Contract Law (Cape Unit 2)

8/17/2019 Contract Law (Cape Unit 2)

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1. The nature of the Law of Contract:

A contract may be defined as a legally binding agreement between two or more parties for

performing or refraining from performing an act. In the words of Sir Frederick Pollock, it is “a

promise or set of promises which the law will enforce”. This contractual agreement will createrights 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 classified as special or simple contract.

Special contracts

These are contracts made by deed. A deed is a written document that is signed, witnessed and

delivered. This type of contract usually includes the parties making the contract and a Justice of

the Peace or Notary Public. It is often used to convey some right or interest in land or to create a

legal obligation under a contract.

Simple contracts

These are the contracts that we are most often familiar with. They include the act of purchasing

petrol for our motor vehicles, purchasing food in our popular fast food restaurants, and even

purchasing a laptop. These are obligations that can be entered into orally, in writing or implied

by conduct of the parties.

You may also encounter the concepts ‘bilateral and unilateral contracts’ throughout your studies.

This is yet another way of classifying contracts.

Bilateral contracts

In a bilateral contract both parties make promises. It can easily be described as a two-sided

exchange in nature. It is a contract where a promise by one party is exchanged for a promise by

the other. Each promise is deemed to be sufficient consideration and so the exchange of promises

is enough to render them both enforceable. An example of a bilateral contract could be where

Isaac promises to pay $2500 and Kimeisha, the washer lady, promises to wash his clothes on the

weekend.


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Unilateral contracts

A unilateral contract is one one-sided in nature. It is one where one party promises to do

something in return for an act of the other party. Notice that there is no mutual promise from the

other contracting party. An example of a unilateral contract would be where Byron promises areward to anyone who will find his lost turtle. The essence of the unilateral contract is that only

one party, Byron, is bound to do anything. No one is bound to search for the lost turtle, but if

Carlton, having seen the offer, recovers the turtle and returns it, he is entitled to the reward.


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2. The legal rules governing formation of contracts:

Agreement(Offer and Acceptance)

OFFER

The intention to legally commit

An expression of willingness to contract made with the intention that it shall become binding onthe offeror as soon as the offeree accepts.

Storer v Manchester City Council, D sent C a letter stating, if you sign the agreement for sale, Iwill send you the agreement signed on behalf of the council, C did as instructed. Before the council

(D) signed, their policy changed and they were unable to sign agreement to sell house. D claimedthe agreement had not been formed because they had not yet signed it. Held, D made the offer toC and C accepted it within the conditions laid out. The council not signing the form was irrelevant,the clear and precise offer had already been made and upon acceptance by C, the contract wasmade. A contract is formed when there is, to all outward appearance, a contract. (Smith v Hughes).

Gibson v Manchester City Council, the council sent Gibson a document, stating they ‘may be prepared to sell the house to him’. The House of Lords held that a contract had not been concluded because the council had not made an offer capable of being accepted. It was noted that the words,‘may be prepared to sell’ are fatal to an offer and there was never an offer available to be accepted.

NB// A valid offer must be communicated (i) Orally, (ii) In writing or (iii) by Conduct. [One ofthree ways]

An Offer is distinct from invitation to treat:

Example of invitation to treat:a) A Commencement of negotiation

Pharmaceutical society v Boots, the society argued that a drug sale was completed whenthe customer took the item from the shelf. The court held this was an invitation to treat.

b) Supply of Information

Harvey v Facey, the telegram that was used to indicate the lowest selling price, wasregarded as a simple request of information, rather than capable of forming a definite offer.


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c) A statement of Intention

Harris v Nickerson, the plaintiff claimed that advertisement constituted an offer and therefusal constituted a breach of contract. Court held, advertisement did not constitute anoffer, rather was merely a declaration of intent.

d) Display of goods The display of goods with a price ticket attached in a shop window or on a supermarketshelf is not an offer to sell but an invitation for customers to make an offer to buy. SeeFisher v Bell ,

Where goods are displayed in a shop together with a price label, such display is treated asan invitation to treat by the seller, and not an offer. The offer is made when a customer presents the item to the cashier together with payment. Acceptance occurs at the point thecashier takes payment.

