cause’ to entering the contract, it is duress. Consent falls and therefore so does the contract.
2. To the goods Threaten to destroy or take away/confiscate goods unless the contract is entered into. Courts refused to recognise in Skeate v Beale that a threat to a person’s good was something the court would consider in whether or not a valid contract had been entered into. However, Car J in The Siboen and The Sibotre refused to follow Skeate and recognised there can be duress to goods.
Then Privvy Council in Pao On v Lau Yiu Long [1980] recognises economic duress. "Duress, whatever form it takes, is a coercion of the will so as to vitiate consent". Separates out that in a contractual situation, mere commercial pressure will not be sufficient.
The pressures "must be such that the victim must have entered the contract against his will, must have had no alternative course open to him and must have been confronted with coercive acts by the party exerting the pressure." . . . "It must be shown that the payment made or the contract entered into was not a voluntary act on his part." [Lord Scarman, 635]
Further, "in determining whether there was a coercion of will such that there was no true consent, it is material to inquire: 1. whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; 2. whether he was independently advised; 3. and whether after entering the contract he took steps to avoid it [after the pressure is removed].
Since these criteria, courts have now become more concerned with whether the illegitimate pressure ‘deflects’ consent rather than ‘destroys’ it à consent doesn’t have to be completely destroyed.
DSND Subsea v Petroleum Geo-Services [2000] The elements of actionable duress: a. Compulsion/lack of practical alternative b. Illegitimate c. This is a significant cause inducing the contract Determination of illegitimate pressure requires court to consider a range of factors including whether: - there has been an actual or threatened breach of contract; - had the victim any realistic practical alternative but to submit to the pressure; - person allegedly exerting pressure acted in good or bad faith; (If in good faith, less likely to find it is illegitimate pressure which caused economic duress) - victim protested at the time; - victim later affirmed and sought to rely on contract. - Illustrated in Atlas Express v Kafco (Importers and Distributors) Ltd [1989].
Unlawful pressure (threat to commit civil wrong) vs illegitimate pressure (threat to commit a criminal wrong). Need one or the other to found a claim for duress.
CTN Cash & Carry v Gallaher [1994] Court recognises that there can be the existence of a lawful act duress. This decision has, however, gone nowhere.
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Effect of Duress
Does duress render a contract void or voidable? This is important because of the potential effect upon a third party. In Barton v Armstrong the Privvy Council says it makes the contract void ab initio.
The better view is that duress renders the contract voidable. Important because of third party, if original contract is void no third party can ever claim a right. It makes sens that duress makes a contract voidable because there is a requirement that you need to act once the pressure has been removed.
Halpern v Halpern [2007] equates duress with fraud. Moral wrongdoing on the part of the party who exerts it.
North Ocean Shipping v Hyundai Construction [1979] Consequences of finding that the contract is voidable for duress.
Alec Lobb Ltd v Total Oil [1983] Important distinction between duress and commercial pressure. Poorer people pay higher interest because they are a bigger risk. Courts try to take into consideration market realities that result in a hard bargain, it is not duress. That’s just the way the market works.
Duress is distinct from undue influence. Duress is a legal response concerned with pressure brought to bear in the contracting process. Undue influence is an older, equitable creation.
Cases
Universe Tankships of Monrovia v International Transport Workers Federation ("The Universe Sentinel") [1983] 1 AC 366
Barton v Armstrong [1976] AC 104
Trying to develop land for a holiday resort in Australia. Both motivated to enter the deal. Strangely, one party hires a Yugoslav to stalk and threaten the other party to enter the transaction or else be killed. This is duress, so no contract.
Skeate v Beale (1840) 11 Ad & E 983
The Siboen and The Sibotre [1976] 1 Lloyds Rep 293
Pao On v Lau Yiu Long [1980] AC 614
Threats made about a crummy building.
DSND Subsea v Petroleum Geo-Services [2000] BLR 530
CTN Cash & Carry v Gallaher [1994] 4 All ER 714
There was an agreement to extend credit. This was not something that the person who extend credit had to do. Simply something the retailer did. If they threatened to remove this credit, which they were entitled to do, is this act duress? Court said no, but there can be the existence of a lawful act duress. This has, however, gone nowhere.
Halpern v Halpern [2007] EWCA Civ 291
Tax avoidance issues makes it a complicated case.
North Ocean Shipping v Hyundai Construction [1979] 3 WLR 129
Contracting to build a ship. Currency deflation problem, the shipyard realises they are not going to make any money. H want to renegotiate price; tell NOS they have to pay more if they want it. Make no protest on delivery of the ship against the duress. North Ocean later said this was because they had a sister ship in the same shipyard, if they complained the other ship won’t get completed. Court said that was too bad, fact of the matter is they made no protest. Lost right to rescind the contract, because they have essentially affirmed it.
Alec Lobb Ltd v Total Oil [1983] 1 WLR 87
TO drove a hard bargain, AL ended up in this situation because of commercial pressure.
Since then courts seem to be concerned with whether the illegitimate pressure is such as to ‘deflect’ rather than ‘destroy’ the will: Huyton v Cremer [1999] 1 Lloyd's Rep. 620
Vitiating Factors: Undue Influence, Unconscionability and Unequal Bargaining Power
Undue Influence
Equitable doctrine. More concerned with the relationship between parties. Seeks to ensure that the weaker party in a relationship doesn’t get taken advantage of. è Equity sets aside the contract. English law has struggled in defining due to situation in which it has arisen in English courts.
Deals with how intent is created, the manner in which the intention to enter into the transaction was secured. Influenced by the relationship: Actual vs presumed (presumed by law, de facto)
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Unconscionability
Conduct is overarching and high-handed. Usually in conjunction with unequal bargaining power. Courts trying to differentiate between acceptable + unacceptable business practices. Þ Mostly based on statute than common law. Consumer Rights Act 2015 coming from EU law.
Weak doctrine, because of the idea that people should look to their own interests. à Courts are reluctant to set aside contracts.
General
Analysing a Legal Problem: IRAC model Issue – Identify the legal issue to be resolved. Rule – State what the relevant legal rule is, including the authority, i.e. case law or legislation. Application – Apply the legal rule to the facts of your problem. Conclusion – Work out what seems to be the most likely conclusion.
Point out what information the court would need to come to a firm conclusion. Consider what the opposing side will argue and counter it.
Be careful of what the case says, i.e. the facts are specific and limited to the items the case deals with. More facts may add a different dimension.
Separate the legal issues from the facts. The issues we have when deciding if contracts are legally binding or not:
1. Is there an offer? - What are the terms? - How do you accept it? - Could be invitation to treat, supply or statement of intention. 2. Is there an acceptance? - When? - Where? Whose law applies in the contract, i.e. jurisdiction - How long before it is stale and cannot sue?
Know the background of a law, coming from the old law, and then look at the application of the current Act. Don’t bother too much with pre-Act qualifications to the old common law, e.g. that the third party can’t sue on a term of a contract.
Stilk v Myrick has various reports, such as Lord Campbell’s report and Epinoss’ report (deemed unreliable).
In an exam, always find out first: 1. Is there a contract? 2. Who is the contract between? A + B 3. Who are you advising? If C, then there is a privity problem.
English courts don’t like implied terms.
The courts will enforce a contract if there is consensus à The ‘will’ theory of contract. Formative elements: Offer and acceptance Intention to create legal relations Consideration
Why do we use the word mistake rather than “error”?
1860s onwards, English contract law became written down à Benjamin, Pollock, Anson Organised English contract law around structure of French law Pothier and German law Savigny (will theorists) – mistake prevented consent. Problem: Cases used to make English contract law are sometimes from equity.
Steven Martin Lee – writer
Hard facts make bad law. A ¾® B ¾® C stupid evil trusting “Where you can use Latin don’t use English. Where you can’t use Latin use Anglo-Norman French.”
Sir Frederick Pollick – editor of Law Reports Says that Phillips v Brooks upsets Cundy v Lindsey.
When approaching a question about remedies in mistake, think about the facts and the law, and recognise things that are irrelevant/inapplicable to the case. Eliminate the irrelevant.
Attacking individual judges undermines the rule of law. Lord Chancellor should have defended the judges from the attack. Government forcing private litigants to get involved in Parliamentary sovereignty is a bad thing if it goes against the will of the people, though it was an argument for Brexit?
Almost all breaches of contract are remedied by damages, although there are some exceptions.
Binary decisions for loss in English law: all or nothing à comes from Larceny Act 1861.
Scotty Bowman of the NHL à harder practice than the actual game is good.
- Raise difficult points you spot, address them at least even if you can’t answer them. - Work out the relevant principles from the case law. - Law essay: work out how the problem is slightly different from what came before and predict what will come in future. - Have more than one reason underpinning an argument or a system of belief. This will make the argument more convincing. - Articulate the problems against you. - Deal with the counter-arguments, anticipate what the other side is going to do. This may cause you to realise that your argument is not that good. If you think your client isn’t going to win, you need to tell them so they don’t go to court and waste a lot of money.
When there is ambiguous language in the problem, explore this. Don’t assume what you’re trying to establish. State what your understanding of the situation is/what it might be. Move out of your comfort zone and explore the possibilities.
To Do List:
Formative 1 review Formative 2 review Seminar 1 McVea & Cumper, ‘How to write law exams’ (OUP)
Discharge of a Contract
A contract is brought to an end and the parties are freed from their contractual obligations.
1. By performance Each party performs their obligation(s). The contract is then discharged or ‘executed’. A contract is executory (the terms are set to be fulfilled at a later date, both sides still have duties to perform) until it is executed.
Þ Ex: Trying to sell a book on eBay and buyer pays the price, your obligation is to send the book and the buyer’s obligation is to give the money.
2. By breach The primary obligation to perform is replaced by the secondary obligation to pay compensation.
Þ If you had promised to send the book in return for the buyer’s promise to pay you, and you didn’t, your primary obligation to send the book is replaced by your secondary obligation to pay damages or compensate the other party.
Damages are given for whatever loss suffered. There are different types, and different ways they may be limited. Damages are to compensate expectation loss or reliance loss.
What limits might apply to restrict the amount of damages that the party in breach is responsible for? Doctrine of remoteness – if damages claimed are too remote/indirect, cannot claim. Innocent party has the obligation to try and mitigate their loss, e.g. try get the book from somewhere else. Þ If you don’t send the book, the other party could try to terminate the contract. What sort of breach would give the buyer the right to terminate the contract? If the buyer has that right and justifiably terminates the contract, then they don’t have the obligation to fulfil their part of the contract.
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Measures of self-help
1. Measures to minimise the risk of a breach
Litigation should be avoided if possible.
In continuing contracts, i.e. one that goes on for several years, like a building contract, measures can be taken in advance. Williams v Roffey Roffey Bros employed Williams to do carpenter work. Williams was behind, Roffey was in danger of breach with owner of the building, so gave Williams more money. Main contractor Roffey Bros wants to minimise effects of defective performance or non- performance.
• Trusted sub-contractor • Co-operative relationship where there is give and take on both sides • Realistic pricing, e.g. a bidding process would incentivise the subcontractor à Roffey Bros knew that the price Williams put in was too low, and the job couldn’t be done at that price. • Stage payments • Entire contracts designed where there is a single sum payment only payable at the very end (not to be confused with entire agreement clauses)
2. Measures to hedge against the consequences of breach
Þ Ex: Timber supplier Lord Stockman to supply timber to Williams. What self-help methods available for the supplied?
• Retention fund: e.g. Landlord requires a refundable deposit to be paid, or people who employ builders to build extension keep some of the payment for a period of time to make sure the builder comes back if there are any defects. • Guarantor or performance bond, which is an insurance against non-performance.
The supplier’s measures of self-help: • Cash on delivery or in advance • Title retention clause (Romalpa clause) à goods still belong to seller after giving to buyer • Documentary credits (important in an international sale)
3. Withholding performance
If one party, the seller, is in breach of contract by not delivering goods, the buyer can withhold payment until goods are delivered, or just not pay. Obligation to pay is not eradicated though, and sometimes they still have to pay. Cannot always withhold payment, depends on two things:
1) The nature of the parties’ obligations.
The innocent party can only withhold payment where the other party’s non-performance is a condition precedent or a concurrent condition.
Promissory conditions precedent = conditions in the contract, e.g. obligation to perform is precedent to obligation to pay. (Contrast with contingent/subsequent conditions precedent = not a promise, but something that has to happen before the contract even comes into existence.)
Where complete performance is a precondition to any payment in the contract, that means one party receives the benefit of some completion of contract without paying anything. Each of the parties might find themselves losing out.
Concurrent promissory conditions = most sale of goods contracts When the buyer receives the goods, he is expected to be willing to pay for that – it is concurrent or even simultaneous.
Independent promissory conditions = exists in most tenancy agreements Promise to perform is independent from the main promise. e.g. Landlord's obligation to do repairs is independent from tenant’s obligation to pay rent. Landlord cannot refuse to do repairs just because the tenant hasn't paid rent.
2) Whether the contractual obligation is ‘entire’ or if there are ‘severable obligations’.
Cutter v Powell (1795) 6 TR 320; 101 ER 573
A seaman Mr Cutter agreed to sail on a ship sailing from Jamaica to Liverpool. The journey would take just over 2 months depending on the wind, average time is 8-9 weeks. The eaman died three weeks before the ship reached Liverpool, but worked for six months before. Captain of the ship refused to pay the widow or his estate. Widow was the administratrix and sued captain. Court held he did not have to pay, contract said there was an entire obligation to pay only when the contract not performed. Why was the contract drafted in this way, instead of being paid weekly? Since the seaman had no choice and couldn’t leave the ship anyway? Mr Cutter was receiving a higher rate of pay than what a seaman would normally take for that voyage, this suggests that the captain was having a hard time finding seamen. 30 guineas for completing the voyage – 21s, 20s = 1 pound, £30,000 today. Suggestion that the work given to the captain would only be useful if the seaman completed the contract. Parties should be free to agree whatever terms they wish when they make a contract, and decide who bears each loss.
Sumpter v Hedges (1898) 1 QB 673
Agreed to build two houses for £565, only to be paid at the end. Builder ran out of money when houses partly built, left the project in the middle. Landowner had to complete houses himself, builder couldn't get any money because he didn't complete, it was an entire obligation contract. Harsh doctrine.
In Cutter v Powell and Sumpter v Hedges, the obligations are entire obligations. Entire contract (also entire obligation) = payment at the end
This is subject to the de minimis rule, i.e. if the quantity falls short of the agreed quantity by just a small amount (trivial discrepancy), obligation said to be satisfied.
Shipton Anderson & Co v Weil Bros (1912) 1 KB 574
Here there was an agreement to deliver 4950 tonnes (2240lbs per tonne) of wheat. Delivery fell short by 55lbs. Shortfall was 0.0005 of the total. Does not warrant no payment because it is below the de minimis threshhold, so doesn’t need there to be no payment under entire agreement.
Severable contract = payment as each obligation completed There could be several obligations in the contract, and could be paid at each stage. Normally in this type of contract, the entire obligation is determined by when the obligation to pay arises. The courts will try to sever a contract to reduce harshness of entire contract rule.
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Substantial Performance
This is another mechanism alongside severable contracts that the courts have developed to reduce the harshness of the entire contract rule. If there is an entire obligation to perform, although the obligation to pay does not arise until the work completes, if for the most part it is completed, they could get paid minus the cost for remedying the defects. Exception: If the breach is such a fundamental one that it allows the party to terminate the contract. Substantial performance is still a useful tool for claimants. Professor Treitel doesn’t accept doctrine of substantial performance, thinks people misunderstand the entire obligations principle. Difficulties with this doctrine: Possibility of skimped performance?
Hoenig v Isaacs [1952] 2 All ER 176
Claimant could recover the full contract price (but less the £55 that the court set off), on the basis that he had substantially completed the contract. Cost small compared to the whole contract.
Bolton v Mahadeva [1972] 1 WLR 1009
Claimant recovered nothing as heating system he was meant to install did not work at all although fully installed.
Law Commission Report no. 121, ‘Pecuniary Restitution for Breach of Contract’ (1983) Argues for quantum meruit in all cases = ‘what one has earned’ A reasonable sum of money is to be paid for services rendered or work done when the amount due is not stipulated in a legally enforceable contract.
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Broader, underlying policy issues
Freedom of contract: To enter into entire obligation without substantial performance principle • Parties agree to what suits them • Incentivises performance, e.g. incentivising unmotivated builders OR: Substantial performance relief OR: Quantum meruit claims in all contracts
Breach
Termination
Innocent party could terminate a contract without the involvement of the court. Termination is the same as rescission, but the term ‘rescission’ is used in so many contexts that it can be ambiguous. What does termination achieve? Wipes out future obligations under the contract – don’t have to perform any more of the obligations. If any obligations have arisen in the time before the contract is completed, i.e. in a severed contract, they must be completed. Accrued obligations remain intact.
The innocent party has a right to terminate where the other party has committed a (serious) repudiatory breach. • Anticipatory repudiatory breach (where one party makes clear that it will not perform its obligations under the contract) • Breach of condition (or a breach akin to a breach of condition)
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Anticipatory Repudiatory Breach
Repudiation = party renouncing the contract Anticipatory if it is before the contract is due. One party renounces the contract, or disables himself from being able to perform it BEFORE the performance is due.
§ Must be a clear refusal to perform à anticipatory breach must be clear e.g. Employment contract, day before the work starts she says she won’t come in at all. The innocent party can terminate the contract and claim damages. Delay, e.g. arriving late, should not allow for termination if given notice and proportionate to how long the job takes. Difficulty is that the breach arises before the time for the performance has arrived.
Hochster v De La Tour (1853) 2 E&B 678
D agreed to defer for three months. 3 weeks before the contract began, said he no longer wanted to hire him. De La Tour argued that Hochster was still under an obligation to stay ready and willing to perform till the day when performance was due, and therefore could commence no action before. Held, claim could be allowed. Hochster did not need to wait until the date performance was due to commence the action.
The innocent party may either: • Affirm the contract = Ask the other party to reconsider, and persuade them to perform. • Accept the guilty party’s anticipatory breach, terminate the contract, and claim damages – but only if the breach is such that it will deprive the innocent party of substantially the whole benefit of the contract.
Problems with accepting the breach: - Damages are accelerated à Can only be assessed from the time the performance was meant to start. Court must take into account the benefit for the claimant of accelerated damages. - Quantification of damages is therefore difficult as actual loss is not yet calculable. E.g. Market value is likely to be the measurement of damages. If there is a long gap between repudiation and performance, must calculate in offence. - But, the court will endeavour only to compensate the claimant, not to punish the defendant. Contract law is not trying to punish the breaching party – arguments against claimant getting advantage for anticipatory breach.
§ Could be less overt, in some circumstances silence may suffice
Vitol SA v Norelf Ltd (The Santa Clara) [1996] AC 800
House of Lords case ‘Normally doing nothing, or merely failing to perform, would be too equivocal (ambiguous, open to interpretation) to amount to an election to terminate the contract.’ Did the innocent party convey unequivocally that they repudiated the contract? Seller’s failure to perform was sufficiently unequivocal, buyers never had any doubt that their contract had be repudiated. Lord Steyn: ‘In some circumstances an innocent party may simply fail to perform his obligations under a repudiated contract, and that was enough to accept the repudiation. So communication (orally or written) was not always necessary. The question was whether the innocent party’s conduct did convey, unequivocally, that he was treating the contract as repudiated. A failure could be unequivocal.’ Therefore, can affirm the contract and continue on the basis that they will perform. There is no obligation to do one or the other (terminate or affirm), can continue to perform and wait until they see what happens later.
Affirming and claiming the contract price
White & Carter (Councils) Ltd v McGregor [1962] AC 413
Renewal of previous contract, allowed McGregor to stick ads on bins owned by local authority for three years. Council – appellant, decided on the day of signing the contract that they didn’t want to do it anymore (anticipatory breach because performance not yet due to start) and informed them immediately. Respondents affirmed contract, placed ads anyway and then sued for damages. If they accepted the anticipatory breach, they would have had no losses. At that point there was no loss, doctrine was to avoid waste. Should the innocent party mitigate loss? Suing for the contract price, a debt, they would get more. From claimant’s point of view, suing for a debt is the contract price, it is there. Advantage to claimant in suing ‘in debt’, or for the contract price, is that it is a fixed sum. Disadvantage of suing for damages is that they are subject to limiting factors.
HL held 3 : 2 that there is no obligation to accept and terminate on the repudiatory breach. Contractors did not need the local authority to cooperate, just a question of them sticking up things. Affirmation is not possible where cooperation of defendant is necessary. If they had needed the council’s cooperation, then they would have had to terminate the contract here.
Hounslow London Borough v Twickenham Garden Developments Ltd [1971] Ch 233
White held this case not to apply. Owner of the land refused to let the builders on the land, so innocent party could not affirm the contract. Order for specific performance is an equitable remedy that is rarely given, only where damages would not be an adequate remedy. Denning argued to allow the innocent party to affirm the contract is to force the breaching party to perform against their will, that would be the same as specific performance.
Lord Reed limited decision in the case itself à claimant could not affirm if they had no legitimate interest in doing so.
Should the claimant have to show a ‘legitimate interest’ in order to affirm? Or, should the defendant have to show that the claimant had no legitimate interest? (The defendants in White did not do this.) The claimant (innocent party) should be protected and allowed to choose between the agreed price (fixed) and damages (subject to limitations). No definition of this, could be financial but is that enough? From the rationale, looks like no, but we don’t know. Burden of performing not put on defendants unless there is benefit to claimants. We would be imposing on a primary right.
Isabella (Shipowner) SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077 (Comm)
Recent High Court case Shipowners refused early return of ship by charterers, would have been an anticipatory breach. Wanted to make charterers liable for the charterer’s hire. Did they have legitimate interest? Held: It was not sufficient to refuse affirmation simply because damages would be an available remedy. The decision of an owner for affirmation had to be ‘beyond all reason’ or ‘perverse’ before there would be no legitimate interest in maintaining the contract and holding the charterer to the contract.
Fercometal SARL v Mediterranean Shipping Co (Simona) [1989] AC 788
Terms of the charter party entitled charterers to cancel if the vessel was not ready for loading by 8 July. Charterers committed anticipatory breach by chartering another ship on 2 July. Shipowners tried to affirm, saying the ship would have been ready for loading on the 8 July, but actually it was not ready. HL held that if the injured party elects to affirm the contract following an anticipatory repudiatory breach, then that party must abide by all the rest of its obligations under the contract.
Bunge SA v Nidera BV [2015] UKSC 43
Supreme Court decision discussing anticipatory breach of contract. What is the effect? Referred back to Hochster v De La Tour. Lord Sumption: The effect of the renunciation of a contract in advance of the time agreed for performance was (i) to confer on the injured party an option to accept the renunciation as bringing the contract to an end and to treat himself as discharged from that time onward from further performance; (ii) to enable the injured party to deal with the financial consequences by suing for damages at once, without waiting for the time fixed for performance; and (iii) to bring forward the injured party’s duty to mitigate to the time when the renunciation was accepted. However, an accepted renunciation/anticipatory breach gives rise to problems in legal analysis to assessment of damages. May lead to the court having to calculate damages before you can!
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Right of withdrawal or termination: Classification of terms
Conditions, warranties and innominate terms
Warranties
Sale of Goods Act 1979 (as amended) s61(1)
Warranty = an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of such contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and treat the contract as repudiated.
More peripheral terms and issues are more likely to be considered warranties. A breach of one of those terms means you cannot terminate the contract if they were wrong, but you can claim damages if one of those things is wrong.
Stocznia Gydnia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75
As with cases of anticipatory breach, even where the defendant’s actual breach is repudiatory, the claimant may choose to affirm the contract rather than terminate it and claim damages. However, affirmation must be clear, or express – the courts generally do not infer it.
Conditions
When classifying terms as conditions, consider:
(i) Intention of parties: Is it clear the parties intended the term to be a condition?
Bunge Corporation v Tradac Export SA: Generally the court will hold that a term is a condition if the parties have labelled it as such.
Schuler v Wickman Machine Tools Sales Ltd [1974] AC 235
But, if the breach or loss is only trifling, termination not justified even if term classified by parties as a condition. Four-year distributorship contract. One of the terms was that the distributors had do visit six named customers once a week for the four years. This was a condition in the contract. Court decided it couldn't have been meant by the parties to intend for it to be a condition when they named it first. Meant it in a general sense, not a technical + legal sense. So it was not a condition even though the parties named it such.
If the parties say it was a condition, it usually is, unless they don’t mean it in the technical sense.
(ii) Whether the breach deprives the other party of substantially the whole of the benefit of the contract – is there substantial failure of performance?
Hong Kong Fir Shipping Co v Kawasaki Kishen Kaisha: In order for a term to be considered a condition (when the contract does not specify which are conditions and which are not), every possible breach of the term must deprive the other party of substantially the whole benefit of the contract. BUT Bunge Corporation v Tradax Export SA refines this: Not every breach need cause a substantial deprivation, but does need to be the majority.
