Contract Subjectguide2014 All

Elements of
the law of contract
Catharine MacMillan
Richard Stone
This subject guide was prepared for the University of London International Programmes by:
uu Catharine MacMillan BA (Victoria), LLB (Queen’s, Canada), LLM (Cantab), Professor of Law
and Legal History, University of Reading
and
uu Richard Stone LLB (Soton), LLM (Hull), Barrister, Professor and Head of Law, Lincoln Law
School, University of Lincoln.
In the 2004 edition of this guide Catharine MacMillan was primarily responsible for Chapters
1–2, 4–5, 7–8, 10–14 and 16–17. Richard Stone was primarily responsible for Chapters 3, 6, 9
and 15. Catharine MacMillan was responsible for the 2009, 2012, 2013 and 2014 revisions.
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 Daniëls © MarineTraffic.com
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Elements of the law of contract page i
Contents
Course overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Introduction and general principles . . . . . . . . . . . . . . . . . . . 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.1 Studying the law of contract . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . . . 10
1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . . . 11
Part I Requirements for the making of a contract . . . . . . . . . . . . . . . 15
2 Offer and acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 The offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Communication of the offer . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Acceptance of the offer . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 Communication of the acceptance . . . . . . . . . . . . . . . . . . . . . . 21
2.5 Exceptions to the need for communication of the acceptance . . . . . . . . 22
2.6 Method of acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.7 The end of an unaccepted offer . . . . . . . . . . . . . . . . . . . . . . . 25
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2 Promissory estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4 Other formative requirements: intention, certainty and completeness . 49

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.1 The intention to create legal relations . . . . . . . . . . . . . . . . . . . . 51
4.2 Certainty of terms and vagueness . . . . . . . . . . . . . . . . . . . . . . 53
4.3 A complete agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Part II Content of a contract and regulation of terms . . . . . . . . . . . . 59
5 The terms of the contract . . . . . . . . . . . . . . . . . . . . . . . . 59

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.1 Is a statement or assurance a term of the contract? . . . . . . . . . . . . . 61
5.2 The use of implied terms . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.3 The classification of terms into minor undertakings and
major undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
page ii University of London International Programmes
6 The regulation of the terms of the contract . . . . . . . . . . . . . . . 75

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
6.1 Common law controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.2 The Unfair Contract Terms Act 1977 . . . . . . . . . . . . . . . . . . . . . 81
6.3 The Unfair Terms in Consumer Contracts Regulations 1999 . . . . . . . . . . 86
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Part III The capacity to contract – minors . . . . . . . . . . . . . . . . . . . 93
7 Contracts made by minors . . . . . . . . . . . . . . . . . . . . . . . . 93

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
7.1 Contracts for necessaries . . . . . . . . . . . . . . . . . . . . . . . . . . 95
7.2 Beneficial contracts of service . . . . . . . . . . . . . . . . . . . . . . . . 95
7.3 Voidable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.4 Recovery of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Part IV Vitiating elements in the formation of a contract . . . . . . . . . . . 99
8 Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
8.1 Some guidelines on mistake . . . . . . . . . . . . . . . . . . . . . . . . 101
8.2 Bilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
8.3 Unilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.4 Mistake in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . . 118
9 Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
9.1 Definition of misrepresentation . . . . . . . . . . . . . . . . . . . . . . 121
9.2 Remedies for misrepresentation . . . . . . . . . . . . . . . . . . . . . . 124
9.3 Exclusion of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
10 Duress and undue influence . . . . . . . . . . . . . . . . . . . . . . 133

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
10.1 Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
10.2 Undue influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Part V Who can enforce the terms of a contract? . . . . . . . . . . . . . . 145
11 Privity of contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
11.1 The doctrine of privity . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
11.2 The Contracts (Rights of Third Parties) Act 1999 . . . . . . . . . . . . . . . 148
11.3 Rights conferred on third parties at common law . . . . . . . . . . . . . 151
11.4 Liability imposed upon third parties . . . . . . . . . . . . . . . . . . . . 156
Elements of the law of contract page iii
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Part VI Illegality and public policy . . . . . . . . . . . . . . . . . . . . . . . 161
12 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
12.1 Statutory illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
12.2 Common law illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
12.3 The effects of illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
13 Restraint of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
13.1 General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
13.2 Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
13.3 The sale of a business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
13.4 Other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Part VII The discharge of a contract . . . . . . . . . . . . . . . . . . . . . . 181
14 Performance and breach . . . . . . . . . . . . . . . . . . . . . . . . 181

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
14.1 The principle of substantial performance . . . . . . . . . . . . . . . . . . 183
14.2 When a breach of contract occurs . . . . . . . . . . . . . . . . . . . . . 183
14.3 What occurs upon breach . . . . . . . . . . . . . . . . . . . . . . . . . 185
14.4 Anticipatory breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
15 Frustration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
15.1 The basis of the doctrine of frustration . . . . . . . . . . . . . . . . . . . 193
15.2 The nature of a ‘frustrating event’ . . . . . . . . . . . . . . . . . . . . . 194
15.3 Limitations on the doctrine . . . . . . . . . . . . . . . . . . . . . . . . 197
15.4 The effect of frustration . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Part VIII Remedies for breach of contract . . . . . . . . . . . . . . . . . . . 205
16 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
16.1 The purpose of an award of damages . . . . . . . . . . . . . . . . . . . . 207
16.2 Two measures of damages . . . . . . . . . . . . . . . . . . . . . . . . . 207
16.3 When is restitution available? . . . . . . . . . . . . . . . . . . . . . . . 209
16.4 Remoteness of damage . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
16.5 Mitigation of damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
16.6 Non-financial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
16.7 Liquidated damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
page iv University of London International Programmes
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

17 Equitable remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
17.1 Specific performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
17.2 Damages in lieu of specific performance . . . . . . . . . . . . . . . . . . 225
17.3 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . 229

Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Elements of the law of contract Course overview page 1
Course overview
This course examines elements necessary to form a binding contract, including offer
and acceptance, intention, certainty of terms and consideration. The major elements
capable of vitiating a contract are examined, namely duress, undue influence, mistake
and misrepresentation. The effect of illegality upon a contract is also considered, as is
restraint of trade. The incorporation of contractual terms (both express and implied),
and their general regulation through the Unfair Contract Terms Act 1977 and the Unfair
Terms in Consumer Contracts Regulations 1999, is considered. The course includes
privity of contract and the rights of third parties. The course concludes with the
consideration of the performance of contracts, the methods by which contracts can
be discharged, the relief available for a breach of contract.
Course aims
This course introduces students to the principles of contract at common law and in
equity and how these are applied to agreements.
Learning outcomes
On successful completion of the course you should be able to:
uu analyse the statutes and cases concerned with contract law
uu demonstrate understanding of the principles of contract law
uu demonstrate understanding of the economic, social and political context in
which contract law is applied
uu demonstrate understanding of the development and consider the future
directions of contract law.
Assessment
Formative assessment is conducted through interactive online activities. Summative
assessment is through a three-hour unseen examination.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . 10
1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . 11

Introduction
This subject guide is designed to help you to study the Elements of the law of
contract in England and Wales. This guide is not a textbook and it must not be taken
as a substitute for reading the texts, cases, statutes and journals referred to in it. The
purpose of the guide is to take you through each topic in the syllabus for Elements of
the law of contract 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 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).
In the study of contract law, it is essential to try to gain an understanding of the

principles of law – what the law is trying to do in response to particular issues – rather
than the rote memorisation of rules and cases. This means you may 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.
In this guide we have taken account of all materials available up to January, 2014.
Elements of the law of contract 1 Introduction and general principles page 5
1.1 Studying the law of contract

As already stated, this guide is not a textbook. It must not be taken as a substitute for
reading the texts, cases, statutes and journals. Its purpose is to take you through each
topic in the syllabus for Elements of the law of contract in a way which will help you
to understand 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. 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 McKendrick’s textbook and Poole’s casebook
(see 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
readings. This will always cover the relevant chapter in Anson’s law of contract. You may
find it desirable to review this textbook from time to time because it is often easier to
grasp a point that you have found difficult when it is explained in a different fashion.
Recommended readings are also included in the Elements of the law of contract
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 answer the question before you check the feedback (rather than simply
reading the question and then checking the feedback). This is because the object
of your studies is to understand, rather than memorise, the law. 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. 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.
The reasons for studying the principles of the law of contract are readily apparent:
contracts are the foundation of commercial activities of all kinds and of many ‘everyday’
transactions as well. Many specialist areas of law are built on this foundation. It also
presents an ideal opportunity for students to take the first steps towards developing the
essential skills of understanding judgments and interpreting statutes.
The importance of case law

It cannot be too strongly emphasised that this is a case law subject. What the
Examiners will be seeking to test is 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.
There are no shortcuts to understanding 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 200–250
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. It may be tempting to start with, say, illegality or incapacity, but 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 Elements
of the law of contract study pack and the Newsletters on the Elements of the law of
contract 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, 2013) 10th edition

[ISBN 9781137293701]. (Referred to in this subject guide as ‘McKendrick’.)
This text forms the foundation text for this subject. 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, 2012) 11th
edition [ISBN 9780199699483].
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

The more detailed textbook currently considered to be best suited to the needs of
students on the International Programme is:
¢¢ Beatson, J., A. Burrows and J. Cartwright Anson’s law of contract. (Oxford: Oxford
University Press, 2010) 29th edition [ISBN 9780199282470]. (Referred to in this
subject guide as ‘Anson’.)
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. (London: Palgrave Macmillan, 2012)

[ISBN 9780230292901].
You may also wish to consult a more detailed casebook. Here the choice lies between:
¢¢ Beale, H.G., W.D. Bishop and M.P. Furmston Contract – cases and materials.
(Oxford: Oxford University Press, 2007) fifth edition [ISBN 9780199287369].
¢¢ McKendrick, E. Contract law: text, cases and materials. (Oxford: Oxford University
Press, 2012) fifth edition [ISBN 9780199699384].
¢¢ Brownsword, R. Smith & Thomas: A casebook on contract. (London: Sweet &

Maxwell, 2009) 12th edition [ISBN 9781847034175].
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 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. See also the Regulations for the
LLB.
1.2.4 Other books

¢¢ Treitel, G.H. and E. Peel The law of contract. (London: Sweet and Maxwell, 2011)
13th edition [ISBN 9781847039217].
¢¢ Furmston, M.P. Cheshire, Fifoot and Furmston’s law of contract. (Oxford: Oxford
University Press, 2012) 16th edition [ISBN 9780199568345].
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 this will provide you with ‘model answers’
which can be learned by heart and reproduced from memory in the examination.
Every examination question requires a specific answer and ‘pre-packaged’ answers do
not serve the purpose.
References to the recommended books in the guide

This guide is designed for use in conjunction with McKendrick’s textbook and Poole’s
casebook. The readings in this subject guide were set around the 10th edition of
McKendrick’s textbook and the 11th edition of Poole’s 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 ‘The 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
¢¢ Law Quarterly Review
¢¢ Lloyd’s Maritime and Commercial Law Quarterly
¢¢ Modern Law Review
¢¢ New Law Journal.
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 LexisNexis, 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.parliament.the-stationery-office.co.uk
contains full texts of the House of Lords’ judgments
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 Commission’s 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).
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 McKendrick’s textbook and Poole’s 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.
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 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 book’s 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 demands 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. For the purposes of the suggested method
of working, you should approach each relevant section of a statute as if it were a
leading case and make a special effort to get to know the precise wording of crucial
phrases as well as any cases in which the section has been interpreted and applied.
Remember that in English law it is the judges who decide what Parliament meant by
the words of the statute.
In general, you are not expected to display knowledge of statutes dealing with
particular types of contract, such as the Consumer Credit Act 1974. (Some parts of the
Sale of Goods Act 1979 are an exception to this, however see Chapter 5: ‘The terms of
the contract’, section 5.2.)
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 unfair terms. (This is covered in Chapter
6: ‘The regulation of the terms of the contract’, section 6.3.) Other directives which
are important to the general law of contract are Directive 2000/31/EC on Electronic
Commerce OJ 2000 L 178/1 and Council Directive 94/44/EC on Certain Aspects of the
Sale of Consumer Goods and Associated Guarantees OJ I 171 7.7.99.
1.4.3 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 party’s
position would have understood him to be conveying. This is known as the process of
‘objective interpretation’.
1.4.4 Finding ‘the intention of the parties’

You will soon discover that, in spite of the disappearance of the subjective approach
to the making of contracts, the law frequently uses ‘the intention of the parties’ as
a test for resolving difficulties. It is most important to appreciate that this does not
refer to the parties’ actual intentions – which may well have been conflicting – but
to the ‘proper inference’ from the facts as a whole as to what would have been the
intentions of a reasonable person in the position of the parties. When deciding
what is the ‘proper’ inference a judge has considerable room for manoeuvre and is
in reality reaching a conclusion based upon the justice of the case as much as upon
any inference in the strict sense. For an instructive illustration of this process see the
judgment of Denning LJ in Oscar Chess v Williams (1957) – in Poole’s casebook – where
the court had to decide whether a warranty was intended. Note that Lord Denning
defines the test by reference to ‘an intelligent bystander’, but it is clear that it is the
court’s responsibility to draw the inference and that the intelligent bystander is
merely an alias for the judge.
1.4.5 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 and undue influence). Equitable intervention in a
contractual problem is based on the conscience of the parties; accordingly, equitable
relief is discretionary and it is bound by a distinct series of considerations. An example
of such a consideration (sometimes referred to as a 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).
1.5 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 Student handbook will normally give advance warning
of 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 ‘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.
1.6.2 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 – the time lost will be amply repaid by not having an irritated
Examiner.
2. Complete the required number of questions, including all parts of questions with
two or more parts.
3. 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.
4. Read the questions very carefully looking 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? 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. Do not waste time repeating the facts of the question or
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.
5. Remember above all that the Examiners are particularly interested in how well
you know the case law: always try to argue from named cases. Avoid merely listing
a lot of case names: select the most relevant cases and show how and to what
extent each one supports your argument. State the facts briefly, say which court
decided the case (especially if it is a Court of Appeal or Supreme Court decision)
and indicate the process of reasoning which led the judges to decide the case in
the way they did. (For example, did they decline to follow an earlier decision and,
if so, why?) Even an ‘essay’ question will be looking for this sort of discussion of the
case law.
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. 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, 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’.
Make sure that you answer the question which the Examiners have asked. 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.
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.

Notes
Part I Requirements for the making of a contract
2 Offer and acceptance
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 The offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Communication of the offer . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Acceptance of the offer . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 Communication of the acceptance . . . . . . . . . . . . . . . . . . . . 21
2.5 Exceptions to the need for communication of the acceptance . . . . . . 22
2.6 Method of acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.7 The end of an unaccepted offer . . . . . . . . . . . . . . . . . . . . . . 25
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Am I ready to move on? . . . . . . . . . . . . . . . . . . . . . . . . . 31

Introduction
The law of contract is about the enforcement of promises. Not all promises are
enforced by courts. To enforce a set of promises, or an agreement, courts look for the
presence of certain elements. When these elements are present a court will find that
the agreement is a contract. This is a somewhat artificial process. To a certain extent,
courts will find that some agreements simply look like contracts and they then
reason backward – and find the elements necessary to form a contract.
As a student you need to be aware of the elements required to constitute an

enforceable contract.
To say that we have a contract means that the parties have voluntarily assumed
liabilities with regard to each other. The process of agreement begins with an
offer. 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 that certain other elements (covered in Chapters 3 and 4 of this guide) are
present.
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.
Elements of the law of contract 2 Offer and acceptance page 17
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’.
It is important to understand that it is not the subjective intentions of the parties that
determine the legal effect of their words or actions but the objective inference from
them. That is to say, the offer is interpreted according to an objective intention – the
interpretation the reasonable person in the position of the offeree would place upon
the statement or action of the offeror. This is crucial in answering the basic question
‘what is an offer?’ See Centrovincial Estates v Merchant Investors Assurance Company
(1983) regarding the objective requirement.
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 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), 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), 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.
An important distinction between the two cases is that in Storer’s case there was an
agreement as to price, but in Gibson’s case there was not. In Gibson’s 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.
2.1.1 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) illustrates this point. The auctioneer’s advertisement was a statement that he
intended to sell certain items; it was not an offer that he would sell the items.
2.1.2 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.
2.1.3 An invitation to treat

This is a puzzling term. An invitation to treat is an indication of a willingness to
conduct 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) (note the rationale behind treating the
display as an invitation to treat rather than as an offer) and Fisher v Bell (1961). In
contrast, where the display is made by a machine, the display will probably be an
offer (Thornton v Shoe Lane Parking (1971)).
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.
See Partridge v
Crittenden (1968) – the
advertisement of a
bilateral contract. The
form of the contract will
give rise to different
results – Carlill v Carbolic
Smoke Ball Company
(1893) decided that an
advertisement was a
unilateral offer.
Figure 2.1 Partridge advertised ‘Bramblefinch cocks, Bramblefinch hens, 25s ea’
Activity 2.2
How were the facts of Carlill v Carbolic Smoke Ball Company different from the usual
situation involving an advertisement?
a. 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).
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).
b. An auctioneer’s 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) and Barry v
Davies (2000).
Figure 2.2 The advertisement for Carbolic Smoke Balls
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. How do courts treat the display of goods in a shop window differently from a
display in an automated machine?
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 offeror’s
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.
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

¢¢ Anson, Chapter 2: ‘The agreement’.
¢¢ Unger, J. ‘Self-service shops and the law of contract’ (1953) 16 MLR 369.
¢¢ 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) 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):
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) deals with the problem of cross-offers.
Activity 2.3
Was the decision in R v Clarke influenced by the consensus theory of contract?
Should it have been?
Activity 2.4
How might the decision have been different 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.
The acceptance can be by words or by conduct. See Brogden v Metropolitan Railway

Company (1871), where the offeree accepted the offer by performance.
Acceptance occurs when the offeree’s words or conduct give rise to the objective
inference that the offeree assents to the offeror’s terms: Day Morris Associates v Voyce
(2003).
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).
Where the offeree queries the offer and seeks more information, this is neither an
acceptance nor a rejection and the original offer stands. See Stevenson, Jacques & Co v
McLean (1880).
In some cases, the parties will attempt to contract on (differing) standard forms. In this
instance, there will be a ‘battle of the forms’ with offers and counter-offers passing to
and fro. The Court of Appeal has held that the ‘last shot’ wins this ‘battle of the forms’.
See Butler Machine Tool v Ex-Cell-o (1979) and Tekdata Interconnections Ltd v Amphenol Ltd
(2009). Note, also, that in some cases courts have held that particular relationships are
not capable of contractual analysis. 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 B’s 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?

