Contract Subjectguide2016 All

Contract law
Roger Halson
Catharine MacMillan
Richard Stone
The 2016 revisions to this subject guide were prepared for the University of London
International Programmes by:
uu Roger Halson, Professor of Contract and Commercial Law at the University of Leeds.
In the 2004 edition of this guide Catharine MacMillan was primarily responsible for
Chapters 12, 45, 78, 1014 and 1617. Richard Stone was primarily responsible for
Chapters 3, 6, 9 and 15. Catharine MacMillan was responsible for the 2009, 2012, 2013
and 2014 revisions. The 2015 updates to the guide were prepared by Anne Street.
This is one of a series of subject guides published by the University. We regret that
owing to pressure of work the authors are unable to enter into any correspondence
relating to, or arising from, the guide. If you have any comments on this subject guide,
favourable or unfavourable, please use the form at the back of this guide.
Acknowledgements
Figure 8.1 has been reproduced by kind permission of:
uu Jan Danils MarineTraffic.com
Figures 16.1, 16.2 and 16.3 have been reproduced by kind permission of:
uu Hugh Conway-Jones www.gloucesterdocks.me.uk
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Contract law page i
Contents
Module descriptor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Introduction and general principles . . . . . . . . . . . . . . . . . . . 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.1 Studying the law of contract . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . . . 11
1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . . . 17
Part I Requirements for the making of a contract . . . . . . . . . . . . . 21
2 Agreement: offer and acceptance . . . . . . . . . . . . . . . . . . . . 21

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.1 The offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2 Communication of the offer . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.3 Acceptance of the offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.4 Communication of the acceptance . . . . . . . . . . . . . . . . . . . . . . 28
2.5 Exceptions to the need for communication of the acceptance . . . . . . . . 29
2.6 Method of acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.7 The end of an unaccepted offer . . . . . . . . . . . . . . . . . . . . . . . 32
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 Promissory estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4 Other formative requirements: intention, certainty and completeness . 59

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.1 The intention to create legal relations . . . . . . . . . . . . . . . . . . . . 61
4.2 Certainty of terms and vagueness . . . . . . . . . . . . . . . . . . . . . . 64
4.3 A complete agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Part II Content of a contract and regulation of terms . . . . . . . . . . 71
5 The terms of the contract . . . . . . . . . . . . . . . . . . . . . . . . 71

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.1 Is a statement or assurance a term of the contract? . . . . . . . . . . . . . 73
5.2 The use of implied terms . . . . . . . . . . . . . . . . . . . . . . . . . . 76
5.3 The classification of terms into minor undertakings and
major undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
page ii University of London International Programmes
6 The regulation of the terms of the contract . . . . . . . . . . . . . . . 87

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.1 Indirect common law controls . . . . . . . . . . . . . . . . . . . . . . . . 89
6.2 Statutory control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Part III The capacity to contract minors . . . . . . . . . . . . . . . . 107
7 Contracts made by minors . . . . . . . . . . . . . . . . . . . . . . . 107

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.1 Contracts for necessaries . . . . . . . . . . . . . . . . . . . . . . . . . . 109
7.2 Beneficial contracts of service . . . . . . . . . . . . . . . . . . . . . . . 109
7.3 Voidable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
7.4 Recovery of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Part IV Vitiating elements in the formation of a contract . . . . . . . . . 113
8 Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
8.1 Some guidelines on mistake . . . . . . . . . . . . . . . . . . . . . . . . 115
8.2 Bilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.3 Unilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
8.4 Mistake in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
9 Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
9.1 Definition of misrepresentation . . . . . . . . . . . . . . . . . . . . . . 135
9.2 Remedies for misrepresentation . . . . . . . . . . . . . . . . . . . . . . 140
9.3 Exclusion of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
10 Duress and undue influence . . . . . . . . . . . . . . . . . . . . . . 151

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
10.1 Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
10.2 Undue influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Part v Who can enforce the terms of a contract? . . . . . . . . . . . . 163
11 Third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
11.1 The doctrine of privity . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
11.2 The Contracts (Rights of Third Parties) Act 1999 . . . . . . . . . . . . . . . 166
11.3 Rights conferred on third parties at common law . . . . . . . . . . . . . 169
11.4 Liability imposed upon third parties . . . . . . . . . . . . . . . . . . . . 174
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Contract law page iii
Part VI Illegality and public policy . . . . . . . . . . . . . . . . . . . . 179
12 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
12.1 Statutory illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
12.2 Common law illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
12.3 The effects of illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
13 Restraint of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
13.1 General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
13.2 Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
13.3 The sale of a business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
13.4 Other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Part VII The discharge of a contract . . . . . . . . . . . . . . . . . . . 201
14 Performance and breach . . . . . . . . . . . . . . . . . . . . . . . . 201

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
14.1 The principle of substantial performance . . . . . . . . . . . . . . . . . . 203
14.2 When a breach of contract occurs (actual breach) . . . . . . . . . . . . . 204
14.3 What occurs upon breach . . . . . . . . . . . . . . . . . . . . . . . . . 206
14.4 Anticipatory breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
15 Frustration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
15.1 The basis of the doctrine of frustration . . . . . . . . . . . . . . . . . . . 215
15.2 The nature of a frustrating event . . . . . . . . . . . . . . . . . . . . . 216
15.3 Limitations on the doctrine . . . . . . . . . . . . . . . . . . . . . . . . . 219
15.4 The effect of frustration . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Part VIII Remedies for breach of contract . . . . . . . . . . . . . . . . . 227
16 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
16.1 The purpose of an award of damages . . . . . . . . . . . . . . . . . . . . 229
16.2 Two measures of damages . . . . . . . . . . . . . . . . . . . . . . . . . 229
16.3 When is restitution available? . . . . . . . . . . . . . . . . . . . . . . . 232
16.4 Non-pecuniary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
16.5 Remoteness of damage . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
16.6 Mitigation of damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
16.7 Liquidated damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
page iv University of London International Programmes
17 Equitable remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
17.1 Specific performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
17.2 Damages in lieu of specific performance . . . . . . . . . . . . . . . . . . 249
17.3 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Contract law Module descriptor page 1
Module descriptor
MODULE PURPOSE AND OVERVIEW
Contract law is one of the seven foundation modules required for a qualifying law
degree in England and Wales and is a core requirement of the University of London LLB
and CertHE Common Law courses. This module covers the key underlying principles
of English contract law and includes key topics such as formation of contracts,
consideration, privity, breach of contract and remedies for breach of contract.
MODULE AIM
This module introduces students to the principles of contract at common law and in
equity and helps them to understand how these principles are applied to agreements.
LEARNING OUTCOMES: KNOWLEDGE

Students completing this module are expected to have knowledge and understanding
of the main doctrines, concepts and principles of contract law. In particular they
should be able to:
1. Describe the essential elements of a contract and explain how a contract is formed,
modified and terminated;
2. Identify and explain appropriate remedies for breach of contractual obligations;
3. Describe the general ( economic, social and political) context in which contract
law is applied and the current issues affecting contract law;
4. Demonstrate understanding of the development of contract law and discuss its

possible future direction(s).
LEARNING OUTCOMES: SKILLS

Students completing this module should be able to demonstrate the ability to:
5. Summarise standard legal materials and arguments;
6. Analyse statutes and cases concerned with contract law;
7. Identify issues raised by legal questions and problems and provide reasoned
solutions;
8. Carry out straightforward research tasks, using internet based resources;
9. Reflect on their own learning, responding appropriately to formative testing and

feedback.
ASSESSMENT
Learning is supported by means of a series of activities in the subject guide, including
self-assessment activities with feedback and multiple choice questions with answers
provided on the VLE. These activities test the skills outcomes 59. The formative
activities also help to prepare students to achieve the module learning outcomes
tested in the summative assessment.
Summative assessment is through a three hour and fifteen minutes unseen

examination. Students are required to answer four questions out of eight. The
questions include both essay and problem based questions and test in particular the
knowledge outcomes 14 and skills outcomes 59.
Permitted materials
Students are permitted to bring into the examination room the following specified
document: Blackstones Statutes on Contract, Tort & Restitution (Oxford: Oxford
University Press).
page 2 University of London International Programmes
Notes
1 Introduction and general principles
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.1 Studying the law of contract . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . 11
1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . 17

Introduction
This subject guide is designed to help you to study the Contract law of England
and Wales. This guide is not a textbook and it must not be taken as a substitute for
reading the texts, cases, statutory materials and journals referred to in it. The purpose
of the guide is to take you through each topic in the syllabus for Contract law in a
way which will help you to understand contract law. The guide is intended to wrap
around the recommended textbooks and casebook. It provides an outline of the
major issues presented in this subject. Each chapter presents the most important
substantive aspects of the topic and provides guidance as to essential and further
reading. Each chapter also provides you with activities to test your understanding of
the topic and self-assessment exercises designed to assist your progress. Feedback
to many of these activities is available at the back of this guide. There are also sample
examination questions, with appropriate feedback, which will assist you in your
examination preparation and quick quizzes to measure your progress, with answers
on the virtual learning environment (VLE). The method of study described is the result
of the accumulated experience of highly experienced teachers and writers on this
topic. Your knowledge of the subject will be maximised when you use this guide in the
intended way. Any other approach (e.g. reading the feedback before or alongside the
self-assessment) might give false confidence in your knowledge and ability to answer
questions under examination conditions.
In the study of contract law, it is essential to try to gain an understanding of the

underlying basis of contract law what the law is trying to do in response to particular
issues. This is then supplemented and exemplified by a more detailed knowledge of
its substantive principles. The rote memorisation of rules and cases alone will not
equip you to analyse a legal problem or statement of the sort that form the basis of
formative and summative examination in this subject. To do this you need to acquire
an overview of the topic, understand its structure, parts and inter-relationships. When
this is supplemented by a more detailed knowledge and skills of analysis you will be
able to apply the law in written answers that gain maximum credit. To do this it is most
likely that you will need to read passages or chapters in the guide (and the relevant
suggested reading materials) several times in order to understand the principles of
law being covered.
Contract law 1 Introduction and general principles page 5
1.1 Studying the law of contract

As already stated, this guide is not a textbook nor a substitute for reading the primary
materials that comprise the law of contract (i.e. cases and statutory materials). Its
purpose is to take you through each topic in the syllabus for Contract law in a way
which will help you to understand and apply contract law. It provides an outline of
the major issues presented in this subject. It will also help you prepare to answer the
kind of questions the examination paper is likely to contain. Note, however, that no
topic will necessarily be included in any particular examination and that some are
more likely to appear than others. Examination questions may take different forms,
though most in the past have been of a traditional problem or essay style. The
examiners are bound only by the syllabus and not by anything said in or omitted
from this guide.
What do we mean by taking you through a topic? Very simply it is to spell out what
problems or difficulties the law is seeking to provide a solution for and to give a
structured guide to the materials (textbooks, cases and statutes). You must read these
in order to appreciate how English law has dealt with the issues and to judge how
satisfactory the solutions are in terms of overall policy.
How to use this subject guide

Each chapter begins with a general introduction to the topic covered.
Following that, the topic is divided into subsections. Each subsection provides a
reference to the recommended readings in McKendricks textbook and Pooles casebook
(see Section 1.2 below). At a minimum, you should read these; in many cases you will
probably find that you need to re-read them. It is often difficult to grasp some legal
principles and most students find that they need to re-apply themselves to some topics.
In addition, at the end of each chapter, there are recommendations for useful further
reading. This will always cover the relevant chapter in the most appropriate more
detailed text. You may find it desirable to review this second textbook from time to
time because it is sometimes easier to grasp a point that you have found difficult
when it is explained in a different, even if more detailed, fashion. Some recommended
readings are also included in the Contract law study pack.
Throughout each chapter, self-assessment questions and learning activities are

provided. Feedback is also given with regard to the learning activities to allow you
to check your comprehension of a particular matter. You will find this process most
helpful if you attempt to answer the question before you check the feedback. This
approach provides invaluable examination practice. If instead you get into the habit
of simply reading the question and then immediately checking the feedback this will
not help you improve your question answering technique and may give you a false
confidence. The unsubstantiated reflection: oh yes I would have written that in an
exam is not the same as actually demonstrating that you could have done so. The
object of your studies is to understand, rather than memorise, the law. This requires
a sufficiently detailed knowledge of the substantive law which you are then able to
apply to answer legal questions. At the end of each chapter, some advice is given with
regard to possible examination questions on this topic. The fact that this constitutes
advice about possible examination questions cannot be stressed enough. The quick
quizzes at the end of each chapter are designed to help you reflect on your learning.
Again, answer the questions before looking at the answers and feedback on the VLE.
The Am I ready to move on? section is for you to reflect on what you have learned and
ensure you have sufficient knowledge of the areas covered in each chapter before you
move on to the next one. There is no feedback for these questions but you should be
honest in your self-reflection.
The reasons for studying the principles of the law of contract are readily apparent: as
individuals we enter and perform contractual obligations every day of our lives and
contracts are the foundation of most commercial activity. Many specialist areas of law
are built upon a contractual foundation.
Activity 1.1
How many contracts did you think about entering yesterday? Did you enter any
contracts yesterday? How many contracts did you (at least partially) perform
yesterday? Did any contracts to which you are a party end yesterday? If so why did
they end?
Reflection upon this series of questions will make you aware of how much the law
of contract lays behind everyday life. Perhaps you looked in a shop window or at
a website, rang up a shop or business to ask about the availability of some good or
service. All of these actions are preparatory to entering a contract. If you purchased
any good (newspaper, drink, lunch or shopping) or service (getting on a bus or train
with a ticket) you will have entered a contract. Remember that contracts may be
formal in the sense of a signed document or informal such as an oral agreement. If
you are employed to work you will have (hopefully) performed some contractual
duties yesterday. If you returned a purchase to a shop or posted it back to an
online supplier, if your contract with a mobile network supplier came to an end or
you were sacked from your employment you have participated in the termination
of a contract as a result of breach of contract (returned goods and sacking) or
performance (mobile phone).
Activity 1.2
Look at a newspaper and identify any stories/subjects/parts which might be better
understood with knowledge of contract law or where that area of law is the
essential background. How would you describe the status of the parties to these
contracts?
Most newspapers carry advertisements which aim to persuade readers to purchase
goods and services. If untrue statements are made (called misrepresentations) the
law of contract may provide a remedy to the disappointed purchaser. The business
pages will directly discuss lucrative contracts concluded between businesses:
perhaps the purchase of valuable TV broadcasting rights or the takeover (by the
purchase of shares) of one company by another. Other sections of the newspaper
may less obviously involve contract law, for example the sports pages may discuss
the transfer of football players for large sums of money. Such a transfer is of course
a contract entered between (at least) the player, selling and purchasing clubs.
Newspaper advertisements are often placed to stimulate sales by a business to
consumers (i.e. private individuals), these are known as B2C contracts. The purchase
of broadcasting rights and the takeover of companies are concluded between
businesses and so are known as B2B contracts.
The importance of case law

It cannot be too strongly emphasised that the law of contract in England and Wales
was established through the decisions of the courts. There are a small number of
important statutory provisions. Older statutes such as the Sale of Goods Act 1979
(originally 1893) were themselves codifications of previous case law. More recent
statutes have been enacted in order to effect reforms in the law of contract either to
implement the recommendations of law reform agencies or as required by particular
European Directives. Nevertheless, the law of contract remains predominantly a case
law subject and the examiners will, primarily, be seeking to test your understanding
of how the judges in the leading cases have formulated and refined the relevant
principles of law. You should attempt to read the important cases. The Online Library
(which you can access through the student portal) will give you access to the relevant
cases. This subject presents an ideal opportunity for you to take the first steps towards
developing the essential transferable skills of understanding and applying the
judgments of courts and, to a lesser extent, of interpreting statutes.
To be explicit, there are no shortcuts to gaining an adequate knowledge of the

development of the case law. If the job is to be well done, it will be time consuming.
Individuals vary, obviously, but it would probably be exceptional to cover the whole
syllabus thoroughly in less than 200250 hours of study.
1.2 Reading
You should begin your reading with this subject guide. Start at the beginning and
work through the guide sequentially, reading the textbook and doing the activities as
directed.
Activity 1.3
Review Activity 1.1 above to see if you can identify different stages in a contract,
especially a long term one such as a lease or mortgage.
A contract, particularly one between parties with equal bargaining power, is often
preceded by a period of negotiation. If successful, a contract may be agreed. It
must then be performed. If the contractual performance is to take place over a long
period of time, altered external circumstances, or the changing preferences of the
parties, may result in some agreed modifications. The contract may then end when
performance is complete or if it is breached in a serious way, in which case the guilty
party may be required to pay damages. This highly abbreviated account of the life of
a contract describes four important stages: negotiation, formation, modification and
termination.
Since a contract has distinct phases it must be studied and problems analysed in a
roughly chronological order. Until a contract comes into existence it is meaningless
to talk about its modification or termination. So while it may be tempting to start
with, say, illegality or incapacity, this is not a good idea. The subject builds on the
basic foundations, without which particular topics later in the subject cannot be
understood.
You will also derive assistance from the selected readings provided in the Contract law
study pack and the Newsletters on the Contract law section on the VLE.
1.2.1 Books for everyday use

The core text for this subject is:
McKendrick, E. Contract law. (London: Palgrave Macmillan, 2015) 11th edition

[ISBN 9781137475794]. (Referred to in this subject guide as McKendrick.)
This text forms the foundation text for this subject. It sets out the law in a clear
way and examines all the major issues in reasonable, but not confusing, depth. It
is advisable to read and re-read this text to allow the material to be thoroughly
understood.
You should also buy a casebook. This guide is structured around:
Poole, J. Casebook on contract law. (Oxford: Oxford University Press, 2016) 13th
edition [ISBN 9780198732815]. (Referred to in this subject guide as Poole.)
You will find it most beneficial to refer from time to time to the more advanced texts
set out in the next section.
1.2.2 More advanced books

On occasion you may want to refer to more detailed accounts of the law. Chapters or
passages from the following medium and longer length books may be referred to in
the Further reading at the end of each chapter.
Two medium sized accounts by other authors you might wish to use are:
Chen-Wishart, M. Contract law. (Oxford: Oxford University Press, 2015) fifth

edition [ISBN 978019989163]
Halson, R. Contract law. (Harlow: Pearson, 2013) second edition

[ISBN 9781405858786].
The areas covered by the standard textbooks are all very similar. The differences
between the various books are in their arrangement, depth, presentation and style. To
illustrate: Chen-Wishart above makes extensive use of flowcharts, diagrams and tables
while Halson analyses a contract as a transaction with distinct phases. The extent to
which you will choose to refer to textbooks beyond the core text by Mckendrick will
depend upon your needs and your liking for the authors approach and style.
The following books contain an even greater depth of discussion. To illustrate this all
contract law textbooks will contain a discussion of the so called parol evidence rule
which states that parties to a written contract may not rely upon evidence outside
the contract, usually oral (parol) statements, to contradict the written document.
You will soon realise that all legal rules are subject to exceptions though some will
be more important than others. McKendrick, the recommended textbook for this
subject, describes seven major exceptions to the parol evidence rule. In contrast, the
compendious Treitel, below, adds a further 9!
Andrews, N. Contract law. (Cambridge: Cambridge University Press, 2015) second

edition [ISBN 9781107660649]
Beatson, J., A. Burrows and J. Cartwright Ansons law of contract. (Oxford: Oxford
University Press, 2016) 30th edition [ISBN 9780198734789]
Furmston, M. Cheshire, Fifoot and Furmstons law of contract. (Oxford: Oxford

University Press, 2012) 16th edition [ISBN 9780199568345]
Peel, E. Treitel: the law of contract. (London: Sweet & Maxwell, 2015) 14th edition
[ISBN 9780414037397] (referred to as Treitel).
You may also find it useful to refer to a volume concerned with leading contemporary
issues in contract law:
Morgan, J. Great debates in contract law. (Basingstoke: Palgrave Macmillan, 2015)

second edition [ISBN 9781137481597].
You may also wish to consult a more detailed casebook. Here the choice lies between:
Burrows, A. A casebook on contract. (Oxford: Hart Publishing, 2013) fourth edition

[ISBN 9781849464468].
McKendrick, E. Contract law: text, cases and materials. (Oxford: Oxford University
Press, 2016) seventh edition [ISBN 9780198748397].
Brownsword, R. Smith & Thomas: A casebook on contract. (London: Sweet &

Maxwell, 2015) 13th edition [ISBN 9780414035324].
It is not suggested that you purchase the books mentioned in this section: they should
be available for reference in your college or other library.
1.2.3 Statute books

You should also make sure you have an up-to-date statute book. Under the current
Regulations you are allowed to take one authorised statute book into the examination
room.
Information about the statute books and other materials that you are permitted to use
in the examination is printed in the current Regulations, which you should refer to.
Please note that you are allowed to underline or highlight text in these documents
but you are not allowed to write notes etc. on them.
1.2.4 Other books

At the other end of the scale, many shorter books have been published in recent years
aimed at the student market. If you are using McKendrick and Poole, you will generally
not find that there is much benefit to be gained from these other works. However, for
the particular purpose of practising the art of writing examination answers, you may
find it helpful to have:
McVea, H. and P. Cumper Exam skills for law students. (Oxford: Oxford University
Press, 2006) second edition [ISBN 9780199283095].
But do not be misled into thinking that any book will provide you with model answers
which can be learned by heart and reproduced from memory in the examination.
From a study of past papers you will be aware that certain broadly defined topics are
often examined. However, you will not be able to anticipate the exact questions that
will be asked and every examination question requires a specific answer. If you do
commit to memory and reproduce pre-packaged answers these will be to questions
other than the exact question posed. Such answers will contain irrelevant, and omit
relevant, material. The criterion of relevance is applied strictly by examiners and so
such pre-prepared answers will not score highly.
References to the recommended books in the guide

This guide is designed for use in conjunction with McKendricks textbook and Pooles
casebook. The readings in this subject guide were set around the 11th edition of
McKendricks textbook and the 13th edition of Pooles casebook. In the event that you
have a later edition of the textbook (i.e. a new edition of the textbook publishes before
the next edition of this subject guide), the subject headings set out in the readings
should refer to the relevant portion of a later textbook. For example:
McKendrick, Chapter 11: Exclusion clauses Section 11.7 Fundamental breach.
Poole, Chapter 8: Breach of contract Section 2 Consequences of breach.
1.2.5 Other sources of information
Journals
It is useful to consult journals regularly to improve your understanding of the law and
to be aware of recent developments in the law. Journals which may prove useful to you
for their articles and case notes are:
Cambridge Law Journal
Journal of Contract Law
Legal Studies
Law Quarterly Review
Lloyds Maritime and Commercial Law Quarterly (not available in the Online
Library)
Modern Law Review
New Law Journal
Oxford Journal of Legal Studies.
Do not worry if you come across material that you do not understand: you simply need
to re-read it and think about it.
Online resources
As mentioned earlier, you will find a great deal of useful material on the VLE and Online
Library. These are both accessed through the Student Portal at
http://my.londoninternational.ac.uk
The Online Library provides access to cases, statutes and journals as well as
professional legal databases such as LexisLibrary, Westlaw and Justis. These will allow
you to read and analyse most of the cases discussed in this guide and the relevant
materials.
Students are also able to access newsletters on the VLE that deal with matters of
contemporary interest.
Use of the internet provides the external student with a great deal of information, as a
great deal of legal material is available online. Although the sites change on an almost
monthly basis, some useful ones at the time of writing this guide are:
uu www.legislation.gov.uk/ukpga
provides the full text of UK Acts back to 1991
uu www.parliament.uk
the sitemap for the Parliament of the United Kingdom, which will provide you with
access to a range of legislative information
uu www.lawcom.gov.uk
the Law Commissions website; this provides information about law reform.
In addition to these sites, a growing number of private publishers provide legal

information and case updates. A site where useful information about recent
cases and developments in the law can be found is:
uu www.bailii.org
Bailii is a freely available website which provides access to case law legislation and
also provides a recent decisions list (www.bailii.org/recent-decisions.html) and lists
new cases of interest (www.bailii.org/cases_of_interest.html).
Several publishers grant access to online resources when a particular textbook is

purchased. Examples include Pearsons My Law Chamber and the online resource centre
promoted by Oxford University Press. It should, however, be noted that the extent to which
all advertised online resources are kept updated is at present inconsistent. One helpful
source of up-to-date practical commentary on recent cases is the websites of the major
law firms. If you search under a case name you will likely be directed to some commentary
written by a practitioner at one of these firms primarily for the benefit of clients.
1.3 Method of working

Remember that your main objective is to understand the principles that have been laid
down in the leading cases and to learn how to apply those principles to a given set of
facts. As a rule of thumb, leading cases for this purpose may be defined as those which
are included in the relevant sections of McKendrick and Poole, together with any other
(generally more recent) cases cited in this subject guide. At a more practical level the
leading cases are those which Examiners would probably expect the well-prepared
candidate to know about. In the nature of things, just as different lecturers will refer
to a different selection of cases, there can be no absolutely definitive list of such cases.
However, there will always be agreement on the importance of many of the cases and
in general terms, core cases are named in the guide. Space is limited and omission
from the guide should not be taken to mean that a case is not worth knowing.
It is suggested that the study of the cases should be approached in the following steps.
1. Read the relevant section of this subject guide.
2. Read the relevant passages of McKendricks textbook and Pooles casebook it may
also be advisable to examine some cases in full following this.
3. Re-read the relevant passages in McKendrick.
4. Attempt to answer the relevant activities or self-assessment questions.
5. Repeat this process for each section of the subject guide.
A further description of the process in each of these steps is set out in further detail
below.
Step 1
Start with the relevant section of this subject guide this will give an idea of the points
you need to look for. Take one section at a time do not try to digest several at once.
Step 2
Read the textbook passage referred to. Look in particular for the cases upon which
the author places special emphasis. Typically these will be decisions of higher appeal
courts such as the Court of Appeal or the Supreme Court (formerly the House of Lords).
Read the cases in the casebook (together with any others mentioned in the subject
guide particularly the more recent ones). You should generally be able to find the
case on the Online Library.
The importance of reading the primary materials of the law cases and legislation
cannot be overemphasised. Learn as much as possible about each case. Make a
special effort to remember the correct names of the parties, the court which decided
the case particularly if it is a Supreme Court (or House of Lords) or Court of Appeal
decision the essential facts, the ratio decidendi and any important obiter dicta. It is
also important to note any other striking features, such as, for example, the existence
of a strong dissenting judgment, the overruling of previous authority or apparent
inconsistency with other cases. It is most important that you understand not only
what the court has decided but also why it has decided that. Knowing the rules
is not enough: it is essential to study the judgments and understand the reasoning
which led the court in a particular case to uphold the arguments of the successful
party and reject the contentions put forward no doubt persuasively on behalf of
the unsuccessful party. It is also important to be critical when studying the cases: ask
yourself whether the result produces injustice or inconvenience; whether there are
any situations in which you would not want the result to apply and, if so, how they
could be distinguished. If it is an older case, you should also ask yourself whether the
reasoning has been overtaken by changes in social and commercial life generally.
Lastly, pay attention to the impact of other cases in the area. How strong is an
authority in light of subsequent decisions?
Step 3
Read the textbook passage again and ask yourself, Does the books statement of the effect
of the cases correspond with my impression of them? If it does not, read the cases again.
Step 4
You will find activities and self-assessment questions throughout the guide. These are
intended not only to build up your knowledge of the material but also to provide you
with an opportunity to measure your knowledge and understanding of the particular
section. An activity requires you to think about a particular question and prepare an
answer which extends beyond a simple yes or no. Feedback is provided for these
activities at the end of the guide. Self-assessment questions are designed to test your
memory of the material which you have covered. No feedback is provided for these
questions as they have simple answers available in the textbook or casebook. With
both forms of exercises, you will find that your knowledge is enhanced if you complete
the exercises as you encounter them in the particular section. You will note that each
chapter of McKendrick also includes some exercises for self-assessment: completing
these will further develop your legal knowledge and skills.
Step 5
Repeat the process for each section of the chapter in turn.
1.4 Some issues in the law of contract
1.4.1 Statutes
Although most of the syllabus deals only with principles developed by the courts,
there are also a few statutory provisions which need to be considered because they
contain rules affecting contracts generally. Cases and statutes come into existence in
different ways and so must be treated differently. Judgments in cases consist of the
reported speech of judges and can be very lengthy. The challenge for the reader is
often to distil from these long judgments the exact point of law that was applied in the
case. Statutory provisions are often short (e.g. the Law Reform (Frustrated Contracts)
Act 1943 and Misrepresentation Act 1967 have three main sections), yet each effects
substantial changes in the law. Statutes are usually written by parliamentary
draftsmen, working in pairs, who spend a large amount of time trying to express in as
few words as possible the change in the law they have been instructed to effect. Many
weeks might be spent drafting, criticising and then redrafting a single section. Statutes
therefore cannot be speed read because every word and even every punctuation mark
was inserted for a particular reason. When the topic of misrepresentation is studied
you will see that the inclusion of the word so in s.2(1) of the Misrepresentation Act
effectively dictates the measure of damages available under that section. Therefore,
it is suggested that you read and reread statutory sections from the perspective that
every word was likely included for a purpose. Ultimately though, we must remember
that in English law it is the judges who decide what Parliament meant by the words of
the statute.
1.4.2 European Union law

The syllabus refers to the inclusion of relevant European Union legislation. At the
present time the most significant part of the general law of contract which is directly
affected by European law is that dealing with consumer rights and unfair terms. The
obligation to comply with European legislation derives ultimately from membership
of the European Union. However, European Directives may be transposed into
domestic law in different ways. This is well illustrated by the European Directive on
Unfair Terms in Consumer Contracts (93/13 EEC). The first attempt to implement the
Directive in domestic law showed a distinct lack of imagination, using the copy out
technique. The provisions of the Directive were simply repeated, mostly verbatim, in
a statutory instrument: the Unfair Terms in Consumer Contracts Regulations 1994 (SI
1994/ 3159). The copy out approach creates many problems as there is no attempt to
integrate the measure with the existing domestic law on the subject. These issues of
integration were not addressed when the 1994 Regulations were replaced by a new
statutory instrument with the same name but a different date in 1999 (SI 1999/2083).
As a consequence the Law Commissions of England and Wales and Scotland proposed
legislation that integrated the substance of the 1999 Regulations with the existing
domestic legislation, principally the Unfair Contract Terms Act 1977 (UCTA 1977). Their
basic proposal to tidy up this area of law was accepted but their preferred technique
of a single domestic statute dealing with unfair contract terms, especially so called
exemption clauses (clauses which seek to remove or limit a contractual liability) was
not used. Instead, Part 2 of the Consumer Rights Act 2015 revoked the 1999 Regulations
and UCTA 1977 in so far as it applied to contracts between businesses and consumers
(B2C contracts) and has produced a unified statutory protection for consumers.
The provisions of UCTA 1977 will continue to apply to contracts concluded between
businesses (B2B contracts). This is an important recent change in the law that will be
referred to in more detail at several places in this subject guide.
The reception into English law of the European Directive on Unfair Terms in Consumer
Contracts was clearly complex and untidy but also illustrates a more general problem
with all European legislation. This arises from the distinct ways in which English and
continental courts approach statutory interpretation. Historically, the approach of
common law courts has been more narrow, with great emphasis upon the exact
words used as opposed to the inherent purpose or spirit of the legislative provision.
The European Court of Justice follows a continental, or civil law, approach and puts
greater emphasis on the underlying purpose of the provision even where this cannot
easily be supported by the actual words used. A question arose as to whether the 1994
Regulations applied to contracts for the sale of land. The 1994 Regulations derived
from the English text of the European Directive referred only to goods and services
and not to land. The usual English approach to legislative interpretation would lead to
the conclusion that contracts for the sale of land were not covered by the Regulations.
However, the French text of the Directive referred to the vendeur de biens which
would cover a seller of goods or land. In London Borough of Newham v Khatun [2004]
EWCA Civ 55 the Court of Appeal avoided the possibility of different interpretations
of the same Directive being upheld in different member countries and held that
the Regulations (and so by inference now the Consumer Rights Act 2015) apply to
contracts for the sale of land. The episode illustrates the difficulties that can arise from
the implementation of EU law.
1.4.3 A law of contract or a law of contracts?

The law of contract described in this guide consists of many principles of general
application. In this sense we can say that there is a single law applicable to all types of
contract. However, in many specialised areas these general principles are disapplied
and supplemented by specific extra rules. For this reason, authors write books which
focus upon particular contracts only (e.g. the contract of employment, charters of
ships, contracts to lease land). Indeed, this process of fragmentation is exactly what
was mentioned above where the law on unfair contract terms could be described
as now comprising consumer contract law (for B2C contracts) and business contract
law (for B2B contracts). However, it is important to realise that this is not a one way
process. Over recent years there has been evidence of an increasing contractualisation
of the relationship between the individual and the state (e.g. the introduction of a
market for healthcare where health authorities and fundholding doctors practices
purchase healthcare from private and NHS trust hospitals). Consequently, it is not
possible to say whether we have a law of contract or a law of contracts. It might be
safer to say simply that the general principles of contract remain important both as
a part of more specific contract regimes and also as the default law applicable to
contracts which are not regulated in a special way.
1.4.4 The real world

This subject guide describes the legal rules that collectively make up the law of
contract. However, you should be careful when making inferences based upon those
rules as to how contractors behave in the real world. The small number of empirical
studies that have been undertaken to investigate the actual behaviour of contractors
reveal that they are frequently more co-operative and flexible than the formal legal
rules would seem to anticipate. In the first such study, Stewart Macaulay described
the views of manufacturing companies in Wisconsin. His conclusion, confirmed by
the small number of other empirical studies, was that some of the usual assumptions
made about contractors actions and the effects of legal rules are just wrong or
greatly overstated. In general, contractors are more flexible and accommodating to
changing circumstances and preferences than might be expected. Another American
commentator, Ian MacNeil, pithily summarised the behaviour of contractors: they do
not go for the jugular when trouble arises.
1.4.5 The consensus theory of contract and objective interpretation

In the past, many writers and courts placed much emphasis on the need for a meeting
of minds or consensus ad idem for the making of contracts. This reliance on actual
intention was an expression of laissez-faire philosophies and a belief in unfettered
freedom of contract. This subjective approach to the making of contracts has now
largely been abandoned, though its influence can still be detected in certain rules. In
general, what matters today is not what meaning a party actually intended to convey
by his words or conduct, but what meaning a reasonable person in the other partys
position would have understood him to be conveying. This is known as the process of
objective interpretation. When analysing contractual problems judges often reflect
in their speech the subjective approach: they speak of trying to discover the intention
of the parties. However, it is crucial to understand that this intention is ascertained
objectively. My intention is taken to be not what I secretly intend but what a reasonable
interpretation of my words and deeds would suggest I am intending. For example, I
offer to sell you my car for 10k while I am sitting on the bonnet of a Ford Fiesta. You
agree to buy my car for 10k. I then go round the corner and bring back an old wreck
of a car worth 200 which I tell you is the only car I own. The law would, in words
usually attributed to Charles Dickens, be an ass if on these facts you had entered
a contract to buy the old wreck for 10k; fortunately it is not and you have not. The
contractual offer I will be held in law to have made is not the one that I secretly intend
(i.e. to sell the car round the corner), but rather is the offer that a reasonable individual
would think I was making (i.e. to sell the car which I was sitting on at that time).
1.4.6 Law and equity

At one time in England and Wales, there were two separate court systems which dealt
with contract cases: courts of equity and courts of common law. In the latter part of
the 19th century, these two courts were amalgamated and one court dealt with both
law and equity. Equity had developed its own principles, considerations and remedies
to contractual problems. Equity is said to supplement the common law where it
is deficient. In the course of studying contract law you will see many equitable
principles in place (see, for example, estoppel, undue influence and the remedy
of specific performance, the courts order that the promisor perform the actual
obligation undertaken). Equitable intervention in a contractual problem is based on
the conscience of the parties; accordingly, equitable relief is discretionary and may
be more flexible. Some legacies of this old distinction remain (e.g. with respect to the
remedies available for breach of contract). The primary remedy, an award of damages,
which originated in the common law courts, is said to be available as of right. In
contrast, specific performance, which originated in the courts of equity, is said to be
available at the courts discretion. The availability of equitable relief is bound by a
distinct series of considerations sometimes referred to as a maxim. One such maxim
is that he who comes to equity must come with clean hands; that is to say, he who
seeks equitable relief must himself not be guilty of some form of misconduct or sharp
practice. You will see the particular restrictions placed upon the granting of equitable
relief as you proceed through the subject guide (see, for example, rescission for
misrepresentation).
1.4.7 Human rights and contract law

From October 2000 the Human Rights Act 1998 (HRA), which incorporates into English
Law the European Convention on Human Rights, has had legal effect. The HRA creates
Convention Rights (CRs) which are enforceable under domestic law. The main rights
are: protection of property; right to life; prohibition of torture, inhuman or degrading
treatment; prohibition of slavery or forced labour; the right to liberty/ security, a fair
trial and hearing, and no punishment without lawful authority; respect for private/
family life, home and correspondence; freedom of thought, conscience and religion;
freedom of expression, freedom of assembly/association; freedom to marry; and
prohibition of discrimination in enjoyment of CRs.
The wide ranging freedoms which are guaranteed by the HRA might have a
considerable impact upon the law of contract depending on their so called horizontal
effect. HRA s.6(1) provides that it is unlawful for a public authority to act in a way that
is incompatible with a Convention Right and so clearly applies to the relationship,
including a contractual one, between a public body and an individual. The extent to
which the HRA will have impacted upon the law of contract is related to the extent
that the HRA has a horizontal effect (i.e. to the extent that it affects relationships,
including contractual ones between individuals, including companies). It has so far
been recognised that CRs have some horizontal effect (e.g. the House of Lords has
recognised that the Article 3 right to respect for private and family life required that
legislation regarding the succession to rented property must be applied in the same
way to same sex relationships as it is to heterosexual relationships). The precise extent
of the horizontal effect of the HRA is a contentious issue. Further development of the
extent of horizontal effect will, if it occurs, increase the importance of human rights
protection upon the law of contract.
An example of how the HRAs protection of CRs has affected contracting activity
is provided by the Court of Appeals recent decision in Dept of Energy and Climate
Change (DECC) v Breyer Group plc [2015] EWCA Civ 408. When the DECC introduced
a subsidy scheme designed to encourage the small scale generation of electricity
from renewable resources it underestimated the likely take-up, and so the cost
to the Government, of the scheme. The DECC, contrary to earlier commitments,
sought to save 1.6 billion by reducing the level of subsidy to be paid for electricity
produced from such sources. Companies supplying this technology claimed that
they had suffered 195 million losses through abandoned installations. The Court
of Appeal held, based upon assumed facts, that the implementation of the changes
had unjustifiably interfered with the companies right to the protection of property
guaranteed by Article 1 of the First Protocol of the European Convention on Human
Rights (known as an A1P1 right) and so, in principle, those companies affected were
entitled to damages.
1.4.8 The Codification of contract

The English law of contract is found in the decisions of the courts supplemented by
a small number of statutory measures, some of the latter which have their origins in
European Directives. The domestic law applicable in many European countries is so
called civil law derived from Roman law.
Figure 1.1 A map of the worlds different legal families

Source: https://commons.wikimedia.org/wiki/File:LegalSystemsOfTheWorldMap.png
A distinctive feature of these systems is the place of codes which in an authoritative

way state the law on a particular topic such as contract or tort: in France the code
civil established under Napoleon 1 in 1804 and so known as the Napoleonic Code and
in Germany the Burgerliches Gesetzbuch (the BGB). The idea of a single source for all
the legal principles on a topic has an instant, but misleading, appeal. A code is not
able to provide for all possible cases and circumstances. Rather its necessarily general
principles must subsequently be interpreted by courts before they are applied in
concrete cases. The need to refer to such interpretations and the different stances
that may be taken complicate the original code. This was acknowledged by Napoleon
himself who, when the first commentary on his code was published, is claimed to have
said: Mon Code est perdu (My Code is lost).
The only common law jurisdictions in Europe are England and Wales, Cyprus and
Ireland (Scotland is a mixed (i.e. common law and civil law) jurisdiction). With civil law
jurisdictions in the majority it was perhaps inevitable that there would be pressure
to enact a single contract code for all of Europe. To this end the private work of
collections of lawyers aimed at producing such a code, the best known being Landos
Principles of European Contract Law (the PECL). This work was eventually supported
and endorsed by the European Commission with strong support from the European
Parliament. After other initiatives in 2011, 10 years after its first communication on
contract law, a Regulation on a Common European Sales Law (CESL) was published
by the European Commission in order to facilitate contracting across national
boundaries. Current trade within the EU is said to be worth over 2 trillion. It was
asserted that different national systems of contract law impeded such trade and so
the potential gains from codification, especially in the context of European economic
recovery, seemed great. However, this potential reduction in transaction costs is
illusory for two reasons. The imposition of a single contract law in Europe is not
politically possible. Therefore, what has been proposed is an optional code that parties
may choose to adopt. The illusory nature of any supposed transaction cost saving is
clear when it is realised that the proposal, instead of replacing the 28 current domestic
contract regimes with a single new system, instead introduces a further (i.e. 29th)
possible contract framework.
An interesting perspective on this debate is provided by the World Banks annual Doing
Business survey which compares the ease of doing business in 185 countries. This is
judged by reference to 11 metrics including enforcing contracts and trading across
borders. Although common law jurisdictions comprise less than 20 per cent of the
countries surveyed, nevertheless five of the top eight rated countries for ease of doing
business were common law based (Singapore, New Zealand, Hong Kong, US and UK) in
the latest 2015 survey. In contrast, the major European civilian jurisdictions of France and
Germany ranked respectively 31st and 14th. This preference on the part of business for
common law, noncodified, systems of law would appear to further support arguments
against the codification of contract law across Europe. It is perhaps not surprising that
the scope of the CESL has subsequently been reduced and will only apply in the main to
distance and online contracts and even then only if the parties so choose.
A different approach to codification is provided by the Uniform Customs and Practice

for Documentary Credits (the Uniform Customs). The Uniform Customs apply only to
one particular type of commercial contract called a documentary credit which is
a guarantee provided by a buyers bank to the supplier of goods that the price will be
paid so long as specified documents are tendered. The Uniform Customs which were
drafted by the International Chamber of Commerce are possibly the most successful
example of contract codification in existence. The standard form of documentary credit
supported by the Uniform Customs is almost universally adopted. The most successful
general contract code is probably the United Nations Convention on Contracts for the
International Sale of Goods (known as either the Vienna Convention or CISG). Once this
Convention is ratified by a country it will apply to all transactions for the international
sale of goods to which that jurisdictions law would apply unless the contract specifically
provides otherwise; it is an opt out rather than an opt in measure. All the major trading
nations except one have ratified the CISG including the US, China, France and Germany.
The only major trading nation that has chosen to resist ratification is the UK.
1.5 Plan of the subject guide

In line with the order of topics in the syllabus, the guide is structured as follows.
uu Part I of the guide deals first with the requirements for the making of a contract
(Chapters 2, 3 and 4).
uu Part II deals with the content of a contract and some of the regulations of the terms
of a contract (Chapters 5 and 6).
uu Part III deals with the capacity to contract the emphasis placed is upon minors
contracts (Chapter 7).
uu Part IV deals with vitiating elements in the formation of a contract (Chapters 8, 9

and 10).
uu Part V deals with the question of who can enforce the terms of a contract
(Chapter 11).
uu Part VI deals with illegality and public policy (Chapters 12 and 13).
uu Part VII deals with the discharge of a contract (Chapters 14 and 15).
uu Part VIII deals with remedies for a breach of contract (Chapters 16 and 17).
Topics not included in the syllabus

Although the following topics are touched upon in the recommended books (and
covered in some detail in the larger books), they are excluded from the present
syllabus.
uu Requirements as to the form of contracts.
uu Gaming and wagering contracts.
uu Assignment (including negotiability).
uu Agency.
1.6 Format of the examination paper

Important: the information and advice given here are based on the examination
structure used at the time this guide was written. Because of this we strongly advise
you to always check both the current Regulations for relevant information about the
examination, and the VLE where you should be advised of any forthcoming changes.
You should also carefully check the rubric/instructions on the paper you actually sit
and follow those instructions.
Past examination papers can be a useful pointer to the type of questions which future
papers will probably include, but you should take care not to read too much into
the style and format of past papers. Remember that, in this as in other subjects, the
examiners may change the format from year to year for example, by requiring a
different number of questions to be answered, by splitting a paper into Part A and Part
B (with some questions to be answered from each part) or by making some questions
compulsory. You must always read and comply with the instructions for the particular
paper you are taking. The annual Programme handbook will normally give advance
warning of major changes in the format of question papers, but the examiners will
have no sympathy with a candidate who does not read the instructions properly.
1.6.1 Difficult facts

Many of the older cases that you will study conveniently arise from a simple set of
facts. One of the most celebrated cases you will encounter involves the sale of a
quack medicine, consumption of which was guaranteed to avoid the catching of
influenza (the flu) (Carlill v Carbolic Smokeball Co [1893] 1 QB 256). Students rapidly
develop an understandable preference for such cases where the factual background
is easy to understand and the application of law to those straightforward facts simple
to follow and relate. Litigation is, however, very expensive and cases rarely reach
appellate courts unless the sums at stake are very large and such large commercial
disputes rarely arise from simple sets of facts. An important skill to practice and
develop is how to summarise such complex sets of facts. Commercial disputes often
involve multiple parties and you may find, as most law teachers do, that it is easier to
understand such facts if you draw a diagram. This should help you to focus upon what
the case is really about and the relevant legal doctrine.
Subsidiary (Indemnity)
Pao On Lao Yiu
Agreement Long
Fu Chip
Shares
Main agreement
Factory
Shing On Fu Chip
Shing On Shares
Figure 1.2
Pao On v Lau Yiu Long [1980] AC 614 presents as challenging a set of facts as you will
meet. Yet the case is really about a simple issue: the purchase of a factory by an
individual called Lao Yiu Long. However, this transaction was effected in a complicated
way. The factory was the principal asset of private company called Shing On which
was owned by Pao On. A contract (the main contract) was entered to exchange all
the shares in Shing On (and so transfer the factory) in exchange for a large number of
shares in Fu Chip, a public company in which Lao Yiu Long was a major shareholder.
The legal issue in the case was whether a subsidiary agreement (called an indemnity)
was enforceable under which Lao Yiu Long agreed to make good any losses that
were caused by a fall in the value of Fu Chip shares before Pao On was entitled to
sell them. The last three sentences are a summary of the facts of a case which are
stated over many pages of the law report. It is a summary that most law teachers can
only assimilate with the use of a simple diagram such as that above. You should not
produce such a diagram in an examination answer but it is a valuable aid to study.
1.6.2 Spotting questions

As we mentioned at the beginning of this Introduction, there is no guarantee that
there will be a question on any particular topic in any given examination paper. It is
a mistake, therefore, to assume that topic A is so important that the examiners are
bound to set a question on it. You should bear this in mind when deciding how many
topics you need to have thoroughly revised as you go into the examination. It is also
worth noting that questions may easily involve more than one topic.
1.6.3 Examination technique in general

Make the most of your knowledge by observing a few simple rules:
1. Write legibly, using a good dark pen. If necessary, write more slowly than normal
to improve legibility. If the examiners cannot read what you have written there is
nothing for them to mark. You may as well have left the answer book empty.
2. Read the question carefully and at least twice. Look for hints as to the particular
issues the examiners hope you will discuss. Think about what the examiners are
asking you to do: what is the question about? Treat it like a passage in a foreign
language. When translating, the sense of the text you are reading becomes much
clearer on the second reading. This also helps to avoid misreading. Read the rubric
or instruction many times. Sometimes it is broad (e.g. Discuss or Advise X), but
sometimes it is directed. Never start writing before you have finished reading, even
if the person at the next desk has already written a side. It is not the quantity you
write but how well you analyse the question and identify the relevant issues that
will determine the quality of your answers.
3. Complete the required number of questions, including all parts of questions with
two or more parts.
4. Poor timing is the main cause of students not achieving their full potential. Plan
your time so that you spend about the same amount of time on each question.
One of the worst mistakes you can make is to overrun on the first two answers: you
are not likely to improve much on the quality of those answers and you will only
increase the pressure and tension while you are trying to finish the other questions
with inadequate time remaining.
5. Make sure that you answer the question which the examiners have asked. It is
often very inconsiderate of examiners not to ask the question you wanted them to
ask. However, never be tempted to answer the question you would have preferred
them to ask. The criterion of relevance is applied mercilessly: only relevant
material gains credit. There are no consolation marks. Think carefully about what
the question asks of you and provide an answer to that question not to a related
(or even worse, unrelated) topic.
6. It is very important to plan out your answer in a rough form (on separate pages)
before you begin to write your answer. An essential technique is to write out a
shopping list of the points and the cases which you intend to cover. If there is
a significant chronology in the question, make a list of the sequence of events with
their dates/times. You should develop a logical order of presenting your points:
many points will have to precede others. Ideally your lists should be on a piece of
paper that you can refer to at all times while writing the answer without having to
turn over pages in the answer book. If you do not make such lists, or do not have
them where you can easily refer to them, you are bound to forget something.
7. Begin your answer with a very short but focused introduction. Show confidence
here as first impressions are important.
This question concerns whether certain promises are enforceable
is bad, whereas,
This question concerns the modification, as opposed to the creation or

termination, of contractual obligations. More particularly it considers the
enforceability of contractual modifications which have the effect of either
enlarging (increasing modifications) or decreasing (reducing modifications)
the obligations assumed by one party under the original contract. The
doctrines of consideration and economic duress will be discussed in relation
to increasing modifications and the doctrine of promissory estoppel in relation
to reducing ones.
is good.
8. Remember above all that the examiners are particularly interested in how well you
know the case law: always try to argue from named cases. Give an accurate and
concise account of the ratio decidendi and, if relevant, obiter dicta of the cases you
mention.
9. A good answer has balance. On the one hand it avoids the needless duplication of
authorities to support settled propositions of law but also investigates in detail areas
of open texture where the law is uncertain. In order to achieve this balance you might
find it helpful to distinguish points from issues. A problem raises a point if it is directly
covered by a case or statute which may be complicated but over which there is little
or no doubt. A problem raises an issue where either no case or statute directly covers
the problem, or where conflicting or unclear cases or statutory provisions need to be
considered. Issues justify more lengthy treatment than points.
10. Repetition of the facts of the problem gets no credit and irritates the examiners
who think you believe they cannot read! Also do not waste time setting out the
whole of the law on a topic when the question is only about part of it. Irrelevant
material not only earns no marks but actually detracts from the quality of the
answer as a whole.
11. Remember that arguments the exploration of possibilities are more important
than conclusions, so you should not feel obliged to come down too firmly on one
side nor should you be inhibited by the fact that you are not sure what the correct
answer is. It is in the nature of the English system of judicial precedent that there
is nearly always room for argument about the scope of a previous ruling, even by
the House of Lords or Supreme Court, so that it is quite possible, even likely, that
more than one view is tenable. It is far better to put forward a reasoned submission
which the examiners may perhaps disagree with than to try and dodge the issue
by saying as surprisingly many candidates do As the law is unclear (or, the
authorities are conflicting) it will be for the court to decide.
Remember, it is important to check the VLE for:
uu up-to-date information on examination and assessment arrangements for this

course
uu where available, past examination papers and Examiners reports for the course
which give advice on how each question might best be answered.
Enjoy your studies and good luck.

Part I Requirements for the making of a contract
2 Agreement: offer and acceptance
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.1 The offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2 Communication of the offer . . . . . . . . . . . . . . . . . . . . . . . 27
2.3 Acceptance of the offer . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.4 Communication of the acceptance . . . . . . . . . . . . . . . . . . . . 28
2.5 Exceptions to the need for communication of the acceptance . . . . . . 29
2.6 Method of acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.7 The end of an unaccepted offer . . . . . . . . . . . . . . . . . . . . . . 32
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . 40

Introduction
The law of contract defines the circumstances when a promise or promises are
enforceable. However, not all promises are enforced by courts. For a promise or
promises to be initially enforceable as a contract certain elements must be present.
There must be:
uu agreement, constituted by a corresponding offer and acceptance, supported by
uu consideration, being the mutual exchange of something which the law recognises
as having a value and
uu an intention to create legal relations.
These are cumulative requirements (i.e. each must be present for a contract to exist).
However, the identification of a contract by reference to these elements is sometimes
a somewhat artificial process. Sometimes, courts will find that some agreements
simply look like contracts and they then reason backward and find the elements
necessary to form a contract.
The process of agreement begins with an offer. An offer may be addressed to a

single person or to many people. For a contract to be formed, this offer must
be unconditionally accepted. The law imposes various requirements as to the
communication of the offer and the acceptance. Once there has been a valid
communication of the acceptance, the law requires:
uu consideration (covered in Chapter 3) and
uu an intention to create legal relations (covered, alongside other sometimes

applicable requirements, in Chapter 4).
If these elements are not present, a court will not find that a contract exists between
the parties. In the absence of a contract, neither party will be bound to the tentative
promises or agreements they have made. It is thus of critical importance to determine
whether or not a contract has been formed.
An important distinction is that between a unilateral and a bilateral contract. A

unilateral contract is an exchange of a promise for an act. A typical unilateral contract
would be the offer of a reward for the return of lost property. It is a frequent, but not
a necessary, feature of a unilateral contract that the offer, such as that of a reward,
is made to a large group of people. As a unilateral contract, by definition, involves a
promise by one party only it follows that it generates an obligation for one party only.
The offer of a reward for the return of lost property does not oblige anyone to look
for that property. The only obligation it creates is a contingent one upon the offeror
to pay the stipulated reward to any person who chooses to perform the stipulated
act (i.e. return the lost property). In several respects the rules of offer and acceptance
discussed below are modified in the case of unilateral contracts (see especially Section
2.7.1 below).
Learning outcomes
This chapter introduces the topic of contractual agreement to enable you to discuss
and apply in problem analysis its key components (and supporting authority)
including:
uu The definition of a contractual offer.
uu The distinction between a unilateral and a bilateral offer.
uu The difference between an offer and other communications.
uu The moment of effective communication of an offer.
uu What is (and is not) a valid acceptance.
uu The requirement of communication of acceptance and its exceptions.
Contract law 2 Agreement: offer and acceptance page 23
2.1 The offer
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.1 Offer and invitation
to treat to Section 3.7 Acceptance.
Poole, Chapter 2: Agreement Section 1 Subjectivity versus objectivity to

Section 4 Acceptance.
2.1.1 What offer?

It is important to remember (see Section 1.4.3) that it is not the subjective intentions
of the parties that determine the legal effect of their words or actions but the
reasonable inference that they would support. This is the so called objective theory of
agreement associated with Smith v Hughes (1871) and more recently summarised in the
Supreme Court by Lord Clarke (RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Co
KG [2010] UKSC 14 at [45].
Whether there is a binding contract between the parties and, if so, upon what terms
depends not upon their subjective state of mind, but upon a consideration of what was
communicated between them by words or conduct, and whether that leads objectively to
a conclusion that they had agreed upon all the terms which they regarded as essential.
This approach was applied in Centrovincial Estates v Merchant Investors Assurance Co

[1983] Com LR 158 where the claimants had bought commercial premises let to the
defendants for a rent of 68,320 pa subject to review. When the claimants mistakenly
proposed a new rent of 65k pa instead of the 126k pa they intended to propose,
the defendants predictably accepted the mistaken offer. The claimants argued that
no reasonable tenant would have expected the rent to be reduced; the defendants
responded that this was a reasonable expectation in light of their communicated
dissatisfaction with the previous letting. The Court of Appeal accepted the defendants
arguments that it was at least arguable that an offer to let premises for 65k pa meant
exactly that. Subsequent cases have made explicit that in a so called B2B contract
(i.e. between two businesses) the interpretation of an offer upon which the offeree is
entitled to rely is that of a hypothetical and reasonable businessman in the position of
the offeree (Dhanani v Crasnianski [2011] All ER (Comm) 799).
It should be noted, however, that there is one circumstance when the courts will
depart from the usual objective approach and take account of the actual subjective
knowledge of the offeree. Under this approach, sometimes known as the snapping up
doctrine, an offeree is not allowed to accept an offer which he knows is mistaken as
to its terms (Hartog v Collins and Shields [1939] 3 All ER 566). This last factor is important
and is what limits the scope of this disapplication of the usual objective approach. It is
not enough to come within this exception that the offeree was aware that the offeror
had made a mistake; the exception will only apply where the offeree is aware that
the offeror is mistaken as to the terms he intended to offer (Statoil ASA v Louis Dreyfus
Energy Services LP (The Harriette N) [2008] EWHC 2257 (Comm)). The doctrine will apply
both where, as in Hartog, the offeree is aware of the offerors mistake as to the terms
he is offering but also where, as in Scriven Bros v Hindley [1913] 3 KB 564, the offeree
should know that the offeror is mistaken as to the terms he has offered perhaps
because, as in Scriven, the offeree induced that mistake by his own carelessness (in
Scriven, contrary to accepted trade custom, marking two distinct commodities with
the same shipping mark).
2.1.2 Offers and invitations to treat

An offer is an expression of willingness to contract on certain terms. It must be made
with the intention that it will become binding upon acceptance. There must be no
further negotiations or discussions required. The nature of an offer is illustrated and
encapsulated by two cases involving the same defendant, Manchester City Council.
The Council decided to sell houses that it owned to sitting tenants. In two cases, the
claimants entered into agreements with the Council. The Council then resolved not
to sell housing unless it was contractually bound to do so. In these two cases the
question arose as to whether or not the Council had entered into a contract.
In one case, Storer v Manchester City Council [1974] 3 All ER 824, the Court of Appeal
found that there was a binding contract. The Council had sent Storer a communication
that they intended would be binding upon his acceptance. All Storer had to do to bind
himself to the later sale was to sign the document and return it.
In contrast, however, in Gibson v Manchester City Council [1979] 1 All ER 972, the Council
sent Gibson a document which asked him to make a formal invitation to buy and
stated that the Council may be prepared to sell the house to him. Gibson signed
the document and returned it. The House of Lords held that a contract had not been
concluded because the Council had not made an offer capable of being accepted. Lord
Diplock stated:
The words may be prepared to sell are fatal so is the invitation, not, be it noted, to
accept the offer, but to make formal application to buy on the enclosed application form.
It is a letter setting out the financial terms on which it may be the council would be
prepared to consider a sale and purchase in due course.
A key distinction between the two cases is that in Storers case there was an
agreement as to price, but in Gibsons case there was not. In Gibsons case, important
terms still needed to be determined.
It is very important to realise from the outset that not all communications will be
offers. They will lack the requisite intention to be bound upon acceptance. If they are
not offers, what are they? At this point, we will distinguish an offer from other steps
in the negotiation process. Other steps in the negotiation process might include
a statement of intention, a supply of information or an invitation to treat. We will
examine these in turn.
A statement of intention
In this instance, one party states that he intends to do something. This differs from an
offer in that he is not stating that he will do something. The case of Harris v Nickerson
[1873] 37 JP 536 illustrates this point. The auctioneers advertisement was a statement
that he intended to sell certain items; it was not an offer that he would sell the items.
2.1.3 A supply of information

In this instance, one party provides information to another party. He supplies the
information to enlighten the other party. The statement is not intended to be acted
upon. See Harvey v Facey (1893) where one party telegraphed, in response to the query
of the other, what the lowest price was that he would accept for his property, if he
were to sell it. This alone did not imply an assurance that he would sell at this price.
2.1.4 An invitation to treat

This is a puzzling term. An invitation to treat is an indication of a willingness to do
business. It is an invitation to make an offer or to commence negotiations. Courts have
considered whether or not a communication was an offer or an invitation to treat in a
wide variety of circumstances.
You should examine the following instances where courts have found that the
communication was not an offer but an invitation to treat.
a. A display of goods is generally an invitation to treat.
See Pharmaceutical Society v Boots [1953] 1 QB 401 (note the rationale behind
treating the display as an invitation to treat rather than as an offer) and Fisher v Bell
[1961] 1 QB 394. In contrast, where the display is made by a machine, the display will
probably be an offer (Thornton v Shoe Lane Parking [1971] 2 QB 163).
Activity 2.1
Your local grocery shop places a leaflet through your letterbox. On the leaflet is
printed Tomorrow only, oranges are at a special low, low price of 9p/kilo.
Has the grocery shop made you an offer? If you visit the shop, must they sell you
oranges at this price?
b. An advertisement is an invitation to treat where a bilateral contract is anticipated.
Figure 2.1 Partridge advertised Bramblefinch cocks, Bramblefinch hens, 25s ea

See Partridge v Crittenden [1968] 2 All ER 421 the advertisement of a bilateral
contract. Where, as in Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256, a
unilateral contract is contemplated the advertisement may be an offer.
See the Introduction above for the distinction between unilateral and bilateral
contracts.
By way of background you should be aware that the broader law of consumer
protection prohibits misleading advertisements. In particular, the Unfair Trading
Regulations 2008/1277, Part 2, prohibits misleading advertisements aimed at
consumers. The European Court of Justice has said that it would be a breach of
European consumer protection law if in a shop a consumer was refused a product
under the advertised terms (Trento Svilippo srl v Autorita Garante della Concorrenza e
del Mercato [2014] 1 All ER (Comm) 113).
Activity 2.2
How were the facts of Carlill v Carbolic Smoke Ball Company different from the usual
situation involving an advertisement?
c. A request for tenders is an invitation to treat and the tender is the offer. See
Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1985] Ch 103.
Note, however, that the invitation to treat may contain an implied undertaking to
consider all conforming tenders, as in Blackpool and Fylde Aero Club Ltd v Blackpool
Borough Council [1990] 3 All ER 25.
d. An auctioneers request for bids is an invitation to treat.
The bid is an offer; when the auctioneer brings his hammer down he has accepted
the offer. In the case of auctions without a reserve price, the auctioneer enters into
a collateral (or separate) contract. The nature of the collateral contract is that the
auctioneer will accept the highest bid. See Warlow v Harrison [1859] 1 E&E 309 and
Barry v Davies [2000] 1 WLR 1962.
Figure 2.2 The advertisement for Carbolic Smoke Balls
Activity 2.3
A store mistakenly advertised Sony televisions for sale on its website for 2.99 each
rather than the 299 they intended. Have the store entered a contract to supply the
televisions at the mistaken price with customers who purported to buy the TVs
online?
Self-assessment questions
1. How does an invitation to treat differ from an offer?
2. Does a railway or airline timetable constitute an offer?
3. Do courts treat the display of goods in a shop window differently from a display
in an automated machine and if so, how?
Summary
A contract begins with an offer. The offer is an expression of willingness to contract on
certain terms. It allows the other party to accept the offer and provides the basis of the
agreement. An offer exists whenever the objective inference from the offerors words
or conduct is that she intends to commit herself legally to the terms she proposes.
This commitment occurs without the necessity for further negotiations. The first
step in finding a contract is to establish that there is an offer and who is making it.
Many communications will lack this necessary intention and thus will not be offers.
They may be statements of intention, supplies of information or invitations to treat.
Although the distinction between an offer and other steps in the negotiating process
is easy to state in theory, in practice, difficult cases arise.
Useful further reading

Winfield, P.H. Some aspects of offer and acceptance (1939) 55 LQR 499.
2.2 Communication of the offer
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.9 Acceptance in
ignorance of the offer.
Poole, Chapter 2: Agreement Section 4C Acceptance must be made in

response to the offer.
To be effective an offer must be communicated: there can be no acceptance of the

offer without knowledge of the offer. The reason for this requirement is that if we say
that a contract is an agreed bargain, there can be no agreement without knowledge.
There can be no meeting of the minds if one mind is unaware of the other. Stated
another way, an acceptance cannot mirror an offer if the acceptance is made in
ignorance of the offer.
The authorities are, however, divided on the need to communicate the offer. In
Gibbons v Proctor (1891) it seems as if a policeman was allowed to recover a reward
when he sent information in ignorance of the offer of reward. The better view is
thought to be expressed in the Australian case of R v Clarke [1927] 40 CLR 227:
there cannot be assent without knowledge of the offer; and ignorance of the offer is the
same thing whether it is due to never hearing of it or forgetting it after hearing.
The case of Tinn v Hoffman [1873] 29 LT 271 deals with the problem of cross-offers.
Activity 2.4
How might the decision have been different in R v Clarke if Clarke had been a poor
but honest widow?
2.3 Acceptance of the offer
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.7 Acceptance.
Poole, Chapter 2: Agreement Section 4 Acceptance.
For a contract to be formed, there must be an acceptance of the offer. The acceptance
must be an agreement to each of the terms of the offer. It is sometimes said that the
acceptance must be a mirror image of the offer.
Contractual acceptance, like a contractual offer, is established objectively. So

acceptance occurs when the offerees words or conduct give rise to the objective
inference that the offeree assents to the offerors terms. The acceptance can be by
words or by conduct. See Brogden v Metropolitan Railway Company (1877), where the
offeree accepted the offer by performance and Claxton Engineering Services Ltd v TXM
Olaj-ES Gazkutato KFT (2010) where the choice of a Hungarian company to continue
trading with its English counterpart after the latter had rejected a proposal for the
arbitration in Hungary of any disputes was held to be an acceptance of the English
companys counter offer that the resolution of disputes should be subject to English
jurisdiction only.
If the offeree attempts to add new terms when accepting, this is a counter-offer and
not an acceptance. A counter-offer implies a rejection of the original offer, which is
thereby destroyed and cannot subsequently be accepted. See Hyde v Wrench (1840) 49
ER 132.
Where the offeree queries the offer and seeks more information, this is neither an
acceptance nor a rejection. It is merely an enquiry as to whether the offeror would be
prepared to vary the offer and the original offer stands. See Stevenson, Jacques & Co v
McLean [1880] 5 QBD 346.
The majority of the Court of Appeal in Butler Machine Tool v Ex-Cell-o [1979] 1 All ER
965 held that the last shot wins this battle of the forms. The minority judgment of
Lord Denning MR in Butler criticised the all or nothing approach of the old mirror
image rule whereby a contract was concluded on either the buyer or the sellers
terms. He preferred to look at the communications as a whole and hold there to be a
contract when there is substantial agreement on all material points. If the remaining
differences are irreconcilable Lord Denning thought they should be replaced by
reasonable implication. Lord Dennings radical approach has not been followed
elsewhere and in Tekdata Interconnections Ltd v Amphenol Ltd [2009] EWCA Civ 1209 the
Court of Appeal reasserted the traditional approach emphasising the importance of
certainty in commercial transactions. If it is found that there is no contract between
the parties it does not follow that they will not have to pay for any benefits received.
A different branch of the civil law of obligation, known as the law of restitution, may
impose on the recipient of a benefit an obligation to pay something to the party who
conferred that benefit irrespective of whether a contract comes into existence to bind
the two parties (BSC v Cleveland Steel [1984] 1 All ER 504).
Note, also, that in some cases courts have held that particular relationships are not
capable of contractual analysis. In the Eurymedon [1975] AC 154 Lord Wilberforce noted
that English law having committed itself to a rather technical and schematic doctrine
of contract nevertheless takes a practical approach, often at the cost of forcing the
facts to fit uneasily into the marked slots of offer, acceptance On rare occasions the
traditional analysis is abandoned altogether. In President of the Methodist Conference v
Preston [2013] UKSC 29 the Supreme Court held that the manner in which a Methodist
minister was engaged was incapable of being analysed in terms of contractual
formation.
Activity 2.5
A wrote to B offering 300 bags of cement at 10 per bag. B wrote in reply that she
was very interested but needed to know whether it was Premium Quality cement.
The following morning, soon after A read Bs letter, B heard a rumour that the price
of cement was about to rise. She immediately sent a fax to A stating, Accept your
price of 10 for Premium Quality. Assuming that the cement actually is Premium
Quality, is there a contract? If so, does the price include delivery? Explain your
reasoning.
Activity 2.6
What is the position under the last shot rule if, after the exchange of forms, the
seller fails to deliver the goods?
2.4 Communication of the acceptance
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.8 Communication of
the acceptance, and Section 3.10 Prescribed method of acceptance to Section
3.14 Termination of the offer.
Poole, Chapter 2: Agreement Section 4D Communication of the acceptance to

the offeror.
The general rule is that acceptance is not effective until it is communicated to the
offeror. This is sometimes expressed by saying that the acceptance cannot be made
through silence and Felthouse v Bindley is often cited to support this proposition.
Such a statement is, however, too broad and the true rule of law is discoverable by
reflection upon what is wrong with saying that silence cannot amount to acceptance.
Most people would agree that is inconsistent with the view of a contract as a
voluntarily assumed obligation to allow one party to force a contract upon a party
that that party does not want at the time of contracting. If a lecturer and author was
able to say to his contract class that he will assume that all his audience want to buy
a copy of his book unless they say not in the next five seconds it is perhaps obvious
that she should not be able to rely upon those five seconds silence as evidence of
acceptance of an offer to sell a copy of her book. The so called rule (i.e. that silence
cannot constitute acceptance) should extend only as far as the policy that justifies
it (i.e. that the law should not allow an offeror to force a contract on an unwilling
offeree). So qualified the proper rule becomes: silence will not constitute acceptance
when to so hold would involve forcing a contract on an unwilling party. It then follows
that silence can constitute acceptance when this does not involve forcing a contract
upon an unwilling party. In Rust v Abbey Life [1979] 2 Lloyds Rep 334 the Court of
Appeal, by way of obiter dicta, approved this more limited statement of the silence as
acceptance rule.
Where the law of contract insists on communication either as here in relation to

acceptance or in relation to the revocation of a contractual offer (Section 2.7.1 below) a
question can arise as to the timing of communication when it is received by a machine
(e.g. a fax or email), maybe outside of usual office hours. By analogy with a case, in
Tenax Steamship Co v Owners of the Motor Vessel Brimnes (The Brimnes) [1975] QB 929,
concerning the notice of the withdrawal of a ship under a ship charter, it is suggested
that communication to any unmanned receptor is effective from the time at which it
is reasonable to expect that machine to be checked. Therefore, if it is not reasonable
to expect a computer to be checked out of usual business hours a communication
sent at this time may only be regarded as communicated after the next opening of the
office concerned.
Activity 2.7
You offer to buy a kilo of oranges from your local shop for 9p. Nothing further is
said, nor do you receive any written correspondence. The next day, however, a kilo
of oranges arrives at your house from the local shop. Is there a valid acceptance of
the contract? Has there been a communication of the acceptance?
See Brogden v Metropolitan Railway Company [1877] 2 App Cas 666.
1. What was the detriment to the offeree in Felthouse v Bindley?
2. Could an offeror use this case to avoid liability?
2.5 Exceptions to the need for communication of the

acceptance
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.12 Exceptions to the
rule requiring communication of acceptance.
Poole, Chapter 2: Agreement Section 4D Communication of the acceptance to

the offeror.
As we saw above, the general rule is that for an acceptance to be valid it must be
communicated to the offeror. It must be brought to the offerors attention. To this
general rule there are certain exceptions situations where the law does not require
communication of the acceptance.
2.5.1 Where the offeror has waived the requirement of communication

As we have seen above, in certain circumstances the offeror may waive the necessity
for communication. This is what occurred in Carlill v Carbolic Smoke Ball Co which was a
case involving a unilateral offer.
2.5.2 Unilateral offers

A unilateral contract is one where one party makes an offer to pay another if that other
party performs some act or refrains from some act. The other party need make no
promise to do the act or refrain from the act. In these cases, acceptance of the offer
occurs through performance and there is no need to communicate acceptance in
advance of performance. An example of the offer of a unilateral contract is an offer of a
reward for the return of a lost cat.
In the case of Carlill v Carbolic Smoke Ball Company (1893) it was established that full
performance is the acceptance of the offer and there is no need to communicate the
attempt to perform. Communication of the acceptance is waived because it would be
unreasonable of the offeror to rely on the absence of a communication which would
have been superfluous or which no reasonable person would expect to be made.
The other principal exception is the postal acceptance rule.
2.5.3 The postal acceptance rule

Communication by post gives rise to special practical difficulties. An offer is posted.
The offeree receives the offer and posts her acceptance. The letter of acceptance will
take several days to arrive. At what point is the acceptance good? If one waits until
the offeror receives the letter, how will the offeree know when this is? The offeree has
known from the time she posted the letter that she has accepted the offer. There is
also the occasional problem of the letter that never arrives at its destination.
To overcome these problems, the courts devised an exception to the general

requirement of communication (which would have been that the acceptance is only
good when the letter arrives). The exception was devised in the cases of Adams v
Lindsell [1818] 106 ER 250 and Household Fire and Carriage Accident Insurance Co Ltd v
Grant [1879] 4 Ex D 216.
These decisions establish the postal acceptance rule, that is, that acceptance
is complete when posted. This puts the risk of delay and loss on the offeror. It is
important to understand that the rule is an exception to the general rule requiring
communication.
The postal acceptance rule will only prevail in certain circumstances. It will prevail
where use of the post was reasonably contemplated by the parties or stipulated by the
offeror. See Household Fire Insurance v Grant (1879).
It may be that the post is the only reasonable form of communication available. See
Henthorn v Fraser [1892] 2 Ch 27.
The postal acceptance rule will not allow a contract to be concluded by posting the
acceptance where the letter is incorrectly addressed by the offeree. The offer may
accept the risk of delay occasioned by the post but not the carelessness of the offeree:
LJ Korbetis v Transgrain Shipping BV [2005] EWHC 1345.
The operation of the postal acceptance rules creates practical difficulties. The greatest
problem is that contracts can be formed without the offeror being aware of the
contract. For example, an offeror makes an offer. Unbeknown to him, the offeree
accepts. The offeror then revokes the offer before receiving the postal acceptance.
The offeror contracts with another party over the same matter and then receives
the postal acceptance from the original offeree. The offeror is now in breach of his
contract with the original offeree.
Partly because of these problems and partly because of technological advances

(the post is no longer a such crucial method of communication), courts seem to
be confining the scope of the postal acceptance rule. This is a rationale behind
the decision in Holwell Securities v Hughes [1974] 1 WLR 155. In this case, the postal
acceptance rule did not apply because the offeror did not intend that it would apply.
While this case is authority for the proposition that the terms of an offer must be met
for acceptance to be valid, it also illustrates the reservations modern courts have over
the postal acceptance rule.
In an early case involving a telegram, a form of the postal acceptance rule was applied
(Bruner v Moore [1903] 1 Ch 305) but in later cases involving telexes, the courts refused
to extend the application of the postal acceptance rules. See Entores v Miles Far East
Corp [1955] 2 QB 327 and Brinkibon Ltd v Stahag Stahl [1982] 2 WLR 264. As modern forms
of communication such as fax and email have become almost instantaneous, courts
have shown a marked reluctance to extend the postal acceptance rule to these new
forms of communication. In JSC Zestafoni Nikoladze Ferroalloy Plant v Romly Holdings
[2004] EWHC 245 (Comm) an acceptance by fax was held to be an instantaneous
communication. In Thomas v BPE Solicitors [2010] EWHC 306 Blair J said obiter that the
postal rule should not apply to contracts concluded through the exchange of emails
and this is supported by the Singapore decision of Chwee Kin Keong v Digilandmall.
com Pte Ltd [2004] 2 SLR 594. Regulations governing internet trading (i.e. the purchase
of goods or services from websites), principally the Electronic Commerce (EC
Directive) Regulations (2002) do not identify at what stage acceptance is effected.
However, Regulation 11(2) provides that in contracts with a consumer the order and
acknowledgment of the order are deemed to be received when the addressee is able
to access them. This reference to receipt in the Regulations would appear to indicate
that the default rule that acceptance is effective upon receipt, rather than as with the
postal rule on sending, should apply to all internet sales.
English contract law awaits a definitive case involving an almost instantaneous

communication such as a fax or an email. It is clear that a contract can be formed
through such mediums (see, for example, Allianz Insurance Co-Egypt v Aigaion Insurance
Co SA [2008] EWCA Civ 1455). Because of the technology involved in both these forms
of communication they are not entirely instantaneous. An email, in particular, may
take some time to arrive at its destination, depending upon the route it takes to its
recipient. As Poole has suggested, there are two possible approaches to the email
communication of the acceptance: postal analogy or receipt rule.
Activity 2.8
What rules do you think courts should adopt for communication by fax or email?
1. What reasons have been given by the courts for the postal acceptance rule?
2. A posts a letter offering to clean Bs house. B posts a letter accepting As offer.

Later in the day, Bs house burns down and B now no longer needs a house
cleaner. B immediately posts a letter to A rejecting As offer. Both of Bs letters
arrive at the same time. Is there a contract or not? See Countess of Dunmore v
Alexander (1830).
3. In what circumstances will the postal acceptance rules not operate?
4. When, if ever, can an offeror waive the need for communication?
Summary
For a contract to be formed, the acceptance of an offer must be communicated.
There are exceptions to this general rule. The most significant of these exceptions is
the postal acceptance rule. The postal acceptance rule is, however, something of an
anachronism in the modern world and is unlikely to be extended in future cases.

Gardner, S. Trashing with Trollope: a deconstruction of the postal rules (1992) 12
OJLS 170.
Poole, J. Textbook on contract law. (Oxford: Oxford University Press, 2014) 12th
edition [ISBN 9780199687220] Chapter 2, Section 2.4 Acceptance.
Mik, E.K. The effectiveness of acceptances communicated by electronic means,

or - does the postal rule apply to email? (2009) 26 JCL 68.
Nolan, D. Offer and acceptance in the electronic age in Burrow and Peel
(eds) Contract formation and parties. (Oxford: Oxford University Press, 2010)
[ISBN 9780199583706].
2.6 Method of acceptance
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.10 Prescribed method
of acceptance.
Poole, Chapter 2: Agreement Section 4B Offeror prescribes the method of

acceptance.
Sometimes an offeror may stipulate that acceptance is to be made using a specific

method. See Manchester Diocesan Council for Education v Commercial and General
Investments [1970] 1 WLR 241.
In other cases the required method for communicating acceptance may also be
inferred from the making of the offer. See Quenerduaine v Cole [1883] 32 WR 185.
The problem that arises is this: if the offeree uses another method of acceptance, does
this acceptance create a contract? The answer is that if the other method used is no
less advantageous to the offeror, the acceptance is good and a contract is formed. This
is the result unless the offeror stipulates a certain method of acceptance and further
stipulates that only this method of acceptance is good. See Manchester Diocesan
Council for Education v Commercial and General Investments (1970).
1. Where a method of acceptance has been prescribed by the offeror:
a. May the offeree choose to use another (equally effective) method of

communicating his acceptance?
b. What does equally effective mean?
c. Whose interest should prevail?
2. Can an offer made by fax be accepted by letter?
Summary
If an offeror intends that a certain method of acceptance is to be used, he must
stipulate this method and that only an acceptance using this method is to be used.
If he only stipulates a method, an offeree can use another method provided that the
other method is no less advantageous than the method stipulated.
2.7 The end of an unaccepted offer
Essential reading
McKendrick, Chapter 3: Offer and acceptance Section 3.14 Termination of the
offer.
Poole, Chapter 2: Agreement Section 5 Revocation of an offer.
Offers do not exist indefinitely, open for an indeterminate time awaiting acceptance.
Indeed, some offers may never be accepted. What we will consider at the conclusion
of this chapter is what happens to an offer before it has been accepted. There is no
legal commitment until a contract has been concluded by the acceptance of an offer.
2.7.1 Change of mind

Because there is no legal commitment until a contract has been formed, either party
may change their mind and withdraw from negotiations any time before there is
acceptance (Payne v Cave [1789] 100 ER 502).
In situations where an offeror has stipulated that the offer will be open for a certain
time period, he or she can nevertheless withdraw the offer within this time period.
This will not be the case, however, where the offeror is obliged (by a separate binding
collateral contract) to keep the offer open for a specified period of time: Routledge
v Grant [1828] 172 ER 415. If a time has been set by which to accept then the offer will
automatically lapse at the end of that period.
For the revocation of an offer to be effective, there must be actual communication

of the revocation. See Byrne v van Tienhoven [1880] 5 CPD 344. It is not necessary for
revocation to be communicated by the offeror. Communication to the offeree through
a reliable source is sufficient. See Dickinson v Dodds [1876] 2 Ch D 463.
Unilateral contracts pose particular problems here. As the act stipulated as acceptance
of a unilateral offer may take some time to complete, the situation may arise where
the offeror tries to revoke the unilateral offer after the offeree has begun, but before
he has completed, performance of the stipulated act. Intuitively it might seem unjust
if revocation was allowed in these circumstances and in most cases it is not (see
Errington v Errington [1952] 1 KB 290 and Soulsbury v Soulsbury [2007] EWCA Civ 969).
However, the way in which such revocation is usually prevented means that revocation
is not always impossible. In Luxor (Eastbourne) Ltd v Cooper [1940] AC 108 the House of
Lords explained that the revocation of a unilateral offer after the offeree has begun
performance of the act stipulated would not be possible in most cases because a
term would be implied into the contract that the offeree would not seek to revoke his
offer (or otherwise prevent the completion of performance) once that performance
had begun (see also Daulia v Four Millbank Nominees [1978] Ch 231). Such a term will be
implied where it is necessary to make the agreement commercially effective (to give
it business efficacy). It follows that where it is not necessary to imply any such term,
as Luxor the offeror is free to revoke the offer after performance has begun. In Luxor
the House of Lords said that it would not be appropriate to imply such a term where a
very large consideration was being offered for a small amount of work, in Luxor more
that the Lord Chancellors salary for the year in exchange for a few hours work! The
Court of Appeal in Schweppe v Harper [2008] EWCA Civ 442 emphasised that cases such
as Luxor where the offeror is able to revoke after performance has begun will be rare.
Activity 2.9
Your neighbour offers to sell you her car for 10,000. She tells you to think about it
and let me know by Monday. On Saturday, she puts a note under your door to say
forget it I want to keep my car. Can she do this? Explain.
By what process must the offeror of a unilateral contract revoke his offer? The problem
of an appropriate process exists when the offer is made to the world. In this situation,
what must the offeror do to alert the world? English law provides no answer to this
question, but it is thought that the principle of Shuey v USA [1875] 92 US 73 would also
apply in the UK (i.e. that revocation may be effected by giving the same prominence
to the revocation as was given to the original offer). If this is done then revocation,
contrary to the usual rule, may be effective even if it does not actually come to the
attention of the offeree.
If the offeree rejects an offer, it is at an end. A counter offer (i.e. an offer substantially
at variance with an earlier offer) is simultaneously a rejection of the original offer and
also a new offer (see Section 2.3 above).
Activity 2.10
Analyse all the communications in Hyde v Wrench (1840) and state whether they
are: an invitation to treat, a contractual offer, a counter offer, a rejection or an
acceptance.
Different problems arise when it is the offeree who changes his or her mind. For
example, if after posting a letter of acceptance, the offeree informs the offeror by
telephone, before the letter arrives, that they reject the offer, should the act of posting
an acceptance prevail over the information actually conveyed to the offeror? In the
absence of English cases the books refer to a number of cases from other jurisdictions
see Dunmore v Alexander [1830] 9 S 190 (Scotland) and Wenkheim v Arndt [1873] 1 JR 73
(New Zealand) but when citing them, it is important to emphasise that they are not
binding, and indeed have very little persuasive authority. The question must therefore
be answered primarily as a matter of principle. Treitel suggests that the issue is
whether the offeror would be unjustly prejudiced by allowing the offeree to rely on
the subsequent revocation.
2.7.2 If a condition in the offer is not fulfilled, the offer terminates

Where the offer is made subject to a condition which is not fulfilled, the offer
terminates. The condition may be implied. See Financings Ltd v Stimson (1962). In this
case, the offeror purported to accept an offer to purchase a car after the car had been
badly damaged.
2.7.3 Death: if the offeror dies, the offer may lapse

This is a point on which the cases divide. On the one hand, Bradbury v Morgan (1862)
158 ER 877 (Ex) held that the deceased offerors estate was liable on the offer of a
guarantee after the death of the offeror. However, obiter dicta in Dickinson v Dodds
(1876) state that death of either party terminated the offer because there could be
no agreement. The best view is probably that a party cannot accept an offer once
notified of the death of the offeror but that in certain circumstances the offer could be
accepted in ignorance of death. The death of an offeree probably terminates the offer
in that the offerees personal representatives could not purport to accept the offer.
2.7.4 Lapse of an offer

The offeror may set a time limit for acceptance; once this time has passed the offer
lapses. In many cases, the offeror can revoke the offer before the time period lapses
provided that the offer has not been accepted. See Offord v Davies (1862).
In cases in which no time period is stipulated for the offer, an offeree cannot make an
offeror wait forever. The offeror is entitled to assume that acceptance will be made
within a reasonable time period or not at all. What a reasonable time period is will
depend upon the circumstances of the case. See Ramsgate Victoria Hotel v Montefiore
[1866] LR 1 Ex 109.
1. Why can the offeror break his or her promise to keep the offer open for a stated
time?
2. In a unilateral contract which is accepted by performance, when has the offeree

started to perform the act (so as to prevent revocation by the offeror)? Does the
offeror need to know of the performance?
3. How can the offeror inform all potential claimants that the offer of a reward has
been cancelled?
4. Will there be a contract if the offeree posts a letter rejecting the offer but then
informs the offeror by telephone, before the letter arrives, that he accepts the
offer?
5. What is the purpose of implying that the offer is subject to a condition?
Summary
Until an offer is accepted, there is no legal commitment upon either party. Up until
acceptance, either party may change their mind subject to the next sentence. An
offeror may not revoke a unilateral offer after performance has begun whenever the
offeror has undertaken, perhaps impliedly, not to do so. An offeree may reject an offer
prior to acceptance and may do so by making a counter offer.
uu An unaccepted offer expires either:
uu at the end of any time period stipulated, or
uu within a reasonable time period where no time period is stipulated.
uu An offer will lapse where it is made on an unfulfilled condition.
uu An offer may lapse when the offeror dies.

