BS 190 BUSINESS LAW

Aim

In a fast changing Zambian political, economic and social environment, the centrality of the law
cannot be overemphasized. An understanding of the law by those who will participate in the
economic sphere in their professional capacities is not only necessary but imperative. We as a
nation have seen the effect of the economic liberalization policies of government on the
insurance, financial and manufacturing sectors. At every turn parliament has had to enact or
amend laws having a bearing on these changes. For example, we have has the Privatization,
Investment and Securities Acts passed to meet the changing economic environments. It is
therefore important that students be enabled to appreciate and grasp the basic tenets and
concepts of law affecting business relationships and transactions.

Recommended Textbooks:

Goode, R., 2004, Commercial law, 3rd Edition, LexisNexis/Penguin Group, UK

Kelly, D., Holmes, A and Hayward, R., 2006, Business Law, Routledge-Cavendish Publishing
Ltd, UK

(Please note - the materials in this manual have been adopted from various law sources)

Unit 1:

Topic 1: INTRODUCTION TO LAW

What is law?

The Nature of Law

A student of law has to take cognizance that from ancient times to-date, no jurist has succeeded
in formulating a convincingly articulated and universally accepted definition of the term "law".
A great number of philosophers and jurists who lived in different periods of history have
attempted to define the term "law" but their definitions have produced a wide diversity, with
each definition being in total or substantial discord with the other. All the definitions have
revealed clear slanting of writers towards some particular ideology or allegiance. As a result,
there are metaphysical, normative, psychological, utilitarian, materialistic and socialistic
definitions depending on the writer's viewpoint of law. Some of these definitions are
diametrically opposed to each other. Some are generally rational and try to embrace as many
spheres of human life as possible while others are downright capricious and dogmatic. Writers
who were close to their rulers usually gave a positivist definition of law, describing it as a
command of the sovereign to his subjects, while Christian jurists generally described the nature
of law from a moral and spiritual base.
All the surviving definitions of law attempt to explain the incidence, the existence and
consequence of law as a social phenomenon. The word ‘law’ suggests the idea of rules; rules
reflecting the lives and activities of people. Rules made by people develop to control the
relationships between members. It is through rules that the conduct of society is regulated.
However, not every rule is necessarily a law. For a rule to acquire the status of a ‘law’ it has to
be enforceable by a person in a position of power in that community. These laws when
applicable to a wider society like a country becomes a legal system..

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Legal Systems

Any group of human beings, large or small, develops principles governing the relationships of
those within the group, setting out their responsibilities and rights as members of the group. At
their most developed these principles make up a legal system. In a theoretical sense the term
‘legal system’ applies to the set of all laws enacted directly or indirectly by one sovereign , or by
the exercise of powers conferred, directly or indirectly by one basic norm, for one society. In
short it is the totality of the laws of a state or community. When the term is qualified by an
adjective, for example, Zambian legal system, it refers to a complex combination of:

a) institutions such as the legislature, executive and the judiciary;

b) bodies of principles and rules, such as, constitutional law, criminal law, law of property
and so on;
C) Ideas, theories, methods, procedures, techniques traditions and practices which
collectively go to make up a distinct organization, existing to apply law to the problems of a
distinct society or state.
In this sense every state has a distinct legal system. Different legal systems have evolved in
different parts of the world, each from a range of sources. Ancient peoples developed principles
governing various matters. Nowadays those principles - perhaps the earliest source of law - are
called customary law. Similarly, the great religions were fertile grounds for the growth of sets of
rules dealing with various aspects of people's lives. For example, the rules of conduct developed
under Islam, known as sharia, still forms the basis of the legal system of a number of Moslem
countries. There are three major legal systems or traditions in the modern world. These are:
Anglo - American common law tradition; Roman - Germanic civil law tradition; Socialist law
tradition.

In addition to these three major legal systems or traditions, there also a group of religious legal
traditions which include, Muslim law, Hindu law, Jewish law and Cannon law. Most of the
states in continental Europe, some states in South America and some countries in Asia, such as
Thailand and Japan, are civil law countries. Generally speaking, that means that all their laws,
both substantive and procedural, are contained in comprehensive documents called "codes".
Although important differences are apparent between the common law system and the civil law
system, both are strongly influenced by the precepts of Christianity, and to a greater or lesser
extent, by Roman law. Together, the common law and the civil law constitute the western
tradition.
Zambia is a common law country whose legal system is based on the English common law
system. Other countries whose legal system is based on the common law include the USA,
Canada, Kenya, India, Australia and Malaysia, although in each of those countries the law has
developed differently, reflecting local views of justice and the prevailing local ethos.

Attributes of a good legal system

Attributes of law given by the jurisprudents depend on the definition formulated by the
particular jurisprudent. A law defined by a theologian is bound to contain some moral attributes,
whereas a definition by a positivist jurist may not contain moral elements. However, common
elements of a good law or legal system as described by most lawyers and legal scholars in
common law jurisdictions have been ascertained.
The main attributes of a good legal system are: -

1) Certainty or predictability;
2) Comprehensiveness;

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3) Simplicity;
4) Accessibility;
5) Flexibility; and
6) Moral values.

1) Certainty

A good~law must be certain so that it enables the citizens to know and comply with what it
dictates, so that they do not come into brush with it. A law that is ambiguous and known only to
a small section of society is not a good law. Certainty is therefore, a cardinal and desirable
attribute of a good legal system.
Thus for example, one of the purposes of the law of theft is to deter certain behaviour by
promising to punish it. If the behaviour in question is ambiguous, it will obviously be difficult to
regulate it, for no one will know exactly what will follow from his acts. Written law is
comparatively more certain than customary law or unwritten law. This is because it is common
knowledge that unwritten laws and traditions inevitably change from one place to another and
from one time to another. These oral rules can almost never be safely found in advance by
persons concerned with the consequences of their actions. Because of this, unwritten laws are
discouraged in modern societies in favour of written laws. There is however, one critical
constraint; it achieves little by way of legal certainty to reduce laws to writing for a population
that is not widely literate and has been accustomed to reliance upon oral traditions over
generations.

2) Comprehensiveness

Most modern legal systems strive to ensure that all potential problems and disputes are covered
by the law. A law that is not comprehensive enough will not be grasped by the majority of
citizens. Also a law that is silent on many critical social issues is defective and likely to create
unnecessary interpretation problems.

3) Simplicity

A good law must also be simple, couched in plain language, so it can easily be understood by
the people whose conduct it is intended to control. Drafts persons should avoid the use of long
massively complex clauses or highly technical phraseology. It is a great defect of many of the
world's legal systems that in striving for certainty through exhaustive, written coverage of every
possible contingency, they have become so massively complex that no one, not even lawyers,
can really understand them. In the United States, for example, the law is contained in more than
two million published cases, plus thousands of pages of statutes, countless treaties and articles
that appear regularly in more than a hundred law journals. In many other countries, the law is
contained in thousands of volumes of law and decided cases, of which not even a good lawyer
can claim to master.

4) Accessibility

A good legal system must have its laws accessible to the people. In other words, the majority of
the populace should be able to access it. For this to happen, the legal process should be
inexpensive, so that the majority of the population is able to retain lawyers to represent them.
This in turn demands for the creation of a large, well trained group of lawyers to be made
available to the population. A costly legal system excludes the majority of the citizens from
justice.

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5) Flexibility

A good law must be flexible to keep up with social dynamics. It is a bad law that resists social
changes because most of the people may begin to break. it. A successful legal system must be
able to bend with the wind of social change, that is to say, it must be sufficiently adaptable to
accommodate new kinds of problems and it must be flexible enough to adjust to changes in the
needs and desires of those whom it serves.

6) Moral values

A legal system should strive to conform approximately to the moral values of the society which
it serves. Unless it does this, it is not likely to be accepted by the people, with the result that they
are not obeyed or respected.

ii) Sources of law

The expression ‘source of law’ can mean several different things. It can refer to the historical
origins from which the law has come, such as common law and equity which were discussed in
the last unit. Secondly, it can also refer to the body of rules which a judge will draw upon in
deciding a case, and where these rules are to be found. In this second sense there are four main
sources of English law today: constitution, legislation, precedent and custom.

a) The Constitution
The Constitution is the most important law in the land. It is the law that is said to come directly
from the people. It sets out the relationship between the people and the government. It also
contains the fundamental principles of law. It is intended to promote the orderly governance of
the country. Any law which is inconsistent with the constitution is void to the extent of the
inconsistency. The constitution binds all persons in Zambia as well as all organs of the state.
Cases
Thomas Mumba Vs The People) 1984) ZR 38 The People Vs Shamwana and Others (1982) ZR
122 Sinabu Vs Attorney-General (1975) ZR 212 Kawimbe Vs Attorney-General (1974) ZR 130
Nkomo Vs Tshili (1973) ZR 102

Some of the most important provisions of the constitution are:

Citizenship
Citizenship may be acquired by birth, descent or by naturalization.
The Bill of Rights
Part III of the constitution provides a list of the fundamental rights and liberties of each
individual in Zambia. Some of the rights are;
i) Each person is entitled to life, liberty, security of the person and
protection of the law; ii) Each person is entitled to freedom of conscience,
expression,
assembly, movement and association;
iii) Each person is entitled to protection for the privacy of his home and other property as
well as from deprivation of property without compensation.

These rights are to be enjoyed by everyone regardless of his race, place of origin, political
opinion, colour, creed, sex or marital status. It is important to note, however, that each person's
rights end where another's begin. In other words these individual rights should not prejudice the
rights and freedoms of others or the public interest.

Unit 2: b) Legislation

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The nature and effect of legislation

Legislation is the body of rules, which have been formally enacted or made. Many bodies in
England have power to lay down rules for limited purposes, for example social clubs, but
fundamentally the only way in which rules can be enacted so as to apply generally is by Act of
Parliament. For various reasons, some of Parliament’s legislative functions are delegated to
subordinate bodies, which, within a limited field, are allowed to enact rules. Local authorities,
for instance, are allowed to enact by-laws. But local authorities can only do this because an Act
of Parliament has given them the power to do so.
In constitutional theory, Parliament is said to have legislative sovereignty and, provided that the
proper procedure is followed, the statute passed must be obeyed and applied by the courts. The
judges have had no power to hold an Act invalid or to ignore it, however, unreasonable or
‘unconstitutional’ they might consider it to be.
In this respect, England differs from many countries, which have written constitutions. In the
United States for instance, the Supreme Court has power to declare legislation passed by
Congress to be invalid if it is, in the opinion of the Court, inconsistent with the written
constitution. The conventional attitude of the courts in this courty, on the other hand, has been
expressed in words attributed to Holt, C. J., in a report of City of London v. Wood in 1702: ‘An
Act of Parliament can do no wrong, though it may do several things that look pretty odd.’
This conventional view has been challenged more recently, but only to a limited and uncertain
extent as yet.
In R. v. Secretary of State for Transport, ex parte Factortame Ltd (1991), Spanish fishermen
were claimed to be catching part of the UK ‘quota’ of European fishing stocks by forming
British companies and having their boats registered in the United Kingdom. The Merchant
Shipping Act 1988 and regulations made under it tried to prevent this. The European Court held
that part of this UK legislation was contrary to European Community law, and to that extent
should be held invalid by the courts here.
Although the courts cannot generally question the validity of an Act of Parliament, they do
always have the task of applying it to specific problems. The Government, by Act of
Parliament, states what the law is to be but, having done so, it must then abide by the words,
which it has used. What those words mean is a matter for the courts to decide. If the
Government disapproves of the interpretation it must pass another Act in an attempt to state its
intentions more clearly. The courts have, in fact, evolved rules of interpretation, which they will
use to discover the ‘true’ meaning of the words of a statute. Parliament helped the courts to
some extent by passing the Interpretation Act 1889, which is now repealed and replaced by the
Interpretation Act 1978 (see page 18).

The legislative process

The process by which an Act is passed is a long one. The first and most important step in most
cases is for the Government to decide that it wishes the legislation to be passed. Once this
decision has been taken, and so long as public opinion does not cause the Government to change
its mind, the legislation will pass through Parliament and become law, because of the
Government’s effective command of a majority in the House of Commons. On some issues the
Government will first seek the response of interested parties to its legislative proposals by the
publication of a consultative Green Paper. After considering the response, advance notice of the
more definite proposals upon which the legislation will be used is given in a White Paper.
A formal requirement is that the bill must be approved by both Houses of Parliament, with
ample opportunity for debate both in the Commons and in the Lords. In spite of Government
control of the Commons, Parliament is not a mere rubber stamp, because it gives opportunities

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for members to criticize, publicize, explain and amend the detailed provisions of the bill, and
few bills emerge without at least some amendment.
Finally, a bill must receive the Royal Assent, which today is never refused. It thereupon
becomes an Act of Parliament and, unless otherwise provided, takes effect from the day of
Assent. Many Acts now contain a section delaying commencement and providing for the Act to
be brought into effect, if necessary part by part, by delegated legislation. Those affected by the
Act are thereby given time to adapt to the change in the law.
The legislative sources of European Community law are described later in this unit.

Amendment and repeal

A salute, once enacted, remains in force permanently unless and until it is repealed, and it can
only be repealed by another statute. The Distress Act of 1276 still appears in the current edition
of Halsbury’s Statutes of England for instance. Similarly, a statute can only be amended by
another Act of Parliament unless, as rarely happens, an Act delegates to a Minister or some other
body the power to make minor changes. Most Acts today, in fact, do have to repeal or amend
some earlier statutory provisions, and they will usually contain a schedule specifying what
earlier provisions have been affected.
Conversely, Parliament can never take away its own power to amend or repeal earlier
legislation. Nor can it abandon its own freedom to legislate in future as it thinks fit. The
European Communities Act 1972 does at present limit the power of Parliament to legislate in a
manner inconsistent with the European Treaties. As we have seen, this was confirmed (in effect)
in the Factorate case recently. Nevertheless, the European Communities Act could always be
repealed by a future Parliament, although this would mean withdrawal of the United Kingdom
from the European Communities.

Consolidating and codifying Acts

Governments have always tended to introduce legislation as and when some specific need
arises, and several connected Acts on a particular topic may well exist side by side. In such
circumstances the Government will often do some tidying up. A consolidating Act will be
passed which will repeal all the piece-meal provisions, and re-enact them in one logically
arranged Act. This is periodically done, for instance, with tax legislation. Other examples
include Acts dealing with road traffic, social security, safety at work, and companies.
Sometimes a Government may decide not only to consolidate all of the legislation, but also to
replace some of the case law on the subject by a new Act. Such an Act is called a codifying one.
It reduces most of the law on the subject into a single code. There are good examples in
commercial law, particularly the bills of Exchange Act 1882 and the Sale of Goods Act 1893.
(The Sale of Goods Act 1893 was subsequently amended by several other Acts, and this
legislation is now consolidated in the Sale of Goods Act (1979).

Legislative law in Zambia comprises of ; Acts of Parliament and delegated legislation; Apart
from all Acts of Parliament, in addition to all Zambian Acts, the following also constitute Acts
of parliament in Zambia;

i) All statutes which were in force in England on 17th August 1911 (being commencement
of the Northern Rhodesia Order in Council of 1911); - The English Law (Extent of
Application)Act, Chapter 11 of the Laws of Zambia, and

All British Acts extended to Zambia by virtue of The British Acts Extension Act, chapter 10 of
the laws of Zambia.

Delegated Legislation

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In a company its CEO has overall control of the way the company is run. As he cannot do
everything himself he authorizes his subordinates to make routine decisions about how the work
is to be done.
Similarly, because today government finds it necessary to make a vast number of detailed new
regulations on almost every subject parliament itself cannot find time to attend to every minor
detail. It therefore delegates power and responsibility to makes regulation to other bodies, such
as local authorities: these regulations are known as delegated legislation. In this way Parliament
Is able in an Act to provide a framework and to leave the local authority or other group to fill in
the detail, e.g., Lusaka City Council has made extensive use of the powers given to it under the
Local Authority Act to chase street vendors that are not registered with it for trading.
Other forms of delegated legislation are the statutory instruments normally made by a minister,
and bye-laws made by local authorities.

Disadvantages of Delegated Legislation

Because in practice most delegate legislation is prepared by civil servants and then ‘rubber
stamped’ by the elected representatives, this system has been called ‘the new despotism’ for, in
effect, it allows the non-elected civil servants to legislate. Nevertheless, parliament does retain
some control over the making of delegated legislation.
The other disadvantage is the sheer number of statutory instruments made each year. It is
obviously very difficult for the person in the street to be aware of all of them and so they may
unwittingly commit an offence. Ignorance of the law is no defence!

Advantages of Delegated Legislation

The practice of authorizing others to make delegated legislation does, of course, allow
parliament to devote itself to the major and nationally important tasks of government.
It allows subordinate authorities to make detailed regulations very quickly if need be and then to
keep those regulations under constant review
Parliament lacks the expertise that may be required to pass certain regulations especially in areas
that may require technical and specialized knowledge. Delegated legislation ensures that the
authority with the relevant competencies handle the formulation of such regulation.

Control over Delegated Legislation

Control over delegated legislation is exercised by Parliament and the courts;

Control by Parliament

Although there is no general rule that delegated legislation is to be laid before (that is bought to
the notice of) Parliament, the individual Act which grants the to make particular regulations (the
enabling Act) usually does require that they should be so laid.
Moreover, statutory instruments are usually subject to either ‘affirmative or negative resolution’.
If they are subject to affirmative resolution they do not become law unless approved by
Parliament; if they are subject to negative resolution they are and will remain law unless rejected
by Parliament usually within 40 days.
They are various other Parliamentary safeguards, the most important being the Select
Committee on Statutory Instruments. This committee reviews all statutory instruments and
decides whether any of them should be brought to the attention of Parliament because it appears
they make an unexpected use of powers conferred by the enabling Act.

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Control by the Courts

The courts will examine any piece of delegated legislation to make sure that it s within the
framework contemplated by the enabling Act. Moreover it is presumed that in the absence of
any express sanction the enabling Act does not give the local authority, board or minister the
power to:

Make unreasonable regulations; or

Allow sub-delegation ( that is , grant a third party power to make regulations); or levy taxes; or
Interfere with the basic rights of the subject (such as freedom of speech)

In addition to the above, the courts keep control on both parent and delegated legislation through
the interpretation of statutes which will be discussed under judge made law.

Custom as a Source of Law (African Customary Law)

This is the most primitive source of law. The Anglo-American law is, in two different respects a
law of custom. In its origin, the common law was nothing more and nothing less than the custom
of the people of England. This custom was relied upon by the courts in that country in making
their decisions. As time went on, however, the accumulation of cases decided by the courts
themselves created precedents which the courts followed. In a very real sense, law became the
custom of the courts. Even today, custom has its effect in that where the law is silent on an issue,
custom of the community can fill the gap. One specific application of this principle is in the
interpretation of contracts where custom is commonly used to define specialized words and to
imply unexpressed terms.
In international law, custom is considered to be a material source (Article 38 of the Statute of the
International Court of Justice). Obviously, to the extent that the law reflects the customs and
desires of the community, it is accepted as good law.

Cases
Sithole Vs Sithole (1987) ZR
Banda Vs Banda & Another (1974) ZR
Hwalima Hwalima (1968) ZR
Shamane Vs Chinza (1968) ZR 137

Unit 3:Case Law (Judicial decisions) as a Source of Law

1. Introduction

A judicial decision under the common law system has two functions;

a) To define and to dispose of the controversy before the court in "accordance with the doctrine
of res judicata. Under this doctrine parties may not litigate issues that have been determined
between them by a valid judgment. Courts must perform this judicial function even if the case is
a novel one to which there is no controlling authority. In such a novel situation, the court will
have to create a law somewhat as a legislature creates law/but within the narrower bounds set by
the facts of the case before it. However, in creating the law to resolve the controversy before it,
it creates an impact which extends beyond the parties before it. This impact forms the second
function of a judicial decision.

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b) The second function of a judicial decision and one which is characteristic of the common law
is that it establishes a precedent so that a like case arising in the future will probably be decided
in the same way. This doctrine of precedent is often called by its Latin tag, stare decisis derived
from the Latin phrase stare decisic et non quieta movere which means to stand by the decisions
and not to disturb settled points. Reliance on precedent developed early in English law and was
received in other common law countries such as Zambia, as part of the tradition of the common
law. As a tradition it has not been reduced into a written rule and can therefore not be found in
the Zambian constitution or other statutes. The justification commonly given for the use of this
doctrine may be summarized in four words, namely, equality, predictability, economy, and
respect.
i) Equality - the application of the same rule to successive similar cases results in equality
of treatment for all who come before the court.
ii) Predictability - consistently following precedents contributes to predictability in
future disputes.
iii) Economy - use of established criteria to settle new cases saves time and energy.
iv) Respect - adherence to earlier decisions shows due respect to the wisdom and experience
of prior generations of judges.

Role of Adjudication

Law has been classified in various ways as seen earlier on. However, the main division is the
one between criminal and civil law. In a civil action the dispute is usually between two private
citizens or private corporations. It may also be between an individual natural person and a
corporation or the state. In any of these actions the parties may try to resolve their differences
before they proceed to the trial stage before a magistrate or judge. If they fail to settle the matter
ex curia (out of court) they may then try arbitration. If that method of dispute resolution fails,
the parties then finally resort to adjudication in a court of law.
In criminal matters the offender is said to have wronged not only his victim but the whole
community. For that reason the offender and the victim are not permitted to negotiate and settle
the matter out of a court of law. This is because the whole society has an interest in it, namely, to
see that the offender is punished if convicted.
The term adjudication may refer to the process of trying a matter in court or may mean the
judgment in the case. To adjudicate is to judge or adjudge, or decide a dispute. It comes from the
Latin wordjudex which means a judge. John Bruke Osborne's Concise Law Dictionary,
describes the term judgment in the following words:
"Judgment is a decision or sentence of a court in a legal proceeding. It includes the reasoning of
the judge which leads him to his decision, which may be reported and cited as an authority, if
the matter is of importance, or can be treated as a precedent".
This definition of adjudication or judgment denotes that it is a written decision of a trial court or
tribunal. The roles or functions of adjudication or a judgment are as follows;

The first role is that taking of the matter to court for adjudication gives the parties the freedom
of having their matter settled by an independent non-partisan person or bpdy of persons who
have no interest whatsoever in the case. The vast majority of such resolutions of disputes are fair
and judicious, and are accepted by the parties, because the adjudicators do not take sides. The
main reason why over 90% of judicial decisions are accepted as judicious by the parties is that
when issuing an order giving effect to his decision, the judge gives reasons for arriving at his
decision. These reasons are technically known as "ratio decidendr (Hood Phillips, A First Book
of English Law, 6th edition, sweet & Maxwell, London ). The ratio decidendi is the principle or
rule of law which the judge applies in reaching his conclusion (or reason for the decision and
principle of law on which the judge bases his conclusion). The rest of the judge's remarks are
said to be side issues (obiter dicta) and not part of the actual judgment. One such remark is

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called "arbiter dictum" The ratio decidendi of a case may be said to be an authority for all cases
which clearly fall under the same principle as the case decided .but not for any case quite
different in nature. In other words, the ratio decidendi is the part of the judgment which forms
the precedent or stare decisis.
ii) The court gives reasons which enable each party to have a chance to study the reasons and
see how a particular decision was reached.
iii) By relying on decided cases whose facts are similar to the case currently before court, it
creates uniformity, stability, consistency and certainty in the law. The criticism against judicial
precedent that it creates rigidity in the growth of the law has been dismissed because flexibility
is still applied in deserving cases.
iv) The forth role of adjudication is that where the law is silent on a particular issue, a judge may
use common law norms, rules or practices to formulate a new rule of law to fill the gap. He may
also apply public policy, analogy, moral values or writings of eminent legal philosophers to the
case. Thus in this way adjudication promotes growth of the law.
v) The final role of adjudication may be said to be, bringing the dispute to finality through the
principle of Res Judicata. It also stops parties from taking the law into their own hands, which
creates chaos and disorder in society.

Judicial Precedent

One of the hallmarks of any good decision - making process is consistency. Like cases should be
treated alike. Unjustifiable inconsistency may lead to a sense of grievance on the part of those
affected and to a reasonable suspicion that the people making the decision do not know what
they are doing. A court's decision is expected to be consistent with decisions in previous cases
and to provide certainty for the future. These considerations are reflected in the common law
system of judicial precedent.
Decision of judges must be reasoned, and the reasons will normally include propositions of law.
The judge in a later case is bound to consider the relevant case law and will normally accept the
propositions stated as correct unless there is good reason to disagree. In some circumstances he
or she is required to accept them even if they are in his or her view obviously wrong.
So all relevant precedents are to a greater or lesser extent "persuasive", and some of them may
be "binding" under the doctrine of stare decisis. The characteristic that an individual precedent
may be binding is peculiar to the common law system. In the European civil law systems based
upon codes that are theoretically complete, judicial decisions are not technically sources of legal
rules. Under the common law, a proposition stated or derived from case A is binding in case B
iif;

1. It is a proposition of law;
2. It forms part of the "ratio decidendi" of case A;
3. Case A was decided in a court whose decisions are binding on the court that is deciding case
B;
4. There is no relevant difference between cases A and B which renders case A distinguishable.
It should be noted that a precedent which is not binding may nevertheless be persuasive.