Does the term go to the root/heart of the contract? Should the claimant have to continue with/be bound by a contract that is not giving them what they want?
Descriptive statements in charterparties and descriptions which are a substantial ingredient in the identity of the goods being sold are terms of great commercial importance.
Couchman v Hill [1947] KB 554
Buyer wanted a cow who was unserved to be served by his own bull. But this hepper was carrying a calf and died from it. Hepper cow “unserved” was vital/crucial to the contract, without that the claimant would not have entered the contract so it wouldn’t be right to bind him. Breach of condition, the contract oculd be terminated.
Another way to determine if the term goes to the root of the contract = Judicial precedent à If court held as condition in the past, will do the same again. Terms as to time are usually ‘of the essence’ i.e. go to the root of the contract, and are held to be conditions. Time clauses = likely to be conditions.
Lombard North Central plc v Butterworth [1987] 1 All ER 267
Contract for the hire of computers for five years. Payment was to be made in quarterly instalments. Court held that on those facts, when the payment was late it was considered a breach of the condition because time was ‘of the essence’ of the contract.
Bunge Corporation v Tradac Export SA [1981] 1 WLR 711
Contract for the sale of soy beans. Delivery was to take place in June, and buyers were to give 15 days notice of the ship’s readiness to load the goods. Only 10 days notice was given. Court held clause to be a condition because time was ‘of the essence’, breach so innocent party could terminate the contract.
However, classifying terms on the basis of judicial precedent can lead to unfortunate results. Arcos Ltd v Ronaasen [1933] AC 470
Contract for the sale of ½ inch thick timber. Timber was in fact 9/16 of an inch thick, tiny fraction difference. However, held that the description of the timber as ½ inch thick was a descriptive term, therefore on the basis of precedent there was a breach of condition even though there was no real harm to the claimant here – it was still perfect for the reason it was bought. The real reason the buyer wanted to terminate was that in the interim the price of timber ad fallen dramatically and buyer could have bought the timber much more cheaply than under this original contract. This doesn’t really square up to why we have the rules, difficulty here. They put forward a convenient reason.
Rules lead to the desirable outcome of commercial certainty, but it doesn’t necessarily sit well with the justifications.
(iii) Legislation: Certain terms implied into a contract are conditions.
Sale of Goods Act 1979 (as amended) ss 12-15
Stipulate certain terms as conditions. §13: Goods will correspond with their description §14: Goods will be of satisfactory quality and fit for their purpose §15: Restricts the effect of those clauses slightly in non-consumer sales
Innominate Terms
Most other terms in a contract apart from conditions will be warranties.
Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd [1962] 2 QB 26
Now, additionally from conditions and warranties, Lord Diplock developed a third type of term: ‘innominate/intermediate terms’. This was because some terms are broadly drafted so that they can be breached both with very serious, costly, consequences, and also in a minor way, with only trivial consequences. Such a term would not be able to be called a condition because not every breach would give the right to termination, and it can’t be a warranty because some breaches would have very serious consequences and shouldn’t give only the rights to damages, hence the third type of term. Remedy for breach of innominate term which does deprive substantially the whole benefit of the contract is the right to terminate, i.e. it will be treated like a condition after identifying how serious its consequences of breach are. If the breach does not amount to a substantial failure, then it will be treated as a warranty and only damages will be available.
Vessel ship contracted for 24 months. Contract said it had to be fitted in a way that it had everything needed to carry cargo. à Innominate term. Covered an enormous range of possibilities. However, understaff and incompetent, needed repairs, broken down engine. Got damages for breach of warranty but did not get considered a condition to set aside the contract. It was held that the term that the vessel was to be ‘fitted for cargo service in every way’ was an innominate term and the actual breach was not sufficiently serious to entitle the hirers to terminate the contract – they were not deprived of substantially the whole of the benefit of the contract and so they could claim damages for breach, but not terminate.
Courts will only hold something as a condition if parties intended it to be so in a technical sense. Sometimes when there is unequal bargaining power, the more powerful party will try to escape the rules of classification of terms in the drafting of the contract.
Rice v Great Yarmouth Borough Council (2001) 3 LGLR 4
Clause: If any obligation of the contract was breached by the contractor, the council could terminate the contract. The council was providing that every term of the contract was a condition. CA said termination could not be justified in every breach of every term. Held that, despite what the contract said, the contract could not be terminated for breach of any one of the terms. It would make no commercial sense for every term to be a condition. Prevents the stronger parties from manipulating the rules.
It can be difficult to decide whether the breach of an innominate term justifies termination in continuing contracts. Sometimes, when a contract that goes on for several years it may just be a repeated minor breach. We have to look at the cumulative effect of the repeated breached.
Alan Auld Assocs v Rick Pollard Assocs [2008] EWCA Civ 655
Defendant persistently late in paying monthly invoices from the claimant even though the claimant had stated that late payment was unacceptable. This cumulative effect was held to be a breach of a condition.
Force India Formula One Team Ltd v Etihad Airways PJSC [2010] EWCA Civ 1051
Sponsorship agreement, contracted to sponsor the team. But step by step, Force India rebranded the cars, replacing the Etihad logo with other logos. Replacing one logo was not a breach, but replacing many was. Cumulative effect of the rebranding amounted to a breach of condition, allowed Etihad to terminate the contract.
So far we looked at classifying express terms. Not all contract terms are express terms. Implied terms need to be classified just as much as express terms.
Reasons for right of termination
Arcos v Ronaasen à Innocent party can put forward no reason, or even a convenient but false (although valid) reason.
The Mihalis Angelos [1971] 1 QB 164
Claimant put forward an invalid reason - but the court allowed them, later, to point to a good reason which, unknown to them, had in fact existed at the time of the termination.
Termination is a useful tool for the innocent party. The right arises where there is: a) a repudiatory anticipatory breach (that is an anticipatory breach of a condition or a sufficiently serious breach of an innominate term) b) on the actual breach of a condition (or the actual breach of an innominate term that is akin to the breach of a condition in the sense that the consequences are very serious for the innocent party). Compensatory Damages
Whether or not a contract can be terminated, the innocent part can claim damages for any loss suffered as compensation. Primary remedy for breach of contract in England & Wales à money to compensate for the innocent party not receiving the performance they have bargained for. This is not a discretionary remedy, unlike equitable remedies. Where the requirements are fulfilled, damages have to be paid, even if they are only nominal damages. The claimant has an absolute right to damages. Normally the claimant will have suffered a loss. But even where there is no loss, the claimant can get nominal damages – just small token damages to recognise the liability of the defendant although there is no loss suffered, e.g. Ruxley Electronics v Forsyth (no monetary loss to the claimant). Compensation is normally about finding a loss and making up for it.
The Aims of Damages
To compensate for loss, a substitute for the performance of the defendant. An award of money seems to be the next best thing. Other ways of rectifying the problem could be specific performance, an injunction or restitution (making D give up the benefit they got from the contract) à discretionary.
Compensatory damages are not about considering what D might have gained in breach of the contract. If D breaches the contract because he would get more from another contract, the law will not usually strip him of that benefit. Not punitive for D à punishment in English & Welsh law seem as in the realm of criminal law. Exemplary/punitive damages rejected by the court. Contract law is about efficiency and freedom of contract, as long as one person is not worse off.
The Albazero [1977] AC 774
“The general rule in English law today as to the measure of damages recoverable for the invasion of a legal right, whether by breach of a contract or by commission of a tort, is that damages are compensatory. Their function is to put the person whose right has been invaded in the same position as if it had been respected so far as the award of a sum of money can do it.”
1. Damages are compensatory 2. We want to put the claimant in the same position he would have been in if his legal rights were respected We must work out what position you would have been in had no wrong been committed. This depends whether the wrong in question is a breach of contract or a tort. Options: • Reliance measure of damages: What you had to spend because of entering into the contract. • Expectation measure of damages: Put you in the position you would have been in if the contract had gone through. We enter into a contract to be better off afterwards, so expectation damages more appropriate.
Johnson v Agnew [1979] 1 All ER 883
Confirmed that in contract law, the primary remedy is the expectation measure. “The general principle for the assessment of damages is compensatory, i.e. that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed.” Consider purpose of contracts: driving economy and encouraging enterprise. We need to encourage people to enter into contracts. Legal benefit of x benefit or a monetary substitute if the other party doesn’t uphold. Rewarding reliance damages means that you don’t gain or lose anything. People would be more risk-adverse when entering contracts if reliance damages are always given, which stifles enterprise.
Alfred McAlpine v Panatown [2001] 1 AC 518
Difficult case because judges did not agree, hard to extract a ratio. HL considered the extent to which the expectation/performance interest of the claimant is protected. General principle that claimant can only recover damages for a loss they themselves have suffered. Lord Gough example: Rich philanthropist contracts with builder to build city hall. Building is defective so build res in breach of contract. Can the philanthropist recover damages even though he doesn't own the hall and the breach did not cause him any financial loss personally? Can we argue that he did not have financial loss but did not receive the bargain he contracted for? How does he get compensated?
Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] 2 AC 353
HL majority confirmed that in quantifying the damages recoverable for wrongful repudiation of a long-term time charter, a tribunal was right to take into account an event occurring subsequently to the termination, even when the occurrence of that event was uncertain at the time of termination. We should always look at what would have happened had the contract been performed, even if that means the contract breaker has to pay less money than what seems at first to represent the expectation loss. There were facts available to the court at the time of assessment of damages that could not have been known at the time of the breach that results in a lesser sum. In order to be truly compensatory, must take into account facts that come into light later, otherwise there will be over-compensation.
Bunge SA v Nidera BV [2015] UKSC 43
Upheld Golden Victory principle in full. That principle applies to one-off sales as well as instalment contracts. Acknowledged that certainty is vital, but not important enough to justify a substantial damages award to someone who has suffered no loss. The fundamental principle for the assessment of damages in cases of breach of contract is … to put the parties in their position had the contract been performed.
Actual performance may sometimes be more beneficial than damages for the innocent party or vice versa. English law assumes minimum obligation principle.
Lavarack v Woods of Colchester Ltd [1967] 1 QB 278
As a general rule, damages calculated on the basis that, in performing his obligations, the defendant would not have done anything more than he was specifically obliged to do, would not take further steps.
But this raises difficulties where D has a discretion on how to carry out his obligations under the contract.
Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485
Airline had an obligation to operate 2 or more aircraft for ten years from the airfield, but the contract did not specify the actual number of flights that had to be operated à airline had discretion as to how to fulfil its obligations. CA said rather than calculating the minimum level at which the claimant could have performed its obligations, the courts should conduct factual inquiry into how the contract would have been performed if it had not been repudiated. Assume parties to have acted in good faith but also with their own commercial interests in mind. Calculation is different in tort. Get reliance loss in tort, no question of any expectation.
Rule does not apply where the defendant is obliged to do something but, under the contract, has a discretion as to how he does it.
Livingstone v Raywards Coal (1880) 5 App Cas 25
The basic principle of damages for personal injury in tort is to award: “that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been if he had not sustained the wrong for which he is now getting his compensation.” While the aim is the same, the primary remedy in contract is expectation loss, remedy in tort is reliance loss.
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Types of Expectation Damages
Pecuniary loss = financial loss, easily measured. e.g. Lost profit because of breach of contract, easy to work out à difference between contract price and market price. If you have suffered distress or lost out on a chance as a result of the breach, it is more difficult to calculate.
Pecuniary losses and non-pecuniary losses measured differently.
Difference in bringing action in debt and claiming compensatory damages (White v McGregor). Where D was supposed to pay money under the contract and the breach is that he hasn’t paid, we want that sum of money. But it is called an action in debt = type of specific performance, asking for the money that were promised to be paid à not a claim for compensatory damages even though it is a claim for cash. Sometimes action of debt better than claim for damages because not subject to same limitations that apply to damages.
Introduction to Contract Terms
To what extend should the law demand fairness in contract terms?
Potential Answer #1:
If people objectively manifest their consent to a bargain, and no public policy is violated, then contracts are to be enforced. Agreement of parties = fairness and justice.
Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462 Sir George Jessel MR, ‘... men of full age and competent understanding shall have the utmost liberty of contracting... their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider—that you are not lightly to interfere with this freedom of contract.’
Lockner v New York (1905) 198 US 45 Limited amount of hours employees can work in baker shops in New York. Said unconstitutional, against Article 5 because of constitutional rights of freedom of contract. The US Supreme Court made this a constitutional doctrine, lasting till 1937. It later struck down many regulations along the same lines: working time rights, child labour laws, consumer rights, social security, etc. A contribution to the Wall St Crash in 1929.
The court’s role is limited to the inherently objective function of identifying failures in the process, evidence of a fixed list of things which prevent informed and un-coerced consent. But what it should not do is make the bargain for the parties – this is very different. In effect, the question comes down to one of legitimacy. Neither the state, nor an official like a court, should substitute its views of fairness for those of the parties, because this violates the principle of private autonomy. The individual should not be subordinated to a public authority. Rather the state should exist to promote freedom.
Why should society enforce unfair deals? Collective action problems; if an individual is against a big corporation, it is difficult to coordinate with other individuals against them, i.e. lack of bargaining power means people agree to unfair terms. We often cannot calculate how a long term contractual relation will evolve, and so people – even with the best of intentions – may legitimately need the power to revoke it.
Potential Answer #2:
The law should strive for fairness of exchange and, when needed, override the contracting parties’ private autonomy. The law’s purpose is justice, so sellers must receive a just price, and buyers reasonable goods and services.
Vernon v Bethell (1762) 28 ER 838 V owned an Antiguan sugar plantation. He mortgaged land to a UK lender B. B’s successor claimed they also agreed that, to clear debt and interest, V would convey the title to the land. V claimed he could repay, and should be able to keep title to land – so any agreement that V would convey the land was void. ‘for necessitous men are not, truly speaking, free men’ à quoted by Roosevelt, State of the Union (1944) Equity of redemption, primitive form of consumer protection
Carter v Boehm (1766) 3 Burr 1905 Carter, Governor of Fort Marlborough, Indonesia, bought insurance from Boehm, without disclosing that the fort could not withstand attack from the French. French attacked. Boehm claimed the policy was void for non-disclosure. The general principle was good faith, though its application remained confined to the contract for insurance – and this was primarily limited to the side of the buyer of insurance, not the seller (who is usually more powerful!). Problem with mandating full disclosure – courts not good at deciding ad hoc what is objectively fair. Suggested general doctrine of unequal bargaining power. Courts don’t want to intervene if parties have equal bargaining power. Williams v Roffey Bros Ltd, per Russell LJ, the courts will find consideration ‘reflect the intention of the parties to the contract where the bargaining powers are not unequal’.
National Westminster Bank plc v Morgan [1985] AC 686 Limiting freedom of contract ‘essentially a legislative task’: courts institutionally incapable of defining what’s right in every situation: substituting its view of ‘fair’. When attempting to determine the idea of a fair exchange, what should be the court’s criteria? Presumably, if one deal deviates from a general, obvious market price, which can be objectively identified, this may serve as a guide. For instance, the price of a sheep of a certain age or size can be set by reference to other sheep. A house in a certain location, similar to other houses of similar size or location. But, (1) What if there is no market to make reference to? (2) Even if there is a market, what if the whole market is skewed: rising house prices, poverty wages, all businesses using exclusion clauses? Should an unfair market be the guide for fair terms? Hence the claim that it is only a legislative task does not always seem to be valid – courts could presumably follow what are obvious accepted social standards. But evidence of social standards need to be identified from some source, and so presumably it is right that legislation leads the way.
Potential Answer #3:
There can be no unified theory of contracts, with equally applicable principles in all social and economic contexts. Unequal bargaining power begins with unequal wealth (wealthier party can hold out in negotiations longer than the party with less resources), collective action problems, information asymmetry (e.g. one party has lawyers advising them) The problem is for individuals bargaining with corporations. Standardised mass contract – standard form contract, efficient for standard terms to roll out to everybody, less administration costs. Kessler “the law, by protecting the unequal distribution of property, does nothing to prevent freedom of contract from becoming a one-sided privilege…” Appearance that you are agreeing to the terms, but really, it’s take it or leave it à where the weaker party ‘submits to terms or change of terms which will be communicated to him later’ (contract of ‘adhesion’).
Statute frequently replaces standard business terms with fair terms, democratically approved. Courts have slowly shifted from a ‘paramount public policy’ of ‘freedom of contract’ to construing agreements in light of people’s reasonable expectations. Caveat: the extent of rights in contract, without statutory codification, is heavily contested.
Incorporating Terms into a Contract
The extent to which the law does or should require contract terms to be fair has been the most contested issue in the history of contract law, and probably in modern economic history.
Terms on the contract are important because that’s why you impose obligations on people. è Express (written in the contract so you have agreed to them, even if you don’t know what they are) or implied (by statute – Parliament implies them into contracts of a type - or by common law)
Three questions in this area: 1. Is this clause incorporated into the contract? Is it an express term? 2. Does this clause cover the loss or damage occurred? Does the clause cover the event which has happened in this instance? (We are looking at limiting liability.) 3. How is this term regulated by the legislation? (Consumer Rights Act 2015 applies, business contracts have UCTA 1977)
How do terms get into a contract? How do you consider these terms once you do have them in a contract, in terms of regulation of these terms? This area of law gives us an insight into how consumers are affected by contract law, and how EU law has applied into this.
How do terms become incorporated into a contract? 1. When we have oral or unsigned agreements 2. Signed agreements
1. Incorporating terms in oral or unsigned agreements
During the offer and acceptance, there is often not clarity on the content of the contract because it comes from a mixture of oral and written sources, maybe a manual etc. Heilbut, Symons & Co Basic rule: it depends on whatever the parties intended. Asks was importance attached to it? Not ‘intended’ as term = mere representation. But contractors’ intentions often contradict. So, in absence of express agreement, which pre-contractual statements, or provisions, should be counted as part of the deal?
Oscar Chess Ltd v Williams [1957] 1 WLR 370
W sold OC a Morris car. Car log book said it was 1948 model, but actually forged and the car was from 1939 so worth less. Was the year of the car intended to be a term of the contract? Held that it was not a term. The car dealers ‘are experts, and, not having made that check at the time, I do not think they should now be allowed to recover against the innocent seller’ – Denning LJ
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
DBP bought a Bentley from HSM which was thought to have done 20,000 miles, but in fact had done 100,000 miles. Very wrong mileage, was this a mere representation? Denning LJ: Because HSM was a professional seller, the statement of the mileage became a term. ‘Here we have a dealer, Mr. Smith, who was in a position to know, or at least to find out, the history of the car.’ Not like Oscar. Court looking at the intention objectively.
2. Terms when a document is signed
L’Estrange v F Graucob Ltd [1934] 2 KB 394
Decided before the Unfair Contract Terms Act 1977. (Tom Denning QC worked on this as a barrister.) Now the decision would differ. Harriet L’Estrange bought an automatic cigarette machine for her small business. She signed an agreement with a clause excluding any liability for the seller if it was defective. It did not work, and Ms L’Estrange refused to pay. She said it was an implicit term (a warranty) in the contract that the machine should work. Clause excluding any liability of the seller if the machine was defective. Said there should be an implicit term (a warranty) in the contract that the machine should work. Now there are laws that it is implied anything being sold is of acceptable quality. Contract held, but Maugham LJ says L’Estrange could get out of it if she successfully pleaded for misrepresentation or non est factum (illiteracy that is exploited à this was severely limited by courts in Saunders v Anglia [1971] AC 1004: there is a ‘radical difference’ from understanding and document) JR Spencer commented Graucob was snapping up a bargain. L’Estrange shouldn’t have been bound because Graucob Ltd knew she was making a mistake: hadn’t read small print.
The extent of the signature rule: 1. Electronic, online forms, click ‘x’ in a box is thought to count as signing and will be a binding signature Law Comm, Electronic Commerce (2001) para. 3.37
2. Curtis v Chemical Cleaning [1951] 1 KB 805 Dry cleaners said that a document only excluded liability for satin dress sequins: it excluded all. The dress was stained. The exclusion clause is much wider in the document than what the cleaners told her, this misrepresentation overrules the clause and makes the exclusion inoperative.
3. Grogan v Robin Meredith Plant Hire [1996] CLC 1127 Timesheet for machinery hire signed. Auld LJ held the exclusion ineffective: it was only an ‘admin’ document.
Autoclenz Ltd v Belcher [2011] UKSC 41
A group of employees claiming they ought to get the minimum wage and minimum days of holidays though they signed agreements that they were self-employed independent contractors. B, a car cleaner signed he ‘hereby confirms that he is a self-employed independent contractor’. To get the minimum wage and paid holidays, the Working Time Regulations 1998 and National Minimum Wage Act 1998 required he is a ‘worker’ or an ‘employee’. B claimed he was in fact an employee, despite the signed ‘contract’. Does this signed contract carry any weight in if this valid? No, it would mean an employment contract would have far less rights. Lord Clarke held, to interpret whether what people have signed is the ‘true agreement’, the parties’ ‘relative bargaining power must be taken into account’. This is a ‘purposive approach’. This does not affect ‘commercial contracts’.
Signed documents are usually considered to be binding, unless there is a statutory right or the courts assert control of standard form contracts
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Exclusion Clauses
Exclusions exist because companies want to limit the risk, the ‘first shot’ in a potential court battle. Statutory inventions can give rights. In the UK, UCTA 1977 s 2(1) and CRA 2015 s 65 places an absolute prohibition on limiting liability for death or personal injury, which is a business’ fault. The UCTA 1977 will prohibit all clauses excluding personal injury liability, and may say other clauses are ‘unreasonable’ (i.e. unfair = void). But in South Africa, for example, there no such statute yet. The courts have kept holding such clauses valid, e.g. Drifters Adventure Tours CC v Hircock [2006] ZASCA 174. The US Supreme Court’s republican side still have a hardcore dedication to freedom of contract.
If there is no signed agreement, when are terms incorporated by notice? Should the state allow corporations of businesses to escape from standard obligation? When you step onto a business’ property in the course of contracting, or in the use of a business’ services, must they dictate the terms? When you walk into the premises, can a contractual promise bind you when you are on the premises?
Incorporating terms by notice
When can terms be incorporated by notice? Timing, visibility, reasonability.
Parker v South Eastern Railway (1877) 2 CPD 416
Mr Parker leaves bag at Charing Cross station cloakroom. He pays 2 pence, and gets a ticket. On the back of the ticket, it excluded liability for losses over £10. Bag lost, cloakroom staff accidentally gave it to someone else. Mellish LJ, “if what they do is sufficient to inform people in general that the ticket contains conditions, I think that a particular plaintiff ought not to be in a better position than other persons on account of his exceptional ignorance or stupidity or carelessness”. Will be held if the railway company does what is sufficient to inform the people of the terms. Person who seeks to rely on the clause have to bring it to the attention of the other party. 1. Do you know if the ticket has writing on it? If you don’t, you are not bound. 2. Do you know that the ticket contained or referred to conditions? If you do, you are bound.
Also, is this clause sufficiently unreasonable? The cloakroom operators probably have an insurance contract in the background. This limitation of liability is not so unreasonable.
What is sufficient notice?
Richardson, Spence and Co Ltd v Rowntree [1894] AC 217
Rowntree wanted to get off ferry, fell into water because of negligence of the company leaving the boat too far from the shore. Ticket with an exclusion was folded and smudged when it was given to her. Incorporated? No. Clause invalid because notice was insufficient.
Thompson v London, Midland and Scottish Railway Co Ltd [1930] 1 KB 41
Mrs Thompson fell off the train when it stopped in the dark, past the platform. Tickets said the conditions were found in the small print on the back of the timetable, which could be bought at the station for 6 pence. Incorporated into the contract? Yes. This brought some uncertainty to the law.
Chapelton v Barry UDC [1940] 1 KB 532
Mr Chapelton hired a deckchair on Cold Knap (pebble) beach, South Wales. When he paid, he got a ticket which said that ‘the council will not be liable for any accident…’ He is on a date with Ms Andrews, doesn’t read the ticket. Chair collapsed, fabric gives way, and Chapelton’s back was injured seriously. Slesser LJ held the ticket was not a contractual document because someone would not reasonably think it contained contract terms. Not incorporated.
A receipt would not be sufficient notice to exclusion clauses. But what if the receipt is the only thing he gets from the contract?
Olley v Marlborough Court [1949] 1 KB 532
Ms Olley left her fur coat in her room at the Marlborough Court Hotel (Lancaster Gate) and her room key at reception. A general say a thief (shadowy figure) took the key and stole the coat. Porter doesn’t see him because he is dusting. A notice behind the bedroom door excluded liability. This doesn’t work because then there would be no certainty into the future à the notice was too late, the contract was formed beforehand (like Thornton v Shoe Lane Parking) after they already have a contract. The clause was not incorporated into the contract.
Denning LJ gave three ways to incorporate terms: 1. Sign something 2. Make it clear at the time of contracting 3. Sufficiently clear notice None were done for Ms Olley here.
