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  1. CONTRACT LAW Saturday 4th February 2012 Lecturer: RowinGurusami

  2. Contract Law No formal definition of a contract Contract law developed around a form of action Sir GuenterTreitel (The Law of Contract, 2nd ed.): “A contract is an agreement giving rise to obligations which are enforced or recognised by law.” The fundamental part of a contract law is based on the agreement between the contracting parties.”

  3. Key Requirements • Agreement • Consideration • Intention to create legal relations Also relevant is incapacity

  4. Void/Voidable Contracts • Lack of Capacity – Voidable • Absence of Free Will – Voidable • Illegality – Void • Mistake – Void/Voidable • Misrepresentation – Voidable Void – The contract never existed; thus the parties have no rights or obligations under it. Can recover from third party Voidable – One party may decide to set it aside. Cannot recover from third party.

  5. Types of Contract • Oral Contract • Deed (leases, transfer of land...) • Writing • Certain contracts have to be in writing (transfer of shares, sale of land, bill of exchange, cheques, contract of guarantee)

  6. Leading Case Carlill v Smoke Ball Company [1893] 1 QB 256

  7. Leading Case Carlill v Smoke Ball Company [1893] • Medical firm advertised new drug, claiming to cure flu • If not, buyers would receive £100 • Mrs Carlill used smoke ball regularly, fell ill and claimed the £100 • Company claimed ad was not a serious, legally binding offer • Court held otherwise.

  8. Offer • Indication by one person (the offeror) to another (the offeree) of the offeror’s willingness to enter into a contract on certain terms without further negotiation • The court in Carlill held that an offer can be made to an individual, a class of persons or to the world at large.

  9. Offer • Unilateral Contract (Carlillv.s. Smoke Ball Co.) • An invitation to treat is not an offer. It is an indication of a person's willingness to negotiate a contract • Fisher v. Bell (1960)– shop window display not an offer • Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) – customer making offer, not seller • Harvey v. Facey–supply of information not an offer

  10. Offer • Harris v. Nickerson (1873) – Auction ad is not an offer. The bid is the offer, which auctioneer is free to accept or reject • Partridge v Crittenden (1968) – advertisement offering for sale not an offer • Tenders • Advertisement only an offer when the other party (the offeree) satisfies the conditions

  11. Termination of Offer • Offer can only be accepted while still open. • Offer closes when: • Rejection • Counter-offer • Lapse of time • Revocation by offeror • Failure of a condition • Death of one of parties

  12. Rejection & Counter-Offer • Outright or by counter-offer • Hyde v. Wrench (1840) – Once original offer rejected, it does not exist anymore • Any change in original terms is a counter-offer: Butler Machine Tool Co. v. Ex-cell-O Corp (England) (1979) • Stevenson v. McLean (1880) – Inquiry not a counter-offer

  13. Revocation • Can revoke an offer at any time before acceptance (Payne v. Cave [1789]) • Even in cases with time limit (Routledge v. Grant [1828]) • Revocation not valid until communicated to offeror (time slots important – e.g. Byrne v. Van Tienhoven [1880]involving letters) • Can be communicated by third party (Dickinson v. Dodds [1876]) • Exceptions: payment, conditions partly satisfied in unilateral contract

  14. Acceptance • Treitel: “final and unqualified expression of assent to the terms of an offer” • Contract comes to effect from moment offeree accepts terms • Once accepted, neither party can withdraw • Oral, written or by conduct

  15. Rules of Acceptance • Acceptance must be communicated (exceptions) • Offer can only be accepted by the offeree • If means of acceptance stated, offer have to be accepted using a means which is no less effective • Silence is not acceptance (Felthouse v. Bindley [1862])

  16. Communication of Acceptance • Postal rule – Acceptance complete as soon as letter posted • Even if letter delayed (Adams v. Lindsell [1818]) or lost (Household Fire and Carriage Accident Insurance Co. v. Grant [1879]) • Exception: Holwell Securities v. Hughes (1974) – Acceptance had to be by notice in writing

  17. Intention to Create Legal Relation Presumption for commercial agreements that parties intend to be legally bound Presumption not to be legally bound for arrangements made in social, domestic and family setting Balfour v. Balfour (1919) – agreement between husband and wife not deemed enforceable Merritt v. Merritt (1970) – parties were already estranged at the time contract was made Lecturer: Rowin Gurusami

  18. Intention to Create Legal Relation Commercial agreements – presumed intention unless it is expressly disclaimed or circumstances indicate otherwise RTS Flexible Systems Ltd v MokereiAlois Muller GmbH (2010) – Court held that unrealistic to consider major works done without a valid contract between parties Jones v. Vernon’s Pools Ltd (1938) – clause stating contract shall not give rise to any legal relationship Lecturer: Rowin Gurusami