What is a proposition of Law?

Determining the ratio decidendi

A proposition of law can only be binding if it forms part of the ratio decidendi of the case. The
ratio decidendi of a case is any rule of law expressly or impliedly treated by the judge as a
necessary step in reaching his conclusion, having regard to the line of reasoning adopted by him,
or a necessary part of his direction to the jury. A judge may adopt more than one line of

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reasoning leading to the same result. In such a case there may be more than one ratio. As we
have seen earlier, a proposition of law stated by a judge that is not necessary for his or her
conclusion is termed "obiter dictum" or merely "dicta". This may, for example, be a proposition
wider than is necessary for the facts of the case or a proposition concerning some matter not
raised in the case. Statements of law which are fully argued by counsel and considered by the
judge, but which do not technically play any part in determining the outcome of the case are
sometimes termed "judicial dicta".

Cases where no reasons are given

Some old cases may simply contain a statement of the facts, the arguments of counsel and an
order of the court based on those facts. In such a situation, the ratio decidendi has, if possible, to
be inferred. However, the authority of such a case would be very weak. As a matter of fact, it
would be most unusual today, for any case to be decided in such a manner.

Judgments with more than one ratio decidendi

A number of distinct points of law may be at issue in a case, each of which taken separately
would be sufficient to determine the case in favour of one party. A judge may choose to take one
point only and give judgment on the basis of that point and decline to comment on the other
points or he may express an opinion on these other points. Such opinions will be dicta .
Alternatively he or she may state a conclusion on each point resolving them all in favour of one
party. In such a situation, each conclusion is a separate ratio decidendi, and in principle, each is
binding.

Ratio decidendi of appellate courts

Determining the ratio decidendi of a decision of an appellate court where separate judgments are
given can be a difficult task. For example, in a three member court where two judges support
ground A and the third supports ground B, clearly ground A will be the ratio decidendi of that
case. On the other hand, in a five member court, where three judges support ground A and two
judges supports ground B then that case will have two ratios.
Where a judge offers a dissenting view, his or her views must technically be disregarded for the
purpose of ascertaining the ratio on the ground that his or her reasons cannot be "necessary" for
a decision he or she opposes. Dissenting judgments may however, carry persuasive weight.

The hierarchy of the courts and rules of binding precedent

Broadly speaking, a court is only obliged to follow the decisions of courts at a higher or the
same level in the court structure.

a) Subordinate courts
Decisions of these courts are rarely reported outside the pages of local newspapers but even if
they were reported they would not constitute precedents binding on anyone. Magistrates
presiding over these courts cannot bind themselves although it is expected that an individual
magistrate will attempt to be consistent in his or her own decision making. However, these
courts are bound by the decisions of the High Court and Supreme Court.

b) High Court

11
A decision of a High Court judge is binding on inferior courts, that is, the subordinate courts and
local courts, but not technically on another High Court judge. In practice High Court judges are
reluctant to depart from the decisions of other high court judges. However, it has been stated
that where there are conflicting decisions of judges of coordinate jurisdiction, the later decision
should be preferred, provided that it was reached after full consideration of the first decision.

c) The Supreme Court

Decisions of the Supreme Court are binding on the High Court judges (including the Industrial
Relations Court), subordinate courts and all other inferior courts such as the local courts. The
supreme court is bound by its own previous decisions with the exception of two instances;

i) where there are compelling reasons to depart from its earlier decision ( Abel Banda Vs The
People (1986) ZR105).
ii) where a decision of the Supreme Court was given per incuriam , meaning "a decision given in
ignorance or forgetfulness of some inconsistent statutory provision or of some authority binding
on the court concerned, so that in such cases some part of the decision or some step in the
reasoning on which it is based is found, on that account to be demonstrably wrong". ( Young Vs
Bristol Aeroplane company Ltd (1955) 2 QB 379, 406)
Where the Supreme Court is faced with previous conflicting decisions of itself, the court is at
liberty to choose to choose which decision to follow.

Persuasive authority

Precedents that are not technically binding may be cited as persuasive authorities. The extent to
which a precedent will be persuasive may depend on a variety of factors including, the status of
the court, the country in which the court is located, and the reputation of the judge.

Distinguishing

A precedent, whether persuasive or binding, need not be applied or followed if it can be

distinguished, that is, if it can be shown that there is a material distinction between the facts of
the precedent case and the case in question.
What counts as a material distinction is obviously crucial. The judge in the later case is expected
to explain why the distinction is such as to justify the application of a different rule. There is no
test or set of tests for whether a distinction is legally relevant. It all depends upon the
circumstances of the case.

Unit 4:e) Judge Made Law/Decisions by the Courts

Enactment of statutes is the culmination of the parliamentary legislative process but is also a
start of what may be many years of existence, in some cases posing problems of interpretation
for generations of users. If a statute has to have its proper intended effect it must be read and
understood. However, there are a number of factors that may cause interpretation doubt in a
statute. These include:

i) The ELLIPSIS drafting technique

Under this technique, the draft persons refrain from using certain words that they regard as
necessarily implied. The problem is that the user may not realize that this is what the draftsman
has done. The unexpressed words may normally be implied in statutes of a particular kind unless
parliament expressly provides to the contrary, for example, those dealing with judicial review
and criminal liability.

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ii) Draftspersons may use "broad terms" (words or phrases of wide meaning) and leave it to
the user to judge what situations fall within it. This is because most words can be said to have a
core meaning surrounded by a penumbra of uncertainty. A good example is the term "vehicle".
This term clearly covers motor cars, buses, trucks and motor cycles. It is however, less clear
whether it covers a child's tricycle, a donkey drawn cart or a pair of roller skates. In a decided
case of Newberry Vs Simmonds (1961) 2QB 345, the question before the court was whether a
car from which the engine had been stolen and a car which could not move under its own power
as parts were missing or rusted were "mechanically propelled vehicles" for which a license was
required. The court answered in the affirmative in the case of the car whose engine had been
stolen and in the negative in the case of the car with missing and rusted parts. The court arrived
at this decision because it believed that in the later case there was no reasonable prospect of the
vehicle ever being made mobile again.

There may be political uncertainty requiring deliberate use of ambiguous words, for example,
where a provision is politically contentious, or where departments wish to minimize the risk of
legal challenge. ( A.S.Miller, "Statutory language and the purposive use of ambiguity", Virginia
Law Review, 42 (1956)23)

iii) There may be unforeseen developments which draftspersons cannot be expected to cover
although they may use language that is capable of extension. A well known example of such
extension is in the case of Attorney General Vs Edison Telephone Co. (1880) 6 QBD 244, where
the Telegraph Act of 1869, passed before the telephone was invented, was held to confer on the
Postmaster General certain powers concerning telephone messages. It must be said, however,
that it may not always be possible to use language that is capable of extension, in which case
new developments may create ambiguity in the law.

iv) In many other instances the wording may be inadequate due to various reasons. For
example,

a) there may be a drafting error such as the use of a word with two or more distinct meanings
without a sufficient indication from the context or by definition of which meaning was intended
b) there may be grammatical or syntax ambiguities created, for example, by faulty reference of
pronouns. An example normally referred to in this regard is from the bible in 2 Kings chapter
XIX verse 35 where it states that, "— and when they arose early in the morning, behold, they
were all dead corpses." ( G.C.Thornton, Legislative Drafting, 3rd Edition, 1987, pp 23-29)
c) There may be an erroneous reference to another statute.
d) The draftspersons may be mistaken about the law that is being altered.

Operation of Statutory Interpretation

In all cases where ambiguities arise, the courts have the power to resolve authoritatively disputes
concerning the meaning of statutory provisions. Their decisions are binding on the parties and
may constitute binding precedent for the future. Words in a statute will, or contract or any other
legal document may be open to alternative construction. Very rarely are such documents
completely free from ambiguity as to be incapable of being used in more than one sense. Owing
to such imperfections of human language and draftsmen, different people will place different
meaning on the same words in the same documents.
In order to guide the courts and Parliamentary draftsmen in construing various documents,
five principles of interpretations were developed by the common law courts in the middle ages.
By the end of the sixteenth century these canons of statutory interpretation or construction were
thoroughly elaborated. It is to be noted that the general methods of statutory interpretation are
not regulated by

13
parliament, but have been developed by judges. These are:

i) The Literal Interpretation (litera legis);

ii) Context Interpretation;
iii) The golden Rule;
iv) The Mischief Rule ( ratio legis);
v) Ejusdem Generis Rule

Before commenting on each of these interpretation rules, it is pertinent to mention other

statutory construction guides. Every Act of Parliament or Statutory Instrument has a Preamble or
a Title, which introduces the Act or Statutory Instrument and explains its purpose and object.
There is also the definition clause usually appearing between section 1 and section 6 of the Act,
giving definitions of certain words or expressions used in it. In addition to the preambles and the
definition clauses, there is also the Interpretation Act, which is chapter 2 of the Laws of Zambia.
The Act tries to interpret as many words as possible used in the various statutes in the country.
The relationship between statutory construction and the doctrine of judicial precedent is that the
construction of provisions of a statute is binding on the court that made it and on its inferior
courts. This is in accordance with the principle of the binding force of judicial precedents. And
an interpretation put by a court on a given word, expression or provision in one Act will be
presumed to apply to the same word in another or later Act if the Acts are inpari material or
where the context is the same, unless a contrary intention appears.
Principles of Interpretation

1. The Literal Interpretation

This principle states that words of a statute or any other document must be interpreted according
to their natural and primary meaning adding to or taking away nothing from them Thus if the
words of a statute are in themselves precise, clear and unambiguous, no more is necessary than
to expound those words in their natural and ordinary sense. This is because according to this
principle, the meaning of the statute is the meaning of those words - as the conclusive evidence
of the legislature's intention. O.Hood Philip, A First Book of English Law, 6th Edition, (1970) p.
123, London, Sweet & Maxwell. One leading Swiss jurist, Vattel, in his book, Law of Nations"
writes as follows:

"It is not allowable to interpret what has no need of interpretation. Plain words in a statute best
declare the intention of the law giver. The object of construction is to intend the legislature to
have meant what they have actually expressed."

The Judge is required to consider what the legislation actually says rather than considering what
it might mean. In order to achieve this end, the judge should give words in legislation their
literal meaning; that is their plain, ordinary, everyday meaning, even if the effect of this is to
produce what might be considered an otherwise unjust or undesirable outcome.

See Inland Revenue Commissioners V Hinchy

Fisher V Bell
Patridge V Crittenden

2. Contextual Rule

Under this rule were a word used is subject to more than one meaning, a Judge when
interpreting a statute that features an elastic word, should construe the language in its context
and in light of the terms surrounding it. See Smith v. United States, 508 U.S. 223, 229 (1993);

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3. The Golden Rule

The Golden rule allows a judge to depart from a word's normal meaning in order to avoid an
absurd result. The rule is usually based on part of Becke v Smith (1836) 2 M&W 195 per Parke
B which states:

“It is a very useful rule in the construction of a statute to adhere to the ordinary meaning of the
words used, and to the grammatical construction, unless that is at variance with the intention of
the legislature to be collected from the statute itself, or leads to any manifest absurdity or
repugnance, in which case the language may be varied or modified so as to avoid such
inconvenience but no further.”

This is supported by Lord Wensleydale in Grey v. Pearson (1857; 6 HL CAS 61), who said:
“the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to
some absurdity or inconsistency with the rest of the instrument, in which case the grammatical
and ordinary sense of the words may be modified, so as to avoid that absurdity or inconsistency,
but not farther.”
This rule may be used in two ways. It is applied most frequently in a narrow sense where there
is some ambiguity or absurdity in the words themselves.
For example, imagine there may be a sign saying "Do not use lifts in case of fire." Under the
literal interpretation of this sign, people must never use the lifts, in case there is a fire. However,
this would be an absurd result, as the intention of the person who made the sign is obviously to
prevent people from using the lifts only if there is currently a fire nearby.
The second use of the golden rule is in a wider sense, to avoid a result that is obnoxious to
principles of public policy, even where words have only one meaning. Section 46 of the
Administration of Estates Act 1925, required that the court should "issue" someone's inheritance
in certain circumstances. In Re Sigsworth,, Bedford v Bedford (1935; Ch 89) the court held that
no one should profit from a crime, and so used the Golden rule to prevent an undesirable result,
even though there was only one meaning of the word "issue". The facts of this case are often
misreported; a son murdered his mother and committed suicide. The courts were required to rule
on who then inherited the estate, the mother's family, or the son's descendants. There was never
a question of the son profiting from his crime, but as the outcome would have been binding on
lower courts in the future, the court found in favour of the mother's family

4. The Mischief Rule (ratio legis)

The mischief rule is a rule of statutory interpretation that attempts to determine the legislator's
intention. Originating from a 16th century case in the United Kingdom, its main aim is to
determine the "mischief and defect" that the statute in question has set out to remedy, and what
ruling would effectively implement this remedy.
The Mischief Rule essentially asks the question: By creating an Act of Parliament what was the
"mischief" that the previous law did not cover?
This was set out in Heydon's Case [1584] 3 CO REP 7a. where it was stated that there were
four points to be taken into consideration when interpreting a statute:

1. What was the common law before the making of the act?
2. What was the "mischief and defect" for which the common law did not provide?
3. What remedy the parliament hath resolved and appointed to cure the disease of the
commonwealth?
4. What is the true reason of the remedy?

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The application of this rule gives the judge more discretion than the literal and the golden rule as
it allows him to effectively decide on Parliament's intent. It can be argued that this undermines
Parliament's supremacy and is undemocratic as it takes law-making decisions away from the
legislature.
The rule was illustrated in the case of Smith v Hughes [1960] 2 All E.R. 859, where under the
Street Offences Act 1959, it was a crime for prostitutes to "loiter or solicit in the street for the
purposes of prostitution". The defendants were calling to men in the street from balconies and
tapping on windows. They claimed they were not guilty as they were not in the "street." The
judge applied the mischief rule to come to the conclusion that they were guilty as the intention
of the Act was to cover the mischief of harassment from prostitutes.
This rule of construction is of narrower application than the golden rule or the plain meaning
rule, in that it can only be used to interpret a statute and, strictly speaking, only when the statute
was passed to remedy a defect in the common law.
Legislative intent is determined by examining secondary sources, such as committee reports,
treatises, law review articles and corresponding statutes.
This rule has often been used to resolve ambiguities in cases in which the literal rule cannot be
applied. In Smith v Hughes the mischief approach gave a more sensible outcome than that of the
literal approach.

5. The "ejusdem generis" and "expression uniust exclusion alterius" rule.

Under the rule of ejusdem generis, when a particular class of persons or things is enumerated in
a statute and general words follow, the general words are to be restricted in their meaning to a
sense analogous to the less general, particular words. Likewise, according to the maxim noscitur
a sociis (associated words) when general and specific words are grouped, the general words are
limited by the specific and will be construed to embrace only objects similar in nature to those
things identified by the specific words. Commonwealth v. United Airlines, 219 Va. 374, 389,
248 S.E.2d 124, 132-33 (1978); Hensley v. City of Norfolk, 216 Va.
According to Reese v. Wampler Foods, Inc., if a statute expressly excepts a class which would
otherwise fall within its terms, the exception negates the idea that any other class is to be
excepted

Unit 5:Common Law and Equity

THE ROOTS OF THE ENGLISH COMMON LAW

The feature which more than anything distinguishes the common law from other western legal
systems is the extent of its reliance upon precedent. As will be seen later, this carries with it
important implications for the nature of legal reasoning in those countries which employ the
common law system. But it also contains the seeds of one of the profound truths of this legal
system - that, it is an inherently conservative one. When a common law judge decides a case, we
say that he or she looks for relevant precedent to apply to the facts at hand. Another way of
describing what happens in common law adjudication, however, is to say that the judge uses the
past as the yardstick against which to measure the propriety of present conduct.

The relevance of English Legal History to Zambia

The legal and political institutions of Zambia find their roots, not in the traditions of its native
inhabitants, but in the traditions of the colonial power (Britain) which imported its
understanding of law and social organisation when it colonised the then Northern Rhodesia. This
is nothing to be ashamed of. Some people decry the continued reference to English case law as
anachronistic, or as a manifestation of a "cultural cringe". In fact nothing could be further from
the truth. Of course, we should not regard English law as superior to our own. But to suggest, as

16
some do, that because Zambia is a fully independent member of the international community, it
must turn its back on its legal and political ancestry is to argue for intellectual and legal
impoverishment. The fact that Zambian lawyers can draw freely upon not only the fruits of their
legal system, but also those of several other countries around the world is a source of great
richness.

History of the common law

The year 1066 is a watershed date in the history of the common law. This is the year when
William, the Duke of Normandy conquered England and set in motion the chain of events which
resulted in those countries which grew out of the British folds having the distinctive legal
tradition that we now refer to as the common law. The system of economic and social
organisation introduced by the Normans is known as "feudalism". Stated in simple terms,
feudalism was a system of land ownership based upon a formal social hierarchy. At the top of
the hierarchy sat the King, who was said to have dominion over all lands in the kingdom. Under
the King sat a first level of landowning nobles who were known as tenants-in-chief, meaning
that they held title to their lands by virtue of a direct grant from the crown. Under the tenants-in-
chief were a series of descending levels of sub-tenants, each of whom held land by virtue of a
grant from the next higher level in the chain, culminating in the lowest order of land-holding
freemen.
The underlying premise of feudal tenancy was the mutual promise. In addition to the loyalty that
all subject owed the King, feudal loyalty was owed one level upwards – each landholder swore
an oath of allegiance to his lord, who wa,s his immediate superior in the chain. Attached to the
bond of loyalty, was an obligation to provide one's lord with a share of one's crops and, if
necessary, to engage in military service on the lord's behalf.In return, lords promised to protect
and assist their tenants in time of need.
One of the prime responsibilities of the Norman Kings, was to hear complaints from their
subjects. Accordingly as William and his successors travelled around the kingdom, they would
"hold court" and receive petitions from the people. Often the petitions complained of acts of
injustice committed on them by local officials. The premise upon which the King dealt with
these petitions was that like cases should be treated alike. This was the foundation of the system
of stare decisis. Over time, a body of royal rulings dealing with petitions for justice came to be
built up. This body of rules came gradually to be known as the common law.

Legal structures under the common law

From the earliest times after the conquest, the Kings had gathered around them a body of trusted
advisors known as curia Regis or the king's court. The curia regis functioned as a general
advisory body, providing the king with counsel and advice before he made decisions. Gradually,
though, probably because the king wished to be relieved of some of the more tedious aspects of
ruling, some decisions began to be left to members of the curia Regis itself. In addition to the,
the kings began to appoint officials called "justiciars". The justiciary acted as a form of viceroy
in the king's absence.
The appointment of these royal delegates - the curia Regis and the justiciars – marked an
important step in the transformation of the common law from a personal instrument of the king
to a real apparatus of government. As one would expect, in the early days, if one wanted to seek
the king's intercession in a dispute, one had to approach the himself. This meant going where the
king happened to be in residence, which was not always an easy thing. But with delegates who
could in the king's absence act on his behalf the lot of the seekers of royal justice was eased.
Even more significant was the appointment, which began in the 12th century of Justices in Eyre
(Justiciae Err antes) a group of travelling justices who although not necessarily members of the
curia Regis, carried the King's commission to hear and resolve disputes in all parts of the

17
country. For purposes of these travelling justices, England was divided into a series of regions,
or circuits which formed a the basis of legal administration in England until the 1970s.
Over time the curia Regis gave birth to a body of professional judges whose job was to hear
disputes between common folk (the plea of common folk). This body became known as the
court of common plea.
There was also a body of specialised financial advisors, who came to hear disputes involving the
royal revenue. Because the table at which this body sat was covered with a chequer-patterned
cloth, it came to be known as the court of exchequer.
Beyond the common plea and the exchequer, there remained a group of advisors who continued
to travel with the king. Over time this group of advisors were divided into two sorts : those
whose task was to advise on resolution of individual disputes (coram rege or king's bench) and
those whose job it was to advise on more general questions of policy (council).
These three dispute - resolving institutions : the common pleas, the exchequer and the king's
bench or queens bench are together known as the common law courts, and it was through their
work that the distinctive English system of justice known as common law flourished..

Equity
As the common law became more systematised, it also became rigid. What had begun as an
informal and comparatively speedy means of dispute resolution had instead become not only
procedurally complex but also often extremely slow.
Beginning in the 15e century, people started again to approach the King with petitions
complaining of injustice - injustice now often claimed to have been suffered at the hands of the
common law courts. At the beginning, the King responded to these complaints either himself, or
through the council. But as before, he soon began to delegate responsibility for looking after
these petitions for redress to a royal official. This time the official chosen was the Chancellor,
the person, it will be remembered whose job was to issue writs.
The fact that it was the Chancellor who was chosen had an important bearing on the way that
cases of injustice were to be handled. This is because for a long time, the Chancellors were
trained as priests. This being the case, when they looked into allegations of injustice, they did
not, as the common law judges did, base their judgements on the accumulated body of judicial
precedent. When they were confronted with vexing issues of proof, they did not look to form, as
their common law brothers did. Instead, they grounded their judgements on Christian precepts.
This body of Chancellor-made, and Christian based law became known as "EQUITY", The body
set up to hear equitable claims became known as the "court of chancery"
One of the features of equity is that it is a discretionary system of justice. While under the
common law, if one could prove certain things, one establishes a legal right to something, in
equity, the Chancellor retained a discretion not to grant a 'requested remedy if he thought the
plaintiff was not morally deserving.
The essence of this discretion was captured in a number of maxims such as "he who seeks
equity must do equity" and " he who comes into equity must come with clean hands". The moral
aspect of equity is well captured by the so-called "equitable maxims " a series of twelve (12)
statements upon which equitable doctrine is supposed to be based, in addition to the two already
mentioned above. These are :
1. equity will not suffer a wrong to be without a remedy;
2. equity follows the law;
3. he who is first in time, takes precedence (qui prior est tempore, potior est jure);
4. where the equities are equal, the law prevails;
5. equity assists the diligent, not the tardy;
6. equity is equity;
7. equity looks to the intent, rather than form;
8. equity looks on that as done which ought to be done
9. equity imputes an intention to fulfil an obligation; and

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10. equity acts in person.
The history of the distinction between law and equity begins in the developing system of law
that followed the Norman conquest of England. A plaintiff who wished to have a complaint
heard in the king's courts rather than the local courts had to purchase from the office of the
chancellor a writ, or royal command, that fitted the facts of his case that required the defendant
to appear in court. The variety of writs available, and with it the jurisdiction of the king's courts,
expanded until the second half of the 13th century when, under pressure from the nobility, the
power to issue writs was circumscribed, .the jurisdiction of the king's courts was limited, and the
flexibility of the law was diminished. Nevertheless, there was a residual power in the king and
his council to do justice in special cases, and he began to refer petitions for redress to the
chancellor who, as the chief law member of the council, might give relief as a matter of "grace"
or of "conscience" in cases where relief at law was inadequate.
From these beginnings there grew up for non-criminal cases a supplementary system, known as
"equity", in which, by the early 15th century, justice was administered through a separate court,
the court of chancery. The law courts were forced to accept this system after a notorious struggle
that ended in the early 17th century. Among the distinctive features of a suit in equity as
opposed to an action at law were the absence of a jury, more flexible procedure, and a wider
scope of review of appeal. While the law courts were generally restricted to the award of money
damages as relief, equity operated on the. person of the defendant and the court could, for
example, issue an injunction, forbidding specific acts in order to prevent further injury, or it
could decree specific performance, ordering performance of an obligation. A defendant who
disobeyed could be punished by fine or imprisonment for contempt of court until compliance.
But because these equitable remedies were considered to be extraordinary, they were only
available where the remedy at law could be shown to be inadequate, and money damages
remained the standard kind of relief.
Equity also came to differ from law in substance as well as procedure, as may be seen from one
of its most important creation, the trust. The trust concept grew out of the conveyance of
property by the owner (the settler) to a transferee (the trustee). For the transaction to succeed,
some means had to be found to compel the trustee to comply with the terms of the trust. Since
equity acted upon the person, it was able to enforce the trustee's judiciary duties by its sanctions
of fine and imprisonment while at the same time recognising the legal ownership of the trustee.
Out of the beneficiary's equitable rights came the concept of equitable, as distinguished from
legal ownership. Around this new institution a whole new branch of substantive law was to
grow.
Equity found its way into most of the colonies in spite of some resistance which stemmed from
the close relationship that equity had had to the crown. It was generally received in the States,
was developed by the courts in the early part of the 19th century and was subject of Story's great
treatises. Some states had separate systems of courts for law and equity; others had a single
system in which a court might sit as either a law court or an equity court depending on the
nature of the case. Both schemes occasioned inconvenience, expense, and delay, as where a
party sought relief in the wrong kind of court and had to begin all over again. By the middle of
the century there was a demanding merger of law and equity. New York led the reform by
enactment of the Field Code Civil Procedure in 1848. The Code abolished the distinction
between a suit in equity and an action at law, substituted a single civil action for the different
forms of action previously available, and consolidated the rules of procedure borrowing heavily
from the more liberal equity rules.
Law "and equity procedures were merged in the United Kingdom between 1873-75 after a
number of reforms were introduced culminating in the Judicature Acts. These statutes swept
away the common law courts and the court of chancery and replaced them with one Supreme
Court of Judicature in which each branch had the power to administer both common law and
equity according to the same rules of procedure. The rule that equity should prevail in the event
of a conflict was also restated.