Halson, Chapter 3 Agreement: offer and acceptance.
Examination advice
The detailed rules of offer and acceptance provide a ready source of problems and
difficulties on which examiners can draw. Here are some examples.
uu Is a particular statement an offer or an invitation to treat?
uu Is there a counter-offer or is it merely an enquiry?
uu When does a posted acceptance fall outside the postal rule?
uu Was the offeror or offeree free to have second thoughts?
uu When is a telephone call recorded on an answering machine actually received?
uu When is an email received?
There are also several everyday transactions where the precise contractual analysis
is not immediately apparent the motorist filling up with petrol (gas), the passenger
riding on a bus, the tourist buying a ticket for the Underground (subway) from a
machine and so on. The fact that some of these problems are not covered by authority
does not make them any less attractive to examiners indeed, the opposite might well
be the case. The key to most problems of offer and acceptance is the idea that the law
should give effect to actual communication wherever possible.
Sample examination questions

Question 1
Alice wrote to Bill offering to sell him a block of shares in Utopia Ltd. In her letter,
which arrived on Tuesday, Alice asked Bill to let me know by next Saturday. On
Thursday Bill posted a reply accepting the offer. At 6pm on Friday he changed his
mind and telephoned Alice. Alice was not there but her telephone answering
machine recorded Bills message stating that he wished to withdraw his
acceptance.
On Monday Alice opened Bills letter, which arrived that morning, and then played
back the message on the machine.
Advise Alice.
Question 2
Cyril, a stamp dealer, had a rare Peruvian 5 cent blue for sale. He wrote to Davina,
a collector who specialises in Peruvian stamps, asking whether she would be
interested in purchasing it. Davina wrote in reply, I am willing to pay 500 for the
blue; I will consider it mine at that price unless I hear to the contrary from you
and will collect it from your shop on Friday next week.
Advise Davina as to the legal position:
a. if Cyril disregarded Davinas letter and sold the stamp to Eric for 600
b. if Cyril put the stamp on one side in an envelope marked Sold to Davina but
Davina decided that she no longer wished to buy it.
Question 3
a. On 1 January A writes to B saying, I am considering selling my horse, Philocretes,
and I wonder whether you would like to buy him. I would expect to receive
about 500 for him. On 2 January B writes back, I accept your offer and will send
you the money in a few days. On 3 January A writes to B: Dont be ridiculous,
I wasnt offering the horse for sale, and anyway I want 750 for him. To avoid
misunderstanding, do not write back unless you do not want the horse at this
price. B was so annoyed on reading the first sentence that he tore up the letter
without reading further and did not reply. Three weeks later A came round and
demanded 750, offering to deliver the horse.
Advise B.
b. Would your answer be any different if upon reading As second letter B decided
to purchase the horse for 750 and A now refuses to deliver it?
Advice on answering the questions

It is important to break the question down into its constituent issues. You are
considering each of these issues with a view to determining whether or not a contract
has been formed. Bill will argue that he is not obliged to purchase the shares because
no contract has been formed.
Communications must be considered chronologically because the proper legal

analysis of a later communication will often depend upon that of a prior one. A
communication from A to B cannot be an acceptance unless there has been a prior
communication from B to A that constitutes an offer; a communication from A to
B cannot be a counter offer unless B has previously made an offer to A. Sometimes
it may not be possible to come to a firm conclusion as to the proper analysis of a
communication, in which case two alternatives may need to be considered, of the
type: if As letter to B is an offer then Bs reply may be an acceptance, but if As letter to
B is only an invitation to treat (negotiate) then Bs reply may be a contractual offer, etc.
Question 1
The issues in this problem are:
a. What is the effect of Alice writing to Bill to offer to sell him shares?
b. What is the effect of Alices stipulation as to the time the offer is open?
c. What is the effect of Bills posting a reply?
d. What is the effect of Bills change of mind? Is there effective communication when
a message is left on an answering machine?
e. Which of Bills two communications is determinative?
When the issues are listed in this form it is apparent that the biggest issue is whether or
not a contract has been formed. This is dependent upon whether Alices offer has been
accepted. This, in turn, depends upon whether Bill has communicated his acceptance or
his rejection.
We will examine these issues in turn.
a. Alices letter appears to be an offer within the criteria of Gibson v Manchester City
Council and Storer v Manchester City Council. You should outline these criteria and
apply them to the facts sometimes the designation of an offer in a problem
question or in everyday life turns out not to be an offer in the legal sense.
b. Alices stipulation that the offer is open for one week is not binding (apply the
criteria in Offord v Davies) unless there is a separate binding contract to hold the
offer open. There does not appear to be such a separate binding agreement.
c. Because Bill posts his letter of acceptance, we need to consider whether or not the
postal acceptance rules apply. Consider the criteria in Household Fire Insurance v
Grant. Does the case apply here? In the circumstances, it probably does. Alice has
initiated communications by post and thus probably contemplates that Bill will
respond by post. In these circumstances, the acceptance is good when Bill posts
the letter it is at this point that a contract is formed. It does not matter that the
letter does not arrive until Monday (at which point the offer will have expired,
given Alices stipulation as to the time period).
A possible counter argument to this is that Alice asked Bill to let her know by
Saturday and this let me know means that there must be actual knowledge of
his acceptance that it must really be communicated. This necessity for actual
communication means that Bills acceptance is not good until Monday when
Alice actually opens the letter. To apply this counter argument, one needs to
consider the criteria set out in Holwell Securities v Hughes. One might also note
that since that decision, courts are reluctant to extend the ambit of the postal
acceptance rule.
d. Bill changes his mind. Here there is no authority as to the effect of his change of
mind. In addition, given the two possible positions in point (c) above, two possible
outcomes exist. If the postal acceptance rules apply, then a contract has been
formed and Bills later change of mind cannot upset this arrangement. However,
this seems a somewhat absurd result since Alice learns almost simultaneously
of the acceptance and the rejection. Bill has attempted to reject the offer by
a quicker form of communication than the post. In these circumstances, you
could apply the reasoning of Dunmore v Alexander and state that no contract
has been formed between the parties. In addition, given the reservations of the
court in Holwell Securities v Hughes, it seems improbable that a court would rely
upon the postal acceptance rule, an unpopular exception to the necessity for
communication, to produce an absurd result. The second possible outcome
here is that the postal acceptance rules never applied and no contract could be
formed until Alice opened the letter. Since she received the rejection at almost
the same time, she is no worse off (see reasoning above) by not having a contract.
You might also wish to consider the application of the rules for instantaneous
communications in Entores v Miles Far East Corp and Brinkibon v Stahag Stahl [1983]
2 AC 34. Should the communication made by telephone be deemed to have been
the first received? If so, there is no contract.
e. This is really the answer to the question. For the reasons stated above, the rejection
should be determinative. Accordingly, no contract arises in this situation and Bill is
not obliged to buy the shares in Utopia Ltd.
Question 2
Note at the outset that in two-part questions such as this you must answer both parts
(unless clearly instructed that candidates are to answer either a or b).
Again, your approach should be to break down the question into its constituent parts:
uu The effect of Cyrils letter is it an offer or an invitation to treat?
uu The effect of Davinas letter is it an acceptance? Does the postal acceptance rule
apply? Is Davinas letter a statement of intention?
uu Is Davinas letter an offer? Can she waive the necessity for the communication of
the acceptance?
By considering these issues, you can determine whether a contract has been formed
or not. With respect to part (a), if a contract has been formed, then Cyril is in breach
of this contract when he sells the stamp to Eric. You need to consider whether Cyril
has made an offer has he exhibited a willingness to commit on certain terms within
Storer v Manchester City Council (1974)? Or is his communication an invitation to treat or
a step in the negotiation of a contract? If his letter is an offer, it seems reasonable that
he expects an acceptance by post and the postal acceptance rules will apply: Household
Fire Insurance v Grant (1879).
On balance, it seems unlikely that his letter is an offer it is phrased in terms that seek
to elicit information and not to be binding upon further correspondence from Davina.
Davina may have made an offer and waived the necessity for further communication
see Felthouse v Bindley (1862). It is, however, possible that either Davina never made
an offer to buy the stamp (she was merely giving an indication of her top price) or that
Cyril never accepted the offer. In these circumstances, no contract has been formed
with Davina and Cyril is free to sell the stamp.
With regard to part (b), if Davina has (and can, given the law in this area see Felthouse
v Bindley (1862) and Rust v Abbey Life (1979)) made an offer, then Cyril has (if possible)
accepted the offer when he takes the step of setting aside the stamp. In these
circumstances, a contract has been formed and Davina is obliged to buy the stamp.
There are, however, significant weaknesses in reaching this conclusion primarily
that she seems to be indicating the top price she would pay for the stamp and that
if a broad interpretation is taken of Felthouse v Bindley (1862) (but this would be
contrary to the obiter dicta in Rust v Abbey Life) she cannot waive the necessity for
communication of the acceptance.
Question 3
A-B Jan 1 Is this an offer or an invitation to treat? You should define each and consider
Gibson v Manchester City Council and Storer v Manchester City Council. On the authority
of Gibson words such as considering, wonder, expect are likely to be considered
too equivocal to support the existence of an offer so this communication will be an
invitation to treat.
B-A Jan 2 This is phrased as acceptance but the law looks to the substance not the form
of communications. For example, in Hyde v Wrench a purported acceptance was held
to amount to an offer only and in Pickford v Celestica [2003] EWCA Civ 1741 a purported
acceptance was held to be a counter offer. Here the purported accept must be an offer
to buy.
A-B Jan 3 This is a counter offer as it is substantially different to the previous offer, see
Hyde v Wrench; it cannot be a mere enquiry as in Stevenson v McLean.
Was this offer accepted? Bs silence cannot constitute acceptance: Felthouse v Bindley.
If Bs silence amounted to acceptance then this would involve forcing a contract on
an unwilling party. This is the wrong which the rule that silence should not amount to
acceptance aims to avoid.
What if? In this variation the offeree B wants to waive the protection usually offered
by the Felthouse v Bindley rule, so here Bs silence could constitute acceptance on the
authority of Rust v Abbey Life.
Quick quiz
Question 1
Which of the following statements provides the most appropriate definition of an
offer in a contract?
a. Where one party (A) offers the other party (B) the opportunity to enter into
negotiations for the purchase of property.
b. Where one party (A) puts a proposition to another party (B) which is coupled by
an indication that they (A) are willing to be held to that proposition.
c. Where one party (A) sees an advert in a newspaper by (B) offering for sale a wild
live bird.
d. Where one party (A) thinks the other party (B) will accept a lower price for
property that he is preparing to sell.
e. Dont know.
Question 2
How did Parker LJ in the case of Fisher v Bell (1961) explain the status of an article as
part of a display in a shop window?
a. Contract law has never been clearer as to the fact that any display in a shop
window must constitute an offer. To decide otherwise would place shoppers in
peril as it would entice them into shops to purchase goods, only to discover the
goods were on sale for a different, probably higher, price.
b. In the case of an ordinary shop, although goods are displayed and it is intended
that customers should go and choose what they want, the contract is not
completed until, the customer having indicated the articles which he needs, the
shopkeeper, or someone on his behalf, accepts that offer.
c. It is perfectly clear that according to the ordinary law of contract the display of
an article with a price on it in a shop window is merely an invitation to treat. It is
in no sense an offer for sale, the acceptance of which constitutes a contract.
d. The display of goods constitute an offer which could not be accepted before the
goods reach the cashier. Until then the customer is free to return an article to
the shelf even though they have put it in the basket.
e. Dont know.
Question 3
Which of the following statements explains how the law of contract treats auction
sales?
a. The advertising of the auction sale is the point at which the contract begins. If
the claimant presents themselves for auction to discover there is no longer any
property for auction they can claim damages from the auctioneer for loss of
expectation.
b. Once the auction begins the auctioneer is bound to sell to the highest bidder
even if the reserve price is not met.
c. Once the auction has begun the highest bidder has the right to enforce the
contract even if they acquire property for 200 which is actually worth 14,000.
d. Once the auctioneers hammer has fallen then the highest bidder has the first
opportunity to enter into negotiations with the auctioneer as to what price they
should pay for the property up for sale.
e. Dont know.
Question 4
Which of the following statements was specifically made by Bowen LJ in Carlill v
Carbolic Smoke Ball Co (1893) and attempts to defeat claims in that case that the
advertisement was an invitation to treat rather than an offer?
a. Any act of the plaintiff from which the defendant gains any benefit or advantage,
or any work, detriment, or inconvenience suffered by the plaintiff, provided
such act is performed or such inconvenience sustained by the plaintiff, with the
consent, express or implied of the defendant.
b. In the advertisement cases ... there never was any problem with thinking that
the advertisement was a promise to pay the money to the person who first gave
information. The difficulty suggested was that it was a contract with all the
world. But that of course was soon overruled.
c. It follows from the nature of the thing that the performance of the condition is
sufficient to acceptance without the notification of it and a person who makes
an offer in an advertisement of that kind makes an offer which must be read by
the light of that common sense reflection.
d. I am of the opinion that an offer does not bind the person who makes it until it has
been accepted, and its acceptance has been communicated to him or his agent.
e. Dont know.
Question 5
Which of the following statements about unilateral contracts are true?
a. A unilateral offer can never be revoked after it has been made.
b. Revocation of a unilateral offer is only effective if the offeree receives actual

notice of revocation.
c. Revocation of a unilateral offer is effective when the offeree receives actual

notice of revocation and also if he does not but the offeror attempts to
communicate the revocation by the same means used to publicise the original
offer.
d. Revocation of a unilateral offer is effective when the offeree receives actual

notice of revocation and also if he does not but the offeror attempts to
communicate the revocation by the same, or more effective, means used to
publicise the original offer.
e. A unilateral offer can never be revoked once the offeree has begun performance
of the stipulated act.
f. A unilateral offer cannot be revoked once the offeree has begun performance
of the stipulated act whenever a term or collateral promise to that effect can be
implied.
Question 6
Which of the following statements is made by Denning LJ in Entores Ltd v Miles
Far East Corporation [1955] 2 QB 327 to explain the requirement, or not, of
communication of an acceptance to an offer made in a contract?
a. He who shouts loudest, shouts longest and if someone shouts their acceptance
and the Concorde aeroplane flies over and their acceptance is muffled by the
breaking of the sound barrier then that acceptance has still been delivered.
b. To err is human, to forgive divine and just because the other party has faithfully
conveyed the acceptance to the offer, if that acceptance is not communicated
effectively, a contract is not formed.
c. It appears to me that both legal principles, and practical convenience require

that a person who has accepted an offer not known to him to have been
revoked, shall be in a position safely to act upon the footing that the offer and
acceptance constitute a contract binding on both parties.
d. Suppose, for instance, that I shout an offer to a man across a river or 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.
e. Dont know.
Answers to these questions can be found on the VLE.
Am I ready to move on?

You are ready to move on to the next chapter if, without referring to the subject guide
or textbook, you can answer the following questions:
1. What is a contractual offer?
2. What is the difference between a unilateral and a bilateral offer?
3. What is the different between an offer and other communications?
4. How do you know when an offer has been communicated?
5. What is (and is not) a valid acceptance?
6. What is the necessity of communicating the acceptance?

7. What are the exceptions are to the necessity of communicating the acceptance?
8. What occurs when the offeror stipulates a certain method of acceptance?
9. What happens to an offer which is not accepted?
10. When does an offer expire?

Notes
3 Consideration
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 Promissory estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Introduction
The concept of consideration is the principal way in which English courts decide
whether an agreement that has resulted from the exchange of offer and acceptance
(as explained in Chapter 2) should be legally enforceable. It is only where there is
an element of mutuality about the exchange, with something being given by each
side, that a promise to perform will be enforced. A promise to make a gift will not
generally be treated as legally binding. It is the presence of consideration which
makes this promise binding as a contract. It is possible to see consideration as an
important indication that the parties intended their agreement to be legally binding
as a contract. Although there is a separate requirement of an intention to create legal
relations (discussed in Chapter 4), it is clear that historically this requirement was also
fulfilled by the requirement of consideration. While the doctrine of consideration is
crucial to English contract law, it has been applied with some flexibility in recent years.
At common law a promise is only enforceable if supported by consideration.
A B
A promises to paint Bs garden fence. The promise to do this is consideration moving
from A to B. For this to form the basis of a binding agreement there must be a promise
from B, perhaps to pay A for the work, for this to be a binding agreement. There is then
consideration moving from B to A.
In some circumstances, English courts will find that a promise given without
consideration is legally binding and this chapter concludes with an examination
of these instances. These instances are decided upon on the basis of the doctrine
of promissory estoppel and in this area the courts are concerned to protect the
reasonable reliance of the party who has relied upon the promise. These instances
arise where there is a variation of existing legal obligations.
LEARNING OBJECTIVES
This chapter introduces the doctrine and requirement of consideration to enable
you to discuss and apply in problem analysis its key components (and supporting
authority) including:
uu The basic definition of consideration.
uu The significance of consideration to the English law of contract.
uu The acts which the courts have recognised as sufficient to constitute good
consideration.
uu Situations where the performance of, or promise to perform, an existing
obligation amount to consideration for a fresh promise.
uu The definition of past consideration and its exceptions.
uu The role of consideration in the modification of existing contracts.
uu The essential elements of the doctrine of promissory estoppel.
uu How the doctrine of promissory estoppel lead to the enforcement of some
promises which are not supported by consideration.
Contract law 3 Consideration page 45
3.1 Consideration
Essential reading
McKendrick, Chapter 5: Consideration and form Section 5.1 Requirements of
form, Section 5.20 Reliance upon non-bargain promises, Section 5.21 The role
of consideration and Section 5.29 Conclusion: the future of consideration.
Poole, Chapter 4: Enforceability of promises: consideration and promissory

estoppel Section 1A What is consideration?.
Consideration has been called the badge of enforceability in agreements. This is

particularly important where the agreement involves a promise to act in a particular
way in the future. In exchanges where there is an immediate, simultaneous transfer
of, for example, goods for money (as in most everyday shop purchases), the doctrine
of consideration applies in theory but rarely causes any practical problems, this
immediate exchange is sometimes referred to as executed consideration. However,
if somebody says, for example, I will deliver these goods next Thursday or I will
pay you 1,000 on 1 January (executory consideration) it becomes important to
decide whether that promise is supported by consideration (that is, something has
been given or promised in exchange). A promise to make a gift at some time in the
future will only be enforceable in English law in absence of consideration if put into
a special form, that is, a deed. (For the requirements of a valid deed, see s.1 of the
Law of Property (Miscellaneous Provisions) Act 1989.) Where a promise for the future
is not contained in a deed, then consideration becomes the normal requirement of
enforceability.
3.1.1 The definition of consideration
Essential reading
McKendrick, Chapter 5: Consideration and form Section 5.2 Consideration
defined to Section 5.6 Consideration must be sufficient but it need not be
adequate and Section 5.19 Consideration must move from the promisee.

estoppel Section 1A What is consideration? and Section 1B Consideration
distinguished from a condition imposed on recipients of gifts.
Look at the traditional definition of consideration as set out in Currie v Misa (1875):
a valuable consideration, in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance, detriment, loss of
responsibility given, suffered or undertaken by the other.
You will see that it is based around the concept of a benefit to the person making the
promise (the promisor), or a detriment to the person to whom the promise is made
(the promisee). Either is sufficient to make the promise enforceable, though in many
cases both will be present.
This is generally quite straightforward where one side performs its part of the
agreement. This performance can be looked at as detriment to the party performing
and a benefit to the other party, thus providing the consideration for the other partys
promise. More difficulty arises where the agreement is wholly executory (that is, it
is made by an exchange of promises, and neither party has yet performed). It is clear
that English law treats the making of a promise (as distinct from its performance)
as capable of being consideration see the statement of Lord Dunedin in Dunlop
Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915) p.855. Thus, in a wholly executory (i.e.
unperformed) contract, the making of the promise by each side is consideration for
the promise made by the other side (so rendering both promises enforceable). This
leads to a circular argument. A promise cannot be a detriment to the person making
it (or a benefit to the person to whom it is made) unless it is enforceable. But it will
only be enforceable if it constitutes such a detriment (or benefit). For this reason it is
perhaps better to regard the doctrine of consideration as simply requiring mutuality
in the agreement (that is, something being offered by each side to it, the exchange
principle) rather than trying to analyse it strictly in terms of benefits and detriments.
Another principle of consideration is that to be able to enforce a promise it must be

proven that the promisee has provided consideration for that promise (Tweddle v
Atkinson). This principle is closely linked to the doctrine of privity, as Tweddle v Atkinson
is held to prove that consideration must move from the promisee but not necessarily
to the promisor and that only those party to the contract can enforce the obligations
of the contract. This is explored more fully in Chapter 11 but it is important to see the
connection between the two principles.
Activity 3.1
Suppose that A arranges for B to clean As windows, and promises to pay B 30 for
this work. B does the work. How does the analysis of benefit and detriment apply
in identifying the consideration supplied by B for As promises of payment?
Activity 3.2
As in 3.1, but this time A pays the 30 immediately, and B promises to clean the
windows next Tuesday. What is the consideration for Bs promise?
Activity 3.3
As in 3.1, but A and B arrange for the windows to be cleaned next Tuesday, with A
paying 30 on completion of the work. Suppose B does not turn up on Tuesday. Is B
in breach of contract?
3.1.2 Consideration must be sufficient but need not be adequate
Essential reading
McKendrick, Chapter 5: Consideration and form Section 5.6 Consideration
must be sufficient but it need not be adequate to Section 5.9 Compromise and
forbearance to sue.

estoppel Section 1C Consideration must be sufficient but need not be adequate.
These words can seem interchangeable at first glance but they actually mean
something very different in this context. The requirement that consideration must be
sufficient means that what is being put forward must be something which the courts
will, or have recognised as legally capable of constituting consideration. The fact that
it need not be adequate indicates that the courts are not generally interested in
whether there is a match in value between what is being offered by each party, so no
need for proportionality. Thus in Thomas v Thomas (1842) the promise to pay 1 per
annum rent was clearly sufficient to support the promise of a right to live in a house:
the payment of, or promise to pay, money is always going to be treated as being within
the category of valid consideration. On the other hand, the fact that 1 per annum was
not a commercial rent was irrelevant, because the courts do not concern themselves
with issues of adequacy.
Consider the case of Chappell v Nestl (1960). You will see that Lord Somervell justifies
the courts approach to the issue of adequacy by reference to freedom of contract:
A contracting party can stipulate for what consideration he chooses. The courts
will not interfere just because it appears that a person has made a bad bargain. The
person may have other, undisclosed, reasons for accepting consideration that appears
inadequate. In the case of Chappell v Nestl the reasoning was presumably that the
requirement to send in the worthless wrappers would encourage more people to buy
the companys chocolate.
It is sometimes suggested that consideration will not be sufficient if it has no

economic value. This explains White v Bluett (1853) where a sons promise to stop
complaining to his father about the distribution of the fathers property was held to be
incapable of amounting to consideration. But it is difficult to see that the wrappers in
Chappell v Nestl had any economic value either.
Activity 3.4
Read the case of Ward v Byham (1956). Identify the consideration supplied by the
mother. Does the consideration meet the requirement of having economic value?
Activity 3.5
Read the case of Edmonds v Lawson (2000). What consideration was supplied by the pupil
barrister? Does the consideration meet the requirement of having economic value?
3.1.3 Existing obligations as good consideration
Essential reading
McKendrick, Chapter 5: Consideration and form Section 5.10 Performance of a
duty imposed by law to Section 5.18 Past consideration.

estoppel Section 1C Consideration must be sufficient but need not be
adequate and Section 1D Part payment of a debt.
Chen-Wishart, M. Consideration: practical benefit and the Emperors

new clothes, in your study pack or Chen-Wishart, M. A bird in the hand:
consideration and contract modifications, in your study pack.
Luther, P. Campbell, Espinasse and the sailors: text and context in the common
law (1999) 19 Legal Studies 526.
There are three aspects to this topic, dealing with three different types of existing
obligation which may be argued to constitute consideration.
1. Obligations which arise under the law, independently of any contract.
2. Obligations which are owed under a contract with a third party.
3. Obligations to perform an existing obligation under a contract to the same

contracting party.
The third situation is, essentially, concerned with the variation of existing contractual
obligations as between the parties and the extent to which such variations can
become binding.
These three situations will be considered in turn.
1. Obligations which arise under law
An example of the first type of existing obligation would be where a public official
(such as a firefighter or a police officer) agrees to carry out one or more of their
duties in return for a promise of payment from a member of the public. In that
situation the promise of payment will not generally be enforceable. This is either
because there is no consideration for the promise (the public official is only
carrying out an existing duty) or, more probably, because public policy generally
suggests that the law should not encourage the opportunities for extortion that
enforcing such a promise would create.
Where, however, the official does more than is required by the existing obligation,
then the promise of payment will be enforceable, as shown by Glasbrook Bros Ltd v
Glamorgan CC (1925).
Activity 3.6
In Collins v Godefroy (1831), why was the promise of payment unenforceable?
Activity 3.7
In Ward v Byham (1956), why was the fathers promise enforceable?
2. Obligations which are owed under a contract with a third party
In the second type of situation, which regards the performance of, or promise
to perform, an existing obligation owed under a contract with a third party, the
position is much more straightforward. The courts have consistently taken the
view that this can provide good consideration for fresh promise. Thus it has been
applied to the fulfilling of a promise to marry (Shadwell v Shadwell (1860) such a
promise at the time being legally binding) and to the unloading of goods by a firm
of stevedores, despite the fact that the firm was already obliged to carry out this
work under a contract with a third party (The Eurymedon (1975)). The Privy Council
confirmed, in Pao On v Lau Yiu Long (1980), that the promise to perform an existing
obligation owed to a third party can constitute good consideration.
A B
A promises B to teach for one hour at the University.
B promises to pay X for that teaching.
A C
C, one of the university students, promises to pay Y for the hours teaching.
A agrees to do the teaching.
In this situation if A does the promised hours teaching they can claim both X from
B and Y from C. Although A has done no more than contractually obliged to do
under the contract with B, this is held to be valid consideration for the promise by
C to pay Y.
The consideration from A can be seen as the detriment of being open to liability
for breach of contract to both B and C should A fail to perform.
3. Obligations to perform an existing obligation under a contract to the same

contracting party
This is essentially where there is a variation to an existing contractual obligation

between contracting parties this is the most difficult to employ as consideration.
This results from the fact that a principle which was clear, though impractical in
some circumstances, has now been modified and the extent of this modification is
unclear.
Performance of an existing obligation

The general rule in relation to the variation of existing obligation can be seen in the
case of Stilk v Myrick (1809) (which you should read in full).
Stilk v Myrick was long

accepted as establishing the
principle that the
performance of an existing
contractual obligation could
never be good consideration
for a fresh promise, to pay
more in this case, from the
person to whom the
obligation was owed. The
sailors contract obliged them
to sail the ship back home.
Thus in bringing the ship back
to London they were doing
nothing more than they were
already obliged to do under
their original contract. This
could not be good
consideration for a promise of
Figure 3.1 Stilk was contracted to work on a ship owned by Myrick

additional wages. Only if the sailors had done something over and beyond their
existing obligation could the variation (the promise of extra payment) become
enforceable. Their extra work constituting fresh consideration for the promise to pay
extra (Hartley v Ponsonby).
Activity 3.8
What other explanation can there be for the decision in Stilk v Myrick?
Activity 3.9
How can Stilk v Myrick be distinguished from the factually similar case of Hartley v
Ponsonby (1857), where the recovery of additional payments was allowed?
However, this rule has now become less certain since the important decision of the
Court of Appeal in Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991). This case
raised the question of whether Stilk v Myrick could still be said to be good law. The
plaintiff carpenters, in completing the work on the flats, appeared to be doing no
more than they were already obliged to do under their contract with the defendants.
How could this constitute consideration for the defendants promise of additional
payment? The application of Stilk v Myrick would point to the promise being
unenforceable.
Yet the Court of Appeal held that the plaintiffs should be able to recover the promised
extra payments for the flats which they had completed. The Court came to this
conclusion by giving consideration a wider meaning than had previously been thought
appropriate. In particular, Glidewell LJ pointed to the practical benefits that would be
likely to accrue to the defendants from their promise of the additional money. They
would be:
uu ensuring that the plaintiffs continued work and did not leave the contract
uncompleted
uu avoiding a penalty clause which the defendants would have had to pay under their
contract with the owners of the block of flats
uu avoiding the trouble and expense of finding other carpenters to complete the work.
The problem is that very similar benefits to these could be said to have accrued to the
captain of the ship in Stilk v Myrick. The main point of distinction between the cases
then becomes the fact that no pressure was put on the defendants in Williams v Roffey
to make the offer of additional payment. In other words, the alternative explanation
for the decision in Stilk v Myrick, as outlined in the feedback to Activity 3.8, above, is
given much greater significance. The effect is that it will be much easier in the future
for those who act in response to a promise of extra payment, or some other benefit,
by simply doing what they are already contracted to do, to enforce that promise
(it is important to cross reference your reading here with Chapter 10 in relation to
economic duress).
You should note that Glidewell LJ summarises the circumstances where, in his view,
the practical benefit approach will apply in six points, which relate very closely to
the factual situation before the court and emphasise the need for the absence of
economic duress or fraud.
The application of Williams v Roffey was held to apply when:
1. There was a contract for the supply of goods or services.
2. A was unable to perform as promised (which can include economic reasons).
3. B agreed to pay more.
4. B obtained a practical benefit from that promise (as outlined above).
5. There was no fraud or duress by A to obtain that promise.
6. If the above are satisfied then consideration is found.

There is no reason, however, why later courts should be restricted by these criteria in
applying the Williams v Roffey approach.
Williams v Roffey has not affected the related rule that part payment of a debt can
never discharge the debtor from the obligation to pay the balance see Re Selectmove
(1995).
Part payment of debt

This rule does not derive from Stilk v Myrick but from the House of Lords decision in
Foakes v Beer (1884). As with the general rule about existing obligations, if something
extra is done (for example, paying early, or giving goods rather than money), then the
whole debt will be discharged (as held in Pinnels Case (1602)). But payment of less than
is due on or after the date for payment will never provide consideration for a promise
to forgo the balance. In Foakes v Beer the House of Lords held, with some reluctance,
that the implication of the rule in Pinnels Case was that Mrs Beers promise to forgo
the interest on a judgment debt, provided that Dr Foakes paid off the main debt by
instalments, was unenforceable.
This common law rule has been regarded with some disfavour over the past 100 years
and in some circumstances its effect can be avoided by the equitable doctrine of
promissory estoppel (discussed below, at Section 3.2). It might have been thought that
the extension of the scope of consideration in Williams v Roffey would have provided
the opportunity for a revised view of Foakes v Beer. After all, in many situations it may
be to the creditors practical benefit to get part of the debt, rather than to run the risk
of receiving nothing at all. In Re Selectmove (1995), however, the Court of Appeal held
that Williams v Roffey had no impact on the Foakes v Beer principle. That principle has
also subsequently been confirmed by the Court of Appeal in Ferguson v Davies (1997).
Some doubt attends the decision in Williams v Roffey. A differently constituted

Court of Appeal in Re Selectmove (1995) confined the ambit of the decision and in
South Caribbean Trading Ltd (SCT) v Trafigura Beeher BV (2004) Colman J doubted the
correctness of the decision in Williams v Roffey. In particular, Colman J noted that the
decision was inconsistent with the long-standing rule that consideration must move
from the promisee.
Activity 3.10
Read the case of Foakes v Beer, preferably in the law reports (1884) 9 App Cas 605
(although extracts do appear in Poole). Which of the judges expressed reluctance to
come to the conclusion to which they felt the common law (as indicated by Pinnels
case) bound them? What was the reason for this reluctance?
Activity 3.11
Why do you think that the Court of Appeal has been reluctant to overturn the
decision in Foakes v Beer?
3.1.4 Past consideration
Essential reading
McKendrick Chapter 5: Consideration and form Section 5.18 Past
consideration.
Poole, Chapter 4: Enforceability of promises: Consideration and promissory

estoppel Section 1C Consideration must be sufficient but need not be
adequate.
A further rule about the sufficiency of consideration states that generally the
consideration must be given after the promise for which it is given to make it
enforceable. A promise which is given only when the alleged consideration has been
completed is unenforceable. The case of Re McArdle (1951) provides a good example.
The plaintiff had carried out work refurbishing a house in which his brothers and sister
had a beneficial interest. He then asked them to contribute towards the costs, which
they agreed to do. It was held that this agreement was unenforceable, because the
promise to pay was unsupported by consideration. The only consideration that the
plaintiff could point to was his work on the house, but this had been completed before
any promise of payment was made. It was therefore past consideration and so not
consideration at all.
As with many rules relating to consideration, there is an exception to the rule about
past consideration. The circumstances in which a promise made after the acts
constituting the consideration will be enforceable were thoroughly considered in
Pao On v Lau Yiu Long (1979). Lord Scarman laid down three conditions which must be
satisfied if the exception is to operate.
1. The act constituting the consideration must have been done at the promisors
request. (See, for example, Lampleigh v Braithwaite (1615).)
2. The parties must have understood that the work was to be paid for in some way,
either by money or some other benefit. (See, for example, Re Caseys Patents (1892).)
3. The promise would be legally enforceable had it been made prior to the acts
constituting the consideration.
The second of these conditions will be the most difficult to determine. The court
will need to take an objective approach and decide what reasonable parties in this
situation would have expected as regards the question of whether the work was done
in the clear anticipation of payment.
Activity 3.12
Why was the approach taken in Re Caseys Patents not applied so as to allow the
plaintiff to succeed in Re McArdle, since it was obvious that the improvement work
would benefit all those with a beneficial interest in the house?
Activity 3.13
Jack works into the night to complete an important report for his boss, Lisa. Lisa
is very pleased with the report and says I know youve worked very hard on this:
Ill make sure theres an extra 200 in your pay at the end of the month. Can Jack
enforce this promise?
1. What is an executory contract?
2. Is the performance of an existing obligation owed to a third party good

consideration?
3. What principle relating to consideration is the House of Lords decision in Foakes

v Beer authority for?
Summary
The doctrine of consideration is the means by which English courts decide whether
promises are enforceable. It generally requires the provision of some benefit to the
promisor, or some detriment to the promisee, or both. The value of the consideration
is irrelevant, however. The performance of existing obligations will generally not
amount to good consideration, unless the obligation is under a contract with a third
party, or the promisee does more than the existing obligation requires. This rule is less
strictly applied following Williams v Roffey. Part payment of a debt can never in itself be
good consideration for a promise to discharge the balance. Consideration must not be
past, unless it was requested, was done in the mutual expectation of payment and is
otherwise valid as consideration.

Anson, Chapter 4: Consideration and promissory estoppel.
3.2 Promissory estoppel
Essential reading
McKendrick, Chapter 5: Consideration and form Section 5.22 Estoppel to
Section 5.29 Conclusion: the future of consideration.

estoppel Section 2 Promissory estoppel.
3.2.1 The equitable concept of promissory estoppel

The doctrine of promissory estoppel is concerned with the modification of existing
contracts. The position under the classical common law of contract was that such
modification would only be binding if consideration was supplied and a new contract
formed. Thus in a contract to supply 50 tons of grain per month at 100 per ton for 5
years, if the buyer wanted to negotiate a reduction in the price to 90 per ton, because
of falling grain prices, this could only be made binding if the buyer gave something
in exchange (for example, agreeing to contribute to the costs of transportation).
Alternatively the two parties could agree to terminate their original agreement
entirely, and enter into a new one. The giving up of rights under the first agreement
by both sides would have sufficient mutuality about it to satisfy the doctrine of
consideration.
These procedures are a cumbersome way of dealing with the not uncommon situation
where the parties to a continuing contract wish to modify their obligations in the light
of changed circumstances. It is not surprising, therefore, that the equitable doctrine of
promissory estoppel has developed to supplement the common law rules. This allows,
in certain circumstances, promises to accept a modified performance of a contract to
be binding, even in the absence of consideration.
The origin of the modern doctrine of promissory estoppel is found in older cases such
as Hughes v Metropolitan Railways but was more widely developed in the judgment of
Denning J (as he then was) in the case of Central London Property Trust Ltd v High Trees
House Ltd (1947).
The facts of the case concerned the modification of the rent payable on a block of
flats during the Second World War. The importance of the case, however, lies in the
statement of principle which Denning set out to the effect that a promise intended
to be binding, intended to be acted on, and in fact acted on, is binding so far as its
terms properly apply. Applying this principle, Denning held that a promise to accept a
lower rent during the war years was binding on the landlord, despite the fact that the
tenant had supplied no consideration for it. You should read this case in full.
The common law recognises the concept of estoppel by representation. Such an

estoppel only arises, however, in relation to a statement of existing fact, rather than a
promise as to future action: see Jorden v Money (1854). The concept of waiver has been
recognised by both the common law and equity as a means by which certain rights
can be suspended, but then revived by appropriate notice. See, for example, Hickman v
Haynes (1875), Rickards v Oppenhaim (1950) and Hughes v Metropolitan Railway (1877). It
was this last case upon which Denning J placed considerable reliance in his decision in
High Trees House. The concept of waiver, however, had not applied to situations of part
payment of debts. Note the suggestion of Arden LJ in Collier v P & MJ Wright (Holdings)
Ltd (2007), based upon the obiter dictum of Denning J, that promissory estoppel has
the effect of extinguishing the creditors right to the balance of a debt when he has
accepted a part payment of the debt. Under the modern law the concept of waiver has
been effectively subsumed within promissory estoppel.
3.2.2 The limitations on promissory estoppel

The doctrine of estoppel has been considered in a number of reported cases since 1947
and now has fairly clearly defined limits.
Need for existing legal relationship

It is generally, though not universally, accepted that promissory estoppel operates
to modify existing legal relationships, rather than to create new ones. The main
proponent of the opposite view is Lord Denning himself who, in Evenden v Guildford
City FC (1975), held that promissory estoppel could apply in a situation where there
appeared to be no existing legal relationship at all between the parties.
Need for reliance

At the heart of the concept of promissory estoppel is the fact that the promisee has
relied on the promise. It is this that provides the principal justification for enforcing
the promise. The lessees of the property in High Trees House had paid the reduced
rent in reliance on the promise from the owners that this would be acceptable. They
had no doubt organised the rest of their business on the basis that they would not be
expected to pay the full rent. It would therefore have been unfair and unreasonable to
have forced them to comply with the original terms of their contract. It has sometimes
been suggested that this reliance must be detrimental, but Denning consistently
rejected this view (see, for example, W J Alan & Co v El Nasr (1972)) and it now seems to
be accepted that reliance itself is sufficient.
A shield not a sword

This is related to the first point (concerning the need for an existing relationship). The
phrase derives from the case of Combe v Combe (1951). A wife was trying to sue her
former husband for a promise to pay her maintenance. Although she had provided
no consideration for this promise, at first instance she succeeded on the basis of
promissory estoppel. The Court of Appeal, however, including Lord Denning, held
that promissory estoppel could not be used as the basis of a cause of action in this
way. Its principal use was to provide protection for the promisee (as in High Trees
House providing the lessees with protection against an action for the payment of the
full rent). As Lord Denning put it: consideration remains a cardinal necessity of the
formation of a contract, though not of its modification or discharge.
English courts have resisted attempts to found an action on a promissory estoppel. See
Baird Textile Holdings Ltd v Marks & Spencer Plc (2001) although note the different approach
taken by the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher (1988).
Must be inequitable for the promisor to go back on the promise

The doctrine of promissory estoppel has its origins in equitable waiver. It is thus
regarded as an equitable doctrine. The importance of this is that a judge is not obliged
to apply the principle automatically, as soon as it is proved that there was a promise
modifying an existing contract which has been relied on. There is a residual discretion
whereby the judge can decide whether it is fair to allow the promise to be enforced.
The way that this is usually stated is that it must be inequitable for the promisor to
withdraw the promise. What does inequitable mean? It will cover situations where
the promisee has extracted the promise by taking advantage of the promisor. This
was the case, for example, in D & C Builders v Rees (1966) where the promise of a
firm of builders to accept part payment as fully discharging a debt owed for work
done was held not to give rise to a promissory estoppel, because the debtor had
taken advantage of the fact that she knew that the builders were desperate for cash.
Impropriety is not necessary, however, as shown by The Post Chaser (1982), where the
promise was withdrawn so quickly that the other side had suffered no disadvantage
from their reliance on it. In those circumstances it was not inequitable to allow the
promisor to escape from the promise.
Doctrine is generally suspensory

Whereas a contract modification which is supported by consideration will generally
be of permanent effect, lasting for the duration of the contract, the same is not true
of promissory estoppel. Sometimes the promise itself will be time limited. Thus in
High Trees House it was accepted that the promise to take the reduced rent was only
to be applicable while the Second World War continued. Once it came to an end,
the original terms of the contract revived. In other cases, the promisor may be able
to withdraw the promise by giving reasonable notice. This is what was done in Tool
Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). To this extent, therefore,
the doctrine is suspensory in its effect. While it is in operation, however, a promissory
estoppel may extinguish rights, rather than delay their enforcement. In both High
Trees House and the Tool Metal Manufacturing case it was accepted that the reduced
payments made while the estoppel was in operation stood and the promisor could
not recover the balance that would have been due under the original contract terms.
Where promise is prohibited by legislation

Evans v Amicus Healthcare Ltd (2003) concerned the use of embryos created by IVF prior
to the breakdown of the couples relationship. The man wished the embryos to be
destroyed, the woman to have the embryos used. In this context it was found, inter alia,
that the man had not given such assurances to the woman as to create a promissory
estoppel because the relevant legislation allowed him to withdraw his consent to the
storage of the embryos at any time. This judgement contains an important discussion as
to the current state of promissory estoppel and its possible future development.
A clear and unambiguous statement

Where the words used to make the statement claimed as the basis for a promissory
estoppel were ambiguous and capable of being interpreted in several ways (including
one which would not support the estoppel) then the words could not be said to
found an estoppel unless the representee sought and obtained clarification of the
statement. See Kim v Chasewood Park Residents [2013] EWCA Civ 239 and Closegate Hotel
Development (Durham) Ltd v McLean [2013] EWHC 3237 (Ch).
Activity 3.14
Why was Dennings statement of principle in High Trees House seen as such a
potentially radical development in the law?
Activity 3.15
Do you think that the doctrine of promissory estoppel is still needed, now that
Williams v Roffey has made it much more likely that a modification of a contract will
be found to be supported by consideration?
1. How does promissory estoppel differ from common law estoppel, and from
waiver?
2. What is the meaning of the phrase a shield not a sword in the context of
promissory estoppel?
3. What important statement of principle did Denning J make in the case of Central
London Property Trust Ltd v High Trees House Ltd?
Summary
Generally the modification of a contract requires consideration in order to be binding.
The doctrine of promissory estoppel, however, provides that in certain circumstances
a promise may be binding even though it is not supported by consideration. The
main use of the doctrine has been in relation to the modification of contracts, but it
is not clear whether it is limited in this way. The doctrine is only available as a shield,
not a sword; there must have been reliance on the promise; it must be inequitable to
allow the promisor to withdraw the promise; but it may well be possible to revive the
original terms of the contract by giving reasonable notice.

Anson, Chapter 4: Consideration and promissory estoppel.
Sample examination question

Simone owns five terraced houses which she is planning to rent to students. The
houses all need complete electrical rewiring before they can be rented out. Simone
engages Peter to do this work during August, at an overall cost of 5,000, payable
on completion of the work. After rewiring two of the houses Peter finds that the
work is more difficult than expected because of the age of the houses. On 20 August
he tells Simone that he is using more materials than anticipated and that the work
will take much longer than he originally thought. He asks for an extra 500 to cover
the cost of additional materials. Simone agrees that she will add this to the 5,000.
In addition, because she is anxious that the houses should be ready for occupation
before the start of the university term, she says that she will pay an extra 1,000 if
the work is completed by 15 September.
Peter completes the work by 15 September, but Simone says that she is now in
financial difficulties. She asks Peter to accept 5,000 in full settlement of her
account. He reluctantly agrees, but has now discovered that Simones financial
problems were less serious than she made out and wishes to recover the additional
1,500 he was promised.
Advise Peter.
Advice on answering the question

This question is concerned with the role of consideration in the modification of
contracts, and the doctrine of promissory estoppel.
There are three separate issues which you will need to consider.
uu Was Simones promise to pay the extra 500 a binding variation of the contract?
uu Was Simones promise of an extra 1,000 if the work is completed by 15 September

a binding variation of the contract?
uu Is Peters promise to take the 5,000 in full settlement binding on him?
The first two questions involve discussion of what amounts to consideration.
If Peter has provided consideration for Simones promises, then he will be able to
hold her to them. The answer to the third question will depend to some extent on the
answer to the first two. If there has been no binding variation of the original contract,
then Peter is not entitled to more than 5,000 in any case. If there has been a binding
variation, then the question will arise as to whether he is precluded from recovering
the extra money because of the doctrine of promissory estoppel.
As to the promised 500, you will need to consider whether the fact that Peter is
buying additional materials is good consideration for this promise. Simone may
argue that it was implicit in the original contract that the cost of all materials needed
would be included in the 5,000. The fact that Peter has made an underestimate
is not her responsibility. Similarly, in relation to the promised extra 1,000, is Peter
doing any more than he is contractually obliged to do, in that it seems likely that the
original contract was on the basis that the work was to be done by the end of August?
In answering both these questions you will need to deal with the principle in Stilk
v Myrick and the effect on this of Williams v Roffey. This will involve identifying any
practical benefit that Simone may have gained from her promises. If such a benefit
can be identified and there is no suggestion of improper pressure being applied by
Peter, then the variations of the contract will be binding on Simone. The effect of the
subsequent decisions in cases such as Re Selectmove and SCT v Trafigura upon Williams v
Roffey could also be considered.
In relation to the third issue, assuming that there has been a binding variation, you
will need to decide whether Foakes v Beer applies (in which case Peter will be able
to recover the 1,500), or whether Simone can argue that Peter is precluded from
recovery by the doctrine of promissory estoppel. In relation to the latter issue, one of
the matters which you will need to consider is whether promissory estoppel can apply
in a situation of a debt of this kind, as opposed to money payable under continuing
contracts such as those involved in High Trees House and Tool Metal Manufacturing v
Tungsten Electric. You will also need to consider whether the fact that Simone may have
not been fully truthful about her financial position may make it inequitable for her
to rely on promissory estoppel (see D & C Builders v Rees). The suggestion of Arden LJ in
Collier v P & MJ Wright (Holdings) could also be considered.
Quick quiz
Question 1
In Currie v Misa (1875) it was said that a valuable consideration, in the sense of the
law, may consist either in some right, interest, profit or benefit accruing to the
one party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other. Which of the following statements best represents what
this statement means?
a. Consideration involves the signalling of equal exchange of goods to ensure that
all contracts are fairly enforceable.
b. Consideration allows all promises to be enforced by showing that one party was
thoughtful about the other when they entered into negotiations.
c. Consideration is some benefit accruing to one party or some detriment suffered

by the other. It is a badge of enforceability.
d. Consideration involves a profit being obtained by one party at the expense of

the other. No exchange is required for the contract to be enforced.
e. Dont know.
Question 2
Which of the following scenarios, in light of the law on consideration, would most
likely allow K, in contract law, to enforce a contract for a new mobile phone?
a. J promises K a brand new mobile phone.
b. J promises K a brand new mobile phone if he takes it out of the box that it came in.
c. J promises K a brand new mobile phone for 5 which is far below its market
value.
d. J promises K a brand new mobile phone worth 150 because he gave him
150 worth of compact discs last year. K had no idea of this when he gave the
compact discs to J.
e. Dont know.
Question 3
Which of the following statements represents the common law view of part
payment of debt?
a. If one party (A) suggests that (B) be let off part of the payment of an existing
debt then (A) cannot then sue for recovery of that debt.
b. If one party (A) suggests that (B) be let off part payment of an existing debt then
(A) cannot sue for recovery of that debt before 25 years have passed.
c. If one party (A) suggests that (B) be let off part payment of an existing debt then
(A) can only sue for recovery of that debt if she can show that (B) was lying about
his financial situation.
d. If one party (A) suggests that (B) be let off part of the payment of an existing
debt then (A) can sue for recovery of that debt.
e. Dont know.
Question 4
In the case of The Eurymedon (1975) Lord Wilberforce said: An agreement to do
an act which the promisor is under an existing obligation to a third party to do
may quite well amount to valid consideration and does so in the present case: the
promise obtains the benefit of a direct obligation which he can enforce. Which of
the following scenarios best reflects this view?
Choose one answer.
a. If a carpenter has a contract with a builder who has a contract with a
homeowner to fit the kitchen in that house then if he receives 500 in addition
to his original fee, just to get the job done on time, he will have provided
sufficient consideration for this additional 500.
b. If a carpenter has a contract with a homeowner to fit the kitchen in that house
then if he receives 500 in addition to his original fee, just to get the job done on
time, he will have provided sufficient consideration for this additional 500.
c. If a carpenter has a contract with a builder who has a contract with a

homeowner to fit the kitchen then any promise to give 500 would be
unsupported by consideration and so not enforceable by the carpenter.
d. If the carpenter has a contract with a builder and he finishes the fitting of the
kitchen of the householder and the builder says I will give you a bonus for
fitting the kitchen. The builder later refuses.
e. Dont know.
Question 5
Which of the following statements is made by Russell LJ in Williams v Roffey Bros
& Nicholls (Contractors) Ltd (1990) to reflect the current view of the courts in the
requirement of consideration in any contract?
Choose one answer.
a. Consideration remains the cornerstone of English contract law. Any attempt to
remove the requirement of its presence has always been defeated.
b. It would be wrong to extend the doctrine of promissory estoppel, whatever its

precise limits at the present day, to the extent of abolishing in this back handed
way the doctrine of consideration.
c. Consideration there must still be but, in my judgement, the courts nowadays

should be more ready to find its existence so as to reflect the intention of the
parties to the contract where the bargaining powers are not unequal and where
the finding of consideration reflects the true intention of the parties.
d. If it be objected that the propositions above contravene the principle in

Stilk v Myrick, I answer that in my view they do not: they refine and limit the
application of that principle but they leave the principle unscathed.
e. Dont know.


1. What are the essential elements of the concept of consideration?
2. What is the significance of consideration to the English law of contract?
3. What types of behaviour will the courts treat as valid consideration?
4. In what situations will the performance of, or promise to perform, an existing

obligation amount to consideration for a fresh promise?
5. What is the definition of past consideration?
6. What is the role of consideration in the modification of existing contracts?
7. What are the essential elements of the doctrine of promissory estoppel?
8. How does the doctrine of promissory estoppel lead to the enforcement of some
promises which are not supported by consideration?
4 Other formative requirements: intention, certainty

and completeness
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.1 The intention to create legal relations . . . . . . . . . . . . . . . . . . 61
4.2 Certainty of terms and vagueness . . . . . . . . . . . . . . . . . . . . .64
4.3 A complete agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Introduction
We have examined many of the basic requirements necessary for the formation of an
enforceable contract: offer and acceptance (Chapter 2) and consideration (Chapter 3).
To these requirements we must add three more:
1. That the parties intend to create legal relations;
2. That the terms of their agreement are certain and not vague; and
3. That their agreement is a complete agreement that does not need further
development or clarification.
Once all of these requirements are present, courts will, in the absence of any vitiating
elements, recognise an agreement as an enforceable contract. We will examine each
of these new requirements in turn.
LEARNING OBJECTIVES
This chapter introduces the other formative requirements: intention to create
legal relations, certainty and completeness to enable you to discuss and apply in
problem analysis its key components (and supporting authority) including:
uu Why courts require an intention to create legal relations.
uu The difference between domestic agreements and commercial agreements with
regard to an intention to create legal relations.
uu The key factors in determining whether or not an intention to create legal
relations exists.
uu What is meant by certainty of terms and the difference between contracts
where there is certainty of terms with those where there is not.
uu Why courts insist upon certainty of terms.
uu The concept of vagueness in relation to contractual provisions.
uu The rationale behind the requirement of contractual completeness.
uu Whether, and if so when, a court may complete an agreement.
Contract law 4 Other formative requirements: intention, certainty and completeness page 61
4.1 The intention to create legal relations
Essential reading
McKendrick, Chapter 6: Intention to create legal relations.
Poole, Chapter 5: Intention to be legally bound and capacity to contract

Section 1 Intention to be legally bound.
Hedley, S. Keeping contract in its place Balfour v Balfour and the enforceability
of informal agreements (1985) 5 Oxford Journal of Legal Studies 391, this article
can be found in HeinOnline using the Online Library.
In Chapter 2 we examined the importance of intention in relation to an offer: for

a statement to be an offer, it must be made with the intention that it be binding
upon acceptance. It is also essential that all the parties to an agreement have an
intention to create legal relations. What this means is that the parties intend that
legal consequences attach to their agreement. In short, the parties intend that the
agreement will be binding with recourse to some external adjudicator (a court or
arbitrator) for its enforceability. The necessity for intention is most evident in domestic
and social agreements. These are agreements between friends (e.g. A agrees to host the
bridge club at her house if B will bring the food to feed the club) or agreements made
between family members (e.g. sister agrees with brother that she will not play her
radio loudly if brother will keep his hamster securely in its cage). In this context there
is generally an offer by one party, which is accepted by the other party and supported
by consideration. So far, the agreement looks like an enforceable contract. The parties,
however, probably do not intend a breach of the agreement to result in legal action.
Their agreement lacks an intention to create legal relations and is thus not a contract
because they did not intend it to be. The agreement has no legal effect at all.
Traditionally, the law has distinguished between domestic and social agreements
and commercial agreements. In the case of domestic and social agreements, it
is presumed that there is not an intention to create legal relations. In the case of
commercial agreements, it is presumed that there is an intention to create legal
relations.
In either instance, the facts of the case may displace the presumption the law would
otherwise make. For example, it may be that when neighbour A agreed to mow
neighbour Bs lawn in exchange for the apples on Bs apple tree, both parties intended
that this agreement would be legally enforceable.
The determination of whether or not the parties intended to enter into legally binding
relations is an objective one and context is all-important. What this means is that the
courts will not examine the states of mind of the parties to the agreement (a subjective
approach), but will ask whether or not reasonable parties to such an agreement would
possess an intention to create legal relations. See Edmonds v Lawson [2000] EWCA Civ
69.
In President of the Methodist Conference v Preston [2013] UKSC 29 the Supreme Court
held that it was necessary to consider the appointment of a Methodist minister in
the context of the factual background. In so doing, the Court found that there was no
contractual intention.
This objective approach applies regardless of whether the agreement is a social or

domestic one or a commercial one.
Social and domestic agreements

The leading case is Balfour v Balfour [1919] 2 KB 571. Here, because the husband would
be working overseas, he promised to pay his wife an amount of money each month.
When the parties separated, the wife sued the husband for this monthly amount.
The court refused to allow her action on the grounds that the agreement was not an
enforceable contract because, at the outset of their agreement, it was not intended
by either party to be attended by legal consequences. The parties did not intend that
the agreement was one which could be sued upon. The judgment of Atkin LJ really
seems to rest upon public policy arguments that as a matter of policy, domestic
agreements, commonly entered into, are outside the jurisdiction of the courts. His
judgment also highlights a judicial concern that if such agreements could be litigated
in the courts, the courts would soon be overwhelmed by such cases.
Similar reasoning was applied in the case of Jones v Padavatton [1969] 2 All ER 616
to find that the agreement between a mother and her adult child did not create
a contract. See also Coward v MIB [1963] 1 QB 259 where the court found that an
agreement to take a friend to work in exchange for petrol money was an arrangement
which lacked contractual intention.
Increasingly in the modern world, domestic arrangements are beginning to take on

a basis in contract law. Balfour v Balfour must be seen as a case which establishes a
rebuttable presumption that domestic agreements are not intended. An example
A rebuttable presumption
of a situation in which the presumption was rebutted can be found in the decision in is a presumption made by
Merritt v Merritt [1970] 2 All ER 760. In this instance the spouses were already separated courts as to a certain state
and the agreement was found to have an intention to create legal relations. A similar of facts until the contrary is
result followed in Darke v Strout [2003] EWCA Civ 176 as the court found that an proved.
agreement for child maintenance following the breakdown of a couples relationship
did not lack an intention to create legal relations given the formality of the letter. Nor
could it be said to be unenforceable for want of consideration since the woman had,
in entering the agreement, given up statutory rights to maintenance. In Soulsbury v
Soulsbury [2007] EWCA Civ 969 the Court of Appeal found that there was an intention
to create legal relations between two former spouses when one agreed to forego
maintenance payments in return for a bequest in the others will.
It can be seen that in many of these cases between spouses the usual presumption is
rebutted after the breakdown of the marriage relationship. A modern development
concerns the legal enforceability of an agreement that precedes, rather than follows,
the entering of a marriage known as a pre-nuptial agreement (colloquially a pre-nup).
In Radmacher v Granatino [2010] UKSC 42 the Supreme Court upheld a decision that the
husband was not entitled to an award of 5.5 million after the breakup of the marriage
because such an award would give insufficient weight to the pre-nuptial agreement.
This agreement acknowledged that neither party would acquire any benefit from the
others property during the marriage and its execution was a condition of a substantial
transfer of family wealth to the wife. Lady Hale dissented, arguing that there
remained important policy considerations sufficient to justify a different approach to
agreements made before and after marriage.
When agreements are entered between non-family members with respect to what
might be considered more trivial subjects such as the division of the proceeds of
joint betting, the cases are less clear. In Simpkins v Pays [1955] 3 All ER 10 it was found
that there was a contract where three co-habitees entered a competition together,
whereas in Wilson v Burnett [2007] EWCA Civ 1170 it was held that there was no binding
agreement to share bingo winnings.
Activity 4.1
Think of the last three promises you have made to friends or family. Did these
promises form agreements intended as contracts? Why (or why not)?
Activity 4.2
How does Simpkins v Pays differ from Coward v MIB?
Activity 4.3
A and B are married to each other. They agree that A will make all the mortgage
payments on the marital home and that B will pay all other household bills. This
arrangement carries on for two years whereupon A refuses to make any more
mortgage payments. Can B sue A?
Activity 4.4
A and B are married to each other. They agree that A will pay all the household
expenses and that B will remain at home to care for their children. B subsequently
takes up paid employment outside the home and another person cares for the
children. Must A continue to pay the household expenses?
Commercial agreements
In relation to commercial agreements, courts will generally presume that an intention
to create legal relations is present. See Esso Petroleum Ltd v Commissioners of Customs
and Excise [1976] 1 All ER 117. This is an especially strong inference when the commercial
context is an ongoing employment relationship (Dresdner Kleinwort Ltd v Atrill [2013]
EWCA Civ 394).
Exceptionally, the facts may disprove such an intention. In a sale of land, agreements
are normally made subject to contract. This wording expressly displaces any
presumption of contractual intention. In other situations, courts have found that the
specific wording of the agreement in question displaced any contractual intention.
See, for example:
uu a comfort letter Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989]
1 All ER 785
uu an honour clause Rose and Frank Company v JR Crompton and Brothers Ltd [1925] AC
445.
In most cases where the parties deal at arms length (i.e. they have no existing ties of
family, friendship or corporate structure) the court will find a contractual intention.
See Edmonds v Lawson (2000).
Activity 4.5
Why might a commercial party not want an agreement to be an enforceable
contract? Is such an agreement of any practical value?
Summary
Ultimately, the question of contractual intention is one of fact. The agreement
in question must be carefully scrutinised to determine the nature of the parties
agreement.
Without an intention to create legal relations, there will not be a contract.
1. To what extent are courts examining whether or not the parties intend to take
any dispute to a court for resolution? To what extent are the courts determining
whether or not the agreement has certain terms?
2. Are courts influenced by the reliance of one party upon the promise of another
in determining that a contractual intention is present?
3. Is the reasoning of the judges in Balfour v Balfour and Esso Petroleum v

Commissioners of Customs and Excise based on public policy considerations or on
the intentions of the parties to the agreements?
4. What factors do courts consider important in negativing contractual intention?

Freeman, M. Contracting in the Haven: Balfour v Balfour revisited in Halson,
R. (ed.) Exploring the boundaries of contract. (London: Dartmouth Publishing
Company, 1996) [ISBN 9781855217126].
4.2 Certainty of terms and vagueness
Essential reading
McKendrick, Chapter 4: Certainty and agreement mistakes Section 4.1
Certainty and Section 4.2 Vagueness.
Poole, Chapter 3: Agreement Problems Section 1 Certainty.
An enforceable contract requires certainty of terms. That is to say, for an agreement to

be a contract, it must be apparent what the terms of the contract are. If an important
term is not settled, the agreement is not a contract.
A statement cannot be an offer unless it is sufficiently certain. In Scammell v Ouston

[1941] AC 251 the court found that the agreement was not enforceable because the
terms were uncertain and required further agreement between the parties (see the
discussion in Chapter 2). Viscount Maugham explained that because the terms were
uncertain, there was no real agreement (a consensus ad idem) between the parties.
The underlying rationale for this area of law can be seen in that if the terms cannot be
determined with certainty, there is no contract for the court to interpret. It is not the
role of the court to create the terms of the contract for this would be to impose a
contract upon the parties. Courts will nonetheless try to give legal force to the parties
attempt to make a contract unless it is legally or practically impossible to give [it]
any sensible content (Scammel v Dicker [2005] EWCA Civ 405 at [30]). On this basis in
Durham Tees Valley Airport v bmibaby (2010) it was held that an agreement to operate
two aircraft from an airport for 10 years was not void for uncertainty because it did not
specify a minimum number of passengers or flights.
In some circumstances, particularly where the parties have relied upon an agreement,
courts will more readily imply or infer a term or find that the essentials of a contract
have been established. This can be seen in the decision in Hillas v Arcos [1932] All ER
494. Here, the agreement had been relied upon and the court was able to infer the
intention of the parties based upon the terms in their agreement and the usage in the
trade. Similarly, in RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Co KG [2010]
UKSC 14 agreement had been reached on all terms of economic significance and
performance commenced. The Supreme Court said that an objective interpretation of
the parties words and deeds suggested that they intended to enter a binding contract
despite the fact that certain terms were not yet confirmed. Even if performance is
almost complete and the parties throughout confidently expected to agree upon key
terms, their actual failure to do so will mean that no contract comes into existence
(British Steel Corp v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504).
Activity 4.6
You agree with Z that you will buy a shirt from Zs summer collection for 25. No size
is specified in your agreement. Have you a contract? Explain.
Activity 4.7
What is the difference between the decisions in Hillas and Scammell? Are there
convincing reasons for deciding these cases differently?
It may be that the agreement provides a mechanism, or machinery, to establish the
term. In such a situation, there is certainty of terms. Thus, if interest on a loan is to
be set at 1% above the Bank of Englands base rate on a certain date, then this is a
certain term. It cannot be stated at the outset of the contract what the interest rate
is, but certainty of terms exists because, on the relevant date, the interest rate can be
determined by an agreed mechanism.
There is a difference between a term which is meaningless and a term which has yet to
be agreed. Where the term is meaningless, it can be ignored, leaving the contract as a
whole enforceable. See Nicolene Ltd v Simmonds [1953] 1 QB 543.
Summary
If the terms of an agreement are uncertain or vague, courts will not find a contract
exists. Courts will not create an agreement between the parties. In a number of
circumstances, courts will use various devices to ensure that terms which might
appear uncertain are, in fact, certain. It may be possible to determine what the term is
from the usage in the trade. A vague or meaningless term may be ignored.
1. Would an agreement to use all reasonable endeavours to achieve a certain
objective be enforceable?
2. What are the arguments in favour of allowing a court to establish the essential
terms of an agreement?
4.3 A complete agreement
Essential reading
Incompleteness.
Poole, Chapter 3: Agreement problems Section 1C Incompleteness.
To create an enforceable contract, parties must reach an agreement on all the major
elements of their contract. The agreement must, in other words, be complete. There
must be nothing left outstanding to be agreed upon at a later date. Completeness is
an aspect of certainty of terms: unless an agreement is complete, a court is unable
to state with certainty what agreement has been made between the parties. If there
is no agreement on all of the essential elements of a bargain, there is no contract.
There must be an agreement on matters such as price, either by fixing the price or
establishing a mechanism to fix the price. What is essential in a contract will depend
upon the nature of the contract.
There is no such thing as an agreement to agree. In Courtney & Fairbairn Ltd v Tolani
Brothers (Hotels) Ltd (1975) it was held that there was no contract where the parties
had simply agreed to negotiate. Their agreement was not enforceable as a contract.
In Barbudev v European Cable Management Bulgaria EOOD [2012] EWCA Civ 548 a
communication offering investment on terms to be agreed was said to be no more
than an unenforceable agreement to agree.
The reason for this probably lies in the practical consideration that if the agreement
is incomplete, it is not for the court to complete the agreement because the court
would then be creating, rather than interpreting, the contract. In Walford v Miles [1992]
2 AC 128 Lord Ackner noted that the parties to negotiations had diametrically opposed
aims and so their opposing interests could not be reconciled sufficiently to support in
Walford an implied obligation to continue to negotiate in good faith with a particular
party. In contrast, an undertaking not to negotiate with third parties (called a lock-
out agreement) was, if for a fixed period, sufficiently certain to be enforceable (Pitt v
PHH Asset Management Ltd [1994] 1 WLR 327).
Activity 4.8
Your milkman leaves you a note to ask if you would like an order of bread at some
point in the future. You reply that you would and you agree to pay his price of 1 per
loaf. Is your agreement a contract? When will the bread be delivered?
Activity 4.9
You offer to pay 200,000 for a house subject to contract. Although the house
looks fabulous on a first viewing, subsequent inspection of it reveals that it suffers
badly from damp. The vendor insists that you must buy the house as she has
accepted your offer. Must you?
In some instances, legislation or case law will enable the court to add the necessary
term to the agreement. An example of this can be seen in s.8(2) of the Sale of Goods
Act 1979 which provides that where the price in a contract for the sale of goods has
not been determined the buyer must pay a reasonable price. Where this occurs, the
agreement can be completed and an enforceable contract exists.
In other instances, where the parties have acted in reliance upon what otherwise
might be considered to be an incomplete agreement, courts have found that they
were able to imply the necessary terms. For examples of this, see the decisions in Foley
v Classique Coaches Ltd [1934] 2 KB 1 and British Bank for Foreign Trade Ltd v Novinex Ltd
[1949] 1 KB 623. There are two different ways of rationalising what courts are doing in
these instances.
uu The first is that courts are protecting the parties reasonable reliance upon an
agreement
uu The second is that, because the parties have relied upon the agreement, it is easier
to imply with certainty what the parties would originally have agreed upon as the
essential terms.
Activity 4.10
What elements have courts found essential in determining whether the agreement
is complete? Why are these elements essential?
Activity 4.11
In what instances have courts been prepared to imply or insert what appears to
be an otherwise missing essential element? Why was the court prepared to do this?
Summary
The agreement must contain all the essential terms necessary to execute the
agreement with certainty. If the agreement does not contain all the necessary terms,
it will not be an enforceable contract. Courts will not create the contract between the
parties.
1. Once the parties have begun to perform an agreement, are courts concerned to
protect the reliance of the parties?
2. How do the previous dealings of the parties or the custom within a particular
trade assist the court? See Scammell v Ouston (1941).
Examination advice
The matters considered in this chapter are unlikely to appear as a separate question
on the examination paper. This does not mean that they are not important. They must
be present in order to form an enforceable contract. The fact that the law insists upon
their presence (and the circumstances in which the law creates these elements) tells
us a lot about the consensual nature of contract law.
For examination purposes, however, the matters covered in this chapter are likely
to appear as issues in a larger question involving a bigger issue. You must think
about how these smaller issues fit within the larger issue. Thus, for example, does an
intention to create legal relations also indicate a greater problem with the adequacy
of consideration?
When you read examination questions that refer to an agreement, check to see if the
agreement is domestic or social in nature will intention to create legal relations be
an issue in the context of that question? A party seeking to avoid contractual liability
may do so on the ground that there was no intention to create legal relations. Where
the agreement is between commercial parties, consider whether or not there are
factors which displace the presumption of intention.
With respect to certainty and completeness, situations will arise where the words
may be ambiguous. You must ask yourself whether this ambiguity creates a problem of
certainty, or possibly a mistake.
Always check to make sure an agreement is complete. Is there anything essential

which remains outstanding? If there is, can a court imply or infer what this term
should be?

A promises her son B 1,000 per month if he begins his engineering studies at
university. As brother, C, offers B a place in his house if B promises to finish his
studies. B offers his girlfriend D 50 per month if she will drive him to the university
each morning. Are any of these agreements enforceable?

The best approach to an examination question of this nature is to break it down into
its component parts. There are three agreements in question. Consider each in turn.
Do not be afraid to use sub-headings to assist the clarity of your answer.
1. Agreement between A and B A is Bs mother and automatically creates an issue of

intention. You should consider the general nature of the test set out by Lord Atkin
in Balfour v Balfour. Next, consider the similar facts of Jones v Padavatton. Without
some element to distinguish it from Jones, it is likely that a court would reach the
same outcome. Is such an element present? Note, however, the more general focus
of intention (as opposed to the relationship of the parties) in Edmonds v Lawson.
2. Agreement between C and B C is Bs uncle; again, intention to create legal

relations becomes an issue. However, an uncle is one step removed from a parent
or a spouse and courts might more readily infer such an intention. You need to
consider what is established by the cases cited above in (1). An additional problem
present here is that the agreement may not be certain in its terms. How long can
B stay in the house? What part of the house can B occupy? How does Scammell
v Ouston apply to this situation? This lack of certainty suggests that this is not a
complete agreement. Is there a way for the court to infer what these terms (such
as the length of Bs tenure) are? See Foley v Classique Coaches Ltd.
3. Agreement between B and D D is Bs girlfriend the agreement thus occurs

within a social context. In this sense, it is similar to Coward v MIB. Here, the House
of Lords found that, in the absence of evidence to the contrary, they would be
reluctant to infer that agreements to take ones friend to work in exchange for
remuneration gave rise to a contract. The relationship lacked intention neither
party contemplated that they were entering into legal obligations. Note, however,
Lord Crosss judgment in Albert v MIB does it provide a ground for allowing that
the B/D arrangement is a contract?
Quick quiz
Question 1
Which of these statements was made by Denning LJ in Merritt v Merritt (1970) to
indicate the view of the courts when deciding whether parties had an intention to
create legal relations?
a. A husbands word is his bond. Even if a man promises his wife flowers daily at
the beginning of their marriage there is no reason why a wife could not sue on
that promise 25 years later when all he brings her is complaints of the quality of
her cleaning.
b. Contracts should not be ... the sports of an idle hour, mere matters of pleasantry
and badinage, never intended by the parties to have any serious effect
whatever.
c. It is necessary to remember that there are agreements between parties which

do not result in contracts within the meaning of that term in our law [including]
arrangements that are made between husband and wife.
d. In all these cases the court does not try to discover the intention by looking into
the minds of the parties. It looks at the situation in which they were placed and
asks itself would reasonable people regard this agreement as intended to be
binding.
e. Dont know.
Question 2
Which of these statements best summarises the reasons why the House of Lords
refused to enforce the husbands promise to his wife in Balfour v Balfour (1919)?
a. The law does not interfere in the relations between family members and
promises made between family members are binding, if at all, only as a matter
of honour and not law.
b. When the husband made the promise to his wife, the couple had not yet
separated and the husband was not bound to pay his wife any money.
c. When the husband promised to pay his wife an allowance he did so without any
intention to create legal relations.
d. When the husband promised to pay his wife an allowance he did so without any
intention to create legal relations and his wife provided no consideration for his
promise.
e. Dont know.
Question 3
In Jones v Padavatton (1969) Fenton Atkinson LJ found that the presumption against
an intention to create legal relations in domestic agreements was not rebutted
because:
a. A promise by a parent to pay a child an allowance during the course of their
studies was no more than a family arrangement not intended to give rise to
legal consequences.
b. The daughter provided no consideration to support her mothers promise to pay

her an allowance during her studies.
c. In examining the subsequent history of events between the mother and

daughter, it was apparent that the parties had not exhibited an intention to
create legal relations at the time the mother promised to fund the daughters
studies.
d. While there was an intention to create legal relations when the mothers
promise was made, the subsequent alterations in the method by which the
mother funded the daughters studies removed this intention.
e. Dont know.
Question 4
Which of the following most accurately states the position in relation to uncertain
and incomplete agreements?
a. A court will never enforce an agreement which omits any term.
b. Courts distinguish between executor agreements and partially executed

agreements in determining whether an agreement is too uncertain to enforce.
c. A court will never enforce an agreement which omits an essential term.
d. Courts will not enforce an agreement unless all the terms are written.
e. Dont know.
Question 5
Which of the following is not a method by which a term, seemingly uncertain or
vague, can be given certainty?
a. That the parties agree that one of the parties resolve the issue.
b. That the matter is resolved by legislation provision.
c. That the agreement provides that the term be resolved by judicial decision.
d. That the agreement provides that the resolution of a particular matter is

determined by a third party to the contract.
e. Dont know.

1. What is meant by an intention to create legal relations?
2. Why do courts require an intention to create legal relations?
3. What is the difference between domestic agreements and commercial agreements

with regard to an intention to create legal relations?
4. What are the most important factors in determining whether or not an intention
to create legal relations exists?
5. What is meant by certainty of terms?
6. What is the difference between contracts where there is certainty of terms with
those where there is not?
7. Why do courts require certainty of terms?
8. What is the concept of vagueness?
9. Why must the agreement be complete?
10. In what circumstances can a court complete an agreement?

Notes
Part II Content of a contract and regulation of terms
5 The terms of the contract
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
5.1 Is a statement or assurance a term of the contract? . . . . . . . . . . . .73
5.2 The use of implied terms . . . . . . . . . . . . . . . . . . . . . . . . . 76

major undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Introduction
In the last three chapters we have considered the basic elements necessary to form an
enforceable contract: offer and acceptance (Chapter 2), consideration (Chapter 3) and
certainty and intention (Chapter 4). We will now examine the content, or terms, of the
resulting contract to ascertain the extent of the obligations undertaken. What are the
parties to the contract obliged to do or not do? It is of critical importance to establish
the terms of any contract because the question of whether or not the contract has
been breached depends upon whether one party has failed to perform according to
the terms of the contract. In addition, the rights that an injured party has following a
breach of contract by another party depend upon whether the term breached was a
major term or a minor term.
This chapter deals with three areas concerning the content of the contract. These are:
uu whether a particular statement made or assurance given in the course of the

negotiations leading up to the contract forms part of the contract
uu how terms (and equivalent obligations) can be implied into a contract either by
operation of a statute or by common law
uu how, and why, the major or essential undertakings of a contract are distinguished
from the minor or inessential ones.
LEARNING OBJECTIVES
This chapter introduces the terms of a contract to enable you to discuss and apply
in problem analysis its key components (and supporting authority) including:
uu Being able to identify when a statement forms a part of the contract (and when
does it not).
uu The remedial consequences of the classification of a statement as respectively, a
term and (in outline at this stage) a mere representation.
uu Why and when will courts imply terms into contracts.
uu The limits upon courts in implying terms into contracts.
uu The different categories of contractual terms.
uu How to determine within which category a particular term should be placed.
uu The consequences of this classification.
Contract law 5 The terms of the contract page 73
5.1 Is a statement or assurance a term of the contract?
Essential reading
McKendrick, Chapter 8: What is a term? and Chapter 9: The sources of
contractual terms Section 9.1 Introduction and Section 9.2 The parol
evidence rule.
Poole, Chapter 6: Content of the contract and principles of interpretation

Section 1 Pre-contractual statements: terms or mere representations? and
Section 2 Written contracts.
Contracts in practice are never as straightforward as the examples explained in legal

textbooks. Textbooks leave the reader with the impression that the contractual
process is an orderly process commencing with an invitation to treat, followed by an
offer and a corresponding acceptance. The reality of many situations, however, is one
of statements forming lengthy, sometimes contradictory, exchanges and negotiations
prior to the formation of a contract. In this chapter we determine which of these
statements form a part of the contract and which do not.
This determination is important because those statements that form a part of the
contract are terms and breach of a term of a contract gives rise to a right to damages
and, possibly, a right to terminate the contract (see Chapter 13: Performance and
breach). If the statement does not form a part of the contract, it is said to be a mere
representation. If a mere representation is not true, there is not a breach of contract
because the representation is not a part of the contract. Someone who suffers loss as a
result of their reliance upon a mere representation will not be able to sue for breach of
contract but will have other remedies available. These remedies for misrepresentation
(a misrepresentation is an untrue representation) are examined in Chapter 9. When
you study misrepresentation it is important to link your reading of that chapter to this
section of Chapter 5. The range of remedies for misrepresentation is introduced in
Section 5.1.1 below.
A brief observation on terminology. You will notice in your reading on this topic
that many of the cases discuss whether the statement is a warranty (by which they
mean a term of the contract or of a separate, collateral, contract) or a representation
(a mere puff; a statement which has no legal significance). Use of the term warranty
has been avoided here because it confuses the discussion set out in Section 5.3:
The classification of terms into minor and major undertakings, in which the term
warranty is used to mean something slightly different.
5.1.1 False representations

Prior to the enactment of the Misrepresentation Act 1967, and the development of the
tort of negligent misstatement in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC
465, a misrepresentation had to be fraudulent in order for the injured party to receive
damages and the proof of fraud was very difficult. Because of this, the older cases are
concerned with attempts by the injured party to establish that the statement was a
contractual term (for which damages were available) rather than a representation.
Lord Denning MR described these attempts in Esso Petroleum Co Ltd v Mardon [1976]
QB 801. At present, however, the matter is not so clear-cut. In many circumstances it
is now advantageous for a party to establish that the statement is a representation
and actionable as a misrepresentation under the Misrepresentation Act 1967. A point
examined further in Chapter 9.
Examination advice
We have just seen that a finding that a statement made in negotiations is not a
term is not now so serious for the party who relied upon it because the victim of a
misrepresentation now has a greater range of remedies available than in the past.
Nonetheless, the proper classification of the statement made in negotiations is
of great importance when answering problem type questions. If in your answer
you wrongly classify a statement made in negotiations as a term when it is a mere

representation this will lead you to write about the remedies available for breach of
contract which are not relevant and so you will gain little or no credit. The criterion of
relevance is applied strictly by markers. There are no charity marks for a discussion of
an area of law, no matter how well written and supported by cases, if it is not relevant
to the question asked. It is a feature of many legal problems that a piece of initial
analysis is a signpost that directs the rest of your answer in a particular direction. Any
such signpost must be identified and conclusions reached after careful application of
the relevant principles.
Finding the intention of the parties

If, then, it is of critical importance to establish if the statement is a term of the
contract or a mere representation which is not a part of the contract, how is this
ascertained? At one level the answer is simple, it all depends on the intention
(objectively ascertained of course) of the parties. Do their words and conduct indicate
to a reasonable person that the statement was intended to be mere representation
or, alternatively, that it was intended to be a contractual term? Difficulty arises in the
application, as opposed to the statement, of this test. The courts have utilised a small
number of factors or rules of thumb to assist them. It is important to emphasise that
these are factors, not rules. If one of these factors applies it inclines to a conclusion
that the statement was intended to be either a mere representation or a term. They
are not rules which would dictate a certain conclusion. When applied to a set of facts
one factor might suggest the statement was intended to be a term, another that it
was a mere representation. In such cases the competing factors must be weighed one
against the other to see which, on the facts, is the stronger. The factors referred to by
the courts include the following. The cases suggest that the first factor may be the
most important.
uu whether the statement maker has special knowledge of the matter in question
where the representor has greater knowledge of the matter than the other, this
is indicative that the statement is intended to be a term Dick Bentley v Harold
Smith Motors [1965] 2 All ER 65; where the representee has greater knowledge of the
matter than the other, this is indicative that the statement is intended to be a mere
representation Oscar Chess Ltd v Williams [1957] 1 All ER 325)
uu whether the maker of the statement accepted responsibility for the soundness
of the statement where such responsibility is assumed, this indicates that the
statement was intended to be a term (Shawel v Reade [1913] 2 IR 64)
uu the importance attached to the statement the more important the matter,
the greater the likelihood that the parties intended the statement to be a term
(Bannerman v White [1861] 142 ER 685)
uu where the statement is accompanied by a recommendation that its truth be

verified the statement is more likely to be a mere representation (Ecay v Godfrey
[1947] 80 LI L Rep 286)
uu where one party clearly relied upon the other, this is indicative that the statement
was intended to be a term (Esso Petroleum Co Ltd v Mardon [1976] QB 801).
Again, it is important to recognise, as Lord Moulton observed in Heilbut, Symons & Co

v Buckleton [1913] AC 30, that none of these factors are decisive tests. The presence or
absence of these factors is not conclusive of the intention of the parties: the intention
of the parties is deduced from the totality of the evidence.
The parol evidence rule

If the parties have chosen to place their contract in a written document, courts have
held, as a general rule, that they cannot provide extrinsic evidence to add to, vary or
contradict the written document; the document is the sole source of the terms of the
contract. This is known as the parol evidence rule (see, e.g. Jacobs v Batavia & General
Plantations Trust Ltd [1924] 2 Ch 329). While the rule is intended to promote certainty, it
has the potential to produce injustice in some instances.
To minimise these injustices a number of exceptions to the rule exist. First, where the
written document was not intended to cover the whole of the agreement the rule
does not apply: Allen v Pink [1838] 150 ER 1376. Second, parol evidence is admissible
to prove terms or a custom which must be implied into the agreement. Third,
parol evidence may be admitted to show that the contract is void by reason of a
misrepresentation, mistake, fraud, or non est factum (see Chapters 8 and 9). Fourth,
parol evidence may also be admitted to show that a contract has not yet come into
operation or has ceased to operate. Fifth, parol evidence may be admitted to prove
the existence of a collateral contract.
The parol evidence rule is said to promote certainty (AIB Group plc v Martin [2001] UKHL
63 at [4]). Evidence to support the benefit of such certainty is provided by the fact that
many commercial contracts incorporate an express clause to similar effect called an
entire obligation clause. This is a contractual term which expressly provides that the
written contract records the totality of their legally enforceable agreement. Such a
provision is valuable in preventing parties from threshing through the undergrowth
[for] some remark or statement (often long forgotten) upon which to found a
claim (Inntrepeneur Pub Co v East Crown Ltd [2000] 3 EGLR 31 per Lightman J). In Axa
Sun Life Services v Campbell Martin [2011] EWCA Civ 549 the Court of Appeal applied this
dictum emphasising that such clauses will help reduce litigation and associated costs.
5.1.2 Terms of collateral contracts

We have thus far distinguished between contractual terms and representations on the
basis that if the statement was a contractual term then it was a term of that particular
contract. It is also possible that the statement is a term of a separate contract a
contract collateral to (i.e. running beside) the main contract. For example, it may
be that I contract to sell you my antiquarian bookshop. I provide you with figures
demonstrating past sales. This statement is not included in the contract of sale;
however, it was made with contractual intent and it forms the basis of a collateral
contract. If the figures are incorrect, if I have improperly warranted the past sales, this
is actionable as a breach of the collateral contract. See Heilbut, Symons & Co v Buckleton
[1913] AC 30 and Esso Petroleum Co Ltd v Mardon [1976] QB 801.
Activity 5.1
Think of the circumstances in which a purchaser will rely upon a sellers expertise as
to the good being sold. In what situations will a purchaser rely upon a seller?
Activity 5.2
Is it relevant to ask, as Lord Denning does in cases such as Dick Bentley Productions
v Harold Smith (Motors) Ltd [1965] 1 WLR 623, whether the defendant was innocent
of fault as an aid to determining the existence of contractual intention? Does this
shed any light on the way judges decide what is the proper inference?
Activity 5.3
Apply the relevant factors to determine whether the statement made by the
private seller of a car to a private buyer that it is a [Triumph] Herald convertible,
white 1961 would be classified as a term or a mere representation when it later
transpires that the car is not a 1961 model?
Activity 5.4
What is the parol evidence rule? Is it still important? If not, why not?
Summary
It is important to determine whether a statement or assurance is a term of the
contract or a representation because this determines the remedy available to the
injured party. If the statement is a term of the contract, or of a collateral contract, the
injured party may bring an action for damages. If it is a representation, the injured
party must establish that the statement is an actionable misrepresentation.