¢¢ Anson, Chapter 2 : ‘The agreement’.
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. See Felthouse v Bindley (1862). The offeror cannot waive
communication if that would be to the detriment of the offeree. This rule is not,
however, an absolute rule (see Vitol SA v Norelf Ltd (1996)).
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 (1871).
The general rule is displaced in the case of a unilateral contract. 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
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.
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 offeror’s attention. To this
general rule there are certain exceptions – situations where the law does not require
communication of the acceptance. One such exception concerning unilateral contracts
was considered above. The other principal exception is the postal acceptance rule.
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.
A weakness to this exception is that it appears to be of limited application where there

is a bilateral contract. In Felthouse v Bindley, the argument can be made that the uncle
had clearly waived any need for the nephew to communicate his acceptance of the
offer and yet the court held that the offer had not been accepted.
2.5.2 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) and Household Fire Insurance v Grant (1879).
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).
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).
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). 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.
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. However, in an early case
involving a telegram, a form of the postal acceptance rule was applied. See Bruner v
Moore (1903).
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) and Brinkibon Ltd v
Stahag Stahl (1982).
These cases are also important for the principles they establish with respect to
instantaneous forms of communication.
English contract law awaits a 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)).
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 B’s house. B posts a letter accepting A’s offer.
Later in the day, B’s house burns down and B now no longer needs a house
cleaner. B immediately posts a letter to A rejecting A’s offer. Both of B’s 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.

¢¢ Hudson, A. ‘Retraction of letters of acceptance’ (1966) 82 LQR 169.
¢¢ Gardner, S. ‘Trashing with Trollope: a deconstruction of the postal rules’

(1992) 12 OJLS 170.
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 ‘The offeror prescribes the method of

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

method. See Eliason v Henshaw (1819) and Manchester Diocesan Council for Education v
Commercial and General Investments (1970).
In other cases the required method for communicating acceptance may also be
inferred from the making of the offer. See Quenerduaine v Cole (1883).
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. See Offord v Davies (1862) and
Routledge v Grant (1828).
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.
For the revocation of an offer to be effective, there must be actual communication of

the revocation. See Byrne v van Tienhoven (1880).
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).
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 see Shuey v USA (1875).
If the offeree rejects an offer, it is at an end. See Hyde v Wrench (1840).
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) (Scotland) and Wenkheim v Arndt (1873) (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

Again, a point on which the cases divide. On the one hand, Bradbury v Morgan (1862)
158 ER 877 (Ex) held that the deceased offeror’s 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 offeree’s 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).
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. An offeror may revoke an offer or an
offeree may reject an 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.

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 Bill’s message stating that he wished to withdraw his
acceptance.
On Monday Alice opened Bill’s 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 Davina’s 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.
Advice on answering the questions

Question 1 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.
The issues are:
a. What is the effect of Alice writing to Bill to offer to sell him shares?
b. What is the effect of Alice’s stipulation as to the time the offer is open?
c. What is the effect of Bill’s posting a reply?
d. What is the effect of Bill’s change of mind? Is there effective communication when
a message is left on an answering machine?
e. Which of Bill’s 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 Alice’s 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. Alice’s 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. Alice’s 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 Alice’s 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 Bill’s 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 Bill’s 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.
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 Cyril’s letter – is it an offer or an invitation to treat?
uu The effect of Davina’s letter – is it an acceptance? Does the postal acceptance rule
apply? Is Davina’s letter a statement of intention?
uu Is Davina’s 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)) 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 following Felthouse v Bindley (1862) she
cannot waive the necessity for communication of the acceptance.
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. Don’t 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. Don’t 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 auctioneer’s 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. Don’t 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. Don’t know.
Question 5
Which of the following statements is made by Denning LJ in Entores Ltd v Miles Far
East Corporation (1955) 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. Don’t 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 an offer?
2. What is the different between an offer and other communications?
3. How do you know when an offer has been communicated?
4. What is (and is not) a valid acceptance?
5. What is the necessity of communicating the acceptance?
6. What are the exceptions are to the necessity of communicating the acceptance?
7. What occurs when the offeror stipulates a certain method of acceptance?
8. What happens to an offer which is not accepted?
9. When does an offer expire?

Notes
3 Consideration
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2 Promissory estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

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. 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.
Elements of the law of contract 3 Consideration page 35
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 gives the ‘badge of enforceability’ to 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. It is where
somebody says, for example, ‘I will deliver these goods next Thursday’ or ‘I will pay
you £1,000 on 1 January’ that 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 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 party’s 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 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) rather than trying to analyse it strictly in terms of ‘benefits’ and ‘detriments’.
Consideration must move from the promisee but not necessarily to the promisor.
Activity 3.1
Suppose that A arranges for B to clean A’s 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 A’s 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 B’s 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’.
The requirement that consideration must be ‘sufficient’ means that what is being
put forward must be something which the courts will recognise 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. 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 Nestlé (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 Nestlé the reasoning was presumably that the
requirement to send in the worthless wrappers would encourage more people to buy
the company’s 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 son’s promise to stop
complaining to his father about the distribution of the father’s property was held to be
incapable of amounting to consideration. But it is difficult to see that the wrappers in
Chappell v Nestlé 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’.

adequate’ and Section 1D ‘Part payment of a debt’.
¢¢ Chen-Wishart, M. ‘Consideration: practical benefit and the Emperor’s new

clothes’, Elements of the law of contract 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 which exist under a contract with a person who has made a new
promise, for which the existing obligation is alleged to provide good consideration.
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.
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 father’s promise enforceable?
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.
The third type of existing obligation – that owed under a contract with the party
making the new promise – 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.
There are two particular cases on this area which it is important you should read in full
– Stilk v Myrick (1809) and Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991).
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 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
additional wages.
Figure 3.1 Stilk was contracted to work on a ship owned by Myrick
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?
The Court of Appeal’s decision in Williams v Roffey 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.
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. 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. 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 Pinnel’s 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 Pinnel’s Case was that Mrs Beer’s promise to forgo the interest on a judgment debt,
provided that Dr Foakes paid off the main debt by instalments, was unenforceable.
This rule has been regarded with some disfavour over the past 100 years and in some
circumstances its effect can be avoided by the doctrine of promissory estoppel
(discussed below, at 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 creditor’s ‘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 Pinnel’s
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

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 promisor’s
request. (See, for example, Lampleigh v Braithwait (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 Casey’s 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 Casey’s 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 you’ve worked very hard on this:
I’ll make sure there’s 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 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 to be found 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. & M.J. Wright (Holdings)
Ltd (2007), based upon the obiter dictum of Denning J, that promissory estoppel has
the effect of extinguishing the creditor’s 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. There are six points which must be
considered.
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 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 – 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 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
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 couple’s 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 Denning’s 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 Simone’s 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 Simone’s promise to pay the extra £500 a binding variation of the contract?
uu Was Simone’s promise of an extra £1,000 if the work is completed by 15 September

a binding variation of the contract?
uu Is Peter’s 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 Simone’s 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 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. Don’t 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. Don’t 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. Don’t 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. Don’t 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. Don’t 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?
Notes
4 Other formative requirements: intention, certainty

and completeness
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.1 The intention to create legal relations . . . . . . . . . . . . . . . . . . 51
4.2 Certainty of terms and vagueness . . . . . . . . . . . . . . . . . . . . .53
4.3 A complete agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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.
Elements of the law of contract 4 Other formative requirements: intention, certainty and completeness page 51
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’, Elements of the law of contract study pack.
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
Figure 4.1 B’s lawn in exchange for the
apples on B’s 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).
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). 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) to find that the
agreement between a mother and her adult child did not create a contract. See also
Coward v MIB (1962) 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). In this instance the spouses were already separated and the courts as to a certain state
agreement was found to have an intention to create legal relations. A similar result of facts until the contrary is
followed in Darke v Strout [2003] EWCA Civ 176 as the court found that an agreement proved.
for child maintenance following the breakdown of a couple’s 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) 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 other’s will.
In addition, in Simpkins v Pays (1955) it was found that there was a contract where
three co-habitees entered a competition together.
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).
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)
uu an honour clause – Rose and Frank Company v J.R. Crompton and Brothers Ltd (1925).
In most cases where the parties deal at arm’s 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?

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.
In Scammell v Ouston (1941) the court found that the agreement was not enforceable
because the terms were uncertain and required further agreement between the
parties. 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.
In some circumstances, particularly where the parties have relied upon an agreement,
courts will more readily imply or infer a term. This can be seen in the decision in Hillas
v Arcos (1932). 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.
Activity 4.6
You agree with Z that you will buy a shirt from Z’s 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 England’s 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).
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.
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.
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) and British Bank for Foreign Trade Ltd v Novinex Ltd (1949).
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. A’s 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 B’s 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 B’s 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 B’s tenure) are? See Foley v Classique Coaches Ltd.
3. Agreement between B and D D is B’s 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 one’s 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 Cross’s 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 husband’s 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 twenty five 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. Don’t know.
Question 2
Which of these statements best summarises the reasons why the House of Lords
refused to enforce the husband’s 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. Don’t 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 mother’s 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 daughter’s
studies.
d. While there was an intention to create legal relations when the mother’s
promise was made, the subsequent alterations in the ‘method’ by which the
mother funded the daughter’s studies removed this intention.
e. Don’t 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. Don’t 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. Don’t 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?

Part II Content of a contract and regulation of terms
5 The terms of the contract
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.1 Is a statement or assurance a term of the contract? . . . . . . . . . . . .61
5.2 The use of implied terms . . . . . . . . . . . . . . . . . . . . . . . . . 63

major undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

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 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.
Elements of the law of contract 5 The terms of the contract page 61
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 14: ‘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.
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.
Please note further that many of the matters considered here are best
understood once you have a grasp of the concept of a misrepresentation dealt
with in Chapter 9 of the subject guide.
5.1.1 False representations

No action for a breach of contract is available for a false representation as the
representation is not a contractual term. If the representation is a misrepresentation
(because it meets separate criteria for such actionability discussed in Chapter 9) an
action may be brought on the basis of misrepresentation.
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),
the misrepresentation had to be fraudulent in order for the injured party to receive
damages. 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). These attempts are described by Lord Denning
MR in Esso Petroleum Co Ltd v Mardon (1976). 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.
Finding the intention of the parties

What you should realise from the above discussion is that 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 do lawyers establish which statement is a term and
which a representation? The basic criterion is that the parties intend the statement to
be a contractual term. Courts have considered a number of factors in establishing such

intention. These include:
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));
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));
uu whether the statement maker has special knowledge of the matter in question –
where one party has a much greater knowledge of the matter than the other, this
is indicative that the statement is intended to be a term (Oscar Chess Ltd v Williams
(1967)); and
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)).
It is important to recognise, as Lord Moulton observed in Heilbut, Symons & Co v

Buckleton (1913), 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)). 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). 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.
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 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) and Esso Petroleum Co
Ltd v Mardon (1976).
Activity 5.1
Think of the circumstances in which a purchaser will rely upon a seller’s 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), 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
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’.
¢¢ Goode, R. ‘The statutory implied terms in favour of the buyer’, Elements of the
law of contract study pack.
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, a court would imply that
the roller skates were of satisfactory quality (because of s.14(2A) of the Sale of Goods
Act 1979).
In this section we will consider the circumstances in which courts will imply 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) 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 employee’s 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’.
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; and
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
broker’s 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: landlord and tenant or employer and employee are two such
instances. An illustration of this can be seen in Malik v BCCI (1997) where it was held
that there was an implied obligation upon an employer not to conduct his business
in a manner likely to destroy or seriously damage the relationship of confidence
and trust between employer and employee. In Malik’s case, the bank had operated
corruptly. See also Liverpool City Council v Irwin (1976) and Equitable Life Assurance
Society v Hyman (2002).
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 implication is made as a matter of necessity.
See, for example, The Moorcock (1889).
A much quoted description of this process is that of MacKinnon LJ in Shirlaw v Southern

Foundries (1926) Ltd (1939):
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 Spencer and another v Secretary of State for Defence (2012) the High Court found that,
in implying terms, an objective standard was applicable and that a reasonable person
could not be assumed to be in ignorance of clear and well-known legal principles.
In Kim v Chasewood Park Residents [2013] EWCA Civ 239 and Closegate Hotel Development
(Durham) Ltd v McLean [2013] EWHC 3237 (Ch) the court found that a requirement
of good faith could be implied into an ordinary commercial contract based on the
presumed intention of the parties.
In his judgment in Attorney General of Belize v Belize Telecom Ltd (2009), 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, or in
which they have explained why the did not think that it did so’.
Activity 5.4
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 5.5
A contracts with B to assemble bicycles to B’s 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?
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 into contracts by operation of
legislation. In these instances, the terms are implied 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.
We will consider, briefly, contracts for the sale of goods as an example of this process.
Contracts for the sale of goods are everyday occurrences. Parties, however, give little
thought to the terms of their contract. To give effect to their reasonable expectations,
certain terms are implied into their contract by operation of statute law (see Anson,
Chapter 5). The relevant provision for our purposes is that of s.14 of the Sale of Goods
Act 1979 (as amended by the Sale and Supply of Goods Act 1994), that goods sold by a
seller in the course of his business shall be of satisfactory quality (not ‘merchantable’
quality). Careful attention should be given to the definition of satisfactory quality
in the new s.14(2A), the ‘aspects’ of quality listed in s.14(2B) and the provisions with
regard to defects which were disclosed by the seller or which the buyer’s examination
ought to have revealed (s.14(2C)). Note also the restriction on the buyer’s right to
reject for breach of the statutory conditions introduced by s.4(1) of the 1994 Act where
the buyer is not a consumer and the breach is ‘so slight that it would be unreasonable’
to reject.
You should keep in mind the fact that these terms are only implied by the statute law:
it is open to the parties to defeat this implication, either by their course of dealing or
by their express agreement. There are, however, limits to which the parties can defeat
terms implied by statute law. The limits are set, principally, by the Unfair Contract
Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. See
Chapter 6: ‘The regulation of the terms of the contract’ for a discussion of these two
pieces of legislation.
For an interesting example of the application of s.14(3) see:
uu Slater v Finning [1996] 3 All ER 398 (camshaft was fit for its purpose, although it
did not work properly in the buyer’s vessel: the problem arose from an abnormal
feature of the vessel of which neither party was aware).
For an example of the implied terms under the Supply of Goods and Services Act 1982,
where the 1994 Act makes corresponding amendments introducing the concept of
‘satisfactory quality’ in the case of goods supplied, see:
uu Wilson v Best Travel (1993) (obligation of tour operator with regard to safety of
holiday accommodation).
The Sale of Goods Act 1979 also implies terms as to title (s.12), terms governing the sale
of goods by description (s.13) and terms regarding the sale of goods by sample (s.15).