19
The two systems have also been merged in practically all other commonwealth countries.
However, rights that originated in the equity courts are still referred to as "equitable". They are
exercised in much the same way and are subject to most of the same limitations as they were in
the courts of equity. The most important restriction is that they are still available only where the
legal remedy is inadequate.
It is therefore important to realise that "equity" is not a synonym for "general fairness" or
"natural justice". It refers instead to a particular body of rules that originated in a special system
of courts. However, these rules have to a considerable extent been assimilated into the
appropriate categories of law and are now often regarded as part, for example, of property or
contract law. It is true that in England, as in all other commonwealth countries, that if we were
to inquire what it is that all these rules have in common and what it is that marks them off from
all other rules administered by the courts, we should by way of answer find nothing but this; that
these rules were until lately administered, and administered only, by courts of equity.

TOPIC TWO: THE LAW OF CONTRACT

Unit 1: DEFINITION

A contract may be defined as a legally binding agreement or, in the words of Sir Frederick
Pollock: "A promise or set of promises which the law will enforce".
The agreement will create rights and obligations that may be enforced in the courts. The normal
method of enforcement is an action for damages for breach of contract, though in some cases the
court may order performance by the party in default.

CLASSIFICATION
Contracts may be divided into two broad classes:
1. Contracts by deed
A deed is a formal legal document signed, witnessed and delivered to effect a conveyance or
transfer of property or to create a legal obligation or contract.
2. Simple contracts
Contracts which are not deeds are known as simple contracts. They are informal contracts and
may be made in any way - in writing, orally or they may be implied from conduct.
Another way of classifying contracts is according to whether they are "bilateral" or "unilateral".
1. Bilateral contracts
A bilateral contract is one where a promise by one party is exchanged for a promise by the other.
The exchange of promises is enough to render them both enforceable. Thus in a contract for the
sale of goods, the buyer promises to pay the price and the seller promises to deliver the goods.
2. Unilateral contracts
A unilateral contract is one where one party promises to do something in return for an act of the
other party, as opposed to a promise, eg, where X promises a reward to anyone who will find his
lost wallet. The essence of the unilateral contract is that only one party, X, is bound to do
anything. No one is bound to search for the lost wallet, but if Y, having seen the offer, recovers
the wallet and returns it, he/she is entitled to the reward.

ELEMENTS
The essential elements of a contract are:
1. Agreement

20
An agreement is formed when one party accepts the offer of another and involves a "meeting of
the minds".
2. Consideration
Both parties must have provided consideration, ie, each side must promise to give or do
something for the other.
3. Intention to create legal relations
The parties must have intended their agreement to have legal consequences. The law will not
concern itself with purely domestic or social agreements.
4. Form
In some cases, certain formalities (that is, writing) must be observed.
5. Capacity
The parties must be legally capable of entering into a contract.
6. Consent
The agreement must have been entered into freely. Consent may be vitiated by duress or undue
influence.
7. Legality
The purpose of the agreement must not be illegal or contrary to public policy.
A contract which possesses all these requirements is said to be valid. The absence of an
essential element will render the contract either void, voidable or unenforceable (as to which see
below).
In addition, a contract consists of various terms, both express and implied. A term may be
inserted into the contract to exclude or limit one party's liability (the so-called "small print"). A
term may also be regarded as unfair. A contract may be invalidated by a mistake and where the
contract has been induced by misrepresentation the innocent party may have the right to set it
aside. As a general rule, third parties have no rights under a contract but there are exceptions to
the doctrine of privity. There are different ways of discharging a contract and remedies are
available for breach of contract at common law and in equity.

ENFORCEABILITY
1. Void contracts
A "void contract" is one where the whole transaction is regarded as a nullity. It means that at no
time has there been a contract between the parties. Any goods or money obtained under the
agreement must be returned. Where items have been resold to a third party, they may be
recovered by the original owner.
2. Voidable contracts
A contract which is voidable operates in every respect as a valid contract unless and until one of
the parties takes steps to avoid it. Anything obtained under the contract must be returned,
insofar as this is possible. If goods have been resold before the contract was avoided, the
original owner will not be able to reclaim them.
3. Unenforceable contracts
An unenforceable contract is a valid contract but it cannot be enforced in the courts if one of the
parties refuses to carry out its terms. Items received under the contract cannot generally be
reclaimed.

REQUIREMENT 1: AGREEMENT

Offer and Acceptance

The first requisite of any contract is an agreement (consisting of an offer and acceptance). At
least two parties are required; one of them, the offeror, makes an offer which the other, the
offeree, accepts.

21
OFFER

An offer is an expression of willingness to contract made with the intention that it shall become
binding on the offeror as soon as it is accepted by the offeree.
A genuine offer is different from what is known as an "invitation to treat", ie where a party is
merely inviting offers, which he is then free to accept or reject. The following are examples of
invitations to treat:

1. AUCTIONS
In an auction, the auctioneer's call for bids is an invitation to treat, a request for offers. The bids
made by persons at the auction are offers, which the auctioneer can accept or reject as he
chooses. Similarly, the bidder may retract his bid before it is accepted. See:
Payne v Cave (1789) 3 Term Rep 148

2. DISPLAY OF GOODS
The display of goods with a price ticket attached in a shop window or on a supermarket shelf is
not an offer to sell but an invitation for customers to make an offer to buy. See:
Fisher v Bell [1960] 3 All ER 731
P.S.G.B. v Boots Chemists [1953] 1 All ER 482.

3. ADVERTISEMENTS
Advertisements of goods for sale are normally interpreted as invitations to treat. See:
Partridge v Crittenden [1968] 2 All ER 421.
However, advertisements may be construed as offers if they are unilateral, ie, open to all the
world to accept (eg, offers for rewards). See:
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
4. MERE STATEMENTS OF PRICE
A statement of the minimum price at which a party may be willing to sell will not amount to an
offer. See:
Harvey v Facey [1893] AC 552
Gibson v Manchester County Council [1979] 1 All ER 972.
5. TENDERS
Where goods are advertised for sale by tender, the statement is not an offer, but an invitation to
treat; that is, it is a request by the owner of the goods for offers to purchase them. The process of
competitive tendering came under scrutiny in the following cases:
Harvela Investments v Royal Trust Co. of Canada [1985] 2 All ER 966
Blackpool Aero Club v Blackpool Borough Council [1990] 3 All ER 25.
ACCEPTANCE
An acceptance is a final and unqualified acceptance of the terms of an offer. To make a binding
contract the acceptance must exactly match the offer. The offeree must accept all the terms of
the offer.
However, in certain cases it is possible to have a binding contract without a matching offer and
acceptance. See:
Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666
Lord Denning in Gibson v Manchester City Council [1979] above
Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25.

The following rules have been developed by the courts with regard to acceptance:

1. COUNTER OFFERS
If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then
that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter offer",

22
which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection
of the original offer which cannot then be subsequently accepted. See:
Hyde v Wrench (1840) 3 Beav 334.
A counter-offer should be distinguished from a mere request for information. See:
Stevenson v McLean (1880) 5 QBD 346.
If A makes an offer on his standard document and B accepts on on a document containing his
conflicting standard terms, a contract will be made on B's terms if A acts upon B's
communication, eg by delivering goods. This situation is known as the "battle of the forms".
See:
Butler Machine Tool v Excell-o-Corp [1979] 1 All ER 965.
2. CONDITIONAL ACCEPTANCE
If the offeree puts a condition in the acceptance, then it will not be binding.
3. TENDERS
A tender is an offer, the acceptance of which leads to the formation of a contract. However,
difficulties arise where tenders are invited for the periodical supply of goods:
(a) Where X advertises for offers to supply a specified quantity of goods, to be supplied during a
specified time, and Y offers to supply, acceptance of Y's tender creates a contract, under which Y
is bound to supply the goods and the buyer X is bound to accept them and pay for them.
(b) Where X advertises for offers to supply goods up to a stated maximum, during a certain
period, the goods to be supplied as and when demanded, acceptance by X of a tender received
from Y does not create a contract. Instead, X's acceptance converts Y's tender into a standing
offer to supply the goods up to the stated maximum at the stated price as and when requested to
do so by X. The standing offer is accepted each time X places an order, so that there are a series
of separate contracts for the supply of goods. See:
Great Northern Railway Co. v Witham (1873) LR 9 CP 16.

Unit 2. ACCEPTANCE

The general rule is that an acceptance must be communicated to the offeror. Until and unless the
acceptance is so communicated, no contract comes into existence:
Lord Denning in Entores v Miles Far East Corp. [1955] 2 All ER 493.

The acceptance must be communicated by the offeree or someone authorised by the offeree. If
someone accepts on behalf of the offeree, without authorisation, this will not be a valid
acceptance:
Powell v Lee (1908) 99 LT 284.

The offeror cannot impose a contract on the offeree against his wishes by deeming that his
silence should amount to an acceptance:
Felthouse v Bindley (1862) 11 CBNS 869.

Where an instantaneous method of communication is used, eg telex, it will take effect when and
where it is received. See:
Entores v Miles Far East Corp [1955] 2 QB 327
The Brimnes [1975] QB 929
Brinkibon v Stahag Stahl [1983] 2 AC 34.

5. EXCEPTIONS TO THE COMMUNICATION RULE

a) In unilateral contracts the normal rule for communication of acceptance to the offeror does
not apply. Carrying out the stipulated task is enough to constitute acceptance of the offer.

23
b) The offeror may expressly or impliedly waive the need for communication of acceptance by
the offeree, eg, where goods are dispatched in response to an offer to buy.
c) The Postal Rule - Where acceptance by post has been requested or where it is an appropriate
and reasonable means of communication between the parties, then acceptance is complete as
soon as the letter of acceptance is posted, even if the letter is delayed, destroyed or lost in the
post so that it never reaches the offeror. See:
Adams v Lindsell (1818) 1 B & Ald 681.
Household Fire Insurance Co. v Grant (1879) 4 Ex D 216.
The postal rule applies to communications of acceptance by cable, including telegram, but not to
instantaneous modes such as telephone, telex and fax. The postal rule will not apply:
(i) Where the letter of acceptance has not been properly posted, as in Re London and Northern
Bank (1900), where the letter of acceptance was handed to a postman only authorised to deliver
mail and not to collect it.
(ii) Where the letter is not properly addressed. There is no authority on this point.
(iii) Where the express terms of the offer exclude the postal rule, ie if the offer specifies that the
acceptance must reach the offeror. In Holwell Securities v Hughes (1974, below), the postal rule
was held not to apply where the offer was to be accepted by "notice in writing". Actual
communication was required.
(iv) It was said in Holwell Securities that the rule would not be applied where it would produce
a "manifest inconvenience or absurdity".

Revocation of posted acceptance.

Can an offeree withdraw his acceptance, after it has been posted, by a later communication,
which reaches the offeror before the acceptance? There is no clear authority in English law. The
Scottish case of Dunmore v Alexander (1830) appears to permit such a revocation but it is an
unclear decision. A strict application of the postal rule would not permit such withdrawal. This
view is supported by decisions in: New Zealand in Wenkheim v Arndt (1873) and South Africa
in A-Z Bazaars v Ministry of Agriculture (1974). However, such an approach is regarded as
inflexible.

6. METHOD OF ACCEPTANCE

The offer may specify that acceptance must reach the offeror in which case actual
communication will be required. See:
Holwell Securities v Hughes [1974] 1 All ER 161.
If a method is prescribed without it being made clear that no other method will suffice then it
seems that an equally advantageous method would suffice. See:
Tinn v Hoffman (1873) 29 LT 271
Yates Building Co. v Pulleyn Ltd (1975) 119 SJ 370.

7. KNOWLEDGE OF THE OFFER

An offeree may perform the act that constitutes acceptance of an offer, with knowledge of that
offer, but for a motive other than accepting the offer. The question that then arises is whether his
act amounts to a valid acceptance. The position seems to be that:
(a) An acceptance which is wholly motivated by factors other than the existence of the offer has
no effect.
R v Clarke (1927) 40 CLR 227
(b) Where, however, the existence of the offer plays some part, however small, in inducing a
person to do the required act, there is a valid acceptance of the offer. See:
Williams v Carwardine (1833) 5 Car & P 566.

24
8. CROSS-OFFERS
A writes to B offering to sell certain property at a stated price. B writes to A offering to buy the
same property at the same price. The letters cross in the post. Is there (a) an offer and
acceptance, (b) a contract? This problem was discussed, obiter, by the Court in Tinn v Hoffman
(1873) 29 LT 271. Five judges said that cross-offers do not make a binding contract. One judge
said they do.

TERMINATION OF THE OFFER

1. ACCEPTANCE
Once an offer has been accepted, a binding contract is made and the offer ends.
2. REJECTION
If the offeree rejects the offer that is the end of it.
3. REVOCATION
The offer may be revoked by the offeror at any time until it is accepted. However, the revocation
of the offer must be communicated to the offeree(s). Unless and until the revocation is so
communicated, it is ineffective. See:
Byrne v Van Tienhoven (1880) 5 CPD 344.
The revocation need not be communicated by the offeror personally, it is sufficient if it is done
through a reliable third party. See:
Dickinson v Dodds (1876) 2 ChD 463.
Where an offer is made to the whole world, it appears that it may be revoked by taking
reasonable steps. See:
Shuey v United States [1875] 92 US 73.
Once the offeree has commenced performance of a unilateral offer, the offeror may not revoke
the offer. See:
Errington v Errington [1952] 1 All ER 149
Daulia v Four Millbank Nominees [1978] 2 All ER 557.
4. COUNTER OFFER
See above for Hyde v Wrench (1840).
5. LAPSE OF TIME
Where an offer is stated to be open for a specific length of time, then the offer automatically
terminates when that time limit expires. Where there is no express time limit, an offer is
normally open only for a reasonable time. See:
Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109.
6. FAILURE OF A CONDITION
An offer may be made subject to conditions. Such a condition may be stated expressly by the
offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer
is not capable of being accepted. See:
Financings Ltd v Stimson [1962] 3 All ER 386.
7. DEATH
The offeree cannot accept an offer after notice of the offeror's death. However, if the offeree
does not know of the offeror's death, and there is no personal element involved, then he may
accept the offer. See:
Bradbury v Morgan (1862) 1 H&C 249.

Unit 3: REQUIREMENT 2

INTENTION TO CREATE LEGAL RELATIONS

Many agreements are plainly never intended by the parties to be legally binding; there is no
intention to take any dispute to a court of law.

25
In the case of agreements of a friendly, social or domestic nature there is a strong presumption
that the parties did not intend to create a legal relationship. If friends agree to come to tea and
they fail to run up, or if a husband agrees to meet his wife and forgets, there can be no action for
breach of contract, even though the complaining party may have-incurred certain expenses.

In Balfour v. Balfour (1919), a husband promised his wife an allowance before he left to take up
a post abroad. When he stopped the payments, an action by the wife failed on the ground that
this was not a binding contract but merely domestic agreement with no legal obligations
attached to it.

Conversely, in Simpkins v. Pays (1955), three people sharing a house, the owner, her grand-
daughter and paying lodger, regularly entered a competition in a Sundary newspaper. The
entries were sent in the name of the grandmother, but all three contributed. When an entry won,
the grandmother refused to share the prize of £750. It was held that the others were entitled to
share, because their agreement to this effect was, in the view of the court, intended to be legally
binding.

On the other hand, there is a strong presumption that business agreements are intended to create
legal relations. This presumption can be rebutted, but only by very strong evidence such as clear
statement in a written contract.

In Rose and Frank v. Crompton Bros. Ltd (1925), an English company agreed to sell carbon
paper in America THROUGH A New York firm. This marketing arrangement was for
renewable period of three years and provided that ‘This arrangement is not entered into . . . as a
formal or legal agreement, and shall not be subject to legal jurisdiction in the Law Courts . . . .
Therefore, when the English company withdrew, it was not liable for breach of contract,
although it was held liable to honour orders placed before withdrawal.
Similarly, in Appleson v. Littlewood Ltd (1939), the plaintiff to recover money which he
claimed to have won on a football pool. His action failed, because the printed entry form
contained a statement that the transaction was ‘binding in honour only’.

Most collective agreements between employers and trade unions as to wages and other terms of
employment will not be legally binding. The parties are assumed to have intended the
agreement to be no more than a broad working arrangement, not a binding contract to be subject
to detailed scrutiny in the courts.

REQUIREMENT 3: CONSIDERATION

Introduction

The mere fact of agreement alone does not make a contract. Both parties to the contract must
provide consideration if they wish to sue on the contract. This means that each side must
promise to give or do something for the other. (Note: if a contract is made by deed, then
consideration is not needed.)
For example, if one party, A (the promisor) promises to mow the lawn of another, B (the
promisee), A's promise will only be enforceable by B as a contract if B has provided
consideration. The consideration from B might normally take the form of a payment of money
but could consist of some other service to which A might agree. Further, the promise of a money
payment or service in the future is just as sufficient a consideration as payment itself or the
actual rendering of the service. Thus the promisee has to give something in return for the
promise of the promisor in order to convert a bare promise made in his favour into a binding
contract.

26
Definition
Lush J. in Currie v Misa (1875) LR 10 Exch 153 refered to consideration as consisting of a
detriment to the promisee or a benefit to the promisor:
"… some right, interest, profit or benefit accruing to one party, or some forebearance, detriment,
loss or responsibility given, suffered or undertaken by the other."
The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge
Ltd [1915] AC 847, is as follows:
"An act or forebearance of one party, or the promise thereof, is the price for which the promise
of the other is bought, and the promise thus given for value is enforceable."

TYPES OF CONSIDERATION

1. Executory Consideration
Consideration is called "executory" where there is an exchange of promises to perform acts in
the future, eg a bilateral contract for the supply of goods whereby A promises to deliver goods to
B at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach
of contract and B can sue. If A delivers the goods his consideration then becomes executed.
2. Executed Consideration
If one party makes a promise in exchange for an act by the other party, when that act is
completed, it is executed consideration, eg in a unilateral contract where A offers £50 reward for
the return of her lost handbag, if B finds the bag and returns it, B's consideration is executed.

RULES GOVERNING CONSIDERATION

1. Consideration Must Not Be Past

If one party voluntarily performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. The rule is that past consideration is no
consideration, so it is not valid and cannot be used to sue on a contract. For example, A gives B
a lift home in his car. On arrival B promises to give A £5 towards the petrol. A cannot enforce
this promise as his consideration, giving B a lift, is past. See:
Re McArdle [1951] 1 All ER 905.
Exceptions To This Rule:

(A) Previous Request

If the promisor has previously asked the other party to provide goods or services, then a promise
made after they are provided will be treated as binding. See: Lampleigh v Braithwait (1615)
Hob 105.
(B) Business Situations
If something is done in a business context and it is clearly understood by both sides that it will
be paid for, then past consideration will be valid. See: Re Casey's Patents [1892] 1 Ch 104.
Note: The principles in Lampleigh v Braithwait as interpreted in Re Casey's Patents were
applied by the Privy Council in: Pao On v Lau Yiu Long [1980] AC 614
(C) The Bills Of Exchange Act 1882
Under s27(1) it is provided that any antecedent debt or liability is valid consideration for a bill
of exchange. For example, A mows B's lawn and a week later B gives A a cheque for £10. A's
work is valid consideration in exchange for the cheque.

2. Consideration Must Be Sufficient But Need Not Be Adequate

27
Providing consideration has some value, the courts will not investigate its adequacy. Where
consideration is recognised by the law as having some value, it is described as "real" or
"sufficient" consideration. The courts will not investigate contracts to see if the parties have got
equal value. See: Chappell & Co Ltd v Nestle Co Ltd [1959] 2 All ER 701.

3. Consideration Must Move From the Promisee

The person who wishes to enforce the contract must show that they provided consideration; it is
not enough to show that someone else provided consideration. The promisee must show that
consideration "moved from" (ie, was provided by) him. The consideration does not have to
move to the promisor. If there are three parties involved, problems may arise. See: Price v
Easton (1833) 4 B & Ad 433

4. Forbearance to Sue
If one person has a valid claim against another (in contract or tort) but promises to forbear from
enforcing it, that will constitute valid consideration if made in return for a promise by the other
to settle the claim. See: Alliance Bank v Broom (1864) 2 Dr & Sm 289.

5. Existing Public Duty

If someone is under a public duty to do a particular task, then agreeing to do that task is not
sufficient consideration for a contract. See: Collins v Godefroy (1831) 1 B & Ad 950.
If someone exceeds their public duty, then this may be valid consideration. See: Glassbrooke
Bros v Glamorgan County Council [1925] AC 270.

6. Existing Contractual Duty

If someone promises to do something they are already bound to do under a contract, that is not
valid consideration. Contrast:
Stilk v Myrick (1809) 2 Camp 317.
Hartley v Ponsonby (1857) 7 E & B 872.
The principle set out in Stilk v Myrick was amended by the following case. Now, if the
performance of an existing contractual duty confers a practical benefit on the other party this can
constitute valid consideration. See: Williams v Roffey Bros Ltd [1990] 1 All ER 512.

7. Existing Contractual Duty Owed To A Third Party

If a party promises to do something for a second party, but is already bound by a contract to do
this for a third party, this is good consideration. See: Scotson v Pegg (1861) 6 H & N 295.
8. Part Payment of a Debt

The General Rule

If one person owes a sum of money to another and agrees to pay part of this in full settlement,
the rule at common law (the rule in Pinnel's Case (1602) 5 CoRep 117a) is that part-payment of
a debt is not good consideration for a promise to forgo the balance. Thus, if A owes B £50 and B
accepts £25 in full satisfaction on the due date, there is nothing to prevent B from claiming the
balance at a later date, since there is no consideration proceeding from A to enforce the promise
of B to accept part-payment. This is because he is already bound to pay the full amount, an
agreement based on the same principle as Stilk v Myrick (1809). It also protects a creditor from
the economic duress of his debtor.
In Pinnel's Case (1602), Cole owed Pinnel £8-10s-0d (£8.50) which was due on 11 November.
At Pinnel's request, Cole payed £5-2s-2d (£5.11) on 1 October, which Pinnel accepted in full
settlement of the debt. Pinnel sued Cole for the amount owed. It was held that part-payment in
itself was not consideration. However, it was held that the agreement to accept part-payment
would be binding if the debtor, at the creditor's request, provided some fresh consideration.
Consideration might be provided if the creditor agrees to accept:

28
* part-payment on an earlier date than the due date (ie, as in Pinnel's Case itself); or
* chattel instead of money (a "horse, hawk or robe" may be more beneficial than money); or
* part-payment in a different place to that originally specified.
Despite its harshness the rule in Pinnel's Case was affirmed by the House of Lords and still
represents the law:
In Foakes v Beer (1884) 9 App Cas 605, Mrs Beer had obtained judgment for a debt against Dr
Foakes, who subsequently asked for time to pay. She agreed that she would take no further
action in the matter provided that Foakes paid £500 immediately and the rest by half-yearly
instalments of £150. Foakes duly kept to his side of the agreement. Judgment debts, however,
carry interest. The House of Lords held that Mrs Beer was entitled to the £360 interest which
had accrued. Foakes had not "bought" her promise to take no further action on the judgment. He
had not provided any consideration.
The rule was recently applied by the Court of Appeal:
In Re Selectmove [1995] 2 All ER 531, Selectmove owed arrears of tax to the Inland Revenue.
The IR was in a position to put Selectmove into liquidation because it was unable to meet its
liabilities. There was a meeting at which Selectmove proposed to pay all future tax as and when
it fell due and that it would pay off the arrears at the rate of £1,000 a month commencing the
following February. The Collector of Taxes informed Selectmove that this proposal would need
approval of his superiors; and that he would get back to them if it was not acceptable. Sometime
later the IR commenced liquidation proceedings which Selectmove resisted, relying upon the
agreement made at the meeting in July.
The Court of Appeal held, dismissing the defence (1) that a promise to pay a sum which the
debtor was already bound to pay was not good consideration; (2) any promise made by the
Collector of Taxes was made without actual or ostensible authority. Selectmove's attempt to use
the notion in Williams v Roffey Bros (1990) failed as it was held that it was applicable only
where the existing obligation which is pre-promised is one to supply goods or services, not
where it is an obligation to pay money.
More recent cases include: Ferguson v Davies (1996) The Independent December 12th 1996, Re
C (a Debtor) [1996] BPLR 535

Exceptions to the Rule

Apart from the exceptions to the rule mentioned in Pinnel's Case itself, there are two others at
common law and one exception in equity.