Thornton v Shoe Lane Parking Ltd [1970] EWCA Civ 2
Mr Thornton parked at Shoe Lane Parking before performing at Farringdon Hall. He got a ticket as he drove in. A notice inside excluded liability for injury, but he was injured. One argument why he should be able to claim for personal injury and not bound by the clause because the contract was already complete once he enters the car park and anything told to him after he enters doesn’t count. Was the contract completed before the exclusion clause could have been seen? Lord Denning MR says contract was complete at the ticket machine. But even then, very unfair exclusions must be very clear and there must be reasonable notice.
J Spurling Ltd v Bradshaw [1956] EWCA Civ 3 “In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.” à Red Hand Rule Onerous terms need to be very clear to be applicable.
But here, it would not help the company because the contract was complete at the machine. ‘The customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back. He may protest to the machine, even swear at it. But it will remain unmoved.’
Interfoto Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6
Interfoto delivered 47 photo transparencies to Stiletto in a sealed bag which wasn’t opened. Inside the bag, condition 2 said £5 per day was charged for each if they were kept for too long. S didn’t return them for a month. S then sent a £3,783.50 bill. (Not an exclusion clause, so no help from UCTA 1977) Held that condition 2 was not incorporated into the contract. Otherwise a ‘venial period of delay, as here, would lead to an inordinate liability.’ – Bingham LJ ‘... the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention.’
Must give really good notice for onerous term to be incorporated. The more onerous the term, the more notice must be given to be incorporated. But terms outside a signed document can be incorporated by reference with reasonable notice.
On the flip side…
O’Brien v MGN Ltd [2001] EWCA Civ 1279
Mr O’Brien and 1471 other Daily Mirror readers were told they’d won up to £50,000 when they scratched a card and by calling a phone line. This was a mistake. Rule 5, printed in papers on some days, not others, said that if too many prizes were given, there would be a prize draw. Were these terms incorporated into the contract? Hale LJ said yes, term was not onerous. The notice was not really adequate, but the term was definitely not onerous – it simply meant the readers did not get a massive windfall bonus, a.k.a. non-onerous terms are easier to incorporate.
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When can terms be incorporated through trade? 1. Course of dealing 2. Trade custom and practice in an industry
1. Incorporating terms in course of dealing
McCutcheon v David MacBrayne Ltd [1964] UKHL 4
M claimed damages for his lost car after DM’s ferry to Islay sank. M was a customer before and for 4 times, he signed a risk note excluding liability if the ferry sank. But this time, M’s brother in law, McSporran, got the ticket. He wasn’t given a risk note DM argued that the exclusion bound M because they had a course of dealing. Lord Reid says it needs to be regular and consistent. Lord Devlin (going further) says that actual knowledge of the term must be proven if a note is not used.
What’s ‘regular and consistent’ enough? Henry Kendall Ltd v William Lillico Ltd [1969] 2 AC 31 Chicken feed defects were excluded in the note. Buyers had bought feed 3 or 4 times a year for 3 years. Held, the dealing was regular and consistent enough, so the term was incorporated.
Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71
Mr Walter Hollier had his car repaired at RM’s garage 3 or 4 times in last 5 years. Each time, he signed a note saying the ‘company is not responsible for damage caused by fire to customers’ cars on the premises.’ This time he did not. Fire caused by employees accidentally sparking. Salmon LJ held the course of dealing was not regular and consistent enough. Difference: perhaps in the numbers, the parties etc?
2. Incorporating terms through general trade practice
British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1973] EWCA Civ 6
IPH hired BCH’s crane, which sank in the mud. IPH had hired 2 times before. BCH’s standard form said the customer had to pay any costs of recovery, but IPH did not sign that this time. Lord Denning MR held that here, 2 times not enough to be a course of dealing. However, (unlike Hollier) the ‘parties were both in the trade and were of equal bargaining power.’ They knew the terms that were habitual in trade à Both parties knew the general trade custom of this. With weaker parties you must take extra care.
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Entire Agreements
The entire agreement debate à What if there are contradictory statements, or conflict on different terms? • Parol evidence rule • Collateral contracts • Entire agreement clauses
The parol evidence rule is a presumption. If a contract is written, this is presumed to be the whole contract unless the parties intended oral exchanges (parol evidence) to become terms. But there could also be a ‘collateral’ contract, imposing obligations alongside a main written contract (i.e. the written contract is overridden).
City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 Written lease said M could only use property for business, but he was orally assured he could live there. Told by CWP that he can live there in the shop, even though contract said he can’t. Harman J held there was a ‘collateral’ contract that overrode the written lease terms.
We interpret and construe express terms objectively from a reasonable person in its context, and usually disregarding pre-contractual negotiations.
What if a contract clause says ‘this is the entire agreement’? Can the contracting parties regulate the court’s power to construe the agreement (especially if one party is an individual and the other is a corporation with much greater bargaining power)? Like in L’Estrange: ‘This agreement contains all the terms and conditions...’
Courts are usually suspicious of ‘entire agreement’ clauses in signed documents, particularly where the parties have truly agreed something different.
Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyd’s Rep 611 IPC leased a pub to EC, with ‘beer tie’ (EC had to buy all its beer from IPC). The signed agreement said this ‘constitutes the entire agreement between the parties’. EC claimed they only signed because they were promised/told orally that the tie would be released after a limited time and they can stop buying from Inntrepreneur in the future. Lightman J held the tie was binding. ‘The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty.’ Beer ties now unlawful after Small Businesses Act 2015.
D McLauchlan (2012) says that in principle, an entire agreement clause should not affect a separate agreement about how the contract is meant to work. Points out that the CA has had conflicting judgments.
Burrows says, ‘Although an entire agreement clause will ‘nullify the intention necessary for there to be contractual terms additional to those in the written contract’ it does not stop an action for misrepresentation.’
Construction
On one hand, the judges want to construe the meaning of the contract in the natural language. On the other hand, the courts are uncomfortable with enforcing unfair clauses.
How should we decide what contract terms mean? • ‘Interpreting’ and ‘construing’ • Philosophy of language • Literalism and contextualism
The difference between ‘interpreting’ and ‘construing’
‘Interpretation’: attaching meaning to the words used in a statute/document ‘Construction’: making legal consequences follow from those words, e.g. allocation of liability – positive analysis and normative results. Courts must ‘construe’ words if there are multiple interpretations, particularly if one complies better with a legal policy (e.g. matching the parties’ reasonable expectations/purpose).
Is there an objectivity principle?
Smith v Hughes (1871) LR 6 QB 597
Buying oats for horse, seller sells new oats but buyer wants old oats. Court said the buyer was bound because it looks to the reasonable person that he is accepting. We don’t ask people what they subjectively thought in the contract. Blackburn J, for offers and acceptance: ‘If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed... [he is...] equally bound as if he had intended to agree to the other party's terms.’ People disagree about what ‘objectivity’ means. Objective = not subjective A Smith, Lectures on Jurisprudence (1763) ‘The foundation of contract is the reasonable expectation...’
E Durkheim, Division of Labour in Society (1893) – sociologist The social context in which the contract is operating ought to shape the reasonable expectations.
Þ Old literalist method (gone now)
North Eastern Railway Co v Hastings [1900] 1 AC 260, 263 Dominant approach was to look at the natural, literal meaning of the words - get out the dictionary to decide. Earl of Halsbury LC: ‘The words of a written instrument must be construed according to their natural meaning, and it appears to me that no amount of acting by the parties can alter or qualify words which are plain and unambiguous.’
Salomon v A Salomon & Co Ltd [1897] AC 22 Most famous case in company law, used literalism. 1862 Statute says must have 7 people, one-man company uses dodgy shareholders to fulfil. This was held as valid.
Philosophy of language
B Russell and L Wittgenstein in 1918: If you have a sentence in a book or contract, you can break down the meaning of the words in any statement according to its constituent parts and analyse it to find the ‘true meaning’. Wanted to develop a philosophy that broke down language into atoms. This was meant to solve everything, e.g. political things, associated with positivism. Wittgenstein later argued that his earlier work was wrong, ‘the meaning of a word is its use in the language’ – must see it in the context it is being used, their real meaning will depend on a shared understanding (not something ‘objective’).
Þ The new contextual method
Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28
ICS Ltd was set up by the SIB (now the FCA) as a safety net for small businesses, to compensate people who had been sold dodgy investments (‘Home Income Plans’) by banks and building societies (like West Bromwich). Some consumers are being ripped off. Customers got compensation, and assigned ICS their legal claims, which sued on their behalf. Efficiency thing, one representative bringing legal cases instead of lots of different investigations. West Brompton says ICS cannot sue them because they can’t get legal claims against them. Exclusion clause in the assignment contract, cannot assign: ‘Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society...’ Literally it means ICS was excluded from getting any claim at all (whether for rescission or otherwise). But presumably they meant any rescission-based claim – so ICS could sue for damages. House of Lords held, what they really meant was to assign all except for: ‘Any claim sounding in rescission (whether for undue influence or otherwise)’ à moved the ‘whether’ and bracket. Lord Hoffmann: construe words according to what a reasonable person would understand in the context at hand, but exclude evidence of prior negotiation. Five principles: 1. What the reasonable person with all background knowledge would think is the meaning. 2. The relevant ‘matrix of fact’ is anything that could affect the language’s meaning, 3. but exclude prior negotiations (this is to avoid cost, but it is a controversial rule). 4. It is not the literal meaning of a sentence, but the contextual meaning that is preferred. à Complete departure from Hastings 5. There is a presumption that people do not make linguistic mistakes (though this presumption can be rebutted).
Bank of Credit and Commerce International SA v Ali [2001] UKHL 8
A contentious case Mr Naaem, an employee of BCCI SA (once the world’s 7th largest bank, now bankrupt after mass fraud) claimed damages for not being able to get a job after redundancy in 1990 because of the stigma. Took a redundancy before the scandal unfolded. He is trying to see for future loss of earnings. But he had signed a release form saying the redundancy pay was ‘in full and final settlement of any claims... of whatsoever nature that exist or may exist’. BCCI argued N was bound. N argued nobody contemplated exposure of mass fraud. House of Lords held that because the exposure of fraud would not have been contemplated when Mr Naeem signed, the release did not actually (despite the words) exclude a stigma damages claim. HL by majority held that Mr Naaem was correct. Lord Bingham: A contextual interpretation could not have included the fraud. The parties could not have intended to include the fraud. Lord Hoffmann dissented: The clause was deliberately wide and should be effective. The context should include whatever a reasonable person would think was relevant. Argues the doctrine of contra proferendum ‘is a desperate remedy, to be invoked only if it is necessary to remedy a widespread injustice.’ Different understandings of what ‘context’ means in terms of policy: e.g. reducing litigation, fairness, etc.
Gisda Cyf v Barratt [2010] UKSC 41
Differences of interpretation when contracts touch statutory rights – construing employment contracts Ms B dismissed for an unknown event at the staff Christmas party. She claimed unfair dismissal – three-month time limit to claim from notice of dismissal. GC sent letter 30 Nov, but B only read on 4 Dec. She made the unfair dismissal claim on 2 March. The letter arrives at a reasonable time. She was away visiting her sister. Is she bound by notice in business hours, like The Brimnes? (She is an employee, not a business) No. B was bound when she actually read the letter: an adjustment of the general contract rule consistent with statute’s purpose.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50
Kookmin Bank guaranteed repayment on instalments paid by buyers of ships from Jinse Shipbuilding Co Ltd. Jinse went bust. Kookmin was called in to pay the money they were guaranteeing. The contract was ambiguous about whether it guaranteed repayment of instalments in all cases, or simply when the contract was terminated or the ship was destroyed (insolvency of the firm). Lord Clarke held, where there are two possible interpretations, prefer the one that fits the commercial purpose. Here, the bank’s purpose was to guarantee in all cases. (Purposive approach and interpretation, like Autoclenz)
To understand meaning, should prior negotiations be admissible? Authority for exclusion, policy arguments.
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
P, a developer, would build on C’s land and sell properties, giving C: ‘23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.’ C argued it was £4.4m owing and P said it was only £897k owing. Pre-contractual negotiations made it clear that it was indeed £897k. Were they to be admissible? Lord Hoffmann holds ‘no’. The meaning could be established by asking whether it made commercial sense if £4.4m was the right figure. But this suggested that P’s contention for £897k was correct. Lady Hale says knowledge of pre-contractual negotiations made it ‘clear’. They will use as much ‘red ink’ as needed to correct verbiage to match the contract’s (commercial) purpose. We must follow the commercial purpose of the deal.
Why not allow pre-contractual negotiations into evidence? - Rising cost for litigation and advice. - Though systems like France allow it, they start from a theory of finding the parties’ true intentions, but then limit those intentions according to fairness. Cannot transplant such continental philosophy to England, which approaches interpretation objectively, from a different starting point. - ‘... the more general interest of economy and predictability in obtaining advice and adjudicating disputes.’
Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44
Oceanbulk and TMT had a dispute over freight contracts, settled, then disputed the meaning of the settlement. They held ‘without prejudice’ negotiations (which weren’t meant to affect the parties’ rights). Lord Clarke held that those negotiations could be admissible as part of the matrix of fact, if it was helpful to understand deal. Negotiations can only be used if they seem to be an important part of the matrix of fact.
But we regard pre-contractual negotiations for rectification. Rectification is an old remedy: if a written document does not reflect the parties’ actual agreement, courts will ‘rectify’ the document to match (they will pretend it said what the parties intended). But it is only for written, not oral agreements, and classically it had to reflect both parties agreement. Rectification is mainly useful in commercial contracts. Otherwise, often principles of construction seem more useful. Treitel says rectification requires misrepresentation, fraud or unconscionability. But what about contracts where (classically) the relative bargaining power of the parties is imbalanced?
Contra proferendum
Conflict between enforcing exactly what is in the contract on the one hand, and fairness on the other hand. AT&T Mobility LLC v Concepcion, 563 US 333 (2011) A 5 to 4 decision of the US Supreme Court, the majority held all consumer rights to class action or an appearance in a public court (rather than private arbitrators, appointed by the corporation) can be contracted away. This is supported by Republicans, opposed by Democrats. The minority and EU law holds this unlawful.
Contra proferentem = Against the proponent Particularly applicable to exemption clauses. if we have an exclusion clause to exempt someone from contractual duty, we can use it against the person trying to rely on it. Many legal systems (though not the UK) say that if statutes contain exceptions to a general rule, the exemption should be construed narrowly. e.g. Pfeiffer v Deutsches Rotes Kreuz (2005) C-397/01, para 67, ECJ: Goes beyond contracts to interpretation of statutes. Exceptions in the statute can be construed narrowly. Opt out from 48 hour working week to be narrowly construed.
In most contracts for services, there is an implied duty to take reasonable care. This is the opposite of negligence. The parties, in cases where negligence liability (duty of diligence/care) is excluded, are aiming to get rid of such common law/statutorily implied terms.
Alderslade v Hendon Laundry Ltd [1945] 1 KB 189
Mr A left ten linen handkerchiefs at HL to be washed and they lost them. Its contract terms said: ‘The maximum amount allowed for lost or damaged articles is twenty times the charge made for laundering.’ This was 11s 5½d (20 s in £1) but they were worth £5. CA Lord Greene MR, limitation clause was effective., so that had to be excluded. Limitation clause had to cover what went wrong here, because the only thing that the clause could have referred to was negligence liability. However, if something other than negligence could be referred to, then the exclusion/limitation will cover that and not negligence. This is operation of the contra proferentem rule. Ex: At common law, a ‘common carrier’ is strictly liable (w/exceptions for natural disasters, etc.) for their customers’ goods. So unless an exemption explicitly mentions negligence, it only covers strict liability.
Canada Steamship Lines Ltd v The King [1952] UKPC 1
CSL stored goods in the Crown’s shed on the wharf of Montreal harbour. An employee, while repairing with an oxy-acetylene torch, accidentally started a fire and burnt down the shed. Quebec law in the civil law said the Crown had an ordinary duty of reasonable care and a strict duty under the statute to keep the shed in repair. Also, clause 7 said ‘the lessee shall not have any claim for damage to goods being in the said shed.’ Did this clause validly exclude negligence? Lord Morton, held no. It was to be interpreted to not exclude negligence despite the wide words. Interpret clause 7 to only exclude the strict duty, construe against the person relying on it and hold that negligence liability is not excluded. To prevent itself from being liable, it could have expressly said negligence liability was excluded.
The court here is concerned with a situation where the clause is set to cover negligence à this is where lack of care is the cause of the problem. 1st question: Does the clause contain language which excludes from negligence? 2nd question: If the words used could cover negligence but could also cover something else, they will exclude negligence from being covered. If the clause doesn’t say negligence, we can say excluding liability for negligence doesn’t apply.
Hollier v Rambler Motors (AMC) Ltd [1971] EWCA Civ 12
H took car for repairs at RM Ltd, as he had 3 or 4 times in the last 5 years. This time he did not sign an invoice saying: ‘The company is not responsible for damage caused by fire to customers' cars on the premises.’ Garage burnt down, caused by fire from faulty wiring. Claiming damages for the car which burned down in the garage when an employee had an accident. Held, clause not incorporated because it is not a course of dealing. But even if it were, a reasonable person would not think this covered the garage’s own negligence – they would have thought it referred to acts of God etc. and thus merely stated the existing law. The reasonable person would not have thought the term meant it covered employee stupidly burning the car. Salmon LJ: ‘In order for the clause to be effective the language should be so plain that it clearly bears that meaning. I do not think that defendants should be allowed to shelter behind language which might lull the customer into a false sense of security by letting him think… that he would have redress against the man with whom he was dealing for any damage which he, the customer, might suffer by the negligence of that person.’
Ailsa Craig Fishing Ltd v Malvern Fishing Co Ltd [1981] UKHL 12
ACF’s boat was sunk on NYE in Aberdeen harbour after another boat crashed into it. Securicor was meant to be watching, but negligently allowed it to happen. Its contract limited liability to any customer to £1000 for ‘arising from any duty’. Boat was worth £55k. Is that clause effective? Can we apply the contra proferendem rule, doesn’t cover negligence liability? Lord Wilberforce and Lord Fraser: the Canada Steamship principles do not apply ‘in their full rigour’ to limitation clauses.
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1982] EWCA Civ 5; [1983] 2 AC 803
Lord Denning MR recognised the secret weapon of ‘true construction of the contract’. FLS sold cabbage seeds. It limited liability for bad seeds to their price (£201.60). GMC bought seeds, and the whole crop failed, loss profits of £61,513. GMC argued they were not given ‘cabbage’ seeds at all. What grew out of the grown was just brown mush, so not even cabbage seeds. Lord Denning MR dissenting: The clause did limit liability and they were cabbages, but it was unfair under statute. Other judges held contra proferendum. HL upheld Lord Denning MR’s reasoning, that the clause was effective at common law, as limitations should be construed less strictly than exclusions. But it was now to be regarded as an unfair contract term (UCTA 1977 ss 6 and 11 and Sch 2). So full damages.
Lord Denning attempted to develop a doctrine of fundamental breach – if you had an exclusion clause which tried to exclude liability which was very fundamental, going to the root of the subject matter, then the exclusion clause is not valid. HL rejected this view: even liability for breaches of fundamental terms could be excluded with clear words.
Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2
S’s employee Mr Musgrove started a fire in PP’s building to keep warm while he was on watch. Burned down the building, causing 615k of damage. S’s contract said it was not ‘to be responsible for any injurious act or default by any employee’ etc. HL held that, even though the breach was ‘fundamental’ (i.e. meant to guard building but burnt it down) exclusion covered it. Rule of construction, no rule of law that wipes the contract away if there is a fundamental breach of the deal.
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6
Chase claimed under an insurance policy with HIH for risky film ventures going wrong. Chase funded risky films with loans. Chase excluded, from its contract with the insurance company, any liability from any non- disclosure by its agents to HIH as insurer. Chase says it covers all liability for fraud, misrepresentation etc. HIH argued that Chase’s agents had (among other things) fraudulently failed to make disclosures. House of Lords held, on public policy grounds, liability for fraud can never be excluded. Though the parties pursued ‘commercial objectives’, fraud was ‘a thing apart’.
If statute can control unfair terms, like exclusions simply for negligence, why could the common law not? Why not extend the public policy concept to preclude courts enforcing unfair terms? Why should courts use state power and taxpayer money to uphold terms that most people think are unjust? (philosophical) Peel (2007) argues contra proferendum is still useful, when a clause absolves one party from performance of the basic contract obligations. Contracts with exemptions purport to give with one hand but take with the other. Lord Denning/Lord Hoffmann says it’s past its use: • makes contracts/interpretation confusing • basic misunderstanding of human behaviour: big business with lawyers can take advantage but small business and individuals will continue not to understand • in the end, it merely enriches lawyers who are encouraged and paid to draft complicated rules
The point of contra proferentem was a good one, even if the rule’s application was not: this was to ensure fairness in contract terms when the parties were of unequal bargaining power. So, extending HIH, why should courts not simply accept that unfair terms are ineffective at common law, that there’s no inherent right to have courts enforce unfair terms?
Implied Terms
When might contract terms be implied?
1. When the contract is silent about an unexpected event/occurrence. This is uncontroversial – but judges often disagree on case facts. There is always a default rule, even if this is that ‘loss lies where it falls’ e.g. The Moorcock 2. When a contract term gives a wide discretionary power to one party: a court can hold the discretion must be exercised when necessary in a way that will not defeat reasonable expectations. This is mostly accepted, e.g. Equitable Life 3. When a contract does appear to make provision for something, but the outcome defeats reasonable expectations, so the court construes it to mean otherwise This is uncertain or disputed, e.g. Belize or Arnold. Express terms used unfairly, or have unfair outcomes, court may narrow down the term.
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Individualised implied (‘in fact’) terms
Applied on the circumstances of the case, term is implied in fact-specific situations.
Older views of implied terms:
Hutton v Warren (1836) 1 M&W 466
Probably still a good decision today. Farmer had a tenancy that ended. He wanted some money from the landlord because of the benefit of his labour on the land the landlord would get. Farm tenant claimed the landlord should pay him for seeds and labour used on land when tenancy ended. Parke B held such a term would be implied, because this kind of thing was the custom at the time: ‘In commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts matters with respect to which they are silent.... upon the principle of presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages.’ People don't write everything down in a contract, people generally expect known usage and custom to be applied. Parke B says customs matter, and people are presumed to be bound by these customs.
The Moorcock (1889) 14 PD 64
The Moorcock was a ship unloading cargo at a Thames wharf. It hit rocks and was damaged. Ship owner sued wharf business, arguing they should be liable because they must have known of risk. Contract said nothing about ship’s liability. Either way we have to imply a term. The liability is either on the person upon whom the loss falls or on the wharf owner.
1 Bowen LJ: liability/bear the risk of ships being damaged should go on the wharf business: ‘to give such business efficacy as must have been intended’. It ‘must have been in the contemplation of both parties’. But presumed intent of the parties is a difficult test to apply. Would both parties have agreed and intended for this term? Since in actual fact, these parties had come to the CA about their disagreement! It would probably have been easier for the wharf owner to tell that the rocks were there, cheaper for the wharf owner to check that the wharf is safe than ships who only come sometimes. cf The Reborn [2009] EWCA Civ 531 Fact dependant! Basically contained the same facts, but the court found the ship owner to be liable for the damage.
Shirlaw v Southern Foundries Ltd [1939] 2 KB 206
Shirlaw had a 10-year employment contract as managing director with SF Ltd. The company was taken over by new shareholders. They changed the company’s constitution (change articles of incorporation of company) and dismissed S from the board. S claimed: 1) This was a breach of contract. à This is uncontroversial, easily breach of contract. 2) There was an implied term that he should remain on the board. à He doesn’t want just damages, he wants to stay. Courts held no. CA and HL held, breach of contract. S could get compensation for all the income he could have got, but HL held no implied right to remain on the board (i.e. damages awarded, but no specific performance). Company law issue: ethic to give the majority the right to decide how it is run.
‘Officious bystander’ metaphor MacKinnon LJ: “Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’” (but CA was overturned by HL on the facts) The Companies Act 2006 s 188 now prohibits director contracts over 2 years without member approval. Directors for public companies can usually only contract for one year. A ten-year contract is very unusual for a director nowadays.
The legal position today:
Equitable Life Assurance Society v Hyman [2000] UKHL 39
Equitable Life AS’s directors had an idea when stock market was down. They purported to use ‘their discretion’ to reduce the extra premiums of its ‘Guaranteed Annuity Rate’ life insurance policyholders.
2 The directors used the money to prop up ‘Current Annuity Rate’ policyholders. Those rates fluctuated with the markets, and the markets had fallen. The ‘GAR’ holders claimed this was illegitimate precisely because their income was meant to be guaranteed. Shouldn't be distributing the company's asset income to the other group. Claimants argued that the directors had breached implied term in the contract, working to an expectation they had. HL held, the directors’ discretion could only be exercised in light of the policyholders’ reasonable expectations à an implied term.
