LEVEL 6 - UNIT 2 – CONTRACT LAW SUGGESTED ANSWERS - JANUARY 2016 Note to Candidates and Tutors: The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2016 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners’ reports which provide feedback on student performance in the examination. SECTION A Question 1(a) A decree of specific performance is an order from the court that a party to a contract should carry out its contractual obligations. It is an equitable remedy and consequently is available at the court’s discretion and not as of right. The discretionary nature of specific performance means that the conduct of the person seeking the order must be such as to not preclude the aid of equity: he who comes to equity must come with clean hands. His actions must not be inequitable or unconscionable. In order to forfeit the aid of equity it is not necessary to commit a legal wrong; trickery or sharp dealing is sufficient: (e.g.) Webster v Cecil (1861), Walters v Morgan (1861). He who seeks equity must do equity: a person seeking specific performance must have performed his side of the bargain or be able and willing to do so. The court will not grant specific performance where damages are an adequate remedy. In contracts for the sale of goods, where it is possible to obtain substitute goods in the market, the appropriate remedy is damages. Where goods or services are faulty the appropriate remedy is usually damages for the diminution in value. Where goods or services are not delivered the usual remedy is damages for loss of bargain and inconvenience where appropriate. It remains open to the party seeking specific performance to demonstrate that damages are not an adequate remedy. This may be done by establishing that the subject matter is in some way unique; it may also be done by demonstrating that damages will not reflect the true expectation loss of the claimant: see Beswick v Beswick (1968). Page 1 of 16 As a matter of law, land is unique. Damages are therefore not usually an adequate remedy for a breach of a contract to sell land. In Phillips v Lamdin (1949) an Adam style door was removed after the defendant had contracted to sell his house to the plaintiff. The door was held sufficiently unique for it to be made the subject of an order for specific performance. Where in contracts for the sale of goods it is possible to show that the goods possessed some unique quality, and so damages will not provide the means of obtaining substitute performance, specific performance may issue. Valuable antiques and works of art have been held to possess this unique quality: see Falcke v Gray (1859). Where such articles are commonly available on the open market specific performance will not issue: Cohen v Roche (1927). An order will not be granted where it would cause undue hardship. In Patel v Ali (1984) the court refused to grant an order of specific performance for the sale of the defendants’ family home because it would have had the effect of causing undue hardship to the wife by isolating her from friends and family: she had a history of ill-health, spoke little English and was at home with small children. Equity does nothing in vain. Performance of the contract must be possible if an order is to issue: see Wroth v Tyler (1974). Performance must not be futile. An order for specific performance will not be made where the contract is vague or uncertain. Equity will not assist a volunteer. An order will not be granted where consideration is lacking. Specific performance will not be ordered where there is a want of mutuality of obligation: see (e.g.) Flight v Bolland (1828), Price v Strange (1978), Sutton v Sutton (1984). Specific performance will not issue where the contract is one involving personal services; equity may not be used to force one person to work for another: see (e.g.) De Francesco v Barnum (1890). Specific performance will not issue where the contract requires constant supervision by the court. In Ryan v Mutual Tontine Westminster Chambers Association (1892) a tenancy agreement provided that the landlord was obliged to provide a hall porter. This was not done properly. The court refused specific performance on the ground that to do so would require the court to supervise the work. However, in Posner v Scott-Lewis (1987) the court was prepared to grant specific performance on similar facts. If the landlord failed to comply with the order the tenant could simply return to the court. Question 1(b) The primary remedy for breach of contract is common law damages. These compensate for faulty performance or non-performance but do not enforce primary contractual obligations. Equity acts in personam: specific performance is an order from the court compelling performance of primary positive obligations under the contract. That is, the Defendant is required to do what the Defendant has contracted to do. A failure to comply with such an order is a contempt of court and may be met with punitive measures, such as fines, sequestration of property, or imprisonment. Page 2 of 16 The restrictions the court places upon the granting of specific performance may be said to have three primary sources. They are: the origins of the remedy in the courts of equity; the practicality and appropriateness of the remedy; and the nature of the remedy and its impact upon personal freedom. It is therefore an appropriate remedy in circumstances in which, because of the nature of the subject matter of the contract, only the enforcement of primary obligations is sufficient to satisfy the loss to the successful Claimant. It is appropriate only where it is a practical order for the court to issue and will not bring with it conceptual or supervisory difficulties for the court. It is appropriate where the issuing of such an order is not unduly harsh or unfair on the Defendant. It is appropriate only where the Claimant’s conduct meets the requirements of equity. Question 2 A contract is a legally enforceable agreement. The existence of a simple contract may be demonstrated by establishing agreement between the parties together with consideration in support of that agreement. Such contracts frequently