A) Part-Payment of the Debt by a Third Party

A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the
part-payment is made by a third party on condition that the debtor is released from the
obligation to pay the full amount. See:
Hirachand Punamchand v Temple [1911] 2 KB 330 - A father paid a smaller sum to a money
lender to pay his son's debts, which the money lender accepted in full settlement. Later the
money lender sued for the balance. It was held that the part-payment was valid consideration,
and that to allow the moneylender's claim would be a fraud on the father.
B) Composition Agreements
The rule does not apply to composition agreements. This is an agreement between a debtor and a
group of creditors, under which the creditors agree to accept a percentage of their debts (eg, 50p
in the pound) in full settlement. Despite the absence of consideration, the courts will not allow
an individual creditor to sue the debtor for the balance: Wood v Robarts (1818). The reason
usually advanced for this rule is that to allow an individual creditor to claim the balance would
amount to a fraud on the other creditors who had all agreed to the percentage.
C) Promissory Estoppel
This is the name that has been given to the equitable doctrine which has as its principal source
the obiter dicta of Denning J in High Trees House Ltd [1947] (see below)

29
PROMISSORY ESTOPPEL
A further exception to the rule in Pinnel's Case is to be found in the equitable doctrine of
promissory estoppel. The doctrine provides a means of making a promise binding, in certain
circumstances, in the absence of consideration. The principle is that if someone (the promisor)
makes a promise, which another person acts on, the promisor is stopped (or estopped) from
going back on the promise, even though the other person did not provide consideration (in so far
as is it is inequitable to do so).

Development
The modern doctrine is largely based on dicta of Denning J in Central London Property Trust
Ltd v High Trees House Ltd [1947] 1 KB 130 and on the decision of the House of Lords in Tool
Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 and can be traced
to Hughes v Metropolitan Railway (1877) 2 App Cas 439.
(a) Hughes Case (1877) - In October a landlord gave his tenant six months notice to repair and
in the event of a failure to repair, the lease would be forfeited. In November the landlord opened
negotiations for the sale of the premises, but these ended in December without agreement.
Meanwhile the tenant had not done the repairs and when the six months period was up, the
landlord sought possession.
The House of Lords held that the landlord could not do so. The landlord had, by his conduct, led
the tenant to suppose that as long as negotiations went on, the landlord would not enforce the
notice. He could not subsequently take advantage of the tenant relying on this. Therefore, the
notice did not run during the period of negotiations. However, the six month period would begin
to run again from the date of the breakdown of negotiations.
(b) High Trees (1947) - In 1937 the Ps granted a 99 year lease on a block of flats in London to
the Ds at an annual rent of £2500. Because of the outbreak of war in 1939, the Ds could not get
enough tenants and in 1940 the Ps agreed in writing to reduce the rent to £1250. After the war in
1945 all the flats were occupied and the Ps sued to recover the arrears of rent as fixed by the
1937 agreement for the last two quarters of 1945.
Denning J held that they were entitled to recover this money as their promise to accept only half
was intended to apply during war conditions. This is the ratio decidendi of the case. He stated
obiter, that if the Ps sued for the arrears from 1940-45, the 1940 agreement would have defeated
their claim. Even though the Ds did not provide consideration for the Ps' promise to accept half
rent, this promise was intended to be binding and was acted on by the Ds. Therefore the Ps were
estopped from going back on their promise and could not claim the full rent for 1940-45.

(c) Tool Metal Case (1955) - see below.

Thus it seems that if a person promises that he will not insist on his strict legal rights, and the
promise is acted upon, then the law will require the promise to be honoured even though it is not
supported by consideration.

Requirements
The exact scope of the doctrine of promissory estoppel is a matter of debate but it is clear that
certain requirements must be satisfied before the doctrine can come into play:

(a) Contractual/Legal Relationship

All the cases relied on by Denning J in High Trees House were cases of contract. However, in
Durham Fancy Goods v Michael Jackson (Fancy Goods) [1968] 2 QB 839, Donaldson J said
that an existing contractual relationship was not necessary providing there was "a pre-existing
legal relationship which could, in certain circumstances, give rise to liabilities and penalties".

(b) Promise

30
There must be a clear and unambiguous statement by the promisor that his strict legal rights will
not be enforced, ie one party must make a promise which is intended to be binding: The
Scaptrade [1983] QB 529. However, it can be implied or made by conduct as in the Hughes
Case (1877).

(c) Reliance
The promisee must have acted in reliance on the promise. There is some uncertainty as to
whether the promisee (i) should have relied on the promise by changing his position to their
detriment (ie, so that he is put in a worse position if the promise is revoked): Ajayi v Briscoe
[1964] 1 WLR 1326, or (ii) whether they should have merely altered their position in some way,
not necessarily for the worse.
In Alan Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189, Lord Denning disclaimed
detriment as an element of promissory estoppel, saying it was sufficient if the debtor acted on
the promise by paying the lower sum. He said that "he must have been led to act differently from
what he otherwise would have done".

(d) Inequitable To Revert

It must be inequitable for the promisor to go back on his promise and revert to his strict legal
rights. If the promisor's promise has been extracted by improper pressure it will not be
inequitable for the promisor to go back on his promise. See:
D & C Builders v Rees [1965] 2 QB 617 - The Ps, a small building company, had completed
some work for Mr Rees for which he owed the company £482. For months the company, which
was in severe financial difficulties, pressed for payment. Eventually, Mrs Rees, who had become
aware of the company's problems, contacted the company and offered £300 in full settlement.
She added that if the company refused this offer they would get nothing. The company
reluctantly accepted a cheque for £300 "in completion of the account" and later sued for the
balance. The Court of Appeal held that the company was entitled to succeed. Lord Denning was
of the view that it was not inequitable for the creditors to go back on their word and claim the
balance as the debtor had acted inequitably by exerting improper pressure.

(e) A Shield Or A Sword?

At one point it was said in Coombe v Coombe [1951] 2 KB 215 that the doctrine may only be
raised as a defence: "as a shield and not a sword". It was held that the doctrine cannot be raised
as a cause of action. This means that the doctrine only operates as a defence to a claim and
cannot be used as the basis for a case. However, this was doubted in Re Wyven Developments
[1974] 1 WLR 1097 by Templeman J, who appeared to think that this was no longer the case
and that it could create rights. Lord Denning in Evenden v Guildford City AFC [1975] QB 917
also adopted this approach.

(f) Extinctive or Suspension of Rights?

Another question raised by this doctrine is whether it extinguishes rights or merely suspends
them. The prevalent authorities are in favour of it merely suspending rights, which can be
revived by giving reasonable notice or by conditions changing.

(i) Where the debtor's contractual obligation is to make periodic payments, the creditor's right to
receive payments during the period of suspension may be permanently extinguished, but the
creditor may revert to their strict contractual rights either upon giving reasonable notice, or
where the circumstances which gave rise to the promise have changed as in High Trees. See:
Tool Metal Case (1955) - Patent owners promised to suspend periodic payments of
compensation due to them from manufacturers from the outbreak of war. It was held by the
House of Lords that the promise was binding during the period of suspension, but the owners

31
could, on giving reasonable notice to the other party, revert to their legal entitlement to receive
the compensation payments.

(ii) It is not settled law that there can be no such resumption of payments in relation to a promise
to forgo a single sum. In D & C Builders, which concerned liability for a single lump sum, Lord
Denning expressed obiter that the court would not permit the promisor to revert to his strict legal
right and that the estoppel would be final and permanent if the promise was intended and
understood to be permanent in effect.
The preferred approach is to look at the nature of the promise: if as in High Trees and Tool
Metal, it is intended to be temporary in application and to reserve to the promisor the right
subsequently to reassert his strict legal rights, the effect will be suspensive only; and if on the
other hand, it is intended to be permanent (as envisaged in D & C Builders), then there is no
reason why in principle or authority the promise should not be given its full effect so as to
extinguish the promisor's right.

Unit 4: PRIVITY OF CONTRACT

1. The Privity of Contract Doctrine

The privity of contract doctrine dictates that only persons who are parties to a contract are
entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a
third party beneficiary) is not entitled to take any enforcement action if he or she is denied the
promised benefit.

Example:

A promises B, for consideration moving from B, to pay C $ 100.

Here A and B are parties to the contract – privy to the contract – and can sue each other if there
is a breach by the other. C is not a party to the contract and cannot sue A is A fails to pay C the
sum of $ 100.

A classic authority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co [1915]
AC 847, where at 853, Viscount Haldane said:

My Lords, in the law of England certain principles are fundamental. One is that only a person
who was party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio [third
party right of action] arising by way of contract.

See also Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460, at 478, per Barwick
CJ.

2. Privity and its Relationship to the Doctrine of Consideration

When looking at the doctrine of consideration we observed the rule that consideration must
move from a promisee, or, in other words, that only a person who has provided consideration
can enforce a promise. In the above example one could have argued that C could not sue on the
basis that C had not provided any consideration for A’s promise to pay C the sum of $ 100.

This raises the question of whether there is a distinction between the privity and consideration
rules. This question has generated considerable discussion in academic circles and there is a

32
division of opinion between those who say the rules are in fact one rule differently expressed
and those who argue that the two rules are distinct.

In the cases, the relatively scant references to the question tend to support the two separate rules
approach.

See Coulls v Bagot’s Executor, at 478, Barwick CJ and, at 494, per Windeyer J; Trident General
Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, at 115-116, Mason CJ, Wilson
J and at 164, per Toohey J.

3. Remedies Against a Promisor in Breach of Obligations to a Third Party

Here we are concerned with the remedies that can be pursued against a promisor who is in
breach of his or her obligations to a third party. In our example above, who can sue A, and what
remedies are available?

Because C is a third party and not privy to the contract, C has no right of action against A.

However, B as the promisee under the contract and a party to the contract can sue A. Two
possible remedies arise, namely, damages at common law and specific performance in equity.

Can C require B to sue A? See Coulls, at 502, per Windeyer J.

(a) Damages at Common Law

Because the remedy of common law damages for breach of contract will always be granted to a
plaintiff, B will always succeed. However, the critical issue is the measure of damages that will
be recovered.

Critical to an understanding of the position of B in this context is the basic principle for the
assessment of damages for breach of contract. As will be explored in more detail in the lectures
on remedies, damages seeks to compensate the plaintiff for the loss suffered as a result of the
breach. If no loss is suffered then a nominal (or token) award of damages is made in favour of
the plaintiff. If real loss is suffered, an award of substantial damages is made in favour of the
plaintiff.

In our example it is likely to be the case that the measure of damages to be recovered by B
would be nominal because B suffers no loss as a result of the breach by A. Put another way, B’s
position is the same irrespective of whether or not A pays the sum of $ 100 to C. In special
circumstances it may be that B will suffer a real loss, in which case substantial damages which
reflect the value of B’s loss – not C’s loss - will be awarded. See Coulls, at 501-502, where
Windeyer J.

Because in most cases the measure of damages recovered will be nominal, there is little reason
for B to pursue common law damages.

The fact that B cannot sue to recover as damages the measure of C’s loss from A’s breach of
contract was recently confirmed by four members of the House of Lords in Alfred McAlpine
Construction Ltd v Panatown Ltd [2001] 1 AC 518, at 522, 563, 575 and 580. The fifth Law
Lord, Lord Goff was, at 538-539, 544, more skeptical, suggesting that it was ‘an extraordinary
defect’ in the law that B should have no remedy for common law damages against A.

33
(b) Specific Performance in Equity

Unlike common law damages, specific performance will not always be granted to a plaintiff
upon proof of a breach of contract. There are various grounds upon which a court will refuse
specific performance. A particularly important one in the present context is that the remedy will
be refused if common law damages would be an adequate remedy. The critical decision in this
respect is Beswick v Beswick [1968] AC 58. From this case set out:

The facts
The issue that had to be determined by the House of Lords
The decision and reasoning of the House of Lords as to why damages were an inadequate
remedy on the facts of the case?

See also Coulls, at 503, per Windeyer J.

4. The Case of Trident General Insurance v McNiece Bros

The most significant High Court decision on privity has been Trident General Insurance Co Ltd
v McNiece Bros Pty Ltd (1988) 165 CLR 107. From this case set out:

The facts
The different views on the status of the doctrine of privity set out by the judges of the High
Court.
What reasons did Mason CJ & Wilson J give for their ‘radical’ approach to privity and how did
they compare and contrast with those of the other ‘radical approach’ given by Toohey J?
What was the approach of the ‘conservative’ judges, Brennan, Deane & Dawson JJ to the status
of privity?
To which of the above two approaches does the judgment of Gaudron J belong?

In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363, Gummow J,
after a long analysis of Trident, concluded, at 368, with the following observation:

At best ... there is support by three only of their Honours for the proposition ... that the old rules
do not apply in their full vigour.

His Honour was, of course, referring to Mason CJ, Wilson, Toohey JJ.

5. General Law ‘Exceptions’ to the Doctrine of Privity

There are a number of general law principles which enable a third party, such as C in our
example, to overcome the doctrine of privity. Because they rely upon establishing the elements
of other established legal doctrines and institutions, they are not true exceptions. Rather they
constitute means of circumventing the doctrine of privity because these other legal principles
apply on the facts of the given case. Some of the key exceptions are discussed below.

(a) Agency

The rule here is that if one of the contracting parties contracts as an agent, then either the agent
or the principal, but not both, can sue to enforce the contract. In our example, if B is C’s agent
then either B or C can enforce the contract against A. In these cases it is immaterial as to
whether A knew that B was C’s agent.

34
A particular situation where agency principles arise is with contracts for the carriage of goods.
Typically the situation will be where a carrier includes in the contract an exclusion clause and
the exclusion clause is expressed to be for the benefit of not only the carrier but third parties that
might be engaged by the carrier for the purpose of transporting the goods. A common example
in the cases is in shipping contracts, where the third party is the stevedore who unloads the
goods at the port of destination.

In such cases, can the stevedore rely on the benefit of the exclusion clause when the stevedore
causes damage to the goods? See elements that have to be satisfied in Midland Silicones Ltd v
Scruttons [1962] AC 446, at 474, per Lord Reid.

Originally these principles were only applied to contracts for carriage of goods by sea. However,
they have been applied to road carriage cases: Life Savers (Australasia) Pty Ltd v Frigmobile
Pty Ltd [1983] 1 NSWLR 431. Presumably they would also apply to contracts for carriage of
goods by rail or air.

It may even be the case that these principles could apply to exclusion clauses in any context
where it is intended to extend their protection to third parties.

An illustration of the application of the principles is in New Zealand Shipping Co v A M

Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. From this case set out:

The facts
The issue that had to be determined by the Privy Council
The decision and reasoning of the Privy Council as to how the elements of Midland Silicones
were satisfied in this case.

In The Eurymedon, the close relationship between the carrier and the third party was crucial to
establishing the third element in Midland Silicones. It now appears that if the third party simply
pleads the exclusion emption when sued for damages that will be enough: Life Savers v
Frigmobile.

If all the elements in Midland Silicones are met a contract arises between the owner of the goods
and the third party. There is, thus, no privity issue. The third party becomes a contracting party
in a later contract that was anticipated by the principal contract between the cargo owner and the
carrier. In this respect in Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] 2
All ER 785, at 851-852, Lord Millett said:

It is well established by the authorities that the Himalaya clause has the effect of bringing into
being a separate or collateral contract between the cargo owner and a third party, usually an
independent contractor such as a stevedore, under which the third party enjoys exemption from
liability to the cargo owner. They also establish that the contract is a unilateral or 'if' contract by
which the third party undertakes no obligation to the cargo owner of any kind, but the cargo
owner promises that if the third party does anything in the course of its employment which
damages the cargo it will have the benefit of the protective provisions of the clause. ... Such a
contract is a promise for an act, not a promise for a promise. If in the course of its employment
the third party performs an act in relation to the goods, which it is under no obligation to the
cargo owner to perform, it will at the one and same time bring the contract with the cargo owner
into existence and supply the consideration for the cargo owner's promise of exemption from
liability.

35
In relation to the contract between the owner of the goods and the third party Lord Millet went
on to say, at 853:

Such a contract cannot properly be characterised as a contract of carriage. It is rather a contract

of exemption which is ancillary or collateral to other contractual arrangements (the time charter
and the bill of lading) which were necessary to achieve the carriage of the goods on the chosen
vessel.

(b) Trusts

The law of trusts can enable a third party beneficiary to initiate action that will enforce the
promisor’s obligation. Using the above example, if B had contracted with A in the capacity of
trustee for C, C as beneficiary under the trust has enforceable rights. These rights arise because
the law of trusts gives a beneficiary certain rights against a trustee.

In the context of privity, if C is a beneficiary under a trust, C can bring an action against B, the
trustee, that has the effect of compelling B to sue A for breach of contract. In formal procedural
terms C sues in an action in which B and A are joined as defendants.

The use of trust law here does not give rise, in the strict sense, to an exception to the doctrine of
privity. In conceptual terms, the action against A is pursued by B, albeit at C’s insistence.

For the trust relationship to arise 2 points need to be examined.

First, for a trust to exist their must be property that is held on trust. There can be no trust without
a trustee holding property on trust for the beneficiary. The law a trusts has a broad and flexible
definition of property. In this case the property is the promise made by the promisor. In other
words, the contract between A and B, it is the promise made by A to B that is held on trust by B
for C.

Second, for the trust to arise in this context, it must be established that there is an intention, at
the time of the contract between A and B, that B was contracting in the capacity of trustee. On
intention in this context see Trident, at 149, per Deane J.

In ascertaining whether the intention is present, a court will look to the language in the contract,
the nature of the transaction and relevant circumstances attending the relationship between the
parties: Winterton Constructions v Hambros at 370. Certain types of contracts may be more
readily amenable to finding a trust intention than others.

Could a trust be found in the context of Trident? See Trident at 148, per Deane and at 155-157,
per Dawson J. What were the reasons why Deane J found in favour of McNiece Bros on the
basis of trusts but Dawson J did not?

When the trust exception is pursued and B sues for damages, the measure of damages that is
recovered reflect the loss to C, the beneficiary of the trust. The damages that are recovered are
held by B on trust for C: Lloyd’s v Harper (1880) LR 16 ChD 290; Eslea Holdings Ltd v Butts
(1986) 6 NSWLR 175.

(c) Estoppel

Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, a third
party may be able to seek relief against a promisor on the basis of promissory estoppel

36
principles. To succeed the third party would need to establish the elements of promissory
estoppel. See Trident, at 145, per Deane J.

In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it was likely that estoppel
could be established on the facts of the case, but it was not necessary for them to determine the
issue on the basis that they had decided the case on other grounds.

(d) Unjust Enrichment

When we examine the remedy of quantum meruit later in this course, we shall see that the
principle of unjust enrichment is the principle that underpins the remedy. The essence of the
principle is that it requires a defendant ‘to make fair and just restitution derived at the expense of
a plaintiff’: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256-257, per Deane J.

In Trident, Deane J, at 145-146, indicated that the principle could possibly be the basis for a
third party to seek relief. However, it was Gaudron J, especially at 176, in Trident who based her
decision in favour of McNiece Bros on the basis of the principle of unjust enrichment.

The action based upon unjust enrichment is not based on the contract but independent of it.
However, usually it will correspond in content and duration with the promisor’s obligation.

6. Statutory Exceptions to the Doctrine of Privity

Insurance Contracts Act 1985 (Cth), s. 48

Bills of Exchange Act 1909 (Cth), ss. 36-43
Cheques Act 1986 (Cth), s. 73
Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)

Unit 5: REQUIREMENT 4

CAPACITY TO CONTRACT

In general, a valid contract may be made by any person recognised by law as having legal
personality, that is natural persons, corporations and the Crown. It is now generally possible to
sue the Crown as of right for breach of contract: see the Crown Proceedings Act 1947 s 1. But
see Crown Lands Comrs v Page [1960] 2 QB 274, [1960] 2 All ER 726, CA; Cudgen Rutile (No
2) Pty Ltd v Chalk, Queensland Titanium Mines Pty Ltd v Chalk [1975] AC 520, PC, [1975] 2
WLR 1.
However, the following classes of persons are in law incompetent to contract, or are only
capable of contracting to a limited extent or in a particular manner:
(1) bankrupts - A bankrupt's property vests on adjudication in the trustee in bankruptcy: see the
Insolvency Act 1986.
(2) minors - The age of majority is 18 years (see the Family Law Reform Act 1969 s 1); and the
contractual incapacity of minors was much reduced by the Minors' Contracts Act 1987.
(3) persons of unsound mind - the original rule of law was that a contract with a person of
unsound mind was void, because there could be no consensus ad idem. This was later qualified
by a rule that a person could not plead his own unsoundness of mind to avoid a contract he had
made. This in turn gave way to a further rule that such a plea was permissible if it could be
shown that the other contracting party knew of the insanity (Hart v O'Connor [1985] AC 1000 at
1018–1019, [1985] 2 All ER 880 at 888, PC; Irvani v Irvani [2000] 1 Lloyd's Rep 412, CA)

37
(4) alien enemies; The rights and liabilities of an alien to sue and be sued in respect of a contract
generally depend on whether he is an alien friend or an alien enemy. An alien friend can sue and
be sued in the same manner as a British citizen.
(5) drunkards - the fact that a party was drunk when he purported to enter into a contract may be
a defence to an action on the contract; and it has been said that drunkenness is in this respect on
the same footing as unsoundness of mind.
(6) corporations - there are specific rules which govern contracts made by registered companies
with: (1) members; (2) third parties (including pre-incorporation contracts)
(7) companies;
(8) partnerships; and
(9) receivers of companies.
Provision is also made to exclude from the courts of the United Kingdom proceedings with
regard to the pay or service of members of certain visiting forces.Such incapacity might be seen
in some cases in terms of a lack of good faith on the part of the other party.

INCAPACITY

Extract from JC Smith, Smith & Thomas: A Casebook on Contract, Eleventh Edition, 2000,
Chapter 17.
The general rule of English law is that any person is competent to bind himself to any contract
he chooses to make, provided that it is not illegal or void for reasons of public policy. (See
below, Chapter 19.) At common law there are exceptions to this rule in the case of corporations,
minors, married women, mentally incompetent and intoxicated persons. The exceptions are now
greatly reduced in scope. A series of statutes from 1870 to 1949 abolished the married woman's
disabilities and she now enjoys full contractual capacity. The present state of the other
exceptions requires a little further explanation.
(a) CORPORATIONS
A corporation created by Royal Charter has always had the same contractual capacity as an
ordinary person but a company incorporated under the Companies Act could, until recently, only
make such contracts as were within the scope of the objects set out in its memorandum of
association. Anything beyond that was ultra vires and void.
In the leading case of Ashbury Railway Carriage and Iron Co. Ltd v. Riche (1875) L.R. 7 H.L.
653 the objects set out in the company's memorandum were "to make and sell, or lend on hire,
railway carriages and waggons, and all kinds of railway plant, fittings, machinery and rolling
stock; to carry on the business of mechanical engineers and general contractors; to purchase,
lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants,
timber, coal, metals, or other materials, and to buy any such materials on commission or as
agents." The directors purchased a concession for making a railway in Belgium and purported to
contract with Riche that he should have the construction of the line. Riche's action for breach of
the alleged contract failed since the House of Lords held that the construction of a railway, as
distinct from rolling stock, was ultra vires the company and that therefore the contract was void.
Even if every shareholder of the company had expressed his approval of the act, it would have
made no difference, for it was an act which the company had no power, in law, to do. Important
changes were made by section 108 of the Companies Act 1989, substituting a new section 35 of
the Companies Act 1985. Under that new section it remains the duty of the directors to observe
any limitations on their powers flowing from the company's memorandum (section 35(3)) and a
member of a company may bring proceedings to restrain the doing of an act in excess of those
powers (section 35(2)); but, by section 35(1):
"The validity of an act done by a company shall not be called into question on the ground of
lack of capacity by reason of anything in the company's memorandum."
So, by applying the modern law to the Ashbury case, the directors committed a breach of duty
by making the contract and might have been restrained by action by a member; but once the

38
contract was made its validity could not be questioned provided that the making of the contract
was "an act done by the company." It might be objected that it was not such an act because the
directors had no power to make the contract. This objection is met by section 35A(1):
"In favour of a person dealing with a company in good faith, the power of the board of directors
to bind the company, or authorise others to do so, shall be deemed to be free of any limitation
under the company's constitution."
A person is presumed to have acted in good faith unless the contrary is proved and is not to be
regarded as acting in bad faith merely because he knows the act is beyond the directors' powers.
An ultra vires act by the directors may now be ratified, but only by special resolution which
does not affect any liability incurred by the directors or any other person-any such relief must be
agreed to separately by special resolution.
Formerly a corporation's contracts were invalid unless made under the corporate seal but, since
the Corporate Bodies' Contracts Act 1960, a corporation may make contracts in the same manner
as a natural person-that is the contract may be made orally unless a special rule requires a
written contract-as in contracts for the sale or disposition of an interest in land-or evidence in
writing-as in the case of a guarantee within section 4 of the Statute of Frauds 1677.