For further discussion of the topic of sale of goods, it is necessary to refer to a

specialist work on the sale of goods:
¢¢ Atiyah, P.S., J. Adams and H. MacQueen Atiyah’s sale of goods (London: Longman,
2010) 12th edition [ISBN 9781405859530].
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. How is ‘satisfactory quality’ determined for the purposes of the Sale of Goods
Act 1979?
4. 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 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 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 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 party’s obligations.

This is different from rescission (rescinding) for misrepresentation, which means
that the contract is cancelled from the very beginning.
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) and Re Moore and Landauer (1921).
This classification into conditions and warranties was extensively used by the drafters
of the Sale of Goods Act 1979, 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. However if the intention is not clearly expressed, the court will again have to draw
the ‘proper inference’. See Behn v Burness (1868); Bettini v Gye (1876) and Poussard v
Spiers (1876).
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, 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 HG (The Hansa Nord) (1976), 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 The Mihalis Angelos (1970);
Bunge v Tradax (1981); The Naxos (1990) and Barber v NWS Bank (1996). But contrast
Torvald Klaveness v Arni Maritime Corp (The Gregos) (1994) 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)
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 L.
Schuler v Wickman Machine Tool Sales (1974).
Contrast the more traditional approach in the following cases.
uu Lombard North Central v Butterworth (1987): 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 5.6
Why was the unseaworthiness of a chartered ship (in Hong Kong Fir) considered
less important than the owner’s estimate of when she would be ready to load the
charterer’s cargo?
Activity 5.7
If the time charterer is late in redelivering the ship, what are the practical
consequences for the owner?
Activity 5.8
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 5.9
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.

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 or 3 (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 Brenda’s Garage Ltd for use in his practice. He paid £12,500
for the car and was given a written guarantee in the following terms. ‘Brenda’s
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 3 John, a builder, advertised in a trade journal for plaster which he might
require in the year 2013. After receiving a number of tenders John entered into a
contract with Keith under which Keith agreed to supply John with up to 300 tonnes
of plaster at £5,000 a tonne during the year 2013 ‘as and when required’.
The agreement contained the following provisions.
‘(6) It is agreed between the parties that in return for executing this agreement
John will not buy plaster from any other plaster supplier during the year 2013.
(7) It is agreed that no undertaking as to quality or fitness for purpose is given

by Keith and no compensation shall be payable in respect of the suitability or
otherwise of the plaster.’
John ordered four loads of plaster of 20 tonnes each. The first three were
satisfactory and paid for. The fourth load proved to be unsatisfactory as it contained
lumps. John said to Keith that he would not be wanting any more plaster and that
he would be buying his plaster in future from Fred, who had indicated that he
would supply the plaster at £4,500 a tonne.
Keith seeks an injunction to prevent John buying plaster elsewhere, payment for
the fourth load and damages for the loss of profit on the 220 tonnes John would not
be ordering.
Advise John.

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 question 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 Brenda’s 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 a good and you must consider the Sale
of Goods Act 1979. 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 compulsory and cannot be varied or excluded by the
parties (s.6 Unfair Contract Terms Act 1977 – covered in Chapter 6). 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.
Question 3 The question involves an evaluation of what terms exist in the contract
between John and Keith and what, if any, effect these terms have. This question
involves a number of issues which you have yet to cover – namely a possible restraint
of trade issue, an issue regarding remedies and the existence of an exemption clause.
All of these issues are yet to be covered – the reason for including this question is to
allow you to see how an issue involving terms can be combined with other issues.
When you have covered the material in Chapter 13 (restraint of trade), Chapters 16 and
17 (dealing with remedies), and Chapter 6 (the regulation of the terms of the contract),
you will have a better grasp of the other issues involved in this question.
An express term of the contract is that Keith will be John’s exclusive plaster supplier
for a year. This is a solus agreement: is it also a contract in restraint of trade? Applying
Esso Petroleum v Harper’s Garage and Alec Lobb v Total Oil, it is possible to construe
it as such. Keith must show that there is reasonableness and fairness in protecting
his commercial interests. Here, at a year, the length of the restraint is not for long.
However, in assessing the fairness of the restraint, it must be examined in light of
provision 7 of the agreement. The contract purports to allow Keith to deliver plaster
which is unfit and unsuitable for John’s purposes. It is hard to see how this is either
reasonable or fair. It is unlikely that Keith will succeed in getting an injunction to
prevent John from buying his plaster elsewhere or damages for ‘lost’ sales.
Another express term of the contract is an exemption clause. Provision 7 states that
Keith provides no undertaking as to the quality or fitness for purpose of the plaster
and that no compensation shall be payable in respect of the suitability or otherwise of
the plaster. The term purports to exclude the terms implied by the Sale of Goods Act
1979. Principally, these are: s.13(1) [goods sold by description will correspond with the
description]; s.14(2) [an implied condition that the goods are of satisfactory quality];
s.14(3) [if the purchaser informs the seller of the purpose the goods have been bought
for there is an implied condition that the goods are reasonably fit for that purpose].
The term essentially attempts to exclude recovery for a fundamental breach of the
contract in that Keith could supply almost anything. The term is thus subject to
challenge on two fronts. Firstly, as a matter of construction, has Keith excluded liability
for breach of a fundamental term (Photo Production v Securicor (1980))? Secondly, if
there has been a successful exclusion of this liability, does the term withstand scrutiny
under the Unfair Contract Terms Act 1977? Two sections of the Act are relevant.
Section 3(1) provides that, if Keith deals on his standard written terms, he cannot
exclude or restrict liability or claim to be able to render a different performance, or no
performance at all, except to the extent the term is reasonable within s.11. Section 6(3)
provides that Keith can only restrict or exclude the liability arising under ss.13 and 14 of
the Sale of Goods Act to the extent that the exclusion clause satisfies the requirement
of reasonableness. It is unlikely that a clause which purports to completely exclude
liability will be found to be reasonable in light of the statute and existing authorities.
In the circumstances, it will not act as an effective defence for Keith in an action
brought by John.
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. Don’t 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. Don’t 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. Don’t 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. Don’t 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. Don’t 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?
Notes
Part II Content of a contract and regulation of terms
6 The regulation of the terms of the contract
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
6.1 Common law controls . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.2 The Unfair Contract Terms Act 1977 . . . . . . . . . . . . . . . . . . . . 81
6.3 The Unfair Terms in Consumer Contracts Regulations 1999 . . . . . . . . 86
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Introduction
In theory the parties to a contract were free to choose their own contractual terms
and were then bound by these terms. It became clear by the late 19th century,
however, that many individuals were bound to terms with which they had no choice
but to agree to or to which they had no real notice. This was exacerbated by the
rise of standard form contracts. At common law, judges had little means by which
to free individuals from such terms. Great lengths were often undertaken 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. This was
particularly true when a party sought to exclude liability for their own negligence or
for a fundamental breach of contract. The need to protect consumers was addressed
by the enactment of the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in
Consumer Contracts Regulations 1999 (UTCCR).
Elements of the law of contract 6 The regulation of the terms of the contract page 77
6.1 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 4 ‘The clause is not rendered
unenforceable by the Unfair Contract Terms Act 1977’.
Adherence to freedom of contract makes courts reluctant to invalidate the

substance of clauses which attempt to limit or exclude liability. Instead they have
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. In addition, at one stage the courts developed a rule relating
to ‘fundamental breach’ (is the breach so serious that the exclusion clause cannot
apply?). The potential of this approach has, however, been 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: their most common use is, however,
in relation to exclusion and limitation clauses. We will start by considering the rule of
‘incorporation’.
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?
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 be effective, it must have been incorporated as one
of the terms of the contract. ‘Incorporation’ is in fact a requirement for any term of the
contract and the rules outlined here do not just apply to exclusion clauses. Their most
frequent use in reported cases is, however, in relation to attempts to limit liability.
There are three main ways in which incorporation may take place.
First, the clause may be included in a contractual document which has been signed by
the other party – as in L’Estrange v Graucob (1934). The party signing will be bound by
the clause, even if it has not been read or understood, provided that the other party
has not made any misrepresentation as to its effect (as in Curtis v Chemical Cleaning &
Dyeing Co (1951)).
Secondly, the clause, even if not in a document which has been signed, may be
incorporated provided reasonable notice of it has been given at or before the time
of contracting. Notice will not be reasonable if it comes after the contract has been
made. Thus, in Olley v Marlborough Court Hotel (1949), the contract was made at the
reception desk but the exclusion clause was displayed in the guest’s bedroom. This
was too late, and the clause was not incorporated. See also Chapelton v Barry UDC
(1940) and Thornton v Shoe Lane Parking (1971).
The test of what is reasonable, assuming that the clause has been put forward in
time, was first stated in Parker v South Eastern Rly (1877) 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 Rly (1930) 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. The document setting out, or referring
to, the exclusion clause must, however, be something more than a mere ‘receipt’
(see Chapelton v Barry UDC (1940)). In other words, it must be the kind of document in
which you would reasonably expect to find contractual terms, or reference to them.
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 party’s attention. This was stated in
Spurling v Bradshaw (1956) and again in Thornton v Shoe Lane Parking (1971). 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).
Activity 6.2
François, a Frenchman 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 François’s 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 Magna’s car park. Angela signs the contract. Is
Angela bound by the clause?
The third way in which a clause may be incorporated, in addition to signing and
reasonable notice, is through a ‘course of dealing’. If the parties have regularly dealt
with each other, and the exclusion clause has always in the past been part of the
contract, 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
– see Kendall (Henry) & Sons v Lillico (William) & Sons Ltd (1969) (regular contracts with
each other on three or four occasions each month over a period of three years). The
course of dealing must be consistent, however. In McCutcheon v MacBrayne (1964) 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.
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’.
Once it is established that the clause is a part of the contract, the next issue is to
decide 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 the person trying to rely on the clause (this is sometimes called the
contra proferentem rule). In Andrews v Singer (1934), for example, a clause excluding
liability in relation to implied terms was ruled ineffective to exclude liability for
breach of an express term. See also: Wallis, Son and Wells v Pratt & Haynes (1911) and
Houghton v Trafalgar Insurance Co Ltd (1954).
Now that consumers are generally protected by legislative provisions (see sections
6.2 and 6.3 below), the courts have indicated that there is less need to adopt ‘strained’
constructions of clauses in order to limit their scope. See, for example, the comments
of Lord Wilberforce in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at
843. They have also 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)). A difficulty with this approach (which has not been
followed in Australia – see Darlington Futures Ltd v Delco Australia Pty Ltd (1987)) is that a
very extensive limitation may in fact be equivalent to a complete exclusion.
There remain problems, however, with deciding whether a clause covers liability for
negligence in the performance of a contract, particularly where the negligence is by
an employee of the contractor. The rules applied in this area derive from the Privy
Council’s opinion in Canada Steamship Lines Ltd v The King (1952). The relevant principles
were stated to be:
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.
This general approach is still applied by the courts in commercial cases (see, for
example, EE Caledonia Ltd v Orbit Valve plc (1994)), despite the fact that the Unfair
Contract Terms Act 1977 specifically deals with the issue (see 6.2.2 below). An example
of the application of the second and third rules can be found in White v John Warwick
(1953). 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. If, however, the only possible liability is for negligence, then
general words (such as ‘howsoever caused’) will be effective to exclude liability: Hollier
v Rambler Motors (1972).
6.1.3 Fundamental breach
Essential reading
¢¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – Section 11.7 ‘Fundamental breach’.
¢¢ Poole, Chapter 8: ‘Breach of contract’ – Section 2 ‘Consequences of breach’.
At one time the courts, and in particular the Court of Appeal, developed a rule
by which it was held that an exclusion clause could never be effective against a
particularly serious breach of contract – a ‘fundamental’ breach. What is a fundamental
breach? There are two main categories.
The first is where the breach relates to a particular obligation which is central to the
contract. An example is the case of Karsales (Harrow) Ltd v Wallis (1956). The contract
was for a car in good condition; when delivered, however, the car could not be driven
because of damage to the engine. When the defendant attempted to rely upon an
exclusion clause the Court of Appeal held that what had been delivered was not a
‘car’. There was, therefore, a breach of a fundamental term of the agreement and the
exclusion clause had no application.
The second category of fundamental breach arises where the consequences of the
breach are exceptionally serious. An example is Harbutt Plasticine Ltd v Wayne Tank
and Pump Co Ltd (1970). The contract involved the supply of pipework in the plaintiff’s
factory. The type of piping used was unsuitable and resulted in a fire which destroyed
the whole of the plaintiff’s factory. The consequences of the defendant’s failure to
meet its obligation to supply suitable pipework were so serious that it constituted
a ‘fundamental breach’ of the contract. There could therefore be no reliance on an
exclusion clause.
These cases illustrate that a ‘fundamental breach’ can occur either through the breach
of a particularly important term, or through a breach which had the consequences of
depriving the other party of the whole benefit of the contract.
The approach to fundamental breaches was, however, reviewed by the House of Lords
in Suisse Atlantique Société d’Armament Maritime SA v NV Rotterdamsche Kolen Centrale
(1967) and Photo Production Ltd v Securicor Transport Ltd (1980). The House rejected the
Court of Appeal’s assertion that there was a rule of law in this area preventing reliance
on an exclusion clause following a fundamental breach. 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, provided that it is clearly worded so as
to do so, the courts will not refuse to apply it for this reason.
Activity 6.4
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 Unfair
Contract Terms Act 1977 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 ‘reasonableness’ – which will be very difficult to satisfy. This
aspect of the UCTA 1977 is discussed in the next section.
Activity 6.5
Mark orders 100 kilos of carrots for his market stall from Ian. Ian delivers 100 kilos of
runner beans. When Mark complains, Ian points to a clause in their contract which
states: ‘The seller may substitute other vegetables in place of those specified in the
order and is not liable for any losses which may result from such a substitution’. Can
Mark claim that this clause is invalid under the common law?
1. What is the present position on the rule of ‘fundamental breach’?
2. What is the contra proferentem rule?
3. How can an unwritten clause be incorporated into a contract ‘in the course of
dealing’?
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 is
applied particularly strictly where the defendant alleges that liability for negligence
has been excluded. Where there is a fundamental breach, an exclusion clause does not
automatically cease to apply but the courts will need very clear language before they
will accept that the clause was intended to cover the breach.