take the form of mutual promises of some future performance. Not all exchanges of promises amount, however, to legally enforceable agreements. In order to be enforceable there must, at the time the agreement was formed, have been an intention, by the parties, that that agreement should be binding, that it should have legal consequences. The absence of such an intention is fatal to the existence of the contract. The agreement then exists in fact but goes unrecognised by the law. It is thus, in principle, possible to overcome extrinsic, objective evidence that a contract exists simply by making the subjective assertion that one or more of the parties lacked the intention to create legal relations. The risks inherent in basing the enforceability of contractual obligations upon the will of the parties are clear. One of the parties may have a change of mind: the contract may no longer be as convenient or profitable as first envisaged; a risk transferred under the contract may have turned from a risk into a fact, which the party in question now finds unpalatable. The court is then faced with the difficulty of coming to a judgment on the thoughts of the parties at some time in the past. The mere assertions of the parties to the action are apt to be unreliable or unsatisfactory in some other way. In order to address this practical, evidential problem the court makes use of the device of ‘rebuttable presumption’. A presumption is a supposition that the law allows or requires to be made. ‘Rebuttable’ in this context means that the supposition will give way to evidence to the contrary. In the law of contract decisions on intention have been traditionally divided into (a) social and domestic situations and (b) commercial situations. To these may be added situations in which public policy plays a significant role. In social and domestic situations the presumption is that there is no intention to create legal relations. The reasons behind such a presumption include its appropriateness to most social situations: there is no intention to bind in a legally enforceable agreement. ‘The ordinary example is where two parties agree to take a walk together, or where there is an offer and an acceptance of hospitality. Nobody would suggest in ordinary circumstances that those Page 3 of 16 agreements result in what we know as a contract…’ Balfour v Balfour (1919) per Atkin LJ. To these straightforward considerations should be added the need to avoid the courts becoming clogged with trivial disputes, which bring the law into disrepute and harms the interests of parties who would be responsible for the costs of such actions. The burden of proof in such situations is upon the party seeking to establish that there was an intention to create legal relations, for it is that party which seeks to rebut the presumption. What may constitute proof of an intention to create legal relations in such circumstances is essentially a question of fact and is decided upon the circumstances of each case. Factors that have proven influential with the court have included: dealing at arm’s length (Merritt v Merritt (1970)), putting financial security at risk (Parker v Clarke (1960)), and money changing hands (Simpkins v Pays (1955)). In commercial situations: the presumption is that there is an intention to create legal relations. This applies even where the undertaking is seemingly gratuitous: see Edwards v Skyways (1964), ESSO v Commissioners of Customs Excise (1975). The presumption may be rebutted by an expressed, clear contrary intention: see Jones v Vernon’s Pools (1938) and Rose & Frank v Crompton Bros (1923). Letters of comfort may also be argued in cases involving disputes as to intention. The rule here appears to be that if, upon an objective reading of the document, there was merely an intention to reassure or show future intent, that may be sufficient to rebut the presumption of intention to create legal relations: see Kleinwort Benson v Malaysian Mining Corp (1989). Public policy has on occasion influenced decisions on whether there was an intention to create legal relations. Considerations of public policy turn not on whether, using the ordinary law of a contract, an enforceable agreement does exist. Public policy requires the court to consider whether a contractual relationship should exist. Where the existence of a contractual relationship might incur unwarranted costs on behalf of the general public, frustrate the will of Parliament in some way, or harm the functioning of a public service, the court may refuse to find an intention to create legal relations. For example, where the supply of electricity was the subject of a statutory duty it was held that there was no intention to create (contractual) legal relations: Willmore v South Eastern Electricity Board (1957). Where a fostering agreement was the subject of regulations made under the Children Act 1989, and an agreement form relied upon but not signed by the Claimant foster parents was worded so as to exclude an intention to create legal relations, it was held that there was no intention to create legal relations: W v Essex County Council (1989). In Robinson v HM Customs & Excise (2000) the claimant acted as an informer for HM Customs & Excise and later claimed fees and expenses for doing so. One of the reasons for the court finding against the Claimant was that there was no intention to create legal relations in these circumstances. Page 4 of 16 Question 3 The common law has long recognised the vitiating factor of duress. A successful plea of duress renders the contract voidable. What amounts to duress was defined in Pao On v Lau Yiu Long (1980) as a ‘coercion of the will which vitiates consent’. Treitel, ‘The Law of Contract’, however questions this definition and argues that it is not the absence of consent but the fact that consent is improperly obtained that is the true indicator of duress. What may be taken to be conduct amounting to duress has changed over time. From the very restrictive beginning of duress to the person it has developed through duress to goods and economic duress and beyond. Duress to the person takes the form