Anson, Chapter 5: The terms of the contract.
5.2 The use of implied terms
Essential reading
McKendrick, Chapter 9: The sources of contractual terms Section 9.8 Implied
terms.

Section 4 Implied terms.
We have, thus far, thought of contractual terms as express terms. I order a pair of roller
skates from a local sports equipment shop. I stipulate that they are to be a size 42, have
four in-line wheels and that the colour will be black. I agree to pay 99 for the skates.
The shopkeeper stipulates that he will deliver them on Friday. All of the matters in this
exchange amount to express terms terms the parties have explicitly agreed upon.
These express terms, however, do not necessarily form the entirety of the contract
between the shopkeeper and myself. In certain circumstances, a court will imply terms
into a contract. Thus, in the example above, the courts will use the Consumer Rights
Act 2015 to imply a duty, as between a business and consumer to provide goods of a
satisfactory quality (s.9(1)), only that the roller skates were fit for purpose.
In this section we will consider the circumstances in which courts will imply duties
and terms into a contract. In examining this area, it is important to bear in mind that
courts are generally reluctant to imply terms into a contract. The courts generally
consider their role to be that of an interpreter of contracts rather than a maker of
them. The more frequently terms are implied into a contract, the greater the extent to
which the court has created the contract rather than merely interpreted it.
In Crossley v Faithful & Gould Holdings Ltd [2004] EWCA Civ 293 the Court of Appeal
declined to find that there was an implied term within the contract of employment
which provided that an employer ought to take reasonable care of an employees
economic well-being. The introduction of such a term would be a major extension
of the existing law and would place an intolerable burden upon employers. Dyson
LJ observed that courts in cases involving implied terms ought not to focus on the
elusive concept of necessity but to recognise that, to some extent at least, the
existence and scope of standardised implied terms raise questions of reasonableness,
fairness and the balancing of competing policy considerations. These important
comments were endorsed by Lady Hale in the Supreme Court in Geys v Societe Generale
[2012] UKSC 63 at [56].
Courts will imply terms into contracts either by operation of the common law or by
statute law. These situations include the following:
uu where there is an established trade usage
uu because of the relationship between the parties
uu to give effect to an unexpressed intention of the parties
uu by operation of statute.
We will examine these in turn.
5.2.1 Implied terms in common law
Trade usage
The courts may imply terms into the contract where an established trade usage can be
demonstrated. This is particularly common in commercial and mercantile contracts.
Here, the standardised implied term functions as a kind of default rule. An example of
such a situation would be that the vendors of a certain type of good always paid the
brokers commission with regard to the sale; absent a term to the contrary, courts will
imply such a term into this type of contract.
The nature of the relationship

Similarly, some terms will be implied because of the nature of the relationship
between the parties: they are general default rules arising from particular forms of
contracts according to Lord Steyn in Equitable Life Assurance Society v Hyman [2002]
1 AC 408. Two relationships have been particularly productive here: landlord and
tenant and employer and employee. In Liverpool City Council v Irwin [1976] AC 239 the
House of Lords implied a duty to take reasonable care of the so called common parts
(stairs, hallways and lifts, etc.) on the landlord (here a local authority) of premises
with multiple occupants. Terms have been implied into contracts of employment
to the effect that an employer should not: overwork its staff in a way that damages
their health (Johnstone v Bloomsbury Health Authority [1992] QB 333); conduct business
fraudulently (Malik v Bank of Credit and Commerce International SA (In Liquidation) [1997]
3 WLR 95); or go back on an earlier promise to provide a large bonus pool (Attrill v
Dresdner Kleinwort Ltd [2012] EWHC 1468) in a manner likely to destroy or seriously
damage the relationship of confidence and trust between employer and employee.
In this area the courts are sensitive to the point that the law of contract is generally
understood to be about enforcing contracts which the parties, not the courts, have
fashioned for them. To minimise any necessary usurpation of the parties general
right to create their own contract, a narrowly framed contract term is more likely to
be implied by law than an overly broad one. In Scally v Southern Health Board [1992]
1 AC 294 a term was implied that the employer was obliged to alert employees to a
particular trap in their pension scheme whereby, if they did not act promptly, they
would fail to secure a large benefit. In contrast in Crossley v Faithful & Gould Holdings Ltd
(2004) the Court of Appeal declined to impose a term on the basis of a more general
duty on employers to look out for their employees financial well-being.
The unexpressed intention of the parties and the officious bystander

The courts may imply terms into the contract to give effect to what appears to be the
unexpressed intention of the parties. In some circumstances, the contract will not
function unless the term is implied; the term is necessarily implied to give business
efficacy (i.e. effectiveness) to the contract. On this basis in The Moorcock [1889] 14 PD
64 a term was implied into a contract for the use of a tidal dock that the owner of the
facility had taken reasonable steps to check that the river bottom was safe for a ship
to settle on after the tide had gone out. Consequently, the business efficacy test is
sometimes also known as the Moorcock test.
A different test was proposed in the much quoted judgment of MacKinnon LJ in Shirlaw
v Southern Foundries (1926) Ltd [1939] 2 KB 206:
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.
[1939] 2 KB 206, 227.
In an important judgment in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR
1988, Lord Hoffmann sought to re-state the law relating to the implication of terms
at common law. The implication of a term is an exercise in the construction of the
contract as a whole. Previous cases establish not a series of independent tests to be
met but rather a collection of different ways in which judges have tried to express
the central idea that the proposed implied term must spell out what the contract
actually means. A term may be implied to give effect to the overall purpose of the
document as understood by a reasonable person. However, that reasonableness alone
is not a sufficient basis for implication was reaffirmed by the Supreme Court in Marks
and Spencer plc v BNP Paribas Securities Services Trust Company [2015] UKSC 72.
It is difficult to assess the impact of Lord Hoffmanns restatement of the proper way to
approach the issue of the implication of terms into contracts. It is perhaps inconsistent
with the longstanding usage of the officious bystander test in commercial contracts.
Despite the broader approach urged it is unlikely to change the courts general refusal
to interfere with detailed written documents that express a negotiated compromise
between commercial parties with opposed objectives (Philips Electronique Grance
Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 and Mediterranean Salvage &
Towage Ltd v Seamar Trading & Commerce Inc (The Reborn) [2009] EWCA Civ 531). In Marks
and Spencer v BNP Paribas Securities Services Trust Company [2015] UKSC 72 the Supreme
Court emphasised the correctness of the traditional restrictive approach to the
implication of terms and so rejected any expansive interpretation of Lord Hoffmanns
comments.
The situation is different where the written document is less expansive. In Yam Seng
Pte Ltd v International Trade Corp [2013] EWHC 111 Leggatt J said that terms will be more
easily implied into an agreement which itself is skeletal, arguing for the implication
into all commercial agreements of a general duty to perform the contract in good
faith. Predictably, the general disinclination to interfere with commercial dealings
has been re-asserted and the broader general duty suggested by Leggatt J has been
denied (Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013]
EWCA Civ 200) or at least limited to long term contracts where there is considerable
interdependence of the parties, called relational contracts (Hamsard 3147 Ltd (t/a Mini
Mode Childrenswear) v Boots UK Ltd [2013] EWHC 3251).
Activity 5.5
Why did the House of Lords reject the variety of implication that the law implies a
term on the basis that it is reasonable to do so, favoured by Lord Denning MR? (The
rejection is made by Lord Wilberforce in Liverpool City Council v Irwin (1977).)
Activity 5.6
A contracts with B to assemble bicycles to Bs specifications. One of these
specifications is that the bicycles will be fitted with a unique gear system. B
manufactures these gear systems. Is there an implied term that B will supply A with
this gear system in sufficient quantities to manufacture the requisite number of
bicycles?

Peden, E. Policy concerns behind the implication of terms in law (2001) 117 LQR
459.
5.2.2 Terms implied by operation of statute

The above three instances are circumstances where the term is implied by operation
of the common law. Terms may also be implied, or equivalent duties imposed, in
contracts by operation of legislation. In these instances, the terms are implied or
duties imposed because Parliament legislates that the term will be in the contract.
To a certain extent, this is to provide a standardisation of terms in certain kinds of
contracts. It also provides a measure of protection for certain categories of parties,
such as consumers.
Prior to the passing of the Consumer Rights Act 2015 the key legislative provisions
were applicable (though to different extents) to contracts between two businesses
(so called B2B contracts) and also to contracts between businesses and consumers (so
called B2C contracts). Since the Consumer Rights Act 2015 came into force in October
2015 B2B and B2C contracts will be subject to separate statutory regimes.
B2B contracts
As between a business and business the earlier legislation of Sale of Goods Act 1979
(SGA) and Supply of Goods Services Act 1982 (SGSA) will apply. In a contract for the sale
of goods the following terms are implied:
uu SGA s.12 an implied term that the seller has the right to sell the goods.
uu SGA s.13 an implied term that the goods will conform to any description given.
In a number of older cases the courts required the strict and exact fulfilment of any
description used by the seller. Although microscopic variations would be disregarded
it was said that A ton does not mean about a ton (Arcos v EA Ronaasen & Son [1933] AC
470). Subsequent cases suggest that words of description fall within s.3. Rather the
section only applies if they constitute a substantial ingredient of the identity of the
thing sold Reardon Smith Line Ltd v Hansen-Tangen (The Diana Prosperity) [1976] 1 WLR
989.
uu SGA s.14(2) an implied term that the goods are of satisfactory quality. According
to s.14(2A) and 14(2B) in assessing whether the goods are of satisfactory quality the
court should take account of any description use which might serve to increase
(e.g. first class) or decrease (e.g. seconds) the standard expected. The courts are
also instructed to take account of the price (if relevant). The word if was possibly
used to prevent a seller arguing that sale goods could be of a lower quality than
non-sale goods. Goods are required to be fit for all the purposes for which goods
of that kind are commonly supplied and account may be taken of the goods
appearance and finish as well as their safety and durability.
uu SGA s.14(3) an implied term that the goods are reasonably fit for any particular
purpose which the buyer made known to the seller. If clothing was bought and the
buyer asked and was assured that it could be washed in a washing machine then a
term to that effect will be implied.
IMPORTANT The terms implied by s.14(2) and 14(3) (and also that implied by the Sale of
Goods and Services Act 1982 s.13 below) only arise where the sale is in the course of a
business. A sale may still be made in the course of a business where it is an infrequent
dealing such as the sale of a fishing boat by a fisherman in Stevenson v Rogers [1999] QB
1028. Where goods are supplied in the course of a business the requirement that they
be of satisfactory quality does not extend to defects brought to the buyers attention,
or more importantly, defects which a pre-purchase inspection that was undertaken
should have revealed (Bramhill v Edwards [2004] EWCA Civ 403).
In a contract for the provision of a service the following term is implied:
uu SGSA s.13 an implied term that any service provider will carry out the service
with reasonable care and skill. This term will only be implied where the service is
provided in the course of a business.
B2C Contracts
The CRA 2015 imposes duties upon traders contracting with consumers that
correspond to the implied terms described above for B2B contracts. The CRA 2015 uses
the language of duties rather than implied terms but the substance of the obligation
should be the same. The duties are:
uu CRA s.11(1) a duty on the trader to supply goods that conform to any description
given.
uu CRA s.9(1) a duty on the trader to supply goods of satisfactory quality. Satisfactory
quality is to be assessed by reference to a non-exhaustive list of factors set out in
s.9(2)-(7).
uu CRA s.10(1) a duty to supply goods that are reasonably fit for any purpose made
known to the trader by the consumer.
uu CRA s.49(1) a duty on the trader to perform any service with reasonable care and
skill.
The CRA itself limits the extent to which these duties can be excluded. This is discussed
further in Section 6.2.1.

Treitel, Chapter 23, for a complete and detailed overview of the CRA 2015.
1. Place the circumstances in which terms will be implied into a contract into two
categories first, those implied by law and secondly, those implied by fact. If
necessary, refer to McKendrick, Chapter 9, Section 9.8 Implied terms.
2. On which party is the onus of proving the existence of an implied term?
3. Does the implication of terms into a contract resolve problems or create them?
Summary
Courts will, in certain circumstances, imply terms into a contract. The terms will be
implied either by operation of the common law or by statute. Once the terms are
implied, they are effective as a contractual term.

major undertakings
Essential reading
McKendrick, Chapter 10: The classification of contractual terms.
McKendrick, Chapter 19: Breach of contract Section 19.6 The right to

terminate performance of the contract to Section 19.8 The right of election.
Poole, Chapter 8: Breach of contract Section 3 Identifying repudiatory breach

and the classification of terms.
We began this chapter by examining how statements and exchanges become terms of
contracts. We conclude by examining how these terms are classified. In general, terms
will be classified into minor and major undertakings (or obligations).
To understand the discussion of the classification of contractual terms it is necessary

to start with the remedies for breach. A contractual term is a primary obligation.
Every breach of a primary obligation gives rise to a secondary obligation to pay
damages for the loss caused. In some cases this is the only remedy, but in others there
is the further remedy of terminating (ending or rescinding) the contract. That is to
say, some breaches of contract provide the injured party with an option. He or she
can either (a) terminate the contract and claim damages or (b) affirm the contract
(accept the breach and insist on continued performance of the contract) and claim
damages. The classification of terms is important because the injured party is only
given this option when the term breached is a condition or there is a sufficiently
serious breach of an innominate term (see Section 5.3.2 below). The injured party is
not given the right to terminate the contract for breach of a term that is a warranty.
We will return to these concepts in Chapter 14 where we examine the performance
and breach of contracts.
Before examining what the terms condition, innominate term and warranty
mean, it is important to consider the different concepts of rescission. The words
rescind and rescission have different meanings in different contexts. Rescinding
or terminating for breach means that the injured party is entitled, if he so wishes,
to treat the contract as discharged (i.e. brought to an end) and to refuse to make
further performance of his own obligations or to receive further performance of
the other partys obligations. This is different from rescission (rescinding) for
misrepresentation, which, when effected, means that the contract is cancelled from
the very beginning. For this reason in this context termination is preferred as a term
over rescission.
Termination for breach is a drastic remedy. The severity of the situation may be
exacerbated when an injured party uses his right to rescind simply to escape from
what has become a bad bargain. For example, a person who has arranged delivery of
coal at a time when coal is scarce and prices are consequently high may later find that
coal has become more plentiful and prices are lower. Such a person may seek to use a
technical breach of contract (that is to say, a breach which does not really harm him)
to end the contract.
5.3.1 The distinction between conditions and warranties

For this reason it is most important to define the breaches which will give the injured
party the right to refuse further performance. A solution to this was found in the 19th
century by classifying the terms of a contract into the two following types.
uu Conditions: breach of which gave the right to refuse further performance.
uu Warranties: for breach of which damages were the only remedy.
Note that a party rescinding for breach need not show that the breach of condition
has actually caused any loss. See Bowes v Shand [1877] 2 App Cas 455 and Re Moore and
Landauer [1921] 2 KB 519.
This classification into conditions and warranties was extensively used by the
drafters of the Sale of Goods Act 1979 (and previously 1893), where the principle
is that the most important terms are conditions and the less important ones are
warranties. (Condition is another word used in several senses: the present sense is
highly artificial, but more important for our purposes than the natural meaning of a
suspensive condition.)
At common law, however, it is clear that the ultimate test is the parties intention: if
the intention is clearly expressed, a term will be a condition, however unimportant
it is. This intention may be expressed in different ways. Where a term is called a
condition this is highly persuasive, but not always conclusive evidence, to infer that
the parties intention was that it should be a condition (L Schuler v Wickman Machine
Tool Sales [1974] AC 235). The next most compelling means of expressing such an
intention is if the parties use words that indicate the importance of a clause. Where
a contract expressly provides that time is of the essence this has been held to be
a sufficient demonstration of intention to render prompt performance a condition
of the contract (Lombard North Central plc v Butterworth [1987] QB 527). However if
the intention is not clearly expressed, the court will again have to draw the proper
inference. See Behn v Burness [1868] 122 ER 281; Bettini v Gye [1876] 1 QBD 183 and
Poussard v Spiers [1876] 1 QBD 410.
5.3.2 Innominate terms

It was implicit in this 19th-century approach that a breach of a contractual term that
was not classified as a condition gave no right to refuse further performance, however
serious the consequences for the injured party. This assumption was rejected in the
Hong Kong Fir case in 1962 (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd
[1962] 1 All ER 474), where the Court of Appeal recognised a new category of terms that
are neither conditions nor warranties. Such unclassified terms are usually referred to
as innominate or intermediate terms.
For breach of such terms the court will decide whether the injured party has the right
to rescind in the light of the seriousness of the consequences of the breach. See also
Cehave v Bremer Handels GmbH (The Hansa Nord) [1976] QB 44, where this analysis was
applied to a term in a contract for sale of goods which did not fall within the statutory
conditions.
The Hong Kong Fir approach may make it less easy for a contract to be rescinded for
breach on a mere technicality but it inevitably introduces greater uncertainty into
the law. In some cases the need for certainty must prevail. See Maredelanto Compania
Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1970] 2 WLR 907; Bunge v
Tradax Export SA [1981] 1 WLR 711; Cie Commerciale Sucres et Denrees v C Czarnikow Ltd
(The Naxos) [1990] 1 WLR 1337 and Barber v NWS Bank [1996] 1 WLR 641. But contrast
Torvald Klaveness v Arni Maritime Corp (The Gregos) [1994] 1 WLR 1465 where the House
of Lords held that the obligation to re-deliver a time-chartered ship on the due date
was probably not a condition.
It is important to note that the Hong Kong Fir case has not changed the law on the
question of what is a condition. It does, however, seem to have had a knock-on effect
on the application of that law by the courts. See Reardon Smith v Hansen-Tangen [1976]
1 WLR 989 where words identifying the yard where the ship was to be built were held
not part of the description so as to amount to a condition of the charter party.
A similar reluctance to permit rescission on a technicality may have influenced

the approach of the House of Lords to the construction of the express condition in
LSchuler v Wickman Machine Tool Sales (1974) and the express termination clause in Rice
(T/A Garden Guardian) v Great Yarmouth BC [2003] TCLR 1.
Contrast the more traditional approach in the following cases.
uu Lombard North Central v Butterworth [1987] QB 527: punctual payment was made a
condition. Note that the hirer was also liable in damages for the entire loss caused
to the plaintiffs by the rescission of the contract.
uu Union Eagle v Golden Achievement [1997] 2 All ER 215: a 10-minute delay was too
much. Time was of the essence: as the time for performance had passed, so too had
the right to performance.
Activity 5.7
Why was the unseaworthiness of a chartered ship (in Hong Kong Fir) considered
less important than the owners estimate of when she would be ready to load the
charterers cargo?
Activity 5.8
If the time charterer is late in redelivering the ship, what are the practical
consequences for the owner?
Activity 5.9
What more could Schuler (in L Schuler v Wickman Machine Tool Sales) have done to
achieve the effect of making the visits genuinely a condition of the contract?
Activity 5.10
Compare the decision in Schuler with that in Lombard. How are they different?
Summary
Contractual terms are categorised as conditions, warranties or innominate (or
intermediate) terms. The categorisation is important because it determines whether
or not the wronged party is entitled to terminate the contract upon breach. Only
the breach of a condition or a sufficiently serious innominate term justifies the
termination of the contract. The principal difficulty posed with this area of the law
is one of certainty: it is often hard to ascertain whether or not there has been a
sufficiently serious breach of an innominate term as to justify termination.

Treitel, G. Some landmarks of twentieth century contract law. (Oxford: Oxford
University Press, 2002) [ISBN 9780199255757] Chapter 3 Types of contractual
terms.
Examination advice
The matters considered in this chapter are unlikely to appear as separate
issues in examination questions. However, the material considered in this
chapter is very important and virtually all examination papers on the law of
contract contain questions on the incorporation of terms in a contract or the
classification of terms and the consequences of breaching different terms.
It is of prime importance in any situation to establish what the terms of a contract

are. Without establishing the terms of the contract it is impossible to ascertain what
the parties are obliged to do and whether or not they have performed the contract.
Consequently, you will find that a careful study of this area of the law is important.
A review of past examination papers indicates that the examiners have frequently
combined an issue involving the terms of the contract with other issues. While this
advice is not exhaustive, these other areas have often been the regulation of terms,
issues involving the performance and breach of the contract and the issue of damages.
The scope for combining an issue of terms with other issues is very wide. Because of
this breadth, three different questions involving terms have been provided below. You
will not, at this point, be able to answer Question 2 (below) fully: they are provided
simply to show you how an issue involving terms can be combined with other issues.
You should return to these questions when you have completed these other areas and
review the questions again.
In attempting a problem question, you should carefully study the facts provided and
determine what terms are incorporated into a contract. If the statement is not a term of
the contract, is it possible that it may be a misrepresentation? In examining the terms of
a contract, you should bear in mind the possibility that terms might be implied into the
contract if this is the case, what effect do these terms have? Lastly, with regard to the
classification of terms, you will need to consider the importance of the term.
A review of past examination papers reveals that essay questions have often been
a variation on the theme, Why is certainty so important in commercial contracts?.
It is most important to have thought, before the examination, about such issues as
whether the essentially flexible concept of innominate terms does not introduce an
undesirable degree of certainty into the law.

Question 1
Alban is a surveyor. Four months ago he bought a nine-month-old Landmaster car
from Brendas Garage Ltd for use in his practice. He paid 12,500 for the car and was
given a written guarantee in the following terms. Brendas Garage Ltd guarantees
that, for three months from the date of purchase, it will put right free of charge
any defects in the vehicle which cannot be discovered on proper examination
at the time of purchase. Thereafter all work and materials will be charged to the
customer.
The sales manager recommended to Alban that he should take out the special
extended warranty under which, for payment of 350, the car would have been
guaranteed in respect of all defects for a further two years, but Alban declined.
Last week the engine and gearbox seized up. The repairs will cost 2,000.
Advise Alban. Would your answer differ if he also used the car to take his wife
shopping on Saturdays?
Question 2
The present legal rules allowing an innocent party to bring a contract to an end
for breach are unclear and in need of reform. Fortunately, the rules concerning
measure of damages for breach are clear.
Discuss.

Question 1
You should begin this problem by considering the facts given. Note that at the end of
the problem, a variant on the facts is provided. The variant involves the personal use of
the car this is likely to give rise to issues about the legal treatment of consumers by
statute law.
The first thing to establish is whether or not there has been a breach of contract
when the engine and gearbox seized up. To establish this, it is necessary to determine
what the terms of the contract are. An express term is that Brendas garage will
put right any problem which occurs within three months. This term is of no use to
Alban because his problem has occurred outside the three months. The issue then
becomes, in the absence of any other express term, whether or not a term can be
implied into the contract. This contract is for the sale of goods and is not a sale by a
trader to a consumer. Therefore you must consider the Sale of Goods Act 1979 and
not the Consumer Rights Act 2015. Section 14(2) provides that where the seller sells in
the course of a business, there is an implied term that the goods supplied under the
contract are of satisfactory quality. You need to consider whether or not satisfactory
quality is established here (by applying ss.14(2A), (2B) and (2C) of the Act). You need
to consider whether or not the statutorily implied term is negatived or varied by the
express agreement between the parties. If this is a consumer sale (as per the variant),
the statutorily implied terms are subject to the Consumer Rights Act 2015. If this is not
a consumer contract, the statutorily implied term can be excluded to the extent that it
is reasonable to do so.
If this is not a consumer sale and the term is implied (and not negated by the presence
of the express terms) then the buyer, Alban, cannot reject the goods where the breach
of a condition implied by s.14 is so slight that it would be unreasonable to reject them
(by reason of s.15A of the Sale of Goods Act).
With regard to the variant to the question, you need to consider whether or not the
use of the car to take his wife to the market on Saturdays removes the contract from
one made in the course of a business.
Question 2
This question calls for an examination of when an innocent party can end a contract
and the rules for ascertaining the measure of damages (a topic you have yet to
consider in this guide). The question invites a comparison between the apparent
lack of clarity an innocent party faces in knowing when he or she is able to end the
contract (the warranty/condition approach or the Hong Kong Fir approach) and the
clarity in the rules surrounding the calculation of damages. The principal challenge
in answering this question lies in clearly synthesising and analysing a wealth of case
law. You will need to examine and compare two areas of law (terms and damages). A
good answer to this question provides some analysis as to why there is a lack of clarity
in ascertaining when a contract can be terminated you could, for example, discuss
whether this apparent lack of clarity provides courts with the flexibility to reach a
just result by preventing parties from terminating a contract for what is actually a
trivial breach. With regard to the area of damages, it is by no means certain what an
appropriate measure of damages will be in many cases. As you will see when you reach
this topic, recent case law has, in some ways, rendered this issue more confusing.
Quick quiz
Question 1
innominate term?
Choose one answer.
a. The major or main obligation in the contract where breach will give the right to
refuse further performance.
b. A more or less important obligation depending upon the effects of breach.
c. A less important obligation where breach will only provide damages as the
remedy.
d. An obligation which the courts will read into the contract so as to support the
intention of the parties.
e. Dont know.
Question 2
Which of the following actions is most likely to be a suitable degree of notice to
ensure that an exclusion clause could be relied upon by the party attempting to
exclude liability?
Choose one answer.
a. A statement excluding liability for loss or theft of articles from a hotel room is
placed on the wall of a hotel bedroom you have secured for the night.
b. A statement excluding liability for accident or damage for the hire of a chair is
on the back of a ticket handed over to you at the point of hire.
c. A statement excluding liability is found on a written sale note sent after an

oral contract has been concluded with a company that you have previously
contracted with.
d. A statement excluding liability for loss or damage to your car is found on the
back of the ticket you obtain from the automated car parking machine when
you enter the car park.
e. Dont know.
Question 3
Which of the following is not considered significant by courts in establishing
whether or not a statement is a term of the contract?
a. Whether the maker of the statement accepted responsibility for the soundness
of the statement.
b. Whether or not the parties to the contract have written the statement down
after it was discussed.
c. Whether or not the parties attached importance to the statement.
d. Whether or not one party clearly relied upon the other.
e. Dont know.
Question 4
In The Moorcock (1889), Bowen LJ implied a term into the contract between the
parties because:
a. The relevant legislation required him to do so.
b. As a matter of public policy concerning the use of the jetty it was important to
imply the term.
c. Because of the presumed intention of the parties.
d. Because of the presumed intention of the parties and because it was necessary
in the circumstances.
e. Dont know.
Question 5
Which of the following statements is false?
a. The origins of innominate terms are doubtful.
b. Innominate terms are substantially the same as intermediate terms.
c. The identification of intermediate terms by the Court of Appeal in Hong Kong

Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962) was an important factor in
introducing a degree of certainty to the rights of an injured party.
d. Whether or not an injured party can terminate a contract for the breach of an
intermediate term depends upon the seriousness of the particular breach.
e. Dont know.


1. When does a statement form a part of the contract (and when does it not)?
2. What are the effects of a statement which is a term and a statement which is not
a term of the contract?
3. Why and when will courts imply terms into contracts?
4. What are the limits upon courts in implying terms into contracts?
5. What are the different categories of contractual undertakings (terms)?
6. How is it determined within which category a particular term should be placed?
7. What are the consequences attendant upon a breach of each of these different
categories of undertakings?
Part II Content of a contract and regulation of terms
6 The regulation of the terms of the contract
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.1 Indirect common law controls . . . . . . . . . . . . . . . . . . . . . . 89
6.2 Statutory control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Introduction
The law of contract is distinguished from other areas of private law because it is about
the enforcement of consensual agreements. In theory the parties to a contract are free
to choose their own contractual terms and are then bound by these terms. However,
such a pure theory of voluntarily assumed obligations must immediately be qualified.
It became clear by the late 19th century that many individuals were bound to terms
with which they had no practical choice but to agree to or of which they had no actual
notice. This was exacerbated by the rise of standard form contracts (i.e. contracts
used by businesses which were not individually negotiated and the terms of which
were rarely modified). Such contracts often offered on a take it or leave it basis are
a common part of day to day life. If you doubt it, when you next take a train try to re-
negotiate the standard forms of carriage contract before buying your ticket!
In the past, judges at common law had no means directly to control these clauses and
practices to free individuals from such terms. Consequently, they relied upon indirect
means of control. Courts went to great lengths to find a particularly onerous clause
was not incorporated into the contract or that the clause, properly construed, did
not cover the actual event which had occurred. Clauses whereby a contractor sought
to exclude (so called exclusion or exemption clauses) were a particular source of
concern, especially when a party sought to exclude liability for their own negligence
or for a fundamental breach of contract. Exclusion (or exemption) and limitation
clauses which seek either to exclude, or perhaps only to limit the liability of a party in
breach of contract will be the main focus of this chapter.
A short review of the direct control of exclusion clauses (hereafter to include

limitation clauses unless separately discussed) is necessary now to understand the
discussion in this chapter of the current law and to relate it to any textbooks you
choose to read. In 1977 the Unfair Contracts Terms Act (UCTA 1977) was enacted.
Despite the Acts title it did not seek to regulate all unfair contract terms but rather
focused upon exclusion clauses. When introduced, UCTA 1977 regulated contracts
entered between two businesses (so called B2B contracts) as well as those between
businesses and consumers (so called B2C contracts). As you would expect businesses
were subject to less constraint when dealing with other businesses than they were
when contracting with consumers. In 1993 a European Directive on Unfair Terms in
Consumer Contracts (93/13 EEC) required all member states to enact a minimum
level of consumer protection including but also extending beyond the control of
exemption clauses, in furtherance of the European single market. The Directives
transposition into domestic law was late and untidy. It was implemented in 1994 (and
later again in 1999) by statutory instruments, the Unfair Terms in Consumer Contracts
Regulations (respectively SI 1994/3159 and SI 1999/2083, hereafter the Regulations)
that simply copied out the originating Directive. This resulted in two parallel systems
for the regulation of exclusion clauses in B2C contracts represented by UCTA 1977 and
the Regulations, which the Law Commission criticised as unacceptably confusing.
The Law Commission therefore drafted a single statute integrating both regimes.
The criticism, but not the solution, was accepted by the government and a different
approach was enacted in the Consumer Rights Act 2015 (CRA 2015).
Most of the provisions of the CRA 2015 came into force on 1 October 2015. The CRA 2015
is the most significant reformulation and consolidation of the contractual protection
of consumers that has been attempted in English law. It is therefore important to
understand the purpose and structure of this new provision. In the accompanying
explanatory notes it is stated that Part 2 of the Act:
Consolidates the legislation governing unfair contract terms in relation to consumer

contracts which currently is found in two separate pieces of legislation, into one place,
removes anomalies and overlapping provisions in relation to consumer contracts
The CRA 2015 avoids the previous overlapping regimes of UCTA 1977 and the
Regulations applicable to B2C contracts by amending UCTA 1977 to make it applicable
to B2B contracts only (CRA s.75 and Schedule 4). The CRA 2015 repeals the Regulations
and enacts a new regime (ss.6169 and Schedule 2) based upon them but containing
Contract law 6 The regulation of the terms of the contract page 89
additions such as an expanded list (the so called grey list) of presumptively unfair
terms and other clarifications.
LEARNING OBJECTIVES
This chapter introduces regulation of the terms of a contract to enable you
to discuss and apply in problem analysis its key components (and supporting
The basis upon which courts decide whether a clause has been incorporated into a
contract.
uu The approach taken by the courts when interpreting exclusion clauses.
uu The concept and current relevance of fundamental breach.
uu The background to and key provisions of the CRA 2015.
uu The key provisions of the UCTA 1977 and their previous and current application.
uu The relationship between the CRA 2015 and UCTA 1977.
uu What kinds of clauses are invalidated by the CRA 2015 and UCTA 1977.
uu What kinds of clauses are required to be reasonable by the UCTA 1977 or fair
under the CRA 2015.
Activity 6.1
List the reasons why it might be undesirable to allow a party to exclude or limit
liability for breach of contract. Are there any reasons why it might be desirable to
allow such exclusion or limitation?
SELF-ASSESSMENT QUESTIONS
What statutory regime regulates the use of exclusion clauses in B2B contracts?
What statutory regime regulates the use of unfair contract terms, including
exclusion clauses, in B2C contracts?
Having introduced the new regime of direct control exemption clauses we will begin
a more detailed examination of the control of exemption clauses by looking at the
different techniques of indirect control
6.1 Indirect common law controls
Essential reading
McKendrick, Chapter 11: Exclusion clauses Section 11.1 Exclusion clauses:
defence or definition? to Section 11.8 Other common law controls upon
exclusion clauses.
Poole, Chapter 7: Exemption clauses and unfair contract terms Section 1 The
general approach to exemption clauses to Section 3 Construction: on its natural
and ordinary meaning, the clause covered what happened.
In the past the courts did not have available to them the statutory schemes introduced
above which would allow them to deny enforcement to harsh exclusion clauses.
Instead they developed rules relating to the incorporation (is the clause a part of
the contract?) and construction (does the clause cover the breach?) of clauses, as a
means of controlling their effect while still ostensibly supporting the parties right to
contract on whatever terms they chose, often summarised as the parties freedom
to contract. At one stage the courts went further and developed a rule of law that
prevented a party from relying upon an exclusion clause when that party was himself
in fundamental breach of contract (is the breach so serious that the exclusion clause
cannot apply?). The potential of this approach was, however, severely limited by the
House of Lords, as is explained in Section 6.1.3 below.
It is important to note that the rules applied in this area are based on rules which
potentially apply to all clauses within a contract: even though their most common
use is in relation to exclusion and limitation clauses. For this reason, one of the leading
modern cases on incorporation, Interfoto Picture Library v Stiletto Visual Programmes

[1988] 2 WLR 615, deals with the question of whether a so called penalty, rather than an
exclusion, clause was included in the terms of the parties contract.
6.1.1 Incorporation
Essential reading
McKendrick, Chapter 9: The sources of contractual terms Section 9.3 Bound
by your signature? to Section 9.5 Incorporation by a course of dealing.

Section 2B The effect of signature and Section 3 Oral contracts: incorporation of
written terms.
In order for an exclusion clause to have any effect it must be a term of the contract.
Where the contract has been signed, as in LEstrange v Graucob [1934] 2 KB 394,
the party signing will be bound by the clause, even if it has not been read or
understood, so long as the party seeking to rely upon the clause has not made any
misrepresentation as to its effect (as in Curtis v Chemical Cleaning & Dyeing Co [1951] 1
KB 805). On this basis the inexperienced purchaser of an investment product was held
bound by the contract he signed despite his reliance upon an earlier, and different,
telephone description of the product (Peekay Intermark Ltd v Australia and New Zealand
Banking Group Ltd [2006] EWCA Civ 386).
However, many exclusion (and other onerous) clauses may be contained in unsigned
documents or notices. Look for these if you are in a car park, hotel or are leaving
something at a left luggage facility or dry cleaners. Such unsigned documents or
notices may become incorporated into the contract upon the principles which were
restated in the Interfoto case. Incorporation occurs when all of the following three
conditions are satisfied.
1. Notice The party seeking to rely upon the unsigned document or notice must
take reasonable steps to bring it to the attention of the other party. The test of
what is reasonable was first stated in Parker v South Eastern Railway Co [1877] 2
CPD 416 and is clearly a question of fact to be determined in the light of all the
circumstances. It was held in Thompson v London, Midland and Scottish Railway
Co [1930] 1 KB 41 that the clause itself does not have to be on the document put
forward: it is sufficient that the document indicates the existence of the clause and
where it can be consulted.
A number of cases have made it clear that the more unusual or onerous the
clause, the more that must be done to draw it to the other partys attention. This
was captured by Lord Denning who said that for some clauses he had seen to be
valid they would need to be printed in red ink on the face of the document with
a big red hand pointing at them (J Spurling Ltd v Bradshaw [1956] 1 WLR 461 and
later see Thornton v Shoe Lane Parking [1971] 1 QB 163). It does not only apply in the
context of consumer contracts, as shown by Interfoto Picture Library v Stiletto Visual
Programmes (1988) (though the clause in this case was not an exclusion clause) and
AEG (UK) Ltd v Logic Resource Ltd [1996] CLC 265.
2. Timing Any term which is to be part of the contract must be brought to

the attention of the parties before or at the time of contracting. See Olley v
Marlborough Court Hotel [1949] 1 KB 532 and Thornton v Shoe Lane Parking (1971).
3. Nature of the document If the terms are in a written document then that
document must be one which the party would reasonably believe to have
contractual force. In Chapelton v Barry Urban DC [1940] 1 KB 532 the ticket
contacting the contractual notice was one used to prove payment. The court found
that this was not generally believed to be contractual in nature. It is not merely
because it was a receipt, as some receipts are contractual, it was the purpose of the
receipt.
A different way in which a clause may be incorporated is through a course of

dealing. If the parties have dealt with each other in the past, and an exclusion
clause has been used, this may in itself lead to a presumption that the clause will
be incorporated in any new contract, even if on this occasion reasonable notice
of it has not been given. The course of dealing in the past must however be both
regular and consistent. In Kendall (Henry) & Sons v Lillico (William) & Sons Ltd [1969]
2 AC 31 it was held that 100 dealings over three years were sufficiently recurrent
to be regular but in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71 that three or
four dealings over five years were not. In McCutcheon v MacBrayne [1964] 1 WLR 125
there were regular dealings, but the document containing the exclusion clause
was not always used: it was held that the clause had not been incorporated. These
requirements may be applied less strictly where both parties are commercial
entities (i.e. it is a B2B contract (British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd
[1975] QB 303)).
Activity 6.2
Marika, a Polish woman who understands very little English, buys a ticket for entry
to Upton Castle (a theme park). The ticket states on it that no liability is accepted
for the loss of, or damage to, property belonging to entrants. Will this clause be
regarded as being incorporated into Marikas contract?
Activity 6.3
Angela takes her car for repair at Magna Garages. She is asked to sign a contract
which states that Magna accept no liability for minor damage to the bodywork
of vehicles left for repair, howsoever caused. When she queries this, she is told,
incorrectly, by an employee of Magna, that it only applies to damage by third
parties while the car is parked in Magnas car park. Angela signs the contract. Is
Angela bound by the clause?
Activity 6.4
David has used a particular supermarket car park for his monthly shop since moving
to the area two years ago. At the entrance there is a large noticeboard which warns
that All cars are parked at the owners risk. This is repeated on the ticket David
purchases after entering the car park. On the last occasion David visited the car
park it was windy and the notice had been blown down. While he was shopping,
the supermarkets poorly maintained advertisement hoarding fell on Davids car. Is
this event a part of any contract David has entered with the supermarket? Would
the answer be different if David was delivering supplies from his farm for sale in the
supermarket?
6.1.2 Construction
Essential reading
McKendrick, Chapter 9: The sources of contractual terms Section 9.4
Incorporation of written terms.
Poole, Chapter 7: Exemption clauses and unfair contract terms Section 3

Construction: on its natural and ordinary meaning, the clause covered what
happened.
If a particular clause is found, on the principles outlined above, to be a part of the

contract, it must then be decided whether, on its true construction, the clause covers
the particular breach which has occurred. The courts have traditionally been strict in
this area and interpret any ambiguity against (contra) the person trying to rely on the
clause (the proferens); hence the principle is sometimes called the contra proferentem
rule. In Andrews v Singer [1934] 1 KB 17, for example, a clause excluding liability in
relation to implied terms was ruled ineffective to exclude liability for breach of an
express term.
Unfortunately the contra proferentem rule is easier to state than it is sometimes

to apply. When studying its application in the following paragraphs you should
remember the following points.
uu That though its application may appear complex the underlying principle is simple
(i.e. that any ambiguity in an exclusion clause is to be interpreted against the
person seeking to rely upon it).
uu There is an increasing tendency to look at the issue of contractual interpretation

more generally. In other words, the construction of exclusion clauses must be
related to the approach to the interpretation of all contractual provisions which
was discussed in Chapter 5.
uu Consumers are now protected by dedicated legislative provisions, chiefly the CRA
2015. Courts have indicated that since the precursors of this latest protection were
introduced the need to adopt strained constructions of clauses in order to limit
their scope is reduced. See, for example, the comments of Lord Wilberforce in
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 843.
uu Courts have suggested that a more relaxed view can be taken of clauses which
merely limit liability, as opposed to excluding it altogether (see Ailsa Craig Fishing
Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964). Such a view may cause difficulties
in application because a limitation of liability to a very modest amount is in effect
almost indistinguishable from a full exclusion of liability and so it has not been
followed in Australia see Darlington Futures Ltd v Delco Australia Pty Ltd [1987] 161
CLR 500.
A particular problem arises where a contractor seeks to exclude liability in respect of

his own negligence. In Canada Steamship Lines Ltd v The King [1952] AC 192 Lord Morton
stated a number of principles to guide the process of interpretation in such cases:
uu if the clause contains express language exempting a person from the consequence
of the negligence, effect must be given to it
uu if there is no express reference to such negligence, the court must consider

whether the words used are wide enough, in their ordinary meaning, to cover it
uu if the words used are wide enough, the court must then consider whether liability
may be based on some ground other than negligence; if so, this will prevent
reliance on the clause in relation to negligence.
An example of the application of the second and third rules was White v John Warwick
[1953] 1 WLR 1285. In a contract for the hire of a bicycle, a clause exempting the owners
from liability for personal injuries was held to cover only breach of strict contractual
liability as to the condition of the bicycle, and not injuries resulting from negligence
in the fitting of the saddle. The usual implication of the rules were subverted (e.g. in
Hollier v Rambler Motors (1972) it was said, obiter dicta, that where the only possible
liability was liability for negligence an exclusion clause was ineffective to exempt such
liability because it could be given adequate content by construing [it] as a warning
(i.e. that there would be no liability in the absence of negligence)). The tendency to
subvert the approach taken in Canada Steamship has increased to the extent that it is
not at all clear now what weight, if any, must be given to the Canada Steamship rules.
In Australia, Lord Mortons guidance has been expressly discarded; in England and
Wales the process has been more subtle. For while lip service is still given to his words
(e.g. EE Caledonia Ltd v Orbit Valve Co Europe plc [1994] 1 WLR 1515) the House of Lords
qualified their application in HIH Casualty and General Insurance Ltd v Chase Manhattan
Bank [2003] UKHL 6 (see also Greenwich Millennium Village v Essex Services Group [2014] 1
WLR 3517) by emphasising the overriding importance in giving effect to the intention
of the parties. The clear implication of this is that where there is a conflict between
that intention and the result indicated by Lord Mortons approach, the former should
prevail.
6.1.3 Fundamental breach
Essential reading
McKendrick, Chapter 11: Exclusion clauses Section 11.7 Fundamental breach.
Poole, Chapter 7: Exemption clauses and unfair contract terms Section 3E

Fundamental breach.
At one time the courts, and in particular the Court of Appeal, developed a rule of
law by which it was held that an exclusion clause could never be effective against a
particularly serious breach of contract a fundamental breach.
A fundamental breach could be one where: the breach relates to a particular obligation
which is central to the contract (Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936), the
consequences of the breach are exceptionally serious (Harbutt Plasticine Ltd v Wayne
Tank and Pump Co Ltd [1970] 1 QB 447) or a deliberate refusal to perform obligations
under the contract (Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576).
This approach to fundamental breaches was reviewed by the House of Lords in Suisse
Atlantique Socit dArmament Maritime SA v Rotterdamsche Kolen Centrale NV [1967]
1 AC 361 and Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. The House
rejected the Court of Appeals assertion that there was a rule of law in this area
preventing reliance on an exclusion clause following a fundamental breach. For some
time it was thought that the doctrine of fundamental breach survived, not as a rule
of law, but rather as a presumption against any exclusion clause being interpreted
to cover a fundamental breach of contract. However, this has now explicitly been
denied (AstraZeneca UK Ltd v Albemarle International Corp [2011] 1 All ER (Comm) 510).
Rather, the question was one of construction. Does the clause cover the breach which
occurred? Although it may be difficult to convince a court that an exclusion clause
was intended to cover a breach which has deprived the other side of all benefit,
but, if it does, it is no longer permissible at common law to reject or circumvent the
clause by treating it as inapplicable to a fundamental breach (Neill LJ in Edmund
Murray Ltd v BSP International Foundations Ltd [1992] 33 Con LR 1). It is therefore now an
overstatement even to say that there is a presumption against a clause.
Activity 6.5
Read the case of Photo Production Ltd v Securicor Transport Ltd (1980).
a. What type of fundamental breach was involved in this case?
b. Why did the House of Lords think that it may well have been the parties
intention that Securicor would have a very minimal level of liability under the
contract?
The approach adopted in Photo Production v Securicor may be justified by the fact that
there are now statutory protections for consumers in relation to very broad exclusion
clauses and that commercial contracts may appropriately be left to be governed by
the principle of freedom of contract. The approach is therefore most appropriate
where the parties are businesses contracting on equal terms. The effect of the
Consumer Rights Act 2015 is that in all consumer contracts an exclusion clause which
attempts to exclude liability for a fundamental breach will either be automatically
void or subject to a test of fairness.
1. What is the effect of signing a contract?
2. What conditions must be fulfilled before an unsigned document or notice may

be said to be incorporated into a contract?
3. What is the relevance of prior contracts entered between the parties? How can
an unwritten clause be incorporated into a contract in the course of dealing?
4. What is the contra proferentem rule?
5. What is the present status of the so called doctrine of fundamental breach?

Summary
The common law controls the use of exclusion clauses by means of the rules of
incorporation and construction. The rules relating to incorporation require close
attention to be given to when the clause was put forward and the notice that was
given of it. The rule of construction is based around the contra proferentem rule and
according to a traditional approach is applied more strictly where the defendant
alleges that liability for negligence has been excluded. More recently the courts have
declined to apply this approach so strictly. Where there is a fundamental breach, an
exclusion clause does not automatically cease to apply but if the parties use very clear
language to express their intention that the protection of an exclusion clause should
extend to such a breach that intention will now be respected (subject to the statutory
controls examined below).

Chen-Wishart, Chapter 10 Identifying and interpreting contractual terms,
Section 10.6 Interpretation of exemption clauses.
6.2 Statutory control
Essential reading
McKendrick, Chapter 11: Exclusion clauses Section 11.9 The Unfair Contract
Terms Act 1977 to Section 11.16 Conclusion.
Poole, Chapter 7: Exemption clauses and unfair contract terms Section 4

Clause in a B2B contract must not be rendered unenforceable by the Unfair
Contract Terms Act 1977.
The statutory controls examined in this section only become relevant if it is first
established that the exclusion clause is a term of the contract (by signature,
incorporation or course of dealing) and, properly construed, it would otherwise operate
to protect the party in breach from liability. For further guidance on how to answer
questions involving exclusion clauses see the concluding section of this chapter.
The Introduction above should be re-read at this point. It contains an overview of

recent statutory developments, particularly the CRA 2015. From this section you will
have learned that the regulation of contractual exclusion clauses is effected differently
depending upon whether the clause is contained in a contract between a business and
a consumer or a contract between two businesses. To repeat this fundamental point:
Business to consumer (B2C)

If the contract is between a business and a consumer it will be necessary to look at the
CRA 2015.
Business to business (B2B)

If the contract is between two businesses then the relevant legislation is the Unfair
Contract Terms Act 1977 (UCTA 1977).
6.2.1 The Consumer Rights Act 2015

Most of the provisions of the CRA 2015 came into force in October 2015. The
background to these provisions in a European Directive and two sets of implementing
Regulations (the latter repealed by the CRA 2015) have been described in Chapter 1,
Section 1.4.2. The CRA 2015 has three parts:
uu Part 1 Goods, Services and Digital Content This part simplifies and clarifies the
law over consumer rights arising from the purchase of goods, services and digital
content. Existing legislation (e.g. the Sale of Goods Act 1979 and the Supply of
Goods and Services Act 1982) is amended or repealed and new rights are created by
the CRA 2015 to apply to all B2C contracts.
uu Part 2 Unfair Protection This part contains provisions relating to unfair terms
which reflect recommendations made by the Law Commission and Scottish Law
Commission. The Unfair Contract Terms Act 1977 (UCTA 1977) is repealed so far as it
affected B2C contracts. A single regime is enacted to regulate unfair terms which
is based on, but has a wider application than, the repealed 1999 Unfair Terms in
Consumer Contracts Regulations (UTCCR 1999).
uu Part 3 Enforcement/ New Civil Remedies This part covers the enforcement powers
of public enforcers as well as the reform of consumer collective actions for anti-
competitive behaviour.
The changes effected by Part 1 in regard to the statutory implied terms have been
examined in Chapter 5. The changes introduced by Part 2 will now be examined.
The core provision of Part 2 is s.62(1) which provides that: An unfair term of a
consumer contract is not binding on the consumer. This simple statement begs a
number of questions.
What is a consumer contract?

A consumer contract is one entered between a trader and a consumer (CRA 2015,
s.61(1)). A trader is defined as a person acting for purposes relating to that persons
trade, business, craft or profession (s.2(1), made applicable by s.76(2)). A business
expressly includes any government department, local or public authority (s.2(7)).
A consumer is defined as the converse of a trader (i.e. an individual acting for
purposes that are wholly or mainly outside the individuals trade, business, craft or
profession (s.2(3), made applicable by s.76(2)). The reference to an individual means
that a company cannot now be considered a consumer. The definition of a consumer
has been extended to cover someone who is mainly acting outside their trade,
business, etc. This will affect the level of protection offered to persons who purchase
goods for mixed purposes. For example, if a car is purchased primarily for private use
but is nonetheless sometimes used for business purposes, the contract will still be
subject to Part 2 of the CRA 2015.
The European Directive (93/13 EEC) and the now repealed UTCCR (SIs 1994/3159 and
1999/2083) stated that a term could only be set aside as unfair where that term was
not individually negotiated. A term drafted in advance in circumstances where the
consumer was unable to influence its substance was not regarded as individually
negotiated. It is of potential significance that this pre-condition is not simply
reproduced in the CRA 2015. Following the CRA 2015 a consumer may challenge a
clause as unfair even though it was individually negotiated. The change effected to
the law may however be small as the fact of individual negotiation, though no longer
an absolute bar to challenge, may be one of many factors relied upon by the trader as
evidence that the term was not unfair.
What makes a contract term unfair?

The CRA s.62(4) defines an unfair term as one which:
contrary to the requirement of good faith causes a significant imbalance in the

parties rights and obligations under the contract, to the detriment of the consumer
This formulation suggests that an unfair term has two key elements: a requirement
of good faith and that the offending term would otherwise result in a significant
imbalance between the parties rights and obligations.
The requirement of good faith may itself be said to have two parts: a procedural and
a substantive aspect. The procedural aspect is in issue when a terms existence came
as a surprise to the party subject to it. The Court of Justice of the European Union
(CJEU) considered the appropriate test in a case where a mortgagor who had defaulted
on payments challenged a clause that increased the applicable rate of interest to
almost 19 per cent per annum. The CJEU advised that the national court applying this
requirement had to assess whether the seller or supplier, dealing fairly and equitably
with the consumer, could reasonably assume that the consumer would have agreed
to such a term in individual contract negotiations (Aziz v Caixa dEstalvis de catalunya,
Tarragona I Manresa (Catalunyacaixa) [2013] 3 CMLR 5). In West v Ian Finlay & Associates
[2014] EWCA Civ 316 the Court of Appeal held that a term in a contract for architectural
services was not unfair bearing in mind the savvy nature of the Wests (at [60])
who were a professional couple comprising a successful banker and his wife, a
neuroscientist. In contrast in Office of Fair Trading v Ashbourne Management Services
Ltd [2011] All ER (D) 276 terms in gym membership agreements setting minimum
membership periods of one, two or three years were considered unfair. The Court
emphasised the defendants business model which was calculated to take advantage
of the naivety and inexperience of the average consumer using gym clubs at the
lower end of the market. Where a term is put forward by either the consumer or the
consumers professional advisers the element of unfair surprise will be absent and the
clause most unlikely to be found to be unfair (Bryen & Langley Ltd v Boston [2005] EWCA
Civ 973).
The substantive aspect of the requirement of good faith means that there will
be some terms that will always be regarded as unfair whatever steps are taken to
publicise them. Any such term is, however, likely to offend the second element of
unfairness (i.e. that the clause causes a significant imbalance in the parties rights and
obligations). In this way there would appear to be a considerable overlap between
the two requirements according to Lords Steyn and Bingham in Director General of
Fair Trading v First National Bank plc [2001] All ER (Comm) 1000 (at [17] and [37]). In
OFT v Asbourne Management Services, considered above, the court emphasised the
requirement that the imbalance in the parties rights must be a significant one.
Terms in contracts for gym membership which prevented termination before the
end of lengthy minimum membership periods had this effect whereas terms which
permitted termination in defined circumstances before this period had elapsed might
evidence an imbalance in the parties rights, but not a significant one (at [17]).
Further explicit guidance on how to ascertain if a contract term is unfair is provided by

s.62(5) which requires the court to take into account the nature of the subject matter
of the contract and all the circumstances existing when the term was agreed and
all of the other terms of the contract. The timing mentioned here is important. The
assessment of fairness is made when the contract is concluded; it is not a retrospective
judgment and so cannot take account of circumstances that arise after the contract
was entered. More specific guidance in the first version of the implementing
Regulations expressly referred to: the bargaining positions of the parties; whether
the consumer had an inducement to accept the term; whether the goods or services
were made to special order; and the extent to which the seller or supplier had acted
fairly. These factors reflected parallel considerations under UCTA 1977 (see below).
Though the factors may still be relevant under the CRA 2015 they are not expressly
referred to in the Act.
The grey list

The Regulations which preceded the CRA 2015 contained a list of terms which will be
presumed to be unfair which became known as the grey list. An expanded version
of this indicative and non-exhaustive list of terms of consumer contracts that may be
regarded as unfair is now found in CRA 2015 Schedule 2 Part 1. The list of presumptively
unfair terms demonstrates the breadth of the CRA 2015 and extends beyond terms
intended to exclude or restrict a traders liability for death or personal injury which are
described in para.1 of the grey list. This provision does not affect a traders attempt
to exclude liability for death and personal injury arising from negligence which is
rendered unenforceable by s.65(1), as opposed to being presumptively unenforceable
under Schedule 2. The grey list refers to 20 different types of contractual provision
including:
uu a term which permits the trader to retain, without compensation, sums paid by the
consumer if the consumer decides not to continue with the contract (para.4)
uu a term which requires a consumer who does not fulfil his obligations to pay a
disproportionately high sum in compensation (para.6)
uu a term which has the effect of binding the consumer to terms which the consumer,
before contracting, had no real opportunity of becoming aware of (para.10)
uu a term which allows the trader without a valid reason specified in the contract
unilaterally to alter the contract terms (para.11)
uu a term which permits the trader to increase the price of goods or services without
the consumer having a corresponding right to cancel if the price demanded is too
high compared to that first agreed (para.15).
The terms added by the CRA 2015 to the grey list are:
uu a term which requires a consumer who does not fulfil his obligations to pay a
disproportionately high sum in compensation for services that have not been
supplied (para.5)
uu a term which permits the trader to determine the characteristics of the contractual
subject matter after the consumer has become bound by the contract (para.12)
uu a term giving the trader a discretion to determine after the consumer has entered
the contract the price payable where no method of price determination was made
known before contracting (para.14).
The consequence of unfairness

Where a term is found to be unfair the rest of the contract continues, so far as
practicable, to have effect in every other respect but the unfair term is not binding
on the consumer (s.67). In Unicaja Banco SA v Hidalgo Rueda [2015] All ER (D) 142 the
European Court of Justice, in a case involving a term in a mortgage that upon the
debtors default increased the applicable rate of interest to 18 per cent, held that
Directive 93/13 did not empower a national court to vary a term that is held to be
unfair. Rather, the national court must exclud[e] the application of that clause in
its entirety with regard to that consumer. However, a national court may, having
deleted an unfair term, substitute for it a supplementary provision of national law
according to the same courts decision in Kasler v OTP Jelzalogbank [2014] WLR (D)
180. In the latter case (at[79]) it was explained that a simple power of revision would
compromise the primary purpose of the Directive because it would tempt sellers or
suppliers (now traders) to use unfair terms in the knowledge that even if they were
held invalid the contract would nevertheless be adjusted.
Exclusion from the assessment of fairness under the CRA 2015
Certain terms do not, subject to certain conditions, fall within the power of review
created by the CRA 2015. The most important category, which under the previous
Regulations gave rise to extensive (and expensive see Office of Fair Trading v Abbey
National plc [2009] EWHC 36 (Comm), below) litigation, is now found in s.64(1).
A contract may not be assessed for fairness to the extent that:
it specifies the main subject matter of the contract, or
the assessment is of the price payable under the contract by comparison with the goods,
digital content or services supplied under it
Significantly, this exclusion will only apply to terms that are transparent and
prominent according to s.64(2) (previously under the Regulations it needed to be
in plain intelligible language). It is not certain whether this change of language has
resulted in a change of meaning. However, both tests seem to provide for a high
standard of comprehensibility that reaches beyond the common law doctrine of
contra proferentem, discussed in Section 6.1.2, which merely resolves any ambiguity
against the party relying upon the exclusion clause. In Kasler v OTP Jelezalogbank Zrt
(2013) the European Court of Justice interpreted Directive 93/13 as requiring not only
that the relevant term should be grammatically intelligible to the consumer but
further that it should set out transparently the specific functioning [of the term] so
that that consumer was in a position to evaluate, on the basis of clear, intelligible,
criteria, the economic consequences (at [75]).
This section states an important limit upon the scope of the CRA 2015. The CRA
2015, the preceding Regulations and the originating European Directive, provided
that where certain tests are satisfied, terms in a contract which operate to the
disadvantage of consumers will not be enforced. If the scope of this power of review
is not precisely defined it would create uncertainty by leaving many contractual
provisions at the core of a contract as liable to challenge. The purpose of CRA 2015 s.64
is to avoid putting in jeopardy of review all contractual provisions. This is achieved
by providing that certain central or core matters are excluded from assessment as
unfair. It is important to appreciate the effect of a wide, as opposed to a narrow,
interpretation of these exclusions. If the excluding provision is interpreted broadly it
would protect from review so many clauses that it might negate the very object of the
original Directive. For this reason Lord Bingham, in Director General of Fair Trading v First
National Bank [2001] 1 All ER 240 cautioned that the object of the regulations [then
in force, now the CRA 2015] would plainly be frustrated if [the core exception was] so
broadly interpreted as to cover any terms other than those falling squarely within it
(at [12]). Consequently, the House of Lords held that a contractual provision providing
that upon the debtors default on a loan the bank was entitled to recover the balance
of the loan as well as outstanding interest and the cost of obtaining judgment did not
define the main consideration which the bank anticipated from the loan. Rather it was
a default provision whose operation was contingent upon the creditors breach. As
it was not a core provision within the then applicable Regulations it was susceptible
to review as an unfair term. A similar approach was applied in Office of Fair Trading v
Foxtons Ltd [2009] EWHC 1662 (Ch) where a standard agreement with a letting agent
provided for the payment by the landlord to the agent of a commission upon the
introduction of a suitable tenant and again if that tenant renewed the lease. It was
the requirement to pay a second or successive commission on renewal that was in
dispute as this required no, or little, extra work by the agent. Again it was concluded
that the provision for further payment was not a core term and so was susceptible to
review. The judge emphasises the parties belief that the term would operate only in
exceptional circumstances as well as its lack of conspicuousness.
The Supreme Courts decision in Office of Fair Trading v Abbey National plc (2009) would
appear to conflict with the narrow interpretations of the core provisions exclusion
examined in the previous two cases. The case concerned terms in contracts for the
provision of personal banking services under which banks levied charges for so called
unauthorised overdrafts and was of huge commercial importance, involving all
the leading UK banks, the smallest of which, Clydesdale bank, had over 2.4 million
UK customers! In a decision that was, perhaps, popular only with the banks and the
all star legal cast representing them (at first instance including 11 Queens Counsel
and all the major commercial firms of solicitors) the Supreme Court reversed the
decision of the Court of Appeal. The Supreme Court held that it was not possible to
distinguish between the different ways in which a bank charged for its services. The
provision which was challenged, under which fees were charged for unauthorised
overdrafts, contributed to the undifferentiated consideration the banks received in
exchange for the provision of services. Consequently, the provision was a core term
and so immune from challenge under the then prevailing Regulations as being unfair.
The decision in Director General of Fair Trading v First National Bank was distinguished,
rather unconvincingly, on the basis that the case dealt with a clause that defined an
ancillary (at [113]) rather than the main consideration of the contract. Such a formal
distinction would seem to push the courts in the direction which Lord Bingham was at
pains in First National to avoid (i.e. an approach which seems to frustrate the object
of consumer protection that lies at the core of the original European Directive (93/13
EEC)).
In addition to the core terms, discussed above, which are excluded from review on
the basis of unfairness, the CRA 2015 prohibits the exclusion of some liabilities. Section
65 provides that a trader cannot by a term in a consumer contract exclude liability
for death or personal injury caused by negligence (reflecting the parallel provision in
the UCTA 1977 s.2 now applicable only to businesses). Terms in contracts for the supply
of goods to a consumer by a trader which exclude or limit the liability of the trader
in respect of the goods unsatisfactory quality (s.9), fitness for a particular purpose
(s.10) and conformity to description (s.11) or sample (s.13) may not, according to s.31,
be excluded. This and associated prohibitions upon exclusion is sometimes referred
to as a black list in contrast to the presumptive unfairness of terms in the so called
grey list examined above. The obligations arising under ss.9, 10,11 and 13, whose
exclusion is prohibited, correspond to terms formerly implied into contracts for the
sale of goods by the SGA 1979 ss.1114. The CRA 2015 contains parallel provisions to
the s.31 prohibition on exclusion of liabilities arising under contracts for the sale of
goods in ss.47 and 57 which apply to contracts under which a trader agrees to supply a
consumer with, respectively, digital content and services.
Enforcement
The CRA 2015, like the Regulations it supersedes, both makes an unfair term
unenforceable in individual cases but also permits certain regulators to take action
against the use of such terms. We have seen that several of the important cases
on the Regulations were brought by the Office of Fair Trading (OFT). The OFT was
closed in 2014 pursuant to the Governments policy of reducing the number of quasi
governmental bodies, or quangos. The successor to the OFTs powers of intervention
and enforcement is now the Competition and Markets Authority.
6.2.2 The Unfair Contract Terms Act 1977

In contrast to Part 2 of the CRA 2015 which will render unenforceable by a trader
against a consumer any unfair term, the UCTA 1977 is primarily concerned with only
one type of unfair term, namely, exclusion and limitation clauses, rather than unfair
terms in general. The scope of the UCTA 1977 has been further reduced by the CRA 2015
so that it will now apply only to contracts between businesses (so called B2B contracts
(Schedule 4)).
Certain types of contract are excluded from the main protective provisions of the
UCTA 1977. These include contracts of insurance, contracts concerning land and
international supply contracts (s.26 and Schedule 1). If the contract requires goods to
be carried from one state to another it is classified as an international supply contract
as is a contract where, at the time of signing, it is expected, but not stipulated, that
the goods will be so transported (Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd
[2009] EWCA Civ 290).
A preliminary question to ask, therefore, when considering the impact of the UCTA
1977 on an exclusion clause, is whether the Act applies to the contract at all.
6.2.3 Negligence liability

The UCTA deals with clauses which attempt to exclude liability for negligence in
s.2. Negligence is defined as covering: an obligation to take reasonable care in the
performance of a contract; the tort of negligence; and liability under the Occupiers
Liability Act 1957.
Under s.2(1) any contract term or notice which seeks to exclude or restrict liability for
negligence causing death or personal injury is void. In contrast, s.2(2) provides that
any contract term or notice which aims to exclude or restrict liability for negligently
inflicted damage to property is not automatically rendered void. Instead it is subject
to the reasonableness test. If the clause satisfies that test it is enforceable, if it does
not, it is void.
Section 2(2) of the UCTA deals with negligence giving rise to loss or damage apart from
death or personal injury. We are talking here about damage to property or financial
losses (lost profits, etc.). In relation to such loss or damage, s.2(2) provides that a
clause purporting to restrict liability will only be effective in so far as [it] satisfies the
requirement of reasonableness. The requirement of reasonableness is discussed
below.
6.2.4 The reasonableness test

The standard of reasonableness referred to in s.2(2) is utilised throughout UCTA.
Section 11 defines it as a requirement that the term was:
a fair and reasonable one to be included having regard to the circumstances which
were, or ought reasonably to have been known to the parties when the contract
was made.
Three preliminary points should be noted before examining this important standard
in more detail. First, the reasonableness of the term will be judged by reference to
the time of entering the contract, without the benefit of hindsight (Stewart Gill Ltd
v Horatio Myer & Co Ltd [1992] QB 600). This is clear from the wording of the section.
Second, the burden of proving that the clause is reasonable is borne by the party
relying upon it (s.11(5)). Third, it is difficult to generalise about the application of the
standard of reasonableness because each case very much depends upon its own facts.
The emphasis upon the facts of the case as found by the judge at first instance means
that courts of appeal are reluctant to interfere with the decision of the trial judge
unless satisfied that [he/she] proceeded on some erroneous principle or was plainly
and obviously wrong (George Mitchell Ltd v Finney Lock Seeds [1983] 2 AC 803).
Fortunately, UCTA itself provides some further guidance. When considering a

limitation, as opposed to an exclusion, clause s.11(4) provides that the court should
take account of the resources of the person who may be subject to liability as well as
the extent to which that liability might have been covered by insurance. However, the
availability and cost of insurance has been referred to many times in relation to cases
involving exemption clauses (e.g. Smith v Eric S Bush (1989)). Section 11(2) refers to a
number of guidelines contained in Schedule 2 which should be taken into account
in assessing reasonableness. This checklist is only expressly said to be relevant when
considering the concept of reasonableness to be applied under UCTA ss.6 and 7
(dealing with the exclusion of statutory implied terms). This formal position has been
ignored and the checklist is considered to be relevant to any section of UCTA that seeks
to apply the standard of reasonableness (see Overseas Medical Supplies Ltd v Orient
Transport Services Ltd [1999] Lloyds Rep 273). A key factor is the relative bargaining
positions of the parties.
Recent cases have paid particular attention to this factor, which has been said to be
the starting point for any enquiry into the reasonableness of a contractual exclusion
(Axa Sun Life Services v Campbell Martin (2011) at [59]). In Watford Electronics v Sanderson
[2001] EWCA Civ 317 the claimant sought damages of over 5.5 million including loss
of profits for breach of a contract to supply a bespoke software system. The Court
of Appeal held that clauses which excluded liability for indirect or consequential
loss and which also limited any other liability to the contract price of 104,600 were
reasonable. The parties to the contract were experienced business people who had
decided to allocate the risks of defective or non-performance in a particular way
which the court should not upset. Chadwick LJ (at [54]) said that the court should only
interfere when satisfied that one party has, in effect, taken advantage of the other or
where the term is so unreasonable that it cannot properly have been understood or
considered.
This approach of respecting, and so enforcing, the terms negotiated by commercial

contractors of roughly equal bargaining power is a further application of the approach
to fundamental breach that was applied in Photo Production v Securicor [1980] 3 All ER
146 (see above Section 6.1.3). Other recent applications include:
uu Sterling Hydraulics Ltd v Dichtomatik [2006] EWHC 2004. Clauses in a contract for
the sale of engine seals similar to those in Watford Electronics v Sanderson were
upheld.
uu Regus (UK) v Epcot Solutions [2008] EWCA Civ 361. In a contract for serviced office
accommodation clauses limiting liability for loss of profit and commercial losses
were held to be reasonable. The Court of Appeal was possibly influenced by the fact
that the party subject to the clause used a similar provision in his own business!
6.2.5 Contractual liability

The exclusion of contractual liability other than through negligence is covered by s.3
of the UCTA. This will now only apply in a business context where one of the parties
deals on the others written standard terms of business. This implies two pre-
conditions: that the relevant party has written standard terms of business and that, on
this occasion, he contracted on the basis of them. Where the contract is preceded by
negotiations that leave the general conditions substantially untouched the parties
will still be held to be contracting on written standard terms of business (St Albans
City and District Council v International Computers Ltd [1996] 95 LGR 592). However, any
significant difference between the terms proposed and agreed will indicate that the
contract was not on the others written standard terms (Yuanda (UK) Co Ltd v W W Gear
Construction Ltd [2011] 1 All ER (Comm) at [26]).
Section s.3(2) makes any attempt to exclude or limit liability subject to the
requirement of reasonableness s.3(2)(a). It also subjects to the same test clauses
which purport to allow a party to render a contractual performance substantially
different from that which was reasonably expected, or to render no performance at
all s.3(2)(b). There is an important distinction between the provisions contained in
s.3(2)(a) and s.3(2)(b). It appears that s.3(2)(a) is aimed at the classic type of exclusion
clause exonerating a contractual party in default from the ordinary consequences of
that default according to Bingham MR in Timeload Ltd v British Telecommunication plc
[1995] EMLR 459. The proper interpretation of s.3(2)(b) has been more problematic. It
must be intended to apply to situations where the party seeking to rely on the clause
is not himself in breach of contract, otherwise it would add nothing to s.3(2)(a). In
Axa Sun Life Services v Campbell Martin [2011] EWCA Civ 133, the Court of Appeal held
that a so called entire agreement clause (i.e. one stating that a particular document
contained all the parties contractual terms) is not subject to s.3(2)(a) because it seems
to prevent any collateral contract from arising, but it could nonetheless be caught by
s.3(2)(b).
In AXA Sun Life Services plc v Campbell Martin Ltd (2011), the Court of Appeal began its
consideration of reasonableness with the recognition that the agreements were made
between commercial organisations in a commercial context, although the claimant
was a larger entity than the defendants.
Activity 6.6
A Ltd engages B Ltd to service the machines in A Ltds factory. The contract is
based on a written contract put forward by B Ltd. There is, however, considerable
negotiation over the price and the periods between services before the contract is
agreed. Will it fall within the scope of s.3 of the UCTA?
Activity 6.7
C Ltd contracts with D Ltd for D Ltd to paint the exterior of Cs office premises. The
contract is made through an exchange of letters. Is the contract within s.3 of the
UCTA?
6.2.6 The supply of goods

The UCTA 1977 contains special provisions in ss.6 and 7 dealing with contracts for the
sale or supply of goods. This includes hire purchase, hire transactions and contracts
for the supply of work and materials. In relation to the statutorily implied terms as to
title (ownership) that operate in relation to such contracts, the UCTA prohibits any
exclusion of liability. In relation to the implied terms as to description or quality (for
example, under ss.13 and 14 of the Sale of Goods Act 1979), then liability under these
terms can only be excluded or limited in so far as the clause satisfies the requirement
of reasonableness.
Previously, UCTA regulated the exclusion of the same terms when the purchaser of
goods or services was a consumer. However, since the CRA 2015 came into force both
the underlying obligations (as to title, description, quality, etc.) and the control of
their exclusion is found in the 2015 Act (see above at Section 6.2.1).
Activity 6.8
To answer a question involving an exemption clause requires a number of questions
to be asked. What are these questions and in what order should they be asked? If
you find it helpful you may wish to present these as a flow chart.
Activity 6.9
Xerxes plc includes an exclusion clause in all its contracts stating that Xerxes plc
is in no circumstances liable for any losses whatsoever resulting from the breach
of this contract, whether resulting from negligence or any other cause. Xerxes has
broken a contract with Zenon Ltd. The contract is worth 50,000 to Zenon. Xerxes
breach, which is not caused by the negligence of Xerxes or any of its employees,
causes Zenon a loss of 2,500. Zenon claims this amount from Xerxes. Can Xerxes
rely on the clause?
1. Name three types of contract that are not covered by the provisions of the UCTA.
2. What is the general attitude of the courts to those who make contracts by way
of business?
3. What, in general, do exclusion clauses purport to exclude?
Summary
The CRA 2015 has made many changes and we have yet to see the true impact and
application of this Act. The protection offered by this Act is much broader in its control
of consumer contracts than the UCTA. The UCTA now applies to certain contracts
concluded between parties acting in the course of business. Clauses are either
rendered invalid or made subject to the requirement of reasonableness. Clauses
which are invalid are those excluding liability for negligence causing death or personal
injury and those excluding liability for the implied terms in supply of goods contracts
with consumers. Clauses which are subject to the test of reasonableness include
those excluding liability for negligence causing loss or damage to property; clauses
excluding contractual liability in relation to those contracting on the other partys
written standard terms; and clauses excluding liability for the implied terms in supply
of goods contracts with business customers.
The test of reasonableness looks at all the circumstances of the case, but inequality in
the strength of bargaining power is likely to be a particularly strong consideration.

Treitel, Chapter 23 Consumer Rights Act.

Andrew is a surveyor. Four months ago he bought a nine-month old Landmaster
car from Brendas Garage Ltd for use in his practice. He paid 12,500 for the car. As
part of the contract for the purchase of the car he was given a written guarantee in
the following terms: Brendas Garage Ltd guarantees that, for three months from
the date of purchase, it will put right free of charge any defects in the vehicle which
cannot be discovered on proper examination at the time of purchase. Thereafter all
work and materials will be charged to the customer.
The sales manager recommended to Andrew that he should take out the special
extended warranty under which, for payment of 350, the car would have been
guaranteed in respect of all defects for a further two years, but Andrew declined.
Last week the engine and gearbox seized up. The repairs will cost 2,000.
Advise Andrew. Would your answer differ if he also used the car at the weekends for
domestic purposes?

In answering questions of this type you should start by indicating the way in which
the potential defendant is in breach of contract. Here it is to be assumed that Brendas
Garage is in breach of contract as regards the implied term of satisfactory quality
under s.14 of the Sale of Goods Act 1979. The question then becomes whether Brendas
Garage can take advantage of the exclusion of liability which is included in the
guarantee. This aspect of the question was examined in Chapter 5. We turn now to
the issues of whether or not the clause was incorporated and, if so, how the clause is
regulated by the legislation.
As regards the common law rules, the main issue would seem to be that of
incorporation. Was the guarantee and the exclusion clause which it contains part
of Brendas Garages contract with Andrew? This will depend on whether the clause
was shown to Andrew before or at the time when he entered into the contract. If it
was handed to him after he had made the contract for the purchase of the car then
it would probably not be incorporated, and would therefore be ineffective (Olley v
Marlborough Court). One argument against this which the garage might use would be
that there was a separate unilateral contract under which Brendas Garage Ltd said,
we will give you a three month full guarantee, in return for your acceptance of the
limitation of our liability after three months.
Assuming that the exclusion clause was incorporated, there would not seem to be
any argument that it covers the breach which occurred. Any detailed discussion of the
rules of construction is therefore unnecessary.
The main focus in answering this question should be the Unfair Contract Terms Act
1977. (Note that the Consumer Rights Act 2015 does not apply, since Andrew is not a
consumer for the purposes of those regulations.) Since the contract is for the sale of
goods, then the relevant provision is s.6. This requires you to decide whether Andrew
is contracting as a consumer (as defined in s.12 of the UCTA) or not. Is he buying the
car in the course of his business as a surveyor? It seems likely that he is (but see R &
B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 All ER 847). If so then the
clause limiting liability must satisfy the requirement of reasonableness. In applying
this test, as well as thinking about the matters set out in Schedule 2 to the UCTA, you
should note the offer of the extended guarantee. Does Andrews rejection of this
opportunity mean that the exclusion contained in the guarantee is more reasonable?
The alternative scenario increases the likelihood that Andrew will be treated as
contracting as a consumer under the R & B Customs Brokers approach. If he is
contracting as a consumer then the Garage will be unable to exclude its liability under
the Consumer Rights Act 2015.
Quick quiz
Question 1
Which of the following is not a statutory guideline for the purpose of explaining the
reasonableness test in the Unfair Contract Terms Act 1977?
Choose one answer.
a. The parties respective bargaining power, taking into account any alternative
means of meeting the customers requirements.
b. Whether the customer offered the seller a financial inducement to waive the
exemption clause.
c. The availability and efficiency of insurance.
d. Whether the customer knew or ought reasonably to have known of the

existence and extent of the term.
e. Dont know.
Question 2
Review the House of Lords decision in Director General of Fair Trading v First National
Bank (2001) and decide which of the following statements best describes how
the court will decide that a contractual term is unfair under the Unfair Terms in
Consumer Contract Regulations 1999, which may inform the application of the
Consumer Rights Act 2015?
a. The term is unfair where there is an inequality in the strength of the bargaining
positions of the parties relative to each other, where the customer has received
an inducement to agree to the term and where the customer did not know of
the existence and extent of the term.
b. The term is unfair if it causes a significant imbalance in the parties rights and
obligations under the contract to the detriment of the consumer in a manner or
to an extent which is contrary to the requirement of good faith.
c. The term is unfair if there is a general inequality of bargaining power and the
court feels compelled to set the term aside if it is relied upon.
d. The term is unfair if the party who relied on it did not bring it to the attention of
the other party to the contract when the negotiations were taking place.
e. Dont know.
Question 3
Which of the following statements is false?
a. There was a substantial overlap between the provisions of the Unfair Terms in
Consumer Contracts Regulations 1999 and the Unfair Contract Terms Act 1977.
b. The Unfair Terms in Consumer Contracts Regulations 1999 only worked to

protect consumers whereas the Unfair Contract Terms Act 1977 could sometimes
protect a business.
c. The Unfair Contract Terms Act 1977 is largely concerned with exemption clauses
while the Unfair Terms in Consumer Contracts Regulations 1999 extended to a
much wider range of contractual clauses.
d. Reasonableness under the Unfair Contract Terms Act 1977 was exactly the same
as fairness under the Unfair Terms in Consumer Contracts Regulations 1999.
e. Dont know.
Question 4
Which of the following is not a principle in deciding whether a clause covers
liability for negligence in the performance of a contract?
a. If the clause contains express language exempting a person from the
consequence of the negligence, effect must be given to it.
b. If there is no express reference to such negligence, the court must consider

whether the words used are wide enough, in their ordinary meaning, to cover it.
c. If there is no express reference to such negligence, the court must consider

whether the words used are wide enough, in their ordinary meaning, to exclude
it.
d. If the words used are wide enough, the court must then consider whether
liability may be based on some ground other than negligence; if so, this will
prevent reliance on the clause in relation to negligence.
e. Dont know.
Question 5
Which of the following statements is true?
a. From the last quarter of the 20th century, courts increasingly relied upon
Parliament to regulate the content of contracts for substantive fairness and
reasonability rather than devising their own means to do so.
b. The doctrine of fundamental breach, expounded in decisions such as Harbutts

Plasticine Ltd v Wayne Tank and Pump Co Ltd (1970) per Lord Denning, provides
that once there has been a fundamental breach of contract, no exclusion clauses
can operate as a defence to that breach.
c. If a party agrees to a term in a contract, then that party is absolutely bound by

the term by reason of this agreement.
d. Contractual terms are interpreted against the party who accepts the term
proffered.
e. Dont know.