Leading judgment from Lord Steyn: ‘It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties. The process “is one of construction of the agreement as a whole in its commercial setting”: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, 212E, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. (This is controversial: Could the term just be drafted more explicitly saying the directors had complete discretion.) The legal test for the implication of such a term is a standard of strict necessity.’ Individualised term which arises on the facts of the case. Implied terms are an extension of overall process of construction, building up what the contract actually means. Practical justice vs judges trying to get the doctrine right. Equitable Life collapsed after the case – it couldn’t pay the GARs.
Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10
Decision about the financial world, here is a corporate takeover and privatisation deal in Belize (Central America). Belize Telecom was being privatised by the government, not a national industry anymore but rather in private hands. The government is trying to sell off the asset to a buyer, so they made the deal very attractive to try and find a buyer. Government says they will give a loan to the person who buys the shares. Government wants security to be the shares that the buyer is buying, a.k.a. if the buyer doesn’t pay back the loan, the takeover shares purchased get to be taken back by the government, the government would enforce its security and retake possession of the secured shares like a mortgage. The government gave the buyer (behind which was Lord Ashcroft, an English Conservative peer) a loan to buy BT’s shares. In BT’s constitution were three groups of shares: 1. A special share: the holder could appoint 2 of 8 directors 2. Class ‘B’ shares: the holders could together appoint another 2 of 8 directors 3. Class ‘C’ shares: they could together appoint 4 of 8 shareholders, but... if the ‘special share’ holder had over 37.5% of ‘C’ shares, it could appoint 2 of the 4 directors
3 Buyer defaulted on the loan. Government repossessed ‘C’ shares, but loan document forgot to put anything on about repossessing the special share. So, it looked like nobody had power to replace the two directors – who wanted to stay, and could have jobs for life and not get removed. The AG claimed shareholders could remove BT’s directors, even though the company’s constitution said a special share was needed.
Lord Hoffmann held the directors could be removed, despite the rule. It is workable that the two directors would have jobs for life, but that would be absurd. ‘It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean.’ Reaffirms the test put down by Lord Steyn in Equitable Life: In that case, an implication was necessary “to give effect to the reasonable expectations of the parties”. The articles do not expressly deal with a situation where a change in shareholding results in the board no longer reflecting the appropriate shareholder interests, and do not enable this to be corrected by providing a power to remove directors.’ It ‘cannot in the Board’s opinion be construed as contradicting the proposed implied term (that you can remove the directors), to which the draftsman plainly did not address his mind.’ The court is not deciding what is more fair, just interpreting the contract. ‘The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means.’ ‘What a reasonable person would understand the contract to mean’ which is necessary “to give effect to the reasonable expectations of the parties”.
Interpretations of Belize: 1. Collins (2014) ‘Imperialism of the Interpretivists’: It is wrong to reduce implied terms to interpretation; all implied terms are/should be about good faith and fair dealing. 2. Hooley (2014): Endorses the Belize approach, and views the implied term as not contradicting the express term. Tension between express terms and implied terms by not interpreting the express term according to its meaning but according to what is a reasonable expectation. 3. The implied term obviously did contradict the express term: the express term was cut down/scrapped to ensure the proposed implied term did not ‘contradict’. (Same method as mentioned in Pfeiffer v Deutsches Rotes Kreuz, by ECJ)
Marks & Spencer plc v BNP Paribas Securities Ltd [2015] UKSC 72
Two big commercial parties. M&S claimed it should be reimbursed by its landlord, BNP, when it terminated early a lease of a Paddington property. No term in the lease said what would happen if the right to terminate was exercised when rent had already been paid for a period. UKSC held no term was to be implied requiring repayments: not ‘necessary’.
4 Lord Neuberger suggested Belize should not be taken to suggest that different things happen between interpreting and implying terms. Lord Neuberger accepts reasonable expectations, but also putting forward obviousness and business efficacy: A term can be implied if ‘(i) the reasonable reader is treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy...’ (Moorcock) It would be wrong to treat Lord Steyn’s statement in Equitable Life that a term will be implied if it is “essential to give effect to the reasonable expectations of the parties” as diluting the test of necessity. The legal test for the implication of a term is strict necessity, which Lord Steyn described as a “stringent test”. Lord Clarke accepts that ‘both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’
Arnold v Britton [2015] UKSC 36
A was a landlord for holiday homes on the coast in Wales. Brought a claim that B was bound to a clause 3(2) saying that repair bills would automatically increase at 10% p.a. over the 90- year lease (£90 p.a. originally, £2700 by 2011, £1m by 2074). Cl 4(8) said it would be the lease would be ‘similar’ to other homes, but there were just 3% increases for other homes. People who signed leases earlier had much less increase. B argued clause 3(2) made no sense, and a term should be implied requiring reasonable repair charges. Clause 3(2) was defeating reasonable expectations, but it was clear and there to account for inflation. A, claimed that B was bound. Could clause 3(2) be cut down to give way to clause 4(8)? Lord Neuberger (majority) held B was bound by clause 3(2) as it was. The less clear the term, the more likely one can depart from natural meaning. But clause 3(2) was clear. Lord Carnwath dissented, saying clause 3(2) was ‘commercial nonsense’ and could not be intended to have effect. So, it was proper to imply the proposed term. When people go into a contract with eyes open, and no statutory protection, courts are reluctant to cut down express wording.
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Why do we imply terms?
Potential Answer #1: Presumed intentions
If the parties’ intentions conflict, whose intentions should prevail? Can the courts introduce terms to prevent unfairness? What should guide a court’s discretion?
5 The Moorcock and Shirlaw suggested we imply terms rarely, and only to reflect the presumed intentions of the parties. This reflects a desire to not rewrite contracts, to promote certainty etc. Difficulty is that having no implied term, or following the express contract terms, frequently defeats expectations, which undermines certainty. Certainty also requires following people’s reasonable expectations.
Potential Answer #2: Good faith
Perhaps good faith and fair dealing should be regarded as the basis of all contract terms. Recall Lord Mansfield in Carter v Boehm (duty of disclosure, ultimately confined to insurance). Many EU jurisdictions say good faith is a compulsory term, the basis for all implied terms, as part of the interpretative process, e.g. the German Civil Code. H Collins (2014): good faith is a basic principle that underpins all implied terms.
Bhasin v Hrynew (2014) SCC 71
Canadian Supreme Court, so common law, not just civil law CAF Corp hired Bhasin as an ‘enrolment director’ for 3 years – like a self-employed franchise job. Another enrolment director, Hrynew, was trying to merge their businesses, said they shouldn’t compete. B didn’t want to. Through CAF, H managed to require it. B claimed breach of contract with CAF because they breached duty of good faith. Canadian SC holds good faith is not just an implied term – good faith is an ‘organising principle’ for all contractual relations. CAF’s failure to give adequate notice about CAF’s merger plans before a decision was made, and be candid during relationship, was a breach.
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111
YS was ITC’s exclusive distributor of Manchester United fragrances in Middle East, Africa, Asia & Australia. Exclusive distributor had to make sure no other distributor would be in the geographical area and selling at a lower price. ITC told YS that retail prices were put up to $65 when they were not. Leggatt J, held this breached an individualised implied term of good faith in this agreement: it was a ‘relational’ long term contract where such a foundation of honesty was necessary to fulfil reasonable expectations. This was not a standardised implied term. The standard English view is there is no general principle of good faith – rejected by HL for pre-contractual negotiations in Walford v Miles. But this does appear to be ‘swimming against the tide’, as most civil law countries recognise such a duty. Leggatt J suggests the content of good faith = basic honesty, and you can always opt out. This would make “good faith” differ: radically weaker than Canada or Germany.
What guides the court’s interpretation of what good faith means? The principle gradually expanded to mean discretion for the courts to instil a duty of fair and open dealing. While
6 this might be seen as laudable, it appears to give unstructured discretion, mainly because the words ‘good faith’ don’t say much in themselves.
Potential Answer #3: Reasonable expectations
The UK approach is to say terms reflect the parties’ ‘reasonable expectations’. A Smith, Lectures on Justice, Police, Revenue and Arms (1763): ‘The foundation of contract is the reasonable expectation, which the person who promises raises in the person to whom he binds himself; of which the satisfaction may be exerted by force.’ But reasonable expectations might mean different things to different people.
Belize suggests construction or implication can’t make a contract fairer, or more reasonable. Belize is saying the court follows, not its own conception of fair or reasonable, but look at the background of commercial or social expectations: what insurance policyholders/ company shareholders/other contractual participants should be entitled to reasonably expect. In Marks & Spencer plc v BNP, the court assumes that big companies with teams of lawyers know what they want to put in a contract and what they don't. This suggests reasonable expectations serves the same function as Canadian/civil law good faith, but tying the court’s discretion along lines of expectations in a context. Arguably, the result should flow from the context of social practices and regulation. Properly understood, courts should interpret contracts to be consistent with the community’s standards (in transactions or statute) of fair and open dealing. R Dworkin, Law’s Empire (1986): The task of courts is to interpret the whole of the law (not just contract law) consistently with contemporary social values. McGaughey thinks this is what Lord Hoffman is trying to say in Belize.
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Standardised implied (‘in law’) terms
Terms which come in specific categories of cases. Some implied terms will always be there for sale of goods, tenancy, employment etc. Distinction between individualised implied terms and default standardised implied terms à those applying by legal default in set contract types. Different rules for particular contracts, carry their own regulations. Sometimes developed by courts, some codified by statute.
Introduced in Liverpool City Council v Irwin [1976] QB 319
Contract type: lease The ‘Piggeries’, an old Liverpool council block, were very vandalised and dirty. Tenants went on rent strike – refused to pay rent in protest until the council cleaned up the block. The contract contained many tenant obligations, but few landlord obligations – no obligation to clean up the place.
7 The council tried to evict the tenants, and the tenants counter-claimed breach of an implied term to keep block in repair. They said they are just withholding payment in reply to the landlord's breach of contract. In the CA, Lord Denning MR held that there was a duty to on landlords to do reasonable repairs. Reasoned that a term could be implied whenever it was reasonable, based on ‘stacks of’ cases. This common law implied term is still there today. But the duty was not breached on the facts: tenants should’ve done more à Give judges more discretion to do what is fair. In the HL, Lord Wilberforce held Lord Denning's judgment was wrong on reasoning though the outcome was correct. Terms could only be implied when it was ‘necessary’ (but did not say necessary for what purpose). Here such a term was necessary, but it was not breached: on the facts, the tenants should have cared more for maintenance themselves.
Current legal test: imply terms as necessary for reasonable expectations.
Sale of Goods Act 1979
Contract type: sales §§ 12-15 set out standard obligations in the performance of sales: s 12: It is an implied term that the seller has title to the goods (owns what he is trying to sell), free from charges. s 13: The goods correspond to descriptions and, under s 15, samples of the goods. s 14(2) For businesses, goods will be of ‘satisfactory quality’, e.g. (2B) in terms of appearance, safety, durability. In L'Estrange, cigarette machine not of good quality, so breach of implied term of satisfactory quality.
Supply of Goods and Services Act 1982 s 13: Reasonable care and skill to be used when performing a service s 14: Performance must be within a reasonable time s 15: Reasonable charge will be paid, reasonable market price But duty to perform a service with reasonable care and skill doesn’t necessarily mean success, e.g. Thake v Maurice [1986] QB 644: failed vasectomy. Thought he had vasectomy, person got pregnant. Court held he could not sue the doctor for damages, there was a small chance it would not work.
Shell UK Ltd v Lostock Garage Ltd [1976] WLR 1187
Contract type: franchises L claimed S breached an implied duty to it, as a franchisee, to not discriminate against L when selling petrol under an exclusive supply agreement. Was there an implied term that there is no discrimination? Lostock was losing money because its price from S was too high. It switched supplier, S sued to enforce the long-term franchise contract.
8 Lord Denning MR held it was not common enough to be a term implied in law; no implied term on the (old) presumed intent test for fact.
Johnstone v Bloomsbury HA [1991] 2 All ER 293
Contract type: labour, employment contracts Junior doctor Dr Johnstone’s contract at UCL hospital said he should work 40 hours, and could have to do overtime of an extra 48 hours on average – sometimes over 100 hours p/w (of 168 total). ‘He suffers from stress and depression; is lethargic and his appetite and ability to sleep are diminished. He has been physically sick on occasions from exhaustion and has felt desperate and suicidal.’ Does this contradict, breach of an implied term – safe system of work? 1964 Health and Safety at Work Act, but not everything could be codified. All found in Dr J’s favour under UCTA 1977 s 2(1) (cannot exclude liability for death or personal injury), but differed on implied term approach. Here the implied term seems to cut the express term. - Stuart-Smith LJ held the implied term – duty to give a safe system of work – overrode the express term of working hour discretion. - Browne-Wilkinson LJ held the express term had to be exercised in light of the implied term, so it could not be abused, thus B in breach. - Leggatt LJ held express terms override implied terms.
Scally v Southern Health and Social Services Board [1992] 1 AC 294
Dr S and others claimed the SHSSB hadn’t properly informed them about their right to get more pension benefits in their contract (‘superannuation’) meaning they hadn’t claimed pension benefits they would’ve been entitled to. At the time, there was a huge pension scandal, so this decision went very closely with what was going on in Parliament. Was there a breach of the implied term to give information? Lord Bridge: term implied based on ‘necessity’, in this case to know what one’s rights at work are.
Mahmud v Bank of Credit and Commerce International SA [1997] UKHL 23
M worked at BCCI when it collapsed due to fraud. Claimed damages for being unable to find a job later – the ‘stigma’ of having worked for BCCI affected prospects. Argued the employer’s conduct breached ‘mutual trust and confidence’ (good faith). Lord Steyn held a necessary incident in every employment contract is mutual trust and confidence/good faith. ‘The parties are free to exclude or modify them. But is common ground that in the present case the particular terms of the contracts of employment of the two applicants could not affect an implied obligation of mutual trust and confidence.’ Idea here that we can always vary implied terms, but not express terms.
Crossley v Faithful & Gould Holdings Ltd [2004] EWCA Civ 293
9 C had a nervous breakdown. The employer advised him to resign. F&G had a disability support scheme for people with work-based injuries or disabilities. He was not told that if he resigned, these benefits would be cut off. He was cut off. Was there a breach of implied term to inform employees about their rights? Here employee’s interest vs employer’s interests à policy factors Dyson LJ held, no term was to be implied. A ‘necessity’ test is elusive; there are always questions of policy and reasonableness. Crucially Dyson LJ is recognising that to not imply a term is to also make a policy decision.
What should be the basis for standardised implied terms?
E Peden (2001) ‘Policy concerns behind implication of terms in law’: Says it’s all about social utilities in the relationship. ‘The essence of the test is a consideration of the nature of the contract and of how to maximise the social utility of the relationship.’ ‘The nature of the employment contract of a secretary to a self-employed businesswoman cannot be assimilated with that of a worker in a factory employing several thousand.’ ‘The issue is knowing how to balance competing policy considerations.... Underlying all these concerns is a notion of co-operation, which impacts on contract law generally.’ Take into account existing law, including legislation, the nature of the parties to the relationship, fairness and the effect on society.
10 The Unfair Contract Terms Act 1977
Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22
Most famous case in company law, used literalism in contract interpretation. A shoe-maker in Whitechapel went bust because of economic depression, government stopped buying shoes. Claimed he shouldn’t be liable for his insolvent company’s debts because it was duly incorporated with 7 people (even though they were not people who truly shared in the business). Fake business partners, e.g. wife, children etc. Lord Halsbury LC held Salomon won, but by strict literal construction of the Companies Act 1862: ‘I have no right to add to the requirements of the statute, nor to take from the requirements thus enacted. The sole guide must be the statute itself…’
Modern approach is different – we take a contextual interpretation approach now. Look at contract’s meaning, same with statute, look at the background facts. à Investors Compensation Scheme v West Bromwich (did they reserve the right to sue for damages or only rescission?)
The Moorcock (1889) 14 PD 64
Bowen LJ held that implied terms were only for ‘business efficacy’ and to reflect what ‘must have been intended’ by the parties, when a ship ran into a submerged rock in the Thames. What must be intended by both parties. What was meant by the contract à officious bystander, what a reasonable person would see. But argument: different expectations of people can differ in different environments. Different market expectations could hold for businesspeople = different reasonable expectations. We’ve seen the modern approach recognises implied terms as ‘necessary’ to reflect ‘reasonable expectations’ of the parties: Equitable Life v Hyman, Belize, M&S v BNP
We have moved on from the simplistic freedom of contract. The old requirements for a deed were for it to be ‘signed, sealed and delivered’ - the old idea of being ‘bound by your signature’ was an evolution from this, and the today’s version is clicking ‘I accept’ online. But the modern approach is that people are not bound to unfair terms, especially if there are statutory rights, or if a document does not represent true agreement, e.g. Autoclenz. There is still plenty of debate about what is unfair – either under the reasonableness test in UCTA 1977, or under the significant imbalance test in CRA 2015.
The basic question confronting the law has always been whether people’s rights (to good health, a fair income, a dignified retirement, a home) can be bought and sold, or whether the law recognises people as having genuine, not merely formal, sovereignty in their affairs. Freedom of contract is a valuable thing, expression of free autonomy. But it’s not the only right that matters. Do people have the freedom from unfair terms, as well as freedom of contract?
By UCTA 1977 the common law still had not clearly declared contract terms unlawful simply for being unfair. Alternative legal techniques: - Term not incorporated, e.g. Thornton (notice of the term too late, after he got the ticket to the parking lot), Interfoto (no warning that there was a condition) - ‘Construe away’ a term, contra proferentem, e.g. Hollier (hostile interpretation taken towards the exclusion clause to his car burning down in the garage) - Narrow/cut down an express term by implied term, e.g. LCC v Irwin (landlords have some duties to keep the building clean, can't just collect rent with nothing else), Hyman (directors cannot have whatever discretion when giving bonuses), Belize (what the instrument means)
Arguably, common law is not irrelevant because: - The common law, in the absence of legislation, affects our basic presumptions as lawyers: Development of idea that nothing is unnegotiable. Do we reason from a theory that says “everything is negotiable” or that “everything can be signed away” and then make exceptions (19th century law: only an express or explicit way of cancelling unfair terms)? Or do we require justice in contractual exchanges to be ensured, and value freedom of contract when (but only when) it realises that goal of just markets and relations? This affects judicial culture and enforcement. - If legislation were repealed, the question would be whether positive statutory enactment would be needed to legitimise the use of unfair terms. At the moment, we have CRA 2015 and UCTA 1977 à primary legislation, would need to be amended by parliament. But it could be that government may not like consumer protection – not likely with current or future governments but possible.
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Regulatory reform in the 1970s
The Law Commission brought out two main reports. Bot took the stance that the problem of unfair terms was general across markets. Exemption Clauses in Contracts – First Report (1969) led to the Supply of Goods (Implied Terms) Act 1973. Exemption Clauses: Second Report (1975) led to the Unfair Contract Terms Act 1977.
1975 on why we need unfair term legislation: Exemption clauses often operate against the public interest. ‘The prevailing judicial attitude of suspicion, or indeed of hostility, to such clauses is well founded. All too often [unfair terms] are introduced in ways which result in the party affected by them remaining ignorant of their presence or import until it is too late. That party, even if he knows of the exemption clause, will often be unable to appreciate what he may lose by accepting it. In any case, he may not have sufficient bargaining strength to refuse to accept it.’ A lack of bargaining power drives the UCTA 1977. Not too concerned when it comes to parties of equal bargaining power.
What is bargaining power? Classic economic theory would say fuelled by three main things: 1. Ability to ‘hold out’ longer in negotiations, which comes from unequal distribution of wealth and resources: Adam Smith, Wealth of Nations (1776), e.g. Workers not being able to hold out in negotiations with employers because they have to earn money. 2. Collective action problems: John Stuart Mill, Principles of PE (1848) à Big companies don't have collective action problem, but individuals do. 3. Imbalance of information: William Stanley Jevons, Theory of Political Economy (1888) à Corporation has big team of lawyers, individual doesn't.
Hard economic reasons about why unfair terms would be an economic productivity issue: - ‘The risk of carelessness or of failure to achieve satisfactory standards of performance is thrown on to the party who is not responsible for it or who is unable to guard against it.’ - ‘By excluding liability for such carelessness or failure, the economic pressures to maintain high standards of performance are reduced.’ This is a cut-throat competition issue: If you have lots of companies competing with each other to make profits. If they can compete in unfair terms, there would be competition to provide the dodgiest product and service with the strongest contract. We want competition to improve standards in the market, not lower them. - ‘The misuse of these clauses is objectionable. Some are unjustified. Others, however, may operate fairly or unfairly, efficiently or inefficiently, depending on the circumstances; for example, the cost and practicability of insurance may be factors in determining how liability should be apportioned between two contracting parties.’ e.g. Olley v Marlborough Hotel: It is more efficient for the hotel to insure against these losses.
HR Hahlo (1979): Developing out of the old principle of laesio enormis, civil systems regulated the fairness of exchanges, if there was ‘exploitation’, or serious imbalance arising from the rights of the parties, or a clause was ‘unreasonable’, e.g. new laws around the 60s and 70s to codify better practice in Quebec, Denmark, Israel, Sweden etc. Different legal systems called it different things: Germany sad control of unfair terms partly flowed out of the principle of good faith, codified in 1976. So, reform picked up in many jurisdictions, regardless of legal family, at similar times.
Arguments against reform of dealing with unfair terms
D Cayne and MJ Trebilcock (1973) à One of the strongest lines of argument, still exists today. • They say that if you have ‘redistributive’ rules to deal with unfair terms/cancelling unfair terms, these may exclude the very people you are trying to help from access to the markets. It might seem that markets are exploitative, loans cost a lot, retailers have an unjust margin of profit from providing dodgy products. But if unfair terms are banned, sellers may stop selling, so consumers get nothing instead of getting unfair terms à sellers of goods and services choose to simply not enter the market. This would perpetuate social exclusion. • Acknowledges that the ‘poor pay more’ is an empirically recognised/verified fact, in consumer credit transactions. This is caused by the very fact that people are poor, e.g. hire purchase. If we regulate unfair terms, we just exclude them even more. • We should be looking at solutions outside contract law, e.g. redistributed taxation, greater optimal markets. Should not tamper with how the market works. Instead of reforming unfair terms, use ‘anti-trust legislation, tariff reductions, controls upon excessive advertising... prohibiting misleading advertising and sales practices, full disclosure’, better rights enforcement or ‘consumer education’. • ‘The consumer problems of the poor are an inherent consequence of paucity of resources and can only be remedied by augmenting those resources, that is, by making the poor not poor.’ Difficulty with this argument is that it has no empirical data/evident to back it up. It is not clear to say that people are actually excluded by unfair terms regulation. Ex: If you introduce a minimum wage, you are going to make people unemployed because some people are not going to get jobs. You are excluding people by having a minimum wage. If you have rent regulations, you may control rents from being extortionate but there will be a decrease in housing supply and quality.
Unregulated markets often do exclude people, so unfair term regulation usually requires universal service in many sectors, e.g. Railways Act 1993 s 4(1)(b) requiring trains run at night even though this is uneconomical.
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Unfair Contract Terms Act 1977
This Act is concerned with regulating negligence and business liability. The UCTA is most concerned with regulating exemption clauses and exclusion/limitation clauses, particularly for negligence liability. s 1(1), ‘negligence’ defined as: (a) [contractual] obligation to take reasonable care as an express/implied contract term (b) any common law duty of care (c) duties of Occupiers’ Liability Act 1957: Duty of care of being on someone else's property s 1(3) for ‘business liability’, liability for negligence that might have incurred in the course of business, also extended to liability of government bodies or public authorities (under s 14) Not just concerned with private businesses, but with any big organisation. Exemptions are mostly concerned with excluding or limiting implied contract terms or common law duties in tort etc. e.g. Irwin – duty to keep common areas clean, could be potentially exempted by exclusion clause. Schedule 1 lists things not covered by the Act: talking about insurance, sale of land, IP rights, companies, or certain kinds of securities contracts à these contracts are not covered by the Act, outside the scope of the UCTA.
UCTA 1977 s 2(1) – Personal injury and death
‘A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.’ If a business would be liable in tort or contract for negligently killing or injuring someone, they can never exclude liability. Past cases: Thompson (falls off train platform – CA’s result would be gone today), Chapelton (deckchair – Court comes to what today is the correct result, deckchair body cannot exclude liability), Thornton v Shoe Lane Parking (trumpeter in carpark) à These are all regarded as consumer cases, now there is a partner section in Consumer Rights Act 2015 s 65. Basically 2015 Act says the exact same things as under section 2(1), but just in more words.
If someone is injured or killed in a problem question, most likely cannot exclude liability. Remember, doesn’t always follow from someone’s injury that someone else is responsible. The UCTA is used only when someone is responsible in the law of tort and failed to take reasonable care, can’t exclude liability.
UCTA 1977 s 6 – Exclusion of implied terms under Sale of Goods Act etc.