of actual or threatened violence to the person claiming that the contract is vitiated: see (e.g.) Friedeberg-Seeley v Klass (1957) and Barton v Armstrong (1976) In Cumming v Ince (1847) a threat to return the Plaintiff to a lunatic asylum was held to be sufficient to render a transaction unenforceable because of duress. Duress to goods takes the form of threats to property. There has been some uncertainty as to existence of the action. In Skeate v Beale (1840) a plea based on duress resulting from a threat to seize goods was rejected. In Maskell v Horner (1915) toll money unlawfully extracted from the plaintiff under a threat to close his market stall and seize his goods if he did not pay was held by the Court of Appeal to be recoverable. Skeate v Beale was distinguished. In The Sibeon and The Sibotre (1976) Kerr J took the view that ‘If I should be compelled to sign a lease or some other contract for a nominal but legally sufficient consideration under an imminent threat of having my house burnt down or a valuable picture slashed through without any threat of physical violence to anyone, I do not think that the law would uphold the agreement …’ It was subsequently thought that duress to goods was subsumed into economic duress. Its continued existence has, however, been affirmed in other common law jurisdictions: see (e.g.) Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991). Economic duress is a creation of the second part of the twentieth century: see (e.g.) The Sibeon and The Sibotre (1976), Pao On v Lau Yiu Long (1980) (JCPC) etc. Perhaps the most complete statement of the law is to be found in Universe Tankships of Monrovia v ITWF (1983): per Lord Diplock ‘where consent is induced by pressure that the law regards as illegitimate, the contract is voidable’ unless the Plaintiff expressly or impliedly affirms the contract. Per Lord Scarman duress may arise where the victim intentionally submits to illegitimate pressure arising from a realisation that there is no practical alternative. The facts that the victim protested at the time, that there was an absence of independent advice, and/or a declaration by the victim of his intention to sue were evidential matters that went to indicate the existence of duress. Silence on the part of the victim would, in such circumstances, not aid the bully provided there was no alternative to giving in to the threat. This gives rise to the question of what constitutes ‘illegitimate pressure’. ‘Illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining’, per Dyson J, DSND Subsea Ltd v Petroleum Geo Services ASA (2000). Pressure is illegitimate where it amounts to Page 5 of 16 an unlawful act or threat: see (e.g.) Universe Tankships of Monrovia v ITWF and B&S Contracts & Design Ltd v Victor Green Publications Ltd (1984). In CTN Cash & Carry Ltd v Gallagher Ltd (1994) a claim for duress was rejected, per Steyn LJ, on the basis that dealings had been at arm’s length, the act threatened was lawful in its nature, and the defendant had a genuine belief in its entitlement. The court nevertheless thought it possible that duress could arise, in appropriate circumstances, where the act threatened was lawful. In Attorney General v R (2003) a soldier claimed that he had signed a confidentiality agreement under the threat of being removed from the SAS to an ordinary army unit. The case gives rise to two important arguments: first, because it does not lie clearly within the realm of economic duress, does it give rise to a broader and more general action of common law duress? Second, because the army was acting lawfully in moving him from one unit to another, could a threat of a lawful act amount to illegitimate pressure and so to duress? The Privy Council took the view that the threat of a lawful act could amount to illegitimate pressure. Per Lord Hoffman two aspects should be considered: (1) the nature of the pressure and (2) the nature of the demand. Where the threat was of an unlawful act it would generally be regarded as illegitimate. Where the threat was of a lawful act it was necessary to look at the nature of the demand: was its object legitimate? If it were not, the pressure was capable of being illegitimate. On the facts of the case it did not amount to duress because the object of preventing unauthorised disclosure of military operations was a legitimate object. By implication, the principles set out by the Judicial Committee may permit the action for common law duress to escape from its present categories and exist as the broader action of ‘common law duress’. Question 4 (a) To succeed in a claim for breach of contract it is necessary to establish that a valid contract was formed and that an express or an implied term was breached by the defendant. Breach may take the form of none performance or of defective performance. Performance in contract is judged against an exacting standard. Contractual obligations must be performed precisely: see (e.g.) Lord Atkin’s comment in Arcos v Ronaasen (1933). Performance must be complete: see (e.g.) Cutter v Powell (1795). A misrepresentation is a false statement of fact (or possibly law) made by one party to the contract to the other party which induces the other party to enter into the contract. Claims in misrepresentation can therefore be compared with claims in breach of contract: a contractual relationship between the parties is an essential element of both actions. Misrepresentation may be contrasted with breach of contract. Misrepresentation is independent of the contract, but attaches to it, only becoming actionable once the contract has been entered into. Liability in tort is imposed by law; liability in contract arises as a matter of agreement. In claims in breach of contract the claimant must establish that the agreement is valid but has not been complied with. In misrepresentation the claimant must Page 6 of 16 establish that the agreement is flawed because it was based upon the false statement of one of the parties. Question 4 (b) Remoteness of damage in contract has long been governed by the rule in Hadley v Baxendale (1854). Per Alderson B, to be recoverable losses must