1. How do the courts decide whether a clause has been incorporated into a contract?
2. What are the rules for the construction of exclusion clauses?
3. Give examples of a fundamental breach of contract and explain its effect on an

exclusion clause.
4. What kinds of clauses are invalidated by the UCTA and Consumer Rights Act?
5. What kinds of clauses are required to be reasonable by the UCTA or fair under
Consumer Rights Act?
6. What is the test of unfairness?
7. Give examples of the kinds of clauses which are invalidated by the Consumer Rights
Act.
Notes
Part III The capacity to contract minors
7 Contracts made by minors
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.1 Contracts for necessaries . . . . . . . . . . . . . . . . . . . . . . . . 109
7.2 Beneficial contracts of service . . . . . . . . . . . . . . . . . . . . . . 109
7.3 Voidable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
7.4 Recovery of property . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Introduction
A minor is a young person under the age of 18 years. A minor is not considered to have
the same capacities as an adult. One of these capacities is the ability to enter into a
legally binding contract. An adult with full mental capabilities has capacity to enter
into a contract. Certain persons do not have full contractual capacity. They include the
drunk, the mentally disordered, minors, unincorporated associations, corporations,
the Crown and public authorities. Within this category of persons who lack capacity,
the syllabus of this course only considers minors. Important changes to this area were
made by the Minors Contracts Act 1987.
The general rule is that a minor is not bound by a contract he enters into during his
minority. The purpose of the rule is to protect minors against their own inexperience
and improvidence by relieving them of liability on contracts made by them but, in
some cases, the rights of the other party must in fairness be allowed to prevail over
this policy of protection.
The issues to concentrate upon are:
uu contracts for necessaries
uu beneficial contracts of service
uu voidable contracts
uu the recovery of money paid or property handed over in pursuance of a non-binding

contract.
LEARNING OBJECTIVES
This chapter introduces the regulation of contracts made by minors to enable
you to discuss and apply in problem analysis its key components (and supporting
uu Contracts for necessaries and beneficial contracts of service.
uu The consequences of failure by the minor to pay for goods or services.
uu The differences between the effect of contracts which have been performed and
those which are still unperformed.
uu Whether the supplier has any prospect of recovering the goods from the minor.
Contract law 7 Contracts made by minors page 109
7.1 Contracts for necessaries
Essential reading
McKendrick, Chapter 16: Capacity Section 16.1 Introduction and Section 16.2
Minors.

Section 2 Capacity to contract: minors contracts.
The rule with regard to necessaries in contracts for the sale of goods is defined by
s.3(3) of the Sale of Goods Act 1979. The definition states that necessaries are goods
suitable to the condition in life of the minor ... and to his actual requirements at the
time of the sale and delivery. Note that necessaries do not mean necessities but
goods which are suitable to the minors condition in life and his actual requirements
(Peters v Fleming [1840] 6 M & W 42). The emphasis upon the individual minors status
means that the older cases appear odd to a modern reader and contain many quaint
examples of a bygone age (Allen v Bloomsbury Health Authority [1993] 1 All ER 651).
Examples include Hands v Slaney (1800) 8 Term Rep 578 where a servants uniform was
a necessity when purchased by a gentleman and Nash v Inman [1908] 2 KB 1 where
the court decided that the purchase of several fancy waistcoats was not a purchase
of necessary goods when the buyer owned several already. The liability is to pay a
reasonable price, not the contract price.
You will note that necessaries may include services and that the beneficial contracts of
service considered in the next section are also regarded as another form of necessaries.
See, for example, Roberts v Gray [1913] 1 KB 520 where the minor was held liable for
breach of an executory contract.
Activity 7.1
How can the supplier know whether young Inman already has enough waistcoats?
Is the law perhaps being overprotective here?
Activity 7.2
Would the decision in Roberts v Gray also apply to an executory contract for
necessary goods?
Summary
At common law, minority was not a defence where the contract was for necessaries.
Necessaries could either be goods or a contract for services.

Anson, Chapter 7 : Incapacity.
7.2 Beneficial contracts of service
Essential reading
McKendrick, Chapter 16: Capacity Section 16.2 Minors.

A minor is generally bound by a contract of employment where that contract is

beneficial to them. This category includes contracts of apprenticeship, training or
employment and professional engagements. As to the overriding requirement that
the contract as a whole must be beneficial to the minor, see, for example, Doyle v White
City Stadium [1935] 1 KB 110, and Chaplin v Leslie Frewin (Publishers) [1966] Ch 71 and
contrast De Francesco v Barnum [1880] 43 Ch D 165.
In Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 2903
it was held that a player representation contract entered into by the footballer Wayne
Rooney at the age of 15 was not enforceable against Rooney as he was a minor but was
voidable at his option. In addition, the contract was not analogous to a contract for
necessaries nor was it a contract of apprenticeship, education or service since Rooney
was already with a football club and could not become a professional footballer
because of his age.
Note that trading contracts are not included.
Activity 7.3
Why should trading be treated differently from exercising a profession?
Summary
A minor will generally be bound where the contract is one of employment which is
beneficial to them. Trading activities are excluded from this category.

Anson, Chapter 7: Incapacity.
7.3 Voidable contracts
Essential reading
In this very mixed group of contracts, the minor may rid himself of his obligations if
he repudiates the contract before attaining the age of 18 or within a reasonable time
after that. What this means is that the contracts are voidable at the minors option. A
voidable contract is a contract which exists, but which one party has a right to set aside
or render void. This right can be lost in certain circumstances. The most common of
these circumstances is the intervention of a third party who has acquired rights following
from the voidable contract. A voidable contract is different from a void contract in that
a void contract is an entity which was never a contract. The term is, therefore, a paradox.
The distinction between void and voidable is discussed again in Chapter 8 in relation to
mistake. There seems to be no convincing explanation for the separate treatment of this
group. If the minor needs protection, why are the contracts not simply void?
7.4 Recovery of property
Essential reading

Previously, at common law, all other contracts (i.e. those neither for necessaries nor
falling within the anomalous class of voidable contracts) were not binding on the
minor unless he ratified them after reaching majority, but they could be enforced by
the minor if he chose. The Infants Relief Act 1874 did away with ratification and made
many of the contracts absolutely void but the Minors Contracts Act 1987 restores the
possibility of ratification and provides (s.3) a new remedy of restitution in favour of the
other contracting party. This remedy is discretionary but cases such as Stocks v Wilson
[1913] 2 KB 235 and Leslie v Sheill [1914] 3 KB 607 illustrate the factors which will be taken
into account.
Activity 7.4
What is the position of a minor who purchases, and pays for, non-necessary goods
but who now wants to cancel the transaction?
Contract law 7 Contracts made by minors page 111

Anson, Chapter 7: Incapacity.
Examination advice
A review of past examination papers indicates that this is a topic which has usually
occurred as a part of a problem involving other issues.

Linda left school last year at the age of 16. She took a job as a trainee kitchen
assistant in a hotel. Her wages are 50 a week and she is required to give three
months notice to terminate her employment.
She recently agreed to buy an Osaka motorcycle so that she could spend more
time with her boyfriend Malcolm, who is mad about motorcycles. She also signed a
written agreement to buy a one-quarter share in a racing greyhound called Dingo.
Linda has now been offered a job as a cook in a restaurant at 100 a week, provided
she can start immediately. She has failed to pay for the motorcycle or the share in
Dingo.
Advise Linda.

This question presents the issue of incapacity by reason of Lindas minority in three
different contracts. You need to deal with each in turn because they raise slightly
different issues. With the first contract, you need to consider whether or not her job
as a trainee kitchen assistant is a necessary in that it is a contract of employment
beneficial to her. You need to consider the case law in this area, notably Roberts v Gray
(1913). The balance of probabilities favours this being a contract of employment from
which she will benefit. Accordingly, it is binding upon her.
With regard to the motorcycle, you need to consider whether or not this is a necessary
within the meaning of s.3 of the Sale of Goods Act 1979, in light of the decision in Nash v
Inman. On the one hand, the motorcycle seems something of an extravagance; on the
other hand, it is possible to argue that she needs it for transportation (possibly to her
employment). The reason given is that she needs it to spend time with her boyfriend
Malcolm, which works against the argument that it is a necessary.
The purchase of a share in the racing greyhound would appear to be something in the
nature of a trade. Accordingly, this contract is unlikely to be enforceable.
Your advice to Linda is that she is bound by her contract of employment, may be
bound by the contract to purchase the motorcycle and is unlikely to be bound by the
contract to purchase a share in the greyhound.
Quick quiz
Question 1
When will a contract of employment be binding upon a minor?
a. When the contract is viewed as not beneficial to the minor.
b. When the contract is viewed as absolutely beneficial to the minor.
c. When the contract is viewed as being beneficial on the whole to the minor.
d. When the contract is viewed as providing some minimal benefit to the minor.
e. Dont know.
Question 2
a. A minor must always pay the contract price for a necessary.
b. A minor must sometimes pay the contract price for a necessary.
c. A minor must pay a reasonable price for a necessary.
d. A minor need never pay for a necessary.
e. Dont know.
Question 3
Which best defines the legal conception of a necessary?
a. A necessary is a good suitable to the condition in life of the minor and to her
actual requirements at the time of the sale and delivery.
b. A necessary is a good unsuitable to the condition in life of the minor and to her
actual requirements at the time of the sale and delivery.
c. A necessary is a good suitable to the minors lifestyle at the time the contract is
entered into between the parties.
d. A necessary is land suitable for use by the minor.
e. Dont know.
Question 4
Which of the following is likely to be a necessary?
a. A computer designed to allow a twelve-year-old from a middle income family to
play online games.
b. A computer used to facilitate online school studies by a twelve-year-old from a

poor family which lacks access to an electrical supply.
c. A computer used to facilitate online studies by a twelve-year-old from a middle

income family which has access to an electrical supply.
d. A computer used to facilitate online studies by a twelve-year-old from a wealthy

family which has already provided the twelve-year-old with three other
computers.
e. Dont know.

1. What are contracts for necessaries and beneficial contracts of service?
2. What are the consequences of failure by the minor to pay for goods or services?
3. What are the differences between the effect of contracts which have been
performed and those which are still executor?
4. When does the supplier have any prospect of recovering the goods from the
minor?
Part IV Vitiating elements in the formation of a contract
8 Mistake
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
8.1 Some guidelines on mistake . . . . . . . . . . . . . . . . . . . . . . 115
8.2 Bilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.3 Unilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
8.4 Mistake in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Introduction
Mistake is a difficult area of contract law. A major reason for the difficulty is that the
common law recognises no comprehensive theory of mistake. Consequently, many of
the decisions are difficult to reconcile with each other. This difficulty is made worse by
the fact that the number of mistake cases is quite small. A further complication is that
judges, authors and lawyers often use different terms to describe the same concept
(and at other times use the same term to describe different concepts).
Consequently, accounts of this area of law are often structured in very different ways
giving an impression that different authors have a different view of the underlying law.
This is usually a misimpression that arises from a different scheme of organisation and
presentation. The same point may be made about the topic of Illegality considered in
Chapter 12. For this reason it is recommended that you do not read a second textbook
account of these subjects if you are happy that you have understood the first account
that you have read.
LEARNING OBJECTIVES
This chapter introduces the effect upon an otherwise valid contract of any mistake
made by the contracting parties to enable you to discuss and apply in problem
analysis its key components (and supporting authority) including:
uu What is a contractual mistake?
uu The relationship between the doctrines of mistake and misrepresentation
including the different effects of each if established.
uu The different categories of operative mistake including key distinctions between
agreement and non-agreement mistakes and the varying vocabularies used to
describe key distinctions and concepts.
uu The distinction and relevance of the different approaches of law and equity to
questions of mistake.
Contract law 8 Mistake page 115
8.1 Some guidelines on mistake

A few guidelines may assist you as you approach this topic.
1. Mistakes can be either unilateral (a mistake of one party only) or bilateral (a

mistake of both parties). In general, the law will only provide relief where the
mistake is a bilateral mistake although there are some important exceptions to
this point.
2. The parties may share the same bilateral mistake (it is a common or mutual
mistake) or they may each be mistaken, but with respect to a different point.
3. At common law, an operative mistake will render a contract void. In equity, the
effect of mistake may be to render the contract voidable. The distinction bears
repeating at this point. A void contract is, of course, one that never comes into
existence. A voidable contract is one that comes into existence but is subsequently
liable to be set aside. Equity seeks to provide whatever remedy is just in the
circumstances. Mistake in equity rendering a contract voidable is, however,
doubted in English law at present.
4. Many cases can be explained upon different grounds than that of mistake.
5. Courts are reluctant to find an operative mistake. A possible reason for this is
that to do so does, to a certain extent, rewrite the contract between the parties.
Another possible reason is that if a court finds that a contract is void for mistake,
this may well affect the rights of innocent third parties.
6. Many mistake cases will present the same fact patterns as misrepresentation
cases indeed, in the majority of cases, a claimant would be advised to claim that a
misrepresentation had been made rather than a mistake. This is partly because of
the availability of damages for a misrepresentation, but also because the changes
effected by the Misrepresentation Act 1967 make a misrepresentation easier to
prove. (See Chapter 9.) This overlap has clear consequences for how problem
answers should be structured.
7. When you have studied this chapter you will see that the English law of contract
has a narrow doctrine of mistake. However, the overlap with misrepresentation
is significant here. The ungenerous approach to relief that follows from a narrow
doctrine of mistake is mitigated by a comparatively broad, and so generous to
relief, doctrine of misrepresentation.
8.1.1 Mistake at common law and in equity

It may assist you to think about mistake in different categories. The most significant
division is between mistake at common law and mistake in equity. We will begin with
mistake at common law, because if the mistake is an operative one, the contract is
void and so there is no need to consider mistake in equity. We will also begin with
bilateral mistakes and consider different types of bilateral mistakes that is to say, the
circumstances in which courts will find that a mistake of both parties is sufficiently
fundamental to invalidate the apparent contract. In these cases, if the mistake is
operative it is said to result in what is best described as a paradox: a void contract.
Because of the mistake, the apparent agreement of the parties lacks consensus and
there is no (nor ever was any) contract.
8.1.2 Mistakes of law and mistakes of fact

English contract law long barred relief where the mistake was one of law rather than
of fact. Exceptions existed to this bar a common one was that a mistake as to private
rights was not a mistake of fact (e.g. Cooper v Phibbs [1867] LR 2 HL 149). In Kleinwort
Benson Ltd v Lincoln City Council [1999] 2 AC 349 the House of Lords allowed recovery of
a mistaken payment where the mistake was one of law. In Brennan v Bolt Burdon [2004]
1 WLR 1240 the Court of Appeal applied this decision and held that the contractual
compromise of a legal claim could be void as a result of a common mistake of
law. It was a question of construction as to whether or not the mistake made the
compromise impossible (Great Peace Shipping Ltd v Tsavliris Salvage Ltd (The Great Peace)
[2002] 4 All ER 689). Where there was a doubt as to the law concerned, there was no
mistake of law sufficient to render the contract void.
8.2 Bilateral mistakes

There are two basic types of bilateral mistakes. In the first case, each of the parties is
mistaken, but they do not share their mistake. In the second case, the parties share
their mistake.
8.2.1 Absence of genuine agreement
Essential reading
Mistake negativing consent.
Poole, Chapter 3: Agreement problems Section 2A Mutual mistake.
In situations where there is an absence of genuine agreement, the parties are each
mistaken, but they do not share a mistake. Their separate mistakes are sufficiently
fundamental, however, that no contract can be created. It is sometimes said that the
parties are at cross purposes and that the offer and acceptance do not correspond.
No contract can arise because there is an absence of agreement. A contract cannot be
formed in these circumstances because, on an objective interpretation, it cannot be
said what was intended by the parties. Another description of this process is that the
mistake negatives the consent of the parties to contract. They have, in other words,
failed to create an agreement.
The leading case is Raffles v Wichelhaus [1864] 2 H&C 906. Here, one party bought,
and the other party sold, cotton to be shipped on the vessel Peerless from Bombay.
Unknown to either party, there were two ships Peerless, and each intended a different
ship. The court found that there was no contract.
See also Scriven Bros & Co v Hindley & Co [1913] 3 KB 564 (see also Chapter 2, Section 2.1.1).
Activity 8.1
Suppose the buyers in Scriven v Hindley had been suing for damages for non-delivery
of hemp. Would the contract still have been held to be void?
Summary
The parties are said to be at cross purposes when the offer and acceptance do not
correspond. In these circumstances, no contract can arise.
8.2.2 Common mistake
Essential reading
McKendrick, Chapter 14: Common mistake and frustration Section 14.2
Common mistake.
Poole, Chapter 13: Common mistake: initial impossibility Section 2 The

theoretical basis for the doctrine of common mistake.
Chandler, A., J. Devenney and J. Poole, Common mistake: a theoretical

justification and remedial inflexibility (2004) JBL 3458, available through the
Online Library.
Common mistake (sometimes, confusingly, referred to as mutual mistake) occurs

where both parties to a contract make the same mistake about a critical element of
their agreement. The leading case dealing with mistake, and this type of mistake in
particular, is Bell v Lever Brothers [1931] 1 KB 557. In this case, Lord Atkin stated that when
mistake operates upon a contract, it does so to negative or nullify the consent of the
parties. Common mistake deals with those situations where an apparent contract
lacks consent and consequently the contract is void ab initio (void from the outset).
This approach to mistake is dependent upon a consensual theory of contract that is
to say, if a contract exists it is due to the consensus or agreement of the parties. The
court enforces the contract on the basis of this consensus. Mistake operates to disrupt
this consensus it removes any consensus and consequently no contract can arise in
the circumstances.
Because English law has yet to work out any comprehensive theory of mistake, it is
best to approach the subject by examining different situations where courts have
found that there was no contract. You should keep in mind as you examine these cases
that many of them can also be rationalised on grounds other than mistake.
8.2.3 Non-existence of the subject matter
Essential reading
Mistake as to the existence of the subject-matter of the contract.
Poole, Chapter 13: Common mistake: initial impossibility, Section 3A Res

extincta.
In some situations, parties may reach an agreement to deal with a subject matter
which, unknown to either party, does not exist. These cases deal with the problem of
res extincta. Note that in these cases, the contract suffers from an initial impossibility;
from the outset it cannot be performed. An example of such a situation is where A,
the seller, contracts to sell his horse to B, the buyer. Without A or Bs knowledge, at the
time the contract is entered into the horse is dead. It is, therefore, impossible for A to
sell B his horse.
In the leading case, Couturier v Hastie [1856] UKHL J3, the seller sold a cargo of corn
to the buyer. Neither party was aware of the fact that, at the time of the sale the
captain of the ship carrying the corn had sold the corn. This case has been taken to
stand for the proposition that in a contract for the sale of goods, where the goods
have perished without the sellers knowledge, the contract is void s.6 of the Sale
of Goods Act 1979. You will note that in Couturier v Hastie the House of Lords did not
call the contract void nor did they consider what the position would have been if the
buyer had claimed damages for non-delivery. However, this understanding of the case
was at least partially incorporated into the 1893 (see now 1979) Sale of Goods Act, s.6,
which expressly provides that in a contract for the sale of goods, where the goods
have perished without the sellers knowledge, the contract is void. It should be noted
here that s.6 applies to goods that have perished (i.e. to goods that once existed and
subsequently ceased to exist). It will not apply to goods which the parties mistakenly
thought existed but which, in fact, never existed.
It is, however, possible to interpret Couturier v Hastie differently and this is what the High
Court of Australia did in McRae v Commonwealth Disposals Commission [1951] 84 CLR 377.
The High Court of Australia expressed doubt that Couturier v Hastie involved issues of
mistake and that, properly understood, the case was about the proper construction of
the contract entered. In McRae the claimants sent a ship to salvage the wreck of a tanker
which they had purchased from the defendants. In fact no such tanker existed at the
location given and the case proceeds on the basis that neither party was aware of this
mistake. The claimant succeeded in their action for breach of contract. The contract was
analysed as one for goods that were guaranteed to exist. An alternative construction
would have been that the contract was one for the sale of the wreck, if it existed at that
location. If this construction had been taken then the claimants action for breach of
contract would have failed. The subject matter of the contract would then have been a
chance (sometimes called an adventure). It may seem odd that a party would purchase
such a chance but that in essence is what the purchase of a lottery ticket is, the purchase
of a chance of winning. If this had been the construction applied in McRae the claimant
would have no more valid claim for breach of contract than would the purchaser of a
lottery ticket who demanded the price back after the draw because the ticket did not
win! The result and approach in McRae seems correct. Put slightly differently, the result
depends upon which party under the terms of the contract is allocated the risk that
the goods may not exist. In McRae this risk was assumed by the seller who guaranteed
the goods existence and so became liable when they did not exist. This approach was
approved by the Court of Appeal in The Great Peace (2002), However, if the Sale of Goods
Act 1979 s.6 applies, the court is prevented from taking account of the construction of
the contract; the section simply states that the contract is void. The law in this area is
therefore untidy with different principles applying when there is a shared mistake as
to the existence of the subject matter of the contract where: goods which once existed
have subsequently perished (contract is void according to s.6 and so no action may be
brought) and goods which never existed (an action may be maintained depending on
the proper construction of the contract: McRae).
Summary
Where the subject matter of the contract does not exist at the time of the contract,
courts must find that the contract is void where Sale of Goods Act s.6 applies. In cases
falling outside s.6, whether a party may sue for breach of contract will depend upon
the proper construction of that contract.

Atiyah, P.S. Couturier v Hastie and the sale of non-existent goods (1957) 78 Law
Quarterly Review 340.
8.2.4 Mistakes as to ownership
Essential reading
Mistake as to the possibility of performing the contract.
Like the situation of the non-existent subject matter, these cases involve a situation
of initial impossibility. One party agrees to sell and the other party agrees to buy
something which, unknown to either of them, is already owned by the buyer. This is
described as the sale of a res sua. The agreement cannot be performed because it is
impossible to transfer the ownership since the buyer already owns the thing. See
Cooper v Phibbs (1867) as explained by the Court of Appeal in The Great Peace (2002).
Activity 8.2
If the seller of a good which had never existed warranted that it did exist, would the
contract of sale be void?
Activity 8.3
Is it possible to regard Couturier v Hastie as a case where the seller provided no
consideration?
Activity 8.4
To what extent, if any, can cases such as Cooper v Phibbs be understood as cases
where there is a defective consent to the contract?

Anson, Chapter 8: Mistake.
8.2.5 Mistake as to the possibility of performance
Essential reading
Mistake as to the possibility of performing the contract.
In some circumstances the parties may be mistaken as to the possibility of

performance. The parties have a shared misapprehension that performance of their
agreement is possible in fact it is not. Professor Treitel divides these cases into three
categories.
uu Cases of physical impossibility see Sheikh Brothers Ltd v Ochsner [1957] UKPC 1.
uu Cases of legal impossibility see Cooper v Phibbs (1867).
uu Cases of commercial impossibility see Griffith v Brymer [1903] 19 TLR 434.
Note that it is important, in cases where it is alleged that there is a mistake as to

the possibility of performance, to ascertain from the agreement whether one party
has assumed the risk of performance. If one party has assumed this risk, the party
will probably be in breach of a (valid) contract. We will return to the concept of
impossibility when we consider frustration in Chapter 15 of the subject guide. As we
will see, a contract is frustrated if performance becomes impossible because of a
supervening (or later) event.
Summary
It is possible to regard the situations where the subject matter does not exist, or the
thing is already owned by the purchaser or situations of physical/legal/commercial
impossibilities as instances where the contract is void or invalidated because it cannot
be performed. It is important to note, however, that the apparent contract is only void
where the mistake is of both parties.
Activity 8.5
Outline the circumstances in which courts have found that performance is
impossible.
Activity 8.6
In Griffith v Brymer, is performance of the contract impossible or is performance of
the contract radically different from that which was contemplated by the parties?

Treitel, paras 8-012 to 8-014.
8.2.6 Mistake as to a quality of the subject matter
Essential reading
Mistake as to quality.
Poole, Chapter 13: Common mistake: initial impossibility Section 3B Mistakes

as to quality.
This is a very difficult area of the law of mistake. The difficulty arises from the House of
Lords decision in Bell v Lever Brothers Ltd [1931] 1 KB 557. The case presented hard facts
to the court. The chairman and vice-chairman of a Lever Brothers subsidiary rendered
exceptional services to the company but also breached their contracts of employment
in such a way that the contracts were terminable at Lever Brothers option. Lever
Brothers, unaware of this, entered into termination contracts to end the employment
of the two men because Lever Brothers were amalgamating the subsidiary with
another company. When Lever Brothers later learned that the employment contracts
were terminable because of the behaviour of the two men they attempted to set aside
the termination contracts and recover the money paid. The mistake was a bilateral
mistake as to a quality of the subject matter of the contract. The subject matter of the
termination contract was the employment contract and the particular quality was the
terminability of the employment contract at Lever Brothers option. Because of their
breaches of duty, Lever Brothers could have terminated the contracts of the two men
without compensation. The jury found that they would have terminated the contracts
without compensation and would never have entered into the termination contracts
had they known of the secret trades.
The House of Lords was divided 32 in favour of finding that the severance contracts
were valid. Lord Atkin wrote the leading judgment. In it, he recognises that a mistake
as to quality may render the contract void:
Mistake as to quality of the thing contracted for raises more difficult questions. In such
a case mistake will not affect assent unless it is the mistake of both parties, and is to the
existence of some quality which makes the thing without the quality essentially different
from the thing as it was believed to be.
Lord Atkin then applied this test to the facts before him and found that the mistake in
Bells case was not sufficient to render the contract void. The problem the case creates
is that if the mistake was not sufficient in this case, it almost never would be. It is
probably for this reason that there have been so few successful mistake cases in later
years.
Note that there are some older contrary authorities that do not sit easily with the
decision of the House of Lords in Bell: Nicholson & Venn v Smith-Marriottc (1947) 177 LT
189 and Scott v Coulson [1903] 1 Ch 453.
In the case of Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All
ER 902 Steyn J (as he then was) explained the meaning and application of Bell v Lever
Bros [1932] AC 161. This is an important case because it provides a comprehensive
assessment of contractual mistake. Steyn J discussed Bell v Lever Bros in some detail
because of the controversy surrounding the application of the case. He stated that the
doctrine of mistake at common law had a narrow ambit and one into which few
cases had fallen. To an extent which has yet to be determined, this case is affected by
the decision in The Great Peace (discussed below and in greater detail in Section 8.4
Mistake in equity).
In The Great Peace, the Court of Appeal referred to Bell v Lever Bros with approval,
although Lord Phillips MR noted the cases which Lord Atkin relied upon as support
for his principles provided an insubstantial basis for his formulation of the test of
common mistake in relation to the quality of the subject matter of a contract. Lord
Phillips MR, in The Great
Peace, appears to have
made the relevant criteria
for an operative mistake
as to quality even more
demanding than those
proposed by Lord Atkin in
Bell v Lever Bros.
Summary
Mistake as to a quality of the
subject matter creates great
Figure 8.1 The Great Peace difficulties in the common
law of contract. Very few
contracts are found to be void on the ground that there is a sufficiently fundamental
mistake as to quality. It is the element of sufficiently fundamental that proves so
troublesome. This is partly because of the decisions in Bell v Lever Bros and The Great
Peace and partly because it is difficult to distinguish a sufficiently fundamental quality
from the assumption of a risk which worked to the disadvantage of one or both of the
parties.
It is because of these difficulties that courts created an equitable device to circumvent

the difficulties posed by mistake at law. This device, and especially its reduced scope
after The Great Peace, is discussed in Section 8.4.
Activity 8.7
Summarise the approach provided by Steyn J in Associated Japanese Bank
(International) Ltd v Credit du Nord SA as to how cases where mistake is alleged
should be resolved.

MacMillan, C.A. How temptation led to mistake: an explanation of Bell v Lever
Bros. (2003) 119 LQR 625.
1. Write a definition of the term res extincta.
2. Compare your definition of res extincta with that of consideration.
3. In what circumstances did Lord Atkin say that consent would be negatived?
4. In what circumstances did he say it would be nullified?
5. What are the differences between these two?

Anson, Chapter 8: Mistake.
8.3 Unilateral mistakes

Courts are generally unwilling to find that a contract is void at law where the mistake
is the mistake of one party only. To find the contract void would, in most instances,
prejudice the non-mistaken party. Accordingly, courts will generally only find the
contract void in one of two situations.
uu In the first case, the non-mistaken party is aware of the other partys mistake and
proceeds to contract anyway.
uu In the second case, the non-mistaken party has created the mistake to induce the
(now) mistaken party to contract. The largest group of these cases are those of
mistaken identity.
In both of these instances, the non-mistaken party does not have any reasonable
expectations to protect. In the first instance, he is aware of the mistaken assumption
or promise and acts to take advantage of it. In the second instance, he has deliberately
caused the mistake as to identity to form a contract between himself and the
mistaken party. In neither situation has he a reasonable expectation that the court will
seek to protect. Indeed, the entire mistake has come about by reason of his inaction or
by his fraud.
As you consider this area, be aware of the fact that there are many cases where the
contract is valid at law and yet equity may provide some relief to the mistaken party.
8.3.1 Mistaken assumptions or promises
Essential reading
McKendrick, Chapter 2: Agreement: clearing the ground Section 2.1 Who
decides that an agreement has been reached? to Section 2.3 The objective test.

Poole, Chapter 3: Agreement problems Section 2B Unilateral mistake.
Brownsword, R. New notes on the old oats, in your study pack.
In some circumstances, mistake is said to negative the consent of the mistaken party
so that no contract arises. The mistake prevents the contract from arising. Importantly,
the non-mistaken party must be aware of the other partys mistake.
The perplexing case of Smith v Hughes [1871] LR 6 QB 597 illustrates this proposition.
The claimant sold the defendant oats after showing him a sample of the oats. The
defendant mistakenly thought he was buying old oats; in fact, they were new oats. The
claimant had done nothing to induce this mistake and was unaware of it. The Court
held that for a mistaken assumption or promise of one party to be sufficient to vitiate a
contract (to render it void) the mistake must be known to the other party and it must
be a mistake as to what is promised. Thus, in Smith v Hughes, the contract would have
been void only if two factors were present. First, if the defendant had been mistaken
as to the promise made to him by the claimant. In this case the promise would have
been as to the age of the oats. Second, that the defendant knew about the claimants
mistake as to the nature of the promise made to him by the defendant (sometimes
described as a mistake as to terms).
As you will see in your readings, while the law appears to require a subjective intention
in these cases (that is to say, what is actually in the minds of these parties), it is in fact
taking an objective approach (that is to say, what would be in the minds of reasonable
parties in these circumstances).
Where the mistake is as to an assumption or as to a promise, courts rarely find that the
mistake is operative that is to say, that, because of the mistake, no contract has been
created. The entire area displays the extent to which the common law of contract is
rooted upon the principle of caveat emptor (let the buyer beware). As long as one party
does not misrepresent a state of affairs or defraud the other party, courts will generally
find the consensus, the agreement, between the parties which is necessary to form a
contract. Indeed, courts will be very reluctant to disrupt an apparent contract in these
circumstances, for to do so would be to write the contract for the parties.
In some instances, however, it is so readily apparent to the one party that the other is
proceeding upon a mistaken basis that the court will find that the apparent contract
is void. These are cases where one party snaps at the obviously mistaken offer of
another. A always sells B grain at a price of x per pound. One day, A offers to sell B grain
at x per ton. B, realising that A has made a mistake, snaps at As offer and accepts
immediately. This is a case where the mistake is operative the mistake negatives As
consent in such a way that there is no contract. Note that: (i) B is aware of As mistake
and (ii) Bs conduct is such that it is unconscionable or inequitable for him to hold A to
a contract.
The cases of Hartog v Colin and Shields [1939] 3 All ER 566 and Centrovincial Estates plc
v Merchant Investors Assurance Co Ltd [1983] Com LR 158 illustrate this proposition and
were discussed earlier in Chapter 2, Section 2.1.1.
Summary
This is not an easy area to understand. The mistake of one party is generally not
enough to avoid the contract. The mistake must be known to the other party. For the
contract to be void, it is not sufficient that the promisor realises that the promisee
is mistaken as to an important element of the contract. The promisor must realise
that the promisee is mistaken and that he is mistaken as to the promise made by the
promisor. It may be that this oddity arises because of the nature of the contract in
Smith v Hughes where the sale of the oats was made by sample. The defendant had
examined a sample of the oats when he placed the order. In the circumstances, the
only reason that the contract would be void was if the promisors conduct verged on
the fraudulent in not explaining to the promisee that he was mistaken about the
promise.
Courts will usually allow the contract to be avoided for a unilateral mistake in
circumstances where the behaviour of the non-mistaken party is such as to indicate
that he has no reasonable expectation to protect. Where the non-mistaken partys
actions are such as to indicate that he seeks to take advantage of the mistaken party,
there is no reasonable expectation to protect. In other words, a non-mistaken party
who snaps at the mistaken offer of another will not reasonably have thought the
mistaken offer was a legitimate one.
Activity 8.8
Ace Sportscards hires a new assistant, Blob. Blob places various cards in the shop
window and places prices below the cards. He knows nothing about sports cards
and places the wrong price tag below some cards. He prices a 1979 Wayne Gretzky
rookie card at $5 the card is worth $500. Crafty, passing the shop, notices the card
and enters the shop. He offers Blob $20 for the card; Blob notes the price below it
and sells the card to him for $5. Blob later realises his error; Ace Sportscards ask you
if there is a contract with Crafty.
Activity 8.9
A and B are art collectors. A has a picture that may be an Emily Carr. A offers to
sell it to B. Consider the following problems. Distinguish between them and note
whether, in any or all of them, a contract arises.
a. A says to B: Its a Carr all right, whereupon B buys the picture. It is not a Carr.
b. A (mistakenly) believes the painting to be a Carr and tells B that it is a Carr

whereupon B purchases it for 500,000.
c. A thinks it is a school of Carr picture, but B thinks it is an original.
d. Same as (c) but A knows B thinks it is an original.
e. B thinks A is warranting the picture as original. A knows this, and has no

intention of warranting it.
8.3.2 Mistakes as to identity
Essential reading
Poole, Chapter 3: Agreement problems Section 2C Unilateral mistake as to

identity.
This area of law has received recent clarification from the House of Lords in the case
of Shogun Finance v Hudson [2003] UKHL 62. Prior to this decision, there was some
uncertainty as to the application of a doctrine of mistake as to identity. Virtually all
mistake as to identity cases arise as the result of the fraudulent actions of a wrongdoer,
the rogue. In the typical situation a rogue presents himself to an innocent vendor
and offers to purchase a good. The rogue deceives the vendor as to his identity. The
vendor sells the goods to the rogue and the rogue departs with the goods. The vendor
is usually given a cheque which is not honoured. When the vendor seeks the return of
the goods from the rogue, he discovers:
a. the rogue for what he is
b. that the rogue has vanished
c. that the rogue has sold the goods to an innocent third party.
The court is thus faced with litigation between the (deceived and mistaken) vendor
as claimant and the (innocent) third party as defendant in which the claimant seeks
the return of his goods. The court must decide which of these two victims will bear
the cost of the rogues deception. If the contract between the rogue and the vendor is
good, the cost will be born by the vendor because by this contract, the rogue acquired
good title to the goods and could sell them on to the third party. If the contract
between the rogue and the vendor is void, the cost will be born by the third party
because the rogue never acquired title to the goods. The vendor thus recovers his
goods from the third party. A decision, as required here, as to which of two victims
should bear the full consequences of a fraud perpetrated by a third party will always
be a difficult one. This difficulty prompted a suggestion from Devlin LJ in Ingram v Little
[1961] 1 QB 31 that a mechanism should be found whereby the loss was effectively
shared by these two parties. The suggestion has never been acted on.
You must also note that in these circumstances, misrepresentation is also involved. In
the above circumstances, the rogue induced the contract by a misrepresentation. If
the contract is not void for mistake, it is voidable for misrepresentation. However, the
vendor must then set aside or rescind the contract before the innocent third party
contracts with the rogue. If he does not, the first contract can no longer be set aside
because of the involvement of the third partys rights. That is to say, if the third party
contracts with the rogue before the contract between the rogue and the vendor is
rescinded, then the vendor loses the right to rescind the first contract. This matter will
be examined further in the next chapter on misrepresentation in Section 9.2.1.
In most mistaken identity cases, the policy arguments will favour protection of the
third party. The vendor assumed a normal commercial risk in selling on credit, or
accepting a payment by cheque. Because it was the vendors choice to assume this
risk, there is no valid reason why he should be able to pass the resulting loss on to the
third party. This reasoning is less convincing when the third party appears to buy the
goods at undervalue. Such a sale should perhaps make the purchaser suspicious. In
Lewis v Averay [1973] 2 All ER 229 the sale to the rogue was for 450 but the rogues sale
of the same property to the innocent third party was for 200.
The House of Lords in Cundy v Lindsay [1878] 3 App Cas 459, however, found differently.
In this case, the rogue presented himself in such a way as to appear to be a legitimate
firm. The innocent party thought that they were dealing with a legitimate firm and
shipped the goods to the rogue. In these circumstances the House of Lords found that
the contract was void because there was a lack of consensus.
Cundy v Lindsay thus operates to establish the proposition that:
1. if A thinks he has agreed with C because he believes B, with whom he is

negotiating, is C; and
2. if B is aware that A did not intend to make any agreement with him; and
3. if A has established that the identity of C was a matter of crucial importance,
4. then the contract will be void.
Note that identity must be material to the formation of the contract: Dennant v Skinner
[1948] 2 All ER 29.
Later courts often found that in seemingly similar circumstances there was a contract.
Thus, a mistake as to the attributes of identity (such as creditworthiness) will generally
be insufficient to render the contract void: see Kings Norton Metal Co v Edridge [1897]
14 TLR 98. In addition, in some circumstances the contract is made inter praesentes
that is to say face-to-face and the vendor meets the rogue and contracts with him.
In these cases, courts have frequently said that the rogue is identified by sight and
hearing: see Phillips v Brooks [1919] 2 KB 243 and Lewis v Averay [1972] 1 QB 198. Where
the parties are before each other, a presumption arises that the mistaken/deceived
party intended to contract with the person before him and a contract has arisen. The
existence of such a presumption has been doubted in the past, but it was accepted by
the majority of the law lords in Shogun Finance v Hudson.
In Shogun Finance v Hudson a rogue entered into a written contract of hire purchase
with Shogun Finance to purchase a vehicle on credit. The rogue fraudulently assumed
the identity of another person. The majority of the law lords found that in these
circumstances, identity was critical to Shogun Finance because it was necessary for
them to check the credit rating of their potential borrowers. The apparent contract
was a nullity due to the mistake of identity and an absence of consensus. The majority
also approved of a presumption that in the face-to-face cases the party deceived
intended to deal with the person physically before him and the result is the formation
of a voidable contract. The presumption may be rebutted. Shogun Finance, however,
was not a case of a face-to-face transaction and the presumption did not arise. A
further effect of this decision is that it is unlikely that the Court of Appeals decision in
Ingram v Little (1961) will be followed in the future.
The dissenting law lords disapproved of drawing a distinction based on whether the
rogues fraud was perpetrated in writing or face-to-face. The dissenting law lords were
concerned with the effect of fraud upon contractual formation. They also sought to
give coherence to an uncertain area of law. Consequently, they disapproved of Cundy
v Lindsay and what they viewed as an untenable distinction based on the method by
which the rogue perpetrated his fraud. Both dissenting law lords believed that in these
circumstances of mistaken identity a voidable contract arose.
Summary
In reviewing this area, you should keep in mind the distinction between contracts
formed between the parties face-to-face and contracts formed at a distance. Where
the apparent contract is formed at a distance, and probably in some form of writing,
it is likely that the apparent contract is void for mistake. For this to occur, however,
the identity of the party must be critical in the formation of the contract. Where the
contract is formed between parties who appear before each other, a presumption
arises that the mistaken party intends to contract with the person before him. The
result is a contract which is voidable at the option of the mistaken party. It is uncertain
at this stage what is necessary to rebut this presumption.
Activity 8.10
What were the practical and commercial concerns of the dissenting law lords in
Shogun Finance v Hudson?
Activity 8.11
M sends an order for goods to N on paper which is headed Greenhill & Co and
shows a picture of a large factory. N sends the goods on credit. Greenhill & Co does
not exist. M resells the goods to P and then disappears. Advise N.
Activity 8.12
Suppose the rogue pretends to be a person who has (unknown to the parties)
already died would the contract be void or voidable?
Activity 8.13
Does it matter if the rogue pretends to be a fictitious person or assumes the identity
of a real person?

MacMillan, C.A. Rogues, swindlers and cheats: the development of mistake of
identity in English contract law (2005) 64 CLJ 711.
8.3.3 Documents signed under a misapprehension as to their contents
Essential reading
McKendrick, Chapter 9: The sources of contractual terms Section 9.3 Bound
by your signature?.
Poole, Chapter 3: Agreement problems Section 3B The plea of non est factum.
Clearly a person must normally take full responsibility for their signature and it is
up to them to make sure that they appreciate what they are signing. Exceptionally,
however, a person may have been so seriously misled that the document is held to be
void under the defence of non est factum (it is not his deed). See Gallie v Lee [1971] AC
1004 where the House of Lords rejected the previous test, based upon a distinction
apparently certain but really meaningless between contents and character, in favour
of an openly flexible criterion. The defence is available to a person who signed the
documents with a fundamental misapprehension as to the substance of the document
provided that the person who signed the documents took all due care.
You will note that the burden of proof lies on the signer to show that he was not
negligent and this is a burden he will normally be unable to discharge.
A rare successful plea of non est factum was Trustees of Beardsley Theobalds Retirement
Benefit Scheme v Yardley [2011] EWHC 1380 (QB) by a party who signed as a guarantor
of a lease to his employer after he was led to believe that his signature was necessary
only to witness the signatures of others.
8.4 Mistake in equity
Essential reading
Mistake in equity.
Poole, Chapter 3: Agreement problems Section 3A Rectification.
Poole, Chapter 13: Common mistake: initial impossibility Section 3B Mistakes

as to quality.
Mistake in equity is not an easy topic to study and there is, at present, considerable
uncertainty as to whether or not a contract can be avoided in equity. The uncertainty
arises from the decision in The Great Peace.
8.4.1 The end of the equitable jurisdiction to set aside on terms

We have seen that the doctrine of common mistake at law operates within narrow
boundaries. In the past this strict and ungenerous (i.e. to relief) approach at common
law has mitigated the courts ability to set aside a contract in equity where there was a
common mistake, but not one which is of sufficient importance to render the contract
void at law. In Solle v Butcher [1950] 1 KB 671, the Court of Appeal stated that the House
of Lords in Bell v Lever Bros was only concerned with mistake at law and not in equity.
Lord Denning then recognised a more flexible doctrine of equitable mistake. As this
equitable doctrine was the exercise by the courts of a power to set aside a contract the
court could do substantial justice between the parties by imposing conditions when
exercising the power. An example of its exercise was Grist v Bailey [1967] Ch 532 where
a house was sold for 850 in the mistaken belief that it was occupied by a protected
tenant. The tenant had, unknown to the parties, died and so, without a sitting tenant,
the house was worth 2,250. The sale was set aside subject to the condition that the
owner should offer it for sale to the disappointed buyer at the full market value. There
was, however, an uneasy relationship between mistake at law and mistake in equity.
It was in this context that the Court of Appeal gave their decision in The Great Peace.
The case involved two ships. The Cape Providence suffered structural damages
and it was feared that she might sink. The defendant was hired to salvage the Cape
Providence. To this end, they contracted with the claimant that the claimants ship,
The Great Peace, would travel to the Cape Providence to escort the vessel and stand
by for the purpose of saving lives. At the time the defendant approached the claimant,
the defendant (and from them the claimant) mistakenly believed that the ships were
35 miles apart. Shortly after the contract was concluded, the defendant discovered
that the ships were 410 miles apart. After they had procured a closer substitute
ship, the defendant refused to perform their contract with the claimant. At trial, the
defendant asserted that the contract was void for mistake at law or voidable in equity
by reason of mistake. The trial judge denied this assertion. On appeal, the Court of
Appeal considered the extent of the doctrine of mistake in equity.
The Court of Appeal extensively reviewed the cases of Bell v Lever Bros and Solle v
Butcher. The concept of mistake in equity was considered both before and after Bell
v Lever Bros. Lord Phillips MR concluded that it was impossible to reconcile the two
cases. Bell v Lever Bros prevailed; Solle v Butcher was disapproved. The House of Lords
in Bell v Lever Bros had not overlooked an equitable right to rescind an agreement
which was valid at law. There was no such equitable right and accordingly no separate
doctrine of mistake in equity existed to provide relief for a common mistake as to a
quality of the subject matter of the contract. In the case before them, the difference in
the proximity between the two ships as they were believed to be and as they actually
were was not a sufficiently fundamental mistake to render the contract void. The
contractual venture could still be performed. Accordingly, the appeal was dismissed:
the defendant was liable under the contract to pay the cancellation fee to the
claimant. In Pitt v Holt [2013] UKSC 26, the Supreme Court stated that The Great Peace
had effectively overruled Solle v Butcher.
8.4.2 Rectification
Equitable relief takes three principal forms. The first is rectification and this is a
remedy which is concerned with correcting a mistake which occurs not in the making
of the agreement, but in the recording of the agreement. There is little difficulty in
ascertaining the principles of this form of relief. The possibility of rectification exists
where a written contract or deed fails to express the common intention of the parties.
What is important in relation to rectification is that it exists where the mistake is made
in the recording of the agreement only. Thus, if A and B negotiate the price of their
contract in American dollars, agree on a price in American dollars, but then wrongly
provide the price in Canadian dollars in their written contract, the written contract
can be rectified or fixed to accord with their actual agreement. Note that the mistake
must be in the recording of the agreement (e.g. in the documents relating to the
negotiation). In Chartbrook v Persimmon Homes Ltd [2009] UKHL 38 the House of Lords
held that if the parties had a common continuing intention, objectively assessed, in
respect of which rectification was sought, it would be granted. It had to be shown, to
receive rectification, that the parties were in complete agreement as to the terms of
their contract but that, by an error, incorrectly recorded them. Where the evidence
suggests that the parties did agree upon the terms in the contract it is not relevant
to a plea for rectification that the claimant misunderstood the meaning of those
words. See FE Rose (London) Ltd v William Pim Jnr & Co [1953] 2 QB 450. Exceptionally
even a unilateral mistake may be a sufficient basis for rectification where it is known
to the other party and that party unconscionably fails to draw the mistaken partys
attention to it (Commission for the New Towns v Cooper [1995] 2 EGLR 113), though the
Court of Appeal in George Wimpey UK Ltd v VI Components [2005] All ER (D) 272 has said
that such cases will be rare.
Because rectification is an equitable device the usual restrictions as to its application

apply. Such restrictions encompass matters such as a lapse of time (a claim for
rectification will be barred when a period of time has elapsed), or the intervention
of third party rights (a claim for rectification cannot be made against a bona fide
purchaser for value without notice of the mistake) or the conduct of the party who
seeks rectification (it is an equitable maxim that he who comes to equity must come
with clean hands). In DS-Rendite-Fonds Nr 106 VLCC Titan Glory GmbH & Co Tankschiff KG
v Titan Maritime SA [2013] EWHC 3492 (Comm) the court held that an entire agreement
clause in a contract was not a bar to rectification.
8.4.3 Specific performance

The remedy of specific performance is discussed in Chapter 17. It has its origins in the
jurisdiction of the Lord Chancellor, subsequently exercised by the Chancery Division of
the High Court, to supplement the remedies available in other courts. The origin of this
jurisdiction in the chancery or equity courts has a consequence for its availability today
because the principal characteristic of equitable relief is that it is discretionary. To the
extent that the exercise of this discretion is influenced by the existence of a mistake it
may be thought of as part of the law of mistake. See, for example, the contrasting cases
of Denny v Hancock [1870] 6 Ch App 1 and Tamplin v James [1880] 15 Ch D 215.
Summary
Since the Court of Appeals decision in The Great Peace the jurisdiction to set aside
a contract in equity, previously associated with Solle v Butcher, a jurisdiction no
longer exists. Rectification is, thus, concerned with mistakes in the recording of the
agreement rather than in the making of the agreement. A court of equity may refuse
to grant an order for specific performance in circumstances where a mistake is
present.
Equitable relief is in all cases discretionary and so may be excluded by various

circumstances sometimes called bars (e.g. excessive delay, where restitution is
impossible and where there is an intervention of an innocent third party purchaser).
These factors are discussed further in Chapter 9, Section 9.2.1.
Activity 8.14
Victor sells a painting to Peter, an art expert, for 50. It is in fact a masterpiece
worth 50,000. To what extent, if any, can a court grant equitable relief?

Chandler, A., J. Devenney and J. Poole Common mistake: A theoretical
justification and remedial inflexibility (2004) JBL 34.
Examination advice
Refer to the examination advice given at the conclusion of Chapter 1 of the subject
guide. With regard to mistake questions generally, you are well advised to follow the
approach of Steyn J in Associated Japanese Bank v Credit du Nord [1989] 1 WLR 255 subject
to the decision in The Great Peace on the availability of relief in equity. That is to say,
consider first whether or not the contract is void at law.
It may assist you if you try to consider what type of mistake exists in the given situation
and compare it to decided cases where the mistake was found to be operative.

Hammer, an auctioneer, sold a collection of paintings by auction. Each painting was
fully described in the catalogue. When Hammer invited bids for Lot 15 described
as Country Scene, artist unknown his assistant Mallet inadvertently held up Lot 16
instead for the bidders to see. Lot 16 was described in the catalogue as Village Life,
(?) school of Brushman, but Sickle, who was sitting in the front row, immediately
recognised it as a lost masterpiece by Brushman himself. No other bidders noticed
Mallets error and Sickles bid of 25 was accepted by Hammer. When Hammer
realised what had happened he refused to let Sickle have the painting, which is
worth 5,000.
Advise Sickle.

Begin by considering the position at law. What sort of mistake has been made
here? Two mistakes have been made. First, the wrong painting has been exhibited
by Hammers assistant, Mallet. Hammer is inviting bids for Lot 15, but Lot 16 has
been exhibited. It is possible to argue that Sickle is bidding on Lot 16. Following
this argument, no contract is made by reason of the decision in Raffles v Wichelhaus
[1864] 159 ER 375 the parties are at cross-purposes; the offer and acceptance do
not correspond. In the circumstances, no contract can arise. The weakness with this
argument is that the painting has been displayed and Sickle will undoubtedly argue
that it was the painting before him which was bought and sold. If the mistake is
only of Hammer, it is a unilateral mistake. Generally, the law will not avoid a contract
where the mistake is unilateral only. Here, however, it is possible to argue that Sickle
has snapped at a mistaken offer by Hammer. There is support for this proposition in
Hartog v Colin and Shields (1939): on these grounds, the contract is avoided. Sickle has
no reasonable expectations which can be protected. The weakness of this argument
is that there is a double mistake here by Hammer even if he held up the painting as
a part of the right lot, he seems uncertain as to what sort of painting he has. In other
words, his offer may not be as mistaken as it first appears.
If the mistake is viewed as a common mistake, the contract is unlikely to be avoided

because of the decision in Bell v Lever Bros. The painting is the same painting in
each case, the artist is only a quality of the subject matter of the painting. It may be
possible, using the decision in Nicholson & Venn v Smith-Marriot, to argue that it is by
this quality that the painting is identified. This is, however, a weak argument since
Hammer is himself confused as to who the artist is (even if he examined the painting
as the right lot).
It is likely, on balance, that the contract would be avoided on the principles set out in
Hartog v Colin and Shields (1939). This result is by no means certain and so the position
must also be considered in equity.
In equity, following The Great Peace, the court has no ability to rescind the contract on
the grounds of mistake in equity.
Quick quiz
Question 1
Which of the following statements is a definition of common mistake at common
law?
a. This is where the parties have made a contract about something which has
ceased to exist at the time the contract was made.
b. This is where the parties are at cross purposes, but neither side is aware of this
when they contend they have made a contract.
c. This is where the agreement is negatived because one party is aware that the
other is mistaken about an aspect of the contract.
d. This is where the parties were under a common misapprehension either

as to facts or as to their relative and respective rights, provided that the
misapprehension was fundamental, and that the party seeking to set it aside
was not himself at fault.
e. Dont know.
Question 2
If one party (A) buys a car from another party (B) in person and pretends to be
(Q) a famous actor, and pays with a cheque, which is then not honoured, which
statement best represents the view the court is likely to take when the car has been
sold on to a third party (C)?
Choose one answer.
a. The court will decide that as the contract was between A and B then C will have
to return the car to B and sustain the loss.
b. The court will decide that as the contract between A and B was voidable, then C
will not have to return the car to B and so B will have to sustain the loss.
c. The court will decide who is in the strongest bargaining position between A and
C before reaching a just and equitable conclusion.
d. The court will decide that the car should be sold and all proceeds should be split
equally between A and C.
e. Dont know.
Question 3
Which ONE of the following examples of mistakes as to quality might allow a
contract to be avoided for a mistake as to quality?
Choose one answer.
a. Where the complainant purchased oats believing them to be old oats rather
than new oats.
b. Where both parties to the sale of a car believe the car to be a 1948 model rather
than a less valuable 1939 model.
c. Where both parties to the sale of a painting believed the painting to be by the
famous artist Constable.
d. Where a set of table napkins described as being the property of Charles I were in
fact Georgian.
e. Dont know.
Question 4
Which of the following is not available as equitable relief for mistake?
Choose one answer.
a. Rectification of the contract.
b. Rescission of the contract.
c. Equitable damages for the mistaken contract.
d. Refusal of an order for specific performance.
e. Dont know.
Question 5
Which statement best summarises the relationship between mistake and
misrepresentation?
Choose one answer.
a. All misrepresentations involve a mistake.
b. All misrepresentations involve a mistake but a misrepresentation also involves

an element of fault.
c. All mis-statements are actionable as either misrepresentations or mistakes.
d. All mis-statements are actionable as either misrepresentations or mistakes and

it is left to the claimant to decide which action to bring.
e. Dont know.

1. What is contractual mistake?
2. What are the effects of mistake compared with the effects of misrepresentation?
3. What is the difference between bilateral and unilateral mistake?
4. What relief will a court provide for an operative mistake in law and in equity?
5. What are the limits of the doctrine of mistake?
6. What is meant by an agreement mistake?

7. What are the circumstances in which an agreement mistake will operate?
8. What is a mutual or common mistake?
9. In what circumstances have courts found a mutual or common mistake to be

operative?
10. What is the basis for finding a contract void where a mutual or common mistake
operates?
11. What is a sufficiently fundamental mistake as to a quality of the subject matter?
12. In what circumstances will courts find that a contract is void where the mistake is a
unilateral mistake?
13. What, if any, is the effect of a mistake as to identity?
14. In what circumstances will courts find a mistake as to identity is operative?

9 Misrepresentation
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
9.1 Definition of misrepresentation . . . . . . . . . . . . . . . . . . . . . 135
9.2 Remedies for misrepresentation . . . . . . . . . . . . . . . . . . . . 140
9.3 Exclusion of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Introduction
This chapter is concerned with the effect of express statements made prior to
entering into a contract. These statements may become terms of the contract or
they may be mere representations (i.e. representations only). If they are terms of
the contract then a remedy lies for breach of contract should they prove to be false.
Technically a remedy for misrepresentation will also be available but may, in many
instances, be less valuable to the claimant than the action for breach. If they are mere
representations then, should they prove to be false, the only remedies available are
those for misrepresentation. An actionable misrepresentation is an unambiguous false
statement of existing fact or law which induced a party to enter into the contract. In a
limited number of circumstances a failure to disclose a matter may also be treated as
a misrepresentation. The potential remedies for a misrepresentation are a rescission
of the contract and damages. The right to rescind, as an equitable remedy, can be lost.
The amount of damages, if any, will depend upon the nature of the misrepresentation,
which we explore below. Damages may be available at common law for the torts of
deceit or negligent misstatement. The Misrepresentation Act 1967 also provides that
damages may be awarded for a misrepresentation. Where a party attempts to exempt
liability for a misrepresentation this attempt will generally be subject to the test of
reasonableness in the Unfair Contract Terms Act 1977 by virtue of the Misrepresentation
Act 1967 s.3. However, s.3 will not apply to a contract between a trader and a consumer
which will be subject to a test of fairness under the Consumer Rights Act 2015 (s.62 and
Schedule 4) which was discussed in Chapter 6, Introduction and Section 6.2.
Essential reading
McKendrick, Chapter 12: A duty to disclose material facts?
McKendrick, Chapter 13: Misrepresentation

Section 1 Pre-contractual statements: terms or mere representations?
Poole, Chapter 14: Misrepresentation Section 1 Actionable misrepresentation
Hooley, R. Damages and the Misrepresentation Act 1967 (1991) 107 LQR 54751,
available through the Online Library.
LEARNING OBJECTIVES
This chapter introduces the effect upon an otherwise valid contract of a
misrepresentation made prior to the entering of a contract to enable you to discuss
and apply in problem analysis its key components (and supporting authority)
including:
uu The definition of a misrepresentation including when a statement of opinion or
intention will be actionable.
uu The requirements of the different claims to damages for misrepresentation.
uu The requirements of the remedy of rescission for misrepresentation.
uu The comparative advantages of the different remedies available for
misrepresentation.
uu What are the potential remedies for misrepresentation.
uu The limits placed upon the exclusion of liability for misrepresentation.
Contract law 9 Misrepresentation page 135
9.1 Definition of misrepresentation

For the reasons discussed in the Introduction above it is important to know whether
a statement made in negotiations becomes a term of any subsequent contract. The
principles that determine the answer to this question were discussed in detail in
Chapter 5, Section 5.1. It is essential that you familiarise yourself with these again. In any
examination answer there is a danger that if you wrongly classify a statement made in
negotiations as either a term or a mere representation this will lead you to discuss the
wrong set of remedies available to the victim when the statement later turns out to be
untrue. Therefore it is important to begin by distinguishing between statements which
are mere representations and statements which become terms of the contract.
9.1.1 Misrepresentation and contractual terms
Essential reading
McKendrick, Chapter 8: What is a term?

Section 1 Pre-contractual statements: terms or mere representations.
As explained in Chapter 5 of this guide, the determination of whether or not a pre-

contractual statement was a term of the contract was important before 1967 for a
different reason than it is now. Prior to 1967
uu the remedies for misrepresentation were limited; and
uu when a misrepresentation was incorporated as a contractual term the remedy of

rescission for misrepresentation was lost.
As a consequence, parties went to great lengths to persuade courts that statements

were intended to be terms in order to secure a remedy. Both of these factors were
changed by the Misrepresentation Act 1967. There are now much more extensive
remedies in damages available for misrepresentation (under s.2 of the Act) and
s.1(a) provides that a contract may be rescinded for misrepresentation, even if the
misrepresentation is also a term of the contract.
The question, however, is still of great importance. If, for example, the pre-contractual
statement is in the form of a promise rather than a statement of fact then a remedy
for misrepresentation is unlikely to be available. The only possible argument for the
claimant will therefore be to show that the statement had become a term of the
contract.
For further full discussion of the way in which statements may become part of a
contract, see Chapter 5, Section 5.1.
9.1.2 Unambiguous false statement of existing fact or law which induces

a contract
Essential reading
McKendrick, Chapter 13: Misrepresentation Section 13.1 Introduction to
Section 13.5 Inducement.
Poole, Chapter 14: Misrepresentation Section 1 Actionable

misrepresentation.
McKendrick, Chapter 12: A duty to disclose material facts?
Poole, Chapter 14: Misrepresentation Section 1A Unambiguous false

statement.
For a misrepresentation to be actionable it must be an unambiguous false statement of

existing fact or law.
Unambiguous
As with contractual terms a degree of certainty is required. If a party is to prove they have
an actionable claim it must be that the term is sufficiently clear. So in Dimmock v Hallett
[1886] LR 2 Ch App 21 where the land was described as improvable this statement was
held to be ambiguous; therefore not actionable.
False
One issue is when the statement is, on a strict and literal interpretation of the words,
true, but misleading. Is the statement false within the requirements of making a claim for
misrepresentation?
In Dimmock v Hallett (1866) a statement made pre-contract was that the land was let to
paying tenants, which at the time was literally true. However, what the seller did not go
on to say is that before the sale the tenants had given notice. This can perhaps be a half-
truth. It is clear that the statement, unless explored further by the purchaser, would lead
the reasonable person to believe the set of facts continued.
Secondly, where a statement, which was true when made, becomes false as a result of a
change of circumstances, keeping silent may be treated as a misrepresentation: see With
v OFlanagan [1936] Ch 575 and Spice Girls Ltd v Aprilia World Service BV [2000] EWCA Civ
15. In both these cases a representation (respectively as to the profits being made by a
medical practice and the continuing membership of a pop group) were true when made
but, due to a change of circumstances, became untrue thereafter but before the relevant
contract was signed. Both cases treated the statement as a continuing representation
by virtue of which, when the change of circumstances occurred, the representor was at
that moment treated as making an untrue statement of existing fact.
Statement
In English contract law there is no general duty to disclose facts (Keates v Earl of Cadogan
[1851] 138 ER 234) based on the principle of caveat emptor (let the buyer beware).
However, in certain circumstances silence has been found to amount to a statement. A
different rationalisation of the successful claims in With and the Spice Girls cases above
is that the parties silence or inaction in the face of the changed circumstances was
actionable.
There are some contracts which are treated as being of the utmost good faith (or
uberrimae fidei). This means that parties are obliged to disclose relevant information,
even if it is not asked for. The most common example of this type of contract is a
contract of insurance. The insurer will normally be entitled to rescind the contract if any
information relevant to the risk insured is not disclosed, whether or not this has been
asked for: see, for example, Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyds
Rep 485. There is no general duty when entering into a contract to disclose information
so this application is very limited.
Conduct
A statement may be express but may also be made by conduct. In Spice Girls the groups
conduct in continuing to participate in promotional activity constituted a representation
that they were not aware that the membership of the group would soon change (Geri
Halliwell had in fact already informed the others of her intention to leave the group).
Fact or law
A statement of opinion is not generally a misrepresentation see Bisset v Wilkinson [1927]
AC 177. Two exceptions exist. The first is where the person expressing the opinion is aware
of facts which indicate that the opinion cannot be sustained. Thus, in Smith v Land House
Corporation [1884] 28 Ch D 7 a tenant who, the landlord knew, was behind with the rent
could not be described as a most desirable tenant. The landlords statement to this
effect was therefore a misrepresentation. Where the representor has particular expertise
in relation to the thing said the inference that the representor is aware of facts that
support his opinion is more easily raised. On this basis an estimate by an oil company of
the future sales that could be expected

from a particular petrol station site was
held to imply a representation that the oil
company was aware of facts (e.g. sales from
equivalent venues) that would support this
estimate (Esso Petroleum Co Ltd v Mardon
[1976] QB 801).
The second exception, which can lead to

a statement of opinion being treated as
a false statement of fact, is where there
Figure 9.1 In Bisset v Wilkinson (1927)
is evidence that the person making the the purchasers alleged that the vendors
statement does not believe it at the time misrepresented the number of sheep
that it is made. Proof that the maker of which could be carried on the land
the statement was aware of contradictory
facts may prove that they did not believe
the statement was true. See Edgington v Fitzmaurice [1885] 29 Ch D 459, where it was
held that the state of a mans mind is as much a fact as the state of his digestion. The
fact falsely stated in these cases is the speakers state of mind. The speaker represents
the fact that he or she believes that what is being said is true, whereas in fact no such
belief is held.
The Edgington v Fitzmaurice approach can also be used to turn statements of intention
into misrepresentations, if at the time of making the statement, the person did not
have the stated intention. This was, in fact, the situation in Edgington v Fitzmaurice itself
in respect of a statement made in a company prospectus that the purpose of soliciting
investments in the company was to expand the business when the real motivation was
to pay off accrued debts. As the representors, at the very moment they proclaimed their
intention, did not in fact have this intention, they were taken to have misrepresented
a present existing fact, the state of their mind. For as Bowen LJ remarked the state of a
mans mind is as much a question of fact as the state of his digestion.
Traditionally, statements of law were not regarded as being statements which, if

false, will give rise to remedies for misrepresentation. It seems, however, that now
that the House of Lords has recognised the possibility of restitutionary remedies
for mistake of law (in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349), the
same approach may well apply in the area of misrepresentation. This was the view
of the High Court in Pankhania v Hackney London Borough Council [2002] EWHC 2441.
In any case, if the statement of law is not believed by the person making it, then the
principle in Edgington v Fitzmaurice will apply, so that the statement will be treated as a
misrepresentation of the persons state of mind.
Activity 9.1
Consider whether any of the following statements is capable of being a
misrepresentation.
a. X, who is selling his car, tells a prospective purchaser that the tyres are good for
another 3,000 miles. In fact, the tyres need replacing after another 1,000 miles.
b. Y, a salesman for XLO Computer Services, tells a prospective customer that all
XLOs service engineers are trained to the highest standards, including six weeks
on the job under supervision. In fact, the supervised period is only five weeks.
c. A new CD is stated on posters displayed in music stores to be The Best Garage

Album in the World Ever!. Reviews of the CD in the music press are universally
hostile.
Which induces the contract

In order for a misrepresentation to be actionable, it must induce the person to whom
it is addressed to make a contract. This simply means that the statement must be one
of the factors which led the person to enter into the contract it does not have to be
the sole or main reason (Edgington v Fitzmaurice (1885)).
It is not sufficient, however, for the claimant to demonstrate that he was supported or
encouraged in reaching his decision by the representation in question (see Raiffeisen
Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm)). The
representation must play a real and substantial part of the claimants decision to enter
into the contract.
Where a misrepresentation is made by A to B and subsequently B enters a contract

with A it is presumed that As misrepresentation induced B to enter the contract
unless A can prove one of the following:
The representee was aware of the untruth of the statement
This must be proved strictly. It does not matter that the claimant had the opportunity
to discover the untruth of the statement but did not take the opportunity. In Redgrave
v Hurd [1881] 20 Ch D 1 the purchaser of a solicitors practice had the opportunity to
consult documents which would have revealed the falsity of the sellers statement
about the practices income. His failure to do so did not preclude his later claim based
on misrepresentation. Obiter comments in Smith v Eric S Bush [1990] 1 AC 831 suggest
that in certain situations it may be unreasonable not to check, perhaps in commercial
or high value transactions. However, treat these comments with caution as the general
rule of Redgrave v Hurd is difficult to dislodge.
The representee relied upon some other inducement
Where the representee who was not aware of the untruth of the statement
relies completely upon some other inducement for which the representor is not
legally responsible, there is no causal link between the misrepresentation and the
representees loss. So, in Attwood v Small [1838] 160 ER 633 statements were made by
the vendor about the output of a mine. The purchaser sent his agent and the vendors
statements were supported by the purchasers agents. In a claim to rescind for fraud
the House of Lords rejected the claim as it was the statements of the agent which had
induced the contract, rather than the vendors.
The representee was not aware of the misrepresentation
In Horsfall v Thomas [1862] 158 ER 813 the claimant sold a gun which exploded when
fired because a metal plug had been used to conceal a defect in the guns barrel. The
use of such a plug could have amounted to a representation by conduct that the
barrel was sound and free of defects. However, as the defendant did not inspect the
gun he was not aware of the misrepresentation and so it could not be said to have
induced him to purchase it.
The representee would have entered the contract even if aware of the untuth
To come within this category the representor must prove, not merely assert, that the
representee would have entered the contract even if he had been in possession of the
full facts (Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy) [1983] 1 Lloyds Rep
188).
A further requirement is sometimes stated, which is that the misrepresentation,

to justify rescission, must be a material one (i.e. one upon which a reasonable
person might have relied). The requirement of materiality is now best thought of as
relevant only to the burden of proof in relation to inducement (Museprime v Adhill
[1990] 36 EG 114). In the usual situation the misrepresentation will be a material
one (i.e. one upon which the representee might reasonably rely) and, as described
above, inducement is presumed unless the representor is able to prove otherwise.
However, where the misrepresentation is not a material one (i.e. it is one upon which
a reasonable representee would not rely (e.g. this car can really fly)) the burden of
proving inducement will shift to the representee who must positively prove that it was
reliance upon the representation that caused him to enter a subsequent contract (see
Dadourian Group International Inc v Simms [2009] 1 WLR 2967).
9.1.3 Categories of misrepresentation

Fraudulent this is the tort of deceit. The requirements in Derry v Peek [1889] 14 App
Cas 337 are that the maker of the statement knows or believes that the statement is
untrue, or makes it not caring whether it is true or false. The burden of proof remains
with the claimant to prove fraud and the burden is a heavy one.
Statutory misrepresentation under the Misrepresentation Act 1967. This

Act has created the fiction of fraud. If a claimant can prove that there was a
misrepresentation, bringing a claim under the Act shifts the burden of proof to the
representor to prove that they had reasonable grounds to believe and did believe
that the statement they made was true. This is a heavy burden of proof, as seen in
Howard Marine & Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd [1978] QB 574 and
more recently in Foster v Action Aviation Ltd [2013] EWHC 2439 (Comm) the Court
held that where a representor had made a statement on the honest but mistaken
belief that it was true (on the basis of the meaning of the term accident), this
was a misrepresentation not made fraudulently but negligently under s.2(1) of the
Misrepresentation Act 1967. As will be seen below, the fiction is that the remedy
provided is the same as if the statement was made fraudulently.
Negligent at common law the maker of the statement and the person relying on it
are in a special relationship giving rise to a duty of care under the principles of Hedley
Byrne v Heller [1964] AC 465 and the maker of the statement acts in breach of this duty.
The burden of proof here is on the claimant to prove these elements.
Innocent if the elements of a misrepresentation can be proved but the maker of

the statement genuinely believes it is true, and does not act negligently (at common
law or under statute, as above) in making it then the action only lies for innocent
misrepresentation.
Please note that before 1964 an innocent misrepresentation referred to any non-
fraudulent misrepresentation because there was at that time no liability to pay
damages in respect of anything other than a fraudulent misrepresentation. Liability
for negligent misrepresentation now exists at common law under Hedley and
under the Misrepresentation Act s.2(1). Consequently the phrase wholly innocent
misrepresentation is now often use to describe a non-fraudulent and non-negligent
misrepresentation.
The distinction between these categories is vital in determining the remedies which
may be available to the person relying on the statement. This is discussed further in
the next section.
Activity 9.2
Keith is an international footballer. He enters into a sponsorship agreement
with Alpha Sports. A week before signing the sponsorship contract he tells a
representative of Alpha that he intends to keep playing for the next five years.
Three weeks after the deal is signed Keith calls a press conference and announces
his immediate retirement from football. Can Alpha take action against Keith for
misrepresentation?
Would Alphas case be any stronger if evidence appears that Keith had told his
manager on the day before he signed the deal with Alpha that he has just decided
to retire?
1. Define a misrepresentation.
2. What is the presumption of inducement? How can it be rebutted?
3. Is there a requirement that a misrepresentation be material? If so, what does

this mean and how is it applied?
4. What is an innocent misrepresentation?

Summary
A misrepresentation is an unambiguous false statement of existing fact or law which
induces a contract. A statement can be both a misrepresentation and a term of the
contract. A misrepresentation may arise from conduct. Statements of opinion are not
misrepresentations, provided that the opinion is genuinely held, and not contradicted
by facts known to the maker of the statement. Silence does not generally constitute a
representation, but representations may be inferred from conduct. Silence may also
be treated as a misrepresentation where a statement only reveals part of the truth;
where circumstances change, rendering the statement no longer true; or in relation
to contracts of the utmost good faith. A presumption of inducement will arise unless
the representor proves that: the representee was aware of the falsity of the statement
or, the representee relied upon a different inducement or, the representee was not
aware of the misrepresentation or the representee would have entered the contract
even if aware that the representation was false.

Bigwood, R. Pre-contractual misrepresentation and the limits of the principle in
With v OFlannaghan [2005] 64(1) CLJ 94.
9.2 Remedies for misrepresentation

The remedies available for misrepresentation will depend on whether it was made
innocently, negligently or fraudulently. There are potential remedies available under
the common law (both in contract and tort) and under statute (the Misrepresentation
Act 1967). The main categories of remedy are first, rescission of the contract and
secondly, damages for losses resulting from the misrepresentation. These will be
considered in turn.
9.2.1 Rescission
The principal common law remedy for a misrepresentation which induced a contract
was rescission. This was, and is still, available whether the representation was innocent,
negligent or fraudulent. Rescission in this context means that the contract is set aside,
and the parties put into the position they would have been in had the contract never
been made. Any goods or money which have been exchanged must be returned.
The equitable remedy of rescission must be sought by the claimant: it does not
occur automatically. Until rescission has taken place, the contract will continue to
exist. In other words, misrepresentation renders a contract voidable rather than
void. Generally speaking the right of rescission will be exercised by giving notice
to the other party. There is one authority, however, which holds that rescission can
be effected by giving notice to relevant third parties. In Car & Universal Finance Co
v Caldwell [1965] 1 QB 525, where the seller of a car wished to rescind the contract
when the purchasers cheque bounced, it was held that notifying the police and the
Automobile Association was sufficient. The seller had done all that he reasonably could
to rescind the contract, given that the purchaser had absconded and was untraceable.
Limitations on rescission
There are some situations where the right to rescind will be lost, sometimes called the
bars to rescission.
uu Where a party to the contract, aware of the other partys misrepresentation,

continues with the contract, and thus affirms it: see, for example, Long v Lloyd
[1958] 1 WLR 753. Affirmation occurs when the dual knowledge test is satisfied
(Peyman v Lanjani [1985] Ch 475). It is necessary that at the time of the conduct said
to constitute affirmation the representee must be aware of both the circumstance
that gives rise to the right to rescind and also to the fact that that right has arisen.
uu Where there is a significant lapse of time between the making of the contract
and the discovery of the misrepresentation. In Leaf v International Galleries
[1950] 2 KB 86, for example, the gap was five years. It may well be, however, that
a much shorter period would be enough for the right to be lost unless the
misrepresentation is fraudulent. In that case, time does not start to run until the
misrepresentation has been, or could reasonably have been, discovered.
uu Where restitution is impossible. Since the idea of rescission is to restore the parties
to the position they would have been in had the contract not been made, if property
which has been transferred has been consumed or inextricably mixed with other
property, rescission will not be permitted. See, for example, Clarke v Dickson [1858]
120 ER 463. The fact that property has been used (rather than consumed), however,
will not necessarily prevent rescission, if a payment of money to cover the use can be
made. In this sense it is sufficient if substantial restitution may be effected combined
with a payment to the representor to cover any diminution in value caused by the
representee (Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218).
uu Where rescission would affect the rights of a third party. The most obvious example
is where goods have been sold to the misrepresentor, who has then sold them on
to an innocent third party before the contract has been avoided. The courts will
not require the third party to return the goods to the original owner. This is why
parties in this type of situation try to argue that the contract is void for mistake
(see Chapter 8).
Note that the court also has a discretion under s.2(2) of the Misrepresentation Act 1967
to award damages instead of rescission, where it is equitable to do so. This is discussed
further in Section 9.2.2.
Activity 9.3
In what other circumstances do the courts talk about rescission of a contract? How
does this differ from rescission for misrepresentation?
Activity 9.4
Why do you think that the remedy of rescission for misrepresentation is subject to
so many limitations? Are they justifiable?
9.2.2 Damages
The common law was late in recognising a right to damages for non-fraudulent
misrepresentations. Originally an innocent misrepresentation provided only an
indemnity for necessary expenditures incurred as a part of the contract rescinded by
way of monetary compensation: see Whittington v Seale-Hayne [1900] 82 LT 49. Where
a misrepresentation was fraudulent, damages were recoverable under the tortious
action for deceit. This requires the claimant to prove that the statement was made
knowing that it was untrue, without any genuine belief in its truth, or with a reckless
disregard for whether it was true or not: see Derry v Peek (1889). Damages for deceit
are, of course still available, but where a claimant has a choice of which action to
pursue, they will elect to recover damages under Misrepresentation Act s.2(1) because
its requirements are easier to prove.
The measure of damages for deceit, being tortious, is based on putting the claimant
into the position he or she would have been in had the misrepresentation not been
made. This is in distinction to putting the claimant in the position he or she would
have been in had the statement been true. In general, this precludes the claimant
from recovering lost profits on the contract. In some circumstances, however,
some damages of this kind may be recovered. In East v Maurer [1991] 1 WLR 461, the
fraudulent statement led the plaintiff to buy a business which turned out to be much
less profitable than it would have been had the statement been true. The damages
recoverable took account of the fact that if the statement had not been made the
plaintiff would probably have bought another business, from which profits would have
been made. These potential profits were recoverable, even though the reduced profits
on the business actually bought were not.
Once it is established that the statement was fraudulent, all losses (calculated on the
basis outlined in the previous paragraph) which are directly attributable to the deceit
are recoverable. The normal rules of remoteness which apply to contract or tort
damages do not operate in this situation: Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158.
Activity 9.5
Read the case of Smith New Court Securities Ltd v Scrimgeour Vickers (Asset
Management) Ltd [1997] AC 254. What was the difference between the view of the
Court of Appeal and the House of Lords in this case? Explain how the measure of
damages used by the House of Lords fits in with the principles outlined above.
The most important innovation in the Misrepresentation Act 1967 was the introduction
of the action for what is generally referred to as negligent misrepresentation, in s.2(1).
In fact, the Act does not use this terminology, but provides that a statement which
would form the basis of an action in deceit, if made fraudulently, will also give rise to
liability unless the person making it is able to prove that he had reasonable grounds
to believe and did believe up to the time that the contract was made that the facts
represented were true.
There are two important points to note about this section: the first relates to the
burden of proof, noted above; the second to the measure of damages.
The burden of proof

On the burden of proof, all that the claimant has to do is to prove that a
misrepresentation was made and that it induced the contract. The defendant will
then be liable for damages under s.2(1) unless he or she can prove that there were
reasonable grounds for his or her belief that the statement was true. This may not
be easy to satisfy. In Howard Marine and Dredging Co v Ogden and Sons (1978) it was
held that reliance on a usually authoritative Register of the details of ships did not to
amount to reasonable grounds for a false statement of a barges capacity, when the
maker of the statement had access to the correct figure in the shipping documents.
The measure of damages

As regards the measure of damages, the most important authority is Royscot Trust
Ltd v Rogerson [1991] 2 QB 297. Here it was held by the Court of Appeal that damages
under s.2(1) should be calculated in the same way as if the statement had been made
fraudulently. This means, therefore, that all losses are recoverable, not simply those
that were reasonably foreseeable (as would be the case with an action for negligent
mis-statement under the Hedley Byrne principle). This conclusion was based on the
courts view of the proper interpretation of s.2(1) and the fact that it appears to
require the negligent misrepresentor to be treated in the same way as the fraudulent
one. This conclusion is somewhat controversial, and some members of the House
of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd
(1997) indicated doubts about its correctness. It has not as yet been overruled. In Gran
Gelato v Richcliff (Group) Ltd [1992] 2 WLR 867 it was suggested that damages under
s.2(1) might be reduced to reflect any want of care (contributory negligence) by the
representee. This does produce a conundrum as damages in deceit are not reduced to
take account of the representees contributory negligence (Standard Chartered Bank
v Pakistan National Shipping (No 2) (2003)) and yet, according to Royscott the damages
available under s.2(1) are the same as those available in the tort of deceit.
The law of tort, in Hedley Byrne v Heller (1964), eventually recognised that a negligent
misstatement which caused economic loss could be actionable. The action that
has developed from this provides another potential remedy for a person who has
entered into a contract as a result of a negligent misstatement from the other party.
That the action can be used in this way was confirmed by the Court of Appeal in Esso
v Mardon (1976). Generally, however, the claimant in such a situation will be better
advised to use the action provided by s.2 of the Misrepresentation Act 1967, since this
has advantages in terms of the burden of proof and damages recoverable, as will be
indicated below. The one situation where the Hedley Byrne action may be needed is
if the statement cannot be categorised as a statement of fact. A negligently given

opinion can, for example, be the basis for an action for negligent misstatement under
Hedley Byrne, without the need to show that it meets the strict requirements of being
a misrepresentation. A further situation where a claimant might choose to pursue
an action for damages under Hedley Byrne (or in the tort of deceit) would be where
A has suffered loss as a result of reliance upon Bs misrepresentation not through
entering a contract with B but rather as a result of entering a contract with C. For
example, a financial adviser recommends the purchase of shares. If the advice contains
a misrepresentation, damages under s.2(1) are not available as they depend upon the
loss being incurred as a consequence of entering a contract with the misrepresentor.
In this example the loss results from entering a contract with a third party, the
company/person selling the shares.
Activity 9.6
In what situations may it be preferable to base an action on fraud (that is, using
the tort of deceit) rather than on s.2(1) of the Misrepresentation Act 1967?
Activity 9.7
Why does McKendrick argue that if the House of Lords does not overrule Royscot v
Rogerson then legislation should be used to do so?
Section 2(2) of the Misrepresentation Act provides a discretion for a court to award
damages in lieu of rescission, where it is adjudged equitable to do so, taking account of
the effect of rescission on both parties. There are conflicting authorities on the question
of whether the right to rescind must still be available in order for damages to be awarded
under s.2(2). In Thomas Witter Ltd v TBP Industries (1996) it was suggested that to require
rescission to be still available would be too restrictive an interpretation. This has not
been followed, however, in the later cases of Floods of Queensferry Ltd v Shand Construction
Ltd [2000] BLR 81 and Government of Zanzibar v British Aerospace (Lancaster House) Ltd
[2000] 1 WLR 2333. All three cases are first instance decisions and clarification by an
appellate court is awaited. The most natural interpretation of the language of s.2(2),
however, would suggest that the right to rescind must still subsist in order for damages
to be awarded.
As to the measure of damages under this section, there is similarly no definitive ruling.
Section 2(3) states that if damages are awarded under s.2(1) and s.2(2), the latter must
be taken into account in assessing the former. This implies that s.2(2) damages will be
less than those under s.2(1). In William Sindall plc v Cambridgeshire County Council [1994] 1
WLR 1016 it was suggested that the basic measure under s.2(2) should be the difference
in value between what the claimant was misled into believing he or she was receiving
under the contract and the value of what was in fact received. This seems sensible as
an estimate of the loss of the right to rescind. In this case it was said obiter that the
proper measure of damages in lieu of rescission if there had been a misrepresentation
as to the existence of a small sewer beneath development land bought for 5 million
was the modest cost (18,000) of re-routing the sewer. Where the misrepresentation is
more serious in relation to the contract as a whole damages in lieu of rescission will be
refused (Harsten Developments Ltd v Bleaken [2012] EWHC 2704).
1. Can a contract be rescinded where a party continues with a contract despite
knowing the other party has made a misrepresentation? If so what must be
proved?
2. When might a representation be regarded as reckless or negligent?
3. What is the basis of the awarding of damages (in tort) for fraudulent
misrepresentation?
Summary
The remedies for misrepresentation are rescission of the contract and damages.
Rescission is available for all types of misrepresentation, but can be lost by affirmation,
lapse of time, impossibility of restitution, or the intervention of third party rights.

Damages are available for fraudulent or negligent misrepresentations, under the tort
of deceit and s.2(1) of the Misrepresentation Act 1967. The measure of damages is the
same in both cases. There is also the possibility of an action for the tort of negligent
mis-statement based on Hedley Byrne v Heller. Section 2(2) of the Misrepresentation Act
1967 gives the court a power to award damages in lieu of rescission.