(b) MINORS
At common law persons under the age of 21 were designated "infants" and had only a limited
capacity to contract. From January 1, 1970, the Family Law Reform Act 1969 reduced the age of
majority to 18 and authorised the term "minor" as an alternative to "infant." "Minor" is now the
preferred term. The capacity of a minor to contract is still regulated by the common law,
modified by the Minors' Contracts Act 1987 which repealed a troublesome statute, the Infants
Relief Act 1874.
The general principle is that a contract made by a minor with an adult is binding on the adult but
not on the minor. If, after attaining his majority, he ratifies it by an act confirming the promise
he made when a minor, he is bound. There need be no consideration for the act of ratification. A
contract by a minor is not void and any money or property transferred by him under the contract
can be recovered only if there has been a total failure of consideration. There are three
exceptional cases where a minor is to some extent bound.
Necessaries. A minor is bound to pay for necessaries supplied to him under a contract. The Sale
of Goods Act 1979 s.3, re-enacting the Act of 1893, provides:
"… where necessaries are sold and delivered to an infant (or minor) … he must pay a reasonable
price therefor.
'Necessaries' in this section means goods suitable to the condition of life of such infant (or
minor) … and to his actual requirements at the time of sale and delivery."
"Necessaries" are those things without which a person cannot reasonably exist and include food,
clothing, lodging, education or training in a trade and essential services. The "condition of life"
of the minor means his social status and his wealth. What is regarded as necessary for the minor
residing in a stately home may be unnecessary for the resident of a council flat. Whatever the
minor's status, the goods must be suitable to his actual requirements-if he already has enough
fancy waistcoats, more cannot be necessary: Nash v. Inman [1908] 2 KB 1, CA.
The nature of the minor's liability for necessary goods is uncertain. The fact that the Sale of
Goods Act makes him liable only for goods "sold and delivered" and to pay, not any agreed
price, but a reasonable price, suggests quasi-contractual liability-he must pay, not because he has
contracted to do so, but because the law requires him to recompense the seller for a benefit
conferred and accepted. Some dicta support this view but others treat the minor's liability as
contractual. In Roberts v Gray [1913] KB 520, CA, a minor was held liable for his failure to
perform a contract for a tour with the plaintiff, a noted billiards player. It was a contract for the
instruction of the minor. The contract was wholly executory and but it was held that the contract
was binding on him from its formation. It may be thought that there is a distinction between
necessary goods and necessary services but this is difficult to justify logically or historically.

39
Perhaps the contract in Roberts v. Gray belongs more properly to the category of beneficial
contracts of service, below.
A contract is not binding on a minor merely because it is proved to be for the minor's benefit;
but a contract which would otherwise be binding as a contract for necessaries is not so if it
contains harsh and onerous terms: Fawcett v. Smethurst (1914) 84 LJKB 473, (Atkin J).
Beneficial contracts of service. It is for the minor's benefit that he should be able to obtain
employment which wou1d be difficult if he could not make a binding contract. The law allows
him to do so, provided that the contract, taken as a whole, is manifestly for his benefit. So where
a young railway porter agreed to join an insurance scheme and to forgo any claims he might
have under the Employers' Liability Act, he had forfeited his rights under the Act, the contract as
a whole being for his benefit: Clements v London & North Western Railway [1894] 2 QB 482,
CA. Contracts enabling a minor to pursue a career as a professional boxer and as an author have
been held binding as being for their benefit.
Acquisition of property with obligations. When a minor acquires "a subject of a permanent
nature … with certain obligations attached to it"-such as a leasehold, or shares in a company-he
is bound by the obligations as long as he retains the subject. He must pay the rent or calls on the
shares: London & North Western Railway v M'Michael (1850) 5 Ex 114. The contract is
voidable by the minor-he may repudiate it any time during his minority or within a reasonable
time thereafter. It is uncertain whether avoidance here means rescission ab initio or avoidance of
only future obligations; but, whether it is retrospective or not, it seems that the minor cannot
recover money which he has already paid unless there has been a total failure of consideration:
Steinberg v. Scala Ltd [1923] 2 Ch 452, CA.
Restitution by a minor. Where a minor has obtained property under a contract which is not
enforceable against him, the adult party who can neither sue for the price nor get the property
back may suffer an injustice. Even where the minor has lied about his age, no action in deceit
will lie because this would, in effect, enable the contract to be enforced against him; and for the
same reason it is improbable that the minor would be estopped from asserting his true age. The
Minors' Contracts Act 1987, s3, now affords a limited measure of redress. Where a contract
made after the commencement of the Act is unenforceable against a defendant because he was a
minor when it was made:
"… the court may, if it is just and equitable to do so, require the defendant to transfer to the
plaintiff any property acquired by the defendant under the contract or any property representing
it."
This may assist the plaintiff where the property is identifiable but where the plaintiff has loaned
the money it will usually not be. The plaintiff will then be able to recover in equity only if he is
able to prove that he loaned the money for the express purpose of enabling the minor to buy
necessaries and that he in fact did so: Lewis v Alleyne (1888) 4 TLR 560.
The 1987 Act, s3, provides "Nothing in this section shall be taken to prejudice any other remedy
available to the plaintiff." The plaintiff might rely on the equitable doctrine which required a
fraudulent minor to return property which he had obtained by deception and which was still
identifiable in his possession: R. Leslie Ltd v. Shiell [1914] 3 KB 607, CA; but it is not clear
that there would be any advantage in doing so, since the remedy under section 3 appears to
overlap the equitable remedy and does not require proof of fraud.
Guarantee of a minor's contract. Section 2 of the 1987 Act provides that a guarantee of a minor's
contract is not unenforceable against the guarantor merely because the contract made by the
minor is unenforceable against him on the ground that he is a minor. The section does not apply
if the contract made by the minor is unenforceable against him for some other reason, for
example misrepresentation or duress by the adult party. In such a case the guarantor would not
be bound.
(c) MENTAL INCOMPETENTS
The ancient rule of the common law was that a lunatic could not set up his own insanity (though
his heir might) so as to avoid an obligation which he had undertaken. But by 1847 Pollock C.B.

40
was able to say, in delivering the judgment of the Court of Exchequer Chamber in Moulton v.
Camroux, 2 Ex 487, that "the rule had in modern times been relaxed, and unsoundness of mind
would now be a good defence to an action upon a contract, if it could be shown that the
defendant was not of the capacity to contract 'and the plaintiff knew it."' Cf. Imperial Loan Co.
v. Stone [1892] 1 QB 599, CA. Section 3 of the Sale of Goods Act 1979 makes the same
provision for persons who are incompetent to contract by reason of mental incapacity as for
minors (see above).
A lunatic so found by inquisition was held to be incapable of making a valid inter vivos
disposition of property (although he could make a valid will) since this would be inconsistent
with the position of the Crown under the Lunacy Acts: Re Walker [1905] 1 Ch 160. Presumably
the position of a lunatic so found with respect to contracts not effecting inter vivos dispositions
of his property was the same as that of a lunatic not so found; that is, he would be bound unless
he could show that he was not in fact of capacity to contract and that the plaintiff knew it. The
Lunacy Acts have been repealed, but an order under the Mental Health Act 1983, may have the
same effect as a finding of lunacy.
(d) INTOXICATED PERSONS
The authorities are scanty; but in Gore v. Gibson (1845) 13 M & W 621; 153 ER 260, it was
held that a contract made by a person so intoxicated as not to know the consequences of his act
is not binding on him if his condition is known to the other party. It appears, however, that such
a contract is not void but merely voidable, for it was held in Matthews v. Baxter (1873) LR 8 Ex
132 that if the drunken party, upon coming to his senses, ratifies the contract, he is bound by it.
Section 3 of the Sale of Goods Act 1979 makes the same provision for persons who are
incompetent to contract by reason of "drunkenness" as for minors and the mentally incompetent.
No doubt, the same rule would be applied to persons intoxicated by drugs other than alcoholic
drink, either by a broad interpretation of "drunkenness," or at common law.

Unit 6: ASCERTAINING CONTRACT TERMS

REPRESENTATIONS AND TERMS

The first step in determining the terms of a contract is to establish what the parties said or wrote.
Statements made during the course ofnegotiations may traditionally be classed as
representations or terms and if one turns out to be wrong, the plaintiffs remedy will depend on
how the statement is classified:
• A representation is a statement of fact made by one party which induces the other to
enter into the contract. If it turns out to be incorrect the innocent party may sue for
misrepresentation.
• Breach of a term of the contract entitles the injured party to claim damages and, if he has
been deprived substantially what he bargained for, he will also be able to repudiate the contract.
• If a statement is not a term of the principal contract, it is possible that it may be enforced
as a collateral contract (which has developed rapidly in the twentieth century as a significant
means by which the difficulties of fixing a statement with contractual force may be
circumvented).

How can the courts decide whether a statement is a term or a mere representation? It was
established in Heilbut, Symons & Co v Buckleton [1913] AC 30, that intention is the overall
guide as to whether a statement is a term of the contract. In seeking to implement the parties'
intentions and decide whether a statement is a term or a mere representation, the courts will
consider the following four factors.

(A) TIMING

41
The court will consider the lapse of time between the making of the statement and the contract's
conclusion: if the interval is short the statement is more likely to be a term. See:
Roof/edge v McKay [1954] 1 WLR 615 Schawel v Reade [1913] 2 IR 6

B) IMPORTANCE OF THE STATEMENT

The court will consider the importance of the truth of the statement as a pivotal factor in
finalising the contract. The statement may be of such importance that if it had not been made the
injured party would not have entered into the contract at all. See:
Bannerman v White (1861) CB(NS) 844 Couchman v Hill [1947] 1 All ER 103.

(C) REDUCTION OF TERMS TO WRITING

The court will consider whether the statement was omitted in a later, formal contract in writing.
If Ihe written contract does not incorporate the statement, this would suggest that the parties did
not intend the statement to be a contractual term. See:
Roof/edge v McKay [1954] 1 WLR 615 Birch v Paramount Estates (1956) 167.

42
 (D) SPECIAL KNOWLEDGE/SKILLS
The court will consider whether the maker of the statement had specialist
knowledge or was in a better position than the other party to verify the statement's
accuracy. See:
Marling v Eddy [1951] 2 KB 739
Oscar Chess v Williams [1957] 1 All ER 325
Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.

CONDITIONS AND WARRANTIES

Traditionally terms have been divided into two categories: conditions and
warranties.

(A) CONDITIONS

A condition is a major term which is vital to the main purpose of the contract. A
breach of condition will entitle the injured party to repudiate the contract and
claim damages. The injured party may also choose to go on with the contract,
despite the breach, and recover damages instead. See:
Poussard v Spiers (1876) 1 QBD 410.
(Note: The word 'condition' also has another meaning. It may mean a stipulation
that a contract should not be enforceable except on the happening of a given
event, or should be brought to an end on the happening of a given event. The
condition is then properly called a 'condition precedent', or a 'condition
subsequent1 respectively. See Cheshire & Fifoot, p1534)

(B) WARRANTIES
A warranty is a less important term: it does not go to the root of the contract. A
breach of warranty will only give the injured party the right to claim damages; he
cannot repudiate the contract. See:
Betttni v Gye (1876) 1 QBD 183.

(C) INTERMEDIATE TERMS

It may be impossible to classify a term neatly in advance as either a condition or a

warranty. Some undertakings may occupy an intermediate position, in that the
term can be assessed only in the light of the consequences of a breach. If a breach
of the term results in severe loss and damage, the injured party will be entitled to
repudiate the contract; where the breach involves minor loss, the injured party's
remedies will be restricted to damages. These intermediate terms have also
become known as innominate terms. See:
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474
The Mihalis Angelos [1971] 1 QB 164
The Hansa Nord [1976] QB 44

43
 Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570
Bunge Corporation v Tradax Export [1981] 2 All ER 513.

NOTE
If the term is described in the contract as a 'condition1 that wll not be conclusive.
See:
Schuler v Wickman Machine Tools [1974] AC 235.

3. IMPLIED TERMS

In most contracts the primary obligations of the parties are contained in express terms. In
addition there are various circumstances in which extra terms may be implied into the
agreement.

A) TERMS IMPLIED BY CUSTOM

he terms of a contract may have been negotiated against the background of the customs
of a particular locality or trade. The parties automatically assume that their contract will
be subject to such customs and so do not deal specifically with the matter in their
contract. See:
Mutton v Warren (1836) 1 M&W 466.

B) TERMS IMPLIED BY THE COURT

(i) Intention of the Parties/Terms Implied as Fact

The courts will be prepared to imply a term irto a contract in order to give effect to the
obvious intentions of the parties. Sometimes the point at issue has been overlooked or the
parties have failed to express their intention clearly. In these circumstances, the court will
supply a term in the irterests of 'business efficacy' so that the contract makes commercial
sense. See:
The Moorcock (1889) 14 PD 64.
A more recent test is the 'officious bystander test' used to incorporate implied obvious
terms (Shirlaw v Southern Foundries [1940] AC 701). If while the parties were making
their contract, an officious bystander were to suggest some express provision, they would
both reply, "oh, of course." See, eg:
Wilson v Best Travel [1993] 1 All ER 353.
(it) Relationship Between the Parties/Terms Implied by Law
In certain relationships and contracts the law seeks to impose a model or standardised set
of terms as a form of regulation. Such terms arising from the relationship between the
parties will be implied as of law. See:
Liverpool City Council v Irwin [1976] 2 All ER 39.

C) TERMS IMPLIED BY STATUTE

See Sections 12, 13, 14 and 15 of the Sale of Goods Act 1979 for examples of terms
implied under statute

44
THE PAROL EVIDENCE RULE

The parol evidence rule is that where the record of a transaction is embodied in a
document, extrinsic evidence is not generally admissible to vary or interpret the
document or as a substitute for it.
According to GH Treitel, The Law of Contract, 9th ed. p176, there are obvious grounds
of convenience for the application of the parol evidence rule to contracts: certainty is
promoted by holding that parties who have reduced a contract to writing should be bound
by the writing and by the writing alone. On the other hand, the parol evidence rule will
commonly be invoked where a dispute arises after the time of contracting as to what was
actually said at that time; and in such cases one of the parties could feel aggrieved if
evidence on the point were excluded merely because the disputed term was not set out in
the contractual document. Evidence extrinsic to the document is therefore admitted in a
number of situations which fall outside the scope of the rule.

EXCEPTIONS TO THE PAROL EVIDENCE RULE:

(A) WRITTEN AGREEMENT NOT THE WHOLE AGREEMENT

If the written agreement was not intended to be the whole contract on which
the parties had actually agreed, parol evidence is admissible. See:
Evans v Andrea Merzario [1976] 2 All ER 930.
(B) VALIDITY
Parol evidence may be given about the validity of the contract, eg to establish the
presence or absence of consideration or of contractual intention, or some invalidating
cause such as incapacity, misrepresentation, mistake or non est factum.
(C) IMPLIED TERMS
Where the contract is silent on a matter on which a term is normally implied by law, parol
evidence may be given to support, or to rebut, the usual implication. See:
Surges v Wickham (1836) 3 B & S 669
(D) OPERATION OF THE CONTRACT
Parol evidence can be used to show that the contract does not yet operate, or that it has
ceased to operate. See:
Pym v Campbell (1856) 6 E & B 370.
(E) EVIDENCE AS TO PARTIES
Parol evidence can be used to show in what capacities the parties contracted, eg where a
person contracts ostensibly as principal, evidence is admissible to prove that he really
acted as another's agent so as to entitle the latter to sue (Humfrey v Dale (1857) 7 E & B
266).
(F) AID TO CONSTRUCTION
Where the words of the contract are clear, parol evidence cannot be used to explain their
meaning, unless they have a special meaning by custom. Parol evidence can, on the other
hand, be used to explain words or phrases which are ambiguous, or which, if taken
literally, make no sense, as well as technical terms.
(G) TO PROVE CUSTOM

45
Evidence of custom is admissible "to annex incidents to written contracts in matters with
respect to which they are silent." ^uttoii v Warren (1836). Custom can also be used as an
aid to construction, eg in Smith v Wilson

(1832) evidence was admitted of a local custom to show that "1,000 rabbits" meant
"1,200 rabbits."
(H) RECTIFICATION
A document may fail in accurately recording the true agreement. Equity allows such a
written contract to be rectified by parol evidence. (See handout on Mistake)
(I) COLLATERAL CONTRACT
Even though parol evidence cannot be used to vary or add to the terms of a written
contract, it may be possible to show that the parties made two related contracts, one
written and the other oral, ie a collateral contract. See:
City & Westminster Properties v Mudd [1959] Ch 129.
The Law Commission (1976) recommended that the rule should be abolished, but by
1986 concluded that it did not stop the courts accepting parol evidence if this was
consistent with the intention of the parties.

EXCLUSION AND LIMITING CLAUSES

INTRODUCTION

A clause may be inserted into a contract which aims to exclude or limit one party's
liability for breach of contract or negligence. However, the party may only rely on such a
clause if (a) it has been incorporated into the contract, and if, (b) as a matter of
interpretation, it extends to the loss in question. Its validity will then be tested under (c)
the Unfair Contract Terms Act 1977 and (d) the Unfair Terms in Consumer Contracts
Regulations 1999.

A. INCORPORATION

The person wishing to rely on the exclusion clause must show that it formed part of the
contract. An exclusion clause can be incorporated in the contract by signature, by notice,
or by a course of dealing.

1. SIGNED DOCUMENTS

If the plaintiff signs a document having contractual effect containing an exclusion clause,
it will automatically form part of the contract, and he is bound by its terms. This is so
even if he has not read the document and regardless of whether he understands it or not.
See:
L'Estrange v Graucob [1934] 2 KB 394.
However, even a signed document can be rendered wholly or partly ineffective if the
other party has made a misrepresentation as to its effect. See:
Curtis v Chemical Cleaning Co [1951] 1 KB 805.

46
2. UNSIGNED DOCUMENTS

The exclusion clause may be contained in an unsigned document such as a ticket or a

notice. In such a case, reasonable and sufficient notice of the existence of the exclusion
clause should be given. For this requirement to be satisfied:
(i) The clause must be contained in a contractual document, ie one which the reasonable
person would assume to contain contractual terms, and not in a document which merely
acknowledges payment such as a receipt. See:
Parker v SE Railway Co (1877) 2 CPD 416
Chappleton v Barry UDC [1940].
(ii) The existence of the exclusion clause must be brought to the notice of the other party
before or at the time the contract is entered into. See:
Olley v Marlborough Court [1949] 1 KB 532.
(iii) Reasonably sufficient notice of the clause must be given. It should be noted that
reasonable, not actual notice is required. See:
Thompson v LMS Railway [1930] 1 KB 41.
What is reasonable is a question of fact depending on all the circumstances and the
situation of the parties. The courts have repeatedly held that attention should be drawn to
the existence of exclusion clauses by clear words on the front of any document delivered
to the plaintiff, eg "For conditions, see back". It seems that the degree of notice required
may increase according to the gravity or unusualness of the clause in question. See:
Thornton v Shoe Lane Parking [1971] 1 All ER 686
Interfoto v Stiletto Ltd [1988] 1 All ER 348.

3. PREVIOUS DEALINGS

Even where there has been insufficient notice, an exclusion clause may nevertheless be
incorporated where there has been a previous consistent course of dealing between the
parties on the same terms. Contrast:
Spurling v Bradshaw [1956] 2 All ER 121
McCutcheon v MacBrayne [1964] 1 WLR 125.
As against a private consumer, a considerable number of past transactions may be
required. See:
Hollier v Rambler Motors [1972] 2 AB 71.
Even if there is no course of dealing, an exclusion clause may still become part of the
contract through trade usage or custom. See:
British Crane Hire v Ipswich Plant Hire [1974] QB 303.

4. PRIVITY OF CONTRACT

As a result of the doctrine of privity of contract, the courts held that a person who is not a
party to the contract (a third party) was not protected by an exclusion clause in that
contract, even if the clause purported to extend to him. Employees are regarded in this
context as third parties. See:
Adler v Dickinson [1954] 3 All ER 396
Scruttons v Midland Silicones [1962] AC 446.

47
Now see the provisions in the Contracts (Rights of Third Parties) Act 1999 (Handout on
Privity of Contract).

5. COLLATERAL CONTRACTS
Even where an exclusion clause has been incorporated into a contract, it may not have
been incorporated in a collateral contract. See:
Andrews v Hopkinson [1957] 1 QB 229.

6. THE BATTLE OF THE FORMS

A problem arises if one party sends a form saying that the contract is made on those terms
but the second party accepts by sending a form with their own terms on and stating that
the contract is on the second party's terms. The "rule of thumb" here is that the contract
will be made on the last set of terms sent. See:
British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811.

B. INTERPRETATION

Once it is established that an exclusion clause is incorporated, the whole contract will be
construed (ie, interpreted) to see whether the clause covers the breach that has occurred.
The basic approach is that liability can only be excluded by clear words. The main rules
of construction are as follows:

1. CONTRA PROFERENTEM
If there is any ambiguity or uncertainty as to the meaning of an exclusion clause the court
will construe it contra proferentem, ie against the party who inserted it in the contract.
See:
Baldry v Marshall [1925] 1 KB 260
Houghton v Trafalgar Insurance Co (1954).
Very clear words are needed in a contract to exclude liability for negligence. See:
White v John Warwick [1953] 1 WLR 1285.

2. THE MAIN PURPOSE RULE

Under this rule, a court can strike out an exemption clause which is inconsistent with or
repugnant to the main purpose of the contract. See:
Glynn v Margetson [1893] AC 351
Evans Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078.

3. THE DOCTRINE OF FUNDAMENTAL BREACH

Prior to 1964, the common law considered that a fundamental breach could not be
excluded or restricted in any circumstances as this would amount to giving with one hand
and taking with the other. This became elevated to a rule of law.
However, the rule of law approach was rejected in UGS Finance v National Mortgage
Bank of Greece [1964] 1 Lloyd's Rep 446, on the basis that it conflicted with freedom of
contract and the intention of the parties. The question of whether a clause could exclude
liability for a fundamental breach was held to be a question of construction.

48
The UGS case was unanimously approved by the House of Lords in the Suisse Atlantique
case [1967] 1 AC 361, and Photo Production Ltd v Securicor Transport [1980] AC 827.

UNIT 13: MATTERS WHICH AFFECT THE VALIDITY OF CONTRACTS

Some contracts, which appear perfectly valid, may nevertheless be wholly or partly
ineffective because of some defect when they were formed. The vitiating factors
discussed in this unit are mistake, misrepresentation, duress, undue influence, and lack of
capacity in the formation of the contract.

A Mistake
The general rule is that mistake does not affect the validity of a contract. For
example, if a man is mistaken as to the nature or value of what he buys, this is simply the
misfortune. The law will not help him unless he has been mislead by the other party (see
Misrepresentation, page 135).

In leaf v. International Galleries (1950), a picture was sold which both seller and buyer
believed to be Constable. In fact it was not. The contract was not affected by this
mistake, because each side intended to deal with the physical thing sold; they were
simply mistaken as to its quality and value.