be such as arise ‘…naturally, i.e., according to the usual course of things, from such breach of contract itself’; or ‘such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract…’ ‘Losses arising naturally’ seeks to identify what must have been in the minds of both the parties as the likely result of the breach in question. The test is objective. ‘In the contemplation of both parties’ refers to the actual knowledge of the parties at the time of contract. Damages may be recovered for losses arising from special circumstances, provided they were known to the party in breach. The test is subjective. In Transfield Shipping Inc v Mercator Shipping Inc, The Achilleas (2008), the House of Lords considered further the test for remoteness of damage in contract. Two of their Lordships sought to extend the Hadley v Baxendale approach to include consideration of whether, at formation of the contract, it was intended that the party in breach should assume liability for the loss in question. Two adhered to the approach established by Alderson B. A fifth appears to have wavered between the two positions. This has given some concern as to the subsequent application of Hadley v Baxendale. The better view seems to be that the extended test (taking in consideration of whether there was an intended assumption of liability) was applicable only in very particular circumstances. For most situations, the test laid down by Alderson B continues to be the correct one: see (e.g.) Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd , The Sylvia (2010) per Hablen J. The position in misrepresentation is quite different. In fraudulent misrepresentation the claimant is entitled to all losses flowing directly from the misrepresentation: Doyle v Olby (Ironmongers) Ltd (1969): ‘…it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen’, per Lord Denning MR (ibid). See also Smith New Court Securities Ltd v Citibank (1997), per Lord Browne-Wilkinson. The wording of s2(1) Misrepresentation Act 1967 means that the rules of remoteness of damage in fraudulent misrepresentation also apply to claims in (statutory) negligent misrepresentation and innocent misrepresentation: see (e.g.) Watts v Spence (1975), Naughton v O’Callaghan (1990) and Royscott v Rogerson (1996) etc. Question 4 (c) Breach of contract does not automatically discharge the contract. Breach of warranty only ever sounds in damages: see Bettini v Gye (1876). Breach of condition goes to the root of the contract. It amounts to a repudiation of the contract. It passes to the innocent party the right to elect to accept the repudiation, thus terminating the contract: Poussard v Spiers & Pond (1876). Alternatively, the innocent party may elect to affirm the contract. Whatever the election by the innocent party, there is a right to damages. Where it is not possible, by reference to the contract itself, to determine whether a term is a condition or a warranty, then the term is described as an innominate Page 7 of 16 term. The court will then look to the consequences of the breach. Where the breach effectively deprives the innocent party of substantially the whole intended benefit of the contract, the innocent party may treat the contract as repudiated: see Hong Kong Fir v Kawasaki Kisen Kaisha (1962) per Diplock LJ. Similarly, misrepresentation does not render the contract void: it makes it voidable at the instance of the innocent party. That is, misrepresentation gives rise to a claim for rescission of the contract, which the innocent party may elect to pursue. Repudiation, in this context, exists as a common law right. It may therefore be exercised irrespective of the conduct of the claimant or the implications for third parties. The right to repudiate is lost if the innocent party chooses to affirm the contract. Rescission is an equitable remedy and so is discretionary. It may be rendered unavailable where the contract has been affirmed, where it is not possible to put the parties back to their original positions (i.e. restitutio in integrum is not possible or is not substantially possible) or where third party rights are prejudiced. Rescission may also be refused under the equitable doctrine of ‘laches’: Leaf v International Galleries (1950). The approach taken to damages in the two actions differs considerably. The primary purpose of damages in contract is to place the claimant in the position s/he would have been had the contract not been breached: Robinson v Harman (1848). Because misrepresentation is a tort, the purpose of damages is to place the claimant in the position s/he would have been had the tort not been committed: see Doyle v Olby (Ironmongers) Ltd (1969). Damages in contract ‘carry the claimant forward’; tortious damages ‘carry the claimant backwards’: one readily admits of claims for lost profit, the other does not. Section B Question 1(a) In order to advise MBC it is necessary to examine the law on consideration. Consideration has been defined in terms of benefit and detriment: it ‘… may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other.’ Currie v Misa (1875). It has also been defined in terms of exchange or the price paid: as ‘An act or forbearance of one party, or the promise thereof, it is the price with which the promise of the other is bought, and the promise thus given for value is enforceable’, Sir Frederick Pollock Principles of Contract, adopted by Lord Dunedin, Dunlop Pneumatic Tyre Co v Selfridge & Co (1915). Where there is an existing contractual duty, a further promise to perform is not traditionally regarded as good consideration: Stilk v Myrick (1809). Where, however, an offer of additional payment is supported by consideration by the promisee, the promise can be enforced. That is, the promisee must do or Page 8 of 16 promise to do something in addition to what was originally agreed: see Hartley v Ponsonby (1857). In Williams v Roffey Bros & Nicholls (1991) the Plaintiff, a sub-contractor, entered into a contract to carry out carpentry work on a block of flats for the defendant, a building contractor. It became clear that the plaintiff was not going to finish the work by the agreed date. The Defendant