¢¢ Anson, Chapter 6: ‘Exemption clauses and unfair terms’.
6.2 The Unfair Contract Terms Act 1977
Essential reading
¢¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – Section 11.9 ‘The Unfair Contract
Terms Act 1977’ to Section 11.16 ‘Conclusion’.
clause is not rendered unenforceable by the Unfair Contract Terms Act 1977’.
¢¢ Beale, H. and T. Goriely ‘An unfairly complex law’, Elements of the law of contract
study pack.
The Unfair Contract Terms Act 1977 (UCTA) provides a statutory framework for the
regulation of exclusion clauses. It operates alongside the common law. It is still
possible, therefore, for a clause to be struck down by the common law rules, without
needing to consider the effect of the UCTA. It is necessary when looking at the validity
of a clause to consider both the common law and the statutory controls (in the form
of both UCTA and the Unfair Terms in Consumer Contracts Regulations 1999, discussed
below at 6.3).
The fact that there are two pieces of legislation, which can overlap, governing
the control of contractual terms can lead to confusion. The Law Commission
issued a report, Unfair Terms in Contracts, Law Com No. 292, Cm 646, 2005 (http://
lawcommission.justice.gov.uk/publications/unfair-terms-in-contracts.htm). The
report considers the current legislation in this area (the Unfair Contract Terms Act
1977 and the Unfair Terms in Consumer Contracts Regulations 1999) and makes a
number of recommendations. It appears unlikely that these recommendations will be
implemented by legislation in the near future.
6.2.1 The scope of the Act

The Unfair Contract Terms Act 1977 is primarily concerned with exclusion and
limitation clauses, rather than ‘unfair terms’ in general. Virtually all of its provisions
are concerned with ‘business liability’ (see s.1(3) of the Act) – that is liabilities arising
in the course of a business. The private individual who puts an exclusion clause in a
contract (not a very common event) will generally only be subject to the common law
rules discussed in the first part of this chapter. Note, however, that the decision in R & B
Customs Brokers v UDT (discussed below, section 6.2.3) may mean that some contracts
made by a business are not made ‘in the course of business’ if they fall outside the
scope of the business’s normal areas of activity (for example, a firm selling off its old
computers).
Various different ways of excluding or limiting liability are noted in s.13 and stated to
fall within the Act’s scope. For example, making enforcement subject to restrictive or
onerous conditions (such as ‘all claims to be made within 24 hours of the conclusion of
the contract’) will be treated as an exclusion. Most of the Act’s provisions also apply to
attempts to avoid liability by stating that a particular obligation or duty does not arise.
So, in Smith v Eric Bush (1989), a statement by a surveyor that a valuation was given
without any acceptance of responsibility for its accuracy, was treated as falling within
the scope of UCTA. See also Phillips Products Ltd v Hyland (1987).
On the other hand, certain types of contract do not fall within the main protective
provisions of the Act (ss.2–4) at all. These are listed in Schedule 1 to the Act and include
contracts of insurance, contracts concerning land and contracts relating to intellectual
property. In addition, the UCTA does not apply to international supply contracts by
reason of s.26 of the Act. In Amiri Flight Authority v BAE Systems Plc (2003) the Court
held that a contract formed in Abu Dhabi to supply aircraft, where the aircraft was
supplied in England, was not an international supply contract within s.26 of the UCTA.
Consequently, the exclusion clause in the contract could be scrutinised under the
UCTA. Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd (2008) decided that s.26(4)
(a) of the UCTA did not require that the goods be delivered to another state and was
satisfied if the goods would be carried from one state to another.
See, also, Air Transworld Ltd v Bombardier Inc (2012).
In Air Transworld Ltd v Bombardier Inc, the High Court held that s.27 of the UCTA applied
to an aircraft purchase agreement and related assignment agreement. There was no
doubt that English law was the governing law of the aircraft purchasing agreement
only because of the express choice of law clause in the contract. There was limited
connection with England in relation to Canada and Portugal. The general presumption
was that the contract was most closely connected with the country where the party
who was to perform (in this case the seller) had its central administration. In this case
the seller’s actions were essentially all in the province of Quebec, Canada.
One of the first questions to ask, therefore, when considering the impact of the UCTA
on an exclusion clause, is whether the Act applies to the situation at all.
6.2.2 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 Occupier’s
Liability Act 1957.
The UCTA separates out negligence resulting in death or personal injury, from
negligence leading to loss or damage to property. As regards death or personal injury,
s.2(1) provides that there can be no exclusion or limitation of such liability arising from
negligence. Any clause in a contract which purports to have this effect will therefore
be void.
Section 2(1) does not, however, apply where the effect of the clause is to transfer
liability between possible tortfeasors, rather than preventing a victim from recovering
(Thompson v Lohan (Plant Hire) (1987)).
Activity 6.6
Are there any clauses purporting to restrict liability for causing death or personal
injury, which will not be struck down by s.2(1) of the UCTA? If so, what might they
be?
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, at 6.2.5.
6.2.3 Contractual liability

The exclusion of contractual liability other than through negligence is covered by s.3 of
the UCTA. This applies in two situations:
uu where one of the parties deals ‘as a consumer’
uu where one of the parties deals on the other’s ‘written standard terms of business’.
Note that in relation to the second of these categories, it can apply as between two
business contractors. All contracts on written standard terms are therefore potentially
within the scope of s.3.
As to the first category, ‘dealing as a consumer’ is defined in s.12 of the Act. This states
that a person deals as a consumer where ‘he neither makes the contract in the course
of a business nor holds himself out as doing so’ and the other party does make the
contract in the course of a business. The phrase ‘in the course of a business’ is thus
crucial to the definition of who is a consumer for these purposes. It is not further
defined in the Act, but R & B Customs Brokers v UDT (1988) shows that it does not
necessarily apply to all the activities of a business. There a firm which bought a car
partly for use in the business but also for the directors’ personal use, was held not to
be contracting ‘in the course of business’. The company’s business was concerned with
exports, not with the buying and selling of cars. This means that a company may ‘deal
as a consumer’, if it is contracting outside its normal areas of activity. See also, Feldaroll
Foundry Plc v Hermes Leasing (London) Ltd (2004).
If a contract is within one of the above two categories, then s.3(2) makes any
attempt to exclude or limit liability subject to the requirement of reasonableness.
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’. This will cover the ‘peas and beans’
type of case (see Activity 6.5 above).
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 6.7
A Ltd engages B Ltd to service the machines in A Ltd’s 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 UCTA?
Activity 6.8
C Ltd contracts with D Ltd for D Ltd to paint the exterior of C’s office premises. The
contract is made through an exchange of letters. Is the contract within s.3 UCTA?
Activity 6.9
Ramesh wants a tree in his garden cut down. He asks his neighbour Tony, who is a
builder by trade, to do the work and he offers Tony £150. Tony is worried that the
tree may damage Ramesh’s greenhouse when it falls. He says that he will do it, but
adds ‘I’m not accepting any liability if your greenhouse gets damaged’. Tony cuts
down the tree as carefully as he can, but nevertheless the greenhouse is damaged.
Will Tony’s stated ‘exclusion of liability’ fall within the scope of s.3 of the UCTA?
6.2.4 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), the position depends on
whether the buyer is dealing ‘as a consumer’ or not. The test for whether this is so
is the same as that discussed above (6.2.3) in relation to s.3 UCTA, with the addition
of a requirement that the goods concerned must be ‘of a type ordinarily supplied
for private use or consumption’ (s.12(1)(c) UCTA). The leading case on ‘dealing as a
consumer’, R & B Customs Brokers v UDT (1988), was in fact concerned with s.6 of the
UCTA.
If the buyer is dealing as a consumer, then there can be no exclusion or limitation of

the implied terms as to description or quality. If the buyer is dealing otherwise than as
a consumer, then liability under these terms can only be excluded or limited in so far
as the clause satisfies the requirement of reasonableness.
Activity 6.10
Emma has a hobby restoring steam engines. She buys from Industries Ltd a second-
hand lathe, previously used in Industries’ factory, which she plans to use to make
spare parts for her engines. The sale contract states that Industries Ltd’s liability
for any loss resulting from the contract is limited to the purchase price of the lathe.
What is the effect of s.6 of the UCTA on this clause?
6.2.5 The test of reasonableness

As we have seen, in a number of situations the UCTA makes the validity of an exclusion
clause dependent on whether it satisfies the ‘requirement of reasonableness’. The test
for this requirement is dealt with by s.11 and Schedule 2 to the Act. It has also been
considered in several cases.
Section 11 itself is not, in fact, very helpful in identifying which clauses will be
reasonable. It states that the clause must be ‘a fair and reasonable one to be included’
in the contract, ‘having regard to the circumstances which were, or ought reasonably
to have been, in contemplation of the parties when the contract was made’. This does
not assist in telling us what will be ‘fair and reasonable’. It does indicate, however, that
the test involves looking at the clause at the time of the contract, rather than in the
light of any breach that has occurred. The test is whether the clause was a reasonable
one to include in the first place, rather than whether it would be reasonable to allow
reliance on it in the circumstances which have actually occurred. This approach was
confirmed in Stewart Gill Ltd v Horatio Myer & Co Ltd (1992). The obiter suggestion to the
contrary in Overseas Medical Supplies Ltd v Orient Transport Services Ltd (1999) seems to
go against the clear wording of s.11.
The only other assistance given by s.11 is in s.11(4), referring to clauses limiting liability
to a particular sum. Here the Act states that, in assessing the reasonableness of the
clause, regard should be had to the resources available to the person putting forward
the clause and the possibility of covering the liability by insurance. The more resources
that are available, and the greater the opportunity for insurance, the less likely the
clause is to be reasonable.
Schedule 2 to the Act contains a list of factors which should be taken into account
in assessing reasonableness. The schedule is stated to be applicable to the
reasonableness test as it applies under ss.6 and 7 (that is, in relation to contracts for
the supply of goods), but the Court of Appeal has made it clear that the factors listed
may be relevant wherever the reasonableness of a clause is to be assessed under the
Act (see Overseas Medical Supplies Ltd v Orient Transport Services Ltd (1999)).
Activities 6.11–6.13
Read the ‘Guidelines’ in Schedule 2 of the UCTA and then answer the following
questions.
Activity 6.11
What is the overall approach, would you say?
Activity 6.12
Are there any overlaps with the common law rules in relation to exclusion clauses?
Activity 6.13
How many of the guidelines are only applicable to supply of goods contracts?
Judicial consideration of statutory tests of the reasonableness of exclusion clauses
pre-dates the UCTA, in that in 1973 a test of whether it was reasonable to rely on an
exclusion clause was added to the Sale of Goods Act (see Schedule 1, para.11 Sale of
Goods Act 1979).
The most important case relating to this provision is the House of Lords decision in
George Mitchell v Finney Lock Seeds (1983), which has also been referred to in cases on
the UCTA. Here the contract was for the sale of cabbage seed. The wrong seed was
supplied and the crop failed entirely. The contract contained a clause limiting the
seller’s liability to the price of the seed. This clause was in common use in the trade.
Nevertheless, the House of Lords held that the seller’s reliance on it was unreasonable
because, among other things, the seller could easily have insured against the liability.
It was also common practice for seed sellers not to rely on the clause in situations such
as those that had occurred, but to negotiate a settlement of claims on terms more
favourable to the buyer.
Post-UCTA the House of Lords considered ‘reasonableness’ in Smith v Eric S Bush (1990).
Here the court emphasised the importance of the balance of bargaining power, the
availability of alternative sources (in this case of surveying advice), the difficulty of the
task for which liability is being limited and the practical consequences of allowing or
rejecting the exclusion.
The rest of the appellate decisions on the UCTA test of reasonableness come from
the Court of Appeal. See, for example, Phillips Products Ltd v Hyland (1987); Stewart Gill
v Horatio Meyer (1992); Schenkers Ltd v Overland Shoes Ltd (1998) and Overseas Medical
Supplies Ltd v Orient Transport Services Ltd (1999).
These cases do not add much to the considerations outlined above. One important
aspect of the Court’s approach, however, is its general reluctance to interfere with
the decision of the trial judge on this issue. Thus, in Phillips Products Ltd v Hyland
(1987) the court concentrated on whether the judge had addressed the right
issues, rather than the substance of his decision. Applying this approach in Watford
Electronics Ltd v Sanderson CFL Ltd (2001), however, the Court felt able to overturn the
trial judge’s decision that a clause in a contract for the supply of computer software
was unreasonable. The Court emphasised that in general the courts should assume
that business contractors will be the best judges of the commercial fairness of their
agreements. It is only if there is evidence that one party has taken unfair advantage
of the other, or that the term is so unreasonable that it cannot have been properly
understood or considered, that the courts should interfere. This suggests a very
limited role for findings of unreasonableness outside the area of consumer contracts.
Activity 6.14
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?
Activity 6.15
Yasmin buys a computer from XLO Electronics. She finds that the monitor’s
detachable lead is faulty. XLO Electronics show her a clause in the contract which
she signed when she bought the computer, stating that ‘XLO Electronics will
replace any faulty items free of charge, but this does not extend to batteries,
leads, headphones, aerials, or other peripherals, in relation to which no liability is
accepted for any defects.’ Can Yasmin challenge this clause?
1. When may a contract made by a business be considered not to have been made
‘by way of business’?
2. Name three types of contract that are not covered by the provisions of the UCTA.
3. What is the general attitude of the courts to those who make contracts by way
of business?
4. What, in general, do exclusion clauses purport to exclude?
Summary
The Unfair Contract Terms Act 1977 applies mainly to the exclusion of ‘business
liability’. 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 consumers or those
contracting on the other party’s 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.
6.3 The Unfair Terms in Consumer Contracts Regulations 1999
Essential reading
¢¢ McKendrick, Chapter 17: ‘Duress, undue influence and inequality of bargaining
power’ – Section 17.6 ‘The Unfair Terms in Consumer Contracts Regulations 1999’.
clause is not rendered unenforceable by the Unfair Terms in Consumer Contracts
Regulations 1999’.
¢¢ Bright, S. ‘Winning the battle against unfair contract terms’, Elements of the law
of contract study pack.
These regulations (the UTCCR) result from the implementation of a European Directive
(93/13/EC). A previous version of the Regulations was enacted in 1994, being replaced
by the current version in 1999.
There is considerable overlap between the effect of the UCTA and the UTCCR in relation
to exclusion clauses. For this reason, the Law Commission has recommended that
the two pieces of legislation be unified into a single legislative scheme: Unfair Terms
in Contracts, Law Com No. 292, Cm 646, 2005 (http://lawcommission.justice.gov.uk/
publications/unfair-terms-in-contracts.htm). As they stand, however, there are some
important differences between the two pieces of legislation.
uu The UTCCR apply only to consumer contracts. A ‘consumer’ is defined by the

Regulations as a ‘natural person’ acting for non-business purposes. The approach
taken in R & B Customs Brokers v UDT (1998) in relation to the UCTA does not apply to
the UTCCR.
uu The UTCCR applies to all types of contractual clauses, other than those that have
been ‘individually negotiated’. It is not limited to dealing with clauses which have
the effect of excluding or limiting liability.
The test of fairness is set out in reg.5 (1). It states that a term will be unfair if ‘contrary
to the requirement of good faith’ it ‘causes a significant imbalance in the parties’ rights
and obligations under the contract to the detriment of the consumer’. There are two
main elements to this test – ‘good faith’ and ‘significant imbalance’. The relationship
between them was considered by the House of Lords in Director General of Fair Trading
v First National Bank plc (2002).
The majority of the House agreed with the analysis of Lord Bingham, to the effect that:
uu ‘significant imbalance’ arises if ‘a term is so weighted in favour of the supplier as to

tilt the parties’ rights and obligations under the contract significantly in his favour’.
uu ‘good faith’ on the other hand relates to the need for ‘fair and open dealing’. In
other words, it requires that the consumer is given full information and that there
are no ‘pitfalls or traps’ in the contract. No advantage should be taken of the
consumer’s necessity, lack of experience, weak bargaining position, etc. In Khatun
v Newham LBC (2003) it was held that the UTCCR applied to the terms of a contract
for accommodation in circumstances where the local authority was statutorily
obliged to provide accommodation. In other words, ‘significant imbalance’ is
concerned with substantive fairness, whereas ‘good faith’ relates to procedural
fairness.
Schedule 2 to the Regulations contains an ‘illustrative and non-exhaustive’ list of terms

which may be regarded as unfair. The list is long and most of the clauses identified
would be in danger of being struck down by the common law or the UCTA. Examples
include terms which seek to restrict liability for death or personal injury or allow the
seller or supplier to provide an inadequate performance or a different product or
service than that which is contracted for. Note, however, that these are examples of
terms which are indicative of an underlying substantive unfairness between a seller or
a supplier on the one side and a consumer on the other, with regard to the substance
of the particular term.
In Perenicová v SOS financ spol sro (2012), the European Court of Justice held that a
practice which consisted in indicating a credit agreement had an APR lower than
the real rate had to be regarded as misleading under Article 6(1) of Directive 93/13
(implemented in the United Kingdom by Regulation 8 of the Unfair Terms in Consumer
Contracts Regulations 1999) to the extent that it caused or was likely to cause the
average consumer to make a contractual decision that he would not otherwise have
taken. This was a matter to be determined by the national court. A finding that such a
practice was unfair was one element upon which a national court could, under Article
4(1) of the Directive 93/13 (implemented in the United Kingdom by Regulation 6(1) of
the Unfair Terms in Consumer Contracts Regulations 1999) base an assessment of the
unfairness of the terms of the contract.
The list also encompasses more procedural considerations; an example of this lies in
para.1(i) of Schedule 2, which covers terms that have the effect of binding a consumer
to terms he had no real opportunity of becoming acquainted with before the contract
was formed. In assessing unfairness, it appears that courts attach significance to which
of the parties put forward the term. In Bryen & Langley Ltd v Boston (2005) the Court of
Appeal found that the consumer could not complain about the nature of the terms
of the contract with a building contractor when the consumer’s agent had asked the
building contractor to tender on the very terms now complained of by the consumer.
The test of fairness does not apply to clauses which define the main subject matter
of the contract, or the adequacy of the price (reg.6(2)). The House of Lords took a
restrictive interpretation to reg.6(2) in Director General of Fair Trading v First National
Bank (2001). In Office of Fair Trading v Abbey National Plc (2009), however, the House
of Lords took a more generous interpretation of reg.6(2) and held that charges for
unauthorised bank overdrafts were within the regulation. The two cases are difficult
to reconcile on theoretical grounds but can be distinguished on the basis that Director
General of Fair Trading v First National Bank concerned a default provision, which was
not present in the later case.
The fairness test, in short, does not operate to prevent the consumer from simply
making a ‘bad bargain’, for example, by paying too much for goods of poor quality.
Clauses relating to these matters are subject only to the requirement of ‘intelligibility’
in reg.7.
Regulation 7 states that all the terms of the contract must be in ‘plain, intelligible
language’. This means that complex sentence structures, unfamiliar words and legal
jargon should all be avoided. Paragraph 2 of this Regulation effectively incorporates
the common law contra proferentem rule, by requiring that where there is a doubt
about the meaning of a term it should be interpreted in favour of the consumer. There
seems to be no other sanction, however, for a failure to comply with reg.7 (unless the
obscurity of the term is such that it should be regarded as ‘unfair’).
In Munkenbeck & Marshall v Harold (2005) Judge Harvey QC held that the terms were
unfair (‘onerous and unusual’) and not enforceable despite the fact that they formed
part of the profession-wide standard terms.
Activity 6.16
Try to find some examples of exclusion clauses aimed at consumers. Likely sources
include mail order catalogues or holiday brochures. Consider the extent to which
the clauses, in your opinion, meet the standards set by the UCTA 1977 and the UTCCR
1999 (including the requirement of ‘intelligible language’). How might they be
improved?
For obvious reasons, no feedback is provided for this activity.
The UTCCR 1999 also give a general supervisory power to the Office of Fair Trading
(reg.10). This includes the power to deal with complaints, to obtain injunctions to
restrain the use of unfair terms, and to monitor compliance with any court order. In
practice this has turned out to be one of the most significant aspects of the regulations,
with several hundred cases a year in which clauses have been modified following the
exercise of these powers. For further consideration of these powers see Bright (2000).
1. To what types of contract do the UTCCR apply?
2. What are the two elements of the test of unfairness in the UTCCR?
3. Does either the UCTA or the UTCCR protect the consumer who makes a ‘bad
bargain’?
Summary
The UTCCR applies only to consumer contracts. All terms within such contracts, other
than those defining the bargain itself, must satisfy the test of ‘good faith’ and the
avoidance of a ‘significant imbalance’ in the rights and obligations to the detriment of
the consumer. All terms must also satisfy the requirement of intelligibility.