Halson, Chapter 2 Negotiating the contract, Section The actions for
misrepresentation.
9.3 Exclusion of liability

The exclusion or limitation of liability for misrepresentation in contracts between a
trader and a consumer will be subject to a test of fairness under the CRA 2015 (s.62
and Schedule 4). For a discussion of the application of this standard see Chapter 6,
Introduction and Section 6.2.
All other cases are dealt with by s.3 of the Misrepresentation Act 1967, as amended by
s.8 of the Unfair Contract Terms Act 1977. This requires that any clause which attempts
to limit liability for misrepresentation must satisfy the requirement of reasonableness
set out in s.11 of the UCTA (Chapter 6). In Avrora Fine Arts Investment Ltd v Christie,
Manson & Woods Ltd [2012] EWHC 2198 the court considered the criteria set out in
Schedule 2 of the UCTA to determine that the clause was reasonable under s.3 of the
Misrepresentation Act 1967.
Broad attempts to exclude liability have been found to be unreasonable, even if the
clauses are drawn from widely used standard conditions: see Walker v Boyle [1982]
1 WLR 495 and Thomas Witter v TBP Industries [1996] 2 All ER 573. In HIH Casualty &
General Insurance Ltd v Chase Manhattan Bank [2003] 1 CLC 358, the House of Lords
held that the right of a party to exclude damages caused by an innocent or negligent
misrepresentation did not extend to a fraudulent misrepresentation. Where there was
a fraudulent misrepresentation the party deceived retained the right to rescind the
contract and sue for damages.
Sometimes the attempt to exclude liability is put into the form of an assertion, for
example, that no statements are made other than those contained in the contract
itself. Such entire agreement clauses have been considered in a number of cases.
Although there is an early authority (on the pre-UCTA version of s.3) which held that
such a clause could be effective to restrict liability for statements made by an agent
of the party concerned (Overbrooke Estates v Glencombe Properties [1974] 1 WLR 1335),
subsequent cases have generally taken the line that an entire agreement clause,
or clauses, which attempt to deny that there is any reliance on pre-contractual
statements, do fall within the scope of s.3 as far as liability for misrepresentation is
concerned. See, for example, Cremdean Properties v Nash [1977] 1 EGLR 58; Inntrepreneur
Estates (CPC) Ltd v Worth [1996] 1 ELGR 84; Thomas Witter Ltd v TBP Industries Ltd [1996]
2 All ER 573; Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyds Rep 611. In
other cases, however, courts have concluded that clauses which seek to define the
applicable duty are outside s.3. See, for example, Watford Electronics Ltd v Sanderson
CFL Ltd [2001] EWCA Civ 317 and Overbrooke Estates Ltd v Glencombe Properties [1974] 1
WLR 1335. The conflict between these two positions awaits resolution. See Raiffeisen
Zentralbank Osterreich AG v Royal Bank of Scotland (2010) and Avrora Fine Arts Investment
Ltd v Christie, Manson & Woods Ltd (2012).
Summary
By virtue of s.3 of the Misrepresentation Act 1967, the exclusion or limitation of liability
for misrepresentation is subject to the requirement of reasonableness set out in s.11 of
the UCTA. Entire agreement clauses are generally regarded as falling within the scope
of s.3.

Treitel, Chapter 9, paras 9-123 to 9-134 and Chapter 23, paras 23-002 and 23-064.

1. Lord Sepulchrave has fallen on hard times. He decides to sell the cherished
vintage Bentley which he was given by his brother Barquentine last year. Lord
Sepulchrave thinks that it is an example of the very rare 1928 MK I Bentley. In
fact it is a very similar 1938 MK II Bentley.
Lord Sepulchrave takes the car to Vintage Car Garages. While a garage
employee, Flay, is inspecting the car, Lord Sepulchrave says:
Dont worry, I can assure you that it is a perfect MK I Bentley, never had a knock.
But I suppose you need to be sure. Ill leave it with you overnight and you can
check it over. You may as well have the documentation as well; thatll prove its
a MK I.
Flay agrees to keep the car overnight as the garages Bentley expert will be in
the next day. That evening Lord Sepulchrave tells Barquentine of the impending
sale. Barquentine is unbothered because he informs his brother its had so
many knocks its hardly in perfect condition.
The next day the garages Bentley expert is off work and so doesnt inspect the
car. Nor does anyone examine the documentation which would have revealed
the cars true model, its age and that the bodywork had been repaired.
When Lord Sepulchrave returns to the garage he is offered and accepts 40,000
for the car. The car is in fact worth 10,000. If it were an unblemished MK I it
would be worth 60,000.
Discuss.
2. Ian, an investment broker, was approached by Vera who asked him whether
she should invest in Wander Electronics Ltd. Ian said, You certainly should, Lord
Wellybob is a director. It is a very sound company. It is my view that it will go
from strength to strength. In fact I own 5,000 shares myself which I can let you
have. Vera then bought the shares from Ian for 10,000. The company went into
liquidation a month later. The shares are now worthless. It now turns out:
a. that Lord Wellybob resigned from his directorship a week after Ians
statement was made
b. that Ians statement regarding the soundness of the company was based
on a report in a financial journal which was intended to refer to Wonder
Electronics Ltd but gave the name of Wander Electronics as a result of a
printing error.
Advise Vera.

1. The initial identification of the relevant area or areas of law is often the most
difficult part of a question. Issues of mistake and misrepresentation often arise
together. If no representation is made by either party and one or more of the
parties are mistaken only mistake is relevant. However, where, as here, mistaken
beliefs result from representations made by the other party, both mistake and
misrepresentation are technically relevant. However, the doctrines of mistake that
are raised here (i.e. unilateral mistake and common mistake) are very narrow and
do not in any event provide for the recovery of damages. So here mistake is of no
help to Vintage Car Garages.
Vintage Car Garages v Sepulchrave
First you should consider the proper classification of the statements made by
Sepulchrave. These are that the car is a MK I Bentley and that it has never had any
damage. Are these statements terms or mere representations? If they are terms
Vintage Car Garages might pursue an action for breach of contract on the basis
that they are express terms or that there is a breach of the term implied by s.13 of
the Sale of Goods Act 1979 that the good sold must conform to any description
given. If an action for breach of contract was available it would result in an award
of expectation measure damages (i.e. to put the claimant in the position he
would have been in if the contract had been performed). This would be an award
of 50,000 (60,000 (the value of the car if it was as described) less 10,000 (its
actual value)).
In deciding if a statement is a term the courts will consider:
a. The parties relative skill and knowledge. Where the representor has
greater skill and knowledge the statement is more likely to be a term (Dick
Bentley v Harold Smith Motors); where the representee has greater skill and
knowledge the statement is more likely to be a mere representation (Oscar
Chess v Williams). Here the garage, with greater skill and knowledge, is the
representee.
a. Where a statement is accompanied by a recommendation that it be verified

the statement is more likely to be a mere representation (Ecay v Godfroy).
Sepulchrave says I suppose you need to be sure which is perhaps a weak
suggestion to verify.
b. Where there is a time lag between the making of the statement and the
eventual conclusion of the contract the statement is more likely to be a mere
representation (Routledge v McKay). Here there is a day between these events.
c. The more important the matter stated the more likely it is to be a term
(Bannerman v White). Here the exact model and history are key to its value.
Factors 13 above suggest the statements by Sepulchrave are mere

representations; factor 4 suggests that they are terms. It is therefore most likely
that they are representations only so that the only remedies available to the
Garage are those for misrepresentation.
Consider first the general preconditions for liability for misrepresentation (i.e.
that there must be an untrue statement of fact that induces the contract (Bisset,
Edgington, etc). Here, Sepulchrave makes two untrue statements of fact. It will
then be presumed that the contract of sale was induced by reliance upon these
misrepresentations.
The Garage has two options. It might want to rescind the contract (i.e. return the
car and receive back the price it paid). Or it might be happy to keep the car and
merely receive damages because it paid too much for the car.
Rescission is the literal restoration of the parties to their pre-contract position

by the mutual re-exchange of goods and money. Mention by name the limits or
bars to rescission and note that none arise on the facts of the case. The availability
of rescission is not lost by the opportunity offered, but not taken, to inspect the
property according to Redgrave v Hurd.
If the garage seeks damages these may be available under the Misrepresentation
Act 1967 s.2(1), in the tort of deceit or in the tort of negligent misstatement. A
good answer will display an awareness of the different preconditions for recovery
in these actions and advise that s.2(1) is the least demanding to prove. Section
2(1) is subject to a reverse burden of proof (Howard Marine Dredging v Ogden). To
escape liability Sepulchrave would need to prove that he had reasonable grounds
to believe in the truth of the statement when it was made and that these grounds
continued until the contract was made. Even if he can prove the former he could
not prove the latter after his conversation with Barquentine. Damages would be
the same as those that are available in the tort of deceit (Royscott v Rogerson).
These damages may be reduced if the garages failure to inspect the car could be
considered to be contributory negligence according to Gran Gelato v Richcliff.
Consider comparative merits and requirements of tort of deceit, Hedley Byrne and
s.2(1). Deceit is only available if Sepulchrave is fraudulent. Consider Sepulchraves
conversation with Barquentine application of With v OFlannagan. Section 2(1)
better because of reversed burden of proof Howard Marine, etc.
2. In order for Vera to have a remedy against Ian for misrepresentation, she will
need to show that he has made a false statement of fact which has induced her to
contract with him. The statements which Ian makes are: (a) about Lord Wellybobs
directorship; (b) that the company is very sound; and (c) that it will go from
strength to strength.
Lord Wellybobs directorship. This statement is true when Ian makes it. Is it still
true when Vera enters into the contract? This is not clear from the facts, but if she
makes the contract after Lord Wellybob has resigned it may be that Ian should have
told her about this (see With v OFlanagan). If she makes the contract before Lord
Wellybob resigns, then Ian can only be liable for misrepresentation if at the time
he made the statement he knew that Lord Wellybob was planning to resign (see
Dimmock v Hallett and Spice Girls v Aprilia). The final issue will be whether the fact
that Lord Wellybob was a director was one of the reasons why Vera entered into
the contract. This is for her to prove.
Company is very sound. Is this an expression of opinion (Bisset v Wilkinson),

or a statement of fact? If the former, then Ians statement will not be a
misrepresentation, unless he is aware of facts that make this opinion untenable
(Smith v Land House Corporation). If it is a statement of fact, and is untrue, then
did Ian have reasonable grounds to believe that it is true (as required by s.2(1) of
the Misrepresentation Act 1967)? He relied on the magazine article will this be
enough to constitute reasonable grounds? Should an investment broker have
more solid bases for making recommendations of this kind? (See Howard Marine v
Ogden).
Company will go from strength to strength. This is clearly stated as an opinion.

On that basis it will only give a remedy in misrepresentation if Ian did not genuinely
hold the opinion (Edgington v Fitzmaurice). Another possibility might be to sue
for negligent misstatement under Hedley Byrne v Heller, if Vera can prove that the
opinion was negligently given.
In any of the above cases, if Vera can establish the misrepresentation, she may
wish to rescind the contract. Do any of the bars to rescission apply? The possible
bars here are lapse of time, and the impossibility of restitution. You should discuss
both of these in considering whether Vera can return the shares and recover her
10,000.
In relation to damages, Veras argument will presumably be that in the absence of

the misrepresentation(s) she would not have bought the shares and that she can
therefore recover the full loss she has suffered from the fall in the shares value
(i.e. 10,000 minus the current value of the shares). Are there any other losses for
which she could recover?
Quick quiz
Question 1
Choose one answer.
a. A misstatement will only amount to a misrepresentation if it is a statement of
fact rather than of opinion and of intention.
b. A misstatement will only amount to a misrepresentation if it involves someone

failing to disclose all relevant information.
c. A misstatement will only amount to a misrepresentation if it is fraudulent or

innocent.
d. A misstatement will only amount to a misrepresentation if it is the sole reason
for the representee entering the contract.
e. Dont know.
Question 2
Which of the following statements best explains statutory liability in damages
under s.2(1) Misrepresentation Act 1967?
a. The misrepresentee has to show that the misrepresentor knew that the
statement made was false or had no belief into its truth or made it recklessly
where they were indifferent to the truth of the statement.
b. The misrepresentee has to show that they were owed a duty of care by the
misrepresentor due to a special relationship where it is reasonably foreseeable
by the misrepresentor that the misrepresentee would reasonably rely on the
statement.
c. The misrepresentee will have to secure damages because they will be denied
rescission as the courts will not permit them to try and escape a bad bargain.
d. The misrepresentee has to show they entered into the contract after the
misrepresentation was made. Then the alleged misrepresentor, to evade
liability, has to prove that he had reasonable grounds to believe in the truth of
the statement made up to the time that the contract was made.
e. Dont know.
Question 3
Are the following statements about liability in damages under s.2(2)
Misrepresentation Act 1967 true or false?
a. Damages are available under this section in addition to a claim for rescission.
b. Damages are available under this section whether the statement was made
fraudulently, negligently or innocently.
c. Damages are available under the section as of right.
d. The misrepresentee has to show they entered into the contract after the
misrepresentation was made. Then the alleged misrepresentor, to evade
liability, has to prove that he had reasonable grounds to believe in the truth of
the statement made up to the time that the contract was made.
e. It is unclear from the authorities whether for damages to be awarded instead of

rescission the recipient must have a continuing or historic claim to rescission.
Question 4
Choose one answer.
a. A lapse of time will bar rescission for fraudulent misrepresentation.
b. Affirmation will always bar rescission.
c. If a third party has acquired a right under a contract for value and in good faith
then the misrepresentee will lose the right of rescission.
d. If complete restitution is impossible then the misrepresentee will lose their

right to rescission.
e. Dont know.
Question 5
With regard to Morritt V-Cs judgement in the case of Spice Girls Ltd v Aprilia World
Service BV (2002), which of the following statements is true?
Choose one answer.
a. Spice Girls Ltd had a legal duty to disclose that one of their members had already
left the group when the contract was concluded and they did not.
b. The cumulative effect of the representations which led up to one of the Spice
Girls leaving serve as evidence of misrepresentation.
c. Aprilia World Service BV expected the line up of the group to remain the same
until the transaction came to an end.
d. Spice Girls Ltd were not engaged in an actionable misrepresentation because

mere silence, however morally wrong, will not support an action in deceit.
e. Dont know.
Question 6
Assuming that A makes a statement (with knowledge of its falsity) inducing B to
contract with her (a contract which caused B to suffer loss), which of the following
is B best advised to assert in an action against A?
Choose one answer.
a. That he, B, only contracted with A on the basis of a common mistake.
b. That he, B, contracted with A on the basis of a fraudulent misrepresentation.
c. That he, B, contracted with A on the basis of a misrepresentation within s.2(1) of

the Misrepresentation Act 1967.
d. That he, B, contracted with A on As innocent misrepresentation.
e. Dont know.

1. What is a misrepresentation?
2. When is a statement of opinion, or the failure to disclose information, sometimes

treated as a misrepresentation?
3. What are the potential remedies for misrepresentation?
4. What are the limitations on the right to rescind for misrepresentation?
5. What are the different measures of damages for misrepresentation?
6. What are the rules which limit the possibility of excluding liability for a
misrepresentation?
Notes
10 Duress and undue influence
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
10.1 Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
10.2 Undue influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Introduction
There is general reluctance to introduce elements of good faith into contract law.
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. This is reflective of the idea that there is
agreement, genuine agreement. 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.
LEARNING OBJECTIVES
This chapter introduces the effect upon an otherwise valid contract of duress and
undue influence to enable you to discuss and apply in problem analysis its key
components (and supporting authority) including:
uu The development of duress and its expansion to cover economic duress.
uu The requirements of economic duress including whether otherwise lawful acts
may constitute economic duress.
uu The effects upon a contracts enforceability of a finding of duress.
uu The definition and different categories of undue influence.
uu The effects, if established, of undue influence.
Contract law 10 Duress and undue influence page 153
10.1 Duress
Essential reading
McKendrick, Chapter 17: Duress, undue influence and inequality of bargaining
power Section 17.1 Introduction and Section 17.2 Common law duress.
Poole, Chapter 15: Duress, undue influence, and unconscionability Section 1

Duress.
The common law was slow to develop a doctrine of duress. Initially, only duress to
the person a threat to the personal security of an individual was recognised as
duress. Gradually, the law expanded to encompass duress to goods and, more recently,
economic duress. We shall examine these in turn.
We will begin with the effect of duress upon a contract.
10.1.1 The effect of duress

Does duress render a contract void or voidable? This is important because of the
potential effect upon a third party. See Chapter 8, Section 8.3.2 Mistakes as to identity,
where this is discussed in relation to mistake.)
The better view is that duress renders the contract voidable, rather than void. The
apparent consent of the victimised party is treated as revocable. They have the ability
to affirm or not to affirm the contract. If they choose not to affirm the contract, it is
void. That duress rendered the contract voidable was the position taken in the cases of
Universe Tankships of Monrovia v International Transport Workers Federation (The Universe
Sentinel) [1983] 1 AC 366 and Pao On v Lau Yiu Long [1980] AC 614.
The effect of finding that duress renders a contract voidable creates several important
consequences. Two of these are:
uu the party subject to the duress must act promptly to set aside the contract see
North Ocean Shipping v Hyundai Construction [1979] QB 705, and
uu a third party can acquire good title to goods even though his vendor has acquired
those goods pursuant to a contract which was brought about by duress.
In Halpern v Halpern [2007] EWCA Civ 909 the Court of Appeal made two observations
about duress. The first was that rescission for duress should be no different in principle
than rescission for other vitiating factors (such as misrepresentation). The second was
that the practical effect of rescission would always depend upon the circumstances of
a particular case. If, in the present case, the defendants established that their consent
had been procured by duress, it would be surprising if the law could not provide a
suitable remedy.
10.1.2 Forms of duress
Duress to the person

Duress to the person was the first form of duress recognised by the common law.
Duress to the person occurs when one party to a contract forces another to contract
with him through threats of violence.
The law will find an apparent contract voidable where duress is a reason for the
contract. The duress does not have to be the reason for the contract. Where a party
enters into a contract for several reasons, of which the duress is only one reason, the
contract is still voidable: see Barton v Armstrong [1976] AC 104.
Duress to goods
Duress to goods may occur where one person takes or destroys, or threatens to
destroy or take the goods of another unless a contract is entered into. Duress to goods
was recognised in the case of Occidental Worldwide Investment Corp v Skibs A/S Avanti
(The Siboen and The Sibotre) [1976] 1 Lloyds Rep 293
Economic duress
From the reading of Stilk v Myrick [1809] 170 ER in Chapter 3 it will be remembered
that one possible reason (from the Espinasse Report) for not upholding the promise
was on policy grounds. However, it is Campbells report of this case, based on
consideration, that has found acceptance. It has only been in recent years that
English courts have accepted that economic duress can be a vitiating factor that
the presence of economic duress will result in a voidable contract. Economic duress
as such was recognised in The Siboen and The Sibotre (1976), North Ocean Shipping Co
v Hyundai Construction Co (The Atlantic Baron) [1979] QB 705 and Pao On v Lau Yiu Long.
The doctrine of economic duress was developed in a small number of cases dealing
with the modification, as opposed to the formation, of contracts. For this reason you
should cross reference the discussion that follows with that in Chapter 3 on Williams
v Roffey Bros & Nicholls (Contractors) [1991] 1 QB 1 and also the doctrine of promissory
estoppel. Both are also concerned with the modification of existing contracts.
Economic duress occurs when one party uses its superior economic power to force
the weaker party into an agreement. The main difficulty in this area is to draw a line
between unacceptable commercial pressures (which amount to economic duress)
and acceptable commercial pressures (which do not amount to economic duress):
illegitimate pressure must be distinguished from the rough and tumble of the
pressures of normal commercial bargaining (Dyson J in DSDN Subsea Ltd v Petroleum
Geo-Services ASA [2000] BLR 530).
In Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu) [2012] EWHC 273
the court held that what constituted economic duress was to be considered on a
fact-specific basis and that there was no requirement that an unlawful act had been
committed although it would be unusual to have economic duress in a commercial
context without an unlawful act having been committed.
Acceptable commercial pressures not amounting to duress were found to exist in

the case of Alec Lobb Ltd v Total Oil [1983] 1 All ER 944. In this case, the defendant had
extracted hard terms in a contract with the claimant. The defendant had done this
because it was reluctant to contract with the claimant. In addition, the commercial
pressures upon the claimant had originated with parties other than the defendant.
Activity 10.1
Read North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron)
(1979). Summarise in about 250 words the facts and legal issues raised.
Duress exists when there is an illegitimate threat to perform an unlawful act unless
the other party enters into a contract or varies an existing contract. Consent must be
vitiated. It has been said that the victims will must be overborne such that he does
not really consent to the contract: see Lord Scarmans comments in Pao On v Lau Yiu
Long (1980). In more recent decisions, courts have moved away from requiring an
overborne will. The reason for this change of position appears to be the recognition
that a person who acts under duress does make a choice. Their act is not, in other
words, automatic. The choice, however, is one which the law disapproves of and
which it thinks they should not have been compelled to make. Lord Hoffmann in R v
Attorney General for England and Wales (2003) stated that the wrong of duress had two
elements: first, pressure amounting to compulsion of the will of the victim and the
second was the illegitimacy of the pressure.
The difference between acceptable and unacceptable commercial pressures is

explained in the speech of Lord Scarman in Pao On v Lau Yiu Long (1980). Lord Scarman
stated that commercial pressure was not enough to constitute duress: There must be
present some factor which could in law be regarded as a coercion of his will so as to
vitiate his consent. Lord Scarman then continued and set out the following indicia as
being useful in determining whether or not there was a coercion of the will such as to
vitiate consent.
1. Did the person who was allegedly coerced protest at the time?
2. Did this person have an alternative course of action open to him such as an
adequate legal remedy?
3. Was the person independently advised?
4. Did the person take steps to avoid the contract once they had entered it?
The decision of the Court of Appeal in CTN Cash and Carry v Gallaher (1994) is of interest
because the Court of Appeal was not willing to extend lawful act duress to a threat
(in this case to withdraw credit facilities) made in a commercial context in pursuit of
a bona fide (but mistaken) claim. The Court, however, refused to state that the threat
of a lawful act could never constitute duress. In Borrelli v Ting (2010), Lord Saville
found that the defendant had used illegitimate means to have the claimant enter into
a settlement agreement and the illegitimate means consisted of both unlawful and
lawful elements.
Summary
Threats to the person, goods or the illegitimate use of pressure to force a party to
contract may result in a contract which is voidable for duress. Economic duress
often arises in the context of the modification of contracts. Economic duress has two
elements: an illegitimate threat and resulting compulsion of the victim. An otherwise
lawful threat might exceptionally amount to an illegitimate threat. Compulsion is
established by considering a list of factors including: the presence or absence of
protest, any alternative courses of action available to the victim and whether the
victim had independent advice. The victim must act promptly to set aside the contract
when the duress has been removed or the contract will be considered affirmed and
so valid. While courts have recognised a doctrine of economic duress in recent years,
it is applied cautiously by the courts. The main difficulty which emerges in these areas
is in separating acceptable commercial pressures from unacceptable commercial
pressures.
Activity 10.2
Would there have been an illegitimate threat for the purposes of the doctrine of
economic duress if in The Atlantic Baron the shipyard, instead of threatening not
to supply the ship it was building, said that if the extra was not paid the shipyard
would terminate ongoing, but not yet concluded, negotiations with the purchaser
for the building of a sister ship?
Activity 10.3
Outline the criteria the Privy Council stated in Pao On v Lau Yiu Long (1980) were
necessary for duress to exist.
Activity 10.4
State the steps necessary for a contract to be avoided (not affirmed) following the
decision in North Ocean Shipping v Hyundai Construction (1979).
Activity 10.5
Would the Court in Atlas Express v Kafco (1989) have reached the same decision if
Kafco were aware that Atlas Express had mistakenly underbid the job?
Activity 10.6
Is it helpful to define unlawful pressure by reference to coercion of the will? Does
normal economic pressure not coerce the will?

Atiyah, P.S. Economic duress and the overborne will (1982) 98 LQR 197.
Halson, R. Opportunism, economic duress and contractual modifications (1991)

107 LQR 649.
10.2 Undue influence
Essential reading
McKendrick, Chapter 17: Duress, undue influence and inequality of bargaining
power Section 17.3 Undue influence.
Poole, Chapter 15: Duress, undue influence, and unconscionability Section 2

Undue influence.
Phang, A. and H. Tjio, The uncertain boundaries of undue influence, in your

study pack.
Equity developed a different response to contracts formed where one party was
subject to illegitimate pressure during the contractual process. Equity did not focus
on the use of force or threats during the making of the agreement but upon the
relationship between the parties to the contract. Equity acts upon the conscience
and the equitable doctrine of undue influence operates where the people are in a
relationship such that one party relies upon the other. Examples of such relationships
would be the man inexperienced in financial affairs who relies upon the advice of
his bank manager or the aged father who depends upon his daughter to manage his
finances.
While the common law doctrine of duress is concerned with the procedure by which
a contract was agreed, the equitable doctrine of undue influence is focussed upon the
relationship between the parties.
Lord Nicholls, in Royal Bank of Scotland v Etridge (No 2) (2001), describes undue
influence as one of the grounds of relief developed by the courts of equity as a court
of conscience. The objective is to ensure that the influence of one person over another
is not abused.
In recent years, the House of Lords has twice produced definitive judgments on the
doctrine of undue influence. These are Barclays Bank v OBrien (1993) and Royal Bank of
Scotland v Etridge (No 2) (2001).
In the past, courts divided undue influence into two categories actual undue
influence and presumed undue influence, based on the decision in Allcard v Skinner
(1887). For a period of time, following the decision in BCCI v Aboody (1989), courts
divided the cases of presumed undue influence into two sub-categories, class 2A and
class 2B. Although the House of Lords adopted this division in Barclays Bank v OBrien
(1993), the House of Lords in Royal Bank of Scotland v Etridge (No 2) (2001) re-explained
what was meant by this division and disapproved of the labels attached to this
category. In one instance, undue influence was presumed as a matter of law by reason
of the type of relationship between the parties. In the other instance, undue influence
would not be presumed by law, but it was open to a party to establish an evidentiary
presumption of undue influence.
10.2.1 Actual undue influence

In such cases, the claimant must prove that the wrongdoer actually exerted an undue
influence upon the complainant to enter into the transaction in question. In these
instances the criteria are:
uu that the party to the transaction (or a person who induced a transaction for his
benefit) had the capacity to influence the other party
uu that he did influence the other party
uu that the exercise of this influence was undue
uu that it was because of this influence that the transaction was brought about.
In a situation of actual undue influence, it is not necessary to show that the transaction
was manifestly disadvantageous to the party subject to the undue influence. See:
uu Lloyds Bank v Bundy (1975): bank and elderly customer
uu CIBC Mortgages v Pitt (1993): husband and wife. This case is also useful for its
discussion of manifest disadvantage.
Note that there need not be any actual threats made by one party to another. In this
regard, actual undue influence is a much broader concept than common law duress.
10.2.2 Presumed undue influence

Here the claimant need not prove that there was actual undue influence. These
situations, according to Lord Nicholls in Royal Bank of Scotland v Etridge (No 2) (2001),
may arise in one of two ways. In the first case, the law makes a genuine presumption
in relation to certain, defined types of relationships. In the second case, there is a shift
in the evidential burden of proof from the complainant to the other party, to show
that the transaction was made without improper influence. For this situation to arise
two elements are required: firstly that the complainant reposed trust and confidence
in the other party, or the other party acquired ascendancy over the complainant;
secondly that the transaction is not readily explicable other than as resulting from
undue influence.
Genuine presumptions
The cases where the law makes a genuine presumption of undue influence consist of
a small group of prescribed relationships where the law automatically considers the
parties to be in a relationship of trust and confidence. Examples of these relationships
are: doctor and patient; solicitor and client; trustee and beneficiary; religious adviser
and disciple.
The law strictly protects the weaker of the parties in such a relationship by establishing
a presumption of undue influence. The complainant need not prove he actually
reposed trust and confidence in the other party. All the complainant needs to do is to
establish the existence of the relationship. In cases where the gift is a small one (such
as a birthday or Christmas gift), the presumption will not apply. Where, however, the
transaction is more substantial, some explanation will be needed on the part of the
donee. In the words of Lord Nicholls the greater the disadvantage to the vulnerable
person, the more cogent must be the explanation before the presumption will be
regarded as rebutted. [para.24]
Evidential presumptions
In some instances the relationship may not fall within those where undue influence is
presumed by law. However, the complainant may prove the de facto existence of:
a relationship under which the complainant generally reposed trust and confidence in the
wrongdoer, the existence of such relationship raises the presumption of undue influence
(per Lord Browne-Wilkinson, Barclays Bank v OBrien [1994] 1 AC 180, 189).
This situation creates an evidential presumption the complainant establishes the

relationship and an inexplicable transaction and the burden of proof then shifts to the
other party to disprove the presumption. That the transaction is inexplicable goes to
another element which is necessary in cases of presumed undue influence that the
transaction is disadvantageous to the weaker party. The presence of disadvantage
strengthens the presumption that the only reason for the transaction was the undue
influence of the putative wrongdoer.
The burden of proof then shifts to the putative wrongdoer to disprove that they did
not exercise undue influence, which is done by establishing that the complainant
acted independently and understood his or her actions. This is most commonly
achieved by showing that the complainant received independent advice before acting.
See Royal Bank of Scotland v Etridge (No 2) (2001).
10.2.3 Undue influence and third parties

Thus far we have considered the situation where the undue influence arises
between the two parties to the contract. The intervention of a third party gives rise
to difficulties. In practice, most litigation occurs where the relationship of undue
influence arises between A and B, whereby B enters into a contract with C for the
benefit of A. The most common instance of this scenario is when the relationship of
undue influence exists between spouses and one spouse induces the other to enter
into a transaction with a bank. This often involves the use of the matrimonial home as
security for business debts. The issue here is whether or not the transaction with the
bank will be set aside because of the relationship with another party. The transaction
will be set aside if the bank has actual or constructive notice of the possibility of undue
influence.
The most common way in which the bank can rebut the possibility of notice is to
inform the spouse as to the nature of the transaction and advise them to seek legal
advice see Barclays Bank v OBrien (1993). The advice offered to banks by the above
case has, to a certain extent, been modified by the House of Lords in their more recent
decision in Royal Bank of Scotland v Etridge (No 2). In the more recent decision, the
House of Lords carefully outlined the steps a financial institution must take to avoid
taking a charge with notice of the suretys claim to set it aside. The House of Lords also
provided guidance to solicitors who advise in such transactions (for which see also
Padden v Bevan Ashford (2011)).
Summary
Undue influence is an equitable doctrine. As such, it is concerned with the conscience
of the alleged wrongdoer. The focus is upon the relationship between the parties
rather than the procedure by which a contract is reached (which is left to duress).
Undue influence is a broad doctrine and encompasses two types of undue influence.
The first is actual undue influence where one party has actually exerted an influence
over another with regard to a contract. The second is presumed undue influence
an even broader category which includes two sub-groupings. In the first sub-
grouping, the law irrebuttably presumes that transactions between people who are
in certain kinds of relationships are entered into because of undue influence. In the
second sub-grouping, an evidentiary presumption is established by the claimant by
showing that they reposed trust and confidence in another and that the transaction
is disadvantageous to them, or not readily explicable other than on the basis of
improper influence. In this second sub-grouping, it is open to the alleged wrongdoer
to rebut the presumption by establishing that the claimant entered into the
transaction freely with knowledge of the transaction and its consequences.
Activity 10.7
What is needed to put the bank on notice as to the rights of the surety?
Activity 10.8
Why does the law require proof of disadvantage in relation to presumed undue
influence but not actual undue influence?
Activity 10.9
Outline the differences and similarities between economic duress and actual undue
influence.

Andrews, Chapter 11, Part 3 Undue influence.

Question 1
Economic pressure is what contractual negotiations are all about:
it is futile for the courts to try to intervene. Discuss.
Question 2
R is a strong-willed and domineering woman. S, the man with whom she lived, left
all financial decisions to her. Last year S inherited a holiday apartment in Spain from
his aunt A. R insisted that S signed an agreement giving R the exclusive use of the
apartment and the right to receive all rent from lettings in exchange for Rs shares
in X&Y plc.
R and S have now separated. S wants to go and live in the apartment but R will not
permit him to use the apartment. The shares in X&Y plc have increased in value.
Advise S.

Question 1
This question asks you to discuss the doctrine of economic duress and analyse
whether or not it should be a ground upon which courts can intervene to invalidate
a contract. The common law was slow to recognise duress as a ground upon which a
contract could be made void. This may be because courts of equity recognised undue
influence as a ground upon which a contract could be set aside. Whatever the reason
for this, duress, as a ground upon which a contract could be set aside, was recognised
in The Siboen and The Sibotre (1976) by Kerr J. In the circumstances of that case, where
a charter rate was reduced when the charterer ran into financial difficulties, Kerr J
refused to recognise duress. There were great commercial pressures, but not duress,
which was defined as a coercion of his will so as to vitiate his consent. This definition
was accepted by Lord Scarman in Pao On v Lau Yiu Long (1980).
There are a number of problems with this definition of duress. First, it is by no

means clear what is duress and what are great commercial pressures. Secondly, the
overborne will theory has been subject to much criticism. Amongst other problems, it
is internally inconsistent. Lord Scarman stated that the commercial 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. In short, it must be shown that the payment made or
the contract entered into was not a voluntary act on his part [at 636]. 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] whether after entering the contract he took steps to avoid it.
[at 635]
The reason why this has been criticised as internally inconsistent is that if the victims
will is truly overborne, how could he realise that there were no alternative courses
open or seek independent advice?
Professor Atiyah has pointed to other problems with the overborne will theory. A
significant one is that if duress operates because the will of the victim has been
overborne, surely duress should render a contract void and not voidable?
The decision of the Court of Appeal in B&S Contracts & Design Ltd v Victor Green
Publications Ltd (1984) indicates that there may be a movement away from the
overborne will theory. While this is a logical development, it serves to heighten rather
than lower the difficulties in distinguishing between ordinary commercial pressures
and duress.
A possible way of differentiating between these two is to say that duress requires an
illegitimate threat or pressure. The Olib [1991] 2 Lloyds Rep 108 tells us that the threat
made must be illegitimate in that it threatens a civil or criminal wrong or the threat
itself is a legal wrong. It has also been suggested that a threat may be illegitimate by
reason of public policy: The Evia Luck (No 2) [1990] 1 Lloyds Rep 319. However, CTN Cash
and Carry v Gallaher (1994) tells us that in certain rare circumstances it may be possible
to have a lawful act duress claim. See the decision of Lord Saville in Borelli v Ting
(2010).
While it may be difficult to distinguish between the two, the question also asks you
if courts should try to intervene. On the one hand, most contracts are formed under
some sort of pressure. Many parties are faced with offers made on a take it or leave
it basis. Few people are able to negotiate the terms of carriage with the Post Office,
or the terms of their mortgage with the Building Society, or the conditions upon
which they will receive a telephone service. However, statutes will now protect most
consumers in these areas. The real problem will be with small commercial firms
especially when they deal with large enterprises. Here, it is hard to justify allowing
the strong to push the weak to the wall. If we accept that contracts are consensual in
nature, many of these contracts will not be. If we are concerned about public policy
arguments, we have to recognise that the use of illegitimate pressure is objectionable.
It is arguable that courts of law have always intervened in these circumstances. Stilk v
Myrick (see Chapter 3), although generally regarded as a case in which there was a lack
of consideration, may really have been a case where the court was concerned about
duress. If courts are going to intervene to prevent the strong from taking advantage of
the weak, it must be sound law to do so explicitly, rather than implicitly.
Question 2
This question raises issues of undue influence and must be considered in light of the
House of Lords recent decision in Royal Bank of Scotland v Etridge (No 2) (2001).
S will want to have the transaction with R declared void. It may be that R has exerted
actual undue influence upon S to enter into the contract. S will, thus, want to argue
that the undue influence is within that set out in CIBC Mortgages v Pitt (1993). The
advantage to S is that once the undue influence is made out, the transaction will be set
aside. R cannot in anyway rebut such a finding. In addition, S will not have to prove
that the contract is disadvantageous to him: Royal Bank of Scotland v Etridge (No 2)
(2001). This is important since S is financially better off as a result of the contract since
the shares in X&Y have appreciated in value.
If S cannot prove actual undue influence, he may be able to establish presumed

undue influence. His relationship with R does not bring him within those relationships
presumed by law to give rise to undue influence. Lord Browne Wilkinson, in Barclays
Bank v OBrien (1993), stated that the law accorded spouses tender treatment but
that it did not presume undue influence. This was repeated in Royal Bank of Scotland v
Etridge (No 2) (2001). S may be able to establish that he reposed trust and confidence in
R (Lloyds Bank v Bundy) and that the transaction is not explicable on any other ground.
The difficulty S faces here is that financially, the contract has been advantageous
to him. He cannot prove that he has been disadvantaged by the contract. In the
circumstances, courts will be hesitant to invalidate the contract.
Quick quiz
Question 1
Which of the following statements provides the most appropriate definition of
duress?
Choose one answer.
a. Where one party (A) explains to the other party (B) that it would be nice of them
to enter into the contract because otherwise they (A) will be upset.
b. Where one party (A) threatens the other party (B) with physical injury if they do
not enter into the contract.
c. Where one party (A) feels they have to enter into a contract with the other party
(B) otherwise they (A) will not be able to afford to buy a new car.
d. Where one party (A) decides to enter into a contract with the other party (B)
because the partner of the party (A) has said it is a very good deal.
e. Dont know.
Question 2
In Pao On v Lau Yiu Long (1980) what factors did Lord Scarman consider relevant to
the determination of whether or not a person acted voluntarily and not subject to
economic duress?
Choose one answer.
a. An extension (of the categories of duress) capable of covering the present case,
involving lawful act duress in a commercial context in pursuit of a bona fide
claim, would be a radical one with far-reaching implications. It would introduce
a substantial and undesirable element of uncertainty in the commercial
bargaining process.
b. It is crucial to establish a strong causative link where pressure comes from one
party and the other party feels compelled to act on their instruction.
c. It is material to inquire whether the person alleged to have been coerced did or
did not protest; whether, at the time he was allegedly coerced into making the
contract, he did or did not have an alternative course open to him such as an
adequate legal remedy; whether he was independently advised; and whether
after entering into the contract he took steps to avoid it.
d. The respondent has to demonstrate that they did not force the claimant to
enter into the contract and they should do this by providing evidence of the
claimants careful and deliberate signature upon the contract.
e. Dont know.
Question 3
Which of the following statements explains how the law of contract defines actual
undue influence?
Choose one answer.
a. This is where the complainant can prove that the other partys positive exercise
of actual pressure induced them to agree to the contract.
b. This is where the complainant suggests that because she is married to the man
who asked her to sign a set of mortgage papers then this must be actual undue
influence.
c. This is where one party places trust and confidence in another and so tends to
rely on the suggestions of the other party without seeking independent advice.
d. This is where the complainant argues that her employer asked her nicely to
mortgage her flat as security for the overdraft extension of her employers company.
e. Dont know.
Question 4
Which of the following statements summarises how the guidelines offered by Lord
Nicholls in Royal Bank of Scotland v Etridge (No 2) (2002) would help a bank to avoid
a transaction being set aside on the basis of undue influence on a wife following a
husbands attempts to persuade his wife to stand surety for his debts?
Choose one answer.
a. When the husband realises that his wife is keen to stand surety for his debts
then he should ask his own solicitor to reply truthfully and honestly to any
questions that his wife may have about the transaction and if the bank believe
the wife does understand then they will continue with the transaction.
b. The wife should write to the bank and explain that she wants to stand surety for
her husbands debts and her husband has told her what the ramifications are of
her co-operation. Then the bank should send one of their own legal advisers to
the couples home and speak to them jointly about the potential consequences
of default.
c. Once the bank become aware that a wife is agreeing to stand surety for her
husbands debts then they should make sure the wife has had the ramifications
of her decision explained to her so that she understands what could happen in
default. The bank must make sure the solicitor instructed is competent and they
will be held responsible for any deficiencies in the advice given.
d. Once a bank has been put on inquiry that a wife offers to stand surety for her
husbands debts then they must take reasonable steps to satisfy themselves that
the practical implications of the proposed transaction have been explained to
the wife in a way which is coherent and comprehensible so that she can enter
into the transaction with her eyes open. The bank should rely upon a solicitor
to have confirmed that they have advised the wife of the significance of the
transaction and should notify the bank that they have done this.
e. Dont know.
Question 5
Which of the following statements correctly explains the remedies available in
a situation where the bank seeks to enforce its charge over a matrimonial home
in circumstances where a wife, subject to undue influence, gave the charge as a
guarantee of her husbands business debts?
Choose one answer.
a. A contract which is affected by undue influence will be compensated with
damages where the courts will instruct the bank to pay the wife a sum of money
to refund her for the bill she incurred for the original independent advice.
b. A contract which is affected by undue influence is voidable which means that

the wife will have to bring an action for rescission to avoid it.
c. A contract which is affected by undue influence is void from the outset.
d. A contract which is affected by undue influence will be rectified which means

the courts will look at the original documentation and ask another solicitor to
advise the wife as to the consequences of her decision and then the bank can
receive confirmation that the wife now understands the consequences of her
action.
e. Dont know.

1. What is the doctrine of duress?
2. What is the theory behind the doctrine of duress?
3. When will duress vitiate an apparent contract?
4. What are the differences between lawful economic pressure and duress?
5. What is the effect of duress?
6. What is undue influence?
7. Under what circumstances may undue influence vitiate a contract?
8. What approach have courts taken towards undue influence?

Part v Who can enforce the terms of a contract?
11 Third parties
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
11.1 The doctrine of privity . . . . . . . . . . . . . . . . . . . . . . . . . 165
11.2 The Contracts (Rights of Third Parties) Act 1999 . . . . . . . . . . . . . 166
11.3 Rights conferred on third parties at common law . . . . . . . . . . . . 169
11.4 Liability imposed upon third parties . . . . . . . . . . . . . . . . . . 174
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

Introduction
Thus far in this guide we have been concerned with three areas of contract law: the
formative elements necessary to create a binding contract; the content of a contract;
and those elements which vitiate an apparent contract. We turn now to the question
of who can enforce the contract. Privity of contract determines who can enforce a
contract. This doctrine is easily stated: in general terms only one who is a party to a
contract can enforce it. In Chapter 3 we looked, briefly, at Tweddle v Atkinson (1861). In
this case, two fathers had entered into a contract, each promising the other to pay
their children 100 when they got married. The brides father died without paying the
money to the couple. The groom sued his estate for the money.
Grooms Brides
Father Father
Groom
The court held that the Groom could not sue as he was not party to the contract (also
he had not provided consideration for the promise to pay 100).
Clearly privity of contract defeated the intentions of the parties to this contract and
can lead to substantial injustices. For these reasons many methods have been devised
at common law to provide third parties to a contract with a means of circumventing
a strict application of the doctrine of privity. The interpretation and employment
of these methods and devices has given rise to much complication in English law. It
was thus recommended by academics, lawyers and judges that privity of contract
should be reformed. The result is the Contracts (Rights of Third Parties) Act 1999 which
provides parties to a contract with a method of circumventing the doctrine of privity
of contract to provide third parties to the contract with a right to enforce contractual
terms. It is the breadth of this exception which justifies the title of this chapter as
Third parties.
LEARNING OBJECTIVES
This chapter introduces the rights and obligations which a contract might generate
for those who are not a party to that contract to enable you to discuss and apply in
uu The doctrine of privity of contract and its two main parts.
uu The different justifications, if any, for these two main parts.
uu The extent to which the doctrine of privity historically gave rise to problems and
the extent to which those problems remain.
uu The significance and key provisions of the Contracts (Rights of Third Parties)
Act 1999.
uu What are the principal provisions of the 1999 Act?
uu The major devices by which rights can be conferred on third parties at common
law?
uu What are the principal strengths and weaknesses of these devices?
uu What is the relationship between the rights of third parties at common law and
under the 1999 Act?
Contract law 11 Third parties page 165
11.1 The doctrine of privity
Essential reading
McKendrick, Chapter 7: Third party rights Section 7.1 Introduction to Section
7.5 The Contracts (Rights of Third Parties) Act 1999.
Poole, Chapter 11: Privity of contract and third party rights Section 1 Origins of
the privity doctrine and its relationship with consideration.
The doctrine of privity of contract is primarily concerned with the question of who can
enforce a contract. There are two aspects to the doctrine of privity of contract.
uu The first is that only parties to a contract are bound by it; A and B cannot, by their
contract, compel C (a third party to the contract) to do something or to refrain
from doing something (see Figure 11.1).
Contract
A B
n: 0
a tio 10
li g yB
Ob o pa
t
C C
Figure 11.1 Only parties to a contract are bound by it

The obligation on C to pay B 100 in Figure 11.1 is unenforceable because C is not a
party to the A/B contract.
uu The second is that only the parties to a contract can derive rights and benefits from
their contract; A and B cannot, by their contract, confer an enforceable benefit
upon C even if A and B clearly intend to confer a benefit upon C (see Figure 11.2).
Contract
A B
0
fit
: 10
e ne ay C
B op
Bt
Figure 11.2 Only parties to a contract can derive rights and benefits from it
The obligation on B to pay C 100 in Figure 11.2 is also unenforceable because C is not a
party to the A/B contract.
At common law the parties to a contract cannot impose a burden on a third party, nor
can they confer a benefit on a third party. See Tweddle v Atkinson (1861).
A number of decisions of the House of Lords illustrate the problems created by the
doctrine.
uu Dunlop Pneumatic Tyre v Selfridge & Co (1915). Dunlop sold tyres to Dew, subject
to a retail price maintenance scheme. Dew resold the tyres to Selfridge & Co
and sought to impose the same retail price maintenance scheme. Selfridge & Co
sold the tyres for a price less than the scheme allowed. Dunlop sued Selfridge &
Co on the basis that Dew had contracted with Selfridge & Co as Dunlops agent.
The House of Lords rejected this argument. In the words of Lord Haldane only a
person who is a party to a contract can sue on it. Lord Haldane also observed that
consideration must be provided if a person is to be able to enforce a contract.
uu Scruttons Ltd v Midland Silicones Ltd (1962). The House of Lords, Lord Denning
dissenting, refused to allow stevedores the benefit of an exemption of a liability
clause entered into between the carrier (who hired the stevedores to unload the
vessel) and the owner of goods. As a general rule, a stranger to a contract cannot
take advantage of its provisions even where the provisions were intended to
benefit him.
uu Beswick v Beswick (1968). An uncle contracted with his nephew whereby the
nephew would receive the uncles coal business. In exchange, the nephew agreed
to pay a weekly sum to the uncle and, upon the uncles death, to the uncles widow.
After his uncles death, the nephew refused to make the payments to his aunt. The
House of Lords held that the aunt was not entitled to sue to enforce the obligation
to make the payments to her. The aunt was, however, able to succeed in her
capacity as the personal representative of her deceased husbands estate.
The first aspect of privity, that the parties cannot by their contract impose liabilities
or burdens upon a third party, is intuitively unobjectionable. The circumstances
in which justice calls for such a result are very limited. The second aspect, that the
parties cannot benefit a third party to the contract, is objectionable. There are many
situations in which the parties to the contract clearly intend to confer an enforceable
benefit upon a third party. The denial of the benefit to the third party defeated the
intention of the contracting parties and often produced manifest injustice and
commercial inconvenience. As a result, the common law created a number of devices
to overcome the rigorous application of the doctrine of privity. Without these devices,
it is doubtful that the doctrine of privity would have survived as long as it did. There
were numerous calls for the reform or abolition of the doctrine. After a period of
thorough consultation and consideration, the Law Commission recommended a
legislative reform of the doctrine of privity (see Law Com No 242, Privity of Contract:
Contracts for the Benefit of Third Parties). These recommendations were implemented
by the Contracts (Rights of Third Parties) Act 1999. The Act allows the parties to a
contract to provide the third party with an enforceable benefit.
Activity 11.1
In his speech in Scruttons Ltd v Midland Silicones Ltd (1962) Lord Reid stated that the
argument that the carriers had acted as the stevedores agent in obtaining for them
an exemption clause could be successful if a number of conditions were met. What
are these conditions? Were they met in the case before him?
Activity 11.2
Consider the arguments in favour of privity of contract and the arguments against
privity of contract.
Activity 11.3
Why do you think privity of contract has survived in the common law for so long?
Summary
The doctrine of privity of contract provides that the parties to a contract cannot confer
a benefit upon a third party nor can they impose a burden on the third party.

Treitel, G. Some landmarks of twentieth century contract law. (Oxford: Oxford
University Press, 2002) [ISBN 9780199255757], Chapter 3 The battle over privity.
11.2 The Contracts (Rights of Third Parties) Act 1999
Essential reading
McKendrick, Chapter 7: Third party rights Section 7.5 The Contracts (Rights of
Third Parties) Act 1999 to Section 7.15 Collateral contracts.
Poole, Chapter 11: Privity of contract and third party rights Section 2 Reform
of the privity doctrine and the Contracts (Rights of Third Parties) Act 1999.
The Contracts (Rights of Third Parties) Act 1999. Available at

www.legislation.gov.uk/ukpga/1999/31/contents
MacMillan, C. A birthday present for Lord Denning: The Contracts (Rights of Third
Parties) Act 1999 (2000) 63 Modern Law Review 721. This article is available in
HeinOnline through the Online Library.
The Act implements the recommendations of the Law Commission. It reforms the
doctrine of privity; it does not abolish the doctrine. The common law devices which
circumvented the effects of privity are, therefore, still effective. The primary reason for
reform of the doctrine of privity was to give effect to the intention of the contracting
parties. The Act allows contracting parties to provide an enforceable benefit to a third
party; the contracting parties cannot impose a burden upon a third party. Two kinds of
benefit are available to a third party. The first is a positive benefit and the second is a
negative benefit (the protection of an exclusion or limitation of liability clause) (s.1(6)).
The Act applies generally to all contracts entered into after 11 May 2000, although
certain types of contracts are excluded from its application (s.6). Under the Act, a
third party to a contract can enforce a term of the contract in his own right in two
circumstances.
1. Where the contract expressly provides that he may (s.1(1)(a)).
2. Where the terms of the contract purport to confer a benefit upon him and nothing
else in the contract denies the purported benefit (s.1(1)(b), s.1(2)).
The second circumstance is more limited than the first because it is possible, on a true
construction of the contract, to rebut the presumption of an enforceable benefit. The
right of the third party to enforce a term of the contract is subject to the terms of the
contract (s.1(4)). This means that the parties to the contract can impose conditions
upon the third partys ability to exercise his rights under the contract they could, for
example, stipulate that the third party could receive a benefit under the contract only
if he applied for it within a certain time period.
In Nisshin Shipping Co Ltd v Cleaves & Co Ltd (2003) the Court of Appeal found that
a chartering broker was entitled to recover his commission by enforcing a clause
under the charterparty between a shipowner and charterer by reason of s.1(1) of the
Contracts (Rights of Third Parties) Act 1999. There was no evidence to conclude that
the contracting parties intended that the charterer should not be entitled to rely
upon the Act. In Prudential Assurance Co Ltd v Ayres (2007) the High Court held that if,
on a true construction of the term, it purports to confer a benefit upon a third party,
the third party can enforce that term in their own right. The Act does not require that
the sole purpose of the term be to confer a benefit upon the third party; in addition
it is possible for a term to confer an enforceable benefit upon a third party and some
other party. Note the distinction drawn between a contract which purports to confer
a benefit upon a party and one which simply improves the position of a third party if
the contract is performed only in the former case will the third party be able to rely
upon the Act. For s.1(1)(b) of the Act to apply, it must be one of the purposes of the
bargain between the parties to benefit a third party, rather than an incidental effect
of contractual performance (see Dolphin Maritime & Aviation Services Ltd v Sveriges
Angfartygs Assurans Forening (2009)).
The application of s.1(3) of the Act was considered in Avraamides v Colwill (2006). The
Court of Appeal held that s.1(3) required the contract to expressly identify the third
party by name or class and that there had been no such identification in the case
before them.
The linked nature of a chain of contracts will not preclude the application of the 1999
Act. See: Laemthong International Lines Company Ltd v Artis (The Laemthong Glory) (No 2)
(2005), discussed and explained in Great Eastern Shipping Co Ltd v Far East Chartering Ltd
(in liquidation) The Jag Ravi (2012).
The right of the third party is additional to any right that the promisee might have to
enforce any term of the contract (s.4). However, where the promisee has recovered
money from the promisor in respect of the third partys loss or the promisees expense
in making good that loss, the court shall reduce any award to the third party to the
extent it finds appropriate (s.5). The third party enforces the contract by receiving
any remedy that would have been available to him as a party to the contract. The
rules relating to that remedy apply accordingly, be it damages, injunctions, specific
performance or other relief (s.1(5)).
Generally, the parties to a contract cannot rescind the contract or vary it in such a way
as to either:
1. deny the right of the third party, or
2. alter the entitlement of the third party once the third party has acquired a right to
enforce a term of the contract.
In Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP [2013] EWCA
Civ 367 the Court of Appeal overturned the lower courts decision in relation to the
Contracts (Rights of Third Parties) Act 1999, s.1 and s.8. In so doing it held that s.1(6) of
the 1999 Act established no distinction between a right of action and a contractual
defence. The right to take the benefit of an exclusion clause might be subject to a term
providing for the arbitration of any disputes. The application of s.8(1) was such that
the parties to the contract positively intended that third parties would be bound to
the result of arbitration proceedings even if they had not initiated the proceedings in
order to secure a benefit apparently conferred upon the third party by the contract.
Very clear language was required, however, to bring about the result that for a third
party to avail themselves of an exclusion clause in a contract between other parties
was, in turn, subject to an arbitration clause in this contract.
The third party receives protection from such later changes to the contract in two
instances. The first is where the third party has communicated his assent to the term
to the promisor. The second is where the promisor is either aware that the third party
has relied upon the term or the promisor can reasonably be expected to have foreseen
that the third party would rely upon the term and the third party has relied upon
the term (s.2(1)). The Act provides that the contracting parties can provide otherwise
in their contract. They can contract to allow a rescission or variation of the contract
without the third partys consent or they can obtain the consent in a different manner
than that set out in the Act (s.2(3)).
Where a third party seeks to enforce his right and brings a claim against the promisor,
the promisor can rely on any defence or set-off in the contract and relevant to the
term being enforced as if the claim had been brought by the promisee (s.3(2)).
In studying the Act, you should keep in mind that it only applies if the contracting
parties intend it to provide the third party with the right to enforce a term of the
contract. In addition, if the contracting parties intend the Act to apply, they may vary
the extent of its application (and thus the extent of the benefit provided to the third
party) by a number of means. Firstly, they could provide that the contract could be
later varied or rescinded by the contracting parties (s.2(3)). Secondly, the contract
could provide that the promisor could avail himself of any and all defences and set-offs
available in any action brought by the third party (s.3(3)). Thirdly, the promisor can
limit or exclude any liability for negligence (other than death or personal injury) in the
performance of his obligation to the third party (s.7(2)).
The Act provides an enforceable right to third parties which is given in addition to any
right or remedy available at common law (s.7(1)). This means that the various devices
developed by the common law to evade the consequences of privity still exist. The Act
also allows the common law to develop new devices.
Summary
The Contracts (Rights of Third Parties) Act 1999 represents an enormous change to
the common law doctrine of privity because it allows contracting parties to confer an
enforceable benefit upon a third party. The intentions of the parties to a contract can
prevail, rather than being thwarted by legal doctrine. It is important to remember,
however, that the parties must bring themselves within the ambit of the Act and that
they can exclude its operation from their contract. In addition, the Act provides the
parties with the ability to determine the extent of the benefit conferred upon the
third party.
1. When is a third party given the right to enforce a term of the contract?
2. What rights are given to a third party?
3. What defences are available to the promisee in an action brought by the third
party?
4. To what extent can the parties to the contract vary or rescind the contract?
5. How can the parties to a contract exclude the rights of a third party?

Burrows, A. The Contracts (Rights of Third Parties) Act 1999 and its implications
for commercial contracts (2000) Lloyds Maritime and Commercial Law Quarterly
540.
11.3 Rights conferred on third parties at common law
Essential reading
McKendrick, Chapter 7: Third party rights Section 7.14 Rights of the promisee
to Section 7.24 Conclusion.
Poole, Chapter 11: Privity of contract and third party rights Section 3 Agency
to Section 7 Privity and burdens.
As already noted, the Contracts (Rights of Third Parties) Act 1999 did not abolish
privity. In addition, the Act preserved any rights the third party would have at common
law (s.7(1)). This section examines the nature of these rights, most of which derive
from various devices or methods created in a number of cases for the purpose of
circumventing the doctrine of privity of contract. The breadth and utility of these
devices varies greatly.
11.3.1 Enforcement by the promisee

This is an obvious proposition. It is, essentially, what occurred in Beswick v Beswick.
The estate of the promisee was able to enforce the promise. Thus, if A (the promisor)
promises B (the promisee) to pay C (the third party) 100, B can sue to enforce this
promise. The 1999 Act, s.4, retains the promisees right to enforce the contract. While
this method eliminates many problems presented by privity it is not without difficulty.
Contract
A B
to
pa
y
10
0
Figure 11.3 Enforcement by the promisee

A (the promisor) contracts with B (the promisee) to pay C (the third party) 100. B can
sue A to enforce the promise because of the A/B contract.
Two difficulties can arise when the enforcement is to be made by the promisee.
1. The promisee may be unwilling, or unable, to enforce the contract (in these
circumstances, there is little C can do to compel B to enforce the contract).
2. The second difficulty is to find an appropriate remedy for B.
As we will see in Chapter 16, the general purpose of an award of damages is to put
the party where they would have been but for the breach of contract. The problem in
these circumstances is that B would never have received the money in the first place.
She is thus no worse off when the contract is breached by A than if it were performed
by A. Another possible view of this problem is that B has a performance interest in

the contract and that damages should be awarded to B because this interest has not
been realised. Courts are reluctant to recognise such an interest (see Panatown v Alfred
McAlpine Construction Ltd (2000)).
The problem of an adequate remedy was considered in Beswick v Beswick. Where

the promise was made solely for the benefit of the third party, the House of Lords
had difficulty in awarding damages. In that case, an order was made for specific
performance. This result was agreed, in obiter, by the House of Lords in Woodar v
Wimpey Construction (1980). In Radford v DeFroberville (1977), however, the Court held
that Bs claim against A for damages was not reduced by the fact that the contract
between A and B also conferred a benefit upon C.
There are a number of circumstances in which the promisee has been able to receive
an award of damages. These are considered below.
Multiple bookings
In Jackson v Horizon Holidays (1975), Lord Denning recognised that a person who
booked a holiday on behalf of himself and family members was able to recover
damages on behalf of the family members where the contract was breached.
The House of Lords later restricted the ambit of this decision in Woodar v Wimpey
Construction (1980).
Sellers contracts with carriers to take buyers goods for delivery

In The Albazero (1977), Lord Diplock recognised a limited ability on the part of one party
to recover damages on behalf of another. This can occur where, for example, a seller of
goods contracts with a carrier to deliver the goods to a buyer. After this first contract
has been entered into, the seller enters a second contract of sale with the buyer and
sells the goods to the buyer. The buyer has no contract with the carrier. The seller has a
contract with the carrier, but because he has transferred the goods to the buyer, he is
no worse off if the contract is breached and the goods are in some way damaged. The
Albazero recognised that when the seller and carrier contract in contemplation of a
second contract with the buyer, the seller can recover substantial damages on behalf
of the buyer where the goods are lost or damaged.
Contracts where the subject matter will be acquired by a third party

The decision in The Albazero was subsequently extended in two cases. First in Linden
Gardens Trust v Lenesta Sludge (1993) to cover the situation where A and B contract
on the basis that the property which is the subject matter of As obligations may at
some point be acquired by a third party, C, and on the footing that B should be able
to enforce the contract to its full extent for the benefit of C. Second, in Darlington BC
v Wilshier Northern (1995), to the situation where it is contemplated that the third
party was (as opposed to will become, as in Linden Gardens) the owner of the property.
While these extensions initially met with judicial approval, its application has been
subsequently limited by the House of Lords decision in Panatown v Alfred McAlpine
Construction Ltd (2000). Following this case, where the third party has a direct remedy
of some sort against the promisor, the exception(s) will not be applied.
An order for the promisor to perform

In some situations it may be possible for the court to make an order for the specific
performance of the contract, as in Beswick v Beswick. In other situations, it may be
possible for a court to enforce a promise not to do something. Thus, if the promisor
A contracts with promisee B not to sue third party C, B can ask the court to stay
the proceedings against C: see Snelling v John G Snelling (1973). This approach is not
without difficulty: see Gore v Van Der Lann (1967). In that case, B was said not to have an
interest unless he had a legal liability to C.
Activity 11.4
What is the relationship between the 1999 Act and the common law with regard to
the provision of exceptions to privity?
Activity 11.5
Is it likely that courts will accept a performance interest on the part of a promisee
and allow the promisee to recover substantial damages for a breach which deprives
the third party of his intended benefit?
11.3.2 Agency
Agency is not so much an exception to privity as a general commercial necessity. If A
cannot, or does not choose to, negotiate directly with C he may authorise B to do so
on his behalf. As a general rule, the resulting contract creates privity between A and
C, with B dropping out of the picture. See Shanklin Pier Ltd v Detel Products Ltd (1951).
Occasionally legislation uses agency to avoid the difficulties caused by privity.
Contract
(i) A B The agent of C
Contract
(ii) A C
Figure 11.4 Agency

At point (i), A contracts with B as Cs agent. The result is illustrated by point (ii) A has a
contract with C and thus C can enforce the contract.
11.3.3 Exemptions and limitations of liability

Where A and B contract for B to perform a service, it may be intended that B will
render part of his performance through C, a third party to the contract. For example,
if A (the owner of goods) contracts with B (the carrier) to deliver goods from Port 1
to Port 2, C may subcontract the unloading of the goods at Port 2 to a third party (the
stevedores). B has two contracts in this example: the first is with A for the carriage
of goods and the second is with C for the unloading of the goods. It is common
practice for B to seek to limit or exclude his liability for breach of contract through
the inclusion of a clause to this effect. B may also seek to extend the benefit of this
clause to C. It is at this point that a problem arises, because C is not a party to this first
contract. The lack of a contract between A and C is no bar to A suing C in tort should C
damage As goods.
Contract 1
A B C Third
[A to exclude liability of B and C] Party
Owner Carrier Stevedores
Contract 2
B C
Carrier Stevedores
A Tort C
A sues C in Tort
Owner Stevedores
Figure 11.5 Exemptions and limitations

By contract 1, A contracts with B to carry As goods and a clause is included which

limits or exempts the liability of B and C. By contract 2, B contracts with C to unload As
goods. Should C damage the goods, A may bring an action in tort against C. C is unable
to protect himself using the exemption clause in contract 1 since he is not a party to
that contract.
Courts have stretched the agency concept in one particular situation to provide the
third party with the benefit of the exclusion clause in contract 1. This was established
in The Eurymedon, New Zealand Shipping v Satterthwaite (1975) and applied again in Port
Jackson Stevedoring v Salmond and Spraggon (1980). In The Eurymedon, the Privy Council
established that in the situation outlined above, it may be possible for B to contract
with A as Cs agent. Through B, A offered an exemption of liability to C. C, in performing
their contract with B and unloading the vessel, accepted this offer and a contract
between C and A was formed such that C could rely on the exemption clause.
Offer to C of immunity
(i) A B (Cs agent)
Performs Contract 2 (B/C)

(ii) C Accepts As offer
through performance
Result
Contract 3
(iii) A C
whereby A exempts
liability of C
Final Result
(iv) A Tort C
Contract 3
Exemption clause
Figure 11.6 The Eurymedon device

In Figure 11.6 the following chain of events takes place:
uu in (i) A offers immunity to C through B
uu in (ii) C unloads the ship and performs contract 2
uu the result is (iii), a contract between A and C whereby C is given some form of
immunity from action by A
uu the final result is (iv), that should A sue C in tort for any damage, C can defend the
action on the grounds of the exemption clause in contract (iii).
An excellent summary of the development of the law in this area is provided by

Lord Goff in The Mahkutai (1996). Lord Goff observed that in the late 20th century the
pendulum of the law swung away from Scruttons Ltd v Midland Silicones Ltd. The effect
of the 1999 Act upon this pendulum is, as yet, uncertain.
Following the 1999 Act, the third party can, however, still take advantage of an
exception clause in a contract for the carriage of goods by sea: s.6(5). It remains to be
seen whether it would be possible to use the device in The Eurymedon to confer other
benefits (see The Mahkutai (1996)).
Activity 11.6
What conditions must be met in order for the exemption clause to protect the third
party through The Eurymedon device?
Activity 11.7
What was the consideration provided by C to A for the contract of immunity in The
Eurymedon?
Activity 11.8
A contracts with B for B to carry goods between Dover and Calais by sea. Included
in this contract is a clause that exempts B and Bs agents, employees and
subcontractors from liability for any damage, howsoever caused. B contracts with
C for C to unload the ship. The ship carries several cargoes besides As goods. In
unloading goods belonging to Z, C accidentally destroys As goods. What advice do
you give to C as to his liability to A for the damage?
11.3.4 Collateral contracts

Occasionally a third party may be made liable on the basis that he has made some
promise in consideration of the promisees entry into the main contract. See, for
example, Andrews v Hopkinson (1957).
11.3.5 Trusts
It is possible for the promisee as owner of the promise to constitute a trust of the
promise (i.e. B holds As promise on trust for C). Where this happens, B may recover
from A the whole of the loss suffered by C because of As non-performance: Lloyds v
Harper (1880) 16 Ch D 290.
Taken to its furthest extent, a trust of a promise negates privity altogether, for the third
party must simply assert that B is the trustee of the promise and that the benefit of the
promise is the third partys.
Possibly for this reason, this device has not met with favour. There have been few
successful decisions since the 1930s. Thus in the case of Re Schebsman [1944] Ch 43
a company promised a retiring employee to pay an annuity to his widow and to his
daughter if she (the widow) died within the annuity period. The court held that there
was no trust in favour of the widow or daughter.
The reason for refusing to find a trust is usually a failure to prove any positive intention
to create a trust. This intention to create a trust was originally a fiction in this context:
its strict requirement means that there are very few cases where the trust concept will
circumvent the doctrine of privity.
In Darlington BC v Wiltshier, two members of the Court of Appeal found in obiter that
the case could have been resolved on the basis that Morgan Grenfell could, before any
assignment to the Council, have sued for damages for the breaches and recovered
substantial damages as constructive trustee for the council. This flowed from the
particular wording of the covenant.
11.3.6 Legislation
For the sake of completeness, you should be aware that in some specific instances,
a statute may overcome the problems that would otherwise be posed by privity.
Examples of this can be seen in the Third Parties (Rights Against Insurers) Act 1930
s.56, s.75 Consumer Credit Act 1974 and s.56 Law of Property Act 1925. While you do not
need to know the specific details of the operation of these provisions, you should be
aware that in particular circumstances the difficulty created by privity may have been
overcome by legislation.
Summary
The harshness caused by a strict application of privity led to the judicial development
of a number of devices and approaches to circumvent the application of privity. The
application, or the lack of an available application, of these devices and approaches
could itself cause injustices to arise. Following the 1999 Act, these devices and
approaches continue to exist. Their further development, in situations where the
parties have expressly chosen not to avail themselves of the 1999 Act, is questionable.
Activity 11.9
a. Would the widow in Re Schebsman have been better off if there had been a
trust?
b. In what way, if at all, does the decision in Beswick v Beswick form an exception to
privity?
c. How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in
Beswick v Beswick?
d. How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in
New Zealand Shipping v AM Satterthwaite?
e. Following the enactment of the 1999 Act, is it likely that courts will continue to
devise exceptions to the doctrine of privity?
No feedback provided.

Halson, Chapter 9: Third parties, Section: Collateral contracts on the Linden
Gardens principle.
11.4 Liability imposed upon third parties
Essential reading
McKendrick, Chapter 7: Third party rights Section 7.23 Interference with
contractual rights.
Poole, Chapter 11: Privity of contract and third party rights Section 7 Privity
and burdens.
The question here is the extent to which the burden of contracts relating to things
other than land can run with them in the same way that the burden of restrictive
covenants can run with land. The answer is far from clear. See Lord Strathcona
Steamship v Dominion Coal (1926), which was not followed in Port Line v Ben Line
Steamers (1958). See also Swiss Bank v Lloyds Bank (1979, at first instance).
It is the case that in instances where a bailment has occurred that there may be a sub-
bailment on terms. In The Pioneer Container (KH Enterprise v Pioneer Container) (1994)
the Privy Council applied principles of bailment to hold that the owner of the cargo
was bound by the agreement between the bailee and the sub-bailee, although the
owner was not a party to the agreement. The liability upon the owner is imposed as a
result of the sub-bailment on terms rather than by contract.
1. What are the two aspects of the doctrine of privity?
2. Name three devices used in common law to give enforceable benefits to third
parties.
3. What is the main test of whether third parties should be given rights under
contract?
4. In relation to the doctrine of privity, what is a performance interest?

5. Outline the Eurymedon case and when the device created in this decision can be
utilised by contracting parties.
6. Can a contract impose a liability on a third party?
Summary
The number of situations in which liability is imposed upon third parties is limited and
is usually dependent upon the knowledge or implied consent of the third party.

Halson, Chapter 9: Third parties, Section: Bailment.
Examination advice
The material considered in this chapter has frequently come up in examination papers
on contract as a question on its own. The questions have taken the form of either:
1. an essay question
2. a problem question.
Examples of both are set out below. Because the material in this chapter goes to the
very essence of the nature of contract law, it could be combined with issues from
many other areas of contract law in an examination question.

Question 1
Last year C entered the employment of D Ltd for a fixed period of six years, his
contract providing that, if he should die before the end of the six years, D Ltd would
pay his widow 2,000 a year for three years from his death. C died in January this
year, but D Ltd has refused to make any payment to his widow (E).
Advise E.
Question 2
F lives alone in his own house. His house suffers badly from rising damp. Living
conditions have become unpleasant. Unfortunately, F does not have sufficient
funds to pay for a course of damp proofing. His daughter, G, offers to pay for the
damp proofing. F gratefully accepts this offer. G hires Hopeless Builders Ltd to
carry out the damp proofing. Hopeless agree to undertake the task for 10,000.
G pays Hopeless in advance. Hopeless estimate that it will cost between 7,000
and 10,000 to undertake the damp proofing. They agree to refund any difference
between the 10,000 paid and the actual cost. The refund is to be given directly to
F. The damp proofing is badly conducted and Fs house is damaged as a result. The
actual cost of the damp proofing and related repairs was only 8,000. Hopeless
refuse to provide F with any refund.
Advise F.
Question 3
The doctrine of privity has become largely irrelevant as a result of recent changes.
Discuss.

Question 1
The widow E is a third party beneficiary to the contract between C and D Ltd. As such,
privity of contract prevents her from enforcing the contract (Tweddle v Atkinson, Dunlop
v Selfridge & Co). There are, however, two possible ways in which she could overcome
the problem posed by privity. The first is that she may be able to utilise the device
employed in Beswick v Beswick. That is to say, if she is the executrix or administratrix
of her husbands estate she could apply in that capacity for an order for the specific
performance of the contract. In this instance, the representative of the promisees
estate would seek to enforce the contract.
The second possible way is if E can bring herself within s.1 of the Contracts (Rights of
Third Parties) Act 1999. She would need to establish that she could enforce a term of
the contract (that regarding the payment of the annuity to her) because either the
contract expressly provided that she could (s.1(1)(a)), or because the term purported
to confer a legally enforceable benefit upon her (s.1(1)(b)) and this was not refuted
upon a proper construction of the contract (s.1(2)). If this right is given to E, she can
receive any remedy which would have been available to her if she had been a party
to the contract in question. In this instance, this is likely to be damages, although an
order for specific performance might be made instead.
Question 2
There are a number of issues present in this problem. F is a third party beneficiary to
the contract between G and Hopeless. F is the intended beneficiary not only of the
work to be conducted (the damp proofing) but is also to receive any refund that exists.
As discussed above, F will need to bring himself within s.1 of the 1999 Act to sue upon
the contract with regard to the deficient work and the damage caused. The likely
remedy in this case will be damages. With regard to the payment of the refund, it could
be argued that there is not a term of the contract which is intended to confer a benefit
upon F. See, for example, White v Jones (1995). Another possible course of action is for
G to sue Hopeless and to recover the refund for the benefit of F. The difficulty with this
course of action is that it would appear that under the original terms of the contract
the money was to go to F is G, therefore, any worse off when F does not receive the
money? See Jackson v Horizon Holidays and Linden Gardens Trust v Lenesta Sludge.
Question 3
A good knowledge of the Contracts (Rights of Third Parties) Act 1999 is essential in
answering this question. You need to consider that the doctrine of privity has not been
abolished but merely reformed by the Act. In particular, you would have to consider
when the Act applied (s.1(1)) because, in absence of the application of the Act, all the old
problems associated with privity of contract would remain. A good answer might also
consider the decision of the House of Lords in Panatown v Alfred McAlpine Construction Ltd
as an instance of the difficulties which could arise if the Act did not apply.
Quick quiz
Question 1
In which of the following circumstances would the third partys claim be successful
and not prevented because of privity of contract at common law?
Choose one answer.
a. A tyre seller sells tyres to a distributor on the basis that they would not be
resold below the sellers list price and if the distributor sold the tyres to a trade
buyer the distributor would ensure that the trade buyer would also have a price
restriction clause imposed on them. The trade buyers then sell the tyres below
the sellers list price. The seller tries to recover damages in light of the trade
buyers selling the tyres below list price.
b. A sells his coal business to B and A agrees that upon As death B will be able
to receive further financial assistance from C, As spouse. A dies. B sues C for
financial support.
c. A vendor agrees to sell land to a contractor for a specified sum and also an
additional sum to a third party. A dispute arises between the purchasers and the
vendors who brought an action for breach claiming not only the specified sum
but also the additional sum owed to the third party.
d. A purchaser contracts with a builder for the construction of a large building and
office development. Before the building was completed the purchaser assigned
his interest to another third party. The purchaser sued the builder, after
assignment, for defective work.
e. Dont know.
Question 2
Which of the following methods has NOT been successfully used as a device to
circumvent the rule of privity of contract?
Choose one answer.
a. Agency.
b. Collateral contracts.
c. Legislation.
d. The Trust.
e. Dont know.
Question 3
Which of the following elements need not be present in order to form a Himalaya
clause applying the decision in The Eurymedon? In the statements set out below,
assume A is the owner of goods who contracts with B, a carrier, to carry the goods
by sea. C is a firm of stevedores who is not party to this contract but who contracts
separately with B to unload As goods.
Choose one answer.
a. A must include in the contract a clause which exempts the liability of not
only the other party to the contract with B but also servants, agents and sub-
contractors of B such as C, the stevedores who unloads As goods.
b. The clause exempting the liability of Bs servants, agents and sub-contractors

must be contained in a deed in writing.
c. B must be authorised to act as Cs agent to receive the offer contained within As

exemption clause or to receive later ratification by C to so act.
d. C must provide consideration to A in order to support the exemption offer made

to C through the agency of B.
e. Dont know.
Question 4
Which answer best summarises why the Contracts (Rights of Third Parties) Act 1999
was enacted?
Choose one answer.
a. The Contract (Rights of Third Parties) Act was enacted because the Law
Commission mandated that Parliament should enact the legislation.
b. The Contract (Rights of Third Parties) Act was enacted because European
Union law required that English contract law be harmonised with that of other
member states of the European Union, all of which recognised a binding third
party right in contract.
c. The Contract (Rights of Third Parties) Act was enacted because it was thought
the best way to facilitate the intention of the contracting parties.
d. The Contract (Rights of Third Parties) Act was enacted because it was a suitable
birthday gift for Lord Denning.
e. Dont know.
Question 5
The Contracts (Rights of Third Parties) Act 1999 does not allow which of the
following actions?
Choose one answer.
a. To bind a third party, C, to the obligations created in a contract between A and B.
b. A and B, having created by contract a right in favour of C, a third party, can vary
their contract to remove the right given to C.
c. To allow C to enforce a benefit in a contract between two other parties or to

avail herself of a limitation clause in a contract between two other parties.
d. To allow a third party, C, to enforce a term of a contract between two other

parties where he is not named.
e. Dont know.

1. What is the doctrine of privity?
2. What are the two aspects of the doctrine of privity?
3. Is one aspect easier to justify than the other? If so which aspect and why?
4. What are the two major forms of benefit available to a third party?
5. To what difficulties does the doctrine of privity give rise?
6. What is the significance of the Contracts (Rights of Third Parties) Act 1999?
7. What are the principal provisions of the 1999 Act?
8. What are the possible applications of the 1999 Act?
9. What are the major devices by which rights can be conferred on third parties at
common law?
10. What are the principal strengths and weaknesses of these devices?
11. What is the relationship between the rights of third parties at common law and
under the 1999 Act?
12. In what possible ways can liability be imposed upon third parties to a contract?
Part VI Illegality and public policy
12 Illegality
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
12.1 Statutory illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
12.2 Common law illegality . . . . . . . . . . . . . . . . . . . . . . . . . 183
12.3 The effects of illegality . . . . . . . . . . . . . . . . . . . . . . . . . 184
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

Introduction
Illegality is a difficult subject within the law of contract, recently described as
seriously knotty territory (Parkingeye Ltd v Somerfield Stores Ltd (2012)). A contract
affected by illegality is one that fails for reasons external to the contract and the
parties to it. Illegality, as a topic, covers a wide range of different areas. It is thus hard
to categorise and different writers use different classifications. For this reason it is
recommended that if you find yourself struggling with one authors account of the
subject you persevere as much as you can before reading another account. The reason
is that if a particular aspect of one authors analysis of the topic confuses you it is not
always easy to simply read a different account of that aspect written by another author
who might have classified the whole topic very differently. In this respect the topic of
illegality is similar to that of mistake which was discussed in Chapter 8.
The effects of illegality upon a contract vary greatly from none at all to complete
unenforceability. The situations in which illegality arise also vary greatly. Illegality will
affect all of the following contracts.
uu A contract to commit a legal wrong (e.g. murder or robbery).
uu A contract which promotes immorality.
uu A contract which is performed illegally.
uu A contract which is not formed in accordance with the procedure prescribed by a

statute.
The principles governing illegality in English law are set out by Peter Gibson LJ in Hall v
Woolston Hall Leisure Ltd (2001) (paras 2831).
LEARNING OBJECTIVES
This chapter introduces the concept of restraint of trade and its effect upon
contracts entered, to enable you to discuss and apply in problem analysis its key
uu The different contractual contexts in which restraint of trade can arise.
uu The circumstances when an employment contract will be found to be in restraint
of trade.
uu The circumstances when a contract to sell a business will be found to be in
restraint of trade.
uu The differences of approach by courts to restraint of trade clauses in an
employment contract and in the sale of a business.
uu When might a court consider a clause to be an offensive restraint of trade in
other circumstances?
uu What is an unacceptable restraint of trade?
Contract law 12 Illegality page 181
12.1 Statutory illegality
Essential reading
McKendrick, Chapter 15: Illegality Section 15.1 Introduction to Section 15.5
Gaming and wagering contracts.
Poole, Chapter 16: Illegality Section 1 Illegal contracts.
12.1.1 Types of illegality

It may be helpful to consider certain distinctions that exist within the illegality
cases. The first distinction exists between common law illegality (such as a contract
to commit a murder or a robbery) and statutory illegality (such as a statute which
requires the vendor of a certain good to possess a licence to sell the good). A second
distinction exists between contracts that are illegal as formed (such as the contract
to commit murder or robbery) and contracts which are legal as formed but illegal
as performed (a contract to deliver pizzas then performed by a motorcyclist who
exceeded the speed limit).
In general terms, courts will not enforce a contract which involves an illegality, nor
will they allow the recovery of a benefit conferred by an illegal contract. There are a
number of, often overlapping, reasons for this (see generally Parkingeye Ltd v Somerfield
Stores Ltd (2012)), such as:
uu to deter parties from such conduct
uu to prevent parties from benefiting from their own wrong
uu to punish wrongdoers
uu to preserve the dignity of the court and integrity of the legal system
uu for reasons of public policy (where it would be offensive to society and the law for
courts to enforce an illegal contract).
The refusal to enforce a contract because of illegality can be an unnecessarily harsh

and unreasonable response. Should, for example, the recipient of the pizzas delivered
by the speeding motorcyclist be able to refuse to pay for the pizzas on the ground
that the contract was illegally performed? Because of the harshness that can result,
courts will sometimes allow a party to enforce a contract or to recover a benefit
conferred. The result is to create a certain inconsistency in cases involving illegality. In
Les Laboritoires Servier v Apotex Inc (2012) the court provided a useful summary of the
approach to be taken in considering the principle of illegality, emphasising that the
court must justify its decision by reference to these competing policy aims and not its
view of the personal qualities of the parties to any particular dispute.
12.1.2 Contracts that are illegal as formed

Where a contract is illegal as formed it is void ab initio, from the beginning. The
illegality is present from the outset of the contract. A statute, for example, may
expressly prohibit a certain type of contract. See, for example, Re Mahmoud & Ispahani
(1921) and Mohamed v Alaga & Co (A Firm) (2000). In such instances, where the contract
is void, the issue is whether or not a party who is innocent of wrongdoing can recover
a benefit conferred by the contract. As can be seen by the two decisions above, the
result is that sometimes the benefit can be recovered, whilst in other cases it cannot.
In the first case, Lord Atkin did not allow the plaintiff to enforce a contract which was
expressly prohibited by statute. In the second case, the Court of Appeal found that
while any contract to introduce refugees was prohibited by the legislation, it might be
possible to recover on a quantum meruit basis for the translation services provided in
Quantum meruit: a partial
relation to the refugees. Translation services were not covered by the legislation and payment (literal meaning: as
public policy would not be offended by allowing such a recovery. much as he/it deserves).
12.1.3 Contracts that are illegal as performed

A contract may be legal in its formation but illegal in its performance. This was
the case in St John Shipping Corporation v Joseph Rank Ltd (1957) where a contract
for the carriage of goods by sea was lawful in its formation but performed illegally
when the shipowner overloaded the ship carrying the goods. The overloading was
a statutory offence and the master of the ship was fined for this offence. The court
held that the shipowner was entitled to recover the moneys owed for the freight.
Devlin J distinguished between contracts which were entered into for the purpose of
committing an unlawful act (which were unenforceable) and contracts which were
expressly or impliedly prohibited by statute. The shipowners case was in the latter
class. Because of this, the court needed to determine if the statute prohibited the
formation of such contracts and, if so, did the particular contract before it fall within
this prohibition.
Two questions are involved. The first and the one which hitherto has usually settled the
matter is: does the statute mean to prohibit contracts at all? But if this be answered
in the affirmative, then one must ask: does this contract belong to the class which
the statute intends to prohibit? [here] an implied prohibition of loading does not
necessarily extend to contracts for the carriage of goods by improperly loaded vessels.
(per Devlin J)
In Parkingeye Ltd v Somerfield Stores Ltd (2012) the court held that where a claimants
contractual performance could have been carried out lawfully (and it had been
intended to be carried out mainly lawfully), illegality was not a defence to the claim. In
some cases, Parliament will declare that a certain type of contract is void. It may also
provide that no action can be brought to recover a benefit derived from such a void
contract. An example is s.4 of the Marine Insurance Act 1906 which provides that every
contract of marine insurance by way of a gaming or wagering contract is void. Statutes
may also provide that the performance, or a certain mode of performance, is illegal.
Activity 12.1
Bertha is a dealer in poisons. The (fictitious) Control of Poisonous Substances
Act 1966 requires that a dealer in poisons be registered under the Act and that
no sale of poisons shall be made without the purchaser producing a poison sale
authorisation certificate from the Poisons Control Board. Bertha is a registered
dealer. Arnold, who cannot be bothered to wait for the issue of the certificate,
forges one and presents it to Bertha when he contracts with her to purchase rat
poison. Bertha accepts the certificate as genuine and sells Arnold rat poison worth
200. Arnold takes the poison away and uses it. He now refuses to pay Bertha for
the poison. Can Bertha recover the money owed?
Activity 12.2
The same as above, except that Arnold does not produce any certificate, forged or
otherwise.
Activity 12.3
The same as above, except that Arnold produces a genuine certificate, however
Bertha, in delivering the poison to Arnolds premises, drives her van in excess of the
speed limit and thus commits a criminal offence.
Summary
Contracts may be illegal as formed or illegal as performed. Where they are illegal as
formed, and statute prohibits their creation, a court will not allow the recovery of
damages under such a contract. Where an innocent party seeks some benefit from
this contract, it may be allowed in some circumstances. Where a contract is illegal as
performed, the court will seek to establish what was intended by the statute.