P.S.G.B v Boots chemists, they held that the display of goods was not an offer. Rather by placing

the goods into the basket, it was the customer that made the offer to buy the goods.

e) Auction, In an auction, the auctioneer’s call for bids is an invitation to treat, a request foroffers. The bids made by persons at the auction are offers, which the auctioneer can acceptor reject or reject as he chooses. Similarly, the bidder may retract his bid before it isaccepted.

Payne v Cove, Stands for the proposition that an auctioneer’s request for bids is not anoffer which can be accepted by the highest bidder. This case was qualified by Berry vDavis, which it states that if the auction is advertised as being ‘without a reserve price’,then the auctioneer is bound to sell to the highest bon a fide bidder.

f)

Advertisements, Advertisements of good for sale are normally interpreted as invitations totreat.

Patrige v Crittenden, it was noted that usually advertisements are treated as an invitation totreat. Where there is no direct use of the words ‘offer for sale’. It was held that theadvertisement in question constituted in law an invitation to treat and not an offer to sell.

Exception

However, advertisement may be construed as offers if they are unilateral, i.e. open to allthe world to accept (i.e. offers for rewards).

Corlill v Carbolic Smoke Ball, The manufacturer advertised that the buyer who foundthe five remedy did not wonk would be rewarded £100. The company was found to have been bound by its advertisement, because all the essential contractual element was


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present. The court of Appeal unanimously rejected the company’s argument and held thatthere was a fully binding contract. (1) the advert was a unilateral contract to the world,(2) satisfying conditions for using the smoke ball constituted acceptance of the offer, (3) purchasing/ merely using the smoke ball constituted good consideration if the company’sclaim that £1000 was deposited at the bank showed the seniors intention to be bound.

g) Mere statement of price

Harvey v Facey, The Judicial Committee held that indication of lowest acceptance pricedoes not constitute an offer to sell, rather it is considered an invitation to treat.

Tenders

Harvela Investments Ltd v Royal Trust of Lonada, This concerns the validity of referential bids in competitive tenders. Royal Trust Lo owned shares in a company and invited bidsfor them. Harvela bid $2,175,000 and Leonard bid $2,100,000 or $101,000 in excess of

any offer. Expressed as a fixed monetary amount, whichever is higher’. Royal Trustaccepted Leonard’s bid as being $2,276,000. Harvela sued for breach of contract saying areferential bid was invalid.

The House of Lords succinctly and cogently summarized the reasons for referential bids as follows:

‘The very essence of sealed competitive bidding is the fair compliance with whichnot only the owner but the other bidders are entitled. To give effect to this bidding practice in which the dollar amount of one bid was tied to bids of another would beto recognize means whereby effective sealed competitive bidding could be whollyfrustrated. A submission by bids of others is invalid and unacceptable as inconsistent with and potentially destructive of the very bidding in which it issubmitted.

Blackpool & Fylde Aero Club v Blackpool Borough Council, This is a leading Englishcontract law case on the issue of an offer and acceptance in relation to call for bids. In itthe Court of Appeal decided that tenders and request for tender are accompanied by acollateral contract implying that the requestor will inspect the bid.

Communication of the offer

There cannot be assent without knowledge of the offer.

R v Clarke, ( a case decided by the Australian high Court in law of contract). Theclaimant wanted to compel the crown to pay a reward it had offered for informationleading to the conviction of a murderer. He told the police ‘exclusively in order to clearhimself’ (given he was also under investigation). The judge interpreted evidence as to saythe claimant had forgotten about offer of the reward. Held, it was necessary to act in


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reliance on an offer to accept it and therefore to create a contract. Here it was held thatthe evidence showed that Mr Clarke was not acting on the offer.