¢¢ Anson, Chapter 6: ‘Exemption clauses and unfair terms’.

Andrew is a surveyor. Four months ago he bought a nine-month old ‘Landmaster’
car from Brenda’s 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: ‘Brenda’s 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 Brenda’s
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 Brenda’s
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 Brenda’s Garage’s 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 Brenda’s 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
1979. (Note that the UTCCR do 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 s.12 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 v UDT).
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 Andrew’s 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 for the
Sale of Goods Act implied terms (see s.6(2) of the UCTA).
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 customer’s 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. Don’t 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?
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. Don’t know.
Question 3
Which of the following statements is false?
a. There is 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 works to protect
consumers whereas the Unfair Contract Terms Act 1977 can sometimes protect a
business.
c. The Unfair Contract Terms Act 1977 is largely concerned exemption clauses while
the Unfair Terms in Consumer Contracts Regulations 1999 extends to a much
wider range of contractual clauses.
d. Reasonableness under the Unfair Contract Terms Act 1977 is exactly the same as
fairness under the Unfair Terms in Consumer Contracts Regulations 1999.
e. Don’t 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. Don’t 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 to devise their own devices to do so.
b. The doctrine of fundamental breach, expounded in decisions such as Harbutt’s

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 he or she 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. Don’t 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?
5. What kinds of clauses are required to be ‘reasonable’ by the UCTA?
6. What is the test of ‘reasonableness’?
7. Give examples of the kinds of clauses which are invalidated by the UTCCR.
Notes
Part III The capacity to contract – minors
7 Contracts made by minors
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
7.1 Contracts for necessaries . . . . . . . . . . . . . . . . . . . . . . . . . 95
7.2 Beneficial contracts of service . . . . . . . . . . . . . . . . . . . . . . 95
7.3 Voidable contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.4 Recovery of property . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

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.
Elements of the law of contract 7 Contracts made by minors page 95
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 – minor’s 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 minor’s ‘condition in life’ and his actual requirements.
The liability is to pay a reasonable price, not the contract price. What is a
necessary will depend upon a number of factors. In Nash v Inman (1908)
the supplier had to prove that the minor did not have sufficient suitable
clothing. Contrast this with the decision in Peters v Fleming (1840) on the
effect of the minor’s ‘condition in life’.
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)
where the minor was held liable for breach of an executory contract. Figure 7.1
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 him. 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), and Chaplin v Leslie Frewin (Publishers) (1966) and contrast De
Francesco v Barnum (1880).
In Proform Sports Management Ltd v Proactive Sports Management Ltd (2006) 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 him. 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 minor’s 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) and Leslie v Sheill (1914) 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?

Elements of the law of contract 7 Contracts made by minors page 97
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 Linda’s 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
Which of the following categories of people always lack contractual capacity?
a. Married women.
b. Unmarried women.
c. Drunken men.
d. Minors.
e. Don’t know.
Question 2
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. Don’t know.
Question 3
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. Don’t know.
Question 4
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 minor’s lifestyle at the time the contract is
entered into between the parties.
d. A necessary is land suitable for use by the minor.
e. Don’t know.
Question 5
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. Don’t 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
8.1 Some guidelines on mistake . . . . . . . . . . . . . . . . . . . . . . 101
8.2 Bilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
8.3 Unilateral mistakes . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.4 Mistake in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

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).
Elements of the law of contract 8 Mistake page 101
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 is said to render the contract voidable. 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. 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.)
6. 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.
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 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 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)). In Kleinwort Benson Ltd v
Lincoln City Council (1999) the House of Lords allowed recovery of a mistaken payment
where the mistake was one of law. In Brennan v Bolt Burdon (2004) 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 (2002)). 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). 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 v Hindley (1913).
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.

¢¢ Anson, Chapter 8: ‘Mistake’.
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 ‘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 34-58, available through the
Online Library.
Common mistake (sometimes, confusingly, referred to as mutual mistake) occurs

where both parties to a contract are mistaken about a critical element of their
agreement. They share this mistaken assumption. The leading case dealing with
mistake, and this type of mistake in particular, is Bell v Lever Brothers (1931). 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 – that the apparent consent of the parties is
not present 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 B’s 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), 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 seller’s 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.
It is, thus, possible to interpret this case differently and this is what the High Court of
Australia did in McRae v Commonwealth Disposals Commission (1951). The High Court
of Australia expressed doubt that Couturier v Hastie involved issues of mistake and
discussed the case in the context of a failure of consideration. Even if the case was
a case of mistake, the High Court added an important qualification to the generally
accepted principle in Couturier. This is that a party cannot rely on a mutual mistake
where the mistake is a belief which (1) is understood by the party without any
reasonable ground and (2) the party is responsible for implanting the mistake in the
mind of the other party.
See also Galloway v Galloway (1914).
Summary
Where the subject matter of the contract does not exist at the time of the contract,
courts will find that the contract is void. This will not occur where the mistake is
brought about by the negligence of one party.

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 is impossible to perform because it
is impossible to transfer the ownership since the ‘buyer’ already owns the thing. See
Cooper v Phibbs (1867) and Bligh v Martin (1966) – the mistake must be fundamental to
the agreement.
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?

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 (see further reading section
below) divides these cases into three categories.
uu Cases of physical impossibility – see Sheikh Brothers Ltd v Ochsner (1957).
uu Cases of legal impossibility – see Cooper v Phibbs (1867).
uu Cases of commercial impossibility – see Griffith v Brymer (1903).
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?

¢¢ Peel, E. and G.H. Treitel The law of contract. (London: Sweet & Maxwell, 2011) 13th
edition [ISBN 9781847039217].
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). 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 3–2 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
Bell’s 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.
There are contrary authorities: Nicholson & Venn v Smith-Marriott (1947) and Scott v
Coulson (1903).
In the case of Associated Japanese Bank (International) Ltd v Credit du Nord SA (1988)
Steyn J (as he then was) explained the meaning and application of Bell v Lever Bros. 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 case of The Great

Peace (2002), 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
Figure 8.1 The Great Peace contract’. Lord Phillips MR,
in The Great Peace, appears
to have made the relevant criteria for an operative mistake as to quality even greater
than those proposed by Lord Atkin in Bell v Lever Bros.
Summary
Mistake as to a quality of the subject matter creates great 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 have created an equitable device to

circumvent the difficulties posed by mistake at law. This device is discussed below
under section 8.4 ‘Mistake in equity’.
Activity 8.7
Summarise the approach provided by Steyn J in Associated Japanese Bank
(International) Ltd v Credit du Nord S.A. as to how cases where mistake is alleged
should be resolved.

uu Anson, Chapter 8: ‘Mistake’.
uu Smith, J.C. ‘Contracts – mistake, frustration and implied terms’ (1994) 110 LQR 400.
uu Wade, H.R. ‘Consensus mistake and impossibility in contract’ (1941) 7 CLJ 361.
uu MacMillan, C.A. ‘How temptation led to mistake: an explanation of Bell v Lever
Bros.’ (2003) 119 LQR 625.
8.2.7 Fundamental mistake going to the root of the contract
Essential reading
‘Common mistake’.
This is really a broad category of common law mistake which arises out of Lord Atkin’s
judgment in Bell v Lever Bros. It may be that the parties share a common mistake so
fundamental that it goes to the very root of the contract, to the very consideration
provided, to such an extent that the contract is void.
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?

uu 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 party’s 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 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’, Elements of the law of contract
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 party’s mistake.
The perplexing case of Smith v Hughes (1871) 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 claimant’s mistake as
to the nature of the promise made to him by the defendant.
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 A’s offer and ‘accepts’
immediately. This is a case where the mistake is operative – the mistake negatives A’s
consent in such a way that there is no contract. Note that: (i) B is aware of A’s mistake
and (ii) B’s 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) and Centrovincial Estates v Merchant
Investors (1983) illustrate this proposition.
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 promisor’s 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 party’s
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: ‘It’s 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.

¢¢ Slade, C.J. ‘The myth of mistake in the English law of contract’ (1954) 70 LQR 385.
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). 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 parties will bear
the cost of the rogue’s 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.
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 party’s 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 vendor’s 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.
The House of Lords in Cundy v Lindsay (1878), 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).
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 King’s Norton Metal Co v Edridge (1897).
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) and Lewis v Averay (1972). 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 Appeal’s 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
rogue’s 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?

¢¢ Goodhart, C. ‘Mistake as to identity in the law of contract’ (1941) 57 LQR 228.
¢¢ Phang, A., P. Lee and P. Koh ‘Mistaken identity in the House of Lords’ (2004) 63
CLJ 24.
¢¢ MacMillan, C.A. ‘Mistake as to identity clarified?’ (2004) 120 LQR 369.
¢¢ 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 his signature and it is up
to him to make sure that he appreciates what he is 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) 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.

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 Three forms of equitable relief
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.
Even a unilateral mistake may be a sufficient basis for rectification where it is known
to the other party and that party fails to draw the mistaken party’s attention to it. See:
Roberts v Leicestershire CC (1961), Thomas Bates and Sons v Wyndham’s (Lingerie) (1981),
Commission for the New Towns v Cooper (1995), but contrast Riverlate Properties v Paul
(1974).
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). When the mistake is present in the agreement itself, rectification is not
available. See F.E. Rose (London) Ltd v William Pim Jnr & Co (1953).
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). A high degree of proof is required before a court will rectify a
contract: George Wimpey UK Ltd v VI Components Ltd (2005).
In Chartbrook v Persimmon Homes Ltd (2009) 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. In DS-Rendite-Fonds Nr 106
VLCC Titan Glory GmbH & Co Tankschiff KG and others 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.
In Hawksford Trustees Jersey Ltd v Stella Global UK Ltd (2012) the Court of Appeal held
that although the negotiator for the corporate claimant did not have the authority to
bind the company to the contract, in the circumstances of the case the negotiator’s
intentions were the ones to look to to ascertain the common intention of both parties
for the purposes of rectification.
Specific performance
It is in relation to the second and third forms of equitable relief that uncertainty exists
as to the extent to which there is a doctrine of equitable relief. The second form of
equitable relief flows from the nature of equitable relief. The principal characteristic
of equitable relief is that it is discretionary: that is, flexible and responsive to the
justice of the individual case. Thus, in an appropriate case, the remedy of specific
performance (discussed in Chapter 17) may be refused. See, for example, the
contrasting cases of Denny v Hancock (1870) and Tamplin v James (1880).
Rescission
The third form of equitable relief is, at present, surrounded by the greatest
uncertainty. It is also the form of relief considered the most important. Equity,
historically, could intervene to rescind the contract. Rescission in this context meant
that the contract is voidable by the court and not by one of the parties. A court of
equity could also rescind the contract upon those terms which the court considered
just in the circumstances. It is important to note at the outset that equitable relief will
not be available where the party has made a unilateral mistake as to the commercial
consequences of the contract he had entered into rather than the terms of the
agreement or the subject matter of the agreement. See Clarion v National Provident
Institution (2000).
The difficulty stems from working out whether or not equity has any ability to
intervene in cases where there is a common mistake, but not one which is of
sufficient importance to render the contract void at law. The difficulty arises from
the combination of the House of Lords’ decision in Bell v Lever Bros and the Court of
Appeal’s decision in Solle v Butcher (1950). As was discussed above, Bell v Lever Bros
establishes a very narrow ambit for a common mistake (particularly a mistake as to
the quality of the subject matter) at law. Lord Denning, in Solle v Butcher, stated that
the House of Lords was only concerned with mistake at law and not in equity. Lord
Denning then recognised a more flexible doctrine of equitable mistake (in which
the criteria were much the same as that of mistake at law) and where such a mistake
in equity had been made, the contract was voidable as a court could rescind the
contract. Such a rescission might occur on terms. By rescinding the contract on terms,
the court could attempt to place the parties where they wanted to be, but for the
mistake. Equity offered greater flexibility in remedial relief. The contract is, in a sense,
‘voidable’ for mistake rather than void. This means that a court applying an equitable
doctrine of mistake is not faced with the all-or-nothing situation that a court applying
a legal doctrine of mistake is – the matter can be rearranged to try to suit the bargain
the parties thought they were reaching in the first place.
The decision in Solle v Butcher received subsequent approval in other cases, although
in truth, the problem of mistake rarely arose in the case law. The provision of a flexible
doctrine of equitable mistake was considered in relation to the more restrictive
doctrine of mistake in law and approved by Steyn J in Associated Japanese Banks v Crédit
du Nord. 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
(2002). 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 claimant’s 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. The effect of this decision has yet to be determined and the
question of whether or not there is a separate doctrine of mistake in equity has an
uncertain answer. If equity lacks the flexibility to provide relief, it is difficult to envision
circumstances in which, in light of Bell v Lever Bros, any contract will be affected by
a mistake as to a quality of the subject matter (something acknowledged by Lord
Phillips MR and also by Steyn J in Associated Japanese Banks v Crédit du Nord).
The requirements of The Great Peace have been applied in a series of subsequent
decisions (see, for example, Brennan v Bolt Burdon (2004), Kyle Bay Ltd (t/a Astons
Nightclub) v Underwriters (2006), Apvodedo NV v Collins (2008)) with the effect that
there is, effectively, no ambit for the doctrine of mistake. In Pitt v Holt; Futter v Futter
[2013] UKSC 26, the Supreme Court stated that The Great Peace (2002) had ‘effectively
overruled’ Solle v Butcher (1949).
Summary
A court of equity is able to rectify an agreement which has been mistakenly recorded.
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. The ability
of a court of equity to rescind an agreement as a result of a common mistake is in
doubt. Since Solle v Butcher, it had been thought that equity provided a flexible means
of rescinding a contract which had been entered into under a mistake. Such a mistake
was not sufficiently serious as to avoid the contract at law. Since the Court of Appeal’s
decision in The Great Peace, such a jurisdiction is very much in doubt.
Where equitable relief is allowed, it is subject to the usual bars (e.g. the intervention of
a bona fide purchaser for value without notice, laches, the impossibility of restitutio in
integrum or lapse of time).
Activity 8.14
How did the contract in Grist v Bailey allocate the risk?
Activity 8.15
In the following cases, should the court grant equitable relief.
a. A contracts to buy a house from B which both parties believe to be let to T, a
tenant protected by the Rent Acts (a fact which would depress the value of the
property). B has now discovered that T died the day before the contract was
signed and that A has agreed to re-sell the property to X at a great profit.
b. Victor sells a painting to Peter, an art expert, for £50. It is in fact a masterpiece
worth £50,000.
Activity 8.16
How can the decision in Bell v Lever Bros be reconciled with the decision in Solle v
Butcher? What is the effect of the decision of The Great Peace upon both of these
cases?