Enonchong, N. Illegal transactions: the future? (2000) Restitution Law Review 82.
12.2 Common law illegality
Essential reading
McKendrick, Chapter 15: Illegality Section 15.6 Illegality at common law to
Section 15.11 Contracts prejudicial to public relations and Section 15.16 The
scope of public policy.
Treitel Extract from Chapter 11: Section 2 Types of illegality, in your study pack.
We are concerned here with those situations where the illegality affects a contract not
by way of a statutory prohibition, but by way of a common law prohibition. Professor
Treitel divides these situations into two categories. First are those cases involved in the
commission of a legal wrong (the contract to commit a murder, for example); second
are those cases which involve contracts contrary to public policy. For examples of
cases in the first category, see Alexander v Rayson (1936) and Beresford v Royal Exchange
Assurance (1938). Of the two, the second
category is more troublesome because
of the difficulty of ascertaining what the
public policy is and whether or not the
contract offends against it. Because of
the changing nature of public policy,
some of the older cases must be treated
with care. It is unlikely, for example,
that the contract in Pearce v Brooks
(1866) to supply a brougham carriage
to the defendant for use in her trade as
a prostitute would now be considered
illegal. Standards of morality may Figure 12.1 A brougham carriage
change over time but also prevailing
moral standards at one particular point in time will vary geographically as noted by
the Malaysian Court of Appeal in Tengku Abdullah Sultan Abu Bakan v Mohd Latiff bin
Shah (1996).
Courts have found that public policy is offended in such a way as to make the contract
illegal in a number of different areas. Thus, a contract which is contrary to good morals
may be illegal. See not only Pearce v Brooks (1866), but also Franco v Bolton (1797)
which involved payment by a man to a woman to become his mistress. Contracts
to promote sexual immorality are now less likely to be found to be illegal due to
the changing public conceptions of immorality. Contracts which are found to be
prejudicial to family life are affected by illegality: see Lowe v Peers (1768) and Hermann
v Charlesworth (1905). Thus contracts in which there was an agreement to restrain the
freedom to marry, marriage brokerages, or some agreements to separate are illegal.
Unsurprisingly, courts are concerned with the administration of justice and a contract
which attempts to restrain this is illegal. See for example, R v Andrews (1973) and
Elliott v Richardson (1870). Courts are particularly suspicious of agreements to oust the
jurisdiction of the court. Another area in which contracts have offended public morals
are those which tend to injure the state in its relations with other states. A contract
with an alien enemy is illegal in time of war and contracts which contemplate hostile
action to a friendly foreign country are also illegal.
Another area in which public policy can be offended are those situations where the
contract imposes a restraint of trade. These will be considered in Chapter 13 of the
subject guide.
Activity 12.4
Compare the cases of Pearce v Brooks (1866) and Tinsley v Milligan (1994). What do
these two cases tell us about the changing nature of public morality?
Activity 12.5
How does a court determine what public policy is?
Summary
Contracts which offend public policy are difficult to categorise. Because public policy
can change over time, conceptions of those contracts which offend it will also change.

Andrews, Sections 20.1720.18, for the impact of recent legislation concerning
bribery.
12.3 The effects of illegality
Essential reading
McKendrick, Chapter 15: Illegality Section 15.17 The effects of illegality to
Section 15.19 Severance.
Poole, Chapter 16: Illegality Section 1 Illegal contracts.
12.3.1 The case law

Because there is no single form of illegality it is very difficult to ascertain the effect of
illegality upon any one contract. The outcomes in the case law are very different. This
is not surprising, given that the impropriety involved is very different in its seriousness.
Before examining these different outcomes, it is worth bearing in mind that a contract
may have both legal and illegal terms. Where it is possible to remove an illegal term or
an illegal part of the term, a court can sever that term and leave the remainder of the
contract standing.
Although a court will not enforce an illegal contract, it may be able to provide an
innocent party with a remedy in some other manner. In Strongman (1945) Ltd v Sincock
(1955) the plaintiffs were unable to sue on the contract, but the court allowed them to
recover the value of the work done on the basis of the breach of a collateral warranty.
In Shelley v Paddock (1980) the innocent party was allowed damages for a fraudulent
misrepresentation.
Another important point is whether a party can be permitted to recover a benefit

conferred upon the other party to an illegal contract. The general rule is that courts
will not permit recovery under an illegal contract: Holman v Johnson (1775). There are,
however, many cases which illustrate methods by which recovery will be allowed.
Where the parties are said not to be in pari delicto (equally guilty) the public policy
considerations in preventing illegal contracts may be outweighed by the desire
to prevent the other party from retaining a benefit which constitutes an unjust
enrichment. Thus in the case of Kiriri Cotton Co Ltd v Dewani (1960) the innocent party
to an illegal contract was able to recover the money paid pursuant to the illegal
contract. The party was innocent in the sense that he was unaware that the contract
was illegal.
In another set of cases, the party has been allowed to recover a benefit when he
withdraws from the contract before the illegality has been committed. See, for
example, Taylor v Bowers (1876), Kearley v Thomson (1890) and Tribe v Tribe (1996).
Exceptionally a benefit conferred by an illegal agreement may be recovered where the
enterprise has become impossible as a result of the action or inaction of third parties
so long as the performance of the illegal agreement has not otherwise begun (Patel v
Murza (2014)).
Finally, cases exist which allow a party to recover a benefit where he can do so without
relying on the illegal nature of the contract. These cases stem from the decision in
Bowmakers Ltd v Barnet Instruments Ltd (1945) and the principle has been extended
by the House of Lords to equitable proprietary claims in Tinsley v Milligan (1994).
The problem in these cases is that by allowing the recovery, the court may, in effect,
enforce the contract or at least provide a remedy which is as helpful to the claimant as
enforcing the contract.
12.3.2 Reform of the law

The Law Commission considered a process of law reform in the area of illegality
in contract. In 1999 The Law Commission produced a consultation paper Illegal
transactions: the effect of illegality on contracts and trusts (see Useful further
reading below). The Law Commission sought the reform of this area of law and made
some provisional recommendations. The most important of these recommendations
was that courts would possess a discretion to decide whether or not to enforce an
illegal transaction, to recognise that property rights have been transferred or created
by it, or to allow benefits conferred under it to be recovered. This discretion would
not, however, be open-ended to allow the court to do what it considered just in the
circumstances. This discretion would be structured to provide certainty and guidance
(and the report considers the nature of this guidance) and this guidance would apply
only where a statute did not expressly prohibit the transaction. The Law Commission
in 2009 decided, however, to abandon the proposal for a general discretion with the
recommendation that the law be developed by the courts in an incremental fashion.
1. Give an example of a contract that would be illegal as formed.
2. Give an example of a contract that would be illegal as performed.
3. Summarise the matters the Law Commission states a court should consider
when exercising the proposed discretion set out in consultation paper 154.
4. What is meant by the term locus poenitentiae?
5. What is meant by the term in pari delicto?
6. What general rule is derived from Holman v Johnson (1775)?
Summary
As a general rule, a contract tainted by illegality cannot be enforced. It is possible,
however, that a remedy may be obtained by another course of action. Courts will also,
in certain circumstances, allow the recovery of money or property which has been
transferred in accordance with an illegal contract.

Anson, Chapter 11: Illegality.
The Law Commissions 1999 consultation paper, Illegal transactions: the effect of
illegality on contracts and trusts (LCCP No. 154) avaialable from BAILII.
Examination advice
A review of past examination papers reveals that this area has generally been
examined as a question on its own. Past questions have taken two forms. First,
problem questions in which candidates have been asked to ascertain the
enforceability of illegal contracts and/or the ability to recover a benefit conferred
under the illegal contract. Secondly, the examiners have asked essay questions in
which candidates needed to critically discuss certain aspects of the law in this area.

Peter was a licensed dealer in pet food under the (fictional) Licensing of Pet Food
Act 2001. Section 1 of the Act requires any person selling pet food to be licensed and
if anyone shall trade in pet food without the appropriate licence he shall be guilty
of a criminal offence. Section 2 requires sales of pet food to be accompanied by a
statutory invoice which must contain details of the food supplied and a statement
of the quantity supplied.
a. Peter supplied Queenie with pet food costing 500 but failed to provide a
statutory invoice at the time of delivery because it had fallen out of the box in
which it had been placed by Peters employee. Queenie refused to pay for the
pet food.
b. Peter supplied Robert with pet food but failed to provide a statutory invoice
after Robert said, Between friends no formalities are required. Robert refused
to pay for the pet food and claimed damages from Peter because, he claimed,
the pet food was of poor quality.
c. Peter was paid 600 by Stefan for pet food to be delivered to Stefans restaurant.
Peter suspected that Stefan might be using the food for human consumption
(which was prohibited by statute). It was subsequently discovered that Stefan was
using the pet food for this purpose. Stefan sought the repayment of the 600.
d. Peter agreed to supply pet food costing 2,000 to Thomas which Thomas paid
for in advance. It was then discovered that, unknown to Peter, his licence had
expired. Peter refused to deliver the pet food to Thomas or to return the 2,000
which Thomas had paid in advance.
Advise the parties.

The question calls for a determination of the extent to which courts will enforce a
contract despite the taint of illegality. Here the illegality is created by statute. The
starting point to such an answer is to consider the purpose behind the statutory
requirements. Following St John Shipping v Rank, the issue to be considered in all
four parts of the question is the purpose behind the statute. Is the statute intended
to penalise conduct or to prohibit contracts? The requirement to provide an
invoice appears to regulate the conduct of the business rather than the legality
of the business. This would indicate that contracts which do not comply with this
requirement are illegal as performed rather than illegal as formed. On the other hand,
the requirement that the dealer must be licensed indicates that the purpose of the
requirement is to make unlicensed agreements illegal as formed. The facts provided
do not make clear at what point Peters licence has expired. Nor does the question
state whether or not the statute provides for the consequences of illegality.
Parts (a) and (b) deal with the requirement that the pet food dealer must supply a
statutory invoice with the pet food. In part (a) Peter attempts to supply Queenie with
the invoice but fails to do so because it falls out of the box in which it has been placed.
There has been an attempt to comply with the statute and in this sense Peter may
be innocent in the sense that he is unaware of the illegality. In some circumstances,
courts have allowed such contracts to be enforced (see Archbolds (Freightage) v
Spanglett). In other cases, courts have not allowed the contract to be enforced (see Re
Mahmoud and Ispahani and Mohamed v Alaga and Co (2000)). Where the statute does
not specify the consequences of the illegality on contracts, the better view is that the
effects should be determined by reference to the statute. Here it is arguable that the
purposes of the statute would not be furthered by denying Peter the remuneration
due under his agreement with Queenie. Peter may be able to recover on a quantum
valebat basis for the goods supplied (Mohammed v Alaga) but not if public policy would
prevent such a restitutionary recovery (Awwad v Geraghty & Co). However, if Peters
licence has expired, the contract is illegal as formed and thus unenforceable by either
party.
Part (b) differs subtly from part (a) in that both Peter and Robert are aware that
the contract is illegal because it lacks the statutory invoice. Both are assenting to a
performance they know is illegal. The parties are in pari delicto and neither can sue on
the contract. Peter cannot obtain the remuneration stipulated in the agreement and
Robert cannot obtain damages for the allegedly poor quality of the pet food supplied.
In part (c), Peter is probably aware that subject matter of the contract will be used for
an unlawful purpose and thus the contract is illegal. Peters awareness may make him
a participant in the illegality (Ashmore, Benson, Pease & Co v AV Dawson Ltd (1973)). The
contract is unenforceable and Stefan cannot recover the 600 advanced in contract.
However, as the illegality has not been perpetrated with respect to the particular
delivery of pet food, Stefan may be able to recover the moneys paid to Peter on a
restitutionary basis. Stefan must repudiate the contract before the illegal purpose has
been performed.
In part (d), Peters licence has definitely expired and the contract is illegal as formed
and thus unenforceable by either party.
Quick quiz
Question 1
In St John Shipping v Joseph Rank Ltd (1957), Devlin J allowed the shipowners
to recover the additional cargo carried by the ship when it was overloaded in
contravention of the Merchant Shipping (Safety and Load Line Conventions) Act
1932 because (choose one answer):
a. The 1932 Act did not prevent the suit upon the contract because the
infringement of a statute in the performance of a contract legal when made did
not make the contract illegal unless the contract as performed was one which
the statute intended to prohibit.
b. The shipowners had not intended to contravene the statute and when the
vessel left her loading port she had three-eighths of an inch to spare without an
offence being committed.
c. An offence against the 1932 Act was a trivial matter and ought not to prevent
the shipowners from the profit owed to them after completing the voyage and
paying the fine.
d. The shipowners could sue because they had not intended to commit an offence
under the 1932 Act and the owners of the cargo were not disadvantaged by the
offence.
e. Dont know.
Question 2
Where a contract is legal in its formation but illegal in its performance which of the
following statements is true?
Choose one answer.
a. Neither party can enforce the contract.
b. Both parties can enforce the contract.
c. The party who has caused the illegal performance can enforce the contract
provided he was unaware of the illegality of the performance.
d. The party innocent of the illegality in performance can enforce the contract,
particularly if he was unaware of the illegality.
e. Dont know.
Question 3
Which of the following contracts is not necessarily illegal?
Choose one answer.
a. A contract whereby A wagers with B that As dog will run across the town square
faster than Bs dog.
b. A contract in which A and B agree that, in the event of a dispute, the matter will
not be taken to court.
c. A contract in which A and B agree that B will murder C in exchange for As

payment of 10,000.
d. A contract in which A and B agree that A will find B a husband in exchange for Bs
payment of 10,000.
e. Dont know.
Question 4
An illegal contract will not be enforced by the courts and a court will not allow any
form of recovery in which of the following instances?
Choose one answer.
a. By allowing the innocent party to sue on a collateral warranty to the main
contract.
b. By allowing the innocent party to recover damages for fraudulent

misrepresentation.
c. By allowing the innocent party to bring a restitutionary claim to recover benefits

conferred.
d. By waiving any knowledge of the illegality the innocent party can enforce the
contract.
e. Dont know.
Question 5
In Tinsley v Milligan (1994) the court held that the claimant was entitled to an
interest in property despite fraudulent claims on the Department of Social Security
for which reason?
Choose one.
a. The House of Lords were unconcerned that the parties to the agreement were
homosexuals.
b. A claimant to an interest in property, whether based on a legal or equitable

title, was allowed to recover where she was not forced to plead or rely on an
illegality.
c. No court will lend its aid to a man who founds his cause of action upon an
immoral or illegal act.
d. If A puts property in the name of B intending to conceal his (As) interest in the
property for a fraudulent or illegal purpose, neither law nor equity will allow A
to recover the property, and equity will not assist him in asserting an equitable
interest in it. This principle applies whether the transaction takes the form of a
transfer of property by A to B, or the purchase by A of property in the name of B.
e. Dont know.


1. What are the differences between contracts which are illegal in formation and
contracts which are illegal in performance?
2. What different effects result from the above distinction?
3. In what different situations will a court find that a contract offends against public
policy?
4. What are the consequences of a finding that the contract is illegal?
5. What major reform of the law has been proposed in this area and, if any has, to
what extent has it been implemented?
Notes
Part VI Illegality and public policy
13 Restraint of trade
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
13.1 General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
13.2 Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . 193
13.3 The sale of a business . . . . . . . . . . . . . . . . . . . . . . . . . . 195
13.4 Other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

Introduction
The material considered in this chapter is a species of the public policy considered in
the previous chapter on illegality. A contract containing a clause to restrain a persons
freedom to trade may be offensive to public policy and, as such, be unenforceable. For
example, one party may contract to sell her business to another. A common clause in
such a contract is one which prevents the vendor from then opening a competitive
business next door and so siphoning off customers of the business that has been
sold to another business owned by the vendor. Such a clause restrains the freedom of
the vendor to trade. Such a clause is only valid to the extent it is reasonable, since it
offends public policy to restrain the freedom of an individual for a disproportionate
period of time.
LEARNING OBJECTIVES
This chapter introduces the concept of restraint of trade and its effect upon
contracts entered, to enable you to discuss and apply in problem analysis its key
uu The different contractual contexts in which restraint of trade can arise.
uu The circumstances when an employment contract will be found to be in restraint
of trade.
uu The circumstances when a contract to sell a business will be found to be in
restraint of trade.
uu The differences of approach by courts to restraint of trade clauses in an
employment contract and in the sale of a business.
uu When might a court consider a clause to be an offensive restraint of trade in
other circumstances?
uu What is an unacceptable restraint of trade?
Contract law 13 Restraint of trade page 193
13.1 General principles

Restraint of trade has been considered primarily in two contexts. The first is in an
employment context an employee may contract with his employer that, among
other things, he will not work for a competitor of the employer while employed or
for a period of time after his employment has ended. The second is where a business
is sold and the purchaser seeks an undertaking from the vendor not to compete with
him. Both employers and purchasers have legitimate interests to protect. To an extent,
what they are contracting over is the exclusive services of the employee or the lack of
competition from the former owner. Where the employee provides unique services to
the employer, or where he has valuable inside knowledge of the employers business,
the employer can act legitimately to confine these services or knowledge. In the case
of the sale of a business, the purchaser often buys the established trade and goodwill
of the business. If the seller were able to establish a rival business in the same area, this
trade and goodwill would be valueless. The problem is that the agreements can work
against the public interest, in that the public is deprived of the abilities of the other
party to the contract. There is a corresponding danger that the restraint works unfairly
against the interests of the party restrained. For these reasons, courts will only enforce
a restraint of trade clause to the extent that it is reasonable. Thus, the party who
seeks to enforce the clause must show that it is reasonable between the parties and
reasonable in the public interest. In some cases, it may be possible for a court to sever
the term which is in restraint of trade and leave the remainder of the contract in force.
In addition, there are statutory controls upon anti-competitive agreements. These are
now to be found, principally, in Articles 101 and 82 of the Treaty on the Functioning of
the European Union (formerly Article 85 and then 81 of prior Treaty Agreements) and
the relevant provisions of the Competition Act 1998. These controls are of more recent
origin than the common law doctrines and broader in scope. They are principally
administered by regulatory authorities.

Treitel, paras 11-105 to 11-109, for the best summary of European and UK
competition law as it affects this topic.
13.2 Employment contracts
Essential reading
McKendrick, Chapter 15: Illegality Section 15.12 Contracts in restraint of trade
and Section 15.13 Contracts of employment.
Poole, Chapter 16: Illegality Section 2 Contracts void on grounds of public

policy: contracts in restraint of trade.
During the employment contract, it is legitimate for an employer to stipulate that

he or she requires the exclusive services of the employee. Accordingly, such a
restraint will stand unless it is exceptionally onerous for example, if the restraint
has as its purpose the prevention of the employee working altogether. A term will
be considered for its reasonableness when it seeks to impose a restraint after the
employment relationship has ended. For example, a major computer software
company employs a programmer. One of the terms of the contract is that the
programmer will not work for another company in the computer business for a period
of time after the programmer has left the software company. The computer software
company obviously wishes to protect its confidential information and, possibly, its
customers, from competition. These can be legitimate interests. The programmer,
however, will need to earn a living. The law must balance these two interests.
Whether or not the restraint can stand will be determined by two criteria.
1. the restraint must be reasonable between the parties it must do no more than is
reasonably necessary for the protection of the employer.
2. the restraint must not be injurious to the public it must also be reasonable in the
interests of the public.
In practice, the first criterion will be more difficult to establish than the second. This
is because the courts are generally reluctant to find that a clause which is reasonable
between the parties is not reasonable in the interests of the public.
There are two criteria to the requirement that the clause must be reasonable between
the parties. First, the clause must protect some legitimate interest of the employer.
It must not be used simply to prevent competition with the employer. The employee
must be free to exercise the general skills and knowledge he possesses. See, for
example, Herbert Morris Limited v Saxelby (1916). Secondly, in protecting this legitimate
interest, the restriction must be reasonable with regard to three elements: subject
matter, area, and duration. See, for example, Mason v Provident Clothing & Supply
Company Ltd (1913).
Once a court has established that a clause is reasonable between the parties, it is
unlikely to find that it is contrary to the public interest. Note, however, the decision in
Wyatt v Kreglinger and Fernau (1933) in which this point was considered.
In Proactive Sports Management Ltd v Rooney (2011), the Court of Appeal held that a
footballers ancillary activity of exploiting his image rights was equally capable of
protection under the doctrine of restraint of trade as any other occupation.
Analogous principles to the above will apply to agency, as opposed to employment,

contracts (BCM Group plc v Visualmark Ltd [2006] EWHC 1831).
Activity 13.1
Amanda is a saleswoman of exceptional ability. She is able to persuade most people
to buy whatever product she has on offer. She works for Plod Products Ltd selling
paper products to the public. Her contract of employment prevents her from
selling any product within a 300km radius of Plods head office for six months after
leaving their employment. Amanda is offered a job selling the pen and ink products
of FabuMats Ltd. Although FabuMats Ltd sells paper, Amanda will not be engaged
in the sale of paper. Amanda resigns her position with Plod Products and takes up
the position with FabuMats. Plod Products seeks an injunction to prevent her from
selling FabuMats.
Advise Amanda.
Activity 13.2
Mega-Pharmaceuticals employs Dorothy, a scientist of exceptional ability. Dorothy
is hired to undertake research for a cure for HIV/Aids. The contract of employment
provides, among other things, that on leaving Mega-Pharmaceuticals, Dorothy
will not undertake research privately or for any other employer. This restriction is
for a period of five years following her employment with Mega-Pharmaceuticals
and applies worldwide. Mega-Pharmaceuticals will pay Dorothy the equivalent of
five years salary. Dorothy leads the world in this research. When she is very close
to a major breakthrough, she is offered a post at Enormo-Pharmaceuticals. Her
duties there would include heading a research team engaged in HIV/Aids research.
Mega-Pharmaceuticals declares that they would rely on the term of the contract
preventing Dorothy from undertaking research in this area. Can they do so?
Summary
A party who seeks to enforce a restraint of trade clause in an employment contract
must establish that:
1. he has a legitimate interest to protect
2. the clause is reasonable between the parties as to subject matter, area and
duration, and
3. the clause is not injurious to the public.


Smith, S.A. Reconstructing restraint of trade (1995) 15 OJLS 565.
13.3 The sale of a business
Essential reading
McKendrick, Chapter 15: Illegality Section 15.14 Contracts for the sale of a
business.

The modern law in this area was established by Nordenfelt v Maxim Nordenfelt (1894).
When a business is sold, the purchaser is wise to insist on a restraint of trade clause
to prevent the vendor from drawing the business to another establishment. The
purchaser has often bought the goodwill and custom of that business and this is
protected by a restraint of trade clause. Not many purchasers would pay significant
sums if they thought the vendor could establish a rival business. Because the
covenant is a part of what is bought, there is an important difference between clauses
in restraint of trade in an employment contract and in a contract for the sale of a
business. The result of this difference is that courts are much more likely to uphold a
restraint of trade clause found in a contract for the sale of a business than in a contract
of employment.
The criteria for determining whether or not a restraint of trade clause in a contract for
the sale of business is enforceable are much the same as in an employment contract.
The party seeking to enforce the clause must show that the clause is reasonable in the
interests of the parties to the contract. In determining this reasonableness, courts will
have regard to the consideration paid for the business. The clause must be reasonable
in light of the interests of both parties. In Nordenfelt v Maxim Nordenfelt, the House of
Lords believed that a covenant not to compete in any future business undertaken by
the business was unreasonable because it sought to protect the future activities of
the business. The House of Lords did, however, find that a worldwide restriction was
reasonable because of the limited number of manufacturers in this area.
Once it has been established that the clause is reasonable, it must be established that
it is not contrary to the public interest. In practice, it is probably the party who seeks
the removal of the clause who will raise this point.
Activity 13.3
Taylor Skate Ltd is a company which manufactures ice skates. The company is
wholly owned by Cyril Taylor, a metallurgical engineer who has developed most
of the Taylor Skate products himself. Mr Taylor sells his company to Mr Shore for
10 million. As a part of the sale agreement, Mr Taylor promises not to open a
rival business or to solicit the customers of Taylor Skate Ltd either for himself or
in the employ of any other company. In addition, he further promises not to work
anywhere in the world in any business which produces any product produced by
Taylor Skate Ltd either now or in the future. He agrees to refrain from such activities
for a period of 30 years. Four years later, Mr Taylor develops an anti-rust coating for
metal exposed to damp. When he forms a new company to develop this product
for use, he discovers that Taylor Skate Ltd has begun to develop a similar coating
for use on a new product. Taylor Skate Ltd warn Mr Taylor that they will not tolerate
such competition. Advise Mr Taylor.
Summary
The criteria necessary to uphold a restraint of trade clause in the sale of a business are
broadly the same as those to uphold the same clause in an employment contract. The
difference is that the public interest is less likely to be offended. This may be because
the public interest is now considered to be protected by competition legislation.
13.4 Other agreements
Essential reading
McKendrick, Chapter 15: Illegality Section 15.15 Restrictive trading and
analogous agreements and Section 15.16 The scope of public policy.

Traditionally the doctrine of restraint of trade was applied to employment agreements

and agreements for the sale of a business. This doctrine has also been applied to other
forms of agreement. The extent of this possible application to other agreements is
uncertain. We consider here two forms of agreements to which the doctrine has been
applied: solus agreements and exclusive service agreements.
One form of agreement to which it has been applied is a solus or exclusive dealing
agreement. This is a contract whereby one party undertakes to purchase all of its supplies
from a certain supplier. In Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd (1968),
the House of Lords held that such an agreement was within the scope of the doctrine
of restraint of trade. In that case, Harper had agreed to buy his petrol exclusively from
Esso for a period of four years, five months in relation to one of his garages and for 21
years with respect to another. In relation to the second garage, the promise was given
in connection with a loan from Esso. The House of Lords established that the period
with respect to the first garage was not a restraint of trade, but that the second one was.
Twenty-one years went beyond what was required to protect the interests of Esso.
The doctrine of restraint of trade has also been applied to exclusive service
agreements. In these agreements, one party promises to provide their services only
to the other party and not to work for anyone else. In A Schroeder Music Publishing v
Macaulay (1974), the court found that the exclusive service agreement was a restraint
of trade and thus unenforceable. In that instance, a young songwriter had contracted
with music publishers to provide his exclusive services for five years. During that
period, the songwriter assigned copyright in his music to the publishers. The music
publishers were under no obligation to do anything with his songs. In the event
that the songwriters royalties exceeded a certain amount, the contract would be
automatically extended for a further five-year period. While the music publishers were
able to terminate the contract, the songwriter was not given this right. The House of
Lords applied their decision in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd
and found that the case was an unenforceable restraint of trade because it went well
beyond what was necessary to protect the interests of the music publishers and so
severely curtailed the abilities of the songwriter.
Summary
In a variety of situations beyond employment contracts and contracts for the sale
of a business, courts will consider whether or not the clause is a restraint of trade.
While the scope of this application is uncertain, the indications are that it will occur in
circumstances similar to employment contracts or in situations where one party ties
himself or herself to another.
Activity 13.4
Review the judgments in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd and
A Schroeder Music Publishing Co Ltd v Macaulay.
What reasons do the judges give for considering the contractual terms in these
cases in light of the doctrine of restraint of trade?

Anson, Chapter 11: Illegality, Section 4 Common law and S statutory control of
anti-competitive agreements (this section contains considerable detail across
this topic).
1. When does a restraint of trade occur?
2. What factors will a court consider in determining the public interest in relation
to a restraint of trade clause?
3. How does the approach of the courts differ in dealing with a restraint of trade
clause in a sale of a business and that of an employment relationship?
4. Why have courts included other sorts of agreements within the scope of the
restraint of trade doctrine?
5. What is the effect of the court finding that a term is an unjustifiable restraint of
trade?
6. What legislation will also regulate many restraint of trade clauses and
arrangements?
Examination advice
You are reminded of the general advice given in the first chapter to this guide. In
particular, this advice is meant to assist candidates by examining past examination
papers. It is in no way determinative of what the examiners in this subject may do in
the future.
A review of past examination papers reveals that questions involving restraint of trade
have tended to form a part of a larger question on the topic of illegality.

Bob and Ted were in partnership as surveyors and valuers. Each covenanted with
the other that he would not, during the time they were in partnership or within five
years thereafter, practise within eight miles (12 km) of their present office or any
other office in which the other should thereafter practise. Bob later took on Albert
as an articled clerk and Albert covenanted that he would not, while employed by
Bob or within 10 years of ceasing to be so employed, practise within eight miles
of Bobs office or any office in which Bob should thereafter practise as a surveyor,
valuer or estate agent.
A year ago the partnership between Bob and Ted was dissolved and Albert ceased
to be employed by Bob. Both Ted and Albert are now practising within eight miles
of Bobs office.
Advise Bob.

Bob will want to enforce both his agreements to ensure that neither Ted nor Albert
practise near his office. It is likely that Ted and Albert will argue that their respective
agreements are unenforceable because they are an unacceptable restraint of trade.
Because there are two agreements, it is best to consider them in turn. In relation to
the first agreement between Bob and Ted, Bob will need to establish that this restraint
of trade is reasonable. He will need to do this by showing that he has a legitimate
interest to protect, that restraint is reasonable between the parties and that it is
reasonable in the public interest. While the agreement does not occur within the sale
of a business, it occurs within a similar context and thus the cases dealing with these
are best considered (such as Nordenfelt v Maxim Nordenfelt). Bob would also be advised
to point out that his situation differs greatly from those encountered by the court in
the solus agreement cases. It is particularly notable that Bob and Ted have exchanged
exactly the same promise Bob has bound himself to the same conditions.
With regard to the second agreement with Albert, this is an employment agreement.
Once again, Bob will need to establish that the clause is not an unacceptable restraint
of trade. To do this he needs to establish that: (1) he has a legitimate interest to
protect; (2) the clause is reasonable between Bob and Albert as to subject matter,
area and duration; and (3) that the clause is not injurious to the public (see Herbert
Morris Limited v Saxelby (1916)). Bobs difficulty here will relate to (2) because it seems
unreasonable to bind Albert for ten years and even more unreasonable to extend this
to any office in which Bob might work in the future.
On balance, it is likely that the first agreement is enforceable, but that the second
agreement is not.
Quick quiz
Question 1
In which of the following circumstances was the contract found to have created a
restraint of trade which was unreasonable and thus unenforceable?
Choose one answer.
a. A solicitors managing clerk of a specified place entered into a covenant that
after leaving his employer he would not, for the rest of his life, practise as a
solicitor within seven miles of the town hall of the specified place.
b. A canvasser who is employed to sell clothes in a specified area entered into a

covenant that he would not enter into a similar business within 25 miles of the
city from which the specified area belonged.
c. A highly specialised Swedish seller of armaments entered into a covenant with

an English purchaser that they would never sell armaments again.
d. A doctor who works as a General Practitioner enters into a covenant not to

practise as a General Practitioner again.
e. Dont know.
Question 2
Which of the following statements is untrue?
Choose one.
a. Restraints of trade are no longer prima facie valid but are now prima facie
void, but can be justified if they are reasonable and not contrary to the public
interest.
b. Restraints of trade will be allowed where they are agreed by the parties.
c. It is no longer essential that the consideration should be adequate.
d. The law no longer establishes as a rule that the restraint must not be general.
e. Dont know.
Question 3
In considering whether or not to allow a clause which acts as a restraint of trade in
an employment contract, which of the following matters is not a factor considered
important by courts in making this determination?
Choose one answer.
a. The extent of the physical area sought to be covered by the clause.
b. The imprecise definition of the physical area sought to be covered by the clause.
c. The type of business the employer is engaged in and for the purpose he has
hired the employee within this business.
d. The duration of the clause.
e. Dont know.
Question 4
Which of the following statements best summarises the approach taken to courts
towards the enforcement of a clause which amounts to a restraint of trade?
Choose one answer.
a. Courts will enforce the clause where the nature of the industry or business
requires it.
b. Courts will enforce the clause where the employee has acquired information
concerned with the running of the employers business.
c. Courts will enforce the clause where it is in the national interest to do so.
d. Courts will enforce the clause where it is in the reasonable interests of the
employer to do so.
e. Dont know.
Question 5
In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894), Lord Macnaughten
made which of the following statements?
Choose one answer.
a. All restraints of trade are contrary to public policy and therefore void, although
the law allows that restraints of trade and interference with individual liberty
of action are exceptions to this general rule and may be justified in certain
circumstances.
b. Restraints of trade are consistent with public policy in a market economy and
are thus necessary to protect the functioning of the market.
c. Restraints of trade are justified where reasonable and as such allowed.
d. Restraints of trade are reasonable with reference to the protection of the public.
e. Dont know.

1. In what different contractual contexts can restraint of trade arise?
2. In what circumstances will an employment contract be found to be in restraint of

trade?
3. When will a restraint of trade clause in the sale of a business be unenforceable?
4. What are the differences of approach by courts to restraint of trade clauses in an

employment contract and in the sale of a business?
5. When might a court consider a clause to be an offensive restraint of trade in other

circumstances?
6. What is the effect upon the contract of an unacceptable restraint of trade?

Notes
Part VII The discharge of a contract
14 Performance and breach
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
14.1 The principle of substantial performance . . . . . . . . . . . . . . . . 203
14.2 When a breach of contract occurs (actual breach) . . . . . . . . . . . 204
14.3 What occurs upon breach . . . . . . . . . . . . . . . . . . . . . . . . 206
14.4 Anticipatory breach . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Introduction
This chapter is concerned with the performance and discharge of contracts. Contracts
will be discharged, that is to say, ended, in one of four general ways. The first is
through performance; the second is by the agreement of the parties; the third is by
breach; and the fourth is by frustration. In the first instance, the parties have fulfilled
their contractual obligations and the contract is at an end. Despite the impression you
may have from the cases you have already read, complete performance is the most
common end to a contract. The parties may also decide to end further performance
of their contract by entering into a (subsequent) binding contract to end their first
contract. Such an agreement is sometimes confusingly called rescission but must be
distinguished from rescission for misrepresentation which we examined in Chapter 9,
Section 9.2.1. In the third instance, one or more parties have not performed their
contractual obligations and this non-performance arises through the fault of one or
more of the parties. In the final instance, the contract is discharged by a supervening
event which occurs without the fault of either party. This is known as frustration and is
dealt with in Chapter 15.
This chapter deals with the first and third ways in which a contract is discharged: by
performance and by breach. The categories are closely related of course because
breach is no more than a defective performance. The focus of this chapter is
primarily upon breach of contract. We are concerned here with situations where the
performance tendered is below the standard required by the contract or one party
refuses to perform or disables themselves from performing. A party could disable
themselves from performing in many ways. They could, for example, take on an
additional and conflicting commitment with another party. Alternately, they might
remove the means by which they would perform the contract or give up control over
the place of performance. We are concerned with what result in law attends upon
one of these events. In examining the material in this chapter, you will find it useful to
consider the nature of the terms of the contract discussed in Chapter 5.
LEARNING OBJECTIVES
This chapter introduces the discharge of contractual obligations as a result of the
performance or the breach of a contract, to enable you to discuss and apply in
uu The concepts of an entire contract and substantial performance.
uu The standard of performance required in different contracts.
uu The definition and operation of repudiatory breaches of contract.
uu The circumstances when an innocent party terminate a contract for breach.
uu The remedial consequences that occur when there has been a breach of contract.
Contract law 14 Performance and breach page 203
14.1 The principle of substantial performance
Essential reading
McKendrick, Chapter 22: Obtaining an adequate remedy Section 22.2 The
entire obligations (or entire contracts) rule.
Poole, Chapter 8: Breach of contract Section 4 Entire obligations.
A contract requires performance of the promised obligation. One issue is if the

performance is sufficient to satisfy the promise. Some contracts are entire obligation
contracts. This means that nothing but 100 per cent performance will satisfy the
obligation. It is said that, as a general rule, a party cannot recover payment for the
partial performance of an entire obligation. What this means is that until the entire
obligation is performed, the party performing the obligation cannot recover any
payment for it. It may be the entire obligation is the whole, or entire, contract. An
example of such a situation can be seen in the case of Cutter v Powell (1795). In this
case, Cutter contracted with Powell to be the second mate on a ship bound from
Jamaica to England. Cutter was to be paid 10 days after the ship arrived in Liverpool
provided that he proceeds, continues and does his duty as second mate in the said
ship from hence to the port of Liverpool. Cutter died shortly before the ship reached
Liverpool and his widow sued to recover payment for the period of time in which
Cutter had acted as second mate. This payment was denied because the contract was
not fully performed. There was no pay until the performance was complete: an entire
contract requires entire performance to entitle the performer to payment. There is no
partial payment for partial performance. These obligations are rare in practice as the
rule is harsh. A similar rule may be applied in a domestic context. In Bolton v Mahadeva
[1972] 1 WLR 1009 the obligation to install a central heating system was held to be
entire. Consequently, the contractor was unable to recover any of the 560 contract
price payable on completion when the installation was defective and would cost a
further 174 to complete.
The ability to stipulate that payment will not be made until performance is complete
may be the only effective way householders can ensure the prompt and proper
performance of small building works (as noted by Brian Davenport QC in his dissent
to the Law Commissions Report on Pecuniary Restitution for Breach of Contract No
121 (1983)). In contrast, most high value commercial contracts will typically involve
payment in instalments. In Smales v Lea [2011] EWCA Civ 1325 the Court of Appeal noted
that it was relatively unusual in commercial construction contracts and contracts for
professional services for the payment obligation to be entire.
The harshness of this general rule is mitigated by a variety of methods that allow
a party to receive some recompense for a partial performance. First, a court may
interpret the contract not as being an entire contract, but as a contract which is
made up of a series of entire obligations. The contract is thus divided into a series of
stages of performance. When a stage has been completed, the performer can recover
payment for this stage.
A second method is that courts will allow recovery where a party in breach has
substantially performed his obligations. If the performance has been substantially
performed then the breach is of minimal consequence (a breach of a warranty). See,
for example, Hoenig v Isaacs [1952] 2 All ER 176, where decoration work that was to
cost 750 was incomplete in minor ways that would cost 55 to remedy. One issue
that is often argued is the performance is not substantial but is in fact only partial
performance.
Third, the general rule is subject to a statutory exception when the buyer does not
contract as a consumer; the buyer is not allowed to reject the goods for a delivery
shortfall (or excess) which is so slight that it would not be reasonable to do so
(Sale of Goods Act 1979 s.30(2A)). The innocent party may be liable to compensate
the performer for a partial performance where the innocent party accepts the
partial performance. The difficulty with this is that the other party may have no
choice but to accept the partial performance, although they contracted not for a
partial performance but for a complete performance. This was the case in Sumpter
v Hedges (1898). The Law Commission, in the report referred to above, thought that
the requirement in the cases that an accepted benefit need only be paid for when
the acceptor had a real choice whether to accept or not, was too restrictive. They
therefore recommended that a more generous right to recovery be enacted but this
proposal has not been implemented. However, the Consumer Rights Act 2015 s.25(1)
provides that if a trader delivers the wrong quantity of goods to a consumer and the
consumer nonetheless accepts them they must be paid for at the contract rate.
Summary
It is said that where the contract, or obligation, is entire then all of the obligation
must be performed in order to entitle the performing party to any payment for
performance. In practice, however, it may be possible to recover payment in
circumstances where the entire contract has not been performed.

Burrows, A.S. Law Commission Report on Pecuniary Restitution on Breach of
Contract (1984) 47 MLR 76.
14.2 When a breach of contract occurs (actual breach)
Essential reading
McKendrick, Chapter 20: Breach of contract Section 20.1 Introduction: breach
defined to Section 20.3 The consequences of breach.
Poole, Chapter 8: Breach of contract Section 1 Absolute and qualified

contractual obligations.
Brownsword, R. Retrieving reasons, retrieving rationality? A new look at the

right to withdraw for breach of contract, in your study pack.
It is often difficult to ascertain if a breach of contract has occurred. In some cases,

where one party refuses to continue performing or commits an act which prevents
further performance, it is clear that a breach of contract has occurred. This is a
repudiatory breach. However, in cases where there is a partial performance or an
inadequate performance, it is often difficult to determine whether or not such a
repudiatory breach has occurred. In this sense, a repudiatory breach is a breach which
entitles the innocent party to terminate the contract. A party who alleges that a
repudiatory breach has occurred must prove that it has occurred.
Whether or not a repudiatory breach has occurred depends upon the terms of the
contract. Two matters must be considered in relation to the particular terms or
obligations of the contract. The first is the standard of performance to be met in the
contract. The second is the type of term breached. The type of breach discussed in this
section is sometimes called actual breach of contract. This refers to the fact that the
time for contractual performance has arrived and the promisor has failed to deliver
that performance. As such it is distinguished from so called anticipatory breach,
discussed below in Section 14.4, where before performance is due the promisor either
announces that when that time arrives he will not tender performance or in advance
of that date disables himself from being able to give that performance.
Standard of performance
With regard to the first matter, different terms impose different standards of
performance. These can be divided into two general standards: strict liability and
a standard of reasonable care. A standard of strict liability is one in which either
performance measures up to what is demanded by the contract or it does not.
The fault of the party in breach in not measuring up to this standard is irrelevant. A
standard of reasonable care, in contrast, imposes a duty on the party to use reasonable
care and skill in the performance of her contractual obligations.
Strict liability
As a general rule, contracts for the supply of goods impose a strict standard of
performance with regard to the quality and quantity of the goods to be supplied. Thus,
a contract to supply barrel staves which were half an inch (8/16th of an inch) thick was
not performed when the staves supplied were of varying thickness from 7/16ths of an
inch thick to 9/16ths of an inch thick (Arcos v Ronaasen (1933)). The fault of the party
who supplies the goods is immaterial; that is to say, it does not matter that the barrel
staves were the wrong thickness through no fault of his own. It may be that the party
in breach exercised all reasonable care to ensure that the goods conformed to the
standard required; she is, however, still in breach of contract. The liability is strict and
fault need not be proved. A strict standard of performance may be imposed by the
legislation for example, the obligations imposed upon a seller of goods under the
ss.1315 Sale of Goods Act 1979 are strict.
Reasonable care and skill

In contrast, some contractual terms impose a lower standard of performance a
standard which requires that reasonable care and skill is exercised. In these cases, the
fault of the party in breach is relevant. Again, as a general rule, contracts for the supply
of services require that the party exercise reasonable care and skill in the performance
of her contractual obligations. Thus, s.13 of the Supply of Goods and Services Act 1982
requires a party to exercise reasonable care and skill in the supply of a service.
With regard to the second matter (i.e. the type of contractual term which has been
breached) you should refer to Chapter 5. You will recall that terms can be classified as
conditions, warranties or intermediate/innominate terms. The classification of terms
is particularly important in relation to a breach of contract because not all breaches
give rise to a right to terminate the contract. Only the breach of a condition, or a
sufficiently important intermediate/innominate term, gives rise to a right to terminate
the contract.
Activity 14.1
Mountain Magic Ltd is purchasing a mountain upon which it plans to develop a
ski resort. The contract for the purchase requires that it tenders payment of 10
million at 5:00 pm on 3 December at the offices of the vendor, Tighte Fist plc. On 3
December, Mountain Magic Ltd sends a representative with a cheque for payment
to the offices of Tighte Fist plc. The representative leaves with plenty of time to
reach his destination. Unfortunately, a bomb scare forces police to prohibit all
travel in the city for a period of several hours. Consequently, the representative
does not reach the offices of Tighte Fist plc until 8:00 pm. Has a repudiatory breach
of contract occurred? Would it have occurred if the representative reached the
offices at 5:10 pm? Would the result have been any different if Mountain Magic Ltd
had telephoned Tighte Fist plc to inform them of the effect of the bomb scare?
Summary
It is important to ascertain whether a breach of contract has occurred. To determine
this, the nature of the term and the standard of performance required must be
ascertained.

Campbell, D. Arcos v Ronaasen as a Relational Contract, Chapter 7 in Campbell,
D., L. Mulcahy and S. Wheeler (eds) Changing concepts of contract : essays
in honour of Ian Macneil. (Basingstoke: Palgrave Macmillan, 2015) [ISBN
9781137574305].
14.3 What occurs upon breach
Essential reading
McKendrick, Chapter 20: Breach of contract Section 20.3 The consequences of
breach to Section 20.9 Anticipatory breach.
Poole, Chapter 8: Breach of contract Section 2 Consequences of breach.
The consequences of a breach of contract are determined by the severity of the

breach and the decision made by the innocent party. A breach of contract does not
automatically end a contract no matter how severe the breach (see Decro-Wall
SA v International Practitioners in Marketing (1971). Rather, a breach of a condition or
a sufficiently serious intermediate/innominate term gives the innocent party the
option to terminate the contract. The terms used to describe this option to terminate
vary from an election to the right to rescind. Where the right is described as one
of rescission, this has different consequences from a rescission which operates in
relation to a vitiating element, such as misrepresentation (considered in Chapter 9).
A rescission for breach ends only future obligations, leaving past ones remaining. In
contrast, rescission for misrepresentation ends all obligations.
Certain other consequences also occur upon a breach of contract. The innocent party,
regardless of whether or not he decides to terminate the contract, will have the right
to sue for damages. This is dealt with in Chapter 16. In addition, it may also be that the
party in breach is unable to sue upon the contract. This will occur if the obligations
imposed by the contract are dependent upon each other. Obligations are dependent
when one party must be willing and able to perform his obligation in order to
maintain a suit against the other party for his breach. It is usually the case in contract
that the obligations are dependent. In a contract of employment, for example,
the contract could provide that the employee is paid weekly. In the event that the
employee does not work that week, he or she will be unable to recover their wages.
The innocent party must communicate to the party in breach that he has elected to
terminate the contract: Vitol SA v Norelf Ltd (1996). A court has to take into account any
steps taken by the party in breach to remedy accrued breaches of contract. If a breach
of contract is remedied before the injured party purports to exercise the right to
termination, then the fact that the breach had been remedied was an important factor
for the court to consider: Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd
[2013] EWCA Civ 577.
The nature of a breach of contract is prospective. That is to say, if the innocent party
elects to terminate the contract, future obligations are no longer binding and are
discharged. Past obligations, however, remain. The contract has no future, but it does
have a past. Those rights which have been unconditionally acquired are still binding.
See, for example, the speech of Lord Porter in Heyman v Darwins Ltd (1942) and the
decision in Johnson v Agnew (1980).
If an innocent party elects to terminate the contract for breach she is no longer bound
to accept or make any performance under the contract. What happens if she does not
elect to terminate the contract? In this case, she remains bound to her obligations. In
addition, she cannot subsequently decide to return to the earlier breach and then
purport to accept it while the breach remains anticipatory: Stocznia Gdanska SA v
Latvian Shipping Co (1997). (An anticipatory breach, considered below in Section 14.4, is
a breach which occurs in time before performance is due.) If a party, on the first of the
month, commits an anticipatory breach of a contract to be performed on the 15th of
the month, the innocent party can terminate the contract or affirm the contract. If the
innocent party chooses to affirm the contract, they cannot then claim on the eighth
of the month that there has been an anticipatory breach of the contract and purport
to then accept the earlier breach. Where the innocent party elects not to terminate
the contract, she is said to have affirmed the contract. Where, however, an innocent
party affirms a breach of contract which is then met by a continued renunciation of
the contract, the innocent party can terminate the contract: White Rosebay Shipping SA
v Hong Kong Chain Glory Shipping Ltd, The Fortune Plum [2013] EWHC 1355.
In Geys v Societe Generale (2012) the Supreme Court held that in a contract of
employment where there existed a good reason and an opportunity for the innocent
party to affirm the contract following a repudiation by the employer, the innocent
party should be allowed to do so. In reaching this decision the court considered the
difference between the two competing types of contractual repudiation.
Summary
Not every breach entitles the innocent party to terminate the contract. Where the
breach is sufficiently serious to entitle the innocent party to terminate the contract,
the contract is not automatically terminated. It is only terminated where the innocent
party elects to terminate the contract. The effect of this termination is prospective
only. When a decision has been made by the innocent party to terminate the contract
for an anticipatory breach, they cannot then purport to revive the contract before the
time at which performance had been due. Likewise, if they affirm the contract after
an anticipatory breach, they cannot then purport to terminate the contract for that
anticipatory breach before the time at which performance is due.
Activity 14.2
In what circumstances will a party be held to have affirmed a contract? To what
extent is a partys election to terminate or to affirm constrained by considerations
such as the reasonableness of his decision or conduct?
Activity 14.3
What is the importance to the innocent party of determining the nature of the term
breached by the other party?
14.4 Anticipatory breach
Essential reading
McKendrick, Chapter 19: Breach of contract Section 19.9 Anticipatory breach.
Poole, Chapter 8: Breach of contract Section 5 Anticipatory breach.
Anticipatory breach occurs when, before a performance is due, a party either

renounces the contract or disables himself from performing it.
A renunciation must amount to a clear and absolute refusal to perform. This can
be either express or indicated by the conduct of the party involved. The inability to
perform must involve the breach of a contractual obligation but does not have to be
the fault of the party in breach. Thus in the case of Universal Cargo Carriers Corp v Citati
(1957), a charterer was held to be in anticipatory breach of his obligation to provide a
cargo at the time specified. The breach occurred because of the failure of a third party
to provide him with the cargo.
An anticipatory breach gives rise to an immediate right of action. The injured

party does not have to wait until the time due for performance to terminate the
contract. This means that an anticipatory breach gives rise to a right to terminate if
its prospective effects are such as to satisfy the requirement of substantial failure in
performance.
One of the odd features about an anticipatory breach is not that the breach gives
rise to an immediate right of action but that the damages are determined and can
be claimed at once, before the time is fixed for performance. This is by reason of the
decision in Hochster v De la Tour (1853).
Termination
How does an injured party know when he or she has the right to terminate for an
anticipatory breach? This will depend upon the form of the anticipatory breach. In
the case of a renunciation, the renunciation must be such as to prove that the party
in breach has acted in such a way as to lead a reasonable man to conclude that he
did not intend to fulfil his part of the contract. The court examines the nature of the
refusal to determine whether the injured party was reasonable in their opinion that
the refusal was sufficiently clear and absolute to give them the right to terminate.
In the case of a prospective inability (where the party is alleged to have committed a
breach by disabling themselves from performance) the question of whether or not the
injured party can rescind/terminate the contract will depend upon the seriousness of
the consequences of the breach.
Affirmation
One of the effects of an anticipatory breach of contract is that the innocent party
may elect to affirm the contract and continue with a performance that he knows
is not wanted by the other party: White and Carter (Councils) Ltd v McGregor (1962).
The innocent partys ability to affirm the contract and continue with performance is
qualified in two ways according to Lord Reid in White and Carter (Councils) Ltd. First the
innocent party cannot carry on with performance where he needs the co-operation
of the party in breach: Hounslow LBC v Twickenham Garden Developments Ltd (1971).
Second, Lord Reid, in his speech in White and Carter (Councils) Ltd stated that where
the innocent party had no legitimate interest in performing the contract other
than claiming damages, he ought not to saddle the other party with an additional
burden. The innocent party will be found to have an insufficient legitimate interest
in performing the contract when such performance would be wholly unreasonable
(The Odenfield (1978) and The Alaskan Trader (1984)) or perverse (the Aquafaith (2012)).
In the Twickenham Garden Developments case Megarry J explained (correctly) that Lord
Reids two qualifications necessarily formed part of the ratio decidendi of the White v
Carter decision.
Another effect of an anticipatory breach is that if the innocent party elects to affirm
the contract, he runs the risk that the contract may later be discharged by frustration
(Avery v Bowden (1855) and generally on frustration see Chapter 15). In this event, he
will not be able to claim for the earlier breach. Similarly, if the innocent party affirms
the contract and subsequently breaches it himself, again, he will not be able to rely
upon the other partys earlier breach of contract.
Summary
An anticipatory breach occurs when the contract is breached before the time is set for
performance. In such a case, the innocent party may elect to affirm the contract and,
if possible, carry on with performance. This will only be possible where the innocent
party can perform his outstanding duties without the assistance of the other party
and where the innocent party is regarded as having a legitimate interest in so doing.
Alternatively, the innocent party may elect to terminate the contract. In this case,
damages will be assessed at the time of the anticipatory breach, rather than the time
at which performance is due.
Activity 14.4
In The Hounslow Megarry J said that the two qualifications mentioned by Lord Reid
in White and Carter are necessarily part of the ratio decidendi of the White and Carter
case. Is this statement correct?
Activity 14.5
Could the claimant insist on performing, after the defendant had repudiated the
contract, if he knew that all his effort and expenditure would simply be wasted?
(Compare Clea Shipping v Bulk Oil (1984)).
Activity 14.6
What are the risks involved in not accepting an anticipatory repudiation?

Anson, Chapter 15: Discharge by breach.
Examination advice
You are reminded of the general advice given in the first chapter to this guide. In
particular, this advice is meant to be of assistance to candidates by examining past
examination papers. It is in no way determinative of what the examiners in this subject
may do in the future.
A review of past examination papers reveals that questions involving performance and
breach of contract usually involve issues surrounding the nature of the terms of the
contract. They have often involved questions as to the assessment of damages.

Question 1
When a party has a right to terminate a contract for breach is far from clear and
should be clarified.
Discuss.
What would you propose to improve the current position?
Question 2
Rhonda is a plumber. She contracts with Simon to replace the plumbing in his
restaurant for 10,000. The work must be completed by the beginning of December
to be ready for Christmas bookings at the restaurant. At the beginning of November,
she has not yet begun work. Simon rings her office and discovers she is out on
a similar job at Thelmas restaurant. He realises, correctly, that Rhonda cannot
complete both jobs by the beginning of December. He tells Rhonda not to bother
with the job. Simon then hires Amanda to replace the plumbing in his restaurant
for 15,000. Rhonda, aware that she cannot complete both jobs, has now decided
not to continue work on Thelmas restaurant in order to undertake the work for
Simon, which is much more lucrative. Simons staff allow Rhonda in to replace the
plumbing while Simon is on vacation. They refuse to allow Amanda entry.
Rhonda completes the work and claims 10,000 from Simon. Amanda sends Simon
a bill for 15,000.
Advise Simon.

Question 1
Whether a contract has been breached is largely dependent upon the particular
terms of the contract in question. The breach occurs when one party, without lawful
excuse, does not perform what is required from him under the contract, or performs
it defectively. The problem that the innocent party is then faced with is whether or
not the breach is such as to justify termination of the agreement. If the breach is not
sufficient to justify termination of the contract but the innocent party purports to
do so, he may then himself have breached the contract (Decro-Wall International SA
v Practitioners in Marketing Ltd (1971)). The question thus calls for a discussion of the
classification of contractual terms into conditions, warranties and intermediate or
innominate terms (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962)).
The difficulty here is for the innocent party to determine in which of these categories
the breached term should be placed. This is particularly true where the term is
an innominate term and the party must determine whether the breach has been
sufficiently serious. Having established the basic framework of the law in this area
and explored what is required, a good answer would consider what could be done to
improve this situation. Would legislation clearly defining the right to terminate assist
(or would it impose an unnecessary rigidity)? Should courts attempt to give greater
effect to the manner in which the parties themselves classify terms? Should parties
take greater care in specifying the consequences of breaches of certain terms? In
these areas, candidates are expected to provide their own thoughts on the matter.
Question 2
The question involves issues of breach and damages. Only the breach issues will be
considered at this point, although in an examination, you would be expected to deal
with both sets of issues.
With regard to the breach issues, the problem presented is which party is in breach
of contract? To answer this, the nature of a breach of contract must be considered.
Is Rhonda in breach of contract when she takes on the other job? To answer this,
you need to consider whether Rhonda has renounced the job or made it impossible
for herself to perform. She clearly has not renounced the job: so has she made it
impossible for herself to perform it? In considering the decisions in Universal Cargo
Carriers Corporation v Citati and British & Benningtons v NW Cachar Tea (1923) it is
not clear that she would lead a reasonable person to conclude that the contract is
impossible to perform. Simon makes no further enquiry as to her ability to perform,
beyond his initial telephone call. In these circumstances, Simon himself is in breach
of contract. Does Rhonda have the right to carry on in performing? Following the
decision in White and Carter (Councils) Ltd v McGregor (1962) it would appear that she
does. However, she requires access to Simons property and in this regard she appears
to fall within the exception in Hounslow LBC v Twickenham Garden Developments Ltd
(1971). However, Simons staff do grant her access to the property should this be
regarded as co-operation on his part?
Finally, Simon has clearly breached the contract with Amanda by refusing to allow her
to perform her obligations.
Quick quiz
Question 1
innominate term?
Choose one answer.
a. The major or main obligation in the contract where breach will give the right to
refuse further performance.
b. A more or less important obligation depending upon the effects of breach.
c. A less important obligation where breach will only provide damages as the
remedy.
d. An obligation which the courts will read into the contract so as to support the
intention of the parties.
e. Dont know.
Question 2
Which of the following statements provides the most appropriate definition of
anticipatory breach?
Choose one answer.
a. Where a contract is not performed at the time it was due to be performed.
b. Where the performance of a contract is complete but defective.
c. Where the breach occurs before the date of performance which was prescribed
in the contract.
d. Where the contract contains an untruthful statement which is deemed to be a

term of that contract.
e. Dont know.
Question 3
Which of the following occurs upon a breach of contract?
a. Sometimes the injured party can terminate the contract for breach.
b. The injured party can always terminate the contract for breach.
c. Either party can sometimes terminate the contract for breach.
d. The terms of the contract provide what the parties can do in the case of breach.
e. Dont know.
Question 4
Which of the following statements is correct in determining whether or not a term
is a condition?
a. Only where the parties stipulate that a term of the contract is a condition does
breach give rise to the injured partys right to terminate the contract.
b. The requisite statute determines whether a term is a condition or a warranty.
c. The intention of the parties is critical and trade custom will determine whether
or not the term is classified as a condition or a warranty.
d. Where the parties have stipulated that a term of the contract is a condition and
have manifested their intention to allow the injured party to terminate for a
breach of this term, courts will classify the term as a condition.
e. Dont know.
Question 5
Faced with a repudiatory breach of contract, which of the following options is not
open to the injured party?
Choose one answer.
a. She may elect to affirm the contract and hold the other party to performance.
b. She may accept the repudiation and terminate the contract.
c. She must decide within the time set by the contract whether to affirm the
contract or accept the repudiation.
d. She may maintain the contract for a period of time whilst reserving the right to
repudiate the contract.
e. Dont know.

1. What is the meaning of the term entire obligations?
2. What is the principle of substantial performance?
3. What standard of performance is required in different contracts?
4. What are the consequences attendant upon a repudiatory breach?
5. In what circumstances can an innocent party terminate a contract for breach?
6. What consequences occur when there has been a breach of contract?

Notes
Part VII The discharge of a contract
15 Frustration
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
15.1 The basis of the doctrine of frustration . . . . . . . . . . . . . . . . . 215
15.2 The nature of a frustrating event . . . . . . . . . . . . . . . . . . . . 216
15.3 Limitations on the doctrine . . . . . . . . . . . . . . . . . . . . . . . 219
15.4 The effect of frustration . . . . . . . . . . . . . . . . . . . . . . . . . 220
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

Introduction
The doctrine of frustration provides one of the ways by which contractual obligations
end. In contrast to termination for breach, the discharge of the contract does not
occur as a result of the wrongful actions of one of the parties. Nor does discharge
for frustration depend upon the agreement or action of the parties. Instead, where
a contract is discharged by frustration, this occurs automatically by operation of law.
The courts decide when a contract has been frustrated and, if they decide that it has,
then all future obligations cease. The consequences of this are dealt with by both
common law rules and statute, the Law Reform (Frustrated Contracts) Act 1943.
Essential reading
Frustration to Section 14.18 Conclusion.
Poole, Chapter 12: Discharge by frustration: subsequent impossibility Section1

The frustration doctrine: discharge for subsequent impossibility and Section 2
The contractual allocation of risk.
LEARNING OBJECTIVES
This chapter introduces the discharge of contractual obligations as a result of
events occurring after the contract was entered under the doctrine of frustration,
to enable you to discuss and apply in problem analysis its key components (and
supporting authority) including:
uu The role of the doctrine of frustration in the termination of contracts.
uu The timing and type of event that will frustrate a contract.
uu The limits upon the operation of the doctrine of frustration including the
concept of self-induced frustration.
uu The consequences of frustration under the common law rules.
uu The consequences of frustration under the Law Reform (Frustrated Contracts) Act
1943.
uu The limitations of the 1943 Act reform.
Contract law 15 Frustration page 215
15.1 The basis of the doctrine of frustration
Essential reading
McKendrick, Chapter 14 Common mistake and frustration Section 14.9
Frustration, force majeure and hardship.
Poole, Chapter 12: Discharge by frustration: subsequent impossibility

Section3 The theoretical basis for the doctrine of frustration.
McKendrick, E. Force majeure and frustration their relationship and a

comparative assessment, in your study pack.
If, after entering into a contract, the continued performance of a contract becomes
impossible as a result of subsequent events, the question arises as to whether one or
the other of the parties or neither of them should be responsible for this failure of
performance. A strict freedom of contract approach might lead to the answer that a
party who has undertaken to perform obligations has also undertaken the risk that
performance of them will become impossible. On this view, failure to perform should
therefore be treated in the same way whether that failure is due to a deliberate action
or arises from impossibility caused by some supervening event after the contract has
been formed. In other words, both situations involve a breach of contract and should
be treated as such. This approach, of an absolute obligation, was the original approach
taken by the common law and can be seen in the decision in Paradine v Jane (1647).
This strict approach was relaxed

in the 19th century in the case
of Taylor v Caldwell (1863). In this
case a music hall, hired for a
series of concerts, was destroyed
by fire before the concerts took
place. Blackburn J held that this
destruction brought the contract
to an end and discharged both
parties from any further obligations
under it. The justification for this
approach was that there was an
Figure 15.1 Surrey music hall
implied condition in the contract
that the main subject matter (the music hall) should continue to exist. When the subject
matter ceased to exist, the parties were discharged from further performance. The effect
of the decision was to allow a contract to be discharged but, at the same time, adherence
to freedom of contract was maintained by the use of an implied term.
In the 20th century it has generally been recognised that the suggestion that there
is an implied term covering the frustrating situation is something of a fiction see, in
particular, the speeches of Lord Reid and Viscount Radcliffe in Davis Contractors Ltd v
Fareham Urban District Council (1956). The point was made with some humour by Lord
Sands in James Scott & Sons v Del Sol (1922). He suggests an example where the daily milk
delivery to a house is suspended after the escape of a tiger from a travelling circus.
The dairy should not be liable for the suspended delivery but it would hardly seem
reasonable to base that exoneration on the ground that tiger days excepted must
be written into the milk contract. The preferred analysis now is that in situations
where, after a contract is entered into, there is an unforeseen change in circumstances
(not attributable to the fault of either party) such that performance of the contract
would become impossible, illegal or something radically different from what the
parties originally intended, justice requires that the courts should treat the contract as
having come to an end. See also National Carriers Ltd v Panalpina (Northern) Ltd (1981).
That the courts will in some circumstances bring a contract to an end on the basis
of frustration does not mean that the parties original agreement will be ignored.
First, it is important that the courts determine exactly what obligations were
originally undertaken, in order to decide whether the change in circumstances has
made any of them radically different. This issue will be explored further in the next
section. Secondly, it is quite possible for the parties themselves to make provision
in the contract for what is to happen should the performance of the agreement
become impossible, or radically different, as a result of some subsequent event for
which neither of them is to blame. This is common in commercial contracts, which
frequently use what are known as force majeure clauses. Where there is a clause of
this type which covers the situation which has occurred, then the courts will give
effect to it. In essence this means the event was foreseen.
Activity 15.1
Why do you think that both McKendrick and Poole deal with the doctrine of
frustration in chapters which also deal with mistake?

Anson, Chapter 14: Discharge by frustration.
15.2 The nature of a frustrating event
Essential reading
Impossibility to Section 14.14 Express provision.

Section4 Frustrating events.
What type of event will be treated as having frustrated a contract? It is impossible to

give a comprehensive list, because it is the effect of the event, rather than the event
itself, which is in the end the determining factor. As Lord Radcliffe stated in Davis
Contractors Ltd v Fareham Urban District Council:
frustration occurs whenever the law recognises that without default of either party
a contractual obligation has become incapable of being performed because the
circumstances in which performance is called for would render it a thing radically different
from that which was undertaken by the contract It was not this that I promised to do.
In deciding whether or not a contract has been frustrated, courts apply a multi-
factorial approach (see Edwinton v Tsavliris (The Sea Angel) (2007)). What is important
is that there must be a break in identity between what was contemplated and the
new performance; courts will not easily conclude that such a break has occurred (see
CTI Group Inc v Transclear SA (2008)). Factors which courts should take into account
include:
the terms of the contract itself, its matrix or context, the parties knowledge, expectations,
assumptions and contemplations, in particular as to risk, as to the time of contract, at any
rate so far as these can be ascribed mutually and objectively, and then the nature of the
supervening event, and the parties reasonable and objectively ascertainable calculations
as to the possibilities of future performance in the new circumstances. [per Rix LJ, The Sea
Angel, para 111]
With this general principle in mind, we can now usefully look at examples from
the cases of situations which have, or have not, led to a decision that a contract is
frustrated. From these some general impression of the characteristics of a frustrating
event can be gained. In all cases, however, it must be that the event has made the
contract impossible, illegal or radically different it is not enough that the contract
has simply become more difficult or expensive for one party. In Davis Contractors Ltd v
Fareham Urban District Council builders who contracted to erect 78 houses within eight
months for 94,000 were not allowed to rely on frustration when construction took
22 months and cost the contractors 115,000. Similarly, in Tsakiroglou & Co v Noblee and
Thorl (1962) the closure of the Suez Canal did not frustrate a contract for the carriage
of goods from Port Sudan to Hamburg. The contract had not specified the route and
the fact that the alternative route, via the Cape of Good Hope, would take much longer
was not sufficient to frustrate the contract.
Courts have consistently indicated that a contract will be frustrated only where
there is a complete change between what was undertaken in the contract and the
circumstances in which it is called upon to be performed. Thus in CTI Group Inc v
Transclear SA (2008) the Court of Appeal concluded that a contract to sell cement was
not frustrated where the contract remained legally and physically possible but where
third party suppliers would not sell the necessary cement to the sellers with the result
that the sellers could not supply the buyers with the cement.
Destruction of subject-matter
The most obvious example is where the main subject-matter of the contract has been
destroyed, as in Taylor v Caldwell (1863). If something central to the performance of
the contract no longer exists, then it is not surprising that the courts will find that the
parties obligations should come to an end. Full destruction may not be necessary. In
Asfar v Blundell (1896), the contamination of perishable goods, which rendered them
unusable, was held to be equivalent to destruction (see also s.7 Sale of Goods Act 1979).
Personal incapacity
Another clear case of frustration will be where both parties have agreed that the
contract is to be carried out by a particular individual, and that individual dies, or is too
ill to perform (see Condor v Barron Knights (1966)). The court will need to be satisfied;
however, the contract was not simply for work to be done, but for it to be done by the
particular individual who is unavailable.
Activity 15.2
On Monday Nathalie arranges for her car to be serviced at Phils garage on the
following Friday. Jamie, the mechanic who normally carries out services on
Nathalies car, is taken ill on Thursday and is unavailable on Friday. Will the contract
be frustrated?
Activity 15.3
On Monday Nathalie arranges to have her hair styled at Phils salon on the following
Friday. Jamie, the hairdresser who normally styles Nathalies hair, is taken ill on
Thursday and is unavailable on Friday. Will the contract be frustrated?
Non-occurrence of an event
A number of cases concerned with the cancelled coronation of King Edward VII in
1903 illustrate this category. In Krell v Henry (1903) a room overlooking the route
of the coronation procession had been hired for the purpose of watching it. When
the procession was cancelled, the contract for the hire of the room was held to be
frustrated (see also Chandler v Webster (1904)). It has subsequently been implied that
the decision in Krell is perhaps as far as the doctrine of frustration should be pushed
(North Shore Ventures v Anstead Holdings (2011)).
Figure 15.2 The coronation of King Edward VII

Again, however, it is important to be clear as to the precise obligations under the

contract in order to decide whether a cancellation has this effect. Thus in Herne Bay
Steam Boat Co v Hutton (1904) a boat had been hired to tour the fleet and to watch the
Kings review of it, which was part of the coronation celebrations. The Kings illness
meant that the review was cancelled. In this case, however, the contract was not
frustrated. The tour of the fleet was still possible and this was a significant element in
the contract. The hirer remained obliged to pay for the use of boat.
Effects of war
In time of war a government may make trading with companies based in enemy
territory illegal. Contracts with such companies which were made prior to this action
will be frustrated: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943).
Similarly, the requisitioning of property which had been allocated to a contract
may lead to the frustration of that contract: see Metropolitan Water Board v Dick Kerr
(1918) and FA Tamplin v Anglo-American Petroleum (1916) (although in this case the
requisitioning of a ship as a troop ship was held not to have frustrated a charter of it,
because the requisitioning was not of sufficient length to defeat the whole purpose of
the contract).
The frustration need not result from direct government action. In Finelvet AG v Vinava
Shipping Co Ltd (1983), the continuing war between Iran and Iraq trapped certain ships
in the Gulf for a lengthy period. Contracts relating to the charter of these ships were
held to be frustrated.
Other government action

Government action not related to war can frustrate a contract. In Gamerco SA v ICM/
Fair Warning Agency (1995) a stadium which had been booked for a pop concert was
closed for reasons of health and safety. It was held that the contract for the hire of the
stadium was frustrated. It is also implicit in Amalgamated Investment and Property Co
Ltd v John Walker & Sons Ltd (1976) that the listing of a building as being of architectural
and historical interest (thus limiting the possibilities for its development) could
frustrate a contract for its sale (though on the facts it did not).
Other frustrating events

Other types of event which have led to contracts being frustrated include industrial
action (The Nema (1981)) and the accidental running aground of a ship (Jackson v
Union Marine Insurance Co Ltd (1874)). As indicated above, however, the categories of
frustrating event are not closed. It will always be possible to argue that some novel
occurrence has frustrated a contract, provided that it has had the required effect on
the obligations of either or both parties.
Activity 15.4
Aaron has booked tickets to attend an event at Highplace Hall. The event is to
include a tour of the grounds and a meal in the hall, followed by a concert featuring
the famous pianist, Claudio Quays. Is the contract frustrated if the following take
place?
a. On the day before the event, Highplace Hall suffers a fire and is badly damaged.
The grounds are still open, but the Hall is closed, so that the meal and concert
cannot take place, or
b. On the day before the event Claudio Quays sprains his wrist and is unable to
perform. The concert is cancelled.
1. What is a force majeure clause?
2. In what circumstances may government action frustrate a contract?
3. What is the distinction between frustration and mistake?

Summary
The doctrine of frustration operates to relieve parties of further obligations under a
contract. It applies when some event which is not the responsibility of either party
has made performance of the contract impossible, or radically different from what
was originally agreed. Examples of events which will lead to frustration include
destruction of the subject matter, the non-occurrence of an event, outbreak of war
and government intervention. The contract will not be frustrated if the performance is
simply made more difficult or expensive, or if a significant part of the contract survives
the frustrating event.

Morgan, Chapter 5.
15.3 Limitations on the doctrine
Essential reading
Express provision to 14.17 The effects of frustration.

Section2 The contractual allocation of risk.
There are two principal limitations on the doctrine of frustration. The first is where
the frustrating event has been foreseen and provided for in the contract; the second is
where the alleged frustrating event has been self-induced by one of the parties, since,
as indicated in the quotation from Lord Radcliffe given in Section 15.2, the problem
must arise without the default of either party.
Part of the essence of the doctrine of frustration is the fact that the event which has
occurred is a surprise. This justifies the conclusion that the risk of the event occurring
has not been allocated by the parties and that the court should therefore intervene.
If, therefore, the parties have clearly foreseen the possibility of a frustrating event
occurring and have made provision for what is to happen in their contract, there
will be no room for the doctrine of frustration. An argument that a contract for the
development of property was frustrated when there was a crash in property values
was unsuccessful as the risk was both foreseen and provided for by a clause that
permitted the renegotiation of minimum prices in such circumstances (Gold Corp
Properties v BDW Trading Ltd (2010)). Thus, as noted at the beginning of this chapter, in
the commercial area force majeure and similar clauses may well replace the common
law and statutory rules on frustration.
The courts have tended to narrowly interpret such clauses. In Jackson v Union Marine
Insurance Co Ltd (1874) a charter required a ship to sail with all possible dispatch from
Liverpool to Newport, there to load a cargo for carriage to San Francisco. The ship ran
aground off the coast of Newport, was damaged, and not fully repaired for some seven
months. The charterer in the meantime used another ship to carry the cargo, on the
basis that the contract had been frustrated. The ship owner, however, sued for breach
of contract, on the basis that the charter contained a clause stating damages and
accidents of navigation excepted. The court held that this clause could not have been
intended to apply in relation to a delay of the length which had occurred. The contract
was frustrated and the clause had no application see also Metropolitan Water Board v
Dick Kerr (1918).
Another important element in the doctrine of frustration is that the alleged frustrating
event must not be attributable to the fault of either party. If it is, then the likelihood is
that the party at fault will be in breach of contract and the doctrine of frustration will
have no application. The courts have interpreted the concept of fault widely in this
context: in fact it may be more accurate to say that wherever the alleged frustrating
event is attributable to the actions of one of the parties (whether these involved fault
or not) then the doctrine of frustration will not apply. In Maritime National Fish v Ocean
Trawlers (1935) the defendants chartered a boat from the plaintiffs, but were then
unable to use it as planned because they were not granted sufficient fishing licences
to cover all the boats they wished to operate. It was held that their contract with the
plaintiffs was not frustrated. It was the defendants choice as to which boats they used
the licences for. The frustration of the contract with the plaintiffs was therefore self-
induced and ineffective to relieve the defendants of liability to the plaintiffs under the
contract.
Activity 15.5
Read the case of J. Lauritzen AS v Wijsmuller BV, The Super Servant Two (1990). Why is
this case seen as extending (rather than simply applying) the principle established
in Maritime National Fish v Ocean Trawlers?
Why do you think the decision has been criticised?
At one time it was thought that there was a further limitation on the doctrine of
frustration, in that it could not apply to leases of land: see Cricklewood Property and
Investment Trust v Leightons Investment Trusts Ltd (1945). This limitation was rejected by
the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd (1981), though on the
facts the contract under consideration in that case was held not to have been frustrated.
Summary
If the alleged frustrating event has been foreseen and provided for in the contract (e.g.
by a force majeure clause) the doctrine of frustration will not apply. Similarly, if the
alleged frustration can be said to self-induced (i.e. it is the result of a decision taken
by one of the parties) the contract will not be treated as frustrated. The party which
took the decision will be in breach of contract.

Treitel, paras 19-082 to 19-089.
15.4 The effect of frustration
Essential reading
McKendrick, Chapter 14: Common mistake and frustration Section 14.17 The
effects of frustration.

Section5 The effects of frustration.
There are two sets of rules relating to the effects of frustration one under the common
law and the other under the Law Reform (Frustrated Contracts) Act 1943. In most cases
the 1943 Act will apply, but there are some situations where the common law is still
applicable. It is easiest to understand the effect of the Act by considering the common
law rules first, and then to look at the way in which the Act has amended these.
15.4.1 Common law

One common law rule which operates even where the Act is also applicable is that a
frustrating event terminates the contract automatically, without any need for action
by either party. This is in contrast to the position following a repudiatory breach of
contract where the innocent party has the option of continuing with the contract or
bringing it to an end (see Chapter 14). It follows that any attempt to affirm the contract
following frustration will be ineffective. This was confirmed in Hirji Mulji v Cheong Yeong
Steamship Co Ltd (1926) and The Super Servant Two (1990).
As to the distribution of losses following frustration, the common law started

from the position that all future obligations were discharged, but that obligations
incurred prior to the frustrating event survived. Where the loss fell would therefore
depend entirely on what the contract said about when payment was to be made, or
when work was to be done. Thus in Chandler v Webster (1904), which was one of the
coronation cases, the full obligation to pay for a room to watch the procession arose
before the cancellation (in contrast to Krell v Henry (1903) where only a deposit was
payable). The hirer of the room was therefore required to make full payment and the
entire loss caused by the frustrating event fell on him. For example:
January February Event March

Deposit Due Instalment 1 Due Instalment 2 Due
The payments in January and February have to be paid but the instalment in March is
no longer due under Chandler v Webster.
The approach taken in Chandler v Webster was, however, modified in Fibrosa Spolka
Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943). 1,000 had been paid under a
contract for the supply of machinery which was frustrated by the German invasion of
Poland in 1939. The House of Lords held that where there has been a total failure of
consideration (that is, the party paying the money has received nothing at all under
the contract), then money paid could be recovered. The purchasers of the machinery
were therefore allowed to recover their payment of 1,000.
Activity 15.6
Sabina makes a contract with Peter for the redecoration of a house which she
owns. The total cost is to be 5,000 and, as provided in the contract, she gives Peter
an initial payment of 1,500. The balance is to be paid on the completion of the
work. The day before Peter starts work, vandals start a fire which totally destroys
Sabinas house. Peter has spent 500 buying materials for the job. What would be
the position as to the distribution of losses on the redecoration contract under the
common law rules relating to frustration?
Activity 15.7
As in 15.6, but the fire takes place after Peter has done one days work. The entire
job was expected to take four weeks to complete.
Activity 15.8
As in 15.6, but the fire takes place on the day before Peter was due to complete the
work.
The inflexibility of the common law rules, even following the slight modification
provided by the Fibrosa case, led to demand for reform. This occurred in the shape of
the Law Reform (Frustrated Contracts) Act 1943.
15.4.2 The Law Reform (Frustrated Contracts) Act 1943

There are some contracts to which the 1943 Act does not apply (see s.2(5)). These
include contracts of insurance, some charters of ships (principally charters for a
particular voyage) and contracts for the carriage of goods by sea. The exclusion of the
shipping contracts exists because there are special rules under shipping law which
deal with the situation. The most important exclusion from the effects of the Act is,
however, in relation to contracts for the sale of specific goods. In relation to these
contracts the common law rules as to the effects of frustration will apply.
The two main provisions in the 1943 Act are s.1(2), which deals with money paid or
payable prior to the frustrating event, and s.1(3) which deals with benefits conferred
prior to that event. They need to be considered in turn.
Section 1(2): money paid or payable prior to frustration

Section 1(2) provides that where money was paid or payable prior to the frustrating
event, it should be returned (if paid), or should cease to be payable (if not paid but
owing). Unlike the common law, this is not dependent on there being a total failure of
consideration. Not all the money may be recoverable, however. The section provides
that if expenses have been incurred towards the performance of the contract, some
of the money paid or payable may be retained or recovered, to the extent that a court
considers it just in all the circumstances. The amount concerned cannot exceed the
amount of the expenses incurred, nor can it exceed the amount paid or payable under
the contract (even if the expenses are greater than this).
The discretion given to the court is a broad one, as confirmed by Gamerco SA v ICM/
Fair Warning Agency (1995). The case concerned the frustration of a contract to hold
a pop concert because of the closure of the specified stadium on grounds of safety.
The plaintiffs sought to recover some $412,500 which had been paid. Although the
defendants could point to expenses which they had incurred, the judge concluded
that in all the circumstances it was just that the $412,500 should be returned in full. It
does not follow, therefore, that simply because a party has incurred expenses that it
will automatically be allowed to deduct these from sums returnable under s.1(2). The
overall justice of the case must be taken into account.
Section 1(3): compensation for a valuable benefit

Section 1(3) deals with the situation where a party has received a benefit other than
money prior to the point at which the contract was frustrated. In that situation the
section allows that the party to recover from the other party such sum as the court
considers just, having regard to all the circumstances of the case. In particular the
court should take into account any expenses incurred by the benefited party and the
effect, in relation to the said benefit, of the circumstances giving rise to the frustration
of the contract.
This final consideration which the court must take into account has been interpreted
in a way which has significantly reduced the scope for recovery for the provision of
benefits. In BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979), Goff J (as he then was),
having held that the purpose of the Act was the prevention of unjust enrichment
rather than the apportionment of losses, ruled that the value of any alleged benefit
under s.1(3) must be assessed in the light of the frustrating event itself. Where,
therefore, the frustrating event has had the effect of destroying the benefit, nothing
will be recoverable under s.1(3). This interpretation of the Act has been the subject of
much criticism though this is mainly focused on the poor drafting of the legislation,
rather than Goff Js interpretation of it.
Activity 15.9
Sabina contracts with Peter for the redecoration of a house which she owns. The
total cost is to be 5,000 and, as provided in the contract, she gives Peter an initial
payment of 1,500. The balance is to be paid on the completion of the work. The day
before Peter starts work, vandals start a fire which totally destroys Sabinas house.
Peter has spent 500 buying materials for the job. What would be the position as
to the distribution of losses on the redecoration contract under the Law Reform
(Frustrated Contracts) Act 1943?
Activity 15.10
As in 15.9, but the fire takes place after Peter has done one days work. The entire
job was expected to take four weeks to complete.
Activity 15.11
As in 15.9, but the fire takes place on the day before Peter was due to complete the
work.
1. Give an example of self-induced frustration of contract.
2. Can the doctrine of frustration be applied to leases of land?
3. What is the object of the Law Reform (Frustrated Contracts) Act 1943?
Summary
The common law rules discharge parties from future obligations, but otherwise leave
any losses to lie where they fall. The only exception is the recovery of money paid
where there is total failure of consideration. The Law Reform (Frustrated Contracts) Act
1943 provides more flexible rules under which money may be recovered, or payment
ordered for benefits which have been acquired. The object of the Act is the prevention
of unjust enrichment; it does not always operate, therefore, to distribute losses
between the parties. The Act has been much criticised for its unsatisfactory drafting,
particularly in relation to s.1(3).

Bernard is the owner of a mansion called Stately Grange, which contains a
collection of 50 valuable oil paintings. Bernard contracts with Artistic Cleaners Ltd
to have all the paintings cleaned and re-hung, at a cost of 200 per painting. He pays
Artistic Cleaners 2,000 in advance, with the balance of 8,000 to be paid when all
the pictures have been cleaned and re-hung.
There is a stable yard in the grounds of Stately Grange from which Bernard runs
pony-trekking holidays. Christine books a weeks holiday for herself and her five
children for the week 815 August. She pays a deposit of 150 with the balance of
850 to be paid at the start of the holiday.
Consider the effect of the following events on these contracts.
a. On 6 August Artistic Cleaners Ltd have cleaned and re-hung 40 of the paintings.
Of the remaining 10, five have been cleaned but remain at Artistic Cleaners
workshop. The other five are still at the Grange. That evening Stately Grange is
badly damaged by fire and all the paintings in the Grange are destroyed.
b. The fire means that Christines holiday party will not be able to be
accommodated in the Grange, as was planned, but will have to use tents in the
grounds. In addition an outbreak of foot-and-mouth disease on a neighbouring
farm means that riding will be restricted to the Granges own grounds, rather
than including tours of the very attractive local countryside. On learning of this
Christine seeks to cancel the holiday and reclaim her deposit.