Termination of an offer

An offer may be terminated in one of the following five ways:

1. Revocation- The offer may be revoked by the offeror at any time until it isaccepted. However, the revocation of the offer must be communicated tothe offeree(s). Unless and until the revocation is so communicated it isineffective.

Ryrne v Van Tienhover, It was ruled that an offer is only revoked by directcommunication with the offeree, and that the postal rule does not apply inrevocation; while simply pushing a letter counts as a valid acceptance, it

does not count as valid revocation.

The revocation need not be communicated by the offeror personally, it is sufficient if it is donethrough a reliable third party. See.

Dickinson v Dodds, Dodds delivered a signed letter to Dickinson offering to sell his house,leaving the offer open for the next two days. Mr Berry told Mr Dickinson that Dodds had offeredto sell the house to somebody else.

Held, it was clear that before there was any attempt of acceptance, he was well aware thatDodds had changed his mind. It was impossible to say therefore that there was ever thatexistence of the same state of mind between the two partners, which is essential in point of lawto the making of an argument.

Where an offer is made to the whole world, it appears that it may be revoked by takingreasonable steps. See.

Shuey v United States, The secretary of War published an announcement in the publicnewspaper offering a reward for information leading arrest of certain criminals. The presidentissued an order revoking the offer which was published in a similar way. The claimantdiscovered and identified one of the criminals, unaware of the notice of revocation. It was heldthere was no contract. The offer had been revoked with the same ‘notoriety’ as the original offerand this was sufficient to cancel it for even those who had not read it.

Once the offeree has commenced performance of a unilateral offer, the offeror may not revokethe offer. See.

Errington v Errington, Before the father died, he made a promise to his daughter-in-law and sonthat he would transfer the title in their names; if they paid the mortgage. The daughter-in-law began payments of the mortgage.


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Held, the offeror cannot revoke unilateral offer, once the offeree had begun part performance.

2. Laspe of Time- where an offer is stated to be open for a specific length oftime, then the offer automatically terminates when that time limit expires.

Where there is no express time limit, an offer is normally open for areasonable time. (Offard v Davies) An offer maybe made subject to certain conditions, if the condition is notsatisfied the offer is not capable of being accepted. An offer may lapsethrough:

i. Passage of time: Financing Ltd v Stimsonii. Failure of a condition (Express or implied), Financing Ltd v

Stimsoniii. Death: The offeree cannot accept an offer after notice of the

offerer’s death. If the offeree doesn’t know of the offeror’s death

there is no personal element involved, then be may accept theoffer. (Bradbury v Morgan)

3. Rejection ( termination by the offeree)- A rejection may be either expressor implied i.e. A counter offer ( a verification of terms or a new term willresult in a counter offer)Hyde v Wrench, Wrench offered to sell his farm to Hyde for £1,200 anoffer which Hyde decline. Another occasion, Wrench wrote to Hydeoffering to sell the farm for £ 1000, stating it to be the final offer and thathe would not alter from it. Hyde offered £950, Wrench refused to accept.Hyde then agreed to buy the farm for £1000 but wrench refused.Held, counter offer cancelled the original offer.

Brogden v Metropolitan Railway co, In signing a contract, the claimantleft blank certain aspects of it and said to be subject to arbitration fordifference that may arise. For a whole both of the partners acted accordingto the terms of the agreement. But when a serious disagreement occurred,the claimant said there had been no formal contract.Held, the contract had arisen by the conduct of the partner. A mere mentalassent to the agreement’s term would not have been enough, but havingacted on the terms made it so. Lord Blackburn also held, that the onus ofshowing that both partner had acted on the terms of an agreement whichhad not been in due form, executed by either, lies upon the person allegingsuch facts.

4. If a condition in the offer is not fulfilled, the offer terminates.

Financings Ltd v Stimson, held, there was an implied condition in theoffer that the subject matter of the offer would remain substantially in thesame condition it was at the time of the offer.