A further preliminary point is that mistake of law will never affect the validity of a
contract. Ignorance of the law is no defence! In certain circumstances, mistake of fact
may affect the contract and, if sufficiently serious, render the contract void.

Mistakes of fact that render a contract void

Mistakes concerning the subject matter of the contract, for example the property sold, can
render the contract void if sufficiently serious. A mere mistake as to the nature or value
of the subject matter will not be enough (see above).

A mutual mistake as to the identity of the subject matter will render the contract void. A
mutual mistake will occur where the parties are, unknown to each other, thinking about
different things. Neither is right, neither wrong; they are simply at cross-purposes and
have never really agreed.

In Raffles v. Wichelhaus (1864), a carge of cotton was described as being on the SS

Peerless from Bombay. There were in fact two ships of that name sailing from the cargo
on the second ship, while the buyer expected it on the first. The contract was held void.

A Fundamental common mistake about the subject matter may, exceptionally, also render
the contract void. A common mistake occurs where both parties are under the same
misapprehension: both wrong. The clearest instance of this is where; unknown to both
parties, the subject-matter does not exist.

49
In Associated Japanese Bank Limited v. Credit du Nord S.A. (1988), Mr B fraudulently
‘sold’ some machinery to Associated Japanese bank (‘AJB) and leased it back. Credit du
Nord (‘CDN’) contracted with AJB to guarantee that Mr. B would per rent. In fact,
unknown to both AJB and CDN, there was no machinery. The contract of guarantee was
held void for common mistake.

In Couturier v. Hastile (1856), the action was based on a contract to sell a cargo of wheat,
which, unknown to both seller and buyer, no longer existed. The action failed.

Similarly, in Galloway v.Galloway (1914),a separation agreement between ‘husband’ and

‘wife’, disposing of property between them, was held void when it was discovered that
they had never legally been married.

In Bell v. Lever Brothers Ltd (1932), however, the common mistake was not sufficiently
fundamental, Agreements to make large severance payments to senior employees who
were losing their jobs wee made on the assumption by all parties that the men were
entitled to some payment. In fact, they could have been sacked for misconduct and
without compensation. Nevertheless the compensation agreements were held valid. The
mistake only affected the value of the old contacts of employment.

Mistaken signing of written documents may, exceptionally, be a nullity. Three elements

must be present if the contract is to be void: the signing must have been fraudulently
induced, the mistake must be fundamental, and the signer must prove that he or she has
not been negligent. A person attempting to avoid liability under a contract on these
grounds is said to plead non est factum (it is not my act).

In Foster v. MacKinnon (1869), a rogue induced Makinnon, an old gentleman with weak
sight, to sign a document which Mackinnon thought to be a guarantee. In fact he was
endorsing a bill of exchange for £3000 thereby incurring a personal liability for this
amount. It was held that, so long as he had not been negligent, he was not liable on the
bill.

Conversely, in Suanders v. Anglia Building Society (1971), a Mrs Gallie intended to

assign the lease of her house so as to enable her nephew to borrow money. The
assignment was prepared fraudulently by a rogue, Lee, who had promised to arrange the
loan. The document that she signed transferred the lease to Lee himself, who mortgaged
it to the building society and departed with the proceeds. Mrs. Gallie and her nephew
received nothing. Mrs. Gallie claimed that the original assignment was void for mistake;
she had not read it because her glasses were broken, and she had not realized its effect.
Her plea failed. She had intended to assign her lease, and her mistake as to the way in
which she was assigning it was not so fundamental as to avoid the contract.

A mistake by one party as to the identify of the other may sometimes invalidate the
contract. If a contracts with B under the impression that he is really dealing with C, the
contract will be void if A can prove that his mistake was material; he intended to deal

50
with C and would not have dealt with anyone dealt else. It may be very difficult for A to
prove this, particularly where the parties dealt with each other face to face.

In Phillips v. Brooks (1919), a rogue brought a ring in a jeweler’s shop. He then

persuaded the jeweler that he was Sir George Bullough, and was, therefore, allowed
taking away the ring in return for a cheque. The cheque was dishoured, and the ring was
eventually traced to a pawnbroker. The jeweler claimed that his contract with the rogue
was void for mistake, but his claim failed. The jeweler had dealt with the man facing
him; the question of identity was only raised when it came to payment.

Again, in Lewis v. Averay (1972), Lewis sold and parted with his car to rogue who
pretended to be Richard Greene, the film actor. The rogue paid by cheque, which was
dishoured, and then re-sold the car to Averay. The contract between Lewis and the rogue
was not void; Lewis could not prove that he was willing to sell only to Richard Greene
and to no one else.

Where the parties did not deal with each other face to face, it may be easier for A to
prove that the mistake was material.

In Cundy v. Lindsay (1878), a rogue called Blenkarn ordered linen by post from Lindsay
& Co. by pretending to be Blenkiron, a reputable dealer. Blenarn re-sold the linen to
Cundy. Lindsay & Co. was able to recover it (or its value) because the contract with
Blenkarn was void. They satisfied the court that they intended to deal only with
Blenkiron.

In Kings’s Norton Metal Co. Ltd v. Edridge, Merret & Co. Ltd (1897), on the other hand,
the plaintiffs sold goods to a firm called “Hallam & Co.” which placed an order by post.
Hallam & Co. turned out to be a complete fiction; the real buyer was a rogue called
Wallis. The contract was not void. If the plaintiffs were willing to deal with an unknown
company, without checking, then the identity of the buyer was clearly not sufficiently
material .

It will be apparent that most of the cases on mistake of identity are actions between two
innocent parties. A will have parted with the goods to a rogue, who will have re-sold to X
and departed with the proceeds. If the contracts between A and the rogue was void for
mistake, A can recover the goods or their value from X by an action for the tort of
conversion (Unit 10); otherwise X will normally be entitled to keep the property.

Other consequences of mistake

Where there is a mistake as to the subject-matter, but the mistake is not so fundamental as
to render the contract void, the court may nevertheless allow one party the equitable
remedy of rescission, that is, the right to have the contract set aside if he so wishes. The
party claiming this remedy must show that he has not been at fault in any way, and the
court may impose certain conditions on granting the remedy.

51
In Cooper v. phibbs (1987), Cooper agreed to lease a fisherly from Phibbs. It later turned
out that, unknown to both, the fishery already belonged to Cooper. The court allowed
Cooper to rescind the lease, on condition that he compensate Phibbs for improvements,
which the latter had made.

In Grist v. Bailey (1967), Grist contracted to buy Bailey’s house for ₤850. Both parties
believed that the house was occupied by a tenant protected under the Rent Acts. In fact,
unknown to both, the tenant had died. This increased the value of the house to about
₤2250, and Bailey refused to carry out the contract, claiming that it was void for mistake.
The contract was held not to be void at common law, but the court exercised its equitable
power to set the original contract aside on condition that Bailey would now sell for the
true value.

When an equitable remedy is claimed, mistake may exceptionally persuade the court to
refuse the remedy. For example, specific performance of a contract may be refused if the
defendant has made a mistake, which renders it unfair and inequitable to enforce the
agreement against him, as in Malins v. Freeman (Unit 15).
Where, by mistake, the terms of a written document do not represent accurately what the
parties agreed orally, the court may, at its discretion, order the rectification of the
document so that it does express what was agreed.

B. Misrepresentation

The conclusion of a contract is often preceded by negotiations, in the course of which one
party makes statements of fact intended to induce the other to enter into the contract. If
any such statement is false, it is called a misrepresentation. A misrepresentation, then,
may be defined as a false statement of fact, made by one party to the contract to the other
before the contract, with a view to inducing the other to enter into it. The statement must
have been intended to be acted upon, and it must actually have induced the other party to
make the agreement.
It must be a representation of fact, not law. A mere boast is not regarded as a statement of
fact (otherwise advertisers might incur substantial liabilities). A distinction is also made
between a statement of fact and a mere expression of opinion, although this can prove
difficult. Statements about a car such as ‘beautiful condition’ and ‘superb condition’ have
been held in criminal cases to be statements of fact, not mere expressions of opinion.
The statements must be one party to the contract to the other. A statement by the
manufacturer, which induces a customer to buy from a retail shop, will not give the
customer any remedy for misrepresentation against either retailer or manufacturer.
The false statement must actually have deceived the other party and induced him to make
the contract. Obviously it must be false, but even a misleading hald-truth can be false.

In London Assurance v. Mansel (1879), a person seeking life assurance was asked on the
proposal form what other proposals for cover he had made. He answered, truthfully, that
he had made two proposals the previous year, both accepted. He did not mention,
however, that he had also had several proposals rejected. This half-truth was held to be a
misrepresentation. (See also non-disclosure, page 138).

52
Many misrepresentations also amount to promises, which are actually incorporated into
the contract. In this event, the party deceived will normally sue for breach of contract
rather than for misrepresentation because once breach of contract is proved, damages will
automatically be awarded. Where mere misrepresentation is proved, the person liable
may still have a defence to an action for damages if he can prove that he reasonably
believed himself to be telling the truth. The distinction between mere representations and
contractual promises can be difficult, but in contracts of sale the court will normally hold
that statements by a seller who is a dealer are contractual promises, whereas statements
by a seller who is not a dealer are mere representations.

In Oscar Chess Ltd v. Williams (1957), the defendant was a private car owner, trading in
his vehicle in part-exchange for another. He falsely stated that it was a 1948 model,
whereas in fact it was a 1939 car. This statement was quite innocent, because the
registration book had been falsified by a previous owner. It was held that his statement
was a mere presentation, so that his innocence was a defence.

On the other hand, in Dick Bently Productions Ltd v. Harold Smith (Motors) Ltd (1965),
a dealer sold a car which appeared from the instruments to have traveled only 20 000
miles. In fact it had done about 100 000. This was held to be breach of contract, not a
mere misrepresentation, so that the buyer automatically was entitled to damages. A
dealer, who knows more about the goods than his customers do, is readily assumed to
promise that his statements are true.

Remedies for misrepresentation

1. Damages. Under the Misrepresentation Act 1967, section 2(1), a party to the
contract can recover damages for loss arising from a misrepresentation; but the other
party has a defence if he can prove that, up to the time of the contract, he believed that his
statements were true, and had reasonable cause so to believe. This can be difficult to
prove, and it should be noted that the onus of proving it is on the defendant.

In Howard Marine Ltd v. Ogden Ltd (1978), the owners made false statements
about the capacity of two barges to a company negotiating to hire them. The owners
themselves were mistaken, basing their claims on incorrect entries in the official Lloyd’s
Register. Nevertheless the owners were liable to the company, which hired the barges.
Damages were awarded under section 2(1) because the owners should have known the
correct capacity, and therefore could not prove that they had reasonable cause to believe
their misrepresentations.

In Corner v. Mundy (1988), the vendor of a house told a would-be purchaser that
the central heating was in good order. At the time, this was true. However, before the
contract was eventually made, the pipes froze and burst, and the purchaser was not told
this. The vendor was liable for damages under section 2(1), because he could not prove
that he had reasonable cause to believe up to the time the contract was made that his
statement was true.

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Under section 2(2), damages may also be awarded as an alternative to rescission at the
court’s discretion and, in this event, even the defendant’s innocence may be no defence.
If the misrepresentation was made fraudulently, the party deceived can, alternatively, sue
for damages for the tort of deceit (Unit 10), but since the onus of proving fraud is on the
plaintiff, this will rarely be done.
2. Rescission. Any misrepresentation, even innocent, will give the other party a
right to rescind the contract, that is, to end it if he so wishes. Each party must be restored
to his original position; for example, the property must be returned to the seller and the
price to the buyer. The contract is said to be voidable (Unit 11).
Since rescission is an equitable right, it must be exercised reasonably promptly. It
is undesirable for a contract to remain voidable for too long, because this lads to
uncertainty as to the ownership of the property. If he delays unduly, therefore, the
innocent party will lose his right to rescind, and be left to sue for damages. What is a
reasonable time is a question of fact, and may in some cases be only a matter of days or
hours.

In Leaf v. International Galleries (1950), which was mentioned earlier, the picture was
sold in 1944. The plaintiff only discovered in 1949 that it was not by Constable.
Although the contract was not void for mistake, the plaintiff claimed the right to rescind
for innocent misrepresentation. It was held that, after a lapse of five years, any right to
rescind had been lost. (The plaintiff could have claimed damages for breach of contract,
but did not in fact do so.)

Time may not run against the plaintiff, however, until he could with reasonable diligence
have discovered the error.
Normally, rescission will only be effective from the moment when it is communicated to
the party at fault. This would cause injustice; however, where the misrepresentation was
fraudulent and the rogue has disappeared. In this event, therefore, the rule is relaxed.
In Car and Universal Finance Co. Ltd v. Caldwell (1965), Caldwell was persuaded by a
rogue to part with his car in return for a cheque, which was dishonoured. On discovering
this, Caldwell immediately told the police, but could do no more to rescind the contract
because the rogue could not be found. It was held that, in the circumstances, Caldwell
had done everything possible to make public his intention to rescind, and the rescission
was, therefore, effective.

Finally, the right to rescind will be lost if the innocent party ‘affirms’ the contract, that is,
elects to go on with it knowing of the misrepresentation. He cannot blow hot and cold,
and once he had decided to go on, he cannot change his mind.
Section 3 of the Misrepresentation Act makes it very difficult for a party to exclude his
liability for misrepresentation (Unit 14). A term in the contract which would exclude or
restrict any liability or remedy for misrepresentation will be of no effect unless the
defendant can show that the clause is ‘reasonable’ within the meaning of the Unfair
Contract Terms Act 1977.

C Duty to disclose

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There is, in general, no duty to disclose facts. Silence cannot normally constitute
misrepresentation even when the silent party knows that the other is deceiving himself
and does nothing about it. Each party must find out the truth as best he can, and in
contracts of sale this rule is known as caveat emptor – let the buyer beware.
There is, however, a duty correct statements, which, although originally true, have
subsequently become false before the contract was made. The facts have changed, and it
would be unfair to let the original statement stand.
In With v. O’Flanagan (1936), at the start of negotiations for the sale of a doctors’s
practice, the seller stated, truthfully, that the annual income was ₤2000. The seller then
fell ill, and by the time that the sale took place some months later, the profits had fallen
drastically. It was held that the early statement should have been corrected, and the fall
disclosed.

Silence is also not enough in contracts of the utmost good faith (uberrimae fidei). These
are, for the most part, contracts where one party alone has full knowledge of the material
facts and therefore, the law does impose on him a duty to disclose. The main examples
are:

1. Contracts of insurance. There is a duty on the insured person to disclose to the

insurance firm any circumstances, which might influence it in fixing the premium or
deciding whether to insure the risk. Failure to do this will render the contract voidable at
the option of the insurance firm.
2. In contracts for the sale of land, the vendor must disclose all defects in title, but
not in the property itself.
3. Contracts to subscribe for share in a company. A prospectus issued by a company,
inviting the public to make an offer to buy shares in the company, must disclose various
matters set out in detail under the Companies Act. If it does not, the contract may be
rescinded.
4. In contracts of family arrangement, each member of the family must disclose all
material facts within his knowledge.

D. Duress and undue influence

At common law, duress arose when a party was induced to enter a contract by force. His
consent was not freely given. Today, economic coercion can also be duress

In Universe Tankships Inc. v. ITWF (1982), a trade dispute arose involving a ship, The
Universe Sentinel. The union stopped it from leaving port, and eventually only allowed it
to do so on condition that the owners paid money into a welfare fund. This agreement
was held voidable for duress, and the owners recovered the money.

However, the economic pressure must be such that the courts regard it as improper.
There can be a narrow line between economic duress and legitimate commercial pressure.

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In D & C Builders Ltd v. Rees (1966) (Unit 11), it was suggested, obiter, that even if
there had been a valid contract, it would have been voidable for duress. Mr and Mrs Rees
almost held the builders to ransom; the builders needed the money quickly, and the Rees
family (who owed ₤482) said in effect, ‘either agree to accept to accept only ₤300 or we
delay still further’.

In Atlas Express Ltd v. Kafco Ltd (1989), K, a small manufacturer, received a good order
from are tail chain, Woolworth’s. K contracted with Atlas, a road carrier, to deliver the
goods at an agreed fee. After the firs load, Atlas realized that it had miscalculated the
delivery costs, and therefore told K that it would not make any further deliveries unless K
almost doubled the agreed fee. K, desperate to fulfil its Woolworth’s order and unable to
find another carrier in time, had to agree – but later refused to pay the extra. It was held
that k was not liable for the extra charge, which had been extorted from it by duress.
(Moreover, there was no consideration for its promise to increase the fee; contrast
Williams v. Roffey, Unit 11).

On the other hand’in Pao On v. Lau Yiu Long (1979) (Unit 11), the defendant was the
major shareholder in Fu Chip Ltd. He was persuaded to give a guarantee to Pao. On by
the latter’s threat to break his contract with Fu Chip Ltd. This could have harmed the
defendant. Nevertheless the guarantee was held valid. The full facts were complex, and
Pao On’s threat was ultimately regarded as legitimate commercial pressure.

Equity has long recognized less direct pressures, particularly where confidential or
professional relationships are abused. Generally, improper pressure has to be proved.

In Williams v. Bayley (1866), a father was induced to give security for his son’s debts to
the bank by the bank’s threats to prosecute the son. On proof of this, the father was held
not to be bound.

In some instances equity goes further and presumes undue influence unless the contrary
is proved. This will occur where the relationship between the parties was doctor and
patient, solicitor and client, religious adviser and disciple, parent and child (but not
husband and wife). The presumption of undue influence can only be rebutted in these
cases by proof that the weaker party had had independent advice or used his own free
will. There are also situations where, although the relationship does not necessarily
suggest undue influence, the circumstances do. It depends upon the facts.

In Lloyd’s Bank Ltd v. Bundy (1975), a son was in financial difficulty. The bank
manager visited the father and persuaded him to give the bank a guarantee of the son’s
debts and a mortgage of the father’s house as security. The father was old and was given
no warning or opportunity to seek independent advice (which might have been against
the contracts). Undue influence by the bank was presumed from the circumstances, and
the contracts were set aside when the bank could not rebut the presumption.

In National Westminster bank p l c v. Morgan (1985), a couple in financial difficulty

mortgaged their home to the bank. The house was jointly owned, and the bank manager

56
had to visit the wife to persuade her to sign. She did not realize that the mortgage could
also cover her husband’s business debts. Nevertheless it was binding on her. She herself
wanted the loan and, in spite of the misunderstanding, she knew basically what she was
doing. The court did not presume undue influence just because the lender was a bank.

In O’Sullivan v. MAM Ltd (1985), a young singer and composer (‘Gilbert O’Sullivan’)
made several contracts with a management company at a time when he had no business
experience. Many of the contracts were unduly harsh, and they were later set aside as
being obtained by undue influence.

Where undue influence is deemed to exist, either by proof or presumption, the contract is
voidable, but the right to rescind must be exercised within a reasonable time of the
influence being withdrawn.

In Allcard v. Skinner (1887), Miss Allcard joined a religious order and, in accordance
with its rule of poverty, gave about ₤7000 to the head of the order during the eight years
that she was a member. After leaving the order she waited six years and then sued to
recover the money. It was held that, while the money had been obtained from her by
undue religious influence, her action failed because she had waited too long before suing.

ILLEGALITY OF CONTRACT AND CONTRACTS IN RESTRAINT OF TRADE

Illegality and public policy

‘The law does not allow us to contract about this’

The illegality doctrine relates to contracts which are illegal or contrary to public policy
(hereafter ‘illegal contracts’). Contracts may be tainted by illegality because making such
contracts is itself prohibited or, more usually, because its means (the method of
performance) or ends (purpose) are illegal. Contracts which become illegal by changes in
the law subsequent to formation are dealt with by the doctrine of frustration (see chapter
7). On one view, the illegality doctrine represents the most open and direct interference
with contract parties’ freedom to determine the substance of their contracts. An
alternative view is that it designates the class of ‘unworthy’ contracts to which the law
will not lend its support or force (see 12.9). As Lord Mansfield explains in Holman v.
Johnson (1775), courts will not assist one whose cause of action is founded upon an
immoral or an illegal act (‘ex dolo malo non oritur actio’). Thus, with exceptions, courts
will generally refuse to enforce an illegal contract even though the contract meets all the
requirements of formation (Part I) and is otherwise untainted by any vitiating factor (Part
II). Furthermore, with exceptions, courts will generally refuse to award restitution of any
money or property transferred under it. Thus, no remedy was given in:
• Parkinson v. College of Ambulance Ltd (1925) where P ‘donated’ £3,000 to C on the
promise of C’s secretary to procure a knighthood which failed to eventuate, and
• Pearce v. Brooks (1866) where P hired out an ornamental carriage to B, a prostitute,
for use in her trade but which B returned in a damaged condition and refused to pay for.

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The questions to be considered are:
(1) What are illegal contracts?
(2) When are contracts exceptionally enforceable despite their illegality?
(3) When will restitution exceptionally be allowed of the benefits transferred under an
illegal contract?

The case law is vast and the answers are far from simple. The distinction is sometimes
made between ‘illegal’ and ‘void’ contracts. However, the distinction is apt to confuse
since their consequences are not clearly distinguishable and courts sometimes use the
terms interchangeably. Thus, ‘illegality’ is used to refer to the whole range of cases where
contract law denies a contract its ordinary legal consequences because of some
prohibition, breach of duty, or contravention of public policy. We will see that the
consequences of illegality vary according to factors such as:

• the nature and seriousness of the illegality,

• how far the contract was carried through,
• the parties’ states of mind, and
• the intricacies of certain rules of property and trust law.

What are illegal contracts?

Types of illegality.

Statutory illegality

A contracts may be illegal because its formation, purpose, or performance contravenes

some statute or the common law. It is difficult to generalize about the wide range of
statutory prohibitions although they are often designed to secure fair trading conditions,
safeguard property and personal safety, and prevent competitive markets from being
undermined. Some examples are the prohibition on the marketing or sale of certain
knives (Restriction of Offensive Weapons Act 1959; Offensive Weapons Act 1996;
Knives Act 1997) and the sale of body parts (Human Organ Transplants Act 1989).
Many of the common law illegalities have become the subject of statutory control or
prohibitions. The relevant statute may:

• expressly prohibit the making of the contract (courts are reluctant to imply a
prohibition) barring enforcement by or restitution to either
• only bar enforcement by one of the parties (e.g. Consumer Credit Act 1974, s 40,
Sex Discrimination Act 1975, s 77, Race Relations Act 1976, s 72, Financial Services
and Markets Act 2000, ss 26, 27);
• permit enforcement by either party because the statutory intent is only to impose a
penalty and not to deny contractual enforcement (St John Shipping Corporation v. Joseph
Rank Ltd (1957)); or
• render the contract void and unenforceable but not bar restitution.
Where statutes are silent (as they often are) on the effect of the illegality on the contract

58
while setting out the administrative and penal sanctions, courts must decide the
consequences on the same general principles as are applicable to common law illegality.
One area of statutory invalidity is gaming, wagering, and related contracts.
The law bars enforcement of such contracts and denies recovery of property transferred
under them (Gam- ing Act 1845, s 18). The aim here is not to discourage betting; an
enormous betting industry thrives without the ability to sue for unpaid bets. The law here
expresses the attitude that courts have more important matters to attend to, than to compel
parties to perform betting contracts.

Common law illegality

With statutory illegality, courts discern and apply the conception of public policy
contained therein. However, where courts refuse to recognize a contract as contravening
public policy at common law, they are vulnerable to the usual charges of:
• usurping the function of Parliament;
• giving effect to their subjective opinions on matters of morality and the public good;
and,
• undermining the freedom, sanctity, and stability of contracts.
Burroughs J saw public policy as ‘a very unruly horse, and when once you get astride it
you never know where it will carry you’ (Richardson v. Mellish (1824) at 252). Lord
Denning’s predictable response is that ‘with a good man in the saddle, the unruly horse
can be kept in control. It can jump over obstacles. It can leap the fences put up by fictions
and come down on the side of justice’ (Enderby Town Football Club Ltd v. The Football
Association Ltd (1970) at 1026).
The categories of public policy are often said to be closed. Characteristically, the picture
presented is of general respect for the sanctity of contract, subject to a series of
exceptions established by precedents. While it is still not open to courts to reject a
contract unless it falls within one of the well-established ‘heads’ of illegality, courts have
been willing to extend existing categories to reflect changing social and moral values. As
Dankwerts LJ said in Nagle v. Feilden (1966 at 650): ‘[T]he law relating to public policy
cannot remain immutable. It must change with the passage of time. The wind of change
blows upon it.’ Chitty concludes (at para 16-004) that ‘the difference between extending
an existing principle as opposed to creating a new one will often be wafer thin’. In a
system of law which evolves (albeit gradually), like the common law, the content of the
public policy (which reinforces the law) cannot remain immutable, but must change with
the evolution of public opinion, morality, and legislative policies.
Writers disagree on how to categorize the ‘heads’ of public policy, but the differences are
largely in exposition and not substance. A detailed account of each category is not
proposed here (see further Treitel, 430–80; Beatson, 348–95); the law of restraint of
Pause for reflection
The law fails if it does not reflect a society’s changing values changes over time. For
example, the older cases reflect a preoccupation with gambling, marriage brokerage, and
unmarried cohabitation. Today we may be more concerned with the commercialization of
babies, child labour, body parts, reproductive services, sex, weapons, and addictive drugs.
Other contemporary examples of objectionable or ‘unworthy’ contracts are mentioned
above (see 12.9). We will see that unmarried cohabitation presented no obstacle in

59
Tinsley v. Milligan (1993) involving lesbian cohabitees and that the scope of
impermissible restraint of trade has been modified in response to changing economic
conditions, trade, for example, fills whole books. What follows is a brief overview of the
kinds of contracts held at common law to contravene public policy.