Deals with exemptions for implied terms under the Sale of Goods Act 1979 and the Supply of Goods Implied Terms Act 1973. s 6(1): If you have got an exclusion of the implied term that the seller seller/hirer has good title to the thing, that exemption clause is just void. s 6(1A): Implied terms of SGA 1979 ss 13-15 or SGITA 1973 ss 9-11 (implied terms, e.g. goods must match descriptions, samples, be of satisfactory quality etc.) can only be excluded or limited if it is reasonable. Very hard if not impossible to exclude these terms.
What exemption clause is reasonable? A number of factors we have to weigh up. s 11(4): (a) Look at the resources that the party has available to manage the liability (b) (b) how far it is open to get insurance a.k.a. Who is the cheapest cost avoider, best placed to cover against the socio- economic risks? Schedule 2: (a) What is the relative bargaining power of the parties? à the most important alongside insurance. Term less likely to be reasonable if unequal. (b) What alternatives were available to the person who wants to cancel the unfair term. (c) The transparency of the terms à was there lots of small print? (d) Compliance with conditions in the contract practicable (e) If goods are made to order à indicates there was more negotiation, so exclusions clauses more reasonable.
Woodman v Photo Trade Processing Ltd (1981) 131 NLJ 933 Although Schedule 2 only refers to ss 6 and 7 of the UCTA, courts pay regard to its factors for all parts of the act to determine what is reasonable.
L’Estrange today 1. Vending machine not working = Breach of an implied term in the contract of satisfactory quality of the good, Sale of Goods Act 1979 s 14(2). Imagine this clause in dispute is not there, then we could say there was a breach of an implied term. 2. Is the exclusion of something having to be of satisfactory quality effective under UCTA 1977 s 6? Weigh up everything à s 6(1A) and s 11 and Schedule 2. Is the exclusion reasonable? No, imbalance of bargaining power, transparency, best placed party to get insurance for defective product has to be the company selling the vending machine etc. If we didn’t place liability on the company for their own defective products, they are going to have an incentive to make bad products – not good for competitive markets. 3. Under UCTA 1977 s 6(5) and CRA 2015 s 2(1), is L’Estrange a consumer? No, because she is buying the machine in the course of her own business. To be a consumer, you must not be in business. You just can’t have an unfair term even if you accepted it and signed up to it – just can’t have some types of terms.
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803
House of Lords decision, first big case on unfair contract terms. GMC bought cabbage seeds from FLS. Clauses 1 and 2 limited damages for defects to the price (£201.60). Cabbage crops failed, £61,513 in lost production. Claiming consequential economic loss from breach. (When you claim damages, put in the position as if the contract was performed.) Lord Denning agreed with the outcome of the case à FLS cannot rely on this clause, but dissented on reasoning in CA. Held that the limitation clause did encompass defective cabbages, so there was a limitation of liability, but was unfair under UCTA 1977 s 6 and Schedule 2. Oliver LJ and Kerr LJ in the CA held that the things that grew were not even cabbages so the limitation not effective à strained, artificial construction on what counts as cabbages, uses supra proferendum reasoning about what cabbages are. HL upholds Lord Denning’s reasoning with plain language. Unreasonable in trying to exclude liability because the seller is better placed to guard against the risk of the cabbage crop failing and get insurance for the seeds than GMC can à internalising risk of the enterprise.
Involving discretion, so first instance judicial opinion might be wrong because judges weigh up different things. ‘When asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.’ Unless there is an obvious error of law, should mostly defer to the first instance court like in criminal court where they would defer to what the jury says.
UCTA 1977 s 2(2) – Property damage
‘In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.’ Talking about loss or damage apart from death or personal injury, i.e. property primarily. For property damage cannot restrict liability unless it passes the reasonableness test.
UCTA 1977 s 13 – Anti-avoidance section
UCTA doesn’t care so much about the form of the exclusion clause, cares about the substance/effect it creates of exempting liability.
Smith v Eric S Bush [1990] UKHL 1
Mrs Smith buys a new house, with a loan from a building society. Building society gets ESB to do a survey: check building is structurally sound, no essential repairs needed. ESB does not have a contract with S, formal contractual relationship is between ESB and building society, not liable for any damage. But ESB’s report disclaimed accuracy of report to anyone à saying he doesn’t owe a duty to anyone for his surveying work being accurate. After S bought the house, the chimney collapsed and destroyed the roof. Wants to bring a claim against ESB for being negligence and failing to see the house was in disrepair. Surveyor has clearly been careless.
Liable under UCTA 1977 s 2(2) – property damage, and s 13 – not the form of exclusion clause but had the same effect. HL holds yes liable, under s 13(1) the attempt to preclude the duty has no consequence. It was caught by s 2(2), exclusion for property damage. The exclusion was unreasonable under s 11 because ESB was better placed to get insurance policy than S. Lord Griffiths, ‘The availability and cost of insurance must be a relevant factor when considering which of two parties should be required to bear the risk of a loss… Bearing the loss will be unlikely to cause significant hardship if it has to be borne by the surveyor but it is, on the other hand, quite possible that it will be a financial catastrophe for the purchaser who may be left with a valueless house and no money to buy another.’ Surveyors just need one insurance policy to cover all their customers. Would be more sensible to shift responsibility of insuring for loss should be put on the stronger, independent party/cheapest cost avoider.
Phillips Products Ltd v Hyland [1984] EWCA Civ 5
Hamsted Plant Hire Co hired out a JCB excavator and a driver (Mr Hyland) to PP Ltd. Condition 8 said H would be considered PP’s employee when they hired the JCB excavator. H crashed into a wall, causing damage. Is condition 8 effective, or can PP claim compensation? Slade LJ held that condition 8 in effect was an exclusion clause, even though it was in form of shifting responsibility onto PP for whatever H did wrong, so caught by s 13. The exclusion clause had to be reasonable under s 2(2). It was unreasonable because HPH was better placed than PP to get insurance for such short-term hire jobs.
Contrasting case: Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649
CA, few years later than Phillips Products. Dispute between two businesses contractually allocating risk and liability amongst themselves. TLPH Ltd hire out a JCB excavator and driver (Mr Hill) to JW Hurdiss Ltd. Condition 8 said H would be considered JWH’s employee. Mr Hill ran over and killed another worker Mr Thompson accidentally. Mrs Thompson sued TLPH for compensatory damages. TLPH then sought to get contribution in the compensatory damages from JWH, joint liability. Is condition 8 effective? Fox LJ: The point of s 2(1) (no exclusions of liability for death or personal injury) was to protect the victim. Here, because condition 8 is not excluding liability but shifting it between two businesses, and the victim was compensated either way, condition 8 was not considered an exemption. It was a duty-defining clause, rather than an exemption clause, therefore it was operative. It was open to the CA to hold that it was an exemption clause caught by s 13, but was unreasonable.
UCTA 1977 s 3 – General exclusion of contractual liability
Deals with general exclusion of liability for breach of contract. (1) When dealing on anoter person’s standard terms and conditions of business, (2) (a) Then there can’t be any exemption for liability for breach of contract through those standard terms if the result would mean they end up (b)(i) performing their contractual duties in a way that is different from what was reasonably expected, (ii) or performing nothing at all, Unless the term is reasonable.
Timeload Ltd v BT plc [1995] EMLR 459 BT has a clause that said it could terminate someone’s phone service ‘at any time’, no liability for any consequential loss. In CA, Sir Thomas Bingham MR held unfair, because it was rendering something different from what was reasonably expected (i.e. stable phone service). We’re talking about two businesses here.
Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] EWCA Civ 6
SG sold HM an overhead conveyer system, and HM was to pay by instalments. SG’s standard terms and conditions: condition 12.4 excluded HM’s right to set off anything for defective goods, i.e. cannot refuse to pay part of the instalment or reduce the amount to pay because of any defect. System defective, HM refused to pay last instalment. SG sued, relying on condition 12.4. CA held s 13(1)(b) was in effect an exclusion clause restricting liability for the goods being defective, and was caught by ss 3 or 7. Also unreasonable.
St Albans City & District Council v International Computers Ltd [1996] EWCA Civ 1296
CA case about the poll tax. Margaret Thatcher’s Conservative government wished to tax people for being an adult citizen (the ‘community charge’ or ‘poll tax’). To administer this tax, needed a lot of computer systems, so St Albans Council contracted to facilitate this, invested in computer systems. Then riots forced it to be scrapped (huge political failure). St Albans’ system from IC failed, and it lost £1.3m. IC’s standard terms limited liability to £100k. Is the exclusion clause reasonable? Scott Baker J held the limit was unreasonable, trying to exclude liability for breach of contract, under ss 3 and 11, and Schedule 2. IC (multinational corporation) had more resources and more bargaining power – even though St Albans was a government entity.
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317
S (a software supplier) sold W (a computer retailer) a computer system that failed. Contract stated consequential losses were excluded. Chadwick LJ held (overturning judge of first instance saying they could get damages for the breach): ‘In circumstances in which parties of equal bargaining power negotiate a price for the supply of product … the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one.’ When you are talking about two businesses in particular of relatively equal bargaining power, negotiating a price, leave them to do what they want.
Freedom of contract is probably a good thing when talking about two commercial parties bargaining with each other.
UCTA 1977 s 10 Contracts that take away rights in another contract have no effect, like a collateral contract. Only limitation: Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, If you have a compromise agreement on damages payable in a claim settled by lawyers, s 10 doesn’t apply.
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Summary
• s 2(1) exemption of liability for death or personal injury is void. • s 2(2) exemption of liability for property damage must be reasonable: s 11 and Sch 2 • s 3 exemption of liability for breach of contract in standard form contracts must be reasonable: s 11 and Sch 2 • s 6 exemption of implied terms under SGA 1979 and SGITA 1973 must be reasonable: s 11, Sch 2 • s 11 and Sch 2 contain the reasonableness test: a court must evaluate, o s 11, which contracting party is better able to get insurance for contractual risks o Sch 2(a) the parties’ relative bargaining strength o Sch 2(b) inducement to agree (c) if customer ought to have known of the term, i.e. transparency (d) reasonable to expect compliance with conditions (e) if goods were made to special order. • Reasonableness of a term depends on the parties’ identity: who is it used against?
Identity of parties to the contract is important. True freedom of contract only truly exists when there is equal bargaining power.
Consumer Rights
Unfair Terms Directive and the Consumer Rights Act 2015
From the experience of 2007/08 global financial crisis, we should be very sensitive about the way we interpret the law in order to ensure it is fulfilling the function that consumer legislation was passed to fulfil. To what extent have the problems been rectified?
English law regulation focuses on exclusion clause. Then EU in 1992 passes the Unfair Contract and Consumer directive – huge scope, applies to all kinds of terms, not just exclusion clauses.
Unfair Terms in Consumer Contracts Directive 93/13/EEC
Recital 9: The purpose of the law is that ‘acquirers of goods and services should be protected against the abuse of power by the seller or supplier, in particular against one- sided standard contracts and the unfair exclusion of essential rights in contracts’. What are essential rights? Fundamental rights, or rights the court thinks is important? Recital 16: ‘in making an assessment of good faith, particular regard shall be had to the strength of the bargaining positions of the parties...’ The purpose of the law is concerned with rectifying unequal bargaining power.
‘Special relationship’ between UK and EU law. 1. EU law’s basic idea/general aim is to harmonise a minimum level of social and economic rights across Europe, within the internal market – a minimum safety net for consumers through which nobody can fall. Defrenne v Sabena (No 2) (1976) C-43/75: The EU is not only about economics, it is also trying to perform social functions. 2. Directives are not laws by themselves, must be implemented by national law, and CJEU interpretation of the directive is binding. Because the UK has a vote in the EU, it must abide by the rules and can be sued for failure to properly implement a CJEU judgment. If a court judgment finds the UK has ‘manifestly infringed’ applicable law, the UK is liable for damages in EU law. 3. UK courts have an obligation to refer a question to the CJEU unless the law is ‘so obvious as to leave no scope for any reasonable doubt’. If there is any doubt, must make a reference for a preliminary ruling.
Consumer Rights Act 2015
Covers a broader range of terms than the UCTA 1977. UCTA mainly concerned with exclusion or limitation clauses. CRA is concerned with any terms that are potentially unfair, apart from ‘core terms’. CRA covers all contracts, bar some exclusions in Schedule 1, but it applies to consumers only. Consumer = ‘an individual acting for purposes that are wholly or mainly outside that individual's trade, business, craft or profession.’ Directive gives consumer rights to natural persons only, UK gone further than that and may include a small partnership, but no longer protecting small companies. Old UCTA cases are gone e.g. R&B Customs Brokers Co Ltd v United Dominions Trust Ltd [1987] EWCA Civ 3, Feldarol Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747. Only talking about real people.
The key terms for whether a term is fair or not is set down in s 62(4), corresponding to Article 3 of the Directive. ‘A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.’ It doesn’t matter if it is a significant imbalance in the favour of the consumer. Debate whether we need both of these, or are they the same thing? Not clear from CJEU, maybe significant imbalance is the main aspect of lacking good faith. HL and SC say it’s a cumulative test à you need both. This is harder to claim. Significant imbalance = lopsided consideration Good faith = transparency
What we can say is an unfair term or not set down in s 64, corresponding to Article 4(2) of the Directive. (1) A term of a consumer contract may not be assessed for fairness under section 62 to the extent that— (a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it. (2) but only if the term is transparent and prominent.
Kásler v OTP Jelzálogbank Zrt (2014) C-26/13, 54-58 says that both exceptions to the general rule must be construed narrowly.
What is the effect if a contract term is found to be unfair? The unfair term is not binding, we just sever it/cut it out. CRA 2015 ss 62(1)-(2) and 67 (art 6) effects: s 62: (1) An unfair term of a consumer contract is not binding on the consumer. (2) An unfair consumer notice is not binding on the consumer. (3) This does not prevent the consumer from relying on the term or notice if the consumer chooses to do so.’ à The term is voidable, not void. Consumer can choose to still enforce it. s 67: ‘Where a term of a consumer contract is not binding on the consumer as a result of this Part, the contract continues, so far as practicable, to have effect in every other respect.’
Schedule 2 lists out potentially unfair terms: (1) limiting death or injury liability (7) authorising contract dissolution on discretionary basis by the seller/business when the consumer cannot do the same (8) allowing termination without reasonable notice (10) binding to terms consumer cannot know in advance (11) allowing unilateral alteration of contract terms without a valid reason, e.g. varying interest rate at the business’s discretion (20) hindering right to sue, binding to arbitration without recourse to a public court (against AT&T v Concepcion.)
Three main cases in which consumers lose every time in the House of Lords and Supreme Court.
Director General of Fair Trading v First National Bank plc [2001] UKHL 52
Litigants in this case: bank and Director General of Fair Trading. Under the legislation, there is a regulator set up (Now the Competition and Markets Authority) meant to take enforcement action against the use of unfair contract terms. DGFT is like a government watchdog to stop consumers from being subjected to unfair terms. DGFT claimed FNB’s term to raise the interest rate after a borrower’s default, was unfair. This is about when a borrower paying off a loan defaults because they can’t make the payments. There is a statutory interest rate under the County Court (Interest on Judgment Debts) Order 1991 which applies if the borrower goes to court and gets a judgment for repayment of the debt. Court works out a repayment plan/schedule to pay back the debt under the Consumer Credit Act 1974. A default interest rate then applies, which the bank doesn’t like because it’s too low. FNB’s terms replaced the statutory rate with its own higher market interest rates. Q: Was this contract term a core term within s 64that can’t be assessed for fairness? If it is not a core term, is it fair? HL held: 1. Not a core term because the default interest rate being charged is not the main interest rate paid on the loan. The price paid on a loan is the interest rate. This is not the main price payable for the product, but a substitute, so it could be assessed for fairness. 2. It was fair to substitute ordinary interest rates that just reflected market interest. Þ Consumer loses. Lots of complaints about this term the bank uses. Lord Bingham: ‘There is an important “distinction between the term or terms which express the substance of the bargain and ‘incidental’ (if important) terms which surround them.’ ‘The object of the regulations and the directive is to protect consumers against the inclusion of unfair and prejudicial terms in standard-form contracts into which they enter, and that object would plainly be frustrated if [section 64] were so broadly interpreted as to cover any terms other than those falling squarely within it.’ The exception to the rule s 64 must be construed narrowly. HL upholds this because all the bank is doing is protecting its financial position from losing money on a loan. The statutory interest rate was to the ‘detriment of the lender’.
What this case does: 1. Recognition that exceptions to be construed narrowly in light of the Directive’s purpose. 2. But why did the court not defer to the DGFT on its view of what was fair? Argument that maybe the court should defer to what the regulator thinks because the regulator is the expert on what is going on in the markets, so arguably they would be better-placed to decide whether or not a term is fair. 3. Lord Bingham refers to ‘good faith’ and ‘significant imbalance’ as cumulative requirements. But not clear from ECJ jurisprudence that the same approach would be taken in the EU.
A few cases in lower courts followed.
Bankers Insurance Co Ltd v South [2004] Ll Rep IR 1 Buckley J in the High Court held that an insurance policy exemption for covering motor boat accidents was fair. Insurance contract with an exemption saying that it won’t cover accidents on a motor boat is fair. Just the insurance company saying it doesn’t want to insure every kind of accident.
OFT v Ashbourne Management Services Ltd [2011] EWHC 1237 Gym had minimum subscription periods of 12 to 36 months. If people sought to terminate the gym subscription early, the gym says they would be classed as ‘defaulters’ and threatens to pass the person’s details to a credit reference agency (i.e. naming and shaming). Data protection problems here. Kitchin J held unfair. Significant imbalance in the rights and duties of the parties.
OFT v Abbey National plc [2009] UKSC 6
There was a whole group of banks being told off by the Officer of Fair Trading for charging customers ‘unplanned overdraft fees’ if they withdrew money over their agreed limit. Banks: Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds, Nationwide, RBS (owning Natwest) If you have an unplanned overdraft, they would charge a high fee like £5 a day. A law student from Bristol was the first to complain. Banks got around 30% of profits on current accounts from these fees. Could this term be assessed for fairness at all? Court of Appeal held unanimously under s 64 that the terms could be assessed. Supreme Court overturned CA, held that under s 64, (1) the terms could not be assessed for fairness, as the fees were all part of a ‘package’ of charges making the bank’s price or remuneration that you pay when you have a bank account. (2) it should not be referred to the CJEU, either because it was acte clair (despite a unanimous CA under Sir Clarke MR) and because a national court would decide the appeal’s result anyway. Never asked if the term was fair or not, said it was just the price payable for a bank account. Lord Walker: ‘In First National Bank Lord Steyn indicated that what is now [section 64] should be construed restrictively, and Lord Bingham said that it should be limited to terms “falling squarely within it”.’ Argues that the Relevant Terms and the Relevant Charges do fall squarely within s 64. The Directive does not require consumer contracts to be substantively fair, but it does require them to be clear. ‘Even if the Court of Appeal’s interpretation had been correct, I do not see how it could have come to the conclusion that charges amounting to over 30 per cent of the revenue stream were “not part of the core or essential bargain.”’ According to Lord Walker, the more money the banks were earning from these unplanned overdraft fees, the less likely it can be assessed for fairness at all. The other way banks make money off bank accounts is the normal way: investing deposits elsewhere. Lady Hale: ‘As a very general proposition, consumer law in this country aims to give the consumer an informed choice rather than to protect the consumer from making an unwise choice.’ The UKSC seems to have thought that: (1) the main purpose of regulation is to ensure good information; no mention of bargaining power (2) unplanned overdraft fees were part of the price of a bank account (on top of the banks using customers’ money to invest and profit) (3) this differed to DGFT v First National based on its view of the law’s purpose (4) the CJEU ostensibly would not have disagreed (5) In any case the terms would probably be held fair
Aziz v Caixa d’Estalvis de Catalunya (2013) C-415/11
Savings bank institution in Barcelona, Catalonia. Aziz was a customer, claimed clause 15 of his mortgage contract was unfair. If he defaulted on the loan, the interest rate would soar up to 18.75% pa from the normal rate 4.87%. Spanish law limited default rates in other consumer contracts to 2.5 times the norm. Q: Was this term substituting the interest rate if Aziz defaulted fair under a proper interpretation of the Directive? CJEU held that the Spanish court should assess the term’s fairness and should provide an effective remedy depending on the outcome of the assessment, asking whether a consumer contracting in good faith would hypothetically agree to this term if they were bargaining at arm’s length and with equal power. It reasons that the purpose of the Directive is to ensure a court ‘re-establishes equality’ between the parties, not just ensuring the consumer has good information. Consider the national rule that would apply by default and consider whether a consumer could have agreed to decide whether the tone is significantly imbalanced. The way we assess significant imbalance is by looking for some standard. How much out of line is the term in question with the standard terms in the marketplace?
Brusse v Jahani BV (2013) C-488/11 The purpose of ‘the directive is based, namely that the consumer is in a weak position vis-à- vis the seller or supplier, as regards both his bargaining power and his level of knowledge.’ Not just information as the Supreme Court says in Abbey National, but also about bargaining power.
ParkingEye Ltd v Beavis [2015] UKSC 67
Mr Beavis uses carpark. Sign from the carpark management says there is a 2-hour max stay. Failure to comply will result in a parking charge of £85. Supreme Court says it is a fair term, held the notice was not unfair as hypothetically, people would have been agreed to. People ‘did accept it.’ ‘Could ParkingEye, “dealing fairly and equitably with the consumer, … reasonably assume that the consumer would have agreed to such a term in individual contract negotiations”?’ ‘The question is not whether Mr Beavis himself would in fact have agreed to the term imposing the £85 charge in a negotiation, but whether a reasonable motorist in his position would have done so. In our view a reasonable motorist would have agreed. In the first place, motorists generally and Mr Beavis in particular did accept it.’ ‘But although the terms, like all standard contracts, were presented to motorists on a take it or leave it basis, they could not have been briefer, simpler or more prominently proclaimed. If you park here and stay more than two hours, you will pay £85. Motorists could hardly avoid reading the notice and were under no pressure to accept its terms.’ No pressure to accept, but they have no bargaining power at all – take it or leave it. Proclamation would not get to what the CJEU decided in Aziz. Lord Toulson dissents: A reasonable consumer would not have agreed if they actually had a choice. If you look at the jurisprudence, it is clear that when we assess if the term if fair, we must identify if there was a significant imbalance or not. Says it is not acte clair and should be referred to the CJEU.
Questions after ParkingEye: 1. When would a penal parking clause be too high? What is its multiple of trespass damages? No answer to this. 2. Why does the UKSC make so little of bargaining power while the CJEU does? Why does it think parties of equal bargaining power would consent to an £85 charge? 3. When does the UKSC think it will be necessary to refer anything to the CJEU?
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Fundamental rights in private law
Freedom of contract as a constitutional ‘principle’ developed in Lochner v New York, 198 US 45 (1905)
NY passed the Bakeshop Act 1895, limiting the work day for bakers to 10 hours, and 60 hours a week. Lochner was fined for making workers work longer in his bakery. He argued the Fourteenth Amendment 1868 (after the civil war) made the statute unconstitutional: ‘nor shall any State deprive any person of life, liberty, or property, without due process of law.’ Supreme Court had to determine whether this general clause is applicable. US Supreme Court held, 5 to 4, the Bakeshop Act was unconstitutional because it violated a reasonable use of state power, so New York State could not pass it. Peckham J: ‘The liberty of contract relating to labour includes both parties to it. The one has as much right to purchase as the other to sell labour’ Just as free as each other. ‘There is no reasonable ground for interfering with the liberty of person or the right of free contract by determining the hours of labour in the occupation of a baker.’ They are not stupid, do not need to be protected by the state. Holmes J dissenting: ‘A constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of the citizen to the State or of laissez faire. It is made for people of fundamentally differing views, and the accident of our finding certain opinions natural and familiar or novel and even shocking ought not to conclude our judgment upon the question whether statutes embodying them conflict with the Constitution of the United States… I think that the word liberty in the Fourteenth Amendment is [being] perverted…’
In the Lochner era, the US Supreme Court continued to strike down economic and social legislation of states and the Federal government until 1936: child labour restrictions, minimum wages, consumer protection, the right to join a trade union, and so on. After the Wall Street Crash of 1929, a Great Depression followed. President Franklin D Roosevelt spearheaded a ‘New Deal’ to rescue the economy (which had about 25% unemployment).
JF Kennedy, Consumer Bill of Rights (15 March 1962) Said consumers needed protection. (1) The right to safety--to be protected against the marketing of goods which are hazardous to health or life. (2) The right to be informed--to be protected against fraudulent, deceitful, or grossly misleading information, advertising, labelling, or other practices, and to be given the facts he needs to make an informed choice. (3) The right to choose--to be assured, wherever possible, access to a variety of products and services at competitive prices; and in those industries in which competition is not workable and Government regulation is substituted, an assurance of satisfactory quality and service at fair prices. (4) The right to be heard--to be assured that consumer interests will receive full and sympathetic consideration in the formulation of Government policy, and fair and expeditious treatment in its administrative tribunals.’ Replacing freedom of contract with government regulation.