  19. Consideration A promisee cannot enforce a promise unless he has given something in exchange for the promise or unless promisor has obtained something in return Either some detriment to the promiseeor some benefit to the promisor The detriment and benefit usually the same (e.g payment and delivery) Lecturer: Rowin Gurusami

  20. Consideration • A promised action, or omission of action, that the promisee did not already have a pre-existing duty to abide by • “Valuable consideration may consist either in some right, interest, profit or benefit accruing to one party and some forbearance, detriment, loss or responsibility given by the other”– Currie v. Misa [1875] • Both parties to a contract must pass consideration to the another party for there to be a valid contract. • Executed or Executory

  21. Consideration • Consideration needs to be sufficient, not adequate • Adequate Consideration – Thomas v. Thomas (1842) • Sufficient Consideration – Chappell & Co v. Nestle Co (1960) • Courts need to be able to put a value on consideration

  22. Consideration • Past Consideration – Something which has already been done at the time promise is made. No legal Value • Re McArdle (1951) – Previous improvements on house is past consideration

  23. Consideration • Performance of an existing obligation imposed by statute is no consideration • Collins v. Godefroy (1831) – appearing in Court enforceable by law • Consideration valid if existing duty is exceeded – in Glasbrook Bros v. Glamorgan CC [1925], police performed extra duty

  24. Consideration • If additional reward is promised for performing existing duties, consideration is not valid - Stilk v Myrick [1809] Recent exception if one party benefits – Williams v. Roffrey Bros (1990) • Performing more than existing contractual duty is consideration – Hartley v Ponsonby [1857]

  25. Consideration • Waiver of existing right needs to be supported by consideration – Foakes v Beer (1884) • Exceptions: • Part payment by third party • Alternative consideration • Bargain between creditors • Promissory Estoppel

  26. Contractual Terms Any provision forming part of a contract Express Term – Clearly defined in contract by one or both parties Implied Term – Term deemed to form part of contract even though not expressly included in contract. Lecturer: Rowin Gurusami

  27. Express Terms Terms must be substantially complete Terms can be determined at a later day; but parties must provide for it expressly (Scammell v Ouston 1941) Statements made before the contract is valid can become terms. Courts will consider: If person making statement had special knowledge of the subject; and Why was the term omitted from the contract Lecturer: Rowin Gurusami

  28. Implied Terms Terms can be implied: By statute By the courts By customs Lecturer: Rowin Gurusami

  29. Privity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it Example: Contract between A and B that A will (for consideration provided by B) confer a benefit to C C cannot enforce A’s promise C provided no consideration Lecturer: Rowin Gurusami

  30. Privity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it Example: Contract between A and B that A will (for consideration provided by B) confer a benefit to C C cannot enforce A’s promise C provided no consideration Tweddle v. Atkinson (1861) Lecturer: Rowin Gurusami

  31. Contracts (Rights to Third Parties) Act 1999 Sets out circumstances in which third party has right to enforce contract term Test: Whether contract expressly so provides Where term confers benefit to third party, unless it appears parties did not want to confer rights to third party NOTE FOR LATER: Common law exception to rule of Privity of Contract – Agency Law Lecturer: RowinGurusami

  32. Performance Brings the contract to an end Substantial performance can be enough to discharge contract but the injured party can seek damages Partial performance makes a contract severable; i.e. some obligations performed so far while others are not. If one party prevents performance, the offer of performance from other party is enough to discharge of obligations and sue for damages for breach of contract (Planche v Colburn 1831) Lecturer: Rowin Gurusami

  33. Frustration In cases where impossibility arises after contract made Usually catered for in escape clauses or force majeure clauses Contract is discharged by frustration if there is NO other way to perform the obligations under the contract Destruction of subject matter Person incapacity Government intervention Non-occurrence of an event Lecturer: Rowin Gurusami

  34. The Law Reform (Frustrated Contracts) Act 1943 In the event of a frustrated contract: Money paid before frustrating event is to be repaid Sums due for payment cease to be payable Expenses incurred may be retained/recovered if incurred in the performance of the contract and before frustrating event If a party has obtained a valuable benefit (other than monetary), it can be ordered to pay to the other party all or part of the value of the benefit - BP Exploration Co (Libya) Ltd v Hunt (No 2) 1982 Lecturer: Rowin Gurusami