Contracts to commit a crime

This is the most obvious category of illegal contracts. Examples include contracts which:
• breach building license regulations (Bostel Bros Ltd v. Hurlock (1949));
• breach exchange controls (Bigos v. Bousted (1951));
• defraud the revenue (Miller v. Karlinski (1945));
• defraud the rating authority (Alexander v. Rayson (1936)).
This public policy also taints any contract which:
• enriches someone for acting unlawfully (in Beresford v. Royal Insurance Co Ltd (1938),
a person insured his own life for £50,000 and then committed suicide (then a criminal
offence); his estate could not claim although the policy expressly covered suicide);
• although lawful in itself, is made to further a criminal or civil wrong (in Langton v.
Hughes (1813) juices and spices were sold to be used illegally for flavouring beer).
An offence committed in the course of an otherwise legal contract will not necessarily
taint the contract.

Contracts made for the deliberate commission of a civil wrong

Examples include contracts to:

• beat up another person (Allen v. Rescous (1676));
• publish a libel (Clay v. Yates (1856));
• perpetrate a fraud (Willis v. Baldwin (1780));
• indemnify a person against loss resulting from his own deliberate criminal or tortious
act (Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd (1957)).

Contracts interfering with the administration of justice

Contracts which amount to a conspiracy to pervert the course of justice include

agreements:
• to stifle a prosecution (R v. Andreas Panayiotou (1973), for rape);
• to refrain from disclosing misconduct which ought to be disclosed to those with a
proper interest to receive it (Initial Services Ltd v. Putterill (1968), unregistered price-
fixing agreement and see AG v. Guardian Newspapers Ltd (No. 2) [1990] 1AC 109;
• to give false evidence in criminal proceedings (R v. Andrews (1973));
• to obstruct bankruptcy proceedings (Elliott v. Richardson (1870));
• to ‘maintain’ or support the litigation of a case in which the supporter has no direct and
legitimate interest in it and no just cause or excuse (Hill v. Archbold (1968)); although
‘just cause and excuse’ is now widely interpreted (Giles v. Thompson (1993) at 328–33)
to permit litigation supported by unions or insurance companies;
• of ‘champerty’ (i.e. financing another’s litigation with a view to taking a share in its
proceeds) which amounts to an aggravated form of maintenance (Giles v.Thompson); but

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section 58 of the Courts and Legal Services Act 1990 and section 27 of the Access to
Justice Act 1999 permit certain ‘no win, no fees’ and other conditional fee agreements
between lawyers and their clients in the interest of increasing access to justice.

Contracts to oust the jurisdiction of the courts

It is contrary to public policy to deny the important constitutional principle of access to

the courts for redress against legal injuries. However, the law must balance this with the
competing interest of facilitating speedy, convenient, and inexpensive dispute resolution.
Thus, parties can agree not to resort to the courts until they have gone to arbitration (Scott
v. Avery (1855)). Under the Arbitration Act 1996 (s 45, 87), although parties can still
appeal to the courts on questions of law, the scope of judicial control is much reduced.
For example, an appeal requires both parties’ agreement or leave of the court, and parties
can exclude the court’s jurisdiction in ‘non-domestic arbitration agreements’ and in
‘domestic arbitration agreements’ if entered into during the arbitration proceedings.
Separation agreements in which a wife agrees not to apply for maintenance in return for
the husband’s payments are unenforceable. The court’s power to award maintenance
cannot be ousted (Hyman v. Hyman (1929), although wives can enforce the promised
payments if the agreement is in writing (Matrimonial Causes Act 1973, s 34).
Contract clauses which make claims more difficult to prove are controlled by the Unfair
Contract Terms Act (s 13(1)). Standard terms in consumer contracts which ‘hinder a
consumer’s right to take legal action’ are presumptively unfair and unenforceable under
the Unfair Terms in Consumer Contracts Regulations 1999 (Schedule 2 para 1(q)).

Contracts prejudicial to the state

A wide range of cases are included. Examples are:

• contracts to commit illegal acts in friendly foreign countries (e.g. to facilitate the
forceful overthrow of the government of a friendly country: De Wutz v. Hendricks
(1824));
• trading with the enemy in wartime, thus aiding the enemy’s economy (Potts v. Bell
(1800), now Trading with the Enemy Act 1939);
• contracts which corrupt public life (e.g. buying public offices or honours, Parkinson v.
College of Ambulance Ltd (1925), now prohibited by the Honours (Prevention of
Abuses) Act 1925);
• contracts whereby a public official is paid a commission to use his position to procure
benefits for another (Montefiore v. Menday Motor Components Co (1918); Lemenda
Trading Co Ltd v. African Middle East Petroleum Co Ltd (1988)) or to vote in a certain
way (Osborne v. ASRS (1910)).

Contracts which further sexually immoral purposes

Although it is sometimes said that contracts against good morals are void, traditionally
this means contracts perceived to promote extra-marital sexual intercourse. In the past,
courts have refused to enforce:
• a promise to pay a woman to be a mistress (Franco v. Bolton (1797));

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• a promise to pay rent on premises known to accommodate the promisor’s mistress
(Upfill v. Wright (1911)); and
• contracts between unmarried cohabiting couples.
The same results are unlikely to be reached today. Parliament and courts have conferred
some rights on unmarried cohabitees analogous to that of married couples and judicial
attitude reflects the growing incidence of extra-marital relationships and changing social
mores. In Tinsley v. Milligan (1994), illegality was not advanced on the basis that the
parties to the agreement were lesbian lovers. And, in Armhouse Lee Ltd v. Chappell,
(1996) the Court of Appeal denied that an agreement to advertise telephone sex lines was
unenforceable for immorality; indeed, the court criticized C’s ‘brazen cynicism’ in
attempting to avoid payment for A’s work which generated enormous profits for C by
pleading his own immorality.
However, agreements involving prostitution are likely to remain unenforceable (e.g. rent
for premises knowingly let for prostitution in Girardy v. Richardson (1793) or hire for an
ornamental carriage knowingly let to further a prostitute’s trade in Pearce v. Brooks
(1866)). Where a contract of employment requires an employee to procure prostitutes for
the employer’s customers, this would be unenforceable for illegality (Coral Leisure
Group Ltd v. Barnett (1981)).

Contracts prejudicial to family life

This covers two types of cases. First, it invalidates contracts prejudicial to the institution
of marriage, for example:
• contracts not to marry (Lowe v. Peers (1768)), or to pay a sum on marriage (Baker v.
White (1690));
• paying someone to procure marriage (Hermann v. Charlesworth (1905)), although the
need to condemn such contracts in modern times is questionable when dating agencies
are common place;
• separation agreements entered while spouses are living together, since they may induce
parties not to perform their matrimonial duties (Cartwright v. Cartwright (1863)), but
such agreements are valid if made in anticipation of immediate separation.
Secondly, it invalidates attempts by parents to contract away their parental rights and
duties in relation to their child, subject to the Adoption Act 1976. A surrogacy agreement,
by which a woman agrees to carry and bear a child for another who will assume the
parental role, is unenforceable (Human Fertilisation and Embryology Act 1990, See Eves
v. Eves (1975) and Part IV of the Family Law Act 1996. Parents cannot by agreement
oust the court’s inherent jurisdiction to make orders regarding the upbringing and
maintenance of children.

Contracts unduly restrictive of personal liberty

The most obvious example is the prohibition against self-enslavement, but even
employment contracts must not contain ‘servile elements’. A loan agreement was struck
down in Horwood v. Millar’s Timber & Trading Co Ltd (1917) where Lord Cozens-
Hardy MR described it as: ‘the worst example to allow a money-lender to get his clutches
round a clerk and to put him in a position in which he is not allowed to move to another

62
district and become a clerk elsewhere, not allowed to leave his house, however unhealthy
it may be, and not allowed to deal with any part of his unencumbered [sic] furniture or
other property without the leave of the money-lender.’ His lordship observed that the
agreement could prevent the debtor from raising money for the maintenance, education or
medical treatment of his family. He commented that ‘Possibly slavery is too strong a
word, but it certainly seems . . . to savour of serfdom’. Warrington LJ added (at 314) that:
‘The man has put himself . . . almost body and soul in the power of this money-lender.
Even in the most trivial incidents of life he cannot do as he pleases.’

Contracts in restraint of trade

In practice, this is the most important head of illegality in modern time. A contract or
covenant in restraint of trade is an undertaking whereby one party agrees:
• to restrict his freedom to trade or conduct his profession or business (what)
• in a particular locality (where)
• for a specified period of time (when).
Such restraints are only valid if they are reasonable. The common law is inclined against
agreements that prohibit or restrain a person from earning a living. Here, the law appears
to impose a substantive limit on contractual freedom in order to preserve it. In Nordenfelt
v. Maxim Nordenfelt (1894) it was said (at 565):
The public have an interest in every person’s carrying on his trade freely: so has the
individual. All interference with individual liberty of action in trading, and all restraints
of trade of themselves, if there is nothing more, are contrary to public policy, and
therefore void. That is the general rule. But there are exceptions: . . . [it] may be justified
by the special circumstances of a particular case. It is a sufficient justification . . . if the
restriction is reasonable . . . in reference to the interests of the parties concerned and
reasonable in reference to the interests of public, so framed and so guarded as to afford
adequate protection to the party in whose favour it is imposed, while at the same time it is
in no way injurious to the public.

The doctrine applies to three principal types of contracts:

(i) employment: where an employee covenants not to compete with his employer
during or after his employment;
(ii) sales of businesses: where the seller of a business and its goodwill covenants not
to carry on competing businesses; and
(iii) exclusive dealing agreements: as where a garage agrees to buy all its petrol
from one supplier for a lengthy period (Esso Petroleum Co Ltd v. Harper’s Garage
(Stourport) Ltd (1967) hereafter ‘Esso v. Harper’).
In a sense, all contracts involve some restrictions on future freedom of action and it may
be a moot point in any particular case whether a contract does involves a restraint of
trade. Atiyah observes that:

‘it would certainly be wrong to conclude that all contracts containing restrictions are now
open to challenge as contracts in restraint of trade, and must be shown to be ‘reasonable’
if they are to be valid. Many customary and accepted forms of business agreement are

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probably still unchallengeable (at any rate under the common law rules), even though
they may strictly involve some degree of business restraint. In particular, it has been held
that a person who buys land (or a building) may validly enter into some restrictions on
how the land is to be used without falling foul of the restraint of trade doctrine’.
The general test of enforceability is whether the restrictions on the relevant activity (in
terms of scope, time and locality), are no more than what is reasonably necessary to
protect the legitimate interests of the party imposing the restraint (Esso v. Harper). The
onus of proving reasonableness is on the party imposing the restraint. This test must
balance:
• the pro-enforcement considerations, such as the legitimate interests of purchasers
of businesses to prevent competition by vendors, or of an employer by a former
employee,
• against the anti-enforcement considerations, such as the public interest in free
competition, an employee’s interest in retaining reasonable freedom to pursue a vocation
and the concern to protect employees from unfairness resulting from their weaker
bargaining power vis-à-vis their employers.

(i) Employment contracts

Employers are generally permitted more protection against the subsequent activities of
senior employees (Nordenfelt Ltd v. Maxim Nordenfelt Guns and Ammunition Co Ltd
(1894)) than of junior or temporary employees (M&S Drapers Ltd v. Reynolds (1957)).
The employer must satisfy two aspects of reasonableness in the particular circumstances
of the case. First, the employer must show his legitimate interest in imposing the
restraint; that is, that he has ‘some proprietary right, whether in the nature of trade
connection or in the nature of trade secrets, for the protection of which such a restraint is .
. . reasonably necessary’ (Herbert Morris Ltd v. Saxelby (1916) at 710). Thus, it was held
to be reasonable to restrain employees:
• who have acquired influence over the employers’ customers and may entice them away
(e.g. Fitch v. Dewes (1921), a solicitor’s managing clerk; Marion White v. Francis (1972),
a hairdresser); or
• who have acquired ‘trade secrets’ (which are protected even without an express
restraint) or confidential information belonging to the employers (Forster and Sons Ltd v.
Suggett (1918), involving glass-making techniques).
But employers cannot protect themselves against their former employees’ personal skill
and knowledge even if acquired in the course of the employers’ business. This belongs to
the employees who are free to exploit them in the market place (Faccenda Chicken Ltd v.
Fowler (1986)). Second, the employer must show that the scope of the restraint is
reasonable in:
• the scope of the activity banned: it must be confined to the business of the employment;
thus, a covenant not to carry on ‘any business whatsoever’ is void (Baker v. Hedgecock
(1888));
• the extent of the locality: the restraint should cover no wider an area than is necessary to
protect the employer’s particular interest (this may not justify a restraint covering a 25-
mile radius of London (Mason v. Provident Clothing and Supply Co Ltd (1913),
involving a canvasser for a clothing company), but may, in other circumstances justify

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one covering the whole of the United Kingdom (Forster & Sons Ltd v. Suggett, taking
into account the secrecy of the glass production methods and the area in which the
employer traded)); and
• the duration: even restraints of unlimited duration may be reasonable if it does not
exceed what is reasonably required for the protection of the convenantee and is not
against the public interest (Fitch v. Dewes (1921)).
In addition to reasonableness between the parties, an enforceable restraint must not
contravene the public interest, particularly that of depriving the community of the
employee’s skills and services (Wyatt v. Kreglinger and Fernau (1933), Bull v. Pitney-
Bowes Ltd (1967)). In practice, reasonableness between the parties and compliance with
the public interest tend to go hand in hand.

(ii) Sales of businesses

The same tests of reasonableness and consistency with the public interest are applied to
restraints in contracts for the sale of businesses, although wider latitude is permitted here
since inequality of bargaining positions is less obvious. A purchaser of a business and its
goodwill are entitled to protect the value of the purchase by an appropriate restraint
clause; sellers would command lower prices if such restraints were unenforceable. The
wider the restraint, the larger the legitimate interest required to justify it. In one extreme
case, a buyer of an armament business for a vast sum was permitted to restrain the seller
from competing with this business anywhere in the world for 25 years, in view of the
world-wide operation of the business sold and the fact that its main customers were
governments (Nordenfelt Ltd v. Maxim Nordenfelt Guns and Ammunition Co Ltd
(1894)).

(iii) Exclusive dealing agreements

In Esso v. Harper the owner of two garages entered into a ‘solus’ agreements to buy all its
petrol from Esso, to keep the garages open at all reasonable hours, and not to sell them
without securing the purchaser’s agreement to enter similar arrangements with Esso. In
exchange, Esso gave a discount on the petrol and provided a loan. The House of Lords
held that the contract lasting 4½ years was onerous but reasonably necessary to protect
Esso’s interests, but not the contract lasting 21 years, which was invalid as an
unreasonable restraint of trade. However, the Court of Appeal upheld a 21-year ‘solus’
agreement in Alec Lobb Garages v. Total Oil (GB) Ltd (1985) where the restrained party
had received a substantial sum from the restraining party. The court applied the dicta in
Nordenfelt that ‘the quantum of consideration may enter into the question of the
reasonableness of the contract’.
Schroeder Music Publishing Co Ltd v. Macaulay (1974) shows how substantive
imbalance in the contract can invalidate a restraint of trade clause. There a young
unknown song-writer entered an ‘exclusive services’ agreement by which he agreed to
assign the full copyright to all his present and future works to the publisher for 5 years,
renewable at the latter’s option for another 5 years, in return for royalties. The publisher
had no obligation to publish the works, could terminate the contract on a month’s notice,
and was free to assign its rights. The song-writer was a great success and obtained a

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declaration that the agreement was void as an unreasonable restraint of trade. As
Trebilcock observes, the contract was produced within a competitive market so there
could be no market failure justification for upsetting the terms of the contract, nor any
alternative set of terms to be discovered by the technique of market transference.
Nevertheless, the House of Lords was clearly influenced by the one-sidedness of the
agreement (the publisher giving minimal commitment in exchange for the song-writer’s
total commitment) in setting aside the restraint on the writer. As Lord Reid said:
‘Normally the doctrine of restraint of trade has no application to such restrictions. . . . But
if contractual restrictions appear to be unnecessary or to be reasonably capable of
enforcement in an oppressive manner, then they must be justified before they can be
enforced.’

Restrictive trading and analogous agreements

Cartels are agreements to regulate the production, marketing, sale price, and standards of
commodities produced. The concern with cartels is not so much unreasonableness
between the parties as their anti-competitive effect in reducing overall competition in a
particular commodity. The common law’s role in controlling such agreements has been
inhibited for a number of reasons. Courts are less adept at considering the broad public
interest and economic issues raised by these anti-competitive arrangements than in
judging reasonableness between particular specific parties. The latter, after all, are
represented in court while the public interest is assumed to be within the knowledge of
judges and not specifically represented. Moreover, courts can only adjudicate on such
agreements in the unlikely event that an affected party challenges its validity before the
courts (Courage Ltd v. Crehan (2001)). Consequently, the policing of anticompetitive
agreements is largely left to detailed legislative regulation. This is usually studied as a
distinct subject under the heading of ‘competition law’. Legislation subjects such
agreements to a public interest test applied by specialist administrative bodies.

Illegality and unfairness

The illegality doctrine invalidates contracts which are undesirable in the public interest or
otherwise unworthy of the courts’ assistance because they do not help individuals to
achieve well-being and so realize fulfilling lives. While this does not directly address the
question of contractual imbalance, it is consistent with the idea that contracts which are
grossly unbalanced or which seriously harm the interests of one party may be undesirable
in the public interest or unworthy of the court’s assistance. Although the courts present an
all but static picture of the scope of ‘public policy’, we have seen that the existing
categories of illegality can be extended and the doctrine applied instrumentally to deny
the enforcement of substantively unfair terms. In Schroeder v. Macaulay (1974) Lord
Diplock said candidly that:

‘[W]hat your Lordships have in fact been doing has been to assess the relative bargaining
power of [the parties] . . . to decide whether the publisher had used his superior
bargaining power to extract from the song writer promises that were unfairly onerous to
him. . . . Under the influence of Bentham and of laissez-faire the courts in the 19th

66
century abandoned the practice of applying the public policy against unconscionable
bargains to contracts generally, as they had formerly done . . . but the policy survived in
its application to penalty clauses and to relief against forfeiture and also to . . . restraint[s]
of trade. If one looks at the reasoning of 19th century judges in cases about contracts in
restraint of trade one finds lip service paid to the current economic theories, but if one
looks at what they said in the light of what they did, one finds that they struck down a
bargain if they thought it was unconscionable as between the parties to it and upheld it if
they thought that it was not. So I would hold that the question to be answered . . . is: was
the bargain fair?’
We have seen that substantively unfair contracts can also be invalidated by other
doctrines such as undue influence (see 9.2); incapacity; unconscionable bargains and the
special rules applicable to exemption penalty, and forfeiture clauses. As Treitel observes,
these and others can be seen as ‘disguised extensions or applications of the doctrine of
public policy’. In this context the doctrine on non-commercial guarantees can be
understood as a recently created head of public policy. Our discussions of these doctrines
and rules reveal the extent of their concern with procedural and substantive unfairness.
Collins locates the real objection to the contract in Schroeder v. Macaulay in terms of
‘power, fairness, and co-operation’. He explains:

‘Because the composer’s career was completely dependent upon the publisher’s
discretion for a period up to ten years, his degree of subordination to another represented
an unjustifiable form of domination. The absence of an undertaking on the part of the
publisher to publish any of his songs rendered the exchange too one-side to be fair. In
addition, because the composer could not terminate the agreement during its fixed period,
he had no effective sanctions against the publisher to ensure that at least it made
reasonable efforts to bring the venture to fruition by publishing and promoting his work. .
. [T]he concern about unjustifiable domination, the equivalence of the exchange, and the
need to ensure cooperation . . .motivate the decision in Schroeder Music Publishing Co
Ltd v Macaulay.

The effects of illegality

The general rule and starting point is that courts will not help parties enforce illegal
contracts or obtain restitution of benefits conferred under them. However, this is subject
to complex and uncertain exceptions which, to some extent, reflect the conflicting
policies in this area. The policies against assisting parties to illegal contracts are that:

(i) courts should not help parties who deliberately enter illegal contracts;
(ii) justice would be tainted and the dignity of the court offended; and
(iii) people should be deterred from entering illegal contracts.

On the other hand, these policies are not offended and some judicial assistance is
justifiable, whether by way of enforcement or restitution, where:
(i) parties are ignorant of the illegality involved or have been wrongfully induced
to contract;
(ii) the relevant illegality does not involve gross moral turpitude, such as robbery or

67
terrorism, but merely the infringement of technical regulations;
(iii) a party has withdrawn from the illegality; or
(iv) a party would be unjustly enriched at the expense of the other.

These policies are reflected in the law, albeit imperfectly. The ‘public conscience’ test
used in evaluating the impact of illegality in tort claims permits an open balancing of
these policies. Such a test has been rejected in the contractual context by the House of
Lords in Tinsley v. Milligan. However, its substance is preserved in the Law
Commission’s proposal based on a structured discretion. As Chitty observes:
Much difficulty would be avoided, if whenever a plea of illegality or public policy were
raised as a defence to a contractual claim, the test were applied: does public policy
require that this claimant, in the circumstances which have occurred, should be refused
relief to which he would otherwise have been entitled with respect to all or part of his
claim? In addition, once the court finds that the contract is illegal and unenforceable, a
second question should be posed which would also lead to greater clarity: do the facts
justify the granting of some consequential relief. . .to either of the parties to the contract.

The enforceability of the contract

The law’s approach to the enforceability of illegal contracts can be divided into three
principal categories:
(i) contracts which are illegal per se (at formation);
(ii) contracts which are not illegal per se, but further an illegal purpose; and
(iii) contracts which are not illegal per se, but involve some illegality in their
performance.

Illegality per se

The law adopts the strictest attitude to contracts which are illegal per se. Contract which
are expressly or impliedly forbidden by statute or by public policy are void and
unenforceable even if both parties are ignorant of the facts constituting the illegality and
had no intention of breaking the law. Re Mahmoud and Ispahani (1921) provides an
example of statutory prohibition. When the parties bought and sold linseed oil without the
required licences the seller could not recover damages for the buyer’s non-acceptance
although the buyer had misrepresented that he had a licence. Scrutton LJ left open the
question of whether the seller would have a remedy for deceit.
In Quereshi v. Circle Properties and others (2004) Q was denied an order to freeze C’s
assets to enforce a commission agreement because, at the time the agreement was made,
was an undischarged bankrupt and could not engage in estate agency work. Section 23 of
the Estate Agents Act 1979 Act rendered any commission agreement with the claimant
invalid or unenforceable. An example of common law prohibition is a contract which
involves trading with alien enemies in wartime.
It may be very difficult to decide whether a statute or head of public policy renders the
contract unlawful per se and bars enforcement by either party, or merely bars
enforcement by a guilty party (i.e. one who knows of the illegality). The question is
whether, having regard to the mischief against which the illegality is directed and the

68
circumstances in which the contract was made and is to be performed, it would be
contrary to public policy to enforce it (Shaw v. Groom (1970)). In view of the potential
harshness of unenforceability, the modern tendency is to prefer the latter unless the
former is very clearly demanded by the statute or public policy. The harshness is clear
enough where both parties are ignorant of the illegality for it may afford one party with
an unmeritorious and technical defence to an action for breach. The potential unfairness
is all the more glaring where the contract breaker either knows of the illegality or
wrongly induces an innocent party into the illegal contract. In such cases, a court may
assist the innocent party by:

(i) Finding and enforcing a collateral contract not tainted by illegality: In Strongman
(1945) Ltd v. Sincock (1955), the defendant promised to but did not obtain the necessary
licenses to enable the plaintiff builders to lawfully modernize his house. The defendant
then refused to pay for some of the plaintiff’s work relying on the illegality of the
contract. The Court of Appeal held that while the contract is absolutely prohibited by
statute and unenforceable, the plaintiff could enforce a collateral warranty that the
defendant would obtain the necessary licenses.