The approach of UK, Commonwealth, and other democratic European countries favoured public ownership more than the US to safeguard the consumer’s interest, or sector-specific regulation if re-privatised. The UK did not have a constitutional document higher than Parliament for consumer protection, but Germany, in particular, did: out of fundamental rights developed a theory of contractual regulation.
Bürgschaft (19 October 1993) BVerfGE 89 German Constitutional Court, bank guarantee case Two joined cases: 1. A 21 year-old daughter guaranteed her father’s large loan while having no job. She was misled by the bank about the seriousness of the obligation. 2. A wife guaranteed her husband’s debt. The bank knew she could not pay off the money because she probably could not work while looking after the children. Held, claimant (1) succeeded in cancelling the obligation, but claimant (2) did not. German Constitutional Court developed two principles, influential on European courts. ‘The claimants’ objections concern the interpretation and application of those general clauses that control the content of contractual obligations in civil courts, primarily [public policy and good faith]. The claimants had said that the contractual framework entered into was contrary to good faith (a provision in the German Code). The civil courts, in construing these clauses, failed to consider the basic right of private autonomy and the right to develop one’s personality. For reasons of legal certainty a contract cannot be brought into question or be corrected with every disruption of negotiating parity. However, in cases of typical types, where one party to a contract may be recognised as being structurally weaker, and if the consequences for the weaker contracting party are significantly imbalanced, the civil law order must react and make correction possible. This follows from the fundamental guarantee of private autonomy... and the principle of the social state...’ When you’ve got an open clause in the legislative framework like ‘good faith’ and significant imbalance, we have to interpret that in light of constitutional principles. The court can’t just rest on the theory of freedom of contract in cases where one party is structurally weaker than the other, e.g. employees, tenants.
European Convention on Human Rights
Countries abide by rulings from ECtHR.
Article 8: 1. General principle: Everyone has the right to respect for his private and family life, his home and his correspondence. 2. Derogations/exceptions: There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well- being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.’
Protocol 1, Article 1: ‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.’
Wilson v Secretary of State for Trade and Industry [2003] UKHL 40
A business claiming that consumer rights protection was too stringent and should be struck down on human rights grounds. Similar to Lockner, business trying to challenge regulation on human rights grounds. HL throws out the case. Consumer Credit Rights Act says if you give someone a consumer credit loan, must put all the terms in one document. First County Trust Ltd, a loan company, argued the Consumer Credit Act 1974 s 127(3) violated right to property under ECHR Prot 1, art 1 à unlawful deprivation of property. FCT charged Mrs W a document fee of £250 of top of interest (94.78%) on a £5k loan, when she pledged her BMW. This failure meant FCT lost all its loan money, £5k. The first major human rights case in UK contract law was a challenge against consumer protection, rather than a device to strengthen it.
Charter of Fundamental Rights of the EU 2000
Implemented by CJEU in all decisions. Article 7: ‘Everyone has the right to respect for his or her private and family life, home and communications.’ Article 8: ‘(1) Everyone has the right to the protection of personal data concerning him or her. (2) Such data must be processed fairly for specified purposes and on the basis of the consent of the person concerned or some other legitimate basis laid down by law. Everyone has the right of access to data which has been collected concerning him or her, and the right to have it rectified. (3) Compliance with these rules shall be subject to control by an independent authority.’ Article 38: the EU should aim for a ‘high level of consumer protection’ à vague term Article 47: ‘right to an effective remedy’ for violation of rights
Kušionová v SMART Capital a.s. (2014) Case C-34/13
CJEU is faced with a claimant K who borrowed €10k from SC and secured it on home. Contract says if there is a default and the bank wants to enforce security, it can do so without any review by court. Business contract trying to exclude the jurisdiction of the court. She claimed this was unfair (outside CRA 2015 s 64, in s 62, in the UK). CJEU held that the Directive must be construed in light of CFREU rights. ‘... the Court has already held that the system of protection introduced by Directive 93/13 is based on the idea that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge.’ Draws on ECtHR jurisprudence even though they are separate, not part of the EU. ‘The European Court of Human Rights has held, first, that the loss of a home is one of the most serious breaches of the right to respect for the home and, secondly, that any person who risks being the victim of such a breach should be able to have the proportionality of such a measure reviewed.’ ‘Under EU law, the right to accommodation is a fundamental right guaranteed under Article 7 of the Charter that the referring court must take into consideration when implementing Directive 93/13.’ Take this into account when determining whether a contract term passes the test of good faith and significant imbalance. If there is litigation about losing a home (a right in the Charter), fundamental rights at stake means courts more likely to be on your side. Stricter level of scrutiny of the term required.
Same would go for interference with private data. We don’t know where this jurisprudence will go.
Barclays Bank SA v García and Barrera (2014) C-280/13
A Spanish statute entitled a bank to buy the property of its borrower at half the contractual reference value (€149k) if nobody showed up to an auction, and still sue the borrower for outstanding sums. Barclays got a house for €74.6k, and pursued G and B for another €95.9k. What they should have done is held onto the house until later, not sell at rock bottom price and sue for the difference. CJEU didn’t do anything. Held, although the contractual relations replicated a statute, where the source of the unfairness was a statute, it could not be assessed under the Unfair Terms Directive.
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Consumer Regulation Strategies
Most cases brought by government regulator.
Approaches to upholding/regulating consumer rights: 1. Good market competition: Good for consumer rights and prices etc. Highly effective only if there is relatively good information and equal bargaining power. They would fail otherwise. A lot of concentration on this in the UK. 2. Courts or regulators enforcing rights, administering legal rights and duties to cancel unfair terms. Drawback is that they tend to only create minimum standards, not good at creating positively fair terms so doesn’t get substantial fairness. Always operates ex post. CJEU more in favour of this. 3. Voting rights in organisations to give a voice to consumers: where consumers have an ongoing, long term relation with a business, allocating governance rights: something that points us beyond contract law.
Not many individual consumers litigating because less incentive to go to court. Consumers themselves are unlikely to litigate: often it will not be rational in terms of time and expense to pursue a claim (even though, taken together, consumers as a group would benefit). Representative actions can work, but still significant costs, and collective action issues in funding. An advantage of courts is their institutional independence from market actors. Yet courts’ incentives to respond favourably to consumer law depend partly on the judiciary’s background and makeup. Some judges will be politically sympathetic to free markets, others will be more active; most will just apply the law as appears most familiar. Contingent on the culture of the courts, background of the judiciary would have different perspectives on how consumer rights work and which voices are heard the most. CRA 2015 s 71, a court should consider if a contract term is unfair even if the parties do not claim it is. Law Com and Scottish Law Com, Exemption Clauses: Second Report (1975) A lot of people know there are exemption clauses but don’t understand them. We need a regulator to protect them à DGFT.
UTCD 1993 Article 7, Member States should ensure: (1) adequate and effective sanctions against unfair terms (2) that representative actions can be taken, by bodies with a ‘legitimate interest’ in consumer affairs, and (3) separate or joint actions against sellers across an industry should be available.
CRA 2015 s 70 points to Schedule 3 on enforcement para 2 sets up the Competition and Markets Authority and other regulators who ‘may consider a complaint’. para 3: CMA ‘may apply for an injunction’ against unfair terms para 6: can accept ‘undertakings’ from firms (i.e. settle) para 7: CMA must publish injunction applications etc. Schedule 5, para 14: power to require information
Office of Fair Trading only had two successful cases. Indicates lack of activism, no incentive for the regulators. What is guiding their activity? Not interested in litigating, depends on pressure from the government to act or not act à political dependence. Regulators potentially solve the collective action and funding problems of private or representative litigation.
This takes us beyond contract law. Experience shows in many cases solutions cannot be reached only through markets, or even through more duties. Thus, most countries have, - nationalised specific enterprises (e.g. the Central Bank, BBC, NHS, universities. By owning the enterprise, the state ensures contract terms are democratically determined (but how well is the state guaranteed to respond to the public interest?) - sector specific regulation – enterprise still private, but subject to specific rules and sanctions for good conduct, including price fixing (but again, the same general problems arise with regulators) e.g. many of the above depending on history, e.g. rail, water, energy... In all the mechanisms, consumer voice could be improved.
August 2016 Julia Liability for the paint Damage + personal injury à Canada Steamship CRA s 65, schedule 2: slip and fall, simply can’t exclude Thomson says can shift but never exclude. Damages to property Can you say this is an unfair term – under s 62 assess fairness, he is not dealing with her in good faith if through his negligence he excludes damage (s 65(1) doesn’t implement UCTA 2(2) which included notices, where there is no contract) But do they have a contract? CRA s 62(2) notices
Contracts Rights of Third Parties Resit papers are about whether you have followed the recent developments Unfair terms in B2C contracts and notices (Consumer Rights Act 2015)
CRA 2015 applies Does a term in the consumer contract or consumer notice seek to Is there a contract The term is of no effect to agreements exclude or restrict liability for death or personal injury resulting from between a trader (s 65(1) CRA 2015). and a consumer and notices negligence? between a trader
or and a consumer: In a consumer sale of goods contract, does the term seek to exclude The term is not binding (s 31(1) CRA 2015). does a notice s 1(1) for Part I or restrict liability arising under the statutory implied terms in ss 9 - A term which has equivalent effect (eg. by relate to rights or 17, 28, 29 CRA 2015? obligations YES s 61 for Part II making enforcement of these rights difficult, or Examples: satisfactory quality, fitness for purpose, matching excluding/restricting a remedy) is also not between a trader For contracts, it and a consumer, does not matter if description, trader's right tosupply the goods. binding: s 31(2)(a)-(d) CRA 2015. or purport to the term is in the The term is not binding (s 57(1) CRA 2015). 2015 CRA PART I exclude or restrict the main or a In a contract for the supply of services, does the term seek to exclude a trader’s liability secondary a trader's liability arising under s 49 CRA 2015 (service to be A term which has equivalent effect (see to a consumer? contract (s 72 CRA performed with reasonable care and skill)? immediately above) is also not binding: 2015). s 57(4)(a)-(d) CRA 2015. Consumer: "an individual acting CRA 2015 does for purposes not apply to Is the term on the Assess the term for fairness: ss 62(1), 63(1), 64(6) CRA 2015. wholly or mainly NO agreements "grey list" of Term cannot be outside that between a trader potentially unfair YES assessed for individual's trade and a business, contract terms YES Is the term transparent (expressed in fairness: s 64(1) craft or see UCTA. (Sch 2 of the CRA Does the term specify plain and intelligible language, legible) CRA 2015. profession." (s 2015)? YES 2(3) CRA 2015). the main subject matter and prominent (average consumer Example: allowing of a contract or is the would be aware of it)? Assess the term termination consumer seeking to NO for fairness: without NO assess the reasonable notice s 64(2) CRA 2015.
appropriateness of the (n° 8). price payable under a Assess the term for fairness: contract ? NO s 62(1) CRA 2015 | contract terms s 62(2) CRA 2015 | consumer notices Assessing a term for fairness :
PART II CRA 2015 CRA PART II s 62(4) CRA 2015 | contract terms s 62(5) CRA 2015 | contract terms The term is not binding on the s 62(6) CRA 2015 | consumer notices s 62(7) CRA 2015 | consumer notices consumer (s 62(1) or (2) CRA 2015), but the consumer may rely on it if s/he A term is unfair if, contrary to the The assessment of fairness requires CONSEQUENCES so wishes (s 62(3) CRA 2015). requirement of good faith, it causes a the nature of the subject matter of the significant imbalance in the parties' contract/notice, all the circumstances OF AN UNFAIR If a contract term is not binding, the rights and obligations to the detriment existing when the term was agreed on rest of the contract continues, so far of the consumer. or the rights/obligations arose, and TERM other terms of the contract to be as practicable, to have effect in every taken into account. other respect (s 67 CRA 2015).
Conor McLaughlin, KCL | [email protected] Exclusion/limitation clauses in B2B contracts s 2 UCTA 1977 Cannot exclude for death or personal injury (UCTA 1977) caused by negligence: s 2(1) UCTA 1977. Liability for negligence (contractual or UCTA does not apply CONSUMER common law or (ss 2(4), 3(3), 6(5)) UCTA does not apply. statutory duty to take Can exclude for other loss or damage if See CRA 2015. reasonable care) Is the term being No (statutory) review reasonable: s 2(2) UCTA 1977. enforced against a NO of otherwise "unfair" business or consumer? Does the term seek to terms in B2B exclude or limit contracts. TRADER liability in the s 3 UCTA 1977 Clause must be contract? Liability for breach of Was theclause YES reasonable: What kind of liability included in the s 3(2) UCTA 1977. YES contract (or does the clause entitlement to render standard terms of exclude or limit? substantially business of the party different/no seeking to enforce it? NO UCTA does not apply: performance) s 3(1) UCTA 1977.
s 6 UCTA 1977 S6(1) UCTA 1977 Liability for breach of s 12 SGA 1979 (undertakings as to title) cannot be a term implied by SGA excluded or restricted. 1979 Assessing a term for reasonableness: S6(1A) UCTA 1977 Exclusion of liability for breach of ss 13 - 15 SGA 1979 (conformity of goods with description, quality and s11(1) UCTA 1977 fitness for purpose) must be reasonable. Term must have been a fair and reasonable one to be included having regard to the circumstances when the contract was made. Is the term reasonable? Schedule 2 s 11(2) UCTA 1977 a) relative bargaining strength of the parties; Regard should be had in particular to the matters specified in Schedule 2 Note: the party claiming that of UCTA. b) inducement to agree to term/possibility of the contract term satisfies the entering another contract without the term; requirement of reasonableness NB: the section states that Schedule 2 only applies to ss 6 and 7 UCTA to show that it does (s 11(5) c) whether customer ought reasonably to have 1977, but it can be considered for other sections as well: Woodman v known of the existence and extent of the term; UCTA 1977). Photo Trade Processing Ltd (1981) 131 NLJ 933. d) reasonableness of expecting performance of conditions, the non-performance of which trigger s 11(4) UCTA 1977: the exclusion or limitation of liability; For limitation clauses, regard shall be hand in particular to: d) whether goods were manufactured, processed a) the resouces which a party could expect to be available to it for the or adapted to special order of the customer. purpose of meeting the liability. b) how far it was open to the party to cover himself by insurance. Conor McLaughlin, KCL | [email protected] King's College London, The Dickson Poon School of Law
How to approach a Contract Problem with Exclusion Clauses.
1. Don't panic.
2. As with all contract problems, first identify the possible contract…
3. … and the relevant parties.
4. See what has gone wrong; work out some way that this can be framed as a breach of contract (more likely, a number of breaches).
Use implied terms if you need to (e.g. implied because of statute law, e.g. Sale of Goods Act, or implied as a matter of fact - officious bystander test, reasonable expectations or whatever).
5. Think about whether it is a negligently caused breach or not (doesn't matter as far as breach of contract is concerned, but might affect impact of an exclusion clause.)
6. OK, now you have a situation where one party (the claimant) can sue another (the defendant) for breach of contract.
Good. Now we see whether the defendant has successfully managed to limit or exclude their liability for the particular breach.
7. This means using the 'checklist for exclusion clauses' - in other words, the three hurdles for an exclusion clause to be valid.
8. Firstly, is it actually incorporated into the contract?
Incorporation can be by one of the following three modes: signature, notice - reasonably brought to the attention at or before the contract concluded or by consistent course of dealing
9. Secondly, construction - on its wording, does it cover the breach?
Look closely at what the breach actually is and what liability has actually been excluded - contra proferentem rule.
Is the breach caused by negligence? Does the exclusion/limitation clause cover negligently caused breaches or just accidents (strict liability)? Use the usual rules for construction of contacts (ICS v West Bromwich Building Society, maybe also the Canada Steamship rules.)
10. Thirdly, is the exclusion/limitation clause controlled by statute? Two different pieces of legislation to consider. UCTA: i. Are the parties acting in the course of business? If not, UCTA not relevant. ii. If UCTA relevant, which active section of UCTA to use? (e.g., s.2, s.3, s.6)? iii. What does the section do? - is the clause void (s.2(1), s. 6(2)) or subject to the reasonableness test as defined in s.11 (s.2(2), s. 3, s.6(3)) and Sch.2?
CRA: i. Is the defendant acting for purposes relating to trade, business etc? ii. Is the claimant an individual acting for purposes wholly or mainly outside their trade, business etc? If not, CRA not relevant. iii. Is the particular contract term fair? Tests for fairness s.62(4) A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. S.62(5) Whether a term is fair is to be determined (a) taking into account the nature of the subject matter of the contract, and (b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends. S. 63 tells us to look at Part 1 of Schedule 2 which contains an indicative and non- exhaustive list of terms of consumer contracts that may be regarded as unfair for the purposes of this Part. iv. S. 64 says assessment of fairness under section 62 is excluded if term (a) specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price. v. S. 65(1) says a trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence. See also Sch.2, Part 1, listed term 1. vi. If not fair, not binding on consumer, unless consumer wishes (s.62) although rest of contract persists, if possible (s.67).
11. OK, now you have investigated whether the exclusion/limitation clause might be used to exclude or limit the defendant's liability for breach of contract.
If the exclusion clause makes it over all three hurdles, liability is excluded (for breach of contract at least). Boo hiss.
If liability is not excluded, the claimant can sue the defendant for the breach. Hurrah!
Finally, bear in mind, though you are not expected to know the details, that it might be possible to sue for tort liability as well (e.g. tort of negligence) - mainly useful for non-parties to the contract.
Jane Henderson Cases
Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462
Sir George Jessel MR: ‘... men of full age and competent understanding shall have the utmost liberty of contracting... their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider—that you are not lightly to interfere with this freedom of contract.’
Lockner v New York (1905) 198 US 45
NY passed the Bakeshop Act 1895, limiting the work day for bakers to 10 hours, and 60 hours a week. Lochner was fined for making workers work longer in his bakery. He argued the Fourteenth Amendment 1868 (after the civil war) made the statute unconstitutional: ‘nor shall any State deprive any person of life, liberty, or property, without due process of law.’ Supreme Court had to determine whether this general clause is applicable. US Supreme Court held, 5 to 4, the Bakeshop Act was unconstitutional because it violated a reasonable use of state power, so New York State could not pass it. Peckham J: ‘The liberty of contract relating to labour includes both parties to it. The one has as much right to purchase as the other to sell labour’ Just as free as each other. ‘There is no reasonable ground for interfering with the liberty of person or the right of free contract by determining the hours of labour in the occupation of a baker.’ They are not stupid, do not need to be protected by the state. Holmes J dissenting: ‘A constitution is not intended to embody a particular economic theory, whether of paternalism and the organic relation of the citizen to the State or of laissez faire. It is made for people of fundamentally differing views, and the accident of our finding certain opinions natural and familiar or novel and even shocking ought not to conclude our judgment upon the question whether statutes embodying them conflict with the Constitution of the United States… I think that the word liberty in the Fourteenth Amendment is [being] perverted…’
In the Lochner era, the US Supreme Court continued to strike down economic and social legislation of states and the Federal government until 1936: child labour restrictions, minimum wages, consumer protection, the right to join a trade union, and so on. After the Wall Street Crash of 1929, a Great Depression followed.
Vernon v Bethell (1762) 28 ER 838
V owned an Antiguan sugar plantation. He mortgaged land to a UK lender B. B’s successor claimed they also agreed that, to clear debt and interest, V would convey the title to the land. V claimed he could repay, and should be able to keep title to land – so any agreement that V would convey the land was void. ‘for necessitous men are not, truly speaking, free men’ à quoted by Roosevelt, State of the Union (1944) Equity of redemption, primitive form of consumer protection
Carter v Boehm (1766) 3 Burr 1905
Carter, Governor of Fort Marlborough, Indonesia, bought insurance from Boehm, without disclosing that the fort could not withstand attack from the French. French attacked. Boehm claimed the policy was void for non-disclosure. The general principle was good faith, though its application remained confined to the contract for insurance – and this was primarily limited to the side of the buyer of insurance, not the seller (who is usually more powerful!). Problem with mandating full disclosure – courts not good at deciding ad hoc what is objectively fair. Suggested general doctrine of unequal bargaining power. Courts don’t want to intervene if parties have equal bargaining power. Williams v Roffey Bros Ltd, per Russell LJ, the courts will find consideration ‘reflect the intention of the parties to the contract where the bargaining powers are not unequal’.
National Westminster Bank plc v Morgan [1985] AC 686
Limiting freedom of contract ‘essentially a legislative task’: courts institutionally incapable of defining what’s right in every situation: substituting its view of ‘fair’. When attempting to determine the idea of a fair exchange, what should be the court’s criteria? Presumably, if one deal deviates from a general, obvious market price, which can be objectively identified, this may serve as a guide. For instance, the price of a sheep of a certain age or size can be set by reference to other sheep. A house in a certain location, similar to other houses of similar size or location. But, (1) What if there is no market to make reference to? (2) Even if there is a market, what if the whole market is skewed: rising house prices, poverty wages, all businesses using exclusion clauses? Should an unfair market be the guide for fair terms? Hence the claim that it is only a legislative task does not always seem to be valid – courts could presumably follow what are obvious accepted social standards. But evidence of social standards need to be identified from some source, and so presumably it is right that legislation leads the way.
Heilbut, Symons & Co
During the offer and acceptance, there is often not clarity on the content of the contract because it comes from a mixture of oral and written sources, maybe a manual etc. Basic rule: it depends on whatever the parties intended. Was importance attached to it? Not ‘intended’ as term = mere representation.
Oscar Chess Ltd v Williams [1957] 1 WLR 370
W sold OC a Morris car. Car log book said it was 1948 model, but actually forged and the car was from 1939 so worth less. Was the year of the car intended to be a term of the contract? Held that it was not a term. The car dealers ‘are experts, and, not having made that check at the time, I do not think they should now be allowed to recover against the innocent seller’ – Denning LJ
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
DBP bought a Bentley from HSM which was thought to have done 20,000 miles, but in fact had done 100,000 miles. Very wrong mileage, was this a mere representation? Denning LJ: Because HSM was a professional seller, the statement of the mileage became a term. ‘Here we have a dealer, Mr. Smith, who was in a position to know, or at least to find out, the history of the car.’ Not like Oscar. Court looking at the intention objectively.
L’Estrange v F Graucob Ltd [1934] 2 KB 394
Decided before the Unfair Contract Terms Act 1977. (Tom Denning QC worked on this as a barrister.) Now the decision would differ. Harriet L’Estrange bought an automatic cigarette machine for her small business. She signed an agreement with a clause excluding any liability for the seller if it was defective. It did not work, and Ms L’Estrange refused to pay. She said it was an implicit term (a warranty) in the contract that the machine should work. Clause excluding any liability of the seller if the machine was defective. Said there should be an implicit term (a warranty) in the contract that the machine should work. Now there are laws that it is implied anything being sold is of acceptable quality. Contract held, but Maugham LJ says L’Estrange could get out of it if she successfully pleaded for misrepresentation or non est factum (illiteracy that is exploited à this was severely limited by courts in Saunders v Anglia [1971] AC 1004: there is a ‘radical difference’ from understanding and document) JR Spencer commented Graucob was snapping up a bargain. L’Estrange shouldn’t have been bound because Graucob Ltd knew she was making a mistake: hadn’t read small print.
L’Estrange today 1. Vending machine not working = Breach of an implied term in the contract of satisfactory quality of the good, Sale of Goods Act 1979 s 14(2). Imagine this clause in dispute is not there, then we could say there was a breach of an implied term. 2. Is the exclusion of something having to be of satisfactory quality effective under UCTA 1977 s 6? Weigh up everything à s 6(1A) and s 11 and Schedule 2. Is the exclusion reasonable? No, imbalance of bargaining power, transparency, best placed party to get insurance for defective product has to be the company selling the vending machine etc. If we didn’t place liability on the company for their own defective products, they are going to have an incentive to make bad products – not good for competitive markets. 3. Under UCTA 1977 s 6(5) and CRA 2015 s 2(1), is L’Estrange a consumer? No, because she is buying the machine in the course of her own business. To be a consumer, you must not be in business. You just can’t have an unfair term even if you accepted it and signed up to it – just can’t have some types of terms.
Curtis v Chemical Cleaning [1951] 1 KB 805
Dry cleaners said that a document only excluded liability for satin dress sequins: it excluded all. The dress was stained. The exclusion clause is much wider in the document than what the cleaners told her, this misrepresentation overrules the clause and makes the exclusion inoperative.
Grogan v Robin Meredith Plant Hire [1996] CLC 1127
Timesheet for machinery hire signed. Auld LJ held the exclusion ineffective: it was only an ‘admin’ document.
Autoclenz Ltd v Belcher [2011] UKSC 41
A group of employees claiming they ought to get the minimum wage and minimum days of holidays though they signed agreements that they were self-employed independent contractors. B, a car cleaner signed he ‘hereby confirms that he is a self-employed independent contractor’. To get the minimum wage and paid holidays, the Working Time Regulations 1998 and National Minimum Wage Act 1998 required he is a ‘worker’ or an ‘employee’. B claimed he was in fact an employee, despite the signed ‘contract’. Does this signed contract carry any weight in if this valid? No, it would mean an employment contract would have far less rights. Lord Clarke held, to interpret whether what people have signed is the ‘true agreement’, the parties’ ‘relative bargaining power must be taken into account’. This is a ‘purposive approach’. This does not affect ‘commercial contracts’.