  35. Breach of Contract Legal concept in which a binding agreement is not honoured by one or more of the parties to the contract by non-performance or interference with the other party's performance Minor breach Material breach Fundamental breach Anticipatory breach – express or implied (injured party can sue as from date of anticipatory breach) Lecturer: Rowin Gurusami

  36. Anticipatory Breach Actual breach – where breach occurs on the due date of performance Anticipatory breach – implied or express Claimant can start action as from day of anticipatory breach, no need to wait for actual breach Claimant can discharge contract and sue for damages without waiting date of performance, or Treat contract as valid, perform his side and sue for payment from other side – White & Carter (Councils) v McGregor (1961) Lecturer: Rowin Gurusami

  37. Damages Common Law remedy for breach – intends to restore party who suffered loss to position he would have been in if contract was performed Can be inserted as a clause in contract (liquidated damages, penalty clause) or determined by court of law Test: Remoteness of damage Measure of damages Lecturer: Rowin Gurusami

  38. Remoteness of Damage Defendant not always responsible for all losses suffered by claimant Remoteness is designed as a further limit on a cause of action to ensure that the liability to pay damages is fairly placed on the defendant Traditional approach – defendant liable for all consequent damages (Re Polemis [1921]) Nowadays, if defendant could not reasonably have foreseen that someone might be hurt by his actions, then there may be no liability Lecturer: Rowin Gurusami

  39. Remoteness of Damage Hadley v Baxendale (1854) sets out rules: Loss must arise naturally from breach, or Loss must arise in a manner which parties may reasonably be supposed to have contemplated Loss outside natural course of events only compensated if exceptional circumstances are within defendant’s knowledge when contract made – Victoria Laundry v. Newman Industries (1949) Lecturer: Rowin Gurusami

  40. Measure of Damages How much to compensate for the loss incurred? Awarded for financial and non-financial loss General Principle is to compensate for actual financial loss Expectation interest: Position party would be in if the contract had been performed Reliance interest: Position party would be in had he not relied on the contract Anglia Television Ltd v. Reed (1972): Speculative contract Damages not intended that injured party profit from claim Lecturer: RowinGurusami

  41. Measure of Damages Market Price Rule – one party can claim amount required to purchase equivalent goods Non-Financial Loss – Discretion of Court Jarvis v. Swan Tours (1973): damages for distress of holidays Alexander v. Rolls Royce Motor Cars Ltd (1995): Damages for distress, inconvenience and loss of enjoyment not granted Lecturer: Rowin Gurusami

  42. Measure of Damage Mitigation of Loss: Claimant need to have taken any reasonable steps to reduce loss – Payzu Ltd v Saunders 1919 Burden of Proof on Defendant to show that Claimant did not mitigate loss Not required to take risky measures, only reasonable ones Lecturer: Rowin Gurusami

  43. Equitable Remedies Money cannot solve all problems Specific Performance: Order of the court directing party in breach to perform his part of contract - usually used to complete a previously established transaction Not applicable if required performance over period of time (e.g. contracts of employment, building contracts, personal service) Lecturer: Rowin Gurusami

  44. Equitable Remedies Injunction: Court Order whereby party in breach is required to do or refrained from doing certain acts (e.g. restraining orders, freezing injunctions) Mandatory Injunction : directs defendant to take positive steps Prohibitory Injunction: directs defendant to observe a negative promise - Claimant has to prove likelihood of irreparable harm in the absence of a injunction before such an injunction may be granted Lecturer: Rowin Gurusami

  45. Equitable Principles He who comes to equity must come with clean hands Delay defeats equity Equity will not assist a volunteer Equitable remedies not granted where damages are sufficient Equity’s darling Lecturer: Rowin Gurusami

  46. Exclusion Clauses Term in a contract that seeks to restrict the rights of the parties, mainly in cases of breach or negligence Courts are hostile to exclusion clauses and thus common law will always try to limit their effects Requirements: Must be incorporated in contract Wording interpreted strictly against person who relies on the exclusion Lecturer: Rowin Gurusami

  47. Exclusion Clauses - Incorporation By signature – L’Estrange v Graucob (1934) : if the clause is written on a document which has been signed by all parties, then it is part of the contract By notice - an exclusion clause will have been incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention By previous dealings Lecturer: Rowin Gurusami

  48. Unfair Contract Terms Act(UCTA) 1977 After satisfying common law test, now Statutory Rules Regulates contracts by restricting the operation and legality of some contract terms, mainly exclusion clauses Clause exempting liability for death or personal injury due to negligence is void Clause exempting liability for other loss due to negligence is void unless reasonable Lecturer: Rowin Gurusami