was subject to the commercial/financial pressures of a penalty clause in the main contract if the building was not completed on time. The Defendant consequently offered the Plaintiff additional payments to finish the work on time. When the Plaintiff sought payment for part performance of this second agreement the Defendant argued that no part of the promise to pay more should be paid: the promise was not supported by consideration on the part of the Plaintiff. The Court of Appeal held that where one party to a contract agrees to make a payment to the other, over and above the contract price, in order to secure a benefit or to avoid a disbenefit, the benefit to the promisor is capable of amounting to good consideration. Certain practical benefits to the promisor were identified. They included: avoiding abandonment of the contract by the promisee; the completion of the contract on time by the promisee, which resulted in the avoidance of having to pay a penalty to a third party; and avoiding the trouble and expense of hiring another carpenter. NES is already under a contractual obligation to carry out the work on the Griffin Bank by 6th June 2014. MBC’s promise to pay £30,000 extra provided the work on the Griffin Bank was completed by the date originally agreed is, prima facie, unenforceable under the principle in Stilk v Myrick: NES has provided no consideration in exchange for MBC’s promise. The facts of the situation are, however, on all fours with those of Williams v Roffey. MBC promised to pay an additional sum in order to secure performance, on time, of an already existing contractual obligation. The practical benefits that MBC obtained as a result of NES’s agreement are consistent with those in Williams v Roffey. MBC avoided the inconvenience and delay of NES abandoning the contract and, the expense of finding another contractor. It avoided the necessity of having to pay Griffin Bank compensation under a penalty clause at a rate of £50,000 per week. Williams v Roffey has caused some academic and judicial disquiet. The ambit of Williams v Roffey has been limited: see re Selectmove (1995). In South Caribbean Trading v Trafigura Beheer (2005) Coleman J expressed the view that Williams v Roffey was wrongly decided and is inconsistent with Stilk v Myrick. His comment may lack force because he gave way in the face of authority, saying were Williams v Roffey not a decision of the Court of Appeal he would not follow it. Williams v Roffey has generally been followed: see (e.g.) Anangel Atlas Compania Naviera v Ishikawaja- Harima Heavy Industries (No 2) (1990) and Simon Container Machinery v Emba Machinery (1998). Arguments in favour of the court’s distinguishing or refusing to follow it are, therefore, not strong. NES is therefore likely to succeed. MBC is advised to pay NES the £30,000 promised. Page 9 of 16 Question 1 (b) MBC’s dealings with NES in the matter of the contract concerning ‘The Elms’ are similar to those concerning Griffin Bank. Both are for the supply of materials and labour within a certain time. In both MBC grew concerned at NES’s slow progress and offered extra payment provided that the work was completed by the date agreed in an original contract. The legal issues are in large part the same: NES was under an existing contractual obligation to carry out the work by the agreed date. In the absence of consideration, provided by NES, for MBC’s promise of additional payment the promise is unenforceable: Stilk v Myrick. The practical benefits to be derived from the performance of the contract by the original contracting party remain the same and are capable of amounting to good consideration: Williams v Roffey. The context of the May Contract (The Elms) is to be distinguished from that of the January Contract (Griffin Bank). There appears to be no risk of potential additional costs arising by way of a penalty payable to a third party. MBC nevertheless avoided the inconvenience and delay of NES abandoning the contract and so avoided the trouble and expense of finding another contractor. However, NES’s conduct in relation to the May Contract gives rise to doubts as to the company’s good faith. That is, having derived a benefit from its apparent inability to perform the earlier contract by the agreed date it appears to have deliberately conducted itself in a manner calculated to increase its remuneration from the contract by £15,000 (i.e. 50% of the original contract price). The Court of Appeal decision in Williams v Roffey makes it clear that the presence of duress or fraud is fatal to the application of the principle in that case: see per Glidewell LJ. If it is possible to convince the court that NES’s conduct amounts to fraud or duress then the case will be decided under the principle in Stilk v Myrick, in which case, NES is likely to fail in a claim for the £15,000 promised. My advice to MBC is therefore to withhold payment of the £15,000 to NES. Question 2 (a) The generally accepted definition of a contract is that it is a legally binding agreement: see (e.g.) Anson ‘Principles of the Law of Contract’ and Treitel ‘The Law of Contract’. In order to establish that a valid contract existed between Kevin and HR it is therefore necessary to show, first, that there was an agreement. For the agreement to be enforceable it is also necessary to establish that there was an intention to create legal relations between the parties, and that the agreement was supported by consideration. On the facts of the problem Kevin is unlikely to have difficulty in demonstrating intention to create legal relations. The relationship falls into the category of business or commercial, there is consequently a rebuttable presumption that there was an intention to create legal relations. Nothing in the facts would appear to provide an argument for rebuttal. If agreement can be established, then the consideration flows from that. The agreement is a mutual exchange of promises: on one side to make and supply certain goods and on the other to pay the price agreed. Page 10 of 16 Establishing the existence of agreement is more problematic. The court will require objective evidence. The