Drifters Adventure Tours CC v Hircock [2006] ZASCA 174
The UCTA 1977 will prohibit all clauses excluding personal injury liability, and may say other clauses are ‘unreasonable’ (i.e. unfair = void). But in South Africa, for example, there no such statute yet. The courts have kept holding such clauses valid.
Parker v South Eastern Railway (1877) 2 CPD 416
Mr Parker leaves bag at Charing Cross station cloakroom. He pays 2 pence, and gets a ticket. On the back of the ticket, it excluded liability for losses over £10. Bag lost. Mellish LJ, “if what they do is sufficient to inform people in general that the ticket contains conditions, I think that a particular plaintiff ought not to be in a better position than other persons on account of his exceptional ignorance or stupidity or carelessness”. Will be held if the railway company does what is sufficient to inform the people of the terms.
Richardson, Spence and Co Ltd v Rowntree [1894] AC 217
Rowntree wanted to get off ferry, fell into water because of negligence of the company leaving the boat too far from the shore. Ticket with an exclusion was folded and smudged when it was given to her. Incorporated? No. Clause invalid because notice was insufficient.
Thompson v London, Midland and Scottish Railway Co Ltd [1930] 1 KB 41
Mrs Thompson fell off the train when it stopped in the dark, past the platform. Tickets said the conditions were found in the small print on the back of the timetable, which could be bought at the station for 6 pence. Incorporated into the contract? Yes. This brought some uncertainty to the law.
Chapelton v Barry UDC [1940] 1 KB 532
Mr Chapelton hired a deckchair on Cold Knap (pebble) beach, South Wales.When he paid, he got a ticket which said that ‘the council will not be liable for any accident…’ Chair collapsed and Chapelton was injured. Slesser LJ held the ticket was not a contractual document because someone would not reasonably think it contained contract terms. Not incorporated.
Olley v Marlborough Court [1949] 1 KB 532
Ms Olley left her fur coat in her room at the Marlborough Court Hotel (Lancaster Gate) and her room key at reception. A general say a thief took the key and stole the coat. A notice behind the bedroom door excluded liability. This doesn’t work because the notice was too late. The clause was not incorporated into the contract.
Denning LJ gave three ways to incorporate terms: 1. Sign something 2. Make it clear at the time of contracting 3. Sufficiently clear notice None were done for Ms Olley here.
Thornton v Shoe Lane Parking Ltd [1970] EWCA Civ 2
Mr Thornton parked at Shoe Lane Parking before performing at Farringdon Hall. He got a ticket as he drove in. A notice inside excluded liability for injury, but he was injured. One argument why he should be able to claim for personal injury and not bound by the clause because the contract was already complete once he enters the car park and anything told to him after he enters doesn’t count. Was the contract completed before the exclusion clause could have been seen? Lord Denning MR says contract was complete at the ticket machine. But even then, very unfair exclusions must be very clear and there must be reasonable notice.
J Spurling Ltd v Bradshaw [1956] EWCA Civ 3 “In order to give sufficient notice, it would need to be printed in red ink with a red hand pointing to it – or something equally startling.” à Red Hand Rule Onerous terms need to be very clear to be applicable.
But here, it would not help the company because the contract was complete at the machine. ‘The customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back. He may protest to the machine, even swear at it. But it will remain unmoved.’
Interfoto Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6
Interfoto delivered 47 photo transparencies to Stiletto in a sealed bag which wasn’t opened. Inside the bag, condition 2 said £5 per day was charged for each if they were kept for too long. S didn’t return them for a month. S then sent a £3,783.50 bill. (Not an exclusion clause, so no help from UCTA 1977) Held that condition 2 was not incorporated into the contract. Otherwise a ‘venial period of delay, as here, would lead to an inordinate liability.’ – Bingham LJ ‘... the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention.’
O’Brien v MGN Ltd [2001] EWCA Civ 1279
Mr O’Brien and 1471 other Daily Mirror readers were told they’d won up to £50,000 when they scratched a card and by calling a phone line. This was a mistake. Rule 5, printed in papers on some days, not others, said that if too many prizes were given, there would be a prize draw. Were these terms incorporated into the contract? Hale LJ said yes, term was not onerous. The notice was not really adequate, but the term was definitely not onerous – it simply meant the readers did not get a massive windfall bonus, a.k.a. non-onerous terms are easier to incorporate.
McCutcheon v David MacBrayne Ltd [1964] UKHL 4
M claimed damages for his lost car after DM’s ferry to Islay sank. M was a customer before and for 4 times, he signed a risk note excluding liability if the ferry sank. But this time, M’s brother in law, McSporran, got the ticket. He wasn’t given a risk note DM argued that the exclusion bound M because they had a course of dealing. Lord Reid says it needs to be regular and consistent. Lord Devlin (going further) says that actual knowledge of the term must be proven if a note is not used.
Henry Kendall Ltd v William Lillico Ltd [1969] 2 AC 31
What’s ‘regular and consistent’ enough? Chicken feed defects were excluded in the note. Buyers had bought feed 3 or 4 times a year for 3 years. Held, the dealing was regular and consistent enough, so the term was incorporated.
Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71
Mr Walter Hollier had his car repaired at RM’s garage 3 or 4 times in last 5 years. Each time, he signed a note saying the ‘company is not responsible for damage caused by fire to customers’ cars on the premises.’ This time he did not. Fire caused by employees accidentally sparking. Salmon LJ held the course of dealing was not regular and consistent enough. Difference: perhaps in the numbers, the parties etc?
British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd [1973] EWCA Civ 6
IPH hired BCH’s crane, which sank in the mud. IPH had hired 2 times before. BCH’s standard form said the customer had to pay any costs of recovery, but IPH did not sign that this time. Lord Denning MR held that here, 2 times not enough to be a course of dealing. However, (unlike Hollier) the ‘parties were both in the trade and were of equal bargaining power.’ They knew the terms that were habitual in trade à Both parties knew the general trade custom of this.
City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129
Written lease said M could only use property for business, but he was orally assured he could live there. Told by CWP that he can live there in the shop, even though contract said he can’t. Harman J held there was a ‘collateral’ contract that overrode the written lease terms.
Inntrepreneur Pub Company v East Crown Ltd [2000] 2 Lloyd’s Rep 611
IPC leased a pub to EC, with ‘beer tie’ (EC had to buy all its beer from IPC). The signed agreement said this ‘constitutes the entire agreement between the parties’. EC claimed they only signed because they were promised/told orally that the tie would be released after a limited time and they can stop buying from Inntrepreneur in the future. Lightman J held the tie was binding. ‘The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty.’ Beer ties now unlawful after Small Businesses Act 2015.
Smith v Hughes (1871) LR 6 QB 597
Buying oats for horse, seller sells new oats but buyer wants old oats. Court said the buyer was bound because it looks to the reasonable person that he is accepting. We don’t ask people what they subjectively thought in the contract. Blackburn J, for offers and acceptance: ‘If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed... [he is...] equally bound as if he had intended to agree to the other party's terms.’
North Eastern Railway Co v Hastings [1900] 1 AC 260, 263
Dominant approach was to look at the natural, literal meaning of the words - get out the dictionary to decide. Earl of Halsbury LC: ‘The words of a written instrument must be construed according to their natural meaning, and it appears to me that no amount of acting by the parties can alter or qualify words which are plain and unambiguous.’
Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22
Most famous case in company law, used literalism in contract interpretation. A shoe-maker in Whitechapel went bust because of economic depression, government stopped buying shoes. Claimed he shouldn’t be liable for his insolvent company’s debts because it was duly incorporated with 7 people (even though they were not people who truly shared in the business). Fake business partners, e.g. wife, children etc. Lord Halsbury LC held Salomon won, but by strict literal construction of the Companies Act 1862: ‘I have no right to add to the requirements of the statute, nor to take from the requirements thus enacted. The sole guide must be the statute itself…’
Modern approach is different – we take a contextual interpretation approach now. Look at contract’s meaning, same with statute, look at the background facts. à Investors Compensation Scheme v West Bromwich (did they reserve the right to sue for damages or only rescission?)
Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28
ICS Ltd was set up by the SIB (now the FCA) as a safety net for small businesses, to compensate people who had been sold dodgy investments (‘Home Income Plans’) by banks and building societies (like West Bromwich). Some consumers are being ripped off. Customers got compensation, and assigned ICS their legal claims, which sued on their behalf. Efficiency thing, one representative bringing legal cases instead of lots of different investigations. West Brompton says ICS cannot sue them because they can’t get legal claims against them. Exclusion clause in the assignment contract, cannot assign: ‘Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society...’ Literally it means ICS was excluded from getting any claim at all (whether for rescission or otherwise). But presumably they meant any rescission-based claim – so ICS could sue for damages. House of Lords held, what they really meant was to assign all except for: ‘Any claim sounding in rescission (whether for undue influence or otherwise)’ à moved the ‘whether’ and bracket. Lord Hoffmann: construe words according to what a reasonable person would understand in the context at hand, but exclude evidence of prior negotiation. Five principles: 1. What the reasonable person with all background knowledge would think is the meaning. 2. The relevant ‘matrix of fact’ is anything that could affect the language’s meaning, 3. but exclude prior negotiations (this is to avoid cost, but it is a controversial rule). 4. It is not the literal meaning of a sentence, but the contextual meaning that is preferred. à Complete departure from Hastings 5. There is a presumption that people do not make linguistic mistakes (though this presumption can be rebutted).
Bank of Credit and Commerce International SA v Ali [2001] UKHL 8
A contentious case Mr Naaem, an employee of BCCI SA (once the world’s 7th largest bank, now bankrupt after mass fraud) claimed damages for not being able to get a job after redundancy in 1990 because of the stigma. Took a redundancy before the scandal unfolded. He is trying to see for future loss of earnings. But he had signed a release form saying the redundancy pay was ‘in full and final settlement of any claims... of whatsoever nature that exist or may exist’. BCCI argued N was bound. N argued nobody contemplated exposure of mass fraud. House of Lords held that because the exposure of fraud would not have been contemplated when Mr Naeem signed, the release did not actually (despite the words) exclude a stigma damages claim. HL by majority held that Mr Naaem was correct. Lord Bingham: A contextual interpretation could not have included the fraud. The parties could not have intended to include the fraud. Lord Hoffmann dissented: The clause was deliberately wide and should be effective. The context should include whatever a reasonable person would think was relevant. Argues the doctrine of contra proferendum ‘is a desperate remedy, to be invoked only if it is necessary to remedy a widespread injustice.’ Different understandings of what ‘context’ means in terms of policy: e.g. reducing litigation, fairness, etc.
Gisda Cyf v Barratt [2010] UKSC 41
Differences of interpretation when contracts touch statutory rights – construing employment contracts Ms B dismissed for an unknown event at the staff Christmas party. She claimed unfair dismissal – three-month time limit to claim from notice of dismissal. GC sent letter 30 Nov, but B only read on 4 Dec. She made the unfair dismissal claim on 2 March. The letter arrives at a reasonable time. She was away visiting her sister. Is she bound by notice in business hours, like The Brimnes? (She is an employee, not a business) No. B was bound when she actually read the letter: an adjustment of the general contract rule consistent with statute’s purpose.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50
Kookmin Bank guaranteed repayment on instalments paid by buyers of ships from Jinse Shipbuilding Co Ltd. Jinse went bust. Kookmin was called in to pay the money they were guaranteeing. The contract was ambiguous about whether it guaranteed repayment of instalments in all cases, or simply when the contract was terminated or the ship was destroyed (insolvency of the firm). Lord Clarke held, where there are two possible interpretations, prefer the one that fits the commercial purpose. Here, the bank’s purpose was to guarantee in all cases. (Purposive approach and interpretation, like Autoclenz)
To understand meaning, should prior negotiations be admissible? Authority for exclusion, policy arguments.
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38
P, a developer, would build on C’s land and sell properties, giving C: ‘23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.’ C argued it was £4.4m owing and P said it was only £897k owing. Pre-contractual negotiations made it clear that it was indeed £897k. Were they to be admissible? Lord Hoffmann holds ‘no’. The meaning could be established by asking whether it made commercial sense if £4.4m was the right figure. But this suggested that P’s contention for £897k was correct. Lady Hale says knowledge of pre-contractual negotiations made it ‘clear’. They will use as much ‘red ink’ as needed to correct verbiage to match the contract’s (commercial) purpose. We must follow the commercial purpose of the deal.
Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44
Oceanbulk and TMT had a dispute over freight contracts, settled, then disputed the meaning of the settlement. They held ‘without prejudice’ negotiations (which weren’t meant to affect the parties’ rights). Lord Clarke held that those negotiations could be admissible as part of the matrix of fact, if it was helpful to understand deal. Negotiations can only be used if they seem to be an important part of the matrix of fact.
AT&T Mobility LLC v Concepcion, 563 US 333 (2011)
A 5 to 4 decision of the US Supreme Court, the majority held all consumer rights to class action or an appearance in a public court (rather than private arbitrators, appointed by the corporation) can be contracted away. This is supported by Republicans, opposed by Democrats. The minority and EU law holds this unlawful.
Alderslade v Hendon Laundry Ltd [1945] 1 KB 189
Mr A left ten linen handkerchiefs at HL to be washed and they lost them. Its contract terms said: ‘The maximum amount allowed for lost or damaged articles is twenty times the charge made for laundering.’ This was 11s 5½d (20 s in £1) but they were worth £5. CA Lord Greene MR, limitation clause was effective., so that had to be excluded. Limitation clause had to cover what went wrong here, because the only thing that the clause could have referred to was negligence liability. However, if something other than negligence could be referred to, then the exclusion/limitation will cover that and not negligence. This is operation of the contra proferentem rule. Ex: At common law, a ‘common carrier’ is strictly liable (w/exceptions for natural disasters, etc.) for their customers’ goods. So unless an exemption explicitly mentions negligence, it only covers strict liability.
Canada Steamship Lines Ltd v The King [1952] UKPC 1
CSL stored goods in the Crown’s shed on the wharf of Montreal harbour. An employee, while repairing with an oxy-acetylene torch, accidentally started a fire and burnt down the shed. Quebec law in the civil law said the Crown had an ordinary duty of reasonable care and a strict duty under the statute to keep the shed in repair. Also, clause 7 said ‘the lessee shall not have any claim for damage to goods being in the said shed.’ Did this clause validly exclude negligence? Lord Morton, held no. It was to be interpreted to not exclude negligence despite the wide words. Interpret clause 7 to only exclude the strict duty, construe against the person relying on it and hold that negligence liability is not excluded. To prevent itself from being liable, it could have expressly said negligence liability was excluded.
Hollier v Rambler Motors (AMC) Ltd [1971] EWCA Civ 12
H took car for repairs at RM Ltd, as he had 3 or 4 times in the last 5 years. This time he did not sign an invoice saying: ‘The company is not responsible for damage caused by fire to customers' cars on the premises.’ Garage burnt down, caused by fire from faulty wiring. Claiming damages for the car which burned down in the garage when an employee had an accident. Held, clause not incorporated because it is not a course of dealing. But even if it were, a reasonable person would not think this covered the garage’s own negligence – they would have thought it referred to acts of God etc. and thus merely stated the existing law. The reasonable person would not have thought the term meant it covered employee stupidly burning the car. Salmon LJ: ‘In order for the clause to be effective the language should be so plain that it clearly bears that meaning. I do not think that defendants should be allowed to shelter behind language which might lull the customer into a false sense of security by letting him think… that he would have redress against the man with whom he was dealing for any damage which he, the customer, might suffer by the negligence of that person.’
Ailsa Craig Fishing Ltd v Malvern Fishing Co Ltd [1981] UKHL 12
ACF’s boat was sunk on NYE in Aberdeen harbour after another boat crashed into it. Securicor was meant to be watching, but negligently allowed it to happen. Its contract limited liability to any customer to £1000 for ‘arising from any duty’. Boat was worth £55k. Is that clause effective? Can we apply the contra proferendem rule, doesn’t cover negligence liability? Lord Wilberforce and Lord Fraser: the Canada Steamship principles do not apply ‘in their full rigour’ to limitation clauses.
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1982] EWCA Civ 5; [1983] 2 AC 803
Lord Denning MR recognised the secret weapon of ‘true construction of the contract’. FLS sold cabbage seeds. It limited liability for bad seeds to their price (£201.60). GMC bought seeds, and the whole crop failed, loss profits of £61,513. GMC argued they were not given ‘cabbage’ seeds at all. What grew out of the grown was just brown mush, so not even cabbage seeds. Lord Denning MR dissenting: The clause did limit liability and they were cabbages, but it was unfair under statute. Other judges held contra proferendum. HL upheld Lord Denning MR’s reasoning, that the clause was effective at common law, as limitations should be construed less strictly than exclusions. But it was now to be regarded as an unfair contract term (UCTA 1977 ss 6 and 11 and Sch 2). So full damages.
House of Lords decision, first big case on unfair contract terms. GMC bought cabbage seeds from FLS. Clauses 1 and 2 limited damages for defects to the price (£201.60). Cabbage crops failed, £61,513 in lost production. Claiming consequential economic loss from breach. (When you claim damages, put in the position as if the contract was performed.) Lord Denning agreed with the outcome of the case à FLS cannot rely on this clause, but dissented on reasoning in CA. Held that the limitation clause did encompass defective cabbages, so there was a limitation of liability, but was unfair under UCTA 1977 s 6 and Schedule 2. Oliver LJ and Kerr LJ in the CA held that the things that grew were not even cabbages so the limitation not effective à strained, artificial construction on what counts as cabbages, uses supra proferendum reasoning about what cabbages are. HL upholds Lord Denning’s reasoning with plain language. Unreasonable in trying to exclude liability because the seller is better placed to guard against the risk of the cabbage crop failing and get insurance for the seeds than GMC can à internalising risk of the enterprise.
Involving discretion, so first instance judicial opinion might be wrong because judges weigh up different things. ‘When asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong.’ Unless there is an obvious error of law, should mostly defer to the first instance court like in criminal court where they would defer to what the jury says.
Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2
S’s employee Mr Musgrove started a fire in PP’s building to keep warm while he was on watch. Burned down the building, causing 615k of damage. S’s contract said it was not ‘to be responsible for any injurious act or default by any employee’ etc. HL held that, even though the breach was ‘fundamental’ (i.e. meant to guard building but burnt it down) exclusion covered it. Rule of construction, no rule of law that wipes the contract away if there is a fundamental breach of the deal.
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6
Chase claimed under an insurance policy with HIH for risky film ventures going wrong. Chase funded risky films with loans. Chase excluded, from its contract with the insurance company, any liability from any non- disclosure by its agents to HIH as insurer. Chase says it covers all liability for fraud, misrepresentation etc. HIH argued that Chase’s agents had (among other things) fraudulently failed to make disclosures. House of Lords held, on public policy grounds, liability for fraud can never be excluded. Though the parties pursued ‘commercial objectives’, fraud was ‘a thing apart’.
Hutton v Warren (1836) 1 M&W 466
Probably still a good decision today. Farmer had a tenancy that ended. He wanted some money from the landlord because of the benefit of his labour on the land the landlord would get. Farm tenant claimed the landlord should pay him for seeds and labour used on land when tenancy ended. Parke B held such a term would be implied, because this kind of thing was the custom at the time: ‘In commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts matters with respect to which they are silent.... upon the principle of presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages.’ People don't write everything down in a contract, people generally expect known usage and custom to be applied. Parke B says customs matter, and people are presumed to be bound by these customs.
The Moorcock (1889) 14 PD 64
The Moorcock was a ship unloading cargo at a Thames wharf. It hit rocks and was damaged. Ship owner sued wharf business, arguing they should be liable because they must have known of risk. Contract said nothing about ship’s liability. Either way we have to imply a term. The liability is either on the person upon whom the loss falls or on the wharf owner. Bowen LJ: liability/bear the risk of ships being damaged should go on the wharf business: ‘to give such business efficacy as must have been intended’. It ‘must have been in the contemplation of both parties’. But presumed intent of the parties is a difficult test to apply. Would both parties have agreed and intended for this term? Since in actual fact, these parties had come to the CA about their disagreement! It would probably have been easier for the wharf owner to tell that the rocks were there, cheaper for the wharf owner to check that the wharf is safe than ships who only come sometimes.
Bowen LJ held that implied terms were only for ‘business efficacy’ and to reflect what ‘must have been intended’ by the parties, when a ship ran into a submerged rock in the Thames. What must be intended by both parties. What was meant by the contract à officious bystander, what a reasonable person would see. But argument: different expectations of people can differ in different environments. Different market expectations could hold for businesspeople = different reasonable expectations. We’ve seen the modern approach recognises implied terms as ‘necessary’ to reflect ‘reasonable expectations’ of the parties: Equitable Life v Hyman, Belize, M&S v BNP cf The Reborn [2009] EWCA Civ 531 Fact dependant! Basically contained the same facts, but the court found the ship owner to be liable for the damage.
Shirlaw v Southern Foundries Ltd [1939] 2 KB 206
Shirlaw had a 10-year employment contract as managing director with SF Ltd. The company was taken over by new shareholders. They changed the company’s constitution (change articles of incorporation of company) and dismissed S from the board. S claimed: 1) This was a breach of contract. à This is uncontroversial, easily breach of contract. 2) There was an implied term that he should remain on the board. à He doesn’t want just damages, he wants to stay. Courts held no. CA and HL held, breach of contract. S could get compensation for all the income he could have got, but HL held no implied right to remain on the board (i.e. damages awarded, but no specific performance). Company law issue: ethic to give the majority the right to decide how it is run. ‘Officious bystander’ metaphor MacKinnon LJ: “Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’” (but CA was overturned by HL on the facts) The Companies Act 2006 s 188 now prohibits director contracts over 2 years without member approval. Directors for public companies can usually only contract for one year. A ten-year contract is very unusual for a director nowadays.
Equitable Life Assurance Society v Hyman [2000] UKHL 39
Equitable Life AS’s directors had an idea when stock market was down. They purported to use ‘their discretion’ to reduce the extra premiums of its ‘Guaranteed Annuity Rate’ life insurance policyholders. The directors used the money to prop up ‘Current Annuity Rate’ policyholders. Those rates fluctuated with the markets, and the markets had fallen. The ‘GAR’ holders claimed this was illegitimate precisely because their income was meant to be guaranteed. Shouldn't be distributing the company's asset income to the other group. Claimants argued that the directors had breached implied term in the contract, working to an expectation they had. HL held, the directors’ discretion could only be exercised in light of the policyholders’ reasonable expectations à an implied term.
Leading judgment from Lord Steyn: ‘It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties. The process “is one of construction of the agreement as a whole in its commercial setting”: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, 212E, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. (This is controversial: Could the term just be drafted more explicitly saying the directors had complete discretion.) The legal test for the implication of such a term is a standard of strict necessity.’ Individualised term which arises on the facts of the case. Implied terms are an extension of overall process of construction, building up what the contract actually means. Practical justice vs judges trying to get the doctrine right. Equitable Life collapsed after the case – it couldn’t pay the GARs.
Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10
Decision about the financial world, here is a corporate takeover and privatisation deal in Belize (Central America). Belize Telecom was being privatised by the government, not a national industry anymore but rather in private hands. The government is trying to sell off the asset to a buyer, so they made the deal very attractive to try and find a buyer. Government says they will give a loan to the person who buys the shares. Government wants security to be the shares that the buyer is buying, a.k.a. if the buyer doesn’t pay back the loan, the takeover shares purchased get to be taken back by the government, the government would enforce its security and retake possession of the secured shares like a mortgage. The government gave the buyer (behind which was Lord Ashcroft, an English Conservative peer) a loan to buy BT’s shares. In BT’s constitution were three groups of shares: 1. A special share: the holder could appoint 2 of 8 directors 2. Class ‘B’ shares: the holders could together appoint another 2 of 8 directors 3. Class ‘C’ shares: they could together appoint 4 of 8 shareholders, but... if the ‘special share’ holder had over 37.5% of ‘C’ shares, it could appoint 2 of the 4 directors Buyer defaulted on the loan. Government repossessed ‘C’ shares, but loan document forgot to put anything on about repossessing the special share. So, it looked like nobody had power to replace the two directors – who wanted to stay, and could have jobs for life and not get removed. The AG claimed shareholders could remove BT’s directors, even though the company’s constitution said a special share was needed.
Lord Hoffmann held the directors could be removed, despite the rule. It is workable that the two directors would have jobs for life, but that would be absurd. ‘It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean.’ Reaffirms the test put down by Lord Steyn in Equitable Life: In that case, an implication was necessary “to give effect to the reasonable expectations of the parties”. The articles do not expressly deal with a situation where a change in shareholding results in the board no longer reflecting the appropriate shareholder interests, and do not enable this to be corrected by providing a power to remove directors.’ It ‘cannot in the Board’s opinion be construed as contradicting the proposed implied term (that you can remove the directors), to which the draftsman plainly did not address his mind.’ The court is not deciding what is more fair, just interpreting the contract. ‘The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means.’ ‘What a reasonable person would understand the contract to mean’ which is necessary “to give effect to the reasonable expectations of the parties”.