¢¢ Phang, A. ‘Common mistake in English law: the proposed merger of common law
and equity’ (1989) 9 LS 291.
¢¢ Cartwright, J. ‘Solle v Butcher and the doctrine of mistake in contract’ (1987) 103
LQR 594.
¢¢ McTurnan, L.B. ‘An approach to common mistake in English law’ (1963) 41

Canadian Bar Review 1.
¢¢ Grunfeld, C. ‘A study in the relationship between common law and equity in

contractual mistake’ (1952) 15 MLR 297.
¢¢ Chandler, A., J. Devenney, J. Poole ‘Common mistake: A theoretical justification

and remedial inflexibility’ (2004) JBL 34.
¢¢ Phang, A. ‘Controversy in common mistake’ (2003) Conv 247.
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. That is to say, consider
first whether or not the contract is void at law. If it is, your inquiry ends there. If it is
not, you then need to consider the position in equity. If the contract is ‘voidable’ in
equity, you need to consider the form of relief that a court will provide. The most
common will be a rescission of the contract on terms.
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
Mallet’s error and Sickle’s 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 Hammer’s 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 –
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, the argument would be that the parties are mistaken as to a quality of
the subject matter of the painting (the identity of the artist). In this sense, the
case is within the principles set out by Lord Denning in Solle v Butcher, a decision
further considered by Lord Phillips MR in The Great Peace. If the Solle v Butcher line of
authorities are followed, the contract should be rescinded on terms. The terms would
be that Sickle could proceed with the purchase, but at the real value of the painting. If
The Great Peace is followed, however, the court has no ability to rescind the contract on
the grounds of mistake in equity. A good answer would also consider the decision in
Clarion v National Provident Institution (2000) to establish that this was a mistake as to
the contract and not as to the commercial consequences of the contract.
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. Don’t 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. Don’t 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. Don’t 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. Don’t 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. Don’t 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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
9.1 Definition of misrepresentation . . . . . . . . . . . . . . . . . . . . . 121
9.2 Remedies for misrepresentation . . . . . . . . . . . . . . . . . . . . 124
9.3 Exclusion of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Introduction
This chapter is concerned with the effect of statements made prior to entering into
a contract. These statements may become terms of the contract or they may be
misrepresentations. An actionable misrepresentation is a 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 be treated as a misrepresentation.
Misrepresentations may also be contractual terms. The potential remedies for
a misrepresentation are a rescission of the contract and damages. The right to
rescind can be lost. The amount of damages, if any, will depend upon whether the
misrepresentation was innocent, negligent or fraudulent. 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.
Essential reading
¢¢ McKendrick, Chapter 8: ‘What is a term?’.
¢¢ 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 547–51,
available through the Online Library.
Elements of the law of contract 9 Misrepresentation page 121
9.1 Definition of misrepresentation

When negotiating a contract, the prospective parties may say many things which are
designed to encourage the other party to enter into the contract. Sometimes these
statements become terms of the eventual contract. If they do not, a remedy may
nevertheless be available to a party who has been induced to enter into a contract
in reliance on a falsehood. This chapter is primarily concerned with identifying the
situations where such remedies are available to an injured party. 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 was examined in Chapter 5 of this guide, the determination of whether or not a

pre-contractual statement was a term of the contract was more important before 1967
than it is today because:
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.
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 may, however, still be of 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 discussion of the way in which statements may become part of a contract,
see Chapter 5, section 5.1.
9.1.2 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’.
For a misrepresentation to be actionable

it must be a false statement of existing
fact or law. A statement of opinion is not
generally a misrepresentation – see
Bisset v Wilkinson (1927). 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) a tenant who,
Figure 9.1 In Bisset v Wilkinson (1927) the landlord knew, was behind with the
the purchasers alleged that the vendors rent could not be described as a ‘most
misrepresented the number of sheep desirable tenant’. The landlord’s
which could be carried on the land
statement to this effect was therefore a misrepresentation (see also Esso Petroleum Co
Ltd v Mardon (1976)).
The second exception, which can lead to a statement of opinion being treated as a false
statement of fact, is where there is evidence that the person making the statement
does not believe it at the time that it is made. Proof that the maker of the statement
was aware of contradictory facts may prove that they did not believe the statement
was true. See Edgington v Fitzmaurice (1885), where it was held that the ‘state of a man’s
mind is as much a fact as the state of his digestion’. The fact falsely stated in these cases
is the speaker’s 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.)
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)), 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). 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 person’s
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 XLO’s 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.
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)). The representation must play a real and substantial
part of the claimant’s decision to enter into the contract. 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) the purchaser of a solicitor’s practice
had the opportunity to consult documents which would have revealed the falsity
of the seller’s statement about the practice’s income. His failure to do so did not
preclude his later claim based on misrepresentation.
If the misrepresentation would have induced a reasonable person to contract, the

court will presume that it did so induce the representee to contract. The representor
must then show that the representee did not rely upon the representation. Where,
however, the misrepresentation would not have induced a reasonable person
to enter into the contract, the onus falls upon the representee to show that the
misrepresentation did, in fact, induce him to contract (see Dadourian Group
International Inc v Simms (2009)).
9.1.3 Misrepresentation by silence
Essential reading
¢¢ McKendrick, Chapter 12: ‘A duty to disclose material facts?’
¢¢ Poole, Chapter 14: ‘Misrepresentation’ – Section 1A ‘Unambiguous false

statement’.
A misrepresentation generally requires an oral or written statement. There are,

however, some exceptions to this.
First, it is clear that in certain situations conduct can be treated as implicitly making
a statement. If the implicit statement turns out to be untrue, then it may be a
misrepresentation. Examples of this can be seen in Spice Girls Ltd v Aprilia World Service
BV (2000) and Gordon v Selico (1986).
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 O’Flanagan (1936).
Thirdly, a statement which is literally true may be treated as a misrepresentation if

relevant information related to the statement is not disclosed: see Dimmock v Hallett
(1866) – the statement that flats were let was true; the failure to disclose that the
tenants had given notice to quit turned it into a misrepresentation.
Fourthly, 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 (1975).
9.1.4 Categories of misrepresentation

There are four different categories of misrepresentation, which relate principally to
the state of mind of the person making the statement.
Fraudulent – the maker of the statement knows or believes that the statement is
untrue, or makes it not caring whether it is true or false.
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) and the maker of the statement acts in breach of this duty.
Statutory misrepresentation – the maker of the statement has no reasonable

grounds for believing it to be true (s.2(1) Misrepresentation Act 1967). 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.
Innocent – 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.
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 Alpha’s 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 misrepresentation.
2. In what circumstances can a misrepresentation be innocent?
3. In what sense is the test of inducement ‘subjective’?
Summary
A misrepresentation is a false statement of existing fact or law which induces a
contract. A statement can be both a misrepresentation and a term of the contract.
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’.

¢¢ Anson, Chapter 9: ‘Misrepresentation and non-disclosure’.
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 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), where the seller of a car wished to rescind the contract when the
purchaser’s 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.
uu Where a party to the contract, aware of the other party’s misrepresentation,

continues with the contract, and thus ‘affirms’ it: see, for example, Long v Lloyd (1958).
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),
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). 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.
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 below.
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. 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). Where a
misrepresentation is fraudulent, damages may be 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).
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), 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 (1969).
Activity 9.5
Read the case of Smith New Court Securities Ltd v Scrimgeour Vickers (Asset
Management) Ltd (1997). 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 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.
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; 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 barge’s 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). 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
court’s 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 Harsten Developments Ltd v Bleaken, Devlin v Harsten Developments Ltd (2012) the
court held that certain statements made in the course of a land conveyance were
actionable as misrepresentations and that the contract would be rescinded and
damages awarded under s.2(1) of the Misrepresentation Act 1967.
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) and Government of Zanzibar v British
Aerospace (Lancaster House) Ltd (2000). 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)
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.
1. Can a contract be rescinded where a party continues with a contract despite
knowing the other party has made a misrepresentation?
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.

9.3 Exclusion of liability

The exclusion or limitation of liability for misrepresentation is 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 Unfair Contract
Terms Act (Chapter 6). In Avrora Fine Arts Investment Ltd v Christie, Manson & Woods
Ltd (2012) the court considered the criteria set out in Schedule 2 of the Unfair
Contract Terms Act 1977 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)
and Thomas Witter v TBP Industries (1996). In HIH Casualty & General Insurance Ltd v
Chase Manhattan Bank, Chase Manhattan Bank v HIH Casualty & General Insurance Ltd
(2003), 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)), 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); Inntrepreneur Estates (CPC) Ltd v Worth
(1996); Thomas Witter Ltd v TBP Industries Ltd (1996); Inntrepreneur Pub Co (GL) v East
Crown Ltd (2000). 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) and Overbrooke Estates Ltd v Glencombe Properties (1974).
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 Unfair Contract Terms Act 1977. ‘Entire agreement’ clauses are generally regarded
as falling within the scope of s.3.


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 Ian’s statement
was made
b. that Ian’s 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.

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 Wellybob’s directorship;
(b) that the company is ‘very sound’; and (c) that it will go from ‘strength to strength’.
Lord Wellybob’s 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 O’Flanagan). 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 Ian’s 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, Vera’s 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. Don’t 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. Don’t know.
Question 3
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. Don’t know.
Question 4
With regard to Morritt V-C’s 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. Don’t know.
Question 5
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 A’s innocent misrepresentation.
e. Don’t know.

1. What is a misrepresentation?
2. Why 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
10.1 Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
10.2 Undue influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Introduction
Courts are reluctant to set aside a contract between parties of unequal bargaining
power solely on the basis of the inequality. At the same time, however, courts will not
allow the strong to push the weak to extract agreement and, in certain circumstances,
courts will set aside apparent contracts. Law and equity developed different responses
to the use of illegitimate pressure. Courts of equity would set aside a contract where
one party had unduly influenced the other to enter into a transaction. Courts of
common law were slower to develop a response to the use of illegitimate pressure but
do now recognise, under the doctrine of duress, to render a contract voidable where
one party has employed illegitimate pressure during the contractual process.
Elements of the law of contract 10 Duress and undue influence page 135
10.1 Duress
Essential reading
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, ‘Mistake’, section 8.3.2 ‘Mistakes as
to identity’, where this is discussed in relation to mistake.) In Barton v Armstrong (1976)
the Privy Council declared that certain deeds were void for duress. There is some
support for this position amongst the academic commentators (see, for example,
Lanham’s article in the further reading section below).
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) and Pao On v Lau Yiu Long (1980).
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), 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) 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).
Duress to goods
Duress to goods may occur where one person threatens to destroy or take the goods
of another unless a contract is entered into. Duress to goods was recognised in the
case of The Siboen and The Sibotre (1976).
Economic duress
It has only been in recent years that English courts have accepted that economic
duress can be a vitiating factor in contractual formation – that the presence of
economic duress will result in a voidable contract. Economic duress as such was
recognised in Pao On v Lau Yiu Long (1980) and Universe Tankships of Monrovia v
International Transport Workers Federation (The Universe Sentinel) (1983). Economic
duress is the most difficult form of duress to apply to a given situation.
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).
In Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu) (2012) 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). 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 Alec Lobb Ltd v Total Oil (1983) and summarise it in about 150 words.
No feedback provided.
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 victim’s will must be ‘overborne’ such that he does
not really consent to the contract: see Lord Scarman’s comments in Pao On v Lau Yiu
Long (1980). In more recent decisions, courts seem to 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 they 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 will result in a contract which is voidable for duress. The victim must,
however, act promptly to set aside the contract when the duress has been removed.
Failure to do so will result in a valid contract. 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
Outline the criteria the Privy Council stated in Pao On v Lau Yiu Long (1980) were
necessary for duress to exist.
Activity 10.3
State the steps necessary for a contract to be avoided (not affirmed) following the
decision in North Ocean Shipping v Hyundai Construction (1979).
Activity 10.4
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 10.5
Is it helpful to define unlawful pressure by reference to ‘coercion of the will’? Does
normal economic pressure not ‘coerce the will’?

¢¢ Anson, Chapter 10: ‘Duress, undue influence, and unconscionable bargains’.
¢¢ Atiyah, P.S. ‘Economic duress and the “overborne will”’ (1982) 98 LQR 197.
¢¢ Lanham, C. ‘Duress and void contracts’ (1966) 29 MLR 615.
10.2 Undue influence
Essential reading
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’, Elements of

the law of contract 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 O’Brien (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 O’Brien
(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 the 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 O’Brien [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 O’Brien (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 surety’s claim to set it aside. The House of Lords also
provided guidance to solicitors who advise in such transactions.
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 10.6
What is needed to put the bank on notice as to the rights of the surety?
Activity 10.7
Why does the law require proof of disadvantage in relation to presumed undue
influence but not actual undue influence?
Activity 10.8
Outline the differences and similarities between economic duress and actual undue
influence.

¢¢ Anson, Chapter 10: ‘Duress, undue influence, and unconscionable bargains’.

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
R’s 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 victim’s
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 Lloyd’s 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 Lloyd’s 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 O’Brien (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 (Lloyd’s 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. Don’t 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
claimant’s careful and deliberate signature upon the contract.
e. Don’t 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 party’s 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 employer’s
company.
e. Don’t 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
husband’s 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 husband’s 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 couple’s 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
husband’s 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
husband’s 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. Don’t 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 husband’s 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. Don’t 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 Privity of contract
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
11.1 The doctrine of privity . . . . . . . . . . . . . . . . . . . . . . . . . 147
11.2 The Contracts (Rights of Third Parties) Act 1999 . . . . . . . . . . . . . 148
11.3 Rights conferred on third parties at common law . . . . . . . . . . . . 151
11.4 Liability imposed upon third parties . . . . . . . . . . . . . . . . . . 156
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

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 many instances, though, privity of contract can defeat the
intentions of the parties to a 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.
Elements of the law of contract 11 Privity of contract page 147
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, for example 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 Dunlop’s 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 uncle’s coal business. In exchange, the nephew agreed
to pay a weekly sum to the uncle and, upon the uncle’s death, to the uncle’s widow.
After his uncle’s 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 husband’s estate.
The first aspect of privity, that the parties cannot by their contract impose liabilities
or burdens upon a third party, is 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 stevedore’s 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.

uu Anson, Chapter 21: ‘Third parties’.
uu Flannigan, R. ‘Privity – the end of an era (error)’ (1987) 103 LQR 564.
uu Kincaid, P. ‘Third parties: rationalising a right to sue’ (1989) CLJ 243.
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’, Elements of the law of contract study pack.
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 party’s 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 and Others, (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 party’s loss or the promisee’s 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 court’s 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 party’s 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?

¢¢ Anson, Chapter 21: ‘Third parties’.
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 success 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 promisee’s 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: ‘Damages’, 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 B’s 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 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 A’s 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. While this approach 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 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 C’s 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 A’s 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 A’s 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 A’s
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 C’s 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 (C’s agent)
Performs Contract 2 (B/C)

(ii) C Accepts A’s 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 B’s 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 A’s goods. In
unloading goods belonging to Z, C accidentally destroys A’s 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 promisee’s 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 A’s promise on trust for C). Where this happens, B may recover
from A the whole of the loss suffered by C because of A’s non-performance: Lloyd’s 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 party’s.
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?

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.

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 F’s 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 husband’s estate she could apply in that capacity for an order
for the specific performance of the contract. In this instance, the representative of the
promisee’s 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 party’s 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 seller’s 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 seller’s 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 A’s death B will be able
to receive further financial assistance from C, A’s 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. Don’t 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. Don’t 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 A’s 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 A’s goods.
b. The clause exempting the liability of B’s servants, agents and sub-contractors
must be contained in a deed in writing.
c. B must be authorised to act as C’s agent to receive the offer contained within A’s
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. Don’t 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. Don’t 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. Don’t know.

1. What is the doctrine of privity?
2. What are the two aspects of the doctrine of privity?
3. What are the two major forms of benefit available to a third party?
4. To what difficulties does the doctrine of privity give rise?
5. What is the significance of the Contracts (Rights of Third Parties) Act 1999?
6. What are the principal provisions of the 1999 Act?
7. What are the possible applications of the 1999 Act?
8. What are the major devices by which rights can be conferred on third parties at
common law?
9. What are the principal strengths and weaknesses of these devices?
10. What is the relationship between the rights of third parties at common law and
under the 1999 Act?
11. In what possible ways can liability be imposed upon third parties to a contract?
Part VI Illegality and public policy
12 Illegality
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
12.1 Statutory illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
12.2 Common law illegality . . . . . . . . . . . . . . . . . . . . . . . . . 165
12.3 The effects of illegality . . . . . . . . . . . . . . . . . . . . . . . . . 166
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Introduction
Illegality is a difficult subject within the law of contract. 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. 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 28–31).
Elements of the law of contract 12 Illegality page 163
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’.
¢¢ Beatson, J., A. Burrows and J. Cartwright, Anson’s law of contract – Extract from
Chapter 11: ‘Illegality’, Elements of the law of contract study pack.
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 reasons for this, such as:
uu to deter parties from such conduct
uu to punish wrongdoers
uu to preserve the dignity of the court
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.
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 shipowner’s 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 claimant’s
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 Arnold’s 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.