While there is some overlap in between the two sections of this problem, the facts and
the issues involved are sufficiently separate for you to deal with each independently.
a. Has the contract with Artistic Cleaners been frustrated? Clearly it cannot be
completed, as five of the pictures concerned have not been cleaned and have now
been destroyed. Full performance is therefore impossible and this suggests that
the contract is frustrated. On the other hand, you might also wish to consider the
possibility that this contract is divisible into a series of separate obligations, since
the price seems to have been calculated at a rate per painting (see, for example,
the discussion of entire obligations and substantial performance in Chapter 14).
On this basis might it be possible to argue that it is only as regards the final five
paintings that the contract is frustrated, so that Bernard is obliged to pay for the
work that has already been done?
If the contract is frustrated, the 1943 Act will apply. Under s.1(2) Bernard could reclaim
the 2,000 he has paid. Artistic Cleaners would wish to set off their expenses, but this
will only allow them, at a maximum, to retain the 2,000. If they wish to recover for
the work done on the 45 paintings which they have dealt with the claim will have
to be based in s.1(3). The difficulty is that Appleby v Myers (1867) and BP Exploration v
Hunt (1979) suggest that Bernard has not received any valuable benefit, other than in
relation to the five paintings in Artistic Cleaners workshop. At the contractual rate of
200 per painting this only entitles Artistic Cleaners to 1,000 as a maximum that
is, less than the 2,000 they have already received. It seems unlikely, therefore, that
if the contract is frustrated, Artistic Cleaners will be able to do more than retain the
2,000 and even this is at the discretion of the court.
b. Again, the first question is to ask whether the contract for the holiday has been
frustrated? Clearly it has not been rendered impossible. Christine and her family
can still stay at the Grange (albeit camping rather than living in the house itself)
and can still spend the week riding ponies. Do the changes and restrictions mean
that the holiday is radically different from what had been contracted for? This will
depend to some extent on what exactly was promised in the contract, and how
important a part of that contract the elements which have changed were. In the
end, however, it is a matter of judgment, which can be argued either way.
If the contract is frustrated, again the 1943 Act will apply. Christine will be entitled
under s.1(2) to reclaim the 150 she has paid, subject to the deduction of expenses
by Bernard (to the extent considered just by a court). She will not be liable to pay
any of the balance. Section 1(3) does not seem to have any role to play in this part
of the problem.
If the contract has not been frustrated, then Christines remedies, if any, will
depend on whether Bernard is in breach of contract and the seriousness of the
breach. See the discussions of breach in Chapter 14 and damages in Chapter 16.
Quick quiz
Question 1
How did Lord Simon, in the case of National Carriers Ltd v Panalpina (Northern) Ltd
(1981), explain when frustration would discharge the obligations of the parties to a
contract?
Choose one answer.
a. Frustration of a contract takes place when there supervenes an event
(without default of either party and for which the contract makes no sufficient
provision) which so significantly changes the nature (not merely the expense
or onerousness) of the outstanding contractual rights and/or obligations
from what the parties could reasonably have contemplated at the time of
its execution that it would be unjust to hold them to the literal sense of its
stipulations in the new circumstances; in such a case the law declares both
parties to be discharged from further performance.
b. In contracts in which performance depends on the continued existence

of a given person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing shall excuse the
performance. In none of the cases is the promise in words other than positive,
nor is there any express stipulation that the destruction of the person or thing
shall excuse the performance; but that excuse is by law implied, because from
the nature of the contract it is apparent that the parties contracted on the basis
of the continued existence of the particular person or chattel.
c. It is not hardship or inconvenience or material loss itself which calls the

principle of frustration into play. There must be as well such a change in the
significance of the obligation that the thing undertaken would, if performed, be
a different thing from that contracted for.
d. You must look at the actual circumstances of the case in order to see whether
one party to the contract is relieved from its future performance by the conduct
of the other; you must examine what the conduct is so as to see whether it
amounts to a renunciation, to absolute refusal to perform the contract.
e. Dont know.
Question 2
Rix LJ, in Edwinton Commercial Corporation, Global Tradeways Ltd v Tsavliris Russ
(Worldwide Salvage & Towage) Ltd (The Sea Angel) (2007) considered the modern
statements of the doctrine of frustration to be found in the words of Lord Simon
in National Carriers Ltd v Panalpina (Northern) Ltd (1981) and Lord Radcliffe in Davis
Contractors Ltd v Fareham UDC (1956) and made certain observations as to how a
court could consider whether or not a frustrating event has occurred. Which of the
following is not an element in Rix LJs considerations in The Sea Angel?
Choose one answer.
a. The concept of justice plays a strong role in the determination of whether or not
a contract has been discharged through frustration.
b. A particular factor, if sufficiently important, in the factual pattern of the contract

can assume such dominance that it can exclude the doctrine of frustration.
c. In particular cases of frustration, one can ascertain one, or perhaps more, factors
which have driven the result in the particular case.
d. The correct approach to determining whether or not a frustrating event has

occurred is a multi-factorial approach considering a range of different factors in
the context of the particular contract.
e. Dont know.
Question 3
Which of the following events will NOT result in the doctrine of frustration
operating?
Choose one answer.
a. A pop group are on a years tour of the US and one month into the tour the lead
singer falls ill. The lead singer is told he can only work a couple of days a week
since his illness. The lead singer is prepared to keep on singing seven days a
week. The band decide to replace the lead singer.
b. A member of the Royal Family decides to get married and so a devoted fan hires
a hotel room with a very good view of the procession route. The member of the
Royal Family falls ill three days before the wedding is due to take place and the
wedding is postponed.
c. A businessman contracts with a foreign businessman to supply monthly

quantities of oranges for three years. After four months war breaks out between
the two countries and the supplying of oranges to the country of the foreign
businessman becomes illegal.
d. A pending bride places an order with a dressmaker for a wedding dress. Two
days before the wedding is due to take place the bride decides she has fallen
in love with the best man and calls the wedding off. She decides she no longer
wants the dress, which was delivered just as she was calling off the wedding.
e. Dont know.
Question 4
This question requires you to apply the law to a particular fact situation in order
to determine the likely outcome of the case. Read the facts given below and then
decide which statement most accurately summarises how a judge should decide
the case.
Arabella arrives in London on Monday and wants to rent a flat from Boris. Arabella
runs her own escort company where she provides company for gentleman callers
of a certain age. Boris suspects that Arabella is actually a prostitute but he is not
sure and so agrees. He says that one of the conditions of renting the flat is that she
works as his escort girl and only his escort girl. Arabella agrees and she places a
250 deposit with him and says she will pay the first months rent of 1,000 when
she moves in.
She says she will be back on Friday with her belongings to move in. On Wednesday
Arabella is mugged by two young men and she loses all her money. They also
seriously injure her so that she has to go into hospital. She is left with permanent
disabilities such that she will never work again. Hearing this news Boris is furious
because on Tuesday he turned down an offer from Clara to rent the flat for 3,000
per month as she loved the location. Boris wants to recover the money he has now
lost for the first months rent. Arabella says she cannot now afford to take the flat
and is unable, due to the mugging, to be released from hospital.
Choose one answer.
a. The contract for the lease has been breached by Arabella and she should now
pay 2,750 in addition to losing the 250 deposit.
b. The contract is illegal because Arabella is a prostitute and so is void and Boris
cannot enforce it.
c. The contract to provide exclusive sexual services is enforceable despite its

attempts to restrain trade.
d. The contract for the lease is frustrated and Arabella should be able to recover
the moneys already paid minus any expenses claimed by Boris.
e. Dont know.
Question 5
With the decision of the court in BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979) the
role of the court under s.1(3) is which of the following?
Choose one answer.
a. To assess whether or not the contract is governed by English law.
b. To assess whether or not the contract has become impossible of performance.
c. To value the benefit which the defendant has obtained at the expense of the
claimant and to award damages to the claimant for that benefit.
d. To value the benefit which the defendant has obtained at the expense of the
claimant and to exercise its discretion in deciding which proportion of that
benefit is recoverable by the claimant.
e. Dont know.

1. What is the role of the doctrine of frustration in the termination of contracts?
2. What types of event will be regarded as frustrating a contract?
3. What are the limitations on the doctrine of frustration
4. What is meant by self-induced frustration?
5. What are the consequences of frustration under the common law rules?
6. What are the consequences of frustration under the Law Reform (Frustrated
Contracts) Act 1943?
7. What are the limitations of the 1943 Act reform?

Part VIII Remedies for breach of contract
16 Damages
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
16.1 The purpose of an award of damages . . . . . . . . . . . . . . . . . . 229
16.2 Two measures of damages . . . . . . . . . . . . . . . . . . . . . . . 229
16.3 When is restitution available? . . . . . . . . . . . . . . . . . . . . . . 232
16.4 Non-pecuniary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
16.5 Remoteness of damage . . . . . . . . . . . . . . . . . . . . . . . . . 234
16.6 Mitigation of damage . . . . . . . . . . . . . . . . . . . . . . . . . . 237
16.7 Liquidated damages . . . . . . . . . . . . . . . . . . . . . . . . . . 237
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Introduction
In Chapter 14 of the subject guide, we examined the issue of what constitutes a breach
of contract. In general terms, every breach of contract entitles the injured party to
claim damages for the loss caused by the breach. The purpose of an award of damages
is simple: to put the injured party in the position, as far as money can, they would
have been in but for the breach of contract. The difficulty lies in how to measure this
loss. The law has traditionally used two measures; one protects expectation interests
and the other protects reliance interests (for definitions see Section 16.2 below).
Usually, but not invariably, the expectation interest is sought. In some cases, however,
the injured party seeks an award based upon a reliance measure. More recently, a
restitutionary measure has been used and this differs from an expectation or reliance
measure in two ways. First, a restitutionary measure is calculated with reference to the
defendants gain rather than the claimants loss. Second, the circumstances in which a
claimant can protect his restitutionary interests are more narrowly prescribed.
Regardless of which measure is employed, not all losses will be recoverable. Two
devices limit an award of damage. The first device is remoteness. There can be
no recovery of losses which are too remote: that is to say, losses which are not
foreseeable. This device presents two problems. Not only have different courts
appeared to propose different tests concerned with remoteness (a problem of law),
but it is also difficult in some cases to determine what is a foreseeable loss (a problem
of fact). The second device used to limit the recoverability of loss is mitigation. It is
said that a party cannot recover damages for a loss that he could have reasonably
avoided. Finally, in addition to the limiting devices of remoteness and mitigation, it
is generally said that a party cannot recover damages for non-financial loss (such as
injured feelings or distress arising as a result of the breach of contract).
The parties to a contract can attempt to avoid the difficulties presented in an

assessment of damages by stipulating the amount of damages payable upon a breach
of contract. This chapter concludes with an examination of the extent to which courts
will enforce these liquidated damages clauses.
LEARNING OBJECTIVES
This chapter introduces the remedy of an award of damages for breach of contract,
to enable you to discuss and apply in problem analysis its key components (and
supporting authority) including:
uu The compensatory aim of a basic award of damages for breach of contract.
uu The difference between damages awarded on an expectation, reliance and
restitution basis including the distinctive and exceptional award of an account of
profits made by the party in breach.
uu The sub rules applicable to the assessment of damages based upon the three
measures above.
uu The circumstances when damages may be awarded for non-pecuniary losses.
uu The different limitations upon an assessment of damages especially the
circumstances in which damages are too remote to be recovered.
Contract law 16 Damages page 229
16.1 The purpose of an award of damages
Essential reading
McKendrick, Chapter 21: Damages for breach of contract Section 21.1
Introduction and Section 21.2 Compensation and the different interests.
Poole, Chapter 9: Damages for breach of contract Section 1 The aim of

contractual damages.
McKendrick, E. Breach of contract and the meaning of loss, in your study pack.
It is said that contract law is separated from other forms of private obligations such as
tort and restitution because contract law seeks to fulfil the expectations created by a
binding promise. To this end, the purpose of an award of damages is to compensate
the injured party and not to punish the party in breach: see Robinson v Harman (1848).
Punitive damages are not available in English law for a breach of contract, even where
the defendant deliberately breached the contract. However, it does seem that with the
advent of restitutionary damages for breach this principle has been weakened. While
the purpose of the award of damages is to compensate the claimant, the difficulty of
assessing damages will not prevent their recovery.
Damages are normally assessed at the time of breach (Johnson v Agnew (1980)), although
this is not an inflexible rule. It was held in Golden Strait Corporation v Nippon Ysen Kubishika
Kaisha, The Golden Victory (2007) that in exceptional cases damages would be reduced
where it was proven that, between the date of breach and the time of trial, certain events
occurred which would have inevitably reduced the damages the claimant could have
recovered in respect of its loss. The date of breach is the right date to assess damages
where there is an immediately available market for the sale of the relevant asset or for
the purchase of an equivalent asset (Hooper v Oates [2013] EWCA Civ 91).
Summary
The purpose of an award of damages is to compensate the injured party.

McKendrick, E. The common law at work: The saga of Alfred McAlpine
Construction Ltd v Panatown Ltd (2003) 3 Oxford University Commonwealth Law
Journal 145. This article is available in HeinOnline through the Online Library.
Halson, Chapter 17: Damages for breach of contract, Section: The general
compensatory aim.
16.2 Two measures of damages
Essential reading
McKendrick, Chapter 20: Damages for breach of contract Section 20.3 The
expectation interest and Section 20.7 Reliance interest.
Poole, Chapter 9: Damages for breach of contract Section 2 Expectation loss

and Section 3 Wasted expenditure.
The question to be answered here is how is the claimants loss to be measured? There
are two possible bases for assessing damages the expectation loss and the reliance
loss. However, a third approach has been used for breach of contract: the restitution
loss. We will consider the first two possible measures here; the third will be examined
in Section 16.3.
Expectation loss
Expectation loss is the basic measure of contractual damages, sometimes called the
contractual measure of damages (emphasis added, Lord Nicholls in Nykredit plc v
Edward Erdman (1997)). This loss is summarised in Robinson v Harman (1848) 1 Ex 850 as:
the rule of the common law is, that where a party sustains loss by reason of a breach of
contract, he is, so far as money can do it, to be placed in the same situation, with respect
to damages, as if the contract had been performed. (per Parke B at 855)
A contract creates an expectation of performance in the promisee. When a defective

performance is tendered the promisee may claim damages to be assessed by
reference to those disappointed expectations.
An award based on the claimants expectation interest is compensation for the loss
of a bargain. The claimant may thereby obtain the profits he would have received had
the contract been performed damages are assessed in reference to the claimants
expectation or performance loss. If A contracts to buy a painting from B for 100 and A
plans to resell the painting for 200, on the expectation measure of damages, A has lost
100 as this is his profit upon the re-sale. Had he already paid the 100 purchase price,
he has lost 200. What is important in these situations is that the law compensates A
for the benefit he would have obtained by reason of his contract with B.
One issue in deciding expectation is whether the expectation should give you the cost
of cure or the difference in value. In situations where the defendant does not perform
the contract, or performs it badly, the claimant is generally entitled to the cost of the
cure. This is the amount required to pay a third party to perform what was stipulated
in the contract. See, for example, Watts v Morrow (1991). In some instances, however,
the courts will not award the cost of the cure where this is wholly disproportionate to
any benefit which would be received (where there is little difference in value between
the value of the thing contracted for and the thing received). In this situation the
courts may award the difference in value.
For example, if I buy a blue car from you but you deliver a red car. The cost of cure
would be x amount but the difference in value would be minimal. Very often there is
no difference between the two amounts. However, in Ruxley Electronics v Forsyth (1995)
the cost of cure far exceeded the original contract price.
Mr Forsyth had contracted for a recreational swimming pool of a certain depth. The
pool was built to the wrong depth and Mr Forsyth sued for breach of the express term.
The cost of cure would have required the original pool to be taken out, re-dug and
replaced correctly. This cost far exceeded the original cost of the pool. The difference
in value, the court decided, was nil. In trying to ensure that damages are truly
compensatory the courts had to ensure that Mr Forsyth was not over-compensated
(i.e. that Mr Forsyth had a swimming pool and extensive damages). The outcome
may have been different if Mr Forsyth had required the pool to be at a certain depth
for reasons other than merely recreational use. Faced with this situation the courts
awarded neither cost of cure nor difference in value but awarded damages based
on loss of amenity (see Section 16.4, see also Arroyo v Equion Energia Ltd (formerly
BP Exploration (Columbia) Ltd) (2013)) for a further suggestion, albeit obiter, that
damages for loss of amenity might be awarded when the refusal of cost of cure or
reinstatement damages would undercompensate the claimant).
Loss of a chance can also form the basis of a claim for loss of expectation. This is
unusual but see Chaplin v Hicks (1911) where the plaintiff received damages for the loss
of a chance to compete in a competition. Such damages are meant to compensate
for the lost opportunity and so, given that there was no certainty that the plaintiff
would if she entered have won, the amount recovered will be less than the prize for
winning. The calculation of such damages will often be very speculative as in Giedo
van der Garde Bv v Force India Formula One Team (2010) where damages of $100,000
were awarded. This sum was the courts best estimate of the lost opportunity of a
Formula One racing driver who was not given at least 6,000 kilometres of test laps. The
claimant will not, however, receive substantial damages where the breach of contract
has left him no worse off. See C & P Haulage v Middleton (1983) and Sunrock Airline Corp
Ltd v Scandinavian Airlines System (2007).
Reliance loss
In some instances, it will not be appropriate to measure the claimants loss on the
basis of his expectations. It may be the case, for example, that the claimant is unable to
prove the value of his expectations (Anglia Television v Reed (1972)). He cannot establish
to what extent he would have been better off had the contract been performed.
An alternative basis on which to assess damages is the reliance loss or the loss of
expenditure. This basis is usually used when the claimant is unable to prove that a
financial benefit would accrue to it had the contract been performed.
In Anglia Television v Reed (1972) the plaintiff was unable to establish what profit his
television show would have made and consequently claimed for the expenditures
he had incurred. On this basis reliance loss damages included: when a contract to
install new machinery was breached, the cost of outsourcing work (Bridge UK.com Ltd v
Abbey Pynford plc (2007)) and for breach of a franchise contract to sell branded goods,
wasted marketing and promotional costs (Yam Seng Pte Ltd v International Trade Corp
Ltd (2013)).
The claimant is the party who decides whether to seek his reliance losses or his
expectation losses: CCC Films v Impact Films (1984). The claimant cannot, however,
seek to recover his reliance losses where this would have the effect of allowing him to
escape the consequences of a bad bargain: C & P Haulage Co Ltd v Middleton (1983) and
Omak Maritime Ltd v Mamola Challenger Shipping (2010).
Activity 16.1
The government of the (fictitious) country of Culloden offers for sale the rights to
hunt and shoot three bighorn mountain sheep. These very rare sheep are highly
prized by big game hunters, who consider the heads of the sheep to be attractive
trophies. Damian accepts Cullodens offer and pays 1 million for the hunting
rights. He spends 100,000 outfitting a group for the hunt. After several months
of searching, it transpires that the bighorn mountain sheep are extinct, a matter
long suspected by some within the Culloden Ministry for the Environment. Advise
Damian.
Activity 16.2
Emma contracts with Fun Toys Co to purchase 10,000 toys from them. Emma
intends to resell the toys in her chain of toy shops. The selection of the toys is to be
made within one year by Emma and is to be from Fun Toys range of 300 different
toys. These toys range in wholesale price from 1.99 to 200. Emma never selects
any toys and refuses to do so. Advise Fun Toys Co.
Activity 16.3
Why does McKendrick write that In awarding loss of amenity damages it can be
argued that the House of Lords (in Ruxley Electronics and Construction v Forsyth
(1995)) took one step forwards and one step backwards? (McKendrick, Section 21.3).
Summary
The two basic measures by which damages for breach of contract are assessed are
the expectation measure and the reliance measure. The expectation measure aims
to compensate the claimant for the loss that arises between the difference between
no performance and performance or, in other words, for the profit that the contract
would have created for the claimant. Where appropriate this may involve choosing
between an award of damages based upon the cost of cure or diminution in value.
In other cases damages may be awarded for the loss of chance. The reliance measure
compensates the claimant for the wasted expenditures he has incurred.

Coote, B. Contract damages, Ruxley, and the performance interest (1997) 56 CLJ
537. This article is available in HeinOnline through the Online Library.
Halson, Chapter 17: Damages for breach of contract Sections: The expectation
measure: non-pecuniary loss and The reliance measure: pecuniary loss.
16.3 When is restitution available?
Essential reading
McKendrick, Chapter 1: Introduction Section 1.4 Contract, tort and
restitution.
McKendrick, Chapter 15: Illegality Section 15.18 The recovery of money or

property.
McKendrick, Chapter 21: Damages for breach of contract Section 21.4 The
restitution interest, Section 21.5 Failure of consideration and Section 21.6
Enrichment by wrongdoing.
Poole, Chapter 10: Remedies providing for specific relief and restitutionary
remedies Section 3 Restitutionary remedies.
Poole, Chapter 16: Illegality Section 3 Money or property transferred under an

illegal contract.
The circumstances in which a claimant can recover on a restitutionary basis for a

breach of contract are strictly limited. Recovery on a restitutionary basis will only
occur when the claimant can establish that the defendant was enriched at the
claimants expense and that it is unjust to allow the defendant to retain his profit
without compensating the claimant. A restitutionary reward requires the defendant
to disgorge the profit obtained as a result of his wrongdoing. When a contract is
terminated because of the defendants breach, the claimant may elect to proceed in
contract or restitution (Planche v Coburn (1831)). However, the circumstances in which
a party can so proceed in a contract case are very limited.
16.3.1 Total failure of consideration

In the first set of circumstances, the claimant may seek a restitutionary remedy where
there has been a total failure of consideration. The decision in Whincup v Hughes (1871)
stands for the proposition that the claimant may seek a restitutionary remedy by
saying that the basis upon which he conferred a benefit has failed entirely because of
the defendants breach of contract. However, to succeed in this, the claimant needs
to establish a total failure of consideration. If any part of the contract is performed,
or if the claimant has received any part of the consideration, the restitutionary claim
is barred. Into this set of circumstances fall many of the illegality cases discussed
in Chapter 12. See, in particular, Bowmakers v Barnet Instruments (1945) and Tinsley v
Milligan (1993). Note the possibility of the defence of change of position: Lipkin Gorman
v Karpnale (1992).
16.3.2 Unjust benefit

The second set of circumstances occurs where the claimant seeks a restitutionary
remedy on the ground that the defendant has obtained an unjust benefit, or profit,
because of his breach of contract. While it had been held that gains-based damages
are not generally available for a breach of contract (Surrey County Council v Bredero
Homes Ltd (1993)), the House of Lords has now held that the court would order an
account of profits where neither equitable remedies (see Chapter 17) nor an award of
damages based upon a financially assessed measure of damages would not provide
a sufficient remedy (Attorney-General v Blake (2000)). In Blake a former spy for the
British intelligence services defected to Russia and published his autobiography
which, in breach of a lifelong contractual obligation of confidentiality, revealed many
secret matters. An account of profits was ordered which required the wrongdoer
to disgorge the benefit he obtained by the breach of contract. The House of Lords
in Blake recognised Wrotham Park Estate Co Ltd v Parkside Homes Ltd (1974) as a rare
example where restitutionary damages for breach of contract had been awarded in
the past. When land was developed for housing in breach of a restrictive covenant in
the sale agreement the developer was ordered to pay 5 per cent of the profit to the
estate which had the benefit of the covenant despite the fact that the development
did not affect the value of the estate at all. The fractional account of profits ordered in
Wrotham Park was the amount which a reasonable person might have asked for the
waiver of the covenant. On the exceptional facts of Blake the courts order was that the
defendant had to account for all the profits he made from the publication of his book.
In Blake it was emphasised many times that an account of profits would be awarded
only in exceptional circumstances; unfortunately, the House of Lords declined to
provide more explicit directions as to when this would occur. Later courts have been
hesitant to award an account of profits and it may be that Attorney-General v Blake will
be confined to its own very unusual facts. In Experience Hendrix LLC v PPX Enterprises Inc
(2003) the Court of Appeal ordered a fractional account of profits when recordings of
Jimi Hendrix were exploited in breach of a prior contract. In Devenish Nutrition Ltd v
Sanofi-Aventis SA (2008) the Court of Appeal held that the remedy was only available
where other contractual remedies are inadequate. Recent cases show a reluctance to
make an award on the authority of Blake preferring to award compensatory damages
for loss of a bargaining position following Wrotham Park (Experience Hendrix LLC v PPX
Enterprises Inc (2003); WWF World Wide Fund for Nature (formerly World Wildlife Fund) v
World Wrestling Federation Entertainment Ltd (2006 reversed on other grounds in 2007)
and One Step (Support) Ltd v Morris-Garner (2014) or to note that the breach of contract
though deliberate was simply too unremarkable to justify an account of profits (One
Step (Support) Ltd v Morris-Garner (2014)).
Activity 16.4
Write a summary of the House of Lords decision in Attorney-General v Blake (2000).
Summary
In limited circumstances, a claimant may recover damages assessed on the unjust
benefit the defendant obtained by his breach of contract rather than damages
assessed on the claimants loss. This is a developing area of law with considerable
uncertainty at present.

Hedley, S. Very much the wrong people: The House of Lords and publication
of spy memoirs (AG v Blake) (2004) The Web Journal of Current Legal Issues 4
available at www.bailii.org/uk/other/journals/WebJCLI/2000/issue4/hedley4.html
Campbell, I.D. and D. Harris In defence of breach: a critique of restitution and

the performance interest (2002) 22 Legal Studies 208.
16.4 Non-pecuniary loss
Essential reading
Damages for pain and suffering and the consumer surplus and Section 21.14
Conclusion.
Poole, Chapter 9: Damages for breach of contract Section 8 Non-pecuniary

loss.
We are concerned here with non-financial losses, that is to say, loss caused by
anxiety, mental distress and hurt feelings. This is an area where the position of the
law is changing, although the extent of the change is as yet difficult to ascertain. The
starting point is the House of Lords decision in Addis v Gramophone Co Ltd (1909).
In this case, the plaintiff was not allowed to recover damages to cover the indignity
he suffered because of the manner in which he was dismissed by the defendants.

The House of Lords held that injured feelings were not compensable for a breach of
contract. Recently the courts have adopted a more relaxed approach to the recovery
of damages for non-pecuniary loss by creating numerous exceptions to Addis, causing
Lord Cooke to remark that he would now doubt the permanence of Addis in English
Law (Johnson v Gore-Wood (2002)). The modern case law supports the recovery of
damages in the following circumstances.
uu Where the provision of a non-pecuniary gain, such as pleasure, is an important, but

not necessarily the only, object of the contract (e.g. a contract for the provision of a
holiday: Jarvis v Swan Tours (1973) QB 233).
uu Where the avoidance of non-pecuniary loss, such as mental distress, is an

important, but not necessarily the only, object of the contract (e.g. a contract with
a house surveyor: Farley v Skinner (2001); or a lawyer acting in a family law dispute:
Hamilton Jones v David & Snape (A Firm) (2003)).
uu Where the claimant suffers physical inconvenience (e.g. when train passengers
had to walk four miles to their destination: Hobbs v London and South Western Rly Co
(1875); or a couples clothes and cabin on a cruise liner were damaged in a storm:
Milner v Carnival plc (2010)).
uu Where the distress or discomfort suffered was directly consequential on physical

discomfort (e.g. for distress and inconvenience caused while property repairs were
effected following a negligent pre-purchase survey: Watts v Morrow (1991)).
uu For loss of amenity (e.g. Ruxley Electronics v Forsyth (1995) above where the trial
judges award of 2,500 for loss of amenity was not challenged).
Activity 16.5
What is the purpose behind preventing a recovery of damages for mental distress
where there is a breach of an ordinary contract?
Activity 16.6
How can Farley v Skinner (2001) be reconciled with Watts v Morrow (1991)?
Summary
Traditionally, the law prevented recovery of damages for hurt feelings, or for mental
distress. In recent years, however, the law has relaxed this restriction to a considerable
extent. The result is to allow recovery for a wider range of damages.

Halson, R. The recovery of damages for non-pecuniary loss in the UK: a critique
and proposal for a new structure integrating recovery in contract and tort
(2015) Chinese Journal of Comparative Law 245.
16.5 Remoteness of damage
Essential reading
Remoteness.
Poole, Chapter 9: Damages for breach of contract Section 6 Remoteness of

damage.
Even if the claimant establishes that his loss was caused by the defendants breach,
damages cannot be recovered for this loss where the loss is held to be too remote.
The Court of Exchequer established the basic rule in Hadley v Baxendale (1854). In this
case the owners of a mill took their broken shaft to a delivery company to send it to
engineers in Greenwich. The carriers delayed the delivery and the owners were not
able to use the mill during this time. The owners sought damages based on their
loss of business during this time. The court held that the owners could not recover
damages for the loss of business during the period of the delay because this was not
damage which was reasonably foreseeable by the carriers it would not be within the
normal contemplation of the carriers that the owners would be unable to operate the
mill without that particular shaft. In a now famous passage, Alderson B stated:
Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such a contract should be such as
may fairly and reasonably be considered as [1] either arising naturally, that is according
to the usual course of things, from such breach itself, or [2] such as may reasonably be
supposed to have been in the contemplation of both parties, at the time they made the
contract, as the probable result of the breach of it.
Figure 16.1 Hadley Mill as an 16.2 Hadley Mill in its present form 16.3 The commemorative plaque
operational mill
It is sometimes said that there are two limbs to the test of remoteness in Hadley
v Baxendale. The first limb, that is to say the first way in which damages will be
foreseeable, is those damages which may reasonably be considered as arising naturally
those damages which arise in the usual course of things as a probable result of the
breach of contract. In South Australia Asset Management Co v York Montague Ltd [1997]
AC 191 at 211 the House of Lords held that what will determine which damages arise in
the usual course of things, as a probable result of breach, will depend on the degree of
knowledge the parties are presumed to possess and the scope of the contractual duty.
The second limb deals with the situation where there are exceptional circumstances.
That is to say, if the contract is breached, then the consequences of the breach will
be particularly severe because, for example, an especially lucrative opportunity will
be lost. In this case, the damages will only be recoverable (that is to say, they will not
be too remote) if the special circumstances are reasonably within the contemplation
of the parties at the time they made the contract as likely to occur if the contract is
breached. The most likely way this test will be satisfied is if the circumstances were
actually communicated by one party to the other. These two limbs are not mutually
exclusive (Jackson v Royal Bank of Scotland (2005)).
No damages were recovered in Hadley v Baxendale. The court found that reasonable
people in the position of the carriers would not think that while they had possession
of the shaft the mill was idle. Rather they might reasonably expect that the mill
owners might have had a spare shaft. On this basis the lost profits claimed for were
not recoverable within the first limb of Hadley. Nor were they recoverable under
the second limb because there was no evidence that the mill owner had actually
communicated the fact that the mill was idle (a contrary suggestion in the headnote
which is not repeated in the judgments in Hadley must be wrong):
in the great multitude of cases of millers sending off broken shafts to third persons by a
carrier under ordinary circumstances, such consequences would not, in all probability
have occurred; and these special circumstances were here never communicated by the
plaintiffs to the defendants.
(per Alderson B at 356)
While this is an apparently simple exposition of remoteness, you will see that courts
have struggled to define what is within the reasonable contemplation of the parties.
See, for example: Victoria Laundry (Windsor) v Newman Industries (1949), The Heron II
(1969) and H Parsons (Livestock) v Uttley Ingham (1978) (discussed in the feedback to
Activity 16.8).
In the Victoria Laundries case the defendant engineers failed to deliver and fit a boiler
as they had contracted with a laundry to do. The laundry consequently lost income
from two sources: they lost some of their normal laundering business and they also
were not able to obtain some particularly lucrative dying contracts from the Ministry
of Supply. It was held that the first item of loss was recoverable under the first limb of
Hadley but that the second was not recoverable under either limb.
In the Heron II the House of Lords addressed the difficult question of the probability
of occurrence which must be foreseen. There were several formulations discussed
but the greatest consensus was that for any item of loss to be recoverable as
damages for breach of contract it must have been within the reasonable foresight
or contemplation of the parties as a not unlikely consequence of breach. This may
not appear a generous test for recovery but as Lord Reid explained, in contractual
relations, the parties are not strangers (as is often the case with the relationship
between a tortfeasor and their victim). Therefore if the promisee wants to expand the
liability for breach of contract of the promisor beyond that imposed by the default
rule stated in the first limb of the Hadley test the promisee may simply, at or before the
time of contracting, inform the promisor of any unusual losses he, the promisee, will
suffer in the event of the promisors breach. This communication will bring the loss
within the second limb of Hadley.
A significant problem in the application of the two-limbed test in Hadley v Baxendale is

the determination of when a particular loss is within the reasonable contemplation of
the parties. The uncertainty which surrounds the resolution of this problem has, in some
respects, been increased by the decision of the House of Lords in Transfield Shipping Inc v
Mercator Shipping Inc (The Achilleas) (2008). The House of Lords considered the two limbs
of the test of remoteness and Lord Hoffmann considered that the essential question
to answer was whether or not the contract breaker ought fairly to have assumed
responsibility for the type of loss in question. This consideration seems to add a new
test to the determination of remoteness. The matter is uncertain, however, because
their Lordships gave separate concurring judgments with the result that it is difficult to
extract a ratio from the case. This apparent conflict between the approaches of Hadley
and The Achilleas may be resolved by a composite position where the traditional Hadley
approach will apply generally but the new Achilleas approach will be used in novel or
difficult cases (Supershield Ltd v Siemens Building Technologies FE Ltd (2010)).
Activity 16.7
What is the policy behind the rules of remoteness? What is the link, if any, between
these rules and the cost of insurance?
Activity 16.8
In H Parsons (Livestock) v Uttley Ingham, was it at all probable that the pigs would
die? Why should it be enough that it might be foreseen that they would become ill?
How can this decision be reconciled with the distinction drawn elsewhere between
ordinary and special business profits?
Activity 16.9
Under the second rule in Hadley v Baxendale, is the defendants knowledge of the
special circumstances enough to make him liable or is something more required. If
so, what?
Summary
A claimant cannot necessarily recover all the losses flowing from a breach of contract.
Those losses which are said to be too remote cannot be recovered. Those losses which
arise in the usual course of things will be recovered, but where there are special and
exceptional losses, these can only be recovered when the claimant has drawn the
defendants attention to the possibility of these losses at the time of contracting.

Halson, Chapter 17: Damages for breach of contract, Sections: Remoteness,
Recovery for ordinary losses and Recovery for unusual losses.
Wee, P.C.K. Contractual Intention and Remoteness (2010) Lloyds Maritime and
Commercial Law Quarterly 150.
16.6 Mitigation of damage
Essential reading
Mitigation.
Poole, Chapter 9: Damages for breach of contract Section 7 Mitigation.
Causation and remoteness are two factors which seek to limit the possible damages
which can be awarded to a claimant. There is another factor which can act to limit the
damages of a claimant the so-called duty to mitigate. Claimants are said to be under
a duty to mitigate their losses. There are two elements to this duty: first, to avoid
increasing loss; and, secondly, to act reasonably to reduce it.
The basic duty is stated by Viscount Haldane in British Westinghouse Electric Co Ltd v
Underground Electric Railways Company of London Ltd (1912).
The fundamental basis is thus compensation for pecuniary loss naturally flowing from
the breach; but this first principle is qualified by a second, which imposes on a plaintiff
the duty of taking all reasonable steps to mitigate the loss consequent on the breach,
and debars him from claiming any part of the damage which is due to his neglect to
take such steps.
Sometimes, the duty to mitigate will require the injured party to re-contract with the
party in breach on slightly different terms. See, for example, Payzu v Saunders (1919).
Summary
The injured party must act to limit the damages which arise on breach.

Halson, Chapter 17: Damages for breach of contract, Section: Migration.
16.7 Liquidated damages
Essential reading
McKendrick, Chapter 22: Obtaining an adequate remedy Section 22.5
Liquidated damages to Section 22.8 Liquidated damages, penalty clauses and
forfeitures: an assessment.
Poole, Chapter 9: Damages for breach of contract Section 9 Agreed damages

clauses.
Because the claimant has the burden of proving the amount of his loss, it is a great
convenience to him if the contract can simply state a sum which will be payable by the
defendant in the event of breach and the claimant can then sue for the stated sum. On
the other hand, any such system is open to abuse if the sums might be set at a level far
higher than the loss actually suffered. The House of Lords attempted to reconcile these
arguments in Dunlop Pneumatic Tyre v New Garage and Motor (1915) by confirming that a
liquidated damages clause is enforceable provided that the amount is a genuine pre-
estimate of the damage and not unconscionable. The law relating to penalty clauses
which was laid down in Dunlop was not reviewed by the House of Lords or Supreme
Court for another 100 years until 2015. Cavendish Square Holdings BV v Makdessi and
Parking Eye Ltd v Beavis [2015] UKSC 67 was a combined appeal heard by a seven person
Supreme Court where the origins and practice of stipulated damages was extensively
reviewed and significant changes introduced. The wide application of the principles to
emerge from that case can be seen from the very different facts of the two combined
appeals. The first concerning two clauses in a substantial commercial contract which
if enforceable would reduce the consideration payable by more than $44 million; the
second the enforceability of an 85 charge for overstaying at a car park.
The Cavendish case involved the sale by its founder of a major stake in a large Middle
Eastern advertising and communications group under which the founder seller
undertook not to compete with the business he sold. The contract further provided
that if he breached the non-competition provisions he would lose any entitlement
to outstanding instalments and be required to sell his retained holding without
compensation for goodwill. When he breached the non-competition provisions the
combined effect of the two clauses was that he would receive $44 million less for his
share of the group. Parking Eye was the manager of a car park located in a retail park.
Notices at the site stated that any car overstaying the two hour free parking would
become liable to pay a parking charge of 85.
The Supreme Court held that neither contractual provision was a penalty. In particular
in the Cavendish appeal the Supreme Court recognised that a stipulated damages
clause which provided for the payment of a sum greater than compensation may
nonetheless be regarded as protecting a legitimate interest of the innocent party. The
following points were noted by the Supreme Court (SC).
uu The SC chose to restate, but not to abolish, the penalty rule.
uu In a contract between properly advised parties of comparable bargaining power

there should operate a strong initial presumption of enforceability.
uu The definition of a penalty stated by Lord Dunedin in Dunlop as a clause that

provided for the payment of a sum that was greater than a genuine pre-estimate
of loss will no longer apply.
uu The test for a penalty is now:
whether the impugned provision is a secondary obligation which imposes a

detriment on the contract-breaker out of all proportion to any legitimate interest
of the innocent party in the enforcement of the primary obligation.
uu The SC confirmed that the penalty rule would continue to apply to clauses
requiring a party to transfer assets at undervalue as much as to those requiring a
payment to be made.
uu A clause which provides that a payment (or other obligation) is to be made upon
an event other than the payors breach of contract will not fall within the penalty
jurisdiction.
Some care is needed to avoid confusion over the word penalty. At one level, the term
has a purely factual or descriptive meaning. In contracts which contain liquidated
damages, these clauses are commonly referred to as providing for penalties (i.e.
penalty clauses). At another level, quite distinct from the use of the word penalty by
the parties to the contract, a penalty, as a matter of legal interpretation, is an invalid
contractual provision. The law views a clause which provides an excessive agreed
sum to the injured party as invalid because the sum is penal. There is, in other words,
a difference between what the parties to a contract have called a provision (as a
matter of fact) and how a court will categorise a provision (as a matter of law). See, for
example, Ford v Armstrong (1915) and Bridge v Campbell Discount (1962). For a contrast,
however, see Lombard North Central v Butterworth (1987).
In practice, however, the importance of penalty clauses in the strict sense is

much reduced by the ease with which similar results can be achieved by other
(unobjectionable) devices. Three devices are outlined in McKendrick (22.6 Evading the
penalty clause rule).
1. The penalty clause rule does not apply to a clause which accelerates an existing
liability.
2. Because the penalty clause rule only applies to breaches of contract, the parties
can legitimately stipulate that an amount shall be payable on an event which is not
a breach of contract.
3. The parties can stipulate that a term is a condition which is of the essence of
the contract with the effect that breach of the term allows the injured party to
terminate the contract and claim damages.
Note that a deposit is paid by way of security and is generally irrecoverable as long as
the sum paid by way of deposit is reasonable.

Cavendish Square Holdings BV v Makdessi and Parking Eye Ltd v Beavis [2015] UKSC
67 (the case restates the law in this area and is not yet incorporated into any
textbook account but it is 120 pages long!)
Examination advice
A review of past examination papers reveals that questions involving damages often
appear in connection with issues surrounding breach of contract. It appears that
examiners are likely to want to test your understanding of the material covered in this
chapter in one or both of two ways.
1. You may be asked to explain some of the general principles governing the award
of damages, in particular those principles, such as the rules of remoteness, which
place limits on the damages which can be recovered.
2. Issues as to damages and other possible remedies may be introduced as

subsidiary, but nevertheless important, aspects of any problem in which a contract
has, or may have, been broken.
In other words, a question may require discussion both of offer and acceptance (or
consideration, or frustration, or whatever) and of damages and/or restitutionary
remedies. It will, therefore, be difficult, if not impossible, to do well in the examination
without a thorough knowledge of remedies.
A review of past examination papers reveals that questions involving restitutionary

remedies have occurred in the context of questions involving other issues, such as
illegality, capacity and damages.

Question 1
Captain Birdseye was a fisherman. The fishing industry was becoming unprofitable
so he decided to go into marine salvage. Accordingly in September, he had his
trawler, the Heron III, converted to undertake such operations at a cost of 20,000.
Captain Birdseye was approached by Arty, a TV producer for Channel Poor, who
was interested in making a documentary about marine salvage. He agreed to pay
Captain Birdseye 20,000 for the exclusive right to film the salvage of a wreck, if
one was located during October.
On 5 October Captain Birdseye purchased the right to salvage a sunken tanker, said
to be lying at a particular chart reference, from Dreadnought Co for 30,000. From
the description of the tanker given him Captain Birdseye anticipated a profit of
about 50,000 from the sale of salvageable metal, etc.
On 10 October, Captain Birdseye steamed to the chart reference with the film crew
on board and spent 21 days unsuccessfully trying to locate the wreck. In fact no
sunken tanker existed at the chart reference given. Dreadnought Co had made
a mistake as to the location of the wreck. It was in fact located a considerable
distance away.
Captain Birdseye returned to port. He was very disappointed that his first salvage
operation had been a flop. He was also annoyed because the expedition had cost
him 5,000 in fuel and crews wages and he lost the TV contract.
Captain Birdseye sues Dreadnought Co for breach of contract. This they admit.
Advise Captain Birdseye as to the damages he is entitled to in respect of this breach.
Question 2
L hired a band, the Fairies, to play at Ls daughters engagement party. The fee was
agreed at 10,000. It was agreed that the Fairies would arrive at the party venue
one day before the performance to ensure presence on the day. In fact, when the
Fairies arrived their lead singer, Tacky, was not with them as he was performing
elsewhere. On the day of the engagement party Tacky arrived one hour before their
performance was scheduled to take place. Tacky was unwell because he had drunk
too much the night before. L told the Fairies that they had broken their contract and
would not be required.
Advise L, who had engaged another band at a fee of 20,000 due to the short notice.
What difference, if any, would it make to your advice if:
a. L had sold tickets to the value of 100,000 and the purchasers demanded a
refund, or,
b. L had been unable to find an alternative band and the engagement party, which
had cost 150,000, was a dreadful flop.
Question 3
M and N arrange to have the electrical system in their house re-wired. Due
to the extensive disturbances that this will entail, they move to temporary
accommodation for one month. They inform O, the electrician, that they will have
to return at the end of the month. O assures them that the work will be finished by
this time. It is not. M and N are forced to live in a house without any electricity. M is
forced to spend 500 on a laundry service, food delivery service and a multitude of
candles. N is unable to bear the stress of living in these circumstances and suffers a
nervous breakdown as a result.
Advise O with regard to his liability.
Question 4
Damages are not an adequate remedy for a breach of contract.
Discuss.

Question 1
The question is about damages only. This is indicated by the instruction at the end. Any
discussion of breach or termination would therefore be irrelevant and get no credit.
It is suggested that you begin an answer on damages with a general statement about
the general compensatory aim of an award of damages for breach of contract such as
that of Lord Bingham in The Golden Victory (2007).
You should consider the expectation measure first. Remember it has been described
as the contractual measure to emphasise its primacy (Lord Nicholls in Nykredit plc v
Edward Erdman). Define the expectation interest perhaps using the famous statement
of Baron Parke in Robinson that:
Where a party sustains a loss by reason of a breach of contract he is so far as money can do
it to be placed in the same situation as if the contract had been performed.
Under the expectation measure consider the following items of loss:
50,000 loss of profit
Can this be proved with the required degree of certainty? The cases of McRae v CDC
and Anglia TV v Reed would suggest not.
20k loss from the contract with Channel Poor

This is a classic remoteness situation like that in Victoria Laundries v Newman (i.e. the
breach of a contract between A (Dreadnought/ Engineers in Victoria) and B (Capt
Birdseye/ Laundry in Victoria) causes the loss of another contract between B and a
third party (Channel Poor/ Ministry of Supply in Victoria)).
At this point you should be able to write a substantial paragraph on the applicable test
for remoteness starting with the two limbs of Hadley v Baxendale, their application in
Victoria Laundries, the refinement on probability in The Heron II and then the current
status of Lord Hoffmanns comments in The Achilleas.
Applying Hadley the loss of this unusual contract would not come within the first limb
and there is no evidence of communication by Birdseye to Dreadnought to bring it
within the second limb.
Non-pecuniary loss
Do not neglect to discuss whether Birdseye can recover damages for non-pecuniary
loss as we are told that he was disappointed that his venture has been unsuccessful.
This contract does not come within the categories where such damages are
recoverable. All those categories involve consumers and so such damages are not a
feature of purely commercial contracts.
Reliance measure
The 5,000 spend on fuel and crews wages is recoverable as reliance measure
damages (sometimes called damages for wasted expenditure) as in McRae v
Commonwealth Disposals Commission and Anglia TV v Reid.
The 20,000 cost of conversion is not recoverable as reliance measure damages. This
expenditure is not wasted as a result of Dreadnoughts breach as Birdseye still has
a trawler capable of salvage operations. Another reason this sum is not recoverable
is because it was so called pre-contractual reliance (i.e. the expenditure was made
before, anticipated the contract with Dreadnought and so could not be described
as money spent in reliance upon that contract). Pre-contractual reliance has only
exceptionally been recovered and then only if the expenditure is necessarily wasted as
a result of the breach (Anglia TV v Reid).
The 30,000 purchase price for the right to salvage would be recoverable either under
the reliance measure of damages or under the restitution measure if Dreadnought
was regarded as having given nothing in exchange for it (i.e. there was a total failure of
consideration).
Question 2
This question requires you to consider issues of both breach of contract (and
damages) and frustration. It is an error to consider the question as either one or
the other: you need to explore both sets of issues to answer the question fully. With
regard to frustration, the argument could be made that Tackys late appearance
and his unfit state is a supervening event which radically changes the nature of the
obligation (National Carriers Ltd v Panalpina (Northern) Ltd (1981)). However, this
event is attributable to the default of one of the parties to the contract. The issue is
then whether the Fairies have breached a condition of the contract, or a sufficiently
fundamental Hong Kong term so as to allow L to rescind the contract for breach. If
it is not, L is himself in breach of contract. It does seem to have been emphasised in
the contract that the Fairies had to be able to perform on the day; it is likely in the
circumstances that L is entitled to rescind the contract.
The issue then to be considered is the appropriate measure of damages available to L.

The purpose of awarding damages is to put L in the position he would have been but
for the breach. Candidates are given two variants. In variant (a), L has sold tickets and
will want to seek damages measured on an expectation basis and seek to recover
the profit he would have made from the performance. It may be that such a loss is too
remote to recover (Hadley v Baxendale (1854)) because it was not a loss which arose
naturally or was contemplated at the time of contracting. It would not normally be the
case that a profit would be made by the host in connection with an engagement party.
In variant (b), L may wish to seek his wasted expenditure see Anglia Television v Reed
(1972), and CCC Films v Impact Films (1984)).
In both variants, it is arguable that L should recover damages for non-financial loss,
namely the distress caused by the breach of a contract to provide enjoyment see
Jarvis v Swan Tours (1973), Jackson v Horizon Holidays (1975) and Farley v Skinner (2001).
Question 3
This question involves two issues: is there a breach of contract and, if so, what are the
damages available for the breach? Again, you need to consider both issues to answer
the question.
The first issue is whether or not the assurance of O that the work will be finished in
a month is a term of the contract. On balance, it appears to be. If it is a term of the
contract, what sort of term is it: a condition, warranty or an innominate term? In other
words, does breach of the term entitle M and N to terminate the contract? On balance,
the term appears to be either a condition or a sufficiently important innominate
term to entitle M and N to terminate the contract. This leaves the question as to what
damages are available for the breach. To what extent can M and N recover the 500
spent on laundry, meals and candles? An answer to this issue entails a consideration
of whether or not the loss is too remote according to the principles established in
Hadley v Baxendale (1854) and as refined and explained in successive cases. On balance,
the losses do not seem too remote they arise in the natural course of things and
should have been within the reasonable contemplation of the parties at the time of
contracting.
More problematic is the possible recovery by N for his nervous breakdown. On the one
hand, the House of Lords held in Addis v Gramophone Co Ltd (1909) that the plaintiff was
not entitled to compensation for hurt feelings. On the other hand, more recent courts
have moved away from an absolute rule prohibiting recovery for mental stress (see
Ruxley Electronics v Forsyth (1996), Mahmud v BCCI (1998), Johnson v Unisys (1999) and
importantly Farley v Skinner (2001)).
Question 4
You need to examine the extent to which a restitutionary remedy based upon the
profit of the wrongdoer would provide an adequate remedy. This would involve
consideration of the House of Lords decision in Attorney-General v Blake (2000). A
number of possible circumstances might occur. Two were suggested by the Court of
Appeal in Blakes case. One would be in the instance of a skimped performance where
the defendant delivers a sub-standard performance of the contract and, in so doing,
saves money without causing the claimant loss. The second would be where the
defendant has obtained his profit by doing the very thing which he contracted not to
do. Other possibilities exist, particularly where a compensatory measure of damages
results in a nominal award of damages and yet the wrongdoer has obtained a vast
profit.
Quick quiz
Question 1
The principal purpose of an award of damages for a breach of contract is best
described by which of the following statements?
Choose one answer.
a. To punish the defendant for their wrongful conduct.
b. To put the claimant in the position they would have been but for the breach of
contract.
c. To put the claimant in the position they would have been had the contract been
performed.
d. To take from the defendant any benefit they might have obtained from the
breach of contract.
e. Dont know.
Question 2
How did Lord Denning, in the case of Jarvis v Swan Tours Ltd (1973), justify the
extension of damages to include mental distress and anxiety?
Choose one answer.
a. But the rule is not absolute. Where the very object of a contract is to provide
pleasure, relaxation, peace of mind or freedom from molestation, damages will
be awarded if the fruit of the contract is not provided or if the contrary result is
procured instead.
b. It should not include any case where the object of the contract was not comfort
or pleasure or the relief of discomfort, but simply carrying on a commercial
contract with a view to profit.
c. I think those limitations are out of date. In a proper case damages for mental
distress can be recovered in contract, just as damages for shock can be
recovered in tort...If the contracting party breaks his contract, damages can be
given for the disappointment, the distress, the upset and frustration caused
by the breach. I know it is difficult to assess in terms of money, but it is more
difficult than the assessment which the courts have to make every day in
personal injury cases for loss of amenities.
d. There are many circumstances where a judge has nothing but his common
sense to guide him in fixing the quantum of damages, for instance, for pain and
suffering, for the loss of pleasurable activities or for inconvenience of one kind
or another.
e. Dont know.
Question 3
Which of the following scenarios WOULD result in damages being awarded?
Choose one answer.
a. A shipowner agrees to carry a cargo of sugar belonging to a sugar merchant to a
specified place of delivery. The shipowner breaches the contract by late delivery
and then the sugar merchants claim loss of profit for late sale.
b. A mill owner engages a carrier to take a broken mill shaft to a specified place as
a pattern for a new one. The carrier promises to deliver it to a different place the
next day. This process of delivery is delayed due to the carriers negligence. The
mill owner then tries to recover damages for the loss of profits stemming from
the delay of delivering the broken mill shaft as no spare was available.
c. A laundry order a larger boiler to expand their business. They are due to acquire
a particularly lucrative laundry contract but this is not disclosed to the seller.
Due to the delay of delivery the laundry wish to recover damages for losing a
particularly lucrative laundry contract.
d. A seller of property agreed with a buyer to sell premises in a specified place.

Unknown to the sellers the buyer wished to buy the property with the purpose
of converting the premises for himself.
e. Dont know.
Question 4
Which statement best summarises the reason for the decision in Ruxley Electronics &
Construction Ltd v Forsyth (1996)?
Choose one answer.
a. Damages are either calculated on the basis of difference of value or cost of cure.
b. Damages will be awarded where you have entered into a bad bargain.
c. Damages should be awarded on the basis of the loss suffered.
d. Damages are always awarded regardless of the injured parties attempts to

mitigate the loss.
e. Dont know.
Question 5
The importance of Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)
(2008) is best summarised by which of the following statements?
Choose one answer.
a. The court must look carefully to determine which party is most at fault in the
breach of contract to determine whether or not a particular loss is too remote to
recover.
b. In deciding whether or not loss is recoverable one has to ask whether or not the
defendant accepted responsibility for the loss in respect of which the claim has
been brought.
c. Damages for a breach of contract should be awarded for those losses arising
naturally from such a breach or as may reasonably be supposed to have been in
the contemplation of both parties at the time they made the contract.
d. Remoteness of damages is a question of law which should be determined by the

consideration of whether there is an economic loss, such as a loss of profit, or
whether there is an injury actually done to the person or his property.
e. Dont know.

1. What is the aim of damages for a breach of contract?
2. Upon what principles are damages assessed?
3. How can damages be measured?
4. What are the limitations upon an assessment of damages and the circumstances in
which damages are too remote to be recovered?
5. What is the nature of a restitutionary remedy and when is it available?
6. What limitations attend a restitutionary remedy?
7. What are the differences between a restitutionary measure and expectation and
reliance measures of damage?
8. What does mitigation of damages mean?
9. To what extent are damages provided for non-financial loss?
10. What is the ability of parties to stipulate their damages through the use of
liquidated damages clauses?
Part VIII Remedies for breach of contract
17 Equitable remedies
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
17.1 Specific performance . . . . . . . . . . . . . . . . . . . . . . . . . . 247
17.2 Damages in lieu of specific performance . . . . . . . . . . . . . . . . 249
17.3 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

Introduction
In the common law, damages are the principal remedy for a breach of contract.
Damages will, thus, be the usual remedy awarded to the injured party. The common
law, through the operation of equity, possesses further remedies in addition to an
award of damages at common law. These remedies seek the performance of the
contract rather than damages to rectify the breach of the contract. The performance
may be through an order of specific performance: that is to say, an order which
compels the party in breach to perform the contract. This is a positive order an
order which compels a party to perform. Another equitable remedy available is an
injunction an order which prohibits a party from certain actions.
Many contracts contain covenants which oblige a party not to do something; in some
circumstances, courts will give effect to those clauses to prevent the party from doing
that which they covenanted they would not do.
LEARNING OBJECTIVES
This chapter introduces the equitable remedies of specific performance and
injunction to enable you to discuss and apply in problem analysis its key
uu The nature of an order for specific performance or an injunction.
uu The availability of, and the restrictions on, an order for specific performance.
uu What an injunction is available.
uu The circumstances when damages might be given in lieu of an order for specific
performance.
Contract law 17 Equitable remedies page 247
17.1 Specific performance
Essential reading
McKendrick, Chapter 22: Obtaining an adequate remedy Section 22.9 Specific
performance.
remedies Section 2 Specific performance and injunctions.
17.1.1 An exceptional remedy

An order for the specific performance of a contract is an exceptional remedy. While
it appeared at one point that the use of specific performance was on the increase
following the decision in Beswick v Beswick (1968), it is clear from the House of
Lords decision in Co-operative Insurance Society Ltd v Argyll Stores (1997) that specific
performance remains an exceptional remedy. In that case, the House of Lords was
reluctant to extend the traditional ambit of an order for specific performance and
clung rigidly to the old restrictions on its application.
An order for specific performance is made when damages are an inadequate remedy.
Where damages are an adequate remedy, an order for specific performance would not
be made. In Behnke v Bede (1927) specific performance was granted when a ship was
sold which was of peculiar and practically unique value [to the claimant]. In contrast,
in Societe des Industries Metallurgiques SA v The Bronx Engineering Co Ltd (1975) specific
performance was refused in respect of a contract to build a complicated piece of
manufacturing machinery that weighed 220 tons and took 912 months to complete.
It was assumed that though there would be an inevitable delay damages would be an
adequate remedy because they allowed the injured party to purchase replacement
goods in the market.
There have been a number of recent cases on specific performance of obligations

where if such an order was not made immediately the possibility of ever doing so
would be lost. In Sky Petroleum v VIP Petrol (1975) effective specific performance was
granted to force the defendant to maintain fuel supplies to the claimant. The fuel
market was in turmoil and so if this order was refused the claimant had no realistic
prospect of getting a substitute supply. Similarly in Thames Valley Power Ltd v Total Gas
and Power Ltd (2005) it was said, obiter, that specific performance would be ordered
to enforce a long term contract to supply gas to an airports power facility when the
delays involved in a claim for damages would result in the insolvency of the business.
In contrast, damages for a breach of a contract to sell land are viewed as inadequate
and the usual remedy in such a case is an order for specific performance: Johnson
v Agnew (1979). A number of recent cases have concerned specific performance of
obligations where if such an order was not made immediately the possibility of ever
doing so would be lost. In Sky Petroleum v VIP Petroleum [1974] 1 WLR 576 effective
specific performance was granted to force the defendant to maintain fuel supplies
to the claimant. The fuel market was in turmoil and so if this order was refused the
claimant had no realistic prospect of getting a substitute supply. Similarly, in Thames
Valley Power Ltd v Total Gas and Power Ltd [2005] EWHC 2208 (Comm) it was said, obiter,
that specific performance would be ordered to enforce a long term contract to supply
gas to an airports power facility when the delays involved in a claim for damages
would result in the insolvency of the business.
Another consideration in awarding specific performance is that in some cases it

may be extremely difficult or impossible to quantify the claimants loss: Decro-Wall
International SA v Practitioners in Marketing Ltd (1971).
In addition, courts have considered whether or not the defendants would be able to
pay an award of damages. There are indications that where this seems unlikely, an
order for specific performance may be made: Evans Marshall & Co Ltd v Bertola SA (1973).
Courts will consider whether or not, in all the circumstances, an order for specific
performance is just.
17.1.2 Restrictions on orders for specific performance

In a number of situations, an order for specific performance will not be made.
Another way of stating this is to say that certain factors prevent an order for specific
performance. It is important to remember that since an order for specific performance
is an equitable remedy, it is also a discretionary remedy. It does not follow as a matter
of right; it is left to the discretion of the courts to decide whether or not to make
the award. The court does not exercise this discretion in an arbitrary fashion but in
accordance with strict rules and practices: Co-operative Insurance Society Ltd v Argyll
Stores (Holdings) Ltd (1998). In the Argyll case the House of Lords held that specific
performance was not available in respect of a keep open covenant in a long lease.
It is a common feature of commercial property development that certain tenancies
are key to the success of the enterprise. If well known stores take key tenancies the
remaining units are easier to let. The lease to a key tenant will also contain some
commitment to stay open for a minimum period each week. An important ground
upon which specific performance is refused is where the order would require
the constant supervision of the courts. In the Argyll case an order for specific
performance was refused inter alia on this ground (also because damages were said to
be an adequate remedy and that if granted the landlord would exploit the tenant by
demanding a high value for the release of the obligation). In discussing these points,
Lord Hoffmann was careful to point out that the problem was not that the court would
have to physically supervise the order, but that continual appearances for further
orders for a contempt of court would have to be made.
The following restrictions apply.
uu The claimants conduct must be beyond question. This rests upon the equitable
maxim that he who comes to equity must come with clean hands. Specific
performance will be refused if the party who seeks it has induced the defendant to
enter into the contract with a promise which he has then failed to perform.
uu Likewise, if the party claiming the order has performed the contract in an unfair
manner the order will be refused. The court may refuse specific performance of a
contract where the contract has been obtained by means which are unfair. It is not
necessary that the unfairness amounts to grounds upon which the contract can be
invalidated.
uu A court will not make an order for specific performance where this would result in
severe hardship to the defendant. This also includes cases where the cost to the
defendant would substantially outweigh any benefit to the claimant: Tito v Waddell
(No 2) (1977).
uu The court will not order specific performance where it is impossible for the
defendant to comply with the order. Thus, if the defendant has contracted to sell
land which he does not own, a court will not make an order to compel him to sell
this land.
uu There must also be a mutuality of remedy. Courts will sometimes refuse to order
specific performance of a contract at the request of one party if it could not order
it at the request of the other party. Thus, if
one party has promised to perform personal
services, the court will not accede to his
request for specific performance on the part
of the other party as specific performance
would not be ordered against him: Page One
Records v Britton (1968). In this case, the first
plaintiff was engaged as a manager by the
defendants, a band named The Troggs. Stamp
J held that as the band could not receive an
order for specific performance for the
plaintiff to perform his management
contract, the manager could not receive an
Figure 17.1 The Troggs
order which obliged the defendants to keep
him as their manager. This lack of a mutuality of the right of enforcement

prevented the plaintiff from receiving an interlocutory injunction preventing the
band from engaging another as their manager.
uu Lastly, courts will not make an order for specific performance with regard to certain
kinds of contracts. The most important of these are contracts for personal services
(or employment) those contracts where one party has agreed to serve another.
Contracts which involve the performance of personal services are not, on the
whole, subject to an order for specific performance. Courts are strongly reluctant
(although have no particular rule against it) to decree specific enforcement of an
employment contract. It has long been thought undesirable that parties be forced
into an employment relationship. In addition, there is the practical difficulty of
determining whether or not there has been a proper performance.
In Giles v Morris (1972), Megarry J stated:
The reasons why the court is reluctant to decree specific performance of a contract for
personal services (and I would regard it as a strong reluctance rather than a rule) are,
I think, more complex and more firmly bottomed on human nature who could say
whether the imperfections of performance were natural or self-induced?!
However, in some circumstances, a court will order that parties enter into a contract
although they would not order them to perform the contract. In the decision of
Giles v Morris the court drew a distinction between an order to perform a contract
for services and an order to procure the execution of such a contract. The mere
appearance of one provision which would not be specifically enforceable did not
prevent the contract as a whole from being specifically enforced. The contract must
be regarded as a whole and the desirability of specifically enforcing it outweighed the
disadvantages of specifically enforcing the obligation to perform personal services.
Activity 17.1
Why are damages not considered to be adequate compensation for the breach of a
contract for the sale of land?
Activity 17.2
Would an order for specific performance in a contract of services be tantamount to
slavery?
Summary
In exceptional cases, an order for specific performance may be made following a
breach of contract. The order is a discretionary remedy and a claimant must establish
that the discretion of the court should be exercised in her favour. The court will
consider the exercise of its discretion in the light of established principles and
practices.

Anson, Chapter 18: Specific remedies.
17.2 Damages in lieu of specific performance
Essential reading
Damages in lieu of specific performance.
The court has the power to award damages in addition to or in substitution for specific
performance by reason of s.50 Senior Courts Act 1981. It applies wherever the court has
the jurisdiction to entertain an application for an injunction or specific performance.
It cannot make such an award where the ability to seek the specific relief has been lost
(e.g. through lapse of time).
Claims for damages can be combined with claims for specific performance or
injunction although it is generally unnecessary to resort to the special power to award
damages in lieu of these remedies (s.49 Supreme Court Act 1981).
In Wroth v Tyler (1974) it was said that damages are made in substitution for specific
performance and must constitute a true substitute for specific performance. The
damages awarded must provide as nearly as possible what specific performance of the
contract would have provided.
In Johnson v Agnew (1980) the House of Lords accepted that damages must be assessed
by the same principles whether claimed in law or in equity.

Eisenberg, M.A. Actual and virtual specific performance, the theory of efficient
breach, and the indifference principle in contract law (2005) 93 California Law
Review 975.
17.3 Injunctions
Essential reading
Injunctions.
remedies Section 2 Specific performance and injunctions.
So far we have dealt with orders of specific performance that is, orders where the
parties are compelled to perform positive obligations. We now turn to a consideration
of negative obligations that is to say, when a party promises not to do something
or to refrain from doing something. In this case, equity offers the possibility of an
injunction by the court prohibiting some form of conduct. The court is enforcing a
negative stipulation. An injunction is also a discretionary remedy. However, courts will
generally order it as a matter of course. They will not order it where it would cause
such a particular hardship to a defendant as to be oppressive to him. See Insurance Co v
Lloyds Syndicate [1995] 1 Lloyds Rep 273 at 276.
It is important to consider that a court will not grant an injunction where to do so

would be to indirectly order specific performance: Page One Records v Britton (1968). In
many cases, however, courts have refused to recognise that the grant of an injunction
preventing the party from employment with another effectively compels them to
specifically perform the first contract. See, for example, Warner Bros v Nelson (1937)
where the court found that the defendant was a person of intelligence, capacity, and
means. The grant of an injunction preventing her from acting for anyone other than
the plaintiffs would not compel her to act for the plaintiffs. That this can be an artificial
distinction is, to a certain extent, recognised in later cases such as in Page One Records v
Britton (1968) and Warren v Mendy (1989).
Like an order for specific performance, an injunction is a discretionary remedy and a

court will only order it where it is just to do so.
Activity 17.3
Will an injunction be awarded if it has the same effect as an order for specific
performance?
Summary
A breach of a negative covenant in a contract may be restrained by the grant of an
injunction. An injunction is an equitable remedy; the effect of an injunction is to
prohibit certain conduct. An injunction will not be granted in circumstances where it
has the effect of compelling the positive covenants in a contract where an order for
specific performance would not be granted.

Treitel, Chapter 21, paras 21-05221-060.
Examination advice
A review of past examination papers reveals that questions involving equitable
remedies appear infrequently. When equitable remedies are involved in an
examination question, they tend to appear as a part of a larger question that also
involves issues of breach or damages.

Damages are not an adequate remedy for a breach of contract.
Discuss.

This question expects you to describe the nature of damages as a remedy for a breach
of contract. A good answer will display a knowledge of the principles established in
the relevant case law. To answer the question you need to analyse what a breach of
contract is and to what extent damages are not an adequate remedy. In certain ways,
damages are not an adequate remedy. For example, an award of damages is premised,
to a certain extent, on the availability of substitutes. Where substitutes are not
available, an award of damages is not an adequate remedy. Another example would
be where the contract is for the performance of a unique service. It may also be that in
certain circumstances the performance interest of the claimant will not be recognised
in an award for damages (see, for example, Panatown v McAlpine Construction (2000)).
In other cases, damages may not operate to provide a real compensation for the loss
(see, for example, Ruxley Electronics and Construction v Forsyth (1996)).
The question then draws you to consider other remedies available in equity such as
an injunction or an order for specific performance. You need to consider the nature of
these remedies and the extent to which they can rectify the shortcomings of an award
of damages.
Quick quiz
Question 1
Which of the following is not an equitable remedy available for a breach of contract?
Choose one answer.
a. Damages.
b. Damages in lieu of specific performance.
c. An order for specific performance.
d. An injunction.
e. Dont know.
Question 2
In which of the following circumstances is a court unlikely to make an order for the
specific performance of a contract?
Choose one answer.
a. Where A has contracted to sell his house to B.
b. Where A has contracted to sell his car to B.
c. Where A has contracted with B to pay C an annuity.
d. Where A has contracted with B to provide B with a service and A would be

unable to pay an order for damages.
e. Dont know.
Question 3
Which of the following is not a potential restriction courts will consider in deciding
whether or not to exercise its discretion to make an order for specific performance?
Choose one answer.
a. The contract is for the performance of personal services.
b. There must be mutuality of remedy.
c. Where an order for specific performance would cause severe hardship to the
defendant.
d. Where an order for specific performance would cause a benefit to the

defendant.
e. Dont know.
Question 4
Read carefully Lord Hoffmanns judgment in Co-operative Insurance Society v Argyll
Stores (Holdings) Ltd (1998). Which of the following was not a consideration in that
judgment?
Choose one answer.
a. When the matter came to court Argyll had already closed the Safeway
supermarket in the Hillsborough Shopping Centre, which meant that it would be
extremely difficult to re-open and re-fit the premises to resume business.
b. To order specific performance in this case would be to involve the court in the
constant supervision of the running of the business.
c. It would be inappropriate to force a defendant to run an uneconomic business

and determine how to run this business in light of the courts order for specific
performance.
d. Orders for specific performance are enforced by making contempt orders when
the courts initial order has been breached and the nature of a contempt order
makes it unsuitable to order specific performance in many instances.
e. Dont know.
Question 5
Which of the following statements about injunctions is false?
Choose one answer.
a. An injunction is a mandatory order prohibiting the performance of a negative
stipulation in a contract.
b. An injunction will be granted in lieu of specific performance in circumstances

where a court would not exercise its discretion to grant an order for specific
performance.
c. An injunction is granted at the courts discretion and is subject to the usual

equitable restrictions.
d. An injunction will not be granted where to grant it would be tantamount to

an order for specific performance in circumstances where the latter would be
refused.
e. Dont know.


1. What is the nature of an order for specific performance?
2. What is the availability of, and what are the restrictions on, an order for specific
performance?
3. What is an injunction and when is it available?
4. What is the difference between an order for specific performance and an

injunction?
5. When may damages be given in lieu of an order for specific performance?

Notes
Feedback to activities
Contents
Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
Notes
Contract law Feedback to activities page 257
Chapter 1
Activity 1.1
Reflection upon this series of questions will make you aware of how much the law
of contract lays behind everyday life. Perhaps you looked in a shop window or at
a website, rang up a shop or business to ask about the availability of some good or
service. All these actions are preparatory to entering a contract. If you purchased
any good (newspaper, drink, lunch or shopping) or service (getting on a bus or train
with a ticket) you will have entered a contract. Remember that contracts may be
formal in the sense of a signed document or informal such as an oral agreement. If
you are employed to work you will have (hopefully) performed some contractual
duties yesterday. If you returned a purchase to a shop or posted it back to an online
supplier, if your contract with a mobile network supplier came to an end or you were
sacked from your employment you have participated in the termination of a contract
as a result of breach of contract (returned goods and sacking) or performance (mobile
phone).
Activity 1.2
Most newspapers carry advertisements which aim to persuade readers to purchase
goods and services. If untrue statements are made (called misrepresentations) the
law of contract may provide a remedy to the disappointed purchaser. The business
pages will directly discuss lucrative contracts concluded between businesses;
perhaps the purchase of valuable TV broadcasting rights or the takeover (by the
purchase of shares) of one company by another. Other sections of the newspaper
may less obviously involve contract law, for example, the sports pages may discuss
the transfer of football players for large sums of money. Such a transfer is of course
a contract entered between (at least) the player, selling and purchasing clubs.
Newspaper advertisements are often placed to stimulate sales by a business to
consumers (i.e. private individuals), these are known as B2C contracts. The purchase of
broadcasting rights and the takeover of companies are concluded between businesses
and so are known as B2B contracts.
Activity 1.3
Chapter 2
Activity 2.1
The grocery shop has not made you an offer. They have made an invitation to treat. See
Grainger & Son v Gough (1896) and Partridge v Crittenden (1968). The reason that they
have only made an invitation to treat and not an offer is because if the statement in
the leaflet is construed as an offer, then the shop would be bound to sell to everyone
who presented themselves at the shop. Clearly, this is impractical and, indeed, may be
impossible. Consequently, if you visit the shop, they do not need to sell you oranges at
this price. The offer can be made by action or by statement. See Trentham Ltd v Archital
Luxfer (1993).
Activity 2.2
In Carlills case the advertiser was advertising the offer of a unilateral contract and not
a bilateral contract. Only one party would be bound from the outset.
Activity 2.3
This scenario is based upon a mistake made by the retailer Argos some years ago. Many
trainee lawyers in London law firms placed orders before the mistake was corrected!
On general contractual principles Argos would have entered a contract to supply
goods at the mistaken price if the website constituted a contractual offer which was
accepted when the order was placed online. It will not surprise you to know that
internet sellers now go to considerable lengths to expressly provide that the virtual
advertisement does not constitute an offer. The current Argos conditions provide:
2.3 Acceptance of your order and the completion of the contract between you and us will
take place on dispatch to you of the products ordered
www.argos.co.uk/static/staticDisplay?includeName/TermsAnd Conditions.htm
Even if the website advertisement had constituted a contractual offer, under the so
called doctrine of snapping up (Hartog v Collins and Shields (1939)) the customers
will not be able to accept an offer which they know (or should know: Scriven Bros v
Hindley (1913)) is mistaken as to its terms. This principle was applied in the context of
an internet site by the Singapore Court of Appeal in Chwee Kin Keong v Digilandmall.com
Pte Ltd (2005)).
Activity 2.4
If Clarke had been a widow, the case would be different for two reasons. First, Clarke
would appear to be a more deserving claimant and the court might have a harder
time dismissing her claim. Such a consideration would not of itself be a sufficient
reason to find in her favour. However, her claim might, as a result of her position,
have been viewed sympathetically and the law applied and interpreted in this light.
Second, the case, on the facts of it, appears to be much more similar to Williams v
Carwardine. However, what is necessary for a contract to be formed, on the basis of the
ratio of Clarkes case, is that Clarke is assenting to the offer that there is a meeting of
minds. It is not clear that the widow is aware of the offer and that she acts to form the
requisite consensus.
Activity 2.5
A has offered the goods for sale the requisite intention to be bound is present. Bs
initial correspondence could be taken as a rejection but it is more likely to be a
request for information and the offer survives. Bs fax is good when it is communicated
probably instantly. The fax, however, adds a condition and the communication is
therefore not an unqualified consent to As offer. On balance, this probably operates as
a conditional offer which has the effect of destroying the original offer. There is, thus,
no contract. Even if there is a contract, the contract will not include the delivery price
(unless such a term can be implied by reason of the course of dealing between these
parties or by reason of the custom of this industry).
Activity 2.6
A contract has been formed. See, for example, Butler Machine Tool Co Ltd v Ex-Cell-O
Corporation (England) Ltd and Tekdata Interconnections Ltd v Amphenol Ltd (2009). If the
seller fails to deliver the goods, they are in breach of the contract.
Activity 2.7
If your offer amounts to an offer in law according to the authorities set out in Section
2.1, there has been an acceptance of your offer. The acceptance has been by act, rather
than by writing or by discussion. Your offer has been accepted by conduct. The oranges
have been despatched in response to your request for them.
Activity 2.8
Contrast the merits of a receipt rule with those of a rule which, like the postal rule,
stipulates an earlier time when acceptance is effective. Refer to the following matters.
a. Does the sender know, or have the means of knowing, if the communication has
not been received?
b. How quickly will the sender know if the communication has not been received?
c. Which party, if any, accepted the risk of using this form of communication?
d. Has the communication been sent to arrive during normal business hours?
Activity 2.9
Your neighbour is free to withdraw her offer. The offer is not a contract and there
is nothing which binds her to keep the offer open until Monday. Authority for this
proposition can be seen in the case of Offord v Davies (1862). In this case, the defendant
undertook to guarantee certain debts of another party for a period of a year. Before
any bills were due, and within the year, the defendant cancelled the guarantee. The
Court held that as the offer was not binding, it could be revoked at any time prior to
the other party acting upon it. The time limit created no extra liabilities but merely
stipulated a period at which liabilities will definitely come to an end.
Special problems arise where the offeror has made an offer of a unilateral contract
which is accepted through performance. Here, the revocation is more difficult. The
English authorities appear divided as to whether or not this is possible. In Luxor
(Eastbourne) Ltd v Cooper (1940) the House of Lords allowed an offeror to revoke
its offer once the offeree had performed the act stipulated, whereas in Errington v
Errington (1952) the Court of Appeal did not allow revocation. The proper reconciliation
of the cases is that such revocation will only be allowed where, as in Luxor, no extra
undertaking can be implied into the contract whereby the offeror can be considered
to have impliedly promised not to revoke the unilateral offer after performance has
started.
Activity 2.10
uu June 6 Defendants letter to the plaintiff offering to sell property for 1k satisfies
the definition of an offer (i.e. it is a definite offer to be bound if certain conditions
are met). It specifies exactly the key price term being proposed.
uu June 6 Plaintiffs response (via an agent) offering to purchase the property for
950 is a counter offer because it is substantially different to the original offer. This
has two effects: it acts as a rejection of the offer to sell for 1k and stands as a new
offer to buy the property for 950.
uu June 27 The defendants letter saying he could not accept the plaintiffs offer was
simply a rejection.
uu June 29 The defendants purported acceptance of the original offer to sell the
property for 1k cannot be an acceptance. An acceptance can only take effect in
response to a prior and subsisting offer. The defendants original offer to sell for 1k
came to an end (was terminated) when it was rejected.
uu It is sometimes said that the law looks to the substance not the form of
communications. The analysis of the June 29 communication illustrates this.
It cannot be the acceptance it purports to be because there is no prior offer.
However, it could be interpreted as an offer to purchase the property for 1k.
uu However, no contract is concluded as there is no evidence of a subsequent

acceptance by the defendant of the claimants offer to purchase the property for
1k.
Chapter 3
Activity 3.1
You should have noted that cleaning the windows is a benefit to A. It is also a
detriment to B (despite the fact that B will receive 30), in that B will be expending
effort, and could be using the time to do other things. Bs actions are therefore clearly
consideration under the Currie v Misa (1875) definition.
Activity 3.2
This is the reverse of situation 1. As payment of the 30 is a detriment to A and a
benefit to B. Again this fits with Currie v Misa.
Activity 3.3
B is only in breach of contract if A provided consideration for the promise to clean
the windows on Tuesday. The only possible consideration is As promise to pay 30.
As we have seen, the courts are prepared to treat the promise to do something as
consideration. By promising to pay 30, A has provided consideration for Bs promise
to clean the windows. B is therefore in breach of contract. It is difficult, however, to fit
this within the Currie v Misa definition of consideration and is better explained by the
concept of mutuality in exchange. You might also have noted that if the agreement
between A and B was in the form of a unilateral contract with A saying: If you clean
my windows on Tuesday, I will pay you 30, B would not be in breach of contract.
Activity 3.4
Denning LJ found consideration in the mothers promise to provide for the childs
upkeep. This clearly has economic value, but raises the question of whether doing
something which the law already obliges you to do can ever be good consideration.
This is discussed below, in the feedback to Activity 3.13. The majority of the Court
of Appeal, however, seems to have found consideration in the mothers promise to
ensure that the child was happy. This does not involve anything of economic value.
Can it be distinguished from White v Bluett? It is difficult to see how. This suggests
that the requirement of economic value may no longer be part of the doctrine of
consideration.
Activity 3.5
The Court of Appeal found that the pupil did not provide consideration as regards
her pupil master, but did do so as regards the chambers. This was on the basis that
the chambers benefited from attracting talented pupils who might become tenants
and enhance the development of the chambers. As Lord Bingham put it: We take
the view that pupils such as the claimant provide consideration for the offer made
by chambers by agreeing to enter into the close, important and potentially very
productive relationship which pupillage involves. The economic benefit to the
chambers, if any, is therefore indirect in that in the future the pupil may become
a tenant and bring additional work to the chambers, enhancing its reputation and
increasing the income of its members. Again, however, the court does not appear
too concerned about the issue of economic value. This suggests, as does Ward v
Byham, that this element in the definition of consideration has less importance than
is sometimes alleged. You might also have noticed that the pupil could have argued
that she was providing consideration through suffering at least a short-term economic
detriment, in that she could have taken more secure paid employment elsewhere. This
line of argument was not, however, explored by the Court of Appeal.
Activity 3.6
The plaintiff in Collins v Godefroy, in giving evidence as a witness in response to a
subpoena, was only doing his public duty. It is clearly undesirable for witnesses (other
than expert witnesses) to be paid for giving testimony.
Activity 3.7
There are at least two possible answers to this question. The first is, as suggested by
Lord Denning, that the performance of an existing legal obligation should be treated
as good consideration, so long as there is nothing in the transaction which is contrary
to the public interest (see also Williams v Williams (1957)). The more orthodox view,
which was taken by the majority in Ward v Byham was that the mother had done
more than her legal duty in relation to her care for her daughter (i.e. following the
same line as Glasbrook Bros Ltd v Glamorgan CC). The implication is that if the mother
had done simply what the law required her to do she would not have provided good
consideration. The problem with the majority view on the particular facts of the case
is that, as noted in Section 3.1.2, it is difficult to see that the mothers actions had any
economic value. A different approach would emphasise as consideration the mothers
preparedness to show that the child was well looked after and happy. The mother
was under a statutory obligation to maintain the child but not to prove this. If this is
correct, her undertaking, upon request, to demonstrate the childs positive welfare
might constitute an extra undertaking sufficient to satisfy the orthodox test.
Activity 3.8
The main alternative explanation of Stilk v Myrick is that it was based on the fact that
the pressure put on the captain by the crew was a kind of extortion. To that extent,
the case is an early example of a type of economic duress (see Chapter 10). This way
of viewing the case has become more attractive since the Court of Appeals decision
in Williams v Roffey, since it avoids the potential conflict between the two cases. Prior
to that, however, the courts regularly treated Stilk v Myrick as being based solely upon
issues of consideration.
For detailed discussion of
this aspect of the case, and
Activity 3.9 the differences between
The main basis for distinction is that in Hartley v Ponsonby the situation had become the reports of the case, see
Luther, P. (1999) Campbell,
so perilous as a result of the reduction in the crew that the surviving members were,
Espinasse and the sailors: text
in continuing with the voyage, doing more than their original contract would have
and context in the common
obliged them to do. The case is thus an example of the principle that doing more than
law 19 Legal Studies 526. See
your existing obligation will amount to good consideration for a fresh promise.
also Harris v Watson (1791).
Activity 3.10
You should have noted the speeches of Lord Selborne at p.613, Lord Blackburn at p.622
and Lord Fitzgerald at p.630.
Activity 3.11
There are two main reasons which you might have identified. First, there is the
problem that Foakes v Beer is a decision of the House of Lords. The doctrine of
precedent does not therefore permit the Court of Appeal to overrule it. A full
reconsideration of the case will therefore have to await a case which is appealed to
the House. Secondly, the Court may well have been reluctant to embark on a general
relaxation of the rule as to part payment of debts, because it is a situation where
the debtor may often be able to put the creditor under pressure to accept such an
arrangement, and such pressure may go beyond what the courts feel is acceptable.
See, for example, the case of D & C Builders v Rees (1966), discussed in Section 3.2.
Activity 3.12
The problem for the plaintiff in Re McArdle was that he acted by himself, without any
request, or even approval, from the rest of the family. By contrast in Re Caseys Patents
the owners of the patents knew that the manager was doing the work. In Re McArdle it
could not be said, looking at the events objectively, that all the parties anticipated that
the work would be paid for, because at the time only the plaintiff knew that the work
was being done. The same answer would be arrived at by applying Lord Scarmans
test in Pao On v Lau Yiu Long, since neither of the first two of his conditions would be
satisfied.
Activity 3.13
This is a situation where prima facie Lisas promise is unenforceable because Jacks
work is past consideration. Does the exception apply? Presumably the work was
done at Lisas request, so the first of Lord Scarmans conditions is satisfied. Was it
anticipated by both parties that the work would be paid for? This is more difficult for
Jack. If he has simply worked the extra hours on his own initiative, then his claim may
well fall at this point. There would need to be some evidence that Lisa was aware that
he was working extra hours, and perhaps evidence of past practice in making bonus
payments in this type of situation. What about the third of Lord Scarmans conditions?
Would Lisas promise be enforceable if it had been made in advance of Jacks doing
the work? The only problem for Jack here is whether what he is doing is simply part of
his normal obligations as an employee. If it is then he may fall foul of the rules about
existing obligations discussed above. If, however, he is doing more than his contract of
employment obliges him to do, there is no reason why the third condition would not
be met.
Activity 3.14
There are two main reasons. First, if taken at face value, the principle seems to deny
the need for consideration altogether. As we shall see, however, later cases have
clarified that promissory estoppel only applies in a limited range of situations.
Secondly, although Denning purported to be merely building on the concept of
waiver, and Hughes v Metropolitan Railway (1877) in particular, that concept had never
been applied to the part payment of debts (which was effectively the situation in High
Trees House). Prior to that it had always been thought that Foakes v Beer (which came
after Hughes, and did not even refer to it) precluded the extension of the concept in
this way.
Activity 3.15
It is true that the broader view of consideration is likely to reduce the need to use
promissory estoppel though it is still not possible to be certain how far the Williams
v Roffey development will be taken. The area where promissory estoppel will certainly
still be required is, however, where the modification of a contract involves the
promisor remitting part of a debt (as in High Trees House, in relation to the rent). As
made clear by Re Selectmove, Williams v Roffey has not affected the rule in Foakes v Beer.
Where a contractual modification is of this kind, therefore, it will be necessary for the
promisee to provide consideration, or establish a promissory estoppel, in order to be
able to enforce the promise.
Chapter 4
Activity 4.1
To answer this question you need to consider the essential nature of your agreements.
Activity 4.2
In Simpkins v Pays, the judge finds that there was a mutuality in the agreement
between the parties. The women entered the contest together in the expectation
that, should they win, the winnings would be shared amongst them. This seems to be
sufficient to establish an intention to create legal relations. In contrast, in Coward v
MIB, the Court of Appeal regards the lift to work as a much more irregular occurrence:
it might happen or it might not. Consequently, the agreement was regarded as too
informal to demonstrate an intention to create legal relations.
Activity 4.3
The leading cases which deal with agreements in the context of a family are Balfour
v Balfour and Jones v Padavatton. You need to do three things here. First, you need to
consider what criteria the court established in these cases to determine whether or
not an intention to create legal relations is established. Second, you need to apply
these criteria to the facts given. Third, you need to provide an outcome to your
problem.
Activity 4.4
You need to apply the same process as that set out in relation to Activity 4.3. The
purpose of giving this example is for you to contrast it with the example in Activity
4.3. Applying the criteria set out above, this instance is much less likely to give rise
to a contract. The requisite intention is most likely lacking at the inception of the
agreement. The reason for this is that the promises from both A and B are directed
at the care of their children financially and physically. This strikes at the very core of
the family and, without strong evidence to the contrary, is an arrangement which is
unlikely to give rise to the necessary intention.
Activity 4.5
There are many reasons why a commercial party might not want an agreement to
be an enforceable contract. The parties may be negotiating and wish to finalise their
agreement at a later date. Or a party may wish to indicate what their present intention
is, without committing themselves to a particular course of action. A representors
statement of present intention is not as valuable to a representee as a promisors
binding commitment to future action. This was explicitly recognised in Kleinwort
Benson v Malaysia Mining (1989) where the rate of interest charged for a loan to a
subsidiary company was increased when the parent company, in respect of the loan
to its subsidiary, offered the creditor bank a comfort letter instead of the contractual
guarantee originally proposed.
Activity 4.6
In some circumstances, particularly where the parties have relied upon an agreement,
courts will more readily imply or infer a term or find that the essential terms of a
contract have been concluded. This can be seen in the decisions in Hillas v Arcos (1932)
and RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Co (2010). In both cases the
agreement had been relied upon and the court was able to infer the intention of the
parties based upon the terms in their agreement and the usage in the trade or partial
performance.
It may be that the agreement provides a mechanism, or machinery, to establish the