primary and most commonly used method of establishing agreement is offer and acceptance. Treitel defines offer as an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the ‘offeree’. An offer has the following characteristics: it is a conditional promise to act or abstain from acting; it lacks any element of negotiation; and is capable of being turned into agreement by acceptance by the offeree. Offers may be made subject to a condition. Until the condition is met the ‘offer’ is incapable of acceptance: Financings Ltd v Stimson (1962). Thus the ‘agreement’ made ‘subject to contract’ at the meeting between Kevin and HR is incapable of acceptance. It is not a true offer. A ‘true’ offer was made by HR in the form of the written contract posted to Kevin. Acceptance would turn the offer into a constituent part of a legally binding agreement. Treitel defines acceptance as a final and unqualified expression of assent to the terms of an offer. Any alteration or addition to a written offer therefore constitutes not an acceptance but a counter offer. Kevin has not accepted the offer. He has amended it. This amounts to a counteroffer: see Brogden v Metropolitan Railway Co. (1877). HR did not accept expressly Kevin’s counter offer. Consequently, using the traditional concepts of offer and acceptance, it is not possible to establish that there was a legally binding contract. There was, however, performance: Kevin made and delivered a considerable number of, systems which HR accepted; HR paid for 100 of them. The question of finding agreement in such circumstances was addressed in Butler Machine Tools v Ex-Cell-O Corporation (England) Ltd (1979) and in Gibson v Manchester City Council (1979), where Lord Denning expressed the view that the issue of agreement should be one of fact and not law and that all the circumstances of the case should be considered, including conduct and relevant documents. Whilst Lord Denning’s approach was rejected by the House of Lords in Gibson, that does not mean that offer and acceptance are the only approach: per Lord Diplock (ibid) ‘there may be certain types of contract, though I think they are exceptional, which do not fit into the normal analysis of contract as being constituted by offer and acceptance’. Per Steyn LJ in Trentham v Archital Luxfer (1993) ‘… [I]t is true that the coincidence of offer and acceptance will in the vast majority of cases represent the mechanism of contract formation… But it is not necessarily so in the case of a contract alleged to have come into existence during and as a result of performance.’ Brogden v Metropolitan Railway Co. (1877) has marked similarities with Kevin’s problem. In Brogden the offeree wrote the name of an arbitrator into a contractual document wrote ‘approved’ on it and returned it to the offeror’s agent. This amounted to a counter-offer. Express acceptance of the counter-offer was not made. The subsequent conduct of the parties was held by the House of Lords to be sufficient to infer agreement. In the present problem Kevin’s Page 11 of 16 counter-offer was not met with express acceptance but his delivery of systems was in each case accepted without demur by HR. In Jayaar Impex v Toaken Group Ltd (1996) Rix J took the view that such an outcome was dependent upon the conduct being only referable to the document in question. In the present problem the conduct of the parties is directly referable to ‘the document in question’, that is to the amended contract sent by Kevin to HR. Consequently, there is a strong argument that a valid contract exists between the parties. Question 2 (b) If there is a valid contract between the parties, it brings with it the risk of liability in breach of contract. If the analysis set out in 1(a) above is correct, the agreement is to be found in the conduct of the parties. That conduct is directly referable to Kevin’s amended document. Kevin made and supplied systems to the specification set out in the amended version. It is then the terms of the amended document that govern the relationship. In which case Kevin is clearly not in breach. If a valid contract exists, and Kevin is not in breach of it, then HR’s conduct is likely to amount to a repudiatory breach of contract. Kevin may then elect to affirm the contract or to accept the repudiation and claim for goods already supplied and for future loss of profit. If HR’s original offer governs the agreement then Kevin is in breach of contract: he made and supplied goods that did not comply with an express term of the contract. He is then likely to be liable to pay substantial damages: see Hadley v Baxendale (1854). Question 3 Bertram’s Liability Abigail’s contract with Bertram is for the supply by Bertram of professional services: the production of a design, drawings and specifications for the construction of the house. There are two terms of the contract which are relevant to Abigail’s claim. The first of these is an express term: that Bertram should specify glass that would have the quality of protecting Abigail’s paintings from sunlight. Abigail appears to have made clear in her instructions to Bertram: it was ‘vitally important’ to her that the glass walls would provide protection from sunlight for her pictures. The question to be resolved is: did this instruction become an express term of the contract? In Bannerman v White (1861) clear indication by a purchaser that he would not buy certain hops if they had been treated with sulphur was sufficient to render assurances by the seller that they were untreated a term of the contract. Abigail’s expression of the importance of the importance of Bertram specifying a particular kind of glass may fall short of this. Page 12 of 16 It is likely that Bertram’s contract with Abigail was reduced into writing. If that is the case, and the written contract is silent on the issue then it may not be a term of the contract: see Routledge v McKay (1954). Where, however, the expression falls short of that in Bannerman v White, and the agreement is reduced into writing that is either silent on the requirement or even excludes it, such a requirement may become an express term of the contract providing it is clear that one of the parties entered into the contract in reliance on the statement: see Birch v Paramount Estates (1956), Couchman v Hill (1947) etc. The second clause, which is relevant to Abigail’s problem, is implied by s13 Supply of Goods and Services Act 1982, which provides that in a contract ‘for the supply of a service where the supplier is acting in the course of a business there is an implied term that the supplier will carry out the service with reasonable care and skill.’ The test for breach of this implied term is objective. The question is: would a reasonably competent architect have carried out the express wishes of the client? In Lawson v Supersink (1984) the failure to carry out instructions was held to be a breach of s13 of the 1982 Act. On the facts of the problem, there is a strong case that Bertram’s undertaking the work after Abigail’s instructions amounted to a promise to carry out her express instructions (Birch v Paramount Estates, Couchman v Hill). Should the court be unwilling to accept the argument that Abigail’s instructions amount to an express term of the contract, there is a strong case that the failure to carry out those express instructions amounts to a breach of the term implied term by s13 of the 1982 Act in that it amounted to a failure to employ reasonable skill and care: Lawson v Supersink. Damages The appropriate measures of damages in Abigail’s case are expectation loss and arguably distress, vexation and anxiety. Her expectation loss is the loss of the benefits she should have received under the contract. In this case the benefits Abigail’s would have derived from the specifying of the appropriate glass. The measure of Abigail’s expectation loss may be calculated either by reference to diminution in the value of the house or by reference to the cost of cure. Diminution in Value of the House Abigail’s requirement in respect of protection from sunlight for her paintings may be particular to her. There may then be little or no diminution in the value of the house. Much of Abigail’s expenditure in replacing the glass would then not be recoverable. Cost of Cure This measure is most likely to reflect Abigail’s true loss. Its availability depends on whether Bertram’s liability is based upon breach of s13 Supply of Goods and Services Act 1982 or upon breach of an express term. In Watts v Marrow (1991) Ralph Gibson LJ said that to award the cost of cure, when the breach in question was of s13 of the Supply of Goods and Services Act Page 13 of 16 1982, would be to act as if the Defendant had guaranteed the accuracy of his work. This would have the effect of imposing strict liability upon the Defendant. His opinion was that the obligation was qualified: it did not go beyond the obligation to act with reasonable skill and care. If Ralph Gibson LJ’s view in Watts v Marrow remains good law it is possible that the claim for cost of cure will be rejected by the court. If it is possible to persuade the court that an express term has been breached, the issue before the court is not the particular wording of s13 but the basic principle that terms of a contract must be carried out fully and precisely. The cost of cure may then be awarded. In East Ham Corporation v Bernard Sunley & Sons (1966), the House of Lords awarded the cost of cure, stating that it was the usual measure in building contracts. In Knott v Bolton (Court of Appeal, 24 March 1995, unreported) the client of an architect was able to recover money spent in improving a staircase when, in breach of contract, the architect failed to produce a design for an ‘impressive staircase’. However, in Ruxley Electronics v Forsyth (1995) the House of Lords refused to award damages for the cost of cure on the ground that it was unreasonable to do so. Significant in the court’s thinking was the fact that the cost of cure was out of proportion to the loss of amenity suffered by the Plaintiff and that the Plaintiff might not use such damages, if awarded, to ‘cure’ the breach in question. The court will now look to see whether it is (a) reasonable for the Claimant to seek the cost of cure and (b) whether the reinstatement is actually intended by the Claimant. Abigail’s case may be distinguished from Ruxley Electronics, where the lack of amenity amounted to having to put up with a pool that was shallower than contracted for. Of significance in Abigail’s case is that a valuable picture collection is likely to be damaged as a result of Bertram’s breach. Provided that Abigail can persuade the court of her intention to cure the defect in the house she has a good case that she should be awarded the cost of cure. Distress, Disappointment Vexation and Anxiety The general rule is that damages are not available for emotional distress unless the main aim of the contract was the provision of pleasure, peace of mind etc. In Knott v Bolton the client’s claim for damages for disappointment and distress was disallowed on the ground that the central object of the contract was to design a house, not to provide pleasure to the occupiers of the house. In Farley v Skinner (No 2) (2001) the House of Lords disapproved of the distinction between strict and qualified obligations made by Ralph Gibson LJ in Watts v Marrow, at least to the extent that it applies to claims for distress and disappointment. It also said that Knott v Bolton had been wrongly decided on the issue of disappointment. In both Ruxley Electronics and Farley the House of Lords recognised the Claimant’s ‘performance interest’ and were prepared to award damages for disappointment to consumers. Whilst Abigail is likely to be able to recover damages for her distress, it is also likely that they will be relatively low. The senior judiciary has consistently held that such damages should be modest: see (e.g.) Watts and Ruxley Electronics. Page 14 of 16 Question 4 Exclusion clauses seek to exclude either liability or the availability of remedies. Limitation clauses seek to limit the amount of damages available. Clauses 77 and 106 are therefore exclusion clauses. Clause 89 is a limitation clause. Both types of clause are exemption