¢¢ Anson, Chapter 11: ‘Illegality’.
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, G.H., Law of contract – Extract from Chapter 11: Section 2 ‘Types of
illegality’, Elements of the law of contract 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. Figure 12.1 A brougham carriage
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.

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).
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
has now decided, however, to leave the matter to courts to develop the law 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.

¢¢ The Law Commission’s consultation paper, ‘Illegal Transactions: The Effect of Illegality
on Contracts and Trusts’ (LCCP No. 154) at
http://lawcommission.justice.gov.uk/docs/cp154_Illegal_Transactions_Consultation.pdf
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 Peter’s 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 Stefan’s 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 Peter’s 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). Where the statue 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 Peter’s 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. Peter’s 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), Peter’s 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. Don’t 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. Don’t know.
Question 3
Which of the following contracts is not necessarily illegal?
Choose one answer.
a. A contract whereby A wagers with B that A’s dog will run across the town square
faster than B’s 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 A’s
payment of £10,000.
d. A contract in which A and B agree that A will find B a husband in exchange for B’s
payment of £10,000.
e. Don’t 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. Don’t 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 (A’s) 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. Don’t know.

1. What are the differences between contracts which are illegal in formation and
contracts which are illegal in performance?
2. What different effects does the above distinction create?
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?

Part VI Illegality and public policy
13 Restraint of trade
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
13.1 General principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
13.2 Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . 173
13.3 The sale of a business . . . . . . . . . . . . . . . . . . . . . . . . . . 175
13.4 Other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

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 person’s
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.
Elements of the law of contract 13 Restraint of trade page 173
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 employer’s 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
to be found, principally, in Articles 81 and 82 of the European Community Treaty 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.
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’.
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.
uu First, the restraint must be reasonable between the parties – it must do no more
than is reasonably necessary for the protection of the employer.
uu Secondly, 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
footballer’s ancillary activity of exploiting his image rights was equally capable of
protection under the doctrine of restraint of trade as any other occupation.
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 Plod’s 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.

13.3 The sale of a business
Essential reading
¢¢ McKendrick, Chapter 15: ‘Illegality’ – Section 15.14 ‘Contracts for the sale of a
business’.

policy’.
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’.

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 Harper’s 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 songwriter’s 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 Harper’s 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 Harper’s Garage (Stourport) Ltd and
A Schroder 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?

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 Bob’s 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 Bob’s 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)). Bob’s 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 solicitor’s 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. Don’t 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. Don’t 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. Don’t 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 employer’s 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. Don’t 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. Don’t 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
14.1 The principle of substantial performance . . . . . . . . . . . . . . . . 183
14.2 When a breach of contract occurs . . . . . . . . . . . . . . . . . . . . 183
14.3 What occurs upon breach . . . . . . . . . . . . . . . . . . . . . . . . 185
14.4 Anticipatory breach . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

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. The parties may also decide
to end further performance of their contract by entering into a (subsequent) binding
contract to end their first contract. 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 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.
Elements of the law of contract 14 Performance and breach page 183
14.1 The principle of substantial performance
Essential reading
¢¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – Section 21.2 ‘The
entire obligations (or “entire contracts”) rule’.
¢¢ Poole, Chapter 8: ‘Breach of contract’ – Section 4 ‘Entire obligations’.
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. The same result occurred in Sumpter v Hedges
(1898).
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. See, for example, Hoenig
v Isaacs (1952). A third method is that 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).
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.

¢¢ Anson, Chapter 12: ‘Performance’.
14.2 When a breach of contract occurs
Essential reading
¢¢ McKendrick, Chapter 19: ‘Breach of contract’ – Section 19.1 ‘Introduction: breach
defined’ to Section 19.3 ‘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’, Elements of the law of contract 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.
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.13–15 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.

¢¢ Anson, Chapter 15: ‘Discharge by breach’.
14.3 What occurs upon breach
Essential reading
¢¢ McKendrick, Chapter 19: ‘Breach of contract’ – Section 19.3 ‘The consequences of
breach’ to Section 19.9 ‘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 party’s 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
principle established in this case is qualified in a number of ways. One is that 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). In
addition, 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.
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.
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 party’s 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. Alternatively, the innocent party may elect
to terminate the contract. In this case, damages will be assessed at the time of the
breach, rather than the time at which performance is due.
Activity 14.4
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 14.5
What are the risks involved in not accepting an anticipatory repudiation?

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 Thelma’s 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 Thelma’s restaurant in order to undertake
the work for Simon, which is much more lucrative. Simon’s 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 Simon’s property and in this regard she appears
to fall within the exception in Hounslow LBC v Twickenham Garden Developments Ltd
(1971). However, Simon’s 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. Don’t 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. Don’t 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. Don’t 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 party’s 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. Don’t 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. Don’t 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?

Part VII The discharge of a contract
15 Frustration
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
15.1 The basis of the doctrine of frustration . . . . . . . . . . . . . . . . . 193
15.2 The nature of a ‘frustrating event’ . . . . . . . . . . . . . . . . . . . . 194
15.3 Limitations on the doctrine . . . . . . . . . . . . . . . . . . . . . . . 197
15.4 The effect of frustration . . . . . . . . . . . . . . . . . . . . . . . . . 198
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

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 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’ – Section 1

‘The frustration doctrine: discharge for subsequent impossibility’ and Section 2
‘Contractual allocation of risk’.
Elements of the law of contract 15 Frustration page 193
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’ –

Section 3 ‘Theoretical basis for the doctrine of frustration’.
¢¢ McKendrick, E. ‘Force majeure and frustration – their relationship and a

comparative assessment’, Elements of the law of contract study pack.
When 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
Figure 15.1 Surrey music hall that there was an ‘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 preferred analysis is that in situations where
there is a change in circumstances (not attributable to the fault of either party) such
that performance of the contract would become 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.
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’.

Section 4 ‘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 or radically different – it is not enough that the contract has
simply become more difficult or expensive for one party. Thus, 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 Phil’s garage on the
following Friday. Jamie, the mechanic who normally carries out services on
Nathalie’s 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 Phil’s salon on the following
Friday. Jamie, the hairdresser who normally styles Nathalie’s 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)).
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
King’s review of it, which was part of the coronation celebrations. The King’s 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.

15.3 Limitations on the doctrine
Essential reading
‘Express provision’ to 14.17 ‘The effects of frustration’.

Section 2 ‘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. 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.
In Bunge SA v Kyla Shipping Company Ltd (2012) the court found that where there
was damage to a vessel below the amount that the vessel had been insured there
were elements of self-induced frustration in a claim that damage to the vessel had
frustrated the contract. The court also considered the historical development of
frustration in relation to charter parties.
Activity 15.5
Read the case of 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
Investment Trust v Leighton’s 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.

15.4 The effect of frustration
Essential reading
¢¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – Section 14.17 ‘The
effects of frustration’.

Section 5 ‘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 by the Privy Council in Hirji
Mulji v Cheong Yeong Steamship Co Ltd (1926).
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. 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
Sabina’s 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 day’s 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 J’s 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 Sabina’s 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 day’s 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. Explain the distinction between ‘specific’ and ‘unascertained’ goods.
4. 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 week’s holiday for herself and her five
children for the week 8–15 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 Christine’s 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 Grange’s 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 Christine’s 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. Don’t 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 LJ’s 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. Don’t 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 year’s 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. Don’t 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 month’s 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. Don’t 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. Don’t 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
16.1 The purpose of an award of damages . . . . . . . . . . . . . . . . . . 207
16.2 Two measures of damages . . . . . . . . . . . . . . . . . . . . . . . 207
16.3 When is restitution available? . . . . . . . . . . . . . . . . . . . . . . 209
16.4 Remoteness of damage . . . . . . . . . . . . . . . . . . . . . . . . . 210
16.5 Mitigation of damage . . . . . . . . . . . . . . . . . . . . . . . . . . 212
16.6 Non-financial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
16.7 Liquidated damages . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

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 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. Usually, but not invariably, the expectation interest
is sought. In some cases, however, the injured party seeks an award based upon a
restitutionary interest. This measure has developed more recently and differs from
an expectation or reliance measure in two ways. First, a restitutionary measure is
calculated with reference to the defendant’s gain rather than the claimant’s 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 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.
Elements of the law of contract 16 Damages page 207
16.1 The purpose of an award of damages
Essential reading
¢¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – Section 20.1
‘Introduction’ and Section 20.2 ‘Compensation and the different “interests”’.
¢¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 1 ‘Aim of contractual

damages’.
¢¢ McKendrick, E. ‘The common law at work: The saga of Alfred McAlpine

Construction Ltd v Panatown Ltd’, Elements of the law of contract study pack.
¢¢ McKendrick, E. ‘Breach of contract and the meaning of loss’, Elements of the law
of contract study pack.
¢¢ Coote, B. ‘Contract damages, Ruxley, and the performance interest’, Elements of

the law of contract 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, for example, Ruxley
Electronics and Construction v Forsyth (1995). Punitive damages are not available in
English law for a breach of contract, even where the defendant deliberately breached
the contract. While the purpose of the award of damages is to compensate the
claimant, the difficulty of assessing damages will not prevent their recovery. See
Chaplin v Hicks (1911) where the plaintiff received damages for the loss of a chance to
compete in a competition, even though there was no certainty that the plaintiff would
have won the competition. The claimant will not, however, receive damages where
the breach of contract has left him no worse off. See C and P Haulage v Middleton (1983)
and St Albans v ICL (1996).
In Sempra Metals Ltd v Inland Revenue Commissioners (2007) the House of Lords resolved
the difficulties regarding the payment of interest upon the late payment of a debt
by holding that a court had a common law jurisdiction to award interest, simple and
compound, as damages on claims for the non-payment of debts as well as on other
claims for a breach of contract.
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.

¢¢ Anson, Chapter 17: ‘Damages’.
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 claimant’s loss to be measured? There
are three possible bases for assessing damages – the expectation loss, the reliance loss
and the restitution loss. We will consider the first two possible bases here; the third
will be examined in the following sub-section, 16.3.
Expectation loss is the basic measure of contractual damages. 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)
The purpose which the expectation measure of damages is meant to fulfil is that the
contract created certain expectations of performance and that when these fail, the
innocent party is to have these expectations fulfilled through an award of damages.
The compensation is thus for disappointed expectations.
An award based on the claimant’s expectation interest is compensation for the loss of
a bargain. The claimant obtains the profits he would have received had the contract
been performed – damages are assessed in reference to the claimant’s 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 advanced his £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.
Note that 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 these circumstances, courts will
award damages for the loss of amenity: Ruxley Electronics and Construction v Forsyth
(1995) and Tito v Waddell (No 2) (1977). Ruxley Electronics and Construction v Forsyth has
been accepted and applied in a number of subsequent cases (see, for example, Birse
Construction Ltd v Eastern Telegraph Co Ltd (2004)).
In some instances, it will not be appropriate to measure the claimant’s 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. 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 the case of 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 made.
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).
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 Culloden’s 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, 20.3).
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. The reliance measure compensates the claimant
for the wasted expenditures he has incurred.

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 20: ‘Damages for breach of contract’ – Section 20.4 ‘The
restitution interest’, Section 20.5 ‘Failure of consideration’ and Section 20.6
‘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
claimant’s 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 defendant’s 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 defendant’s 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)). This account of profits required
the wrongdoer to disgorge the benefit he obtained by the breach of contract. Such
an account of profits would occur 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 unusual facts. In Experience
Hendrix LLC v PPX Enterprises Inc (2003) the Court of Appeal did confine an account of
profits to exceptional circumstances such as national security, exceptional profits
and fiduciary duties. See, also, Devenish Nutrition Ltd v Sanofi-Aventis SA (2008) where
the Court of Appeal held that the remedy was only available where other contractual
remedies are inadequate. It seems likely that the law on this point may be entering a
period of change and development.
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 claimant’s loss.

¢¢ Anson, Chapter 19: ‘Restitutionary awards’.
¢¢ 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 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 defendant’s 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.
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. These two limbs are not mutually exclusive (Jackson v Royal Bank of Scotland
(2005)).
Hadley v Baxendale itself was found to be within this second limb. The court found that
the carriers had no reason to know that without the shaft the mill could not operate.
Accordingly, the mill owners could not recover the damages which flowed from the
stoppage of the mill:
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).
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 increated 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.
Activity 16.5
What is the policy behind the rules of remoteness? What is the link, if any, between
these rules and the cost of insurance?
Activity 16.6
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 16.7
Under the second rule in Hadley v Baxendale, is the defendant’s 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
defendant’s attention to the possibility of these losses at the time of contracting.

16.5 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.

16.6 Non-financial loss
Essential reading
‘Damages for pain and suffering and the “consumer surplus’’’ and Section 20.14
‘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.
This rule was subject to certain recognised exceptions. Primarily, these occurred
where the purpose of the contract was to provide pleasure – see, for example, Jarvis
v Swan’s Tours (1973) and Jackson v Horizon Holidays (1975) – or if the purpose of the
contract was to alleviate distress.
The changes to the law have come about through the following cases. As we discussed,
the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth (1996) recognised
that damages were available for a ‘loss of amenity’. In Malik v BCCI (1997) the House of
Lords considered Addis v Gramophone Co Ltd, distinguished it, and held that damages
could be awarded for the effect of an employer’s dishonest business operation on
the future employment opportunities of honest employees. Malik v BCCI appears to
broaden the possible ambit of recovery for damages for non-financial loss. In Johnson
v Unisys Ltd (2001), the House of Lords held that Addis v Gramophone Co Ltd did not
prevent recovery in circumstances where the claim was based on breach of an implied
term of trust and confidence in the contract. The House of Lords held, however, that an
employee had no right to damages arising from the unfair manner of his dismissal.
In Farley v Skinner (2001), the House of Lords held that damages for non-pecuniary
losses would be allowed for a breach of contract where a major or important
object of the contract was to give pleasure, relaxation or peace of mind. The claim
for non-pecuniary damages was not defeated by the fact that the defendant had
only promised to exercise reasonable care in the performance of his obligations, as
opposed to guaranteeing a certain result. Watts v Morrow (1991) was explained and
distinguished. In Hamilton Jones v David & Snape (a firm) (2003) the court applied the
principles developed in Farley v Skinner and allowed the claimant to recover damages
for mental distress suffered when the defendant solicitors breached their duty to
her in not taking reasonable steps to prevent the claimant’s husband from removing
their children from the United Kingdom. In doing so, the court held that the claimant
did not need to establish that peace of mind or freedom from distress was the
predominant object of the contract but only that these were important terms of the
contract.
The effect of these cases appears to be, however, that the manner of the breach
cannot be compensated but the courts will consider a wider range of terms (implied
and express terms) within a contract which may allow damages for non-financial
losses.
Activity 16.8
What is the purpose behind preventing a recovery of damages for mental distress
where there is a breach of an ‘ordinary’ contract?
Activity 16.9
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 seems to have relaxed this prevention. The
result is to allow recovery for a wider range of damages.

16.7 Liquidated damages
Essential reading
¢¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – Section 21.5
‘Liquidated damages’ to Section 21.8 ‘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. In Cavendish Square
Holdings BV v Makdessi [2013] EWCA Civ 1539 the Court of Appeal considered extensively
the law of penalties and the earlier decision in Dunlop Pneumatic Tyre v New Garage and
Motor (1915). The Court observed that a newer approach to the subject indicated that
a dichotomy between a genuine pre-estimate of loss and a penalty was too rigid an
approach and that because a payment on breach may not be a genuine pre-estimate
of loss did not mean that it necessarily had to be penal, especially where the clause
was commercially justified.
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 (21.6 ‘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.

¢¢ Anson, Chapter 18: ‘Specific remedies’.
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 L hired a band, the Fairies, to play at L’s daughter’s 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 2 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 3 ‘Damages are not an adequate remedy for a breach of contract.’
Discuss.

Question 1 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 Tacky’s 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 2 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 3 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 Blake’s 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. Don’t 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. Don’t 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 carrier’s 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. Don’t 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. Don’t 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. Don’t 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?
Notes
Part VIII Remedies for breach of contract
17 Equitable remedies
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
17.1 Specific performance . . . . . . . . . . . . . . . . . . . . . . . . . . 223
17.2 Damages in lieu of specific performance . . . . . . . . . . . . . . . . 225
17.3 Injunctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

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.
Elements of the law of contract 17 Equitable remedies page 223
17.1 Specific performance
Essential reading
¢¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – Section 21.9 ‘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: Cohen v Roche (1927). Where, for example, the contract involved the sale of
ordinary goods, damages are an adequate remedy. The damages allowed the injured
party to purchase replacement goods in the market. 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).
Another consideration in awarding specific performance is that in some cases it

may be extremely difficult or impossible to quantify the claimant’s 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).
The following restrictions apply.
uu The claimant’s 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.
Likewise, contracts which require the constant supervision of the court are unlikely
to be the subject of an order for specific performance. This issue was examined by the
House of Lords in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997).
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.
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.