term. In such a situation, there is certainty of terms. Thus, if interest on a loan is to be
set at 1 per cent above the Bank of Englands base rate on a certain date, then this is a
certain term. It cannot be stated at the outset of the contract what the interest rate
is, but certainty of terms exists because, on the relevant date, the interest rate can be
determined by an agreed mechanism.
There is a difference between a term which is meaningless and a term which has yet to
be agreed. Where the term is meaningless, it can be ignored, leaving the contract as a
whole enforceable. See Nicolene Ltd v Simmonds (1953).
In this case, it is likely that a court will either imply that the size of the shirt is your size
or, alternatively, find that this term is meaningless.
Activity 4.7
In Hillas, the agreement had already been relied upon by the parties. In addition,
the wording of the agreement made it clear that the parties intended to make, and
believed that they had made, a concluded bargain. Related to this is that in Scammells
case, the uncertainty surrounded the nature of another agreement, the hire purchase
agreement, which had to be entered into. It was not possible to ascertain or imply the
terms of this agreement in the way that the courts could ascertain the meaning of the
term in Hillass case.
The most convincing reason for distinguishing these cases is likely that in Hillass case
the agreement had been relied upon; this indicates that there was sufficient certainty
present to perform the agreement.
Activity 4.8
In this instance you need to determine whether you have an agreement to agree that
is to say you would like to buy bread and he would like to sell bread but this may not
be a contract. Are all of the terms necessary for a contract to be present? In this case,
it is not certain when the bread is to be delivered. That is to say, when will the bread
delivery start right away, next week or next month? A court may be able to imply a
term that the delivery will begin in the week the order is placed. A court will, however,
have more trouble in establishing how frequently the bread is to be delivered. The
court will not want to write the terms of the contract between you and your milkman.
Activity 4.9
In this instance, you do not have to buy the house. The offer was accepted subject
to contract. There has been no contract to purchase and there is, therefore, no
obligation upon you to purchase. Only in the most exceptional cases will courts
displace the inference that arises from the use of these or equivalent words that the
parties did not at that time intend a binding contract to come into existence (RTS
Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Co (2010)).
Activity 4.10
It is impossible to compile an exhaustive list of essential terms because what is
essential will depend upon the particular case. The following are suggested by way of
guidance: (a) the identity of the parties involved; (b) price or a mechanism by which
price can be determined; (c) the time at which the contract is to be performed. Of
these, price is the most important probably because a bargain is the essence of a
contract.
Activity 4.11
You will need to come back to this area after you have reviewed the section on implied
terms (Chapter 5, Section 5.2). Courts will imply terms to give a contract efficacy; that is
to say, to make it work. In some instances this can be done because legislation allows
it to be done (see, for example, s.8 of the Sale of Goods Act 1979). In other cases, it can
be done because the parties are able to determine a mechanism established by the
parties within the contract. In other instances, the contract has been executed, that is
to say, the contract has been performed. See, for example, Foley v Classique Coaches Ltd
(1934).
Chapter 5
Activity 5.1
A purchaser will typically rely upon a seller where she has great experience of, or
expertise in, a particular area: see Esso Petroleum Co Ltd v Mardon. A purchaser is also likely
to rely upon a seller where the seller has knowledge of matters that it is highly unlikely
the purchaser would. A seller of a car, for example, is much more likely to know how
the car has been driven than the purchaser. Something to bear in mind in considering a
purchasers reliance upon the seller is that the purchaser may be protected by legislation
particularly if the purchaser is a consumer. See, for example, the Unfair Contract Terms
Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.
Activity 5.2
Lord Denning uses the term innocent of fault in the making of a statement as an aid
to the determination of whether to impose contractual liability for the statement. The
process he engages in is to determine whether the maker of the statement should
have, or could have, known more about the statement. In Dick Bentley Productions v
Harold Smith (Motors) (1947), the defendants could have checked the accuracy of their
statement rather than simply relying upon what was obvious. Their fault becomes
even more glaring because the circumstances are such that a purchaser would assume
that they had checked the accuracy of the statement.
Fault, however, means something in the nature of negligence rather than fraud or
deception. For this reason, an inquiry into fault as such is misleading. It might be more
productive to consider whether there is reliance upon the statement and the maker of
the statement has assumed responsibility for the accuracy of the statement. What this
examination of fault does reveal is the process by which the judges are apportioning
liability when the reasonable expectations of the parties are not met. The party who is
at fault will bear the responsibility for the failure.
Activity 5.3
The following factors suggest that the statement would be a term:
uu Between a private buyer and a private seller one would expect the seller who has
had possession of the goods and associated document for some time to have
greater skill and knowledge in relation to its age and model year (Dick Bentley v
Harold Smith Motors (1965) cf Oscar Chess Ltd v Williams (1967)).
uu A statement as to a cars age goes directly to its value and so is important. Applying
Bannerman v White this would suggest it was a term.
uu It is likely that the buyer clearly relied upon the seller thereby also suggesting it
was a term.
All three factors point to the conclusion that the statement as to the cars age would
be regarded as a term. These are the facts of Beale v Taylor (1967) where the court
reached the same conclusion in respect of the car which was an example of what has
become known as a cut and shut job where the front of a car that has had a rear end
collision is welded to the back of a car that has suffered a front end crash. Half the car
was in fact a 1961 Triumph Herald but the other half was not!
Activity 5.4
In practice, the parol evidence rule amounts to no more than a rebuttable
presumption that the written contract is the whole contract. The exceptions to the
rule are so numerous that its status as a rule is highly questionable. These exceptions
include evidence to establish that a contract is void or voidable on the grounds of
mistake, misrepresentation or fraud; to indicate an implied term or custom; or to
prove the existence of a collateral agreement. Because the rule can be circumvented
so easily, it is not really a rule. What is useful about the rule is that it operates as a
guide that the written terms of the contract are, at a minimum, the starting point for
the determination of the contracts terms. When the Law Commission in a Working
Paper (No 76, 1976) examined the parol evidence rule they pointed out that one
exception to the rule is wider than the rule itself, thereby negating it. The exception
established in Allen v Pink (1838) was that a party can rely upon parol evidence where
the written document does not record the whole of the agreement. However, the only
circumstance when a party would ever want to rely upon parol evidence would be
when where the written document does not record the whole of the agreement, thus
the exception has consumed the rule! Although the Law Commission said this reduced
the rule to no more than a circular statement in their full report (No 154, 1980) they
pulled back from their earlier recommendation that the rule be abolished. Therefore,
it survives as a rebuttable presumption that the terms of any written contract should
not be contradicted by other evidence (HIH Casualty and General Insurance Ltd v New
Hampshire Insurance Co (2001)). Its usefulness is probably confirmed by the fact that a
stronger, express version, known as an entire agreement clause is often inserted in
commercial contracts (Inntrepreneur Pub Co v East Crown Ltd (2000) and Axa Sun Life
Services v Campbell Martin (2011)).
Activity 5.5
The main reason that this variety of implication is rejected is undoubtedly because,
if terms were implied into contracts on the basis that it was reasonable to do so,
the contract would, inexorably, become what the judges thought was a reasonable
contract. In these circumstances, the courts are not so much interpreting the
contract as creating the contract. This is a role they have consistently refused. In
addition, it may often become difficult to determine what term is reasonable in the
circumstances of the case.
Activity 5.6
The answer to this question depends upon whether or not a term can be implied by
operation of the common law. It may be possible to establish that the commercial
practice in such a situation requires B to supply the gear system. A court would require
convincing evidence of such an invariable practice and this may not exist. A second
argument rests upon necessity that the parties, by necessity, intended such a term to
be within their contract: see MacKinnon LJs officious bystander. A possible weakness
in such an argument is that it may be that while B is the only manufacturer of such a
gearing system, B may not be the only supplier of such a system. If it can be obtained
elsewhere, there may be no necessity to imply the term.
Activity 5.7
The unseaworthiness of the vessel was not considered a sufficiently serious breach of
an innominate term in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962)
as to justify terminating the contract because the delay caused by the breakdown and
the necessary repairs were not so great as to remove the commercial purpose of the
charterparty. The seaworthiness of the vessel was thus not a condition of the contract.
The term did not meet the test set out by Diplock LJ in that case
The test of whether an event has this effect or not has been stated in a number of metaphors
all of which I think amount to the same thing: does the occurrence of the event deprive the
party who has further undertakings still to perform of substantially the whole benefit which
it was the intention of the parties as expressed in the contract that he should obtain as the
consideration for performing those undertakings?
In the case before him, there was not a substantial deprivation of benefit.
In comparison, clauses dealing with time tend to be conditions time is a particularly

important factor in commercial contracts. It is often expressed that time is of the
essence. See, for example, Bunge Corporation v Tradax SA (1981).
Activity 5.8
The practical consequences for the owner if the time charterer is late in redelivering
the ship is that he will probably be in breach of another contract with another party
for the delivery of the ship. These consequences can be quite severe.
Activity 5.9
The difficulty that Schuler faced was that while clause 7(b) of the agreement
with Wickman stipulated that it was a condition of this agreement that the
representatives of Wickman would visit the motor manufacturers at least weekly,
the court found that the parties had used the word condition in the sense of term.
Consequently, the contract could not be terminated when the weekly visits were not
made on a few occasions. What Schuler could have done to ensure that the visits were
genuinely a condition of the contract (breach of which entitled Schuler to terminate
the contract) was to clearly indicate in the contract that a breach of this obligation
entitled Schuler to terminate the contract. See Lombard North Central plc v Butterworth
(1987) where Mustill LJ discusses the ability of a party to establish as a condition a
matter which, at common law, would not be considered a condition in the sense of
allowing the injured party to terminate the contract because the obligation stipulated
was of a minor nature. It is this point which marks the difference between the majority
in Schuler (as expressed in the speech of Lord Reid) and the dissent of Lord Wilberforce.
Activity 5.10
The critical difference between the decision in Schuler AG v Wickman Machine Tools
Sales Ltd (1973) and Lombard North Central plc v Butterworth (1987) is that in the latter
case, the contract clearly stipulated that the punctual payment was of the essence of
the agreement (clause 2(a)) and that failure to make punctual payments entitled the
plaintiffs to terminate the agreement (clause 5).
Chapter 6
Activity 6.1
Your list might include the fact that such a clause may be unexpected; that parties
should not be able to escape from obligations freely undertaken; and that consumers
and other parties with weak bargaining power may be forced to accept unfair clauses.
All these reasons relate to the protection of parties from the abuse of a position of
power by the other contracting party. As to the reasons why such exclusion might be
desirable, if the parties are of equal bargaining power, a clause of this kind may simply
indicate that they have thought about where the risks under the contract should lie
and have made provision for that by means of an exclusion clause. If, for example, in a
construction contract the owner of the land has undertaken to insure against the risk
of damage to surrounding property from the work, it will be perfectly reasonable for
the developer to exclude its own liability for such damage.
Activity 6.2
The question is whether Marika has been given reasonable notice of this clause. In
Thompson v LMS Rly (1930), it was held that reasonable notice had been given, even
though the claimant was illiterate and could not read the clause. This would suggest
that, if Upton Castle have acted reasonably as regards adult entrants who understand
English, then the clause will be incorporated. The answer to this question may also
depend on whether the ticket is a contractual document or a mere receipt (see
Chapelton v Barry UDC (1940)). Note that if the clause is incorporated, it will need to be
considered in the light of the Consumer Rights Act 2015.
Activity 6.3
Generally the signing of a contract is sufficient to make the signer bound by the terms
contained in it (see LEstrange v Graucob (1934)). This would suggest that Angela is
bound by the clause. The only exceptions to this are, first, where the signer can claim
that the contract was a fundamentally different document from what it was thought
to be that is the plea of non est factum dealt with in Chapter 8, Section 8.3.3. This has
no application to Angela. Secondly, there is an exception where the principle applied
in Curtis v Chemical Cleaning and Dyeing Co Ltd (1951) operates. Here an employee
innocently misrepresented to a customer the effect of an exclusion clause in a
dry-cleaning contract. It was held that the customer, who had signed the contract,
could nevertheless recover for losses which fell within the actual scope of the clause,
because the company was bound by their employees misrepresentation. Here,
therefore, the answer would be likely to be that a court would hold that the clause
was part of Angelas contract, but only to the extent that it excluded liability in the
situation specified by Magnas employee.
Activity 6.4
The question arises here whether Davids previous dealings (24 times in two years)
have been regular and consistent. The frequency and duration of the dealings is
less than in Kendall (Henry) & Sons v Lillico (William) & Sons Ltd (1969) but more than
in Hollier v Rambler Motors (1972) so a firm conclusion is hard to reach. Questions are
often posed which sit between decided cases like this and your answer requires
interpolation (i.e. you must decide if the hypothetical you are considering is closer to
one of the decisions you refer to than the other). It is perhaps more likely here that the
course of dealing would be held to resemble that in Kendall than that in Hollier. If David
was delivering produce from his farm it is more likely that the clause would be binding
on him as under British Crane Hire v Ipswich Plant Hire Ltd (1975) a lesser frequency of
dealing is regarded as sufficient in so called B2B contracts
Activity 6.5
a. The breach involved was not a breach of a fundamental term. The fire might have
been put out quickly, in which case no serious damage would have been done. The
case is similar to Harbutts Plasticine, in that it was the consequences of the breach
which made it fundamental, rather than the nature of the obligation broken.
b. As to the explanation for the parties agreement to this wide clause, you should
have noticed that Lord Wilberforce pointed out that the rate of payment for each
visit worked out at 26 pence. Photo Production were therefore getting a very
cheap deal. As Lord Wilberforce concluded: In these circumstances nobody could
consider it unreasonable, that as between these two equal parties the risk assumed
by Securicor should be a modest one, and that [Photo Production] should carry the
substantial risk of damage or destruction.
Activity 6.6
The only question here is whether the negotiation which has taken place means
that the contract is not to be regarded as being on Bs written standard terms. The
question is one of fact and degree, but the case of St Albans City District Council v
International Computers Ltd (1996) indicates that prior negotiation will not in itself
prevent s.3 from applying. Assuming that any exclusion clause in the contract between
A and B is part of Bs standard package, then s.3 will apply.
Activity 6.7
The fact that the contract is made by an exchange of letters suggests that it is not on
written standard terms. If that is so, s.3 cannot apply.
Activity 6.8
The following questions must be asked, If the answer is negative you should move on
to the next question. Your written answer to a problem might include such a negative
conclusion but you should be careful to do so briefly. There is a thin line between
stating a negative conclusion and including irrelevant material in an answer.
1. First ignore the exemption clause! Consider what liability would arise if there
were no exemption clause. If there are other express contract terms these will
need to be interpreted. Do not forget the possible statutory implied terms or
obligations. Be careful to consider all possible liabilities (e.g. breach of an express
term or terms, breach of any implied terms or obligations and possible liability for
misrepresentation). If there would be liability then:
2. Does the exemption clause form part of the contract? If it is in a signed document
consider the signature rule. If it is an unsigned document or notice consider the
preconditions of incorporation. If yes then:
3. Does the clause cover the breach or breaches that have occurred? The will involve
the application of the principles of contractual interpretation of exclusion clauses
including the contra proferentem rule and the doctrine of fundamental breach. If
the clause or clauses do otherwise cover the breaches that have occurred:
4. Is the contract a B2B or B2C contract?
5. The previous answer will direct you to the correct statutory regime applicable to
exclusion clauses contained in that type of contract, either:
B2C CRA 2015

B2B UCTA 1977
Apply the relevant statutory provisions.
Activity 6.9
The way this question is put saves you from stage 1 and 2 above because you are told
that there has been a breach of contract and from the facts we can assume that the
clause is incorporated and that its wording covers the breach. It clearly falls within
either s.2 or s.3 of the UCTA. The question is, is it reasonable? The test is whether it was
a fair and reasonable clause to include in the contract at the time it was made not
whether it is fair and reasonable to allow Xerxes to rely on it in the circumstances
which have occurred (see Stewart Gill v Horatio Meyer (1992)).
If the latter was the test to be applied then, in the light of the apparently minor
nature of the breach in relation to the contract as a whole, and the fact that it was not
caused by negligence, it might well have been reasonable to allow exclusion. Looking
at the potential scope of the clause at the time of the contract, however, it becomes
much less reasonable. The burden of proof is on Xerxes to prove that it is reasonable
(s.11(5) UCTA). A court would have to make a judgment taking into account all the
circumstances. The breadth of the clause would suggest that it is likely to be found to
be unreasonable. Xerxes would not, therefore, be able to rely on it.
Chapter 7
Activity 7.1
In practice, the supplier will have difficulty in establishing whether or not young Inman
had sufficient clothing. It is perhaps worth noting from the decision that Buckley LJ
describes the clothing as being clothing of an extravagant and ridiculous style having
regard to the position of the boy.
This should have been an indication that these clothes were not necessaries. In
addition, it is also worth noting, on the facts of the case, that the plaintiff, a Savile
Row tailor, sent his agent to call upon Inman when he was studying at Cambridge
University. In the circumstances, he might have been able to note whether or not he
had sufficient waistcoats. In this case the law does seem to be overly protective of
young Inman. He must have known what he was doing when he ordered the clothes.
He is reported as having been spending freely and must have been aware of the debts
he was incurring.
Activity 7.2
The decision would not apply to an executory contract for necessary goods because
s.3 of the Sale of Goods Act 1979 provides that it is only where the necessaries are
sold and delivered to a minor that a reasonable price must be paid for the goods. If
the contract was an executory contract, the goods would not have been delivered.
In Roberts v Gray (1913), the contract had been partly executed and the infant had
received some benefit from it. Consequently, the remainder of the contract was also
binding upon him.
Activity 7.3
The traditional explanation is to be found in Ex parte Jones (1881). The explanation
is that the law will not suffer him to trade, which may be his undoing. The law is
concerned that the minor may lose all his capital in trade. In contrast, it is perceived
that this risk will not occur in learning a profession.
In practice, it may be difficult to distinguish in some circumstances between whether

the minor is trading or exercising a profession.
Activity 7.4
The minor will not be able to recover his money unless he can establish that there has
been a total failure of consideration (see Steinberg v Scala (Leeds) Ltd (1923)). In general
terms the incapacity of a minor will act as a defence to a claim by the other party who
seeks to enforce the contract rather than as the basis of a claim by the minor for the
restitution of the benefit he has conferred upon the other party.
Chapter 8
Activity 8.1
You must examine the underlying rationale for the decision in order to answer this
question. In this case, the trial judge stated that a contract cannot arise when the
person seeking to enforce it has by his own negligence or by that of those for whom
he is responsible caused, or contributed to cause, the mistake. In the circumstances
of Scriven, the seller was said to have contributed to the cause of the mistake. If the
buyers had not contributed to the mistake, the contract would not be void and they
should recover damages for non-delivery on the basis of the contract. See also the
discussion in Chapter 2, Section 2.1.1.
Activity 8.2
If the seller warranted that the good existed, then the warranty forms a part of the
contract of sale (or a separate, collateral contract). In this case, the seller has assumed
the risk that the good exists. If it does not, the seller is in breach of contract. This
is one explanation of McRae v Commonwealth Disposals Commission (1951) (i.e. the
Commission had warranted the existence of the vessel to be salvaged). Since it did not
exist, the Commission had breached their contract.
Activity 8.3
Yes, it is possible to regard Couturier v Hastie (1856) as a case where the seller provided
no consideration. A strong argument is made by the High Court of Australia in McRae
v Commonwealth Disposals Commission (1951) to this effect. The High Court states that
the question of mistake as to the supposed existence of the subject matter of the
contract never arose in Couturier v Hastie. This was only a subsequent and incorrect
interpretation of the case; which, unfortunately, was codified in the Sale of Goods Act
1893. The real ground for the decision is that there was a failure of consideration and
the purchaser was not bound to pay the purchase price. The purchaser would receive
nothing in exchange for the purchase price. Had he paid the purchase price, he could
have sued for the recovery of the money on the ground that this was money he had
received. The High Court also stated that such an interpretation is supported by the
observations of Lord Atkin in Bell v Lever Bros Ltd (1931). What is of central importance
is the construction of the contract. If the vendor had warranted or promised that
the goods were in existence at the time of the contract, then the vendor would be in
breach of contract if they were not. This was a risk that the vendor had assumed.
Activity 8.4
It is possible to view these as cases where the putative purchaser did not actually
consent to the contract. The consent was defective in that it was based upon a
mistaken assumption that the purchaser needed to contract to acquire the right in
question. However, it is also possible to see these as cases of impossibility in which
case, how would the consent of the parties be relevant? These are cases of initial
impossibility because it is never possible for an owner to purchase that which he
already owns. The result in the case may be explained on either basis. For a further
explanation see Section 8.5.2.
Activity 8.5
The most common instance of this form of impossibility is in the case of a res sua
where one party attempts to purchase that which he already owns. The case of Cooper
v Phibbs is usually given as support for this proposition. Another instance occurs when
the parties contract on the basis that something will be done when in fact, that
something is incapable of performance. See, for example, Sheikh Brothers v Ochsner. Yet
another instance can be found in the situation where the commercial purpose of the
contract can no longer be fulfilled see Griffith v Brymer.
Activity 8.6
On the one hand, performance of the contract is still possible the hirer could still
take the room on the appointed day. On the other hand, the entire purpose of the
contract was for the hirer to hire a room with a view (of the coronation procession).
Once the possibility of this view has gone, the commercial possibility of the contract
has also disappeared. The case can be compared to Herne Bay Steamboat Co v Hutton
(1903). Here the Court found that some of the commercial possibilities of the contract
remained and it had not been frustrated.
Activity 8.7
Steyn J (as he then was) recommended the following approach to cases of common
mistake.
It must be determined whether the contract, by express or implied condition,

provides who bears the risk of the relevant mistake for only when the contract is silent
on this point can mistake as a legal doctrine be considered.
Where common law mistake has been pleaded, the court must then consider this
claim and if the contract is found to be void, mistake in equity can not be considered.
If the contract is valid at law, it may still have to be considered as to whether or

not there is a mistake in equity. (Note You should note the effect of The Great Peace
upon this last point because Lord Phillips MR found that there was no such separate
equitable doctrine of common mistake.)
With this approach in place, Steyn J then set out the following propositions.
1. It is imperative that the law ought to uphold rather than destroy apparent
contracts.
2. Common law rules on mistake are designed to cope with the impact of sudden and
unexpected circumstances upon apparent contracts.
3. For a mistake to attract legal consequences it must be substantially shared by both

parties at the time the contract is made.
4. The mistake must render the subject matter of the contract essentially and
radically different from the subject matter which the parties believed to exist.
5. A party cannot be allowed to rely on a common mistake where the mistake

consists of a belief which is entertained by him without any reasonable grounds for
such belief.
Activity 8.8
You need to approach this question by asking yourself if there is a contract between
Ace and Crafty (Blob acts as an employee of Ace). Ace alone, through Blob, operates
under a mistake. There is nothing in the problem to indicate that Crafty is mistaken
about the worth of the card. If Crafty is also mistaken as to the card, then the parties
share a common mistake as to a quality of the subject matter of the contract and
the House of Lords decision in Bell v Lever Bros Ltd (1931) applies. On the prevailing
interpretation of Bell, that means that it is unlikely that the court will find that the
contract is void. However, if only Ace is mistaken, the contract is likely to be set aside
as void. This is because Crafty is aware of Aces mistake and he snaps at the offer. His
conduct is unconscionable or inequitable in the sense that he enters the shop solely to
take advantage of what he knows is a mistaken offer. Hartog v Colin and Shields (1939)
applies to this case there the price had always been negotiated per piece and not
per pound (which resulted in a lower overall cost). What Crafty will argue in this case
is that there have been no prior dealings between the parties in this instance Ace
will need to establish that the price of $20 is so inconsistent with the price offered
in the trade that Crafty has indeed snapped at the mistaken offer. (You should be
aware of the possibility, without exploring it in any depth, that s.20 of the Consumer
Protection Act makes it an offence for a person acting in the course of business to give
a misleading indication as to price to consumers.)
Activity 8.9
In a situation such as this, it is best to approach each subdivision of the question
individually. You may find it useful to compare the subdivision you are discussing to
another subdivision to express why one subdivision reaches a different outcome from
another.
a. The statement is certainly a misrepresentation (see Chapter 9), assuming it is

a statement of fact, not opinion. If the statement is not a misrepresentation, it
may be incorporated into the contract or form a collateral contract (a contract
which is separate from the contract of sale): see Heilbut, Symons & Co v Buckleton
(1913). If it is a contractual warranty, then A is liable to B for a breach of contract.
If it is a misrepresentation, then A may be liable to B for damages under the
Misrepresentation Act 1967, or for a fraudulent misrepresentation (Derry v Peek)
or for a negligent misrepresentation (Hedley Byrne v Heller). Regardless of the
type of misrepresentation, A should be able to have the contract rescinded if the
misrepresentation is actionable.
b. This may be actionable under s.2(1) of the Misrepresentation Act 1967 does A
have reasonable grounds at the time of making the statement for believing that
the picture is a Carr and does he have these grounds up to the time the contract is
entered into? (See Howard Marine v Ogden.) If A does not have these grounds, then
he is liable to B under s.2(1). Note in this connection that A is a dealer. If A does have
these grounds, then the parties are labouring under a mistake. The problem here is
that this is a mistake as to a quality (who painted the painting) of the subject
matter (the painting). You need to apply the decision in Bell v Lever Bros and this
rarely results in an operative mistake. The principle established by Lord Atkin is:
Mistake as to quality of the thing contracted for raises more difficult questions. In
such a case mistake will not affect assent unless it is the mistake of both parties,
and is to the existence of some quality which makes the thing without the quality
essentially different from the thing as it was believed to be. The elements of an
actionable misrepresentation
Applying this principle, it will be difficult to establish the mistake as operative.
can be found in Chapter 9 of
Does the mistake as to the quality make the thing without the quality essentially
this subject guide.
different from the thing as it was believed to be? It is still the same painting. It
was displayed by the vendor to the purchaser they identified it by the sight
of the painting before them. The identity of the artist is simply a quality of the
painting. On the other hand, there may be limited scope to assert that this quality
is so important that it is the feature by which the painting is identified. (Certainly
conditions in the modern art market, where buyers are more concerned with the
creator of art rather than the art itself, would support such an argument.) Unless
the artist can be identified as critical to this contract, the contract will not be set
aside as void.
c. In this instance both parties may be mistaken, but their mistake is not shared.
Therefore, mutual mistake and Bell v Lever Bros does not apply. Is there a lack of
agreement? On the one hand, they do seem to be dealing in different things. On
the other hand, the painting is before them this situation is unlike that in Raffles
v Wichelhaus. The offer is to sell the painting before them; the acceptance is to
buy the painting before them. The parties are not at cross purposes. What is really
going on is that B thinks he is getting the better of A and courts will not intervene
to relieve a party from a bad bargain or for not receiving what he gambled upon
receiving. This is, in other words, a case of caveat emptor.
d. In this instance, mere knowledge on the part of A that B thinks that the painting is
an original is not sufficient to render the contract void. A has to know of the mistake
of B and know that it is a mistake as to the nature of the promise made by A. The
principle is set out by Hannen J in Smith v Hughes: In order to relieve the defendant
it was necessary that the jury should find not merely that the plaintiff believed
the defendant to believe that he was buying old oats, but that he believed the
defendant to believe that he, the plaintiff, was contracting to sell old oats. There is
nothing to indicate that Bs mistake is as to the nature of the promise made by A.
e. In this variant, the mistake of B does seem to be with respect to the nature of the
promise made by A. A knows of Bs mistake. Accordingly, the principle in Smith v
Hughes (above) applies and the contract is void.
Activity 8.10
Lord Nicholls and Lord Millet found commercial sense in allocating the risk of fraud
to the party who chose to part with his goods on credit, rather than a third party
who purchases from the rogue. In addition, technological changes in the methods of
communication may render the distinction between contracts formed face-to-face
and contracts formed at a distance untenable.
Activity 8.11
Property in the goods will be Ps. When N supplied the goods on credit they took a
commercial risk and they must bear the cost of this risk. Identity was not material to
the formation of this contract because there was, in fact, no company by the name of
Greenhill & Co. Because of this, this situation is distinguishable from Cundy v Lindsay
(1878), where there was a reputable firm by the same name and the mistaken party
thought that he was contracting with the reputable firm. See the decision in Kings
Norton Metal v Edridge, Merrett (1897).
Activity 8.12
If the person did exist, the fact that their death was unknown to the parties should not
be relevant. Applying the principle in Cundy v Lindsay, there was no consensus of mind
which could lead to any agreement or any contract whatsoever between the rogue
and the innocent party. The innocent party is attempting to contract with the third
party; in the absence of consensus, the contract is void.
Activity 8.13
It does matter if the rogue assumes the identity of a fictitious party or a real party
but only if the identity is material to the contract. This will generally mean that the
mistaken party is mistaken as to identity from the outset of the process of negotiation.
If the identity only becomes relevant at the point of payment (will credit be extended
or a cheque accepted) then identity will not be viewed as material and the contract
will be voidable for misrepresentation. Where identity is relevant from the outset of
negotiations, it does matter if the identity assumed is of a real or a fictitious person.
In Cundy v Lindsay, the House of Lords found that where the rogue pretended to be
a real person, the contract was void. The mistaken party had meant to deal with the
reputable firm; with the rogue, there was no consensus and thus no contract. In Kings
Norton Metal v Edridge, Merritt & Co (1897), in contrast, there has been no firm by the
name given and there was a contract with the rogue.
Activity 8.14
This mistake is probably not sufficient to avoid the contract at common law. It is a
mistake as to a quality of the subject matter of the contract but it is not sufficiently
fundamental within the test established by Lord Atkin in Bell v Lever Bros (1931). The
contract thus stands at law and must be considered in equity. Following the decision
in The Great Peace, there is no scope for a doctrine of mistake in equity. Accordingly,
Victor is bound. However, the argument can be made that the behaviour of Peter is
objectionable and that he is seeking to take advantage of Victor. Peter, as an art expert,
must be aware that Victor has seriously undervalued the painting and is unaware of
its worth. If Victor refuses to deliver the painting, it is unlikely that a court of equity
will order specific performance of the contract. Because this case involves an order
for specific performance, it is possible to argue that the decision in The Great Peace
(which involved the question of rescinding the contract) is not applicable to these
circumstances. There is an older line of authorities dealing with the refusal to order
specific performance on grounds of mistake. Nonetheless, Victor would be liable to
pay damages to Peter if Peters claim for specific performance fails.
Chapter 9
Activity 9.1
a. Xs statement appears to be an expression of opinion as to the likely future life of the
tyres. The only possibility of this being a misrepresentation is, then, if X is aware that
the wear on the tyres is worse than he is suggesting. His statement will then become
a misrepresentation as to his state of mind, on the Edgington v Fitzmaurice (1855)
principle.
b. The phrase trained to the highest standards is too vague to be treated as

a representation. The statement about the length of supervised training
is a statement of fact, however. Since this is untrue, it will amount to a
misrepresentation. The remedies available will depend on whether the statement
induced a contract, and whether the salesman was aware, or should have been
aware, that the statement was untrue (see Section 9.2).
c. Statements in advertising are generally treated as mere puffs, not giving rise to
any legal liability. It is unlikely, therefore, that the statement on the poster would
be treated as a misrepresentation, even if the statement that the CD was the best
could be treated as fact rather than opinion. There is also the requirement that
the statement is made by one contracting party to the other. Could the statement
on the poster be said to be made by the shop selling the CD, rather than the
company which produced it?
Activity 9.2
Keiths statement to Alpha Sports is a statement of intention. Such statements cannot
usually be treated as misrepresentations. The exception is where there is evidence
that the person making the statement did not genuinely have the relevant intention
(as in Edgington v Fitzmaurice). In the absence of evidence that Keith had already
decided to retire when he made the statement to Alphas representative, Alpha will
not be able to take action against Keith for misrepresentation.
In the alternative situation, it seems that Keith has changed his mind about his
intentions between speaking to Alpha, and signing the contract. In general, keeping
silent does not amount to a misrepresentation. But here Keiths change of mind means
that his statement about his intentions made to Alphas representative is no longer
true. There is no direct authority in relation to changed intentions (as opposed to
changed circumstances), but by analogy with With v OFlanagan (1936), it would seem
that Alpha can argue in this situation that Keiths failure to tell them of his change of
mind does constitute a misrepresentation.
Activity 9.3
The main other use of the term rescission is in relation to the power of the innocent
party to terminate a contract for breach. This is discussed further in Chapter 14. The chief
difference is said to be that termination for breach does not aim to undo the contract,
but simply to bring it to an end for the future. In other words it is only obligations which
are not yet due for performance that are rescinded in this situation. The distinction is
not clear cut, however, in that in some cases termination for breach may lead to property
being handed back. If, for example, a sale of goods contract is terminated because the
goods are of unsatisfactory quality, the consequence may be that the goods are returned
to the seller and the purchase price is returned to the buyer. For the sake of clarity it
is probably best to reserve the term rescission for misrepresentation and to refer to
termination or repudiation when breach is being discussed.
Activity 9.4
You must remember that rescission of a contract is available even if the
misrepresentation is entirely innocent. It is also a powerful remedy which, in undoing
the contract, can have serious consequences. Taking these two factors together, the
courts are probably right to limit the scope for rescission, leaving the situations where
the misrepresentation was not innocent to be dealt with by damages under the tort of
deceit (as discussed in Section 9.2.2).
The gap that was left, however, was the situation where the misrepresentation was
negligent. If the right to rescind was lost, the victim of a negligent misrepresentation
was left without a remedy. This gap has now been filled as far as damages are
concerned by both the common law and the Misrepresentation Act 1967 (again, see
Section 9.2.2). It is arguable that now that the law has recognised a range of categories
of misrepresentation, more flexibility should be employed in deciding whether to
allow rescission.
Activity 9.5
The Court of Appeal thought that if the misrepresentation had not been made
then the plaintiffs would still have bought the shares, but at a lower price. They
would therefore still have suffered a loss on the resale of the shares, but a smaller
one, based on the difference between the actual purchase price and the price they
would have paid without the misrepresentation. The House of Lords thought that
if the misrepresentation had not been made then the plaintiffs would not have
bought the shares at all. They were therefore entitled to the full loss suffered on the
transaction. It was irrelevant that the dramatic reduction in the value of the shares
was unforeseeable at the time of the initial contract. Since the misrepresentation was
fraudulent, the principle in Doye v Olby meant that all direct losses were recoverable,
without any consideration of remoteness.
Activity 9.6
Where the fraud involves a misrepresentation by a party to a contract which has
induced the other party to enter into an agreement, there seems little point in using
the tort of deceit. The Misrepresentation Act 1967 has a much lighter burden of
proof for the claimant, and the remedies available are just as extensive as for deceit
(on the basis of Rosyscot v Rogerson). Do not forget, however, that the tort of deceit
does not only apply to misrepresentations inducing a contract; for fraud outside the
contractual area the tort of deceit may well still be a useful basis for a claim.
Activity 9.7
McKendricks argument supports the view taken by other academic commentators,
and in particular Hooley (1991), that the Court of Appeals decision in Royscot v
Rogerson involved a misinterpretation of s.2(1) of the 1967 Act. Although the section
uses the analogy of fraud, there is nothing in it which compels the court to apply
the same approach to damages as is used in the tort of deceit. The current approach
means that the law fails to make any distinction between the defendant who cannot
prove that he or she took reasonable care and the defendant who is proved to have
acted fraudulently. McKendrick suggests that the different level of culpability between
the defendants would justify (or even require) a difference in the level of damages
which they are required to pay. (Note that considerations of culpability have a much
stronger role in the law of tort than they normally do in contract, where the loss
to the claimant, rather than the fault of the defendant, is generally the dominant
consideration.)
Chapter 10
Activity 10.1
Shipbuilders who were building a ship demanded (as a result of currency devaluations
but with no legal entitlement) that all outstanding stage payments be increased by
10 per cent. The purchaser, who had already entered a lucrative charter for the vessel
to commence immediately upon delivery, protested but reluctantly agreed to the
increase. After payment and delivery of the ship the purchasers sought the return of
the extra sums paid. On the basis that there was no consideration provided by the
shipyard in exchange for the payments and that they were in any event obtained by
duress.
The appropriate test for consideration at that time was that in Stilk v Myrick (1809)
as the case predated Williams v Roffey Bros and Nicholls (1991). Thus, consideration
for the promise to increase outstanding instalments would need an undertaking of
something beyond that which was originally promised. Consideration was found in
the shipyards promise to amend the letter of credit to cover the increased payments
(effectively a banks promise to return to the purchaser any payments made in the
event of the shipyard having financial problems).
The court further held that the extra payments were obtained by economic duress.
They were made as a result of the shipyards threatened breach of contract. The
purchaser had protested but felt compelled to agree as he had no reasonable
alternative. However, the payments were not ultimately returned because though
there was initial economic duress, the purchaser had affirmed the contract at a time
when they were free of the economic duress.
Activity 10.2
In this scenario the shipyard would be threatening to do something that it was
otherwise legally entitled to do. The courts have held in Progress Bulk Carriers Ltd v
Tube City IMS LLC (The Cenk Kaptanoglu) (2012) that what constituted economic duress
was to be considered on a fact-specific basis and that there was no requirement that
an unlawful act had been committed. An illegitimate threat may combine elements
of lawfulness and unlawfulness (Borrelli v Ting (2010)). Exceptionally, a threat only
to do something that was otherwise lawful might constitute economic duress if it
compelled its victim to submit. According to CTN Cash and Carry v Gallaher (1994)
it is less likely to amount to such when then contract is between two commercial
entities. According to this case it will also be relevant to know if the party making
the threat acted in good faith (i.e. believed himself to be entitled to the demand he
was asking for). On this basis the threat in this example which is basically a threat
to refuse future business is unlikely to constitute economic duress. This accords
with an Australian case Smith v William Charlick Ltd (1924) where a millers claim for
reimbursement of surcharges paid to the Wheat Harvest Board failed despite the fact
that they had threatened to cut off future supplies to him if they were not paid.
Activity 10.3
In Pao On v Lau Yiu Long (1980), Lord Scarman set out the following criteria as indicative
of the existence of duress.
1. Did the person who was allegedly coerced protest at the time?
2. Did this person have an alternative course of action open to him such as an
adequate legal remedy?
3. Was the person independently advised?
4. Did the person take steps to avoid the contract once they had entered it?
Activity 10.4
Mocatta J states that, since duress renders the contract voidable, it is for the party
coerced to act to set aside the contract once the pressure has been removed. The
party must also have a full knowledge of all the circumstances. The court must, on an
objective view, determine whether or not the party coerced has acted to affirm or not
the voidable contract. This is done by his conduct: quoting an earlier decision, Mocatta
J stated that the question was what would his conduct indicate to a reasonable man
as to his mental state? In the case before him, Mocatta J noted that the party had not
registered a protest once the duress had been removed, that they had made the final
payments without qualification and that there was a delay between making the final
payment and protesting of the duress.
Activity 10.5
It is by no means certain that the case would have been decided on the same basis if
Kafco were aware that Atlas had mistakenly underbid the job. Two possibilities arise
in such circumstances. The first is that if Kafco had snapped up Atlass mistaken offer,
it is possible that no contract would have arisen because of this unilateral mistake
(see Chapter 8, where the topic of mistaken offers is discussed). The second is that if
Kafco were aware that Atlas had underbid the job the case begins to look very similar
to Williams v Roffey Bros (discussed in Chapter 3). The question might then become
whether, absent duress, there was consideration in the form of a practical benefit for
the new contract to pay more.
Activity 10.6
There are many ways of distinguishing between commercial pressures and a coercion
of the will that constitutes duress. One difference can be seen from the speech of Lord
Scarman in Pao On v Lau Yiu Long. In cases of economic duress, for duress to be present,
it must be shown that the payment made or the contract entered into was not a
voluntary act on his part. In contrast, normal economic pressure is not normally to
remove the voluntary nature of the contractors act. Such an explanation ignores what
has, more recently, become the focus of attention in cases of duress. The focus here
is upon the illegitimate acts or pressure brought by a stronger party upon a weaker
party. Such a focus is present in Universe Tankships Inc of Monrovia v International
Transport Workers Federation. Thus, what is critical in the separation of duress and
normal commercial pressure is the use of illegitimate force.
Activity 10.7
Where the bank knows of the wrongdoing of the debtor, then they will be bound by
the suretys equity to avoid the transaction: Barclays Bank v OBrien. It would be highly
unusual, however, for a bank to have actual knowledge of the debtors wrongdoing.
Generally, the bank will be bound because it has constructive notice of the suretys
right to avoid the transaction. The bank has constructive notice when it knows of facts
which should put it upon inquiry. The most common fact will be that the transaction is
not, on the face of it, to the financial advantage of the wife: see Barclays Bank v OBrien
(where the transaction was not, on the face of it, to the advantage of the surety) and
CIBC v Pitt (where the transaction, on the face of it, appeared to be to the advantage
of the surety). See Lord Nicholls speech at paragraphs 3843 of Royal Bank of Scotland
v Etridge (No 2) in which he discusses the development of form of notice. Lord Nicholls
continues to consider [at paras 44 and 4749] when a bank is put in inquiry.
Activity 10.8
The presence of disadvantage strengthens the presumption that the only reason
for the transaction was the wrongdoing of the stronger party. The transaction is not
otherwise readily explicable on other grounds. See Royal Bank of Scotland v Etridge
(No2) (2001), paras 2128.
Activity 10.9
The most obvious difference between the two is that economic duress is a legal
doctrine, whereas undue influence is an equitable doctrine. Equity operates as a
matter of discretion rather than as of right. There are, however, many similarities
between what is required to establish each of them. Duress, whatever form it takes,
requires actual coercion or pressure (Pao On v Lau Yiu Long). Similarly, actual undue
influence consists of actual pressure brought to bear upon one party by another. The
similarities between the two were noted in Royal Bank of Scotland v Etridge (No 2) by
Lord Nicholls when he described actual undue influence as overt acts of improper
pressure or coercion such as unlawful threats and then commented that Today
there is much overlap with the principle of duress as this principle has subsequently
developed. [para 8] Similarly, Lord Hobhouse in the same decision noted that the
same conduct as would constitute actual undue influence might constitute the
defence of duress at law [para 108].
Chapter 11
Activity 11.1
Lord Reid stated that the agency argument might be successful if:
uu the contract made it clear that the stevedores were intended to receive the
protection of the exemption clause
uu the contract made it clear that the carrier, in addition to contracting on his own
behalf, was also contracting on behalf of the stevedores
uu the carrier had authority from the stevedore to enter into the contract on his
behalf (or, possibly, a later ratification of the contract by the stevedores would
suffice) and any difficulties about how the stevedores would provide consideration
for this contract were overcome.
The agency argument was not successful in the case before Lord Reid. The stevedores
were not named or described in the class of people to whom the limitation of liability
was to extend nor was there any evidence that the carrier was acting on their behalf.
Consequently the first two criteria were not satisfied.
Activity 11.2
The principal arguments in favour of privity of contract are:
uu the doctrine clearly defines the ambit and enforceability of contractual obligations
uu it can ensure that courts do not create a contractual obligation
uu it operates in tandem with the requirement that consideration must move from
the promisee and the third party has not provided any consideration
uu it would not be desirable for a promisor to face actions for breach of contract from
both the promisee and the third party
uu if the third party could enforce the contract, this would affect the ability of the
parties to vary or rescind the contract.
The point here is that Lord Reid is indicating how parties can establish a collateral
contract between the owner of the goods and the stevedores in order to provide the
stevedores with the benefit of the exclusion clause. Because it is a separate contract, it
requires consideration.
The principal arguments against privity of contract are:
uu it leads to commercial inconvenience
uu it can operate to create great injustices
uu it defeats the intentions of the parties to the contract
uu it puts English contract law in an anomalous position in that the contract law of
other countries does recognise third party rights
uu it creates uncertainty in contractual relationships given the number of devices

which exist to circumvent the application of the doctrine.
Activity 11.3
The survival of privity of contract illustrates some of the limitations of the common
law. Courts were hesitant to overrule the doctrine (existing contractual relationships
would be upset if the doctrine was abolished) and expressed disapproval of it. Steyn
LJ, in Darlington BC v Wiltshier Northern Ltd (1995) pointed out that common law courts
are the hostages of the arguments deployed by counsel if counsel did not seek to
challenge the doctrine, it was difficult for the court to do so. Legislative action was
difficult to achieve, in large part because of the difficulty in finding parliamentary time
to deal with the matter.
Activity 11.4
The 1999 Act preserves existing exceptions to privity (subsection 7(1)) and the Law
Commission, in its report on privity, Privity of Contract, Contracts for the Benefit of
Third Parties (Law Com No. 242 Cm 3329 July 1996), expressed the hope that legislation
would not hamper the further judicial development of third party rights. The result is
that any situation concerning privity of contract and a third party beneficiary will fall
within one of four scenarios. In the first scenario, the problem will be dealt with by the
1999 Act alone. In the second scenario, the problem will be dealt with by an existing
common law device and does not fall within the 1999 Act. In the third scenario, the
problem can be dealt with by both the 1999 Act and an existing common law device.
In the fourth scenario, the problem does not come within either the existing common
law devices or the 1999 Act.
Activity 11.5
There are two opposing arguments as to the future development of a performance
interest. It is possible to view cases which appear to accept such a performance
interest as situations where, in the absence of such recognition, there would be
no effective sanction for a breach of contract. The 1999 Act, however, provides
parties with the opportunity to confer a benefit on a third party. If they have chosen
not to, the court can view the lack of this conferment as indication that there
is no performance interest. See, for example, the approach taken in Panatown v
Alfred McAlpine Construction Ltd (2000). This may, however, cause harsh results in
circumstances where the parties have not, by accident, brought themselves within
the ambit of the Act. In such a circumstance, the lack of a performance interest which
entitles the promisee to substantial damage allows a promisor to breach a contract
with impunity.
Activity 11.6
The conditions were those set out by Lord Reid in Scruttons Ltd v Midland Silicones Ltd
(1962) that:
a. the contract made it clear that the stevedores were intended to receive the
protection of the exemption clause
b. the contract made it clear that the carrier, in addition to contracting on his own
behalf, was also contracting on behalf of the stevedores
c. the carrier had authority from the stevedore to enter into the contract on his
behalf (or, possibly, a later ratification of the contract by the stevedores would
suffice), and
d. any difficulties about consideration moving from the stevedores were overcome.
Activity 11.7
Cs consideration was the performance of the contract with B; that is to say, the
unloading of the ship. It was good consideration because their performance thus
provided A with the benefit of a direct obligation which they could enforce.
Activity 11.8
To answer this question, you need to consider what Cs potential liability is and what
defence they could use to meet this liability. They have no contract with A and thus
are not liable for a breach of contract in causing the damage. Where their liability
probably arises is for the tort of negligence. The issue then becomes whether or not
they have a contractual defence to this action based upon the exemption clause
negotiated by B. To determine this, you need to apply the criteria (noted in Section
11.3.3) set out in The Eurymedon to see if they are met. It is likely that criteria (a), (b)
and (c) are met; thus the problem is concentrated on (d). The consideration in The
Eurymedon was the stevedores performance of the contract between the carriers and
the stevedores. Here, the damage occurs before the B/C contract is performed. In the
circumstances, it would appear that no consideration has been provided such that a
contract of immunity can arise between A and C. If there is no such contract, then C
cannot raise a contractual defence of immunity. See Raymond Burke Motors Ltd v Mersey
Docks & Harbour Co [1986] 1 Lloyds Rep 155 for an example of this problem.
Activity 11.9
Chapter 12
Activity 12.1
The problem that Bertha faces is that the contract for the sale of the rat poison is
tainted with illegality. The first issue to determine is whether the contract is illegal
as formed or illegal as performed. In this case, it appears to be illegal as formed
the statute requires that an authorisation certificate must be produced. Here, the
certificate was not genuine. Re Mahmoud & Ispahani (1921) needs to be considered; in
this instance, it is probably not possible to recover damages under the illegal contract.
However, it may be possible to recover the reasonable value of the goods supplied:
see Mohamed v Alaga & Co (A Firm) (2000). The difficulty with this approach is that it
allows a contract which cannot be enforced directly to be enforced indirectly. See, for
example, Awwad v Geraghty & Co (A Firm) (2000) in which Mohamed v Alaga & Co was
distinguished and the claim for the reasonable value of the services was not allowed.
Activity 12.2
The difference created by this variation is that Bertha is not an innocent party to
the illegality in the sense that she knows there is no certificate in existence. In the
circumstances, it is unlikely that she will be able to recover anything under the contract.
See, for example Parkinson v College of Ambulance Ltd & Harrison (1925), Kiriri Cotton Co
Ltd v Dewani (1960) and Ashmore, Benson, Pease & Co Ltd v A v Dawson Ltd (1973).
Activity 12.3
In this variation of the problem, the contract is legal as formed (Bertha is registered
and the authorisation certificate is validly issued) but it is illegal as performed
when Berthas van exceeds the speed limit. In this instance, you need to apply St
John Shipping Corporation v Joseph Rank Ltd (1957). In applying the criteria set out in
that case, it is unlikely that Parliament, with respect to the speeding, intended to
prohibit this sort of contract. As such, Berthas punishment lies in the criminal law
and not the civil law. This result is supported by more recent cases such as Parkingeye
Ltd v Somerfield Stores Ltd (2012) where the courts appear to take a more flexible
approach in line with the Law Commissions earlier recommendations (The Illegallity
Defence, 2009) which seeks to balance more appropriately the interests of the parties
rather than to allow an easy escape from a contractual undertaking on the basis of a
peripheral illegality.
Activity 12.4
In Pearce v Brooks, the sexual immorality of prostitution was sufficient to render the
contract to supply the brougham to be illegal. In Tinsley v Milligan, in contrast, the
fact that the pair were lovers was not considered sufficiently important to argue that
it affected their contractual relations. From this we can deduce that conceptions of
morality (and in the case law this is invariably sexual morality) are much more relaxed
than they have been in the past. What is considered immoral changes over time.
Activity 12.5
To answer this question, you need to examine the cases. There is no scientific process
employed for ascertaining the nature of public policy.
Chapter 13
Activity 13.1
This question involves a restraint of trade clause in a contract of employment. You
need to consider, firstly, whether or not the clause seeks to protect a legitimate
interest of Plod Products. Plod will need to establish this. A weakness of their position
is that they may be seeking to restrain Amanda to keep her from meeting clients
of theirs in other words, it may be to keep her from competing with them. It may
be that they seek to protect clients from awareness of FabuMats paper products.
Alternatively, it may be possible for Amanda to argue that the real reason they seek
to restrain her is to prevent a competitor from gaining strength. Neither of these is
a legitimate interest on the part of Plod: see Herbert Morris Limited v Saxelby (1916). If
Plod is able to establish a legitimate interest, Plod must still establish that the clause
is reasonable as to subject matter, duration and area. The difficulty they have here is
that not only is Amanda dealing in a different product, but the area of the restraint is
very broad: see Mason v Provident Clothing & Supply Company Ltd (1913). It is likely to be
unreasonable as a result.
Activity 13.2
This question involves much the same issues of restraint in a contract of employment.
The same approach should be followed as to whether or not the restraint is reasonable
between the parties. Unlike the scenario in Activity 13.1, it probably is. Mega-
Pharmaceuticals has a legitimate interest to protect with regard to its highly sensitive
confidential information. The restraint is very long (five years) and broad (worldwide)
but Dorothy will be paid for the duration of this restraint. Where this clause differs
from the previous one is that there is an obvious public interest involved here. If
Dorothy is at the verge of discovering a cure for a life-taking disease, it is hard to see
how the public interest is served by taking her out of circulation.
Activity 13.3
To answer this question, you need to consider the criteria established in Nordenfelt v
Maxim Nordenfelt. Taylor Skate Ltd will need to establish that they have a legitimate
interest to be protected. If they succeed in this, they then need to establish that the
clause goes no further than necessary in protecting this interest that the clause is
reasonable as between the parties. See, for example, Herbert Morris Ltd v Saxelby (1916).
Here, Taylor Skate Ltd will encounter problems the clause covers the entire world, it
covers any business in which Taylor Skate might undertake in the future and the time
period is very long. If Taylor Skate is able to establish that this is what is adequate to
protect their interest, it is then open to Mr Taylor to establish that the clause is not in
the interests of the public.
Activity 13.4
The courts exhibit a concern about re-writing the contract between the parties
when they examine it to see if it is affected by the doctrine of restraint of trade.
They recognise that it is not the role of the court to re-allocate burdens assumed
by a party. However, they are also concerned with situations where one party has
been disadvantaged vis vis the other as to the terms of the contract. The example
Lord Reid, in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd, gave was where
conditions have been incorporated which were not the subject of negotiation. In A
Schroeder Music Publishing Co Ltd v Macaulay, the concern with regard to one, stronger,
party taking an unacceptable advantage over the other is more clearly expressed.
Chapter 14
Activity 14.1
This question involves a consideration of the nature of the term in question and
the standard of performance required. Terms as to time are generally construed as
conditions in commercial contracts (Bunge v Tradax (1981)). In this instance it is said
that time is of the essence which has been treated as a sufficient indication that the
parties intended the term to be a condition (Lombard North Central v Butterworth
(1987)). Additionally, liability for performance tends to be strict. The cause of the
representatives lateness is, therefore, likely to be irrelevant. For a discussion of
these matters, see Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514. In the
circumstances, Tighte Fist plc is entitled to terminate the contract for breach.
An examination answer could also include discussion of whether the police action
amounted to frustration of the contract (see generally Chapter 15). A specific issue
here would arise if, having set out earlier, the delay could have been avoided. If this
was the case it might be easier to argue that the risk of delay was assumed by MML and
consequently that the contract was not frustrated.
Activity 14.2
A party is said to affirm the contract when he elects to carry on with the contract and
not to terminate it because of the breach of the other party. To affirm the contract,
the party must have knowledge of the facts giving rise to the right to elect. More
recent cases appear to have further required that the innocent party also be aware of
the right to elect: see Peyman v Lanjani (1985) and The Kanchenjunga (1990). While, in
theory, the innocent party is free to decide whether to terminate the contract or to
affirm it, his decision may in some circumstances be affected by the requirement that
he mitigate his damages. It may be that the only way he can mitigate, or minimise, his
damages is to affirm the contract. See Payzu Ltd v Saunders (1919).
See Chapter 16, Section 16.6, for a full discussion of mitigation. The innocent party must
act to minimise his or her damages and not increase them.
Activity 14.3
It is of critical importance for the innocent party to determine the nature of the term
breached. Is the term a condition, warranty or intermediate/innominate term? If the
term is a warranty, the innocent party is not entitled to terminate the contract; his
remedy lies in damages. If the term is a condition, or a sufficiently serious breach of
an intermediate/innominate term, then the innocent party is entitled to terminate
the contract. One practical aspect of this important point is that if an innocent party
elects to terminate a contract and refuses to perform his further obligations where
(because of the nature of the breach) he does not have that election, he is himself in
breach of contract. See Decro-Wall S.A. v International Practitioners in Marketing (1971).
Activity 14.4
Yes, this statement is correct. When an appeal is heard by several judges the ratio
decidendi of the case is the principle of law applied by the majority of those judges
to the material facts of the case. Lords Tucker and Hodson were part of the majority
but did not mention the restrictions outlined by Lord Reid. However, two is not a
majority of five (the number of judges that heard the appeal in the House of Lords,
Lords Keith and Morton dissented). Therefore, the ratio decidendi is to be found in the
extent to which Lord Reid agreed with Lords Tucker and Hodson (i.e. including the two
restrictions). As Megarry J in Hounslow explained:
without Lord Reid there was no majority for the decision of the House [of Lords]. I do not
think that it can be said that a majority of a bare majority is itself a majority.
Activity 14.5
The danger to the claimant with such a course of action is that he will be found to have
no legitimate interest, financial or otherwise, in performing. In so doing, he would
be saddling the defendant with an additional burden where there was no benefit to
himself, the claimant. See the speech of Lord Reid in White and Carter (Councils) Ltd v
McGregor (1962).
Activity 14.6
The risk in not accepting an anticipatory repudiation is that in so doing, the innocent
party may forego all opportunity to claim damages in the event that the contract is
later discharged by reason of his own breach or by frustration.
Chapter 15
Activity 15.1
There are close links between frustration and the type of mistake known as common
mistake. For example, if A and B are contracting for the hire of a concert hall, but
unknown to them at the time they make the contract the hall has just burnt down,
their contract will be void for common mistake. If, on the other hand, the hall burns
down the day after they make their contract, it will be frustrated. Both concepts
are concerned with deciding where risks and associated losses should fall when a
contract is disrupted by events outside the control of either party. The question as
to which applies depends solely on whether the disrupting event takes place before
or after the contract is made. (See, for example, Amalgamated Investments & Property
Co Ltd v John Walker & Sons Ltd (1977).) For this reason, the area of law considered in
Chapter 8 involving common (i.e. shared) mistake is sometimes called the law of initial
impossibility, and the area covered by the doctrine of frustration is sometimes called
the law of subsequent impossibility. It should be noted that some commentators
argue that the close relationship between the doctrines of common (i.e. shared)
mistake and frustration should not be pressed too far. Treitel (para 19-122) notes that:
The law seems to be less ready to hold that a contract is void for mistake than discharged
by frustration, perhaps because it is, in general, easier to be sure of present fact than to
forsee future events
Activities 15.2 and 15.3

As you will have realised, these questions are intended to focus attention on why
some contracts which involve the provision of services are more likely to be frustrated
than others. I suspect that you are much more likely to have said that the contract for
hair styling would be frustrated than the contract for servicing the car. Why should
there be such a difference? This can be explained by remembering that it is important
when considering frustration to identify exactly what the contract was for. It is likely
that in 15.2, the contract was simply for Nathalies car to be serviced. In 15.3, because
Nathalie is much more likely to be concerned about who styles her hair than who
services her car, it may well be that the contract is for her to have her hair styled by
Jamie. Once the precise nature of the contract has been identified, then the question
becomes whether the alleged frustrating event has rendered performance impossible
or radically different. In 15.2, if the mechanic is not specified in the contract, then
the unavailability of Jamie makes no difference to Phils obligation to carry out the
service. In 15.3, if Jamie has been specified as the stylist, then his absence will render
performance on the Friday impossible and the contract will be frustrated.
You might also like to consider what the position would be if all Phils mechanics go on
strike on Friday (see The Nema (1981)).
Activity 15.4
The events which have occurred in the two alternative situations (the fire at the
Hall destruction of subject-matter, and the injury to Claudio Quays personal
incapacity) are clearly of a type capable of bringing about the frustration of a contract.
The question requires you to think, however, about whether on the facts there is a
sufficient effect on the particular contract for it to be frustrated. In particular, you
will need to think about the case of Herne Bay Steam Boat Co v Hutton (1903), outlined
above. In both the situations given, some part of the contract survives the frustrating
event. The question is whether the contract has become radically different from what
was originally intended. In (a), the answer is probably that it has. Although the tour of
the grounds is still possible, two thirds of the contract cannot now take place. If it is
frustrated, this will mean that Aaron will not be able to sue for breach of contract in
relation to the meal and the concert, but the rules relating to the effect of frustration
(discussed in Section 15.4) will apply.
The answer to (b) is slightly more difficult. How important an element was the
concert? The most likely answer here seems to be that the contract will not be
frustrated, but that Aaron will be entitled to compensation for breach of contract, in
that Highplace Hall has not provided the promised concert.
All the above is on the assumption that there is nothing specific in Aarons contract
with Highplace Hall to deal with these situations.
Activity 15.5
A significant difference between The Super Servant Two and Maritime National Fish
is that in the Super Servant the owner of the vessels was faced with breaking one or
other of two contracts. Once the Super Servant Two had sunk it was impossible for
both contracts to be performed. In contrast, in Maritime National Fish the defendants
could have allocated one of the licences to the plaintiffs boat rather than to one of
their own boats. In other words, they could have performed their contract with the
plaintiffs without breaking a contract with anyone else. The Court of Appeal, however,
treated the two cases as being the same, arguing that in Super Servant Two the reason
for the inability to perform was not the sinking of the vessel, but the decision of the
owners to allocate the Super Servant One to another contract. Thus in both cases
the failure to perform resulted from a decision of one of the parties. Critics of the
decision in Super Servant Two argue that the cases are not identical and that in the
Super Servant Two case, the owners had no real choice, in that whichever contract they
used the Super Servant One for, this would involve breaking another contract. There
was therefore a much stronger case for treating the Super Servant Two as a case of
frustration. Note, however, that the defendants in Super Servant Two were protected by
a force majeure clause, provided that they had not been negligent.
Activity 15.6
The contract is clearly frustrated when the house is destroyed. The common law
rules say that obligations which have arisen up to that point generally stand. The
only exception is where there is a total failure of consideration. The obligation to pay
the 1,500 arose before the destruction, but it seems that there is a total failure of
consideration, in that Peter has done no work on the contract. The common law would
therefore allow Sabina to recover the full 1,500. Peter has no entitlement to any
payment under the contract not even for the money spent on materials.
Activity 15.7
In this case, Peter has started work. Sabina cannot argue, therefore, that there is a
total failure of consideration. Because Peter has done some work, albeit very little, the
common law rules say that Sabina cannot now recover any of the 1,500 which she has
paid. This was the situation in Whincup v Hughes (1871) where a father apprenticed his
son to a watchmaker for six years for a premium of 25. When the watchmaker died
after the first year the father could not recover any part of the consideration as the
failure of consideration was only partial.
Activity 15.8
As in Activity 15.7, there is no total failure of consideration, so the 1,500 cannot
be recovered. The obligation to pay the balance, however, does not arise until the
contract has been completed. Sabina is not therefore, under the common law rules,
obliged to pay anything to Peter for the work done over the previous weeks. (See, for
example, the case of Appleby v Myers (1867)).
Note that in practice the Law Reform (Frustrated Contracts) Act 1943 would apply
to the contract between Sabina and Peter and this would affect some of the above
answers. This is dealt with further in Section 15.4.2.
Activity 15.9
You will remember that under the common law rules (see Activity 15.6 above)
Sabina would have recovered her full 1,500 because there was a total failure of
consideration. Peter would have been entitled to nothing. Under the Act (which would
apply in this situation) Sabina is still entitled to recover her payment under s.1(2). The
main difference is that under the Act Peter can argue that he should be allowed to
retain some of the 1,500 to cover the cost of the materials which he has bought. It
is up to the court to decide what it is just for him to retain. It might be relevant, for
example, whether the materials are of a kind which can be used on other jobs, or
whether they were specially designed for the work to be done on Sabinas house.
Activity 15.10
Under the common law, Peter could retain the full 1,500 because there is no total
failure of consideration. Under the Act, the position will be the same as the answer
to Activity 15.9. In other words, under s.1(2) Sabina can recover the 1,500, subject to
Peter being able to retain money to cover his expenses. These may be more than the
500 spent on materials and may include expenses relating to the days work which
has been done (for example, wages paid to others working on the house). What do you
think the position would be if Peters expenses totalled 2,000? What is the maximum
he could receive under s.1(2)?
Activity 15.11
As regards the 1,500 the position is the same as in Activity 15.10. The difference here
is that Peter has almost completed the work on the house when it is destroyed. Will he
be entitled to claim under s.1(3) for the value of the benefit which he has supplied by
doing the work? The answer, based on BP Exploration v Hunt (1979) is that he will not be
able to recover anything under this section. The benefit must be looked at in the light
of the frustrating event; once the house has burnt down there is no valuable benefit
to Sabina. The Act has not altered the position as it stood under the common law in
Appleby v Myers (1867). The position would be different if, for example, the contract
was to decorate two houses and only one of them was destroyed by the fire. In that
situation Peter would be able to recover under s.1(3) for the benefit represented by
the work done on the surviving house.
Chapter 16
Activity 16.1
You need to establish, first, that there has been a breach of contract. It would appear
that there has been the government has offered for sale something that some of
its civil servants suspect does not exist. The offer implies that there exist bighorn
mountain sheep to hunt. The next issue is as to the measure of damages recoverable
by Damian. What amount of money will put Damian in the position he would have
been in if the contract had been performed? These facts offer two possibilities: loss
of profits or wasted expenditure. If the sheep are very rare, loss of profits, measured
by the value of the trophy heads of the sheep, could be great. The difficulty with this
measure is that Damian may well have problems proving this loss (see Anglia Television
v Reed (1972)). Another way of looking at this is to say that Damians loss of profits is too
speculative because Culloden has not promised him three sheep, but the opportunity
to hunt three sheep. Hence Damian is unable to prove that there is a loss of profit and
is confined to claiming his expenditures (McRae v Commonwealth Disposals Commission
(1951) and Anglia Television v Reed (1972)).
Activity 16.2
Once again, you need to establish that there has been a breach of contract. This is not
difficult since Emma simply refuses to perform. The great difficulty here surrounds the
assessment of damages. Fun Toys Co should be able to claim for loss of profits (the case
fits ideally within Robinson v Harman); the problem is, what is the amount of the loss
suffered? Their toys range in price enormously can it be said that Emma would have
chosen 10,000 of the toys priced at 200 each or 10,000 of the toys priced at 1.99
each? It is suggested that either extreme is unlikely to have actually been undertaken
by Emma had the contract been performed. If she was stocking her toy shops, she
would not have selected entirely from one end of the price range or the other. Instead,
she would likely have selected a range of toys. Consequently, it can be argued that
the damages should be assessed by reference to a selection of 10,000 toys chosen in
a reasonable manner. Thus the damages are set by a reasonable amount made with
reference to the likely selections of Emma. See Paula Lee Ltd v Robert Zehil [1983] 2 All ER
390 where the court faced a similar problem.
Activity 16.3
The decision in Ruxley Electronics and Construction v Forsyth is not without problems
and it is these problems that McKendrick refers to in this quote. McKendrick points
to the recognition of a loss of amenity as the step forward. The step backward,
however, is the apparent limitations that the decision places upon the valuation of the
expectation interest with regard to the claimants performance interest. It will often
be the case that the claimant has contracted to receive something which is really only
a benefit to himself and would not provide a benefit to most people. For example, the
claimant, a keen gardener, may contract to have special rails affixed to the exterior of
his house to hold plants. The majority of householders would not do this and would
see no value in such fixtures (and may well believe that the value of the house was
diminished if the rails were in place). This means that there will be no, or only a slight,
increase in value if the work is performed. Consequently, the damages will be low.
Can it be said that the claimants performance interest is properly protected in such
circumstances?
Activity 16.4
Activity 16.5
Judges have been reluctant for some time to award damages to compensate loss
which has arisen by reason of mental distress. There are a variety of possible purposes
behind this refusal. One possibility, as discussed by Cockburn J in Hobbs v London and
South Western Railway Co (1875) is that such loss arising from a breach of contract
is beyond the contemplation of the parties to the contract. This, however, will not
hold true in all cases it is entirely possible that such loss may be contemplated in
some circumstances. In cases such as the provision of a holiday the essence of the
contract is the provision of pleasure/happiness; default will then inevitably, and so
foreseeably, cause displeasure or unhappiness. Another possibility is raised by Mellor
J in Hobbs v London and South Western Railway Co (1875): such loss, in absence of real
physical inconvenience, is purely sentimental. It is not, in other words, a loss for
which contract law will provide damages as a matter of principle. This is reinforced
by the decision of the House of Lords in Addis v Gramophone (1909). The problem is
that modern tort law will now, in some circumstances, recognise damages for loss
connected to mental distress. This anomaly was noted by Lord Denning MR in Jarvis
v Swan Tours Ltd (1973) and in this case it was recognised that damages for mental
distress would be allowed where the sole purpose of the contract was to provide
entertainment and enjoyment. This was then modified in the important case of Farley
v Skinner (2001) to a requirement that the provision of pleasure (or enjoyment and
happiness) is an important, but not necessarily the main, object of the contract. A
third possibility is that to allow compensation for mental distress is to award damages
that are close to punitive; and damages for a breach of contract are not to be punitive.
A fourth possibility is that by not allowing compensation for such loss, the law denies
recovery of a form of loss which may be difficult to quantify when the contract is
entered into.
Activity 16.6
The two cases are very similar. In both cases, a surveyor was hired by contract to survey
a residential home. In both cases, the purchasers proceeded to buy the home based
on the surveyors report. Both reports were negligently prepared and failed to reveal
important aspects of the house. In Watts v Morrow the survey failed to reveal that
the property needed major repairs; in Farley v Skinner, the survey failed to reveal that
the house was affected by the noise of aircraft flying overhead. In Watts v Morrow,
the Court of Appeal disallowed the trial judges award of damages for distress and
inconvenience. In Farley v Skinner, however, the House of Lords allowed damages for
non-pecuniary loss.
How can the two cases be distinguished? One important factual difference is that in the
latter case, Farley had asked the surveyor to investigate the possibility of aircraft noise
and as a result of this request, the surveyor included the element within his report. In
Farley v Skinner, Lord Steyn distinguished Bingham LJs decision in Watts v Morrow by
saying that his observations were never intended to state more than broad principles
(see paragraphs 14 and 15). Lord Steyn stated that in Watts v Morrow, the claim was
for damages for inconvenience and discomfort resulting from a breach of contract:
it was not a claim for damages resulting from the breach of a specific undertaking to
investigate a matter important for the buyers peace of mind. The House of Lords, in
Farley v Skinner, was also concerned that their decision was consistent with the earlier
House of Lords decision in Ruxley Electronics v Forsyth (1995).
Activity 16.7
The policy behind the rules of remoteness is one of limiting the amount of damages
that can be recovered. It enables parties to, potentially, plan for any losses which may
occur as a result of breach. Thus, for example, parties are able to ensure that they have
adequate insurance cover for any loss which will occur. If the loss creates exceptional
damages, the party responsible for this loss will want to ensure that they have extra
insurance coverage. It also allows parties to determine whether or not it is in their best
interests to breach a contract. The link between these rules and the cost of insurance
is that the rules give, at least in theory, the insurers the ability to assess loss and hence
estimate the cost of the premiums to be paid for the insurance to cover this loss.
Activity 16.8
In H Parsons (Livestock) v Uttley Ingham it was unlikely that the pigs would die, although
it was likely that they would suffer some form of illness as a result of the way in
which the pig nuts were stored (with the lid of the hopper left closed). The majority
(Orr LJ and Scarman LJ) found that it was sufficient to establish liability if there was
a serious possibility that breach of contract would cause physical injury to the pigs.
It did not matter that the severity of the injury could not be foreseen. Scarman LJ
explains that this is sufficient because it would be too much to expect the parties to
have a prophetic foresight as to the exact nature of the injury that does in fact arise.
The difficulty with this decision is that it is not easy to reconcile with the cases that
distinguish between ordinary and special business profits, such as Victoria Laundry
(Windsor) Ltd v Newman Industries Ltd (1949). In this case, there had to be disclosure of
a particularly lucrative contract that increased the amount of the damages. It may be
possible to say that such a contract could be disclosed by the plaintiff because it was
within his special knowledge, but that to foresee that the breach of contract in Parsons
case would cause death was not within the particular knowledge of either party.
This does, however, beg the question of how the cases can be satisfactorily resolved.
It is likely that the essential difference is that in Parsons case, the court was also
concerned with the concept of remoteness in tort where it is well-established that
it is the category of harm resulting from the tort, not the actual extent of the harm,
that must be foreseeable: Hughes v Lord Advocate (1963). Lord Denning, in Parsons case,
challenged the distinction between remoteness in contract and tort.
Activity 16.9
It is difficult to provide a satisfactory answer to this question. On the one hand, it
seems to be sufficient that the defendant is aware of the exceptional circumstances:
see Simpson v London and North Western Railway Co (1876) and Seven Seas Properties Ltd
v Al-Esa (No 2) (1993). On the other hand, there are some indications that the defendant
must also agree to accept liability for this exceptional loss: see Horne v Midland Railway
(1873) and Kemp v Intasun Holidays Ltd (1987). If the defendant, aware of the special
circumstances, carries on with the contract is he not impliedly accepting these losses?
Chapter 17
Activity 17.1
Each piece of land is considered to be unique and, for this reason, damages are not an
adequate remedy for an injured party. Damages generally follow as a matter of course
in the case of a breach of contract for the sale of goods because the damages awarded
allow the injured party to enter the market and purchase a similar substitute. Because
each piece of land is unique, no similar substitute is available. See Johnson v Agnew
(1979). Yet, this is not an entirely satisfactory answer in the modern world, where
parcels of land tend to be small and many residences are similar in their construction
and aspect. In these cases, it may that 125 Acacia Avenue is much the same as 123
Acacia Avenue. The real problem may be that the market of similar substitutes is so
small that it is impossible in practice to purchase a substitute: people tend not to
sell houses in the way that they sell, for example, cars. The real reason is, therefore,
the unavailability of a substitute because the market does not provide one. Another
explanation tendered for the availability of specific performance for a breach of a
contract for the sale of land is that the sale of land creates an equitable proprietary
interest in the purchasers favour. Yet, the reason that this occurs is because the law
will, generally, order that such a contract be specifically performed. Thus, what may
really be occurring here is that an order for specific performance is made because
everyone involved expects that it will be made. In such circumstances, damages are
not an adequate remedy because none of the parties ever expected such a remedy.
Activity 17.2
It depends on what sort of contract the contract of services was. If the services could
be performed by an agent or employee of the parties, then it is hard to see that it
would be tantamount to slavery. In addition, in many cases, a modern employer will be
enormous and employ vast numbers of people. In such a concern, personal elements
will be more removed. In the case where the individual is required to perform their
services to an individual or within a small organisation, the analogy to slavery may be
more appropriate.
Activity 17.3
As a general rule, an injunction will not be awarded if it has the same effect as an order
for specific performance. That is to say, if the terms of the injunction are so broad that
they effectively compel a positive performance of the contract, the court will not grant
the injunction. See Warren v Mendy (1989) and Page One Records Ltd v Britton (1968).
Thus, if Albert contracts with Beatrice not to play professional hockey for anyone
else besides Beatrices hockey team, and not to work for anyone else in any capacity,
a court is unlikely to grant an injunction enforcing such a term. This is because it
effectively compels Albert to work for Beatrice something that would be most
unlikely to be the subject of an order for specific performance because it is a contract
for personal services. On the other hand, if Albert was simply prohibited from playing
professional hockey for anyone else besides Beatrices team, such an injunction would
likely be granted. Although he cannot play hockey for any other team, he can do
anything else necessary to earn his income. This is the underlying rationale in Warner
Bros v Nelson (1937). The effect, however, can be to cause Albert to continue with
Beatrices team. Whilst other employment is open to him, none is as lucrative. This was
the effect in Warner Bros v Nelson (1937), where the defendant Nelson (better known as
Bette Davis) returned to work for Warner Bros.

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Contract law

Figure 8.1 has been reproduced by kind permission of:

uu Jan Danils MarineTraffic.com

uu Hugh Conway-Jones www.gloucesterdocks.me.uk

University of London International Programmes

Published by: University of London

1 Introduction and general principles . . . . . . . . . . . . . . . . . . . 3

Part I Requirements for the making of a contract . . . . . . . . . . . . . 21

2 Agreement: offer and acceptance . . . . . . . . . . . . . . . . . . . . 21

4 Other formative requirements: intention, certainty and completeness . 59

Part II Content of a contract and regulation of terms . . . . . . . . . . 71

5 The terms of the contract . . . . . . . . . . . . . . . . . . . . . . . . 71

6 The regulation of the terms of the contract . . . . . . . . . . . . . . . 87

Part III The capacity to contract minors . . . . . . . . . . . . . . . . 107

7 Contracts made by minors . . . . . . . . . . . . . . . . . . . . . . . 107

Part IV Vitiating elements in the formation of a contract . . . . . . . . . 113

10 Duress and undue influence . . . . . . . . . . . . . . . . . . . . . . 151

Part v Who can enforce the terms of a contract? . . . . . . . . . . . . 163

11 Third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

Part VI Illegality and public policy . . . . . . . . . . . . . . . . . . . . 179

13 Restraint of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Part VII The discharge of a contract . . . . . . . . . . . . . . . . . . . 201

14 Performance and breach . . . . . . . . . . . . . . . . . . . . . . . . 201

Part VIII Remedies for breach of contract . . . . . . . . . . . . . . . . . 227

17 Equitable remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

LEARNING OUTCOMES: KNOWLEDGE

2. Identify and explain appropriate remedies for breach of contractual obligations;

4. Demonstrate understanding of the development of contract law and discuss its

LEARNING OUTCOMES: SKILLS

5. Summarise standard legal materials and arguments;

6. Analyse statutes and cases concerned with contract law;

8. Carry out straightforward research tasks, using internet based resources;

9. Reflect on their own learning, responding appropriately to formative testing and

Summative assessment is through a three hour and fifteen minutes unseen

1.1 Studying the law of contract . . . . . . . . . . . . . . . . . . . . . . . . 5

1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . 11

1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . 16

1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . 17

In the study of contract law, it is essential to try to gain an understanding of the

1.1 Studying the law of contract

How to use this subject guide

Throughout each chapter, self-assessment questions and learning activities are

The importance of case law

To be explicit, there are no shortcuts to gaining an adequate knowledge of the

1.2.1 Books for everyday use

McKendrick, E. Contract law. (London: Palgrave Macmillan, 2015) 11th edition

You should also buy a casebook. This guide is structured around:

1.2.2 More advanced books

Chen-Wishart, M. Contract law. (Oxford: Oxford University Press, 2015) fifth

Halson, R. Contract law. (Harlow: Pearson, 2013) second edition

Andrews, N. Contract law. (Cambridge: Cambridge University Press, 2015) second

Furmston, M. Cheshire, Fifoot and Furmstons law of contract. (Oxford: Oxford

Morgan, J. Great debates in contract law. (Basingstoke: Palgrave Macmillan, 2015)

Burrows, A. A casebook on contract. (Oxford: Hart Publishing, 2013) fourth edition

Brownsword, R. Smith & Thomas: A casebook on contract. (London: Sweet &

1.2.3 Statute books

1.2.4 Other books

References to the recommended books in the guide

McKendrick, Chapter 11: Exclusion clauses Section 11.7 Fundamental breach.

Poole, Chapter 8: Breach of contract Section 2 Consequences of breach.

1.2.5 Other sources of information