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The following rules have been developed with regard to acceptance:

Counter Offers

A counter offer also amounts to a rejection of the original offer which cannot then besubsequently accepted.Hyde v Wrench

A counter offer should be distinguished from a mere request for information. See.

Stevenson v Mclean, It was held that the plaintiff’s telegram was not a rejection of the offer but a mere inquiry about whether the terms could be modified.

If A makes an offer on his standard document and B accepts on a document containing hisconflicting standard of terms, a contract will be made on B’s term if A acts upon B’scommunication, the situation is known as the ‘battle of forms’

Butler Machine Tool v Excell-O-Corp, The offer to sell machine on terms provided by B wasdestroyed by the counter offer made by E. Therefore the price verification form was part of thecontract. The contract was concluded on E’s terms since B signed the acknowledge slipaccepting those terms. Where there is a battle of forms, whereby each party submits their ownterms. The last shot rule applies where by the contract is concluded on the terms submitted by party who is last to communicate those terms before the performance of the contract commences.

Conditional Acceptance

If the offeree puts a condition in the acceptance, then it will not be binding. But a request forinformation does not destroy the offer.

Request for information

At the end the test will be- what was the intention of the offense (Stevenson v Mclean)

Tenders

A tender is an offer, the acceptance of which leads to the formation of a contract.

Communication of Acceptance

The general rule is that an acceptance must be communicated to the offeror until and unlessthe acceptance is so communicated, no contract comes into existence.

Entores v Miles For East Corp, Lord Denning found that the regular postal rule did not applyfor instantaneous means of communication such as telex. Instead, acceptance occurs where themessage of acceptance is read. The postal rule does not apply to instantaneous communication


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such as telephone or email. A contract is also formed when and where the medium of agreementwas received. When instantaneous method of communication is used it will take effect when andwhere it is received.

Prolonged silence or inactivity may in some rear case amount to communication of

acceptance.The Hannah Blumenthal

Instantaneous Termination

Tenex Steamship v The Brimnes, The plaintiff sent defendant, a telex to terminate the contract. Itwas sent during the normal office hours, but the defendant did not see it until the next day.

It was held that the withdrawal telex was effective from the time it arrived not the time itwas read.

Note this was a case relating to withdrawals of offers not acceptance, but it is a useful

analogy.

Exceptions to the need for communication

a) Where the offer has warned the requirement of communication

Carlil v Carbolic Smoke Ball- Because it is a unilateral contract

b) The Postal Acceptance Rule

Adams v Lindsell, (First case on postal rule in which letter was misdirected by thedefendant)

It was held that there was a binding contract when the letter was posted by the postalacceptance rule. In Henthorn v Fraser, that the court determined the precise timing of theacceptance, that is the moment the letter of acceptance, is posted.

Household Five Insurance v Grant, Held, that there was a valid contract, because the rulefor the post is that acceptance is effective even if the letter never arrives (this aspect asoverruled in Holwell Securities v Hughes). He noted that if anyone can opt out of the ruleand that even if it sometimes causes hardship, it would cause even more hardship to nothave the rule. Once someone posts acceptance, he argued there is a meeting of minds, and by doing that decisive act a contract should come into effect.

Henthorn v Fraser, The claimant received a note from the defendant with an offer to purchase a certain property within 14 days. Claimant accepted via mail the next day. Thedefendant withdraws the offer before receiving the acceptance, but after the acceptancewas posted.

Held, claimant was entitled to specific performance. Where the circumstances aresuch that it must have been within the contemplation of the partner that according to the


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ordinary usage of mankind, the post must be the means of communicating the acceptanceof an offer, the acceptance is complete as soon as it is posted.

Offer

This is an expression of willingness to a contract on specified terms without furthernegotiations, so that it requires only acceptance for a binding agreement to be formed.

One must be able to differentiate an offer from all other statement which is made in thecourse of negotiation, in particular an invitation to treat. As only an offer is capable of immediatetranslation into a contract by the fact of acceptance.