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.

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
Lloyd’s Syndicate [1995] 1 Lloyd’s 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.

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. Don’t 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. Don’t 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. Don’t know.
Question 4
Read carefully Lord Hoffmann’s 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 court’s order for specific
performance.
d. Orders for specific performance are enforced by making contempt orders when
the court’s initial order has been breached and the nature of a contempt order
makes it unsuitable to order specific performance in many instances.
e. Don’t 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 court’s 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. Don’t 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?

Feedback to activities
Contents
Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Notes
Elements of the law of contract Feedback to activities page 231
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 Carlill’s 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
The reasoning behind the decision is clearly influenced by the consensus theory of
contract. Note the reference by Higgins J to Anson’s theories of consent.
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. 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 Clarke’s 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.
B’s initial correspondence can be taken as a rejection – but it is more likely to be a
request for information and the offer survives. B’s 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 A’s 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. 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
Possible rules include consideration of 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 are 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. The better view is, however,
that once the act of acceptance has begun the offeror cannot revoke the offer as long
as performance is ongoing. See Errington v Errington (1952). It was explained in Daulia
v Four Millbank Nominees (1978) that in these circumstances there must be an implied
obligation on the part of the offeror not to prevent the condition from becoming
satisfied and this obligation must arise as soon as the offeree starts to perform the act
of acceptance. Once this performance had begun, the offeror could not revoke his offer.
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. B’s actions are therefore clearly
consideration under the Currie v Misa (1875) definition.
Activity 3.2
This is the reverse of situation 1. A’s 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 A’s 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 B’s 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 mother’s promise to provide for the child’s
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 mother’s 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 mother’s actions had any
economic value.
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 Appeal’s 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 Casey’s 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 Scarman’s
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 Lisa’s promise is unenforceable because Jack’s
work is ‘past consideration’. Does the exception apply? Presumably the work was
done at Lisa’s request, so the first of Lord Scarman’s 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 Scarman’s conditions?
Would Lisa’s promise be enforceable if it had been made in advance of Jack’s 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). 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, 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.
Activity 4.6
In some circumstances, particularly where the parties have relied upon an agreement,
courts will more readily imply or infer a term. This can be seen in the decision in Hillas
v Arcos (1932). 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.
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 England’s 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 Scammell’s
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 Hillas’s case.
The most convincing reason for distinguishing these cases is likely that in Hillas’s 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.
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 purchaser’s 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
In practice, the parole 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 contract’s terms.
Activity 5.4
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 5.5
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 LJ’s 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 5.6
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 5.7
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 5.8
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 5.9
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 François 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 plaintiff 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 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 Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer
Contract Regulations 1999, discussed in section 6.3 below.
Activity 6.3
Generally the signing of a contract is sufficient to make the signer bound by the terms
contained in it (see L’Estrange 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, 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 employee’s misrepresentation. Here,
therefore, the answer would be likely to be that a court would hold that the clause
was part of Angela’s contract, but only to the extent that it excluded liability in the
situation specified by Magna’s employee.
Activity 6.4
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 Harbutt’s Plasticine, in that it was the consequences of the breach which
made it ‘fundamental’, rather than the nature of the obligation broken.
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 6.5
This is a version of the old example of a ‘beans’ for ‘peas’ situation (see Chanter v
Hopkins (1838) and Pinnock Bros v Lewis & Peat Ltd (1923)). At one time the courts would
have said that this was a fundamental breach and that the exclusion clause would
therefore be ineffective. Under the Photo Production approach it is a question of
deciding whether the clause on its true construction covers the breach. The clause
in Ian’s contract seems to be very clearly worded, and to cover the situation that has
arisen. At common law, therefore, Mark would not be able to avoid the effect of the
exclusion clause.
Note, however, that under the UCTA 1977, since Ian is almost certainly in breach of one
of the implied conditions in the Sale of Goods Act 1979 (s.13, Sale by Description), the
exclusion will be subject to the requirement of reasonableness imposed by the UCTA
(discussed in 6.2.5). The clause might also come within s.3(2) UCTA (see section 6.2.3).
Activity 6.6
The answer is yes, there can be such clauses. Where the attempt is to restrict a liability
which is not based on negligence, then s.2(1) will not apply. The clause may be struck
down by other provisions of the Act, however. For example, the obligation to supply
goods of satisfactory quality under s.14 of the Sale of Goods Act 1979 is strict and can
be broken without negligence on the part of the seller. If a seller puts a clause in a
contract stating that ‘the seller will not be liable for death or personal injury arising
from the unsatisfactory quality of the goods, unless this is attributable to the seller’s
negligence’ this will not be struck down by s.2(1). It will be subject, however, to the
special rules applicable to sale of goods contracts and contained in s.6 of the UCTA.
These are discussed in section 6.2.4.
Activity 6.7
The only question here is whether the negotiation which has taken place means
that the contract is not to be regarded as being on B’s ‘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 B’s ‘standard package’, then s.3 will apply.
Activity 6.8
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 can only apply if one of the parties ‘deals
as a consumer’. The only possible argument to that effect would be to apply the R
& B Customs Brokers approach and suggest that, since C Ltd is not in the business of
painting premises, it is not dealing in the course of a business but as a consumer. A
court could, however, regard the upkeep of the premises in which C Ltd carries on
its business as sufficiently closely connected with its normal activities, for a contract
made in relation to it to be regarded as being in the course of business. If that is so,
then s.3 of the UCTA will not apply to this contract.
Activity 6.9
There are no ‘written standard terms’ here. Does Ramesh ‘deal as a consumer’? Only if
Tony deals ‘in the course of business’. Since he is a builder, rather than a tree surgeon,
it seems that he does not so deal. His attempt to exclude liability will not, therefore, be
subject to s.3. Note, however, that if Tony had been negligent in cutting down the tree,
his exclusion of liability would have been subject to the reasonableness test, by virtue
of s.2(2) of the UCTA (see section 6.2.2).
Activity 6.10
The answer to this question depends on whether Emma is dealing as a consumer. If
she is, then Industries’ exclusion clause will be totally ineffective. If she is not, then
the clause will be subject to the requirement of reasonableness. She is clearly not
buying the lathe ‘in the course of business’; she wants it for her hobby. As you will
remember, however, there is an additional requirement for ‘dealing as a consumer’ in
this context, that is, that the goods are of a kind ordinarily supplied for private use. Will
the lathe fall into this category? If, as seems likely from the facts, it is a lathe which was
originally intended for industrial use, then the answer will be ‘no’. The limitation of
liability clause may then be valid, depending on whether it satisfies the requirement of
reasonableness. It may well do so (see, for example, George Mitchell v Finney Lock Seeds
(1983), discussed in section 6.2.5).
Activity 6.11
You may well feel that the overall approach is indicated by the first guideline,
which refers to the ‘strength of the bargaining position’ of the parties. The rest of
the guidelines can be largely seen as being related to the issue as to whether the
‘customer’ entered into the contract with full knowledge and without undue pressure.
That is, the focus is more on the process by which the clause became part of the
contract than its substantive content.
Activity 6.12
There is a clear overlap in guideline (c) with the common law rules about ‘reasonable
notice’. It might be argued that this guideline is redundant, in that if the customer did
not have reasonable notice of the term, then it would not be incorporated into the
contract and the issue of its ‘reasonableness’ would not arise.
Activity 6.13
Only guideline (e) makes specific reference to ‘goods’. All the others are in general
terms and therefore easily applicable outside the context of sale of goods contracts.
Activity 6.14
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.
Activity 6.15
This is a contract for the sale of goods and XLO appear to be in breach of the implied
term as to ‘satisfactory quality’ under s.14 of the Sale of Goods Act 1979. This means
that s.6 of the UCTA applies. We are not told whether Yasmin is dealing as a consumer,
though the suggestion is that she probably is. If so, then s.6 prevents any exclusion of
liability of the kind which XLO is attempting and Yasmin will be able to recover for the
defective lead. If Yasmin were not dealing as a consumer, then the clause would need
to satisfy the requirement of reasonableness. This is a matter of judgment, applying
the approaches indicated by the cases. What do you think a court would decide?
Activity 6.16
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.
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,
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 interpretation
of the case; and the interpretation which 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.
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. (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 Ace’s 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
† The elements of an
have reasonable grounds at the time of making the statement for believing that
actionable misrepresentation
the picture is a Carr and does he have these grounds up to the time the contract is
can be found in Chapter 9 of
entered into? (See Howard Marine v Ogden.) If A does not have these grounds, then
this subject guide.
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.’
Applying this principle, it will be difficult to establish the mistake as operative.

Does the mistake as to the quality ‘make the thing without the quality essentially
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 B’s 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 B’s 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 P’s. 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 King’s
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 King’s
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
The contract did not allocate the risk explicitly to either party. The contract for the
sale of the house was made subject to the existing statutory tenancy; however,
neither party assumed the risk that the tenant was no longer a sitting tenant. In the
circumstances, Goff J (as he then was) found that there was a fundamental mistake in
equity.
Activity 8.15
a. 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. In Solle v
Butcher (1950), Lord Denning said:
It is now clear that a contract will be set aside if the mistake of the one party has been
induced by a material misrepresentation of the other, even though it was not fraudulent
or fundamental; or if one party, knowing that the other is mistaken about the terms of an
offer, or the identity of the person to whom it is made, lets him remain under his delusion
and concludes a contract on the mistaken terms instead of pointing out the mistake. [692]
Goff J applied these criteria in Grist v Bailey to facts that were very similar to the
one given in the hypothetical problem. There is a critical difference between the
hypothetical and Grist v Bailey. This is that there is the intervention of a third party’s
rights – X. X appears to be a bona fide purchaser for value without notice and the
intervention of such an individual usually prevents equitable relief. Following the
decision in The Great Peace, there is no scope for a doctrine of mistake in equity and
the decision in Grist v Bailey is irrelevant to the determination of this problem. The
contract is probably good in law and equity is unable to provide relief. Accordingly,
B is bound and A can perform his contract with X. B would want to argue that
the decision in The Great Peace should not be followed and that those decisions
recognising a flexible form of equitable relief for mistake (Solle v Butcher, Grist v
Bailey, Associated Japanese Banks v Crédit du Nord) should be followed. Even if the
first part of this argument succeeds, B is unlikely to receive equitable relief because
of the presence of X.
b. Once again, the contract would likely stand at law: see Bell v Lever Bros. 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.
The judgment in Grist v Bailey indicates that a court of equity will view a mistake
as fundamental where there is a great discrepancy in the value of the good. 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.
Activity 8.16
The difficulty with the two cases is that the mistake as to quality in Solle v Butcher is
very similar in degree to that of Bell v Lever Bros. Solle v Butcher can be reconciled with
Bell v Lever Bros on the grounds that the majority of the House of Lords considered
the case on the basis of mistake in law while Solle v Butcher was decided in equity. This
is consistent with the dissenting judgment of Lord Warrington where he stated that
he was not concerned with the equitable cases and it is the distinction advanced by
Lord Denning himself in Solle v Butcher. Further support for this distinction can also
be found in the decision of Steyn J in Associated Japanese Bank v Credit du Nord. The
weakness with this distinction is that some of the cases considered by the majority in
Bell v Lever Bros were equitable cases and the decision appears to attempt to state the
position at both law and equity. In addition, Lever Bros’ claim was for rescission of the
contracts of termination – and rescission is an equitable remedy. For these reasons,
and others, the Court of Appeal in The Great Peace found that it was impossible to
reconcile these two decisions and disapproved of Solle v Butcher. If The Great Peace
is followed in preference over the Solle v Butcher line of authorities which allow an
equitable doctrine of mistake, the result is a very narrow ambit of situations in which a
contract will be avoided by reason of a mistake as to a quality of the subject matter.
Chapter 9
Activity 9.1
a. X’s 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
Keith’s 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 Alpha’s 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 Keith’s change of mind means
that his statement about his intentions made to Alpha’s 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 O’Flanagan (1936), it would seem
that Alpha can argue in this situation that Keith’s 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
McKendrick’s argument supports the view taken by other academic commentators,
and in particular Hooley (1991), that the Court of Appeal’s 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
Activity 10.2
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 10.3
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 10.4
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 Atlas’s 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 10.5
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 contractor’s 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 10.6
Where the bank knows of the wrongdoing of the debtor, then they will be bound by
the surety’s equity to avoid the transaction: Barclays Bank v O’Brien. It would be highly
unusual, however, for a bank to have actual knowledge of the debtor’s wrongdoing.
Generally, the bank will be bound because it has constructive notice of the surety’s
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 O’Brien
(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 38–43 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 47–49] when a bank is put in inquiry.
Activity 10.7
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 (No
2) (2001), paras 21–28.
Activity 10.8
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. Nothing
indicated that the carriers were contracting as the agent for the stevedores.
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
C’s 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 C’s 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 Lloyd’s 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
Bertha’s 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, Bertha’s punishment lies in the criminal law and not the
civil law.
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 à vis the other as to the terms of the contract. The example
Lord Reid, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, gave was where
conditions have been incorporated which were not the subject of negotiation. In A
Schroder 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; it is said that ‘time is of the essence’. Additionally, liability for performance
tends to be strict. The cause of the representative’s 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.
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 16.5, 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
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 14.5
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).)
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 Nathalie’s 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 Phil’s 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 Phil’s 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 Aaron’s 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.
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 Sabina’s 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 day’s work which
has been done (for example, wages paid to others working on the house). What do you
think the position would be if Peter’s 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 Damian’s 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)).
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 claimant’s 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
claimant’s performance interest is properly protected in such circumstances?
Activity 16.4
Activity 16.5
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 16.6
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 16.7
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?
Activity 16.8
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. 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 purpose of the contract was to provide ‘entertainment and enjoyment’. 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 16.9
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 surveyor’s 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 judge’s 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 LJ’s 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 buyer’s 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).
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 purchaser’s 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 Beatrice’s 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 Beatrice’s 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
Beatrice’s 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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Elements of

the law of contract

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 . . . . . . . . . . . . . . . 15

2 Offer and acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4 Other formative requirements: intention, certainty and completeness . 49

Part II Content of a contract and regulation of terms . . . . . . . . . . . . 59

5 The terms of the contract . . . . . . . . . . . . . . . . . . . . . . . . 59

6 The regulation of the terms of the contract . . . . . . . . . . . . . . . 75

Part III The capacity to contract – minors . . . . . . . . . . . . . . . . . . . 93

7 Contracts made by minors . . . . . . . . . . . . . . . . . . . . . . . . 93

Part IV Vitiating elements in the formation of a contract . . . . . . . . . . . 99

10 Duress and undue influence . . . . . . . . . . . . . . . . . . . . . . 133

Part V Who can enforce the terms of a contract? . . . . . . . . . . . . . . 145

11 Privity of contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Part VI Illegality and public policy . . . . . . . . . . . . . . . . . . . . . . . 161

13 Restraint of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Part VII The discharge of a contract . . . . . . . . . . . . . . . . . . . . . . 181

14 Performance and breach . . . . . . . . . . . . . . . . . . . . . . . . 181

Part VIII Remedies for breach of contract . . . . . . . . . . . . . . . . . . . 205

Quick quiz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

17 Equitable remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . 229

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

1.3 Method of working . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.4 Some issues in the law of contract . . . . . . . . . . . . . . . . . . . . 10

1.5 Plan of the subject guide . . . . . . . . . . . . . . . . . . . . . . . . . 11

1.6 Format of the examination paper . . . . . . . . . . . . . . . . . . . . 11

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

1.2.1 Books for everyday use

¢¢ McKendrick, E. Contract law. (London: Palgrave Macmillan, 2013) 10th edition

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

1.2.2 More advanced books

¢¢ Morgan, J. Great debates in contract law. (London: Palgrave Macmillan, 2012)

¢¢ 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 ‘The consequences of breach’.

1.2.5 Other sources of information

¢¢ Cambridge Law Journal

¢¢ Journal of Contract Law

¢¢ Law Quarterly Review

¢¢ Lloyd’s Maritime and Commercial Law Quarterly

¢¢ Modern Law Review

¢¢ New Law Journal.

In addition to these sites, a growing number of private publishers provide legal

1.3 Method of working

1. Read the relevant section of this subject guide.

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.

1.4 Some issues in the law of contract

1.4.2 European Union law

1.4.3 The ‘consensus’ theory of contract and objective interpretation

1.4.4 Finding ‘the intention of the parties’