(ii) Awarding damages for fraudulent misrepresentation: In Shelley v. Paddock (1980) P

fraudulently induced S to buy land in Spain that P did not own in a contract which
breached the Exchange Control regulation. P sought to retain S’s purchase money by
relying on the illegality. The Court of Appeal held that the illegality did not bar an action
in the tort of deceit; this allowed S to recover her money and an additional sum
for distress. P could not retain the profits of its own fraud.

Intention to achieve illegal purpose or perform illegally

A contract which is not illegal per se, but which is intended to further an improper
purpose or to be performed in an illegal way is generally unenforceable by the party
contracting with such an intention, or knowing of the other party’s intention to this effect.

REMEDIES FOR BREACH

Breach of contract can occur in several ways. For example, one party may expressly
repudiate his liabilities and refuse to perform his side of the bargain. This can happen
either at or before the time when performance was due. If a party renounces his
obligations in advance, this is known as an anticipatory breach. A person can impliedly
renounce his obligations by rendering himself incapable of performing them; for
example, if he had contracted to sell a specific painting, he would renounce the contract
by selling the painting elsewhere. Alternatively, one party may simply fail to perform the
contract. He may fail altogether to perform his bargain or he may merely fail to perform
one, or some, of his many obligations under the agreement. If the obligation broken was a
major part of the contract, there will be breach of condition', if only a minor part, there
will be breach of warranty.

69
Sometimes the courts have classified a breach according to whether or not it is
'fundamental', but this classification has been used mainly in relation to exemption
clauses.

Effects of breach

L Every breach of contract will give the injured party the right to recover damages (see
below).
2. If the breach is sufficiently serious, it also gives the injured party a right to avoid the
contract and bring it to an end. This right arises if the contract has been repudiated, or if
there is breach of condition. It will not arise for breach of warranty.
The consequences of breach can be so serious that the injured party has no choice. He
may have to treat the contract as ended if, for example, the property is destroyed. Subject
to this, however, he need not end the contract unless he wants to. He can either avoid the
agreement and no longer perform his side; or he can go on with it and either be content
with defective performance from the other (but recover damages) or, sometimes, continue
to press for performance. If he does wish to end the contract, he must do so reasonably
promptly and, as with rescission for misrepresentation (Unit 13), the right is lost if he
'affirms' the agreement.
If a term is so wide that it is not possible to classify it in advance as a condition or a mere
warranty, then the right to avoid the contract will depend upon the seriousness of the
breach; see Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd. Often,
however, commercial requirements demand that terms should be classified in advance, so
that the parties will be sure of what their rights are in the event of breach.
In Bunge Corporation v. Tradax Export SA (1981), the seller contracted to deliver goods
to the buyer's ship provided that the buyer gave at least 15 days' notice that the ship was
ready. This notice requirement was held to be a condition, which the buyer then broke by
giving shorter notice. The seller could, therefore, refuse delivery.
Terms implied by statute are almost invariably classified in advance. For example the
terms implied by sections 13 to 15 of the Sale of Goods Act are all conditions, and breach
entitles the buyer to withdraw from the contract. On the other hand, late payment does
not entitle the seller to avoid, unless the parties had specifically agreed otherwise. A time
set for delivery of the goods is almost invariably a condition, and lateness entitles the
buyer to reject the goods and end the contract. The buyer can, alternatively, waive failure
to deliver on time, but impose a new deadline, breach of which will again entitle him to
set the contract aside.
In Charles Rickards Ltd. v. Oppenheim (1950), the buyer ordered a new car body, to be
ready in seven months' time. It was not, but the buyer agreed to wait a further three
months. When it was still not completed, he indicated that he would cancel the order
unless it was ready within a further four weeks. He was held entitled to do so, and to
refuse the car body when it was finally tendered months later.
3. If one party renounces his obligations and commits an anticipatory breach, the injured
party may have two possible course of action. He may treat the contract as at an end and
opt either for damages for breach or for reasonable remuneration for the work which he
has performed.

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In Holster v. De La Tour (1853), the defendant agreed in April to employ the plaintiff as a
courier on a European tour as from 1 June. In May, the defendant repudiated this
agreement, and the plaintiff was held entitled to commence proceedings immediately,
before waiting for 1 June.
The plaintiff may, in fact, be forced to adopt this course if the defendant has made it
impossible to go on with the contract, perhaps by destroying the subject-matter. In any
event, when the contract ends, the plaintiff must try to mitigate his loss immediately, for
example by seeking another job.
Alternatively, since renunciation does not generally discharge a contract automatically,
the injured party can often continue to press for performance until the due date arrives. If
this is done, the contract continues to exist, for the benefit and at the risk of both parties,
until the final date for performance. If, before that date, performance becomes
impossible, this will discharge the contract without the party who renounced it having to
pay damages.
In Avery v. Bowden (1855), a ship arrived at Odessa for a cargo of wheat and was met by
a refusal to load. This renunciation was not accepted and, before the last date for
performance arrived, war broke out between England and Russia. This discharged the
contract, and the shipowner was unable to recover damages.

C. Damages for breach of contract

Whenever one person has broken a contract, the other can recover damages which are
assessed according to the following principles:
1. The basic rule is that the plaintiff should be compensated, but no more than
compensated, for loss which he has suffered as a result of the breach. Loss can be
financial, damage to property, personal injuries or even distress to the plaintiff, as where a
holiday firm defaults on its obligations; see Jarvis v. Swan Tours Ltd (1973). Where no
loss has been suffered, as where a seller fails to deliver the goods but the buyer is able to
purchase elsewhere at no extra cost, the court may award nominal damages, a nominal
sum, perhaps of £2, to mark the breach.
Exemplary or punitive damages, which exceed the actual loss suffered by an amount
intended to punish the offending party, are not normally awarded for breach of contract,
although they have been awarded in the past against banks who have dishonoured traders'
cheques when the account had sufficient funds to meet them.
2. The plaintiff, however, cannot be compensated for all of the consequences which might
logically 'result' from the defendant's breach, otherwise there might be no end to liability.
Some loss, therefore, will be too remote.
In Hadley v. Baxendale (1854), a mill owner entrusted a broken crankshaft to a carrier,
for delivery to an engineer who would replace it. Delivery was delayed through the fault
of the carrier, and the mill stood idle longer than was necessary. The mill owner
recovered damages against the carrier, but the claim for loss of profits was disallowed,
because it was not shown that the carrier knew that the mill would have to stand idle.
The court suggested two tests which still form the basis of the rules covering remoteness
of damage. The damage or loss treated as resulting from the breach should only include:
(a) such damage as may fairly and reasonably be considered as arising naturally, that is,
according to the usual course of things, from the breach; and

71
(b) such other loss as may reasonably be supposed to have been in the contemplation of
both parties at the time they made the contract, so that the defendant in effect accepted
responsibility for it.
The working of these rules can best be illustrated by some of the cases which have arisen.
In Home v. Midland Railway Co. (1873), Home had a contract to manufacture boots for
the French army at a price higher than the normal market price, provided that he could
deliver by a certain date. The boots were consigned to the railway company, which was
informed of the importance of the delivery date but not the special price. Delivery was
delayed, the boots were rejected and had to be sold elsewhere at below the normal market
price. Home only recovered the difference between his re-sale price and the market price.
His claim for the difference between the contract price and the price on re-sale failed,
because the carriers did not know of the original contract price.
In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd (1949), a laundry firm
ordered a new boiler which arrived late. The firm was held entitled to recover damages
for normal loss of profits, because the supplier should have anticipated this. It was not,
however, entitled to recover for further losses due to losing an exceptionally profitable
contract of which the suppliers did not know.
In The Heror^II (1969), a shipowner was late in delivering a cargo of sugar to Basrah,
and by the time of delivery the market price had fallen. It was held that the loss of'profits
could be recovered, because this possibility must reasonably have been in the
contemplation of the parties. (Basrah was a major trading centre where it could be
expected that the buyer might want to re-sell quickly.)
3. At least when the contract is ended, the injured party must try to mitigate or
minimize his loss, that is, take all reasonable steps to reduce it. A worker who
is wrongly dismissed must attempt to find other work; a seller whose goods are
rejected must attempt to get the best price for them elsewhere; a buyer of
goods which are not delivered must attempt to buy as cheaply as possible
elsewhere. Loss arising from failure to take such steps will not be recovered.
On the other hand, only reasonable steps need to be taken to mitigate; the
buyer, for example, need not tour the globe looking for the cheapest alternative supplier.
.
4 Damages for breach of contract will not normally be reduced for the plaintiffs
contributory negligence, unlike in tort (see page 106). The only circumstances in which
the Law Reform (Contributory Negligence) Act 1945 can apply are for breach of a
contractual duty of care, where the victim could have recovered his loss either for breach
of contract or in tort.
In Savers v Harlow UDC (Unit 10), the plaintiff had to put money into the door slot to
gain access to the public lavatory. She therefore had a contract with the local authority
and could have sued them for breach of this as well as for the tort of negligence. Her
damages could be reduced for her contributory negligence in either case.
The 1945 Act will not apply to breach of a strict contractual duty, where negligence need
not be proved (as in Frost v. Aylesbury Dairy Co. Ltd. earlier); nor if the plaintiffs loss is
purely financial and therefore irrecoverable for the tort of negligence, as is very often the
case.
5. In some cases, the parties, foreseeing the possibility of breach, make an attempt in the
original contract to assess in advance the damages which will be payable on breach. Such

72
provision for liquidated damages will be perfectly valid if it is a genuine attempt to pre-
estimate the likely loss. If it is not a genuine pre-estimate, however, but an attempt to
impose punitive damages where none would otherwise be awarded, then the liquidated
damages clause will be void as a penalty. The essence of a penalty is that it was inserted
in error, to frighten the potential defaulter. Such clauses often used to appear in hire-
purchase agreements, so that if a hirer returned the goods after paying only one
installment, he might have to bring his payments under the agreement up to half or more
of the original hire-purchase price. The courts held such performance, because the
employer can usually suspend the man on full pay if the employee's presence is an
embarrassment.
In Hill v. C. A. Parsons & Co. Ltd (1972), the plaintiff was dismissed with
inadequate notice as a result of trade union pressure to maintain a 'closed shop'.
The court granted an injunction restraining Parsons Ltd from dismissing Hill until
adequate notice had been given. •
As will be seen, injunctions are sometimes granted to enforce lawful restraints on trade;
see cases such as Home Counties Dairies Ltd v. Skilton. The remedy may be granted to
enforce negative promises in contracts relating to land; for example, a purchaser may be
restrained from breaking his contractual promise not to build on the land sold. In
exceptional circumstances, injunctions may even issue to order the seller of goods not to
withhold delivery.
In Sky Petroleum Ltd v. VIP Petroleum Ltd (1974), the parties made a 10-year agreement
in 1970 that VIP would supply all Sky Ltd's petrol requirements. In November 1973 a
dispute arose between the parties, and VIP withheld supplies. In the oil crisis then
existing, Sky Ltd could not get supplies from any other source (contrast Cohen v. Roche,
page 163). The court granted a temporary injunction restraining VIP from withholding
reasonable supplies, even though this was equivalent to a temporary order of specific
performance.

2. A decree for specific performance is an equitable remedy which is sometimes

granted where damages would not be an adequate remedy. It is an order of the court
directing the party in breach to carry out his promises, on pain of penalties for contempt
of court. Since it is equitable, it is discretionary; in particular, it will not be granted in the
following circumstances:
(a) It will not be awarded where damages would be enough and, for this reason, it will
rarely be granted in commercial transactions. Monetary compensation will usually enable
a disappointed buyer to obtain similar commodities elsewhere. In the sale of goods, the
seller will normally only be ordered to hand over the article specifically where it is
unique, such as an original painting.
In Cohen v. Roche (1927), the court refused to order specific performance of a contract to
sell some Hepplewhite chairs which were rare, but not unique. Similar chairs could be
bought elsewhere, albeit with difficulty.
On the other hand, each piece of land is unique, and the main use of the remedy today is
in contracts for the sale of land.
(b) The court must be sure that it can adequately supervise enforcement. Therefore
contracts of a personal nature, such as employment, which depend upon good faith which

73
the court cannot ensure, will not be specifically enforced. Similarly, building contracts
will not be enforced.
(c) Specific performance will not be awarded either to or against a minor.
(d) The court may exercise its discretion to refuse specific performance in any other
situation where it is not felt just or equitable to grant it.
In Malms v. Freeman (1837), the remedy was refused where a bidder foolishly bought
property at an auction in the belief that he was bidding for an entirely different lot. It
would have been harsh to compel him to take the property; the seller could still sue for
damages if he so wished.

3. An injunction is an order of the court directing a person not to break his contract. It is
normally appropriate to enforce a negative provision in the agreement and, being an
equitable remedy, is only awarded on the same principles as specific performance. It can,
however, be awarded to enforce a negative stipulation in a contract for services or
employment.
In Warner Brothers Pictures Incorporated v. Nelson (1937), an actress had contracted with
the film company not to work as an actress for anyone else during her present contract. It
was held that she could be restrained by injunction from breaking this undertaking.
On the other hand, an injunction will not be granted in contracts of employment if it
would operate as an indirect way of specifically enforcing the agreement; thus, Nelson
could only be restrained from working elsewhere as an actress, otherwise she might be
faced with the alternatives of either working for Warner Brothers or starving. An
employer, however, may temporarily be restrained from dismissing an employee; this is
not tantamount to specific performance.

D. Other remedies for breach

1. Claims on a quantum meruit. In some situations a claim for damages may not be the
appropriate financial remedy. This may happen where the plaintiff is prevented from
completing liis side of the bargain by the defendant's conduct and repudiation. The
plaintiff may have done a lot of work, but not yet earned any fee. He may be entitled to
claim on a quantum meruit basis (for so much as he deserves) for what he had done.
In Plancht v. Colburn (1831) the plaintiff was commissioned by a publisher to write a
book for £100. After he had done the necessary research and written part of the book, the
publisher repudiated the contract. It was held that the plaintiff could recover £50 on a
quantum meruit.
A claim on this basis may also be made where work has been done under a void contract.
The plaintiff cannot recover damages for breach, because no contract exists, but he may
recover a quantum meruit.
In Craven-Ellis v. Canons Ltd (1936), the plaintiff .recovered reasonable remuneration
for work which he had done as managing director of the company, when it transpired that
his appointment was void.
In British Steel Corporation v. Cleveland Bridge & Engineering Co. Ltd (1984), BSC
supplied steel to the defendants while still negotiating terms. Negotiations failed and
there was, therefore, no contract. BSC was entitled to a quantum meruit payment for what
it had supplied and Cleveland had used.

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A contract may be discharged, that is, come to an end, in four main ways. Two of these,
namely performance and discharge as a result of breacfr, arise directly out of the terms of
the original contract, and were discussed in the last unit. The present unit is concerned
with methods of discharge which do not necessarily arise out of what was originally
agreed, but from extraneous events. These methods of discharge are new agreement and
frustration. Two other matters which affect the right to sue on a contract will also be
discussed here, namely the time limits affecting when actions must be brought, and the
rules of privity affecting who can sue or be sued.

A. Discharge by Agreement

There are three main ways in which a contract can be discharged by agreement. 1. The
parties may have made provision for discharge in their original contract. For example, the
parties may have agreed at the outset that the contract should end automatically on some
determining event or on the expiration of a fixed time. Thus goods may be hired,
premises may be leased, or a person employed for a fixed term. On the expiration of the
term, the contract will cease.
Alternatively, the contract may contain a provision entitling one or both parties to
terminate it if they so wish. Thus a contract of employment can normally be brought to an
end by either party on reasonable notice to the other (subject only to statutory minimum
periods of notice laid down by the Employment Protection (Consolidation) Act 1978).
Hire-purchase contracts usually give the hirer a contractual right to end the agreement
and return the goods at any time; where the Consumer Credit Act 1974 applies, there is
also a statutory right to do this. Discharge in these ways does arise out of the terms of the
original agreement.
Discharge can also arise, not out of the original agreement, but by reason of a new,
extraneous contract. In order that the new agreement should discharge the -old one,
however, the new contract must be valid; for example, there must be consideration.
Where neither side of the original contract has yet been performed, there will be no
difficulty; each side still owes duties, and the consideration for one party waiving his
rights is the waiver of rights by the other. Thus the buyer and seller may agree to cancel
an order; the seller need no longer supply the goods, and the buyer no longer has to pay.
The position is more complicated where one party has completely performed his original
obligations. The agreement for discharge will only be binding if, in return for the release,
the other party does or promises something which he is not already bound to do, such as
paying earlier than he was bound to do or in a different manner.
In Re Charge Card Services Ltd (1986), a garage agreed to accept payment for petrol by a
charge card instead of cash. This was held to discharge the customer s obligation to pay
cash so that, when the card company became insolvent, the customer did not have to pay
again.
In the absence of such new consideration, the agreement for release will not be binding,
and the original contract will stand; D & C Builders Ltd v. Rees (1966) (Unit 11). For this
reason discharge by new agreement is sometimes called discharge by accord (agreement)
and satisfaction (consideration). 3. Finally, one party can release the other unilaterally,
without consideration, but only if he does so by deed.

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B. Discharge by Frustration

Until the last century, the obligation to perform a contractual duty was absolute. If it
became physically impossible for a party to perform his bargain, he nevertheless had to
pay damages for breach, and if extraneous events took away the whole purpose of the
contract without the fault of either party, the parties still had to continue with the
agreement.
In Paradine v. Jane (1647), a lessee was evicted during the Civil War. It was held that he
still had to pay the rent; the fact that he could not enjoy the property because of events
beyond his control was of no concern to the lessor, and was no excuse.
Starting with the case of Taylor v. Caldwell in 1863 (see below), the courts have
developed the doctrine of frustration as an exception to this absolute rule. If some outside
event occurs, for which neither party is responsible and which makes total nonsense of
the original agreement, then the contract will be discharged by frustration. A radical
change in circumstances can sometimes, therefore, he pleaded by a party as a valid
excuse for not performing his side of the bargain. This doctrine must be approached with
caution, however, because the courts have understandably been reluctant to accept
anything but the most fundamental changes as frustrating events. The following are the
main examples.

Subsequent physical impossibility.

This will occur where, after the contract was made, it becomes physically impossible or
impracticable to perform it. (If this was already impossible when the contract was made,
the agreement would be void from the outset.)
In Taylor v. Caldwell (1863), a music hall hired for a series of concerts was burnt down
before the date for the first performance. This was held to frustrate the contract, because
there was no longer any hall to hire. The hirer, therefore, no longer had to pay.
In Robinson v. Davison (1871), a pianist, who was engaged to give a concert on a
specified date, became ill and was incapable of appearing. It was held that this frustrated
the contract.

Subsequent illegality.
This will occur where, after the contract was made, a change in the law or in the
circumstances renders it illegal to perform the agreement.
In Avery v. Bow den (1855), the contract to load a cargo at Odessa was eventually
discharged by the outbreak of the Crimean War, which made it thenceforth an illegal
contract of trading with the enemy.

Basis of the contract removed.

The contract may be frustrated where both parties made it on the basis of a future event
which does not take place.
In Chandler v. Webster'(1904) the contract was for the hire of a room in Pall Mall for the
day of the coronation procession. The rent was over £140, because the procession would
pass directly beneath the window. Unfortunately the coronation was postponed when the
King became ill. This was held to frustrate the contract.

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Frustration of the commercial purpose of the contract.

A change may occur which makes a total nonsense of what was originally agreed, so that
what the parties would have to perform bears no relation to what was originally intended.
This change must be radical; an event which merely makes it more difficult or expensive
for a party to perform the contract will be no excuse. It is rare that a contract will be
frustrated on this ground.
In Metropolitan Water Board v. Dick, Kerr & Co. (1918), a firm of contractors agreed in
1914 to build a reservoir. In 1916, under wartime emergency powers, the Government
ordered the contractor to stop work and sell the plant. This was held to frustrate the
contract. Although it might eventually be possible to start work again after the war, the
enforced hold-up for an indefinite period made nonsense of the contract.
On the other hand, in Tsakiroglou Ltd v. Noblee & Thorl G.m.b.H (1962), the sellers
agreed to deliver groundnuts from Port Sudan to the buyers in Hamburg, and to ship them
in November or December 1956. In November 1956, the Suez Canal was closed, and the
sellers would now have had to ship the goods round the Cape of Good Hope, a much
longer and more expensive journey. It was held that this did not frustrate the contract, but
merely made it more difficult to perform. If a seller wishes to protect himself against
liability to the buyer for delays due to such matters as strikes or non-delivery of raw
materials, he should make special provision for this in the contract. If one party,makes a
promise which he fails to perform, the court is reluctant to allow him to say, in effect,
'Oh, but it's not my fault'.

The effects of frustration

Frustration automatically brings the contract to an end and renders it void. As a general
rule, all sums paid by either party in pursuance of the contract before it was discharged
are recoverable, and all sums not yet paid cease to be due.
In the Fibrosa Case (1943), an English company agreed in 1939 to make some machinery
for a Polish buyer at a price of £4800. The buyer paid an initial sum of £1000. When war
broke out, Poland was occupied by the German army, and the contract was, therefore,
frustrated by subsequent illegality. It was held that the London agent of the Polish buyer
had no furtffer liability, ana could recover the £1000 already paid. This was rather harsh
to the seller, who had already done considerable work and incurred expense in
manufacturing the goods. The Law Reform (Frustrated Con- ' tracts) Act 1943,
therefore, restated the general rule, but introduced two exceptions to it.
1. If one party has, before the time of discharge, incurred expenses in performing it, the
court may in its discretion allow him to keep or recover all or part of sums already paid or
due under the contract.
2. If one party has, by reason of anything done by the other, obtained a valuable benefit
(other than the payment of money), then the other may recover such sum as the court
considers just.
The Law Reform (Frustrated Contracts) Act applies to all contracts except (a) contracts
for the carriage of goods by sea, (b) contracts of insurance, (c) contracts containing
special provisions to meet the case of frustration (such as force ma\eure^ clause^), and

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(d) contracts for the sale of specific goods where the agreement is frustrated because the
goods perish before risk passes to the buyer. This last category is covered by the Sale of
Goods Act 1979, section 7.

Limitation of actions

Contractual obligations are not enforceable for ever. Apart from other considerations,
evidence becomes less reliable with the passage of time, and therefore, after a certain
period, the law bars any remedy. The Limitation Act 1980 lays down the general periods
within which an action must be brought. These are as follows:
1. Actions based on a simple contract will be barred after six years from the date when
the cause of action accrued.
2. Where the contract is made by deed, actions can be brought up to 12 years from the
date when the cause of action accrued.
3. Actions to recover land can be brought up to 12 years from the date when the cause of
action accrued.
A right of action 'accrues' when breach occurs. Thus, if a loan is made for a fixed time,
the right will accrue when this time expires. If no time is agreed it will be when a written
demand for payment is made.
If, when the cause of action accrues, the plaintiff is under a disability by reason of
infancy or unsoundness of mind, the period will not run until the disability has ended or
until his death, whichever comes first. Once the period has started to run, subsequent
insanity will have no effect.
If the plaintiff is the victim of fraud or acts under a mistake or if the defendant
deliberately conceals relevant facts, the limitation period will not begin until the true state
of affairs is discovered or should reasonably have been discovered.
In Lynn v. Bamber (1930), some plum trees were sold in 1921 with an undertaking by the
seller that they were of a particular type. Not until they matured in 1928 was it discovered
that they were of inferior quality. It was held that an action for damages could still be
brought, since the fraudulent misrepresentations by the seller had postponed the operation
of the period of limitation.
Provided that the limitation period has not already expired, the period may be extended
where the party in breach either acknowledges his liability in writing, signed by him or
his agent, or makes part payment in respect of the debt or claim. Time will then begin to
run afresh from the date of acknowledgement or part payment. Property obtained by theft
may be recovered at any time unless it has passed to a bona fide purchaser who is
protected after six years.
Equitable remedies such as rescission, specific performance or an injunction, are not
covered by the ordinary limitation periods, but will almost invariably be barred much
earlier under general equitable principles. An equitable remedy must be sought
reasonably promptly, because 'equity aids the vigilant, not the indolent'. A short delay, of
weeks or even days, may bar the remedy; see Bernstein v. Pamson Motors Ltd.

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