Pfeiffer v Deutsches Rotes Kreuz, by ECJ
The implied term obviously did contradict the express term: the express term was cut down/scrapped to ensure the proposed implied term did not ‘contradict’.
Marks & Spencer plc v BNP Paribas Securities Ltd [2015] UKSC 72
Two big commercial parties. M&S claimed it should be reimbursed by its landlord, BNP, when it terminated early a lease of a Paddington property. No term in the lease said what would happen if the right to terminate was exercised when rent had already been paid for a period. UKSC held no term was to be implied requiring repayments: not ‘necessary’.
Lord Neuberger suggested Belize should not be taken to suggest that different things happen between interpreting and implying terms. Lord Neuberger accepts reasonable expectations, but also putting forward obviousness and business efficacy: A term can be implied if ‘(i) the reasonable reader is treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy...’ (Moorcock) It would be wrong to treat Lord Steyn’s statement in Equitable Life that a term will be implied if it is “essential to give effect to the reasonable expectations of the parties” as diluting the test of necessity. The legal test for the implication of a term is strict necessity, which Lord Steyn described as a “stringent test”. Lord Clarke accepts that ‘both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’
Arnold v Britton [2015] UKSC 36
A was a landlord for holiday homes on the coast in Wales. Brought a claim that B was bound to a clause 3(2) saying that repair bills would automatically increase at 10% p.a. over the 90- year lease (£90 p.a. originally, £2700 by 2011, £1m by 2074). Cl 4(8) said it would be the lease would be ‘similar’ to other homes, but there were just 3% increases for other homes. People who signed leases earlier had much less increase. B argued clause 3(2) made no sense, and a term should be implied requiring reasonable repair charges. Clause 3(2) was defeating reasonable expectations, but it was clear and there to account for inflation. A, claimed that B was bound. Could clause 3(2) be cut down to give way to clause 4(8)? Lord Neuberger (majority) held B was bound by clause 3(2) as it was. The less clear the term, the more likely one can depart from natural meaning. But clause 3(2) was clear. Lord Carnwath dissented, saying clause 3(2) was ‘commercial nonsense’ and could not be intended to have effect. So, it was proper to imply the proposed term. When people go into a contract with eyes open, and no statutory protection, courts are reluctant to cut down express wording.
Bhasin v Hrynew (2014) SCC 71
Canadian Supreme Court, so common law, not just civil law CAF Corp hired Bhasin as an ‘enrolment director’ for 3 years – like a self-employed franchise job. Another enrolment director, Hrynew, was trying to merge their businesses, said they shouldn’t compete. B didn’t want to. Through CAF, H managed to require it. B claimed breach of contract with CAF because they breached duty of good faith. Canadian SC holds good faith is not just an implied term – good faith is an ‘organising principle’ for all contractual relations. CAF’s failure to give adequate notice about CAF’s merger plans before a decision was made, and be candid during relationship, was a breach.
Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111
YS was ITC’s exclusive distributor of Manchester United fragrances in Middle East, Africa, Asia & Australia. Exclusive distributor had to make sure no other distributor would be in the geographical area and selling at a lower price. ITC told YS that retail prices were put up to $65 when they were not. Leggatt J, held this breached an individualised implied term of good faith in this agreement: it was a ‘relational’ long term contract where such a foundation of honesty was necessary to fulfil reasonable expectations. This was not a standardised implied term. The standard English view is there is no general principle of good faith – rejected by HL for pre-contractual negotiations in Walford v Miles. But this does appear to be ‘swimming against the tide’, as most civil law countries recognise such a duty. Leggatt J suggests the content of good faith = basic honesty, and you can always opt out. This would make “good faith” differ: radically weaker than Canada or Germany.
Liverpool City Council v Irwin [1976] QB 319
Contract type: lease The ‘Piggeries’, an old Liverpool council block, were very vandalised and dirty. Tenants went on rent strike – refused to pay rent in protest until the council cleaned up the block. The contract contained many tenant obligations, but few landlord obligations – no obligation to clean up the place. The council tried to evict the tenants, and the tenants counter-claimed breach of an implied term to keep block in repair. They said they are just withholding payment in reply to the landlord's breach of contract. In the CA, Lord Denning MR held that there was a duty to on landlords to do reasonable repairs. Reasoned that a term could be implied whenever it was reasonable, based on ‘stacks of’ cases. This common law implied term is still there today. But the duty was not breached on the facts: tenants should’ve done more à Give judges more discretion to do what is fair. In the HL, Lord Wilberforce held Lord Denning's judgment was wrong on reasoning though the outcome was correct. Terms could only be implied when it was ‘necessary’ (but did not say necessary for what purpose). Here such a term was necessary, but it was not breached: on the facts, the tenants should have cared more for maintenance themselves.
Thake v Maurice [1986] QB 644
Supply of Goods and Services Act 1982 Failed vasectomy. Thought he had vasectomy, person got pregnant. Court held he could not sue the doctor for damages, there was a small chance it would not work.
Shell UK Ltd v Lostock Garage Ltd [1976] WLR 1187
Contract type: franchises L claimed S breached an implied duty to it, as a franchisee, to not discriminate against L when selling petrol under an exclusive supply agreement. Was there an implied term that there is no discrimination? Lostock was losing money because its price from S was too high. It switched supplier, S sued to enforce the long-term franchise contract. Lord Denning MR held it was not common enough to be a term implied in law; no implied term on the (old) presumed intent test for fact.
Johnstone v Bloomsbury HA [1991] 2 All ER 293
Contract type: labour, employment contracts Junior doctor Dr Johnstone’s contract at UCL hospital said he should work 40 hours, and could have to do overtime of an extra 48 hours on average – sometimes over 100 hours p/w (of 168 total). ‘He suffers from stress and depression; is lethargic and his appetite and ability to sleep are diminished. He has been physically sick on occasions from exhaustion and has felt desperate and suicidal.’ Does this contradict, breach of an implied term – safe system of work? 1964 Health and Safety at Work Act, but not everything could be codified. All found in Dr J’s favour under UCTA 1977 s 2(1) (cannot exclude liability for death or personal injury), but differed on implied term approach. Here the implied term seems to cut the express term. - Stuart-Smith LJ held the implied term – duty to give a safe system of work – overrode the express term of working hour discretion. - Browne-Wilkinson LJ held the express term had to be exercised in light of the implied term, so it could not be abused, thus B in breach. - Leggatt LJ held express terms override implied terms.
Scally v Southern Health and Social Services Board [1992] 1 AC 294
Dr S and others claimed the SHSSB hadn’t properly informed them about their right to get more pension benefits in their contract (‘superannuation’) meaning they hadn’t claimed pension benefits they would’ve been entitled to. At the time, there was a huge pension scandal, so this decision went very closely with what was going on in Parliament. Was there a breach of the implied term to give information? Lord Bridge: term implied based on ‘necessity’, in this case to know what one’s rights at work are.
Mahmud v Bank of Credit and Commerce International SA [1997] UKHL 23
M worked at BCCI when it collapsed due to fraud. Claimed damages for being unable to find a job later – the ‘stigma’ of having worked for BCCI affected prospects. Argued the employer’s conduct breached ‘mutual trust and confidence’ (good faith). Lord Steyn held a necessary incident in every employment contract is mutual trust and confidence/good faith. ‘The parties are free to exclude or modify them. But is common ground that in the present case the particular terms of the contracts of employment of the two applicants could not affect an implied obligation of mutual trust and confidence.’ Idea here that we can always vary implied terms, but not express terms.
Crossley v Faithful & Gould Holdings Ltd [2004] EWCA Civ 293
C had a nervous breakdown. The employer advised him to resign. F&G had a disability support scheme for people with work-based injuries or disabilities. He was not told that if he resigned, these benefits would be cut off. He was cut off. Was there a breach of implied term to inform employees about their rights? Here employee’s interest vs employer’s interests à policy factors Dyson LJ held, no term was to be implied. A ‘necessity’ test is elusive; there are always questions of policy and reasonableness. Crucially Dyson LJ is recognising that to not imply a term is to also make a policy decision.
Woodman v Photo Trade Processing Ltd (1981) 131 NLJ 933
Although Schedule 2 only refers to ss 6 and 7 of the UCTA, courts pay regard to its factors for all parts of the act to determine what is reasonable.
Smith v Eric S Bush [1990] UKHL 1
Mrs Smith buys a new house, with a loan from a building society. Building society gets ESB to do a survey: check building is structurally sound, no essential repairs needed. ESB does not have a contract with S, formal contractual relationship is between ESB and building society, not liable for any damage. But ESB’s report disclaimed accuracy of report to anyone à saying he doesn’t owe a duty to anyone for his surveying work being accurate. After S bought the house, the chimney collapsed and destroyed the roof. Wants to bring a claim against ESB for being negligence and failing to see the house was in disrepair. Surveyor has clearly been careless.
Liable under UCTA 1977 s 2(2) – property damage, and s 13 – not the form of exclusion clause but had the same effect. HL holds yes liable, under s 13(1) the attempt to preclude the duty has no consequence. It was caught by s 2(2), exclusion for property damage. The exclusion was unreasonable under s 11 because ESB was better placed to get insurance policy than S. Lord Griffiths, ‘The availability and cost of insurance must be a relevant factor when considering which of two parties should be required to bear the risk of a loss… Bearing the loss will be unlikely to cause significant hardship if it has to be borne by the surveyor but it is, on the other hand, quite possible that it will be a financial catastrophe for the purchaser who may be left with a valueless house and no money to buy another.’ Surveyors just need one insurance policy to cover all their customers. Would be more sensible to shift responsibility of insuring for loss should be put on the stronger, independent party/cheapest cost avoider.
Phillips Products Ltd v Hyland [1984] EWCA Civ 5
Hamsted Plant Hire Co hired out a JCB excavator and a driver (Mr Hyland) to PP Ltd. Condition 8 said H would be considered PP’s employee when they hired the JCB excavator. H crashed into a wall, causing damage. Is condition 8 effective, or can PP claim compensation? Slade LJ held that condition 8 in effect was an exclusion clause, even though it was in form of shifting responsibility onto PP for whatever H did wrong, so caught by s 13. The exclusion clause had to be reasonable under s 2(2). It was unreasonable because HPH was better placed than PP to get insurance for such short-term hire jobs.
Contrasting case: Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649
CA, few years later than Phillips Products. Dispute between two businesses contractually allocating risk and liability amongst themselves. TLPH Ltd hire out a JCB excavator and driver (Mr Hill) to JW Hurdiss Ltd. Condition 8 said H would be considered JWH’s employee. Mr Hill ran over and killed another worker Mr Thompson accidentally. Mrs Thompson sued TLPH for compensatory damages. TLPH then sought to get contribution in the compensatory damages from JWH, joint liability. Is condition 8 effective? Fox LJ: The point of s 2(1) (no exclusions of liability for death or personal injury) was to protect the victim. Here, because condition 8 is not excluding liability but shifting it between two businesses, and the victim was compensated either way, condition 8 was not considered an exemption. It was a duty-defining clause, rather than an exemption clause, therefore it was operative. It was open to the CA to hold that it was an exemption clause caught by s 13, but was unreasonable.
Timeload Ltd v BT plc [1995] EMLR 459
BT has a clause that said it could terminate someone’s phone service ‘at any time’, no liability for any consequential loss. In CA, Sir Thomas Bingham MR held unfair, because it was rendering something different from what was reasonably expected (i.e. stable phone service). We’re talking about two businesses here.
Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] EWCA Civ 6
SG sold HM an overhead conveyer system, and HM was to pay by instalments. SG’s standard terms and conditions: condition 12.4 excluded HM’s right to set off anything for defective goods, i.e. cannot refuse to pay part of the instalment or reduce the amount to pay because of any defect. System defective, HM refused to pay last instalment. SG sued, relying on condition 12.4. CA held s 13(1)(b) was in effect an exclusion clause restricting liability for the goods being defective, and was caught by ss 3 or 7. Also unreasonable.
St Albans City & District Council v International Computers Ltd [1996] EWCA Civ 1296
CA case about the poll tax. Margaret Thatcher’s Conservative government wished to tax people for being an adult citizen (the ‘community charge’ or ‘poll tax’). To administer this tax, needed a lot of computer systems, so St Albans Council contracted to facilitate this, invested in computer systems. Then riots forced it to be scrapped (huge political failure). St Albans’ system from IC failed, and it lost £1.3m. IC’s standard terms limited liability to £100k. Is the exclusion clause reasonable? Scott Baker J held the limit was unreasonable, trying to exclude liability for breach of contract, under ss 3 and 11, and Schedule 2. IC (multinational corporation) had more resources and more bargaining power – even though St Albans was a government entity.
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317
S (a software supplier) sold W (a computer retailer) a computer system that failed. Contract stated consequential losses were excluded. Chadwick LJ held (overturning judge of first instance saying they could get damages for the breach): ‘In circumstances in which parties of equal bargaining power negotiate a price for the supply of product … the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one.’ When you are talking about two businesses in particular of relatively equal bargaining power, negotiating a price, leave them to do what they want.
Defrenne v Sabena (No 2) (1976) C-43/75 The EU is not only about economics, it is also trying to perform social functions.
Directive gives consumer rights to natural persons only, UK gone further than that and may include a small partnership, but no longer protecting small companies. Old UCTA cases are gone e.g. R&B Customs Brokers Co Ltd v United Dominions Trust Ltd [1987] EWCA Civ 3, Feldarol Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747. Only talking about real people.
Kásler v OTP Jelzálogbank Zrt (2014) C-26/13, 54-58 says that both exceptions to the general rule must be construed narrowly. What we can say is an unfair term or not set down in s 64, corresponding to Article 4(2) of the Directive. (1) A term of a consumer contract may not be assessed for fairness under section 62 to the extent that— (a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it. (2) but only if the term is transparent and prominent.
Director General of Fair Trading v First National Bank plc [2001] UKHL 52
Litigants in this case: bank and Director General of Fair Trading. Under the legislation, there is a regulator set up (Now the Competition and Markets Authority) meant to take enforcement action against the use of unfair contract terms. DGFT is like a government watchdog to stop consumers from being subjected to unfair terms. DGFT claimed FNB’s term to raise the interest rate after a borrower’s default, was unfair. This is about when a borrower paying off a loan defaults because they can’t make the payments. There is a statutory interest rate under the County Court (Interest on Judgment Debts) Order 1991 which applies if the borrower goes to court and gets a judgment for repayment of the debt. Court works out a repayment plan/schedule to pay back the debt under the Consumer Credit Act 1974. A default interest rate then applies, which the bank doesn’t like because it’s too low. FNB’s terms replaced the statutory rate with its own higher market interest rates. Q: Was this contract term a core term within s 64that can’t be assessed for fairness? If it is not a core term, is it fair? HL held: 1. Not a core term because the default interest rate being charged is not the main interest rate paid on the loan. The price paid on a loan is the interest rate. This is not the main price payable for the product, but a substitute, so it could be assessed for fairness. 2. It was fair to substitute ordinary interest rates that just reflected market interest. Þ Consumer loses. Lots of complaints about this term the bank uses. Lord Bingham: ‘There is an important “distinction between the term or terms which express the substance of the bargain and ‘incidental’ (if important) terms which surround them.’ ‘The object of the regulations and the directive is to protect consumers against the inclusion of unfair and prejudicial terms in standard-form contracts into which they enter, and that object would plainly be frustrated if [section 64] were so broadly interpreted as to cover any terms other than those falling squarely within it.’ The exception to the rule s 64 must be construed narrowly. HL upholds this because all the bank is doing is protecting its financial position from losing money on a loan. The statutory interest rate was to the ‘detriment of the lender’.
Bankers Insurance Co Ltd v South [2004] Ll Rep IR 1
Buckley J in the High Court held that an insurance policy exemption for covering motor boat accidents was fair. Insurance contract with an exemption saying that it won’t cover accidents on a motor boat is fair. Just the insurance company saying it doesn’t want to insure every kind of accident.
OFT v Ashbourne Management Services Ltd [2011] EWHC 1237
Gym had minimum subscription periods of 12 to 36 months. If people sought to terminate the gym subscription early, the gym says they would be classed as ‘defaulters’ and threatens to pass the person’s details to a credit reference agency (i.e. naming and shaming). Data protection problems here. Kitchin J held unfair. Significant imbalance in the rights and duties of the parties.
OFT v Abbey National plc [2009] UKSC 6
There was a whole group of banks being told off by the Officer of Fair Trading for charging customers ‘unplanned overdraft fees’ if they withdrew money over their agreed limit. Banks: Abbey, Barclays, Clydesdale, HBOS, HSBC, Lloyds, Nationwide, RBS (owning Natwest) If you have an unplanned overdraft, they would charge a high fee like £5 a day. A law student from Bristol was the first to complain. Banks got around 30% of profits on current accounts from these fees. Could this term be assessed for fairness at all? Court of Appeal held unanimously under s 64 that the terms could be assessed. Supreme Court overturned CA, held that under s 64, (1) the terms could not be assessed for fairness, as the fees were all part of a ‘package’ of charges making the bank’s price or remuneration that you pay when you have a bank account. (2) it should not be referred to the CJEU, either because it was acte clair (despite a unanimous CA under Sir Clarke MR) and because a national court would decide the appeal’s result anyway. Never asked if the term was fair or not, said it was just the price payable for a bank account. Lord Walker: ‘In First National Bank Lord Steyn indicated that what is now [section 64] should be construed restrictively, and Lord Bingham said that it should be limited to terms “falling squarely within it”.’ Argues that the Relevant Terms and the Relevant Charges do fall squarely within s 64. The Directive does not require consumer contracts to be substantively fair, but it does require them to be clear. ‘Even if the Court of Appeal’s interpretation had been correct, I do not see how it could have come to the conclusion that charges amounting to over 30 per cent of the revenue stream were “not part of the core or essential bargain.”’ According to Lord Walker, the more money the banks were earning from these unplanned overdraft fees, the less likely it can be assessed for fairness at all. The other way banks make money off bank accounts is the normal way: investing deposits elsewhere. Lady Hale: ‘As a very general proposition, consumer law in this country aims to give the consumer an informed choice rather than to protect the consumer from making an unwise choice.’
Aziz v Caixa d’Estalvis de Catalunya (2013) C-415/11
Savings bank institution in Barcelona, Catalonia. Aziz was a customer, claimed clause 15 of his mortgage contract was unfair. If he defaulted on the loan, the interest rate would soar up to 18.75% pa from the normal rate 4.87%. Spanish law limited default rates in other consumer contracts to 2.5 times the norm. Q: Was this term substituting the interest rate if Aziz defaulted fair under a proper interpretation of the Directive? CJEU held that the Spanish court should assess the term’s fairness and should provide an effective remedy depending on the outcome of the assessment, asking whether a consumer contracting in good faith would hypothetically agree to this term if they were bargaining at arm’s length and with equal power. It reasons that the purpose of the Directive is to ensure a court ‘re-establishes equality’ between the parties, not just ensuring the consumer has good information. Consider the national rule that would apply by default and consider whether a consumer could have agreed to decide whether the tone is significantly imbalanced. The way we assess significant imbalance is by looking for some standard. How much out of line is the term in question with the standard terms in the marketplace?
Brusse v Jahani BV (2013) C-488/11 The purpose of ‘the directive is based, namely that the consumer is in a weak position vis-à- vis the seller or supplier, as regards both his bargaining power and his level of knowledge.’ Not just information as the Supreme Court says in Abbey National, but also about bargaining power.
ParkingEye Ltd v Beavis [2015] UKSC 67
Mr Beavis uses carpark. Sign from the carpark management says there is a 2-hour max stay. Failure to comply will result in a parking charge of £85. Supreme Court says it is a fair term, held the notice was not unfair as hypothetically, people would have been agreed to. People ‘did accept it.’ ‘Could ParkingEye, “dealing fairly and equitably with the consumer, … reasonably assume that the consumer would have agreed to such a term in individual contract negotiations”?’ ‘The question is not whether Mr Beavis himself would in fact have agreed to the term imposing the £85 charge in a negotiation, but whether a reasonable motorist in his position would have done so. In our view a reasonable motorist would have agreed. In the first place, motorists generally and Mr Beavis in particular did accept it.’ ‘But although the terms, like all standard contracts, were presented to motorists on a take it or leave it basis, they could not have been briefer, simpler or more prominently proclaimed. If you park here and stay more than two hours, you will pay £85. Motorists could hardly avoid reading the notice and were under no pressure to accept its terms.’ No pressure to accept, but they have no bargaining power at all – take it or leave it. Proclamation would not get to what the CJEU decided in Aziz. Lord Toulson dissents: A reasonable consumer would not have agreed if they actually had a choice. If you look at the jurisprudence, it is clear that when we assess if the term if fair, we must identify if there was a significant imbalance or not. Says it is not acte clair and should be referred to the CJEU.
Bürgschaft (19 October 1993) BVerfGE 89
German Constitutional Court, bank guarantee case Two joined cases: 1. A 21 year-old daughter guaranteed her father’s large loan while having no job. She was misled by the bank about the seriousness of the obligation. 2. A wife guaranteed her husband’s debt. The bank knew she could not pay off the money because she probably could not work while looking after the children. Held, claimant (1) succeeded in cancelling the obligation, but claimant (2) did not. German Constitutional Court developed two principles, influential on European courts. ‘The claimants’ objections concern the interpretation and application of those general clauses that control the content of contractual obligations in civil courts, primarily [public policy and good faith]. The claimants had said that the contractual framework entered into was contrary to good faith (a provision in the German Code). The civil courts, in construing these clauses, failed to consider the basic right of private autonomy and the right to develop one’s personality. For reasons of legal certainty a contract cannot be brought into question or be corrected with every disruption of negotiating parity. However, in cases of typical types, where one party to a contract may be recognised as being structurally weaker, and if the consequences for the weaker contracting party are significantly imbalanced, the civil law order must react and make correction possible. This follows from the fundamental guarantee of private autonomy... and the principle of the social state...’ When you’ve got an open clause in the legislative framework like ‘good faith’ and significant imbalance, we have to interpret that in light of constitutional principles. The court can’t just rest on the theory of freedom of contract in cases where one party is structurally weaker than the other, e.g. employees, tenants.
Wilson v Secretary of State for Trade and Industry [2003] UKHL 40
A business claiming that consumer rights protection was too stringent and should be struck down on human rights grounds. Similar to Lockner, business trying to challenge regulation on human rights grounds. HL throws out the case. Consumer Credit Rights Act says if you give someone a consumer credit loan, must put all the terms in one document. First County Trust Ltd, a loan company, argued the Consumer Credit Act 1974 s 127(3) violated right to property under ECHR Prot 1, art 1 à unlawful deprivation of property. FCT charged Mrs W a document fee of £250 of top of interest (94.78%) on a £5k loan, when she pledged her BMW. This failure meant FCT lost all its loan money, £5k. The first major human rights case in UK contract law was a challenge against consumer protection, rather than a device to strengthen it.
Kušionová v SMART Capital a.s. (2014) Case C-34/13
CJEU is faced with a claimant K who borrowed €10k from SC and secured it on home. Contract says if there is a default and the bank wants to enforce security, it can do so without any review by court. Business contract trying to exclude the jurisdiction of the court. She claimed this was unfair (outside CRA 2015 s 64, in s 62, in the UK). CJEU held that the Directive must be construed in light of CFREU rights. ‘... the Court has already held that the system of protection introduced by Directive 93/13 is based on the idea that the consumer is in a weak position vis-à-vis the seller or supplier, as regards both his bargaining power and his level of knowledge.’ Draws on ECtHR jurisprudence even though they are separate, not part of the EU. ‘The European Court of Human Rights has held, first, that the loss of a home is one of the most serious breaches of the right to respect for the home and, secondly, that any person who risks being the victim of such a breach should be able to have the proportionality of such a measure reviewed.’ ‘Under EU law, the right to accommodation is a fundamental right guaranteed under Article 7 of the Charter that the referring court must take into consideration when implementing Directive 93/13.’ Take this into account when determining whether a contract term passes the test of good faith and significant imbalance. If there is litigation about losing a home (a right in the Charter), fundamental rights at stake means courts more likely to be on your side. Stricter level of scrutiny of the term required.
Same would go for interference with private data. We don’t know where this jurisprudence will go.
Barclays Bank SA v García and Barrera (2014) C-280/13
A Spanish statute entitled a bank to buy the property of its borrower at half the contractual reference value (€149k) if nobody showed up to an auction, and still sue the borrower for outstanding sums. Barclays got a house for €74.6k, and pursued G and B for another €95.9k. What they should have done is held onto the house until later, not sell at rock bottom price and sue for the difference. CJEU didn’t do anything. Held, although the contractual relations replicated a statute, where the source of the unfairness was a statute, it could not be assessed under the Unfair Terms Directive.