clauses. Both are subject to the same common law rules and the Unfair Contract Terms Act 1977. Limitation clauses may be treated somewhat more leniently and are subject to particular provisions under the 1977 Act. The burden of the validity an exemption clause is upon the party seeking to rely on it. To be valid at common law such clauses must be incorporated into a contract. The contract in question is a signed document. There is nothing to suggest either an overriding oral representation or supplementary unsigned documents. The agreement is consequently governed by the rule in L’Estrange v Graucob (1934): once a party has signed a document it is bound by the contents. Exemption clauses are interpreted strictly by the court. Ambiguities are construed contra proferentem: see (e.g.) White v John Warwick & Co Ltd. (1953). They are read in the context of the contract as a whole. It is unclear whether liability for breach of implied terms is excluded altogether or is subject to limitation (clauses 77 and 89). It is unclear whether ‘equipment’ (clause 106) includes the entire engine or whether it refers to a part of the engine. Even if such ambiguities are interpreted contra proferentem against YEC it is likely that the limitation in clause 77 will stand. Section 3 of the Unfair Contract Terms Act 1977 deals with contractual liability and provides (inter alia) that the section applies where one party deals on the other’s ‘written standard terms of business’. The section goes on to provide that a party cannot by reference to a contractual term claim to exclude or limit liability for breach save in so far as it is reasonable to do so (s3(2)(a)). WTT dealt on YEC’s standard terms of business. Clauses 77 and 89 fall within s3(1) and so must be subjected to the test of reasonableness in order to determine their validity. Section 13(1)(a) of the 1977 Act provides that a clause making liability or its enforcement subject to onerous or restrictive conditions is an exclusion clause. Clause 106 imposes an onerous/ restrictive condition on any claim for economic loss. It is consequently an exclusion clause for the purposes of the Act and should be subjected to the test of reasonableness. ‘Reasonableness’ under the Act has a technical meaning. It is dealt with in s11 and Schedule 2 of the Act. S11(1) provides that reasonableness is to be judged by whether the clause is fair and reasonable in the light of circumstances that were known, or ought to have been known at the time of the contract. S11(5) provides that the burden of proving reasonableness lies upon the party seeking to rely on the exclusion clause. S11(2) directs the court to have regard to Schedule 2 when considering breach of implied terms in contracts for the sale and supply of goods. In practice the courts have applied Schedule 2 criteria generally when considering reasonableness: see Stewart Gill Ltd v Horatio Myer & Co Ltd (1992) per Smith LJ. Page 15 of 16 S11(5) contains special provisions for dealing with limitation clauses: s11(5)(a) directs that regard should be had to the resources of the party seeking to restrict liability and s11(5)(b) directs that regard should be had to the availability of insurance. Schedule 2 criteria includes the requirement that the parties knew or ought reasonably to have known ‘of the existence and the extent of the term’. This goes beyond the common law test of incorporation and requires that consent to the term be real: see AEG (UK) Ltd v Logic Resource Ltd (1996). The remaining four criteria within the Schedule may be divided into those which require consideration of economic and business matters which may go to the reality (or lack of it) of consent to the disputed clause. They include the strength of the bargaining positions of the parties and whether there had been an inducement to accept the clause. Where terms are agreed between experienced businessmen of equal bargaining power it is more likely that the court will regard the term as reasonable. It will interfere only if it is convinced that one party has taken unfair advantage of the other or the term is so unreasonable that it is likely that one of the parties has misunderstood or failed to consider it: see Watford Electronics v Sanderson (2001). Both parties to the contract are businesses dealing at arms’ length and prima facie are of equal bargaining power. It is arguable that WWT’s bargaining position is weaker: it depended upon having the engine renovated; there are few providers of such services. The argument would be strengthened if it were possible to demonstrate that the exemption clauses in issue were general in contracts throughout the trade and WTT was unable to obtain the service without agreeing to them. In the present contract, Clause 77 excludes all implied terms, thus removing WTT’s remedy in respect of poor workmanship. This is likely to be regarded as unreasonable and so invalid: see (e.g.) Balmoral Group v Borealis (2006). Clause 106 imposes an onerous condition on any claim for lost income resulting from poor workmanship: the engine would need to be returned to YEC within a very short period of time and at great cost. This is likely to be regarded as unreasonable and so invalid: see George Mitchell (Chesterhall) v Finney Lock Seeds (1983) and Stag Line v Tyne Ship Repair Group (1984). The court is likely to take a more lenient view of Clause 89. S11 (4) of the 1977 Act directs the court, when considering reasonableness in limitation clauses to have regard to resources and the availability of insurance. WTT would be expected to insure against its own business risks. They would include (a) damage to or loss of engine (b) consequential harm to its trade and (c) other foreseeable business risks. It is arguable that, once the engine was returned to WTT, YEC has no insurable interest in the engine or WTT’s trade. In this context the limitation clause may be regarded a proper allocation of risk between two businesses. It is, therefore, likely that the clause is reasonable. WTT’s remedy against YEC is therefore likely to be limited to £10,000. Page 16 of 16
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