Do not be thrown off by the way examiners label something, they may show you an invitation totreat but then suggests that Tom has accepted Mary’s offer, when in fact all Mary has done was put an advert selling her car, which as we all know is an invitation to treat. But the examiner maycall it an offer, but what you need to do is to identify and discuss what exactly it is.

In most cases you can distinguish between what is an offer and an invitation to treat. Youmust look at whether the communication is sufficiently specific in terms of the main and force to be capable of immediate acceptance and whether it is made with an intention to be bound uponacceptance. The intention to be bound is determined objectively so you have to look at thelanguage used. Gibson v Manchester City Council, The House of Lords looked at the languageuse of the correspondents to determine whether there was an intention to be bound. The House ofLords held that the word maybe prepared to sell was not an offer but an invitation to treat. Thecouncil was inviting the plaintiff to make an offer, and although he had made such offer his offerhad not been yet accepted, at the time of the policy change.This is often contrast with Stoner v Manchester City Council, where the court said a bindingcontract had been concluded as the language used namely; ‘If you will sign the agreement andreturn it to me, I will send you the agreement signed on behalf of the council’. The court said thecouncil’s intention to be bound was clearly evident and that was an offer.

The general rule in respect of advertisement, brochures and pricelist are that they amount to aninvitation to treat.

Exception to the General Rule

Where the advertisement is unilateral, then it binds itself to perform a stated promise upon performance of the requested act, and as such the promise gives no commitment to perform but ifhe does perform then the promisor will be bound. If you get a problem question you relate backto Carlil v Carbolic Smoke Ball. In respect of a unilateral offer, although it was an advertisementit was held to be an offer rather than an invitation to treat, not just because of its unilateral nature but because it saw the deposit of funds into a bank which evidenced the company’s willingnessto be bound or legally bound in the circumstance that someone caught influenza.

What if you are given a website situation? Well, the argument maybe that websites are theelectronic equivalent of displays, advertisements or catalogue. This would mean in general thatwebsite would constitute an invitation to treat. So then if the website arguably constitutes an


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invitation to treat.The offer will come from the customer at the check-out stage when thecustomer clicks the relevant instruction to process the order.Generally tenders are invitations to treat but under certain circumstances would constitute a validoffer.

Communication of an Offer

An offer does not take effect unless communicated to the offeree. This may not be a straightforward as it sounds. What you have to look at is whether they have used a scenario where the person who is making the offer says I am about to post it. Please do not go down the route of postal rule. If the person making the offer has to post it, it is no good until it has actually beencommunicated to the offeree.

Revocation

• Personal service contracts are revoked by death of the offeror.

•

Where an offer is being revoked by a third party he must be reliable (emphasis added)

Acceptance

How do we identify if an acceptance has occurred. The general principle is that to constituteacceptance, the offeree’s unequivocal expression of intention and assent must be made inresponse to an exactly matched terms of the offer, also the matching acceptance must becommunicated to the offeror. So there are two aspects to it (i) The fact of acceptance and (ii) Thefact of communication.

A Qualifying Cover Letter

What happens if you have sign the contract and send it back but you send a cover letter sayingthis is what I intend or don’t intend.(Society of Lloyds v Twins), D said they did not accept a reconstruction and renewal agreementwhich was offered to Lloyds name and that they could not be in breach of the agreement becausealthough they had completed the application form, they had put in a cover letter saying that theywould not be able to pay the some due from them under the settlement.

Held, there was an unconditional acceptance of the offer because there was a completedapplication form, and the cover letter was separate and collateral and had nothing to do with thecontract itself.


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Rule in relation to acceptance

The person accepting must know of the offer.R v ClarkeVs

Williams v Caradine, there is a suggestion that once the offeree did have knowledge of the offerand accept it in response to that his motive for doing so is irrelevant. In Gibbson v proctor, atfirst sight it appears to be at odds with the principle that there must be knowledge of the offer inorder to claim the reward. But in the decision it has been explained as turning on the particularrequirements of offer, which said that it require the particular information to be given to a particular person. Although the information was given to another person at that time, when therewas no knowledge of the reward. The offeree had the necessary knowledge at the time when theinformation reached the particular person. It stands for the proposition that you still need to haveknowledge of the offer in order to accept.

This case held that the advertisements of rewards for information leading to the arrest or

conviction of the perpetrator of crime, is treated as an offer as the intention to be bound isinferred from the fact that no further bargaining is expected to result from them. In- section ofthe case reveals that the party claiming the reward possessed full knowledge of the offer at therelevant time in giving the information.

(As Opposed to Unilateral Contracts)

In bilateral contract, the general rule is that the offeror cannot wave the need for communication.(Felthouse v Bindly), In the said case it was seen that silence will not amount to acceptance.

There might be a question whether it may be possible to retract a postal acceptance before itreaches the offeror? In other words could the offeree post an acceptance, change his mind andtelephone the offeror to tell him he does not want to accept. There is no English case on this point and you should say this, but there is a Scottish case, Dunmore v Alexander, it is a highlyobvious authority (emphasis added). Although it is sometimes cited in support of the conclusionthat it is possible to overtake a postal acceptance following Dunmore v Alexander, arguably youcan retract by quicker method but by the strict postal rule in English law, there is no retractiononce you have validly posted letter it will amount to an acceptance.

Instantaneous Method of Communication

Instantaneous method of communication can only take effect on receipt. Generally the onus is onthe communicator to get his message through. There are some instances where the actualcommunication would be non-instantaneous even though they have use an instantaneous method.(Brinkibon v Stahog) For all irregularities that may occur with the many warrants oftelecommunication such as: message not reaching the recipient immediately, message sent out ofoffice hours, or message may be sent at night with the intention or on the assumption that theywill be read at a later time and many other remark may occur. No universal rule can cover allsuch cases; (1) they must be resolved by the intention of the parties, (2) by sound business


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practice and (3) in some cases by a judgement where the risk should lie certain irregularity mayamount to instantaneous method of communication being treated as non-instantaneous method ofcommunication, this happens when a message is sent after 5:00pm, looking at the rules in turnthen. If you are communicating with another office, follows that the offeree would reasonablyexpect the offeror to be monitoring the fax machine. I would expect communication to occur

when the message was received. Accordingly communication to that machine would be actualcommunication. Equally messages would be at the risk of the recipient, if the recipient failed tomanned his telex/ fax machine.

What about Message left on Telephone Answering Machine

There is no case and you should argue by analogy. So if you apply the general principle of whatthe offeree could expect, the conclusion might be that the message will not be communicateduntil it is played back, since anyone leaving a message could reasonably assume that as themachine is switched on the message will not be communicated immediately. Of course there is a

practical point to this that the person could be screening and be right there, but that aside whatyou have to consider is if the person leaving the message is doing so in order to accept that hereally ought to consider that it will not be communicated to the person until it is played back. Inwhich case it will possibly fall into the non-instantaneous variety.

Emails

When you are looking at emails there may be a postal rule analogy, but the better approach seemto be that it will be dealt with under the receipt rule. In that it would seem better to apply anactual communication, because the sender will know if the message had not been sent and canresend it. One has to consider has there been an offer?


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Intention to create legal relations

N\B: ReformationRegard must be given to the actualIntention of the parties as approve to

Purely circumstances.

There is a presumption for commercial agreements that parties intended to be legally bound(unless the parties expressly state that they do not want to be in which case the presumptionis rebutted).On the other hand, many kinds of social and domestic agreements are unenforceable on the basisof public policy(unless rebutted by evidence of the contrary).

Domestic\Social Agreements (4 cases)Balfor vs Balfor

Using contract like terms, Mr. Balfor had agreed to give his wife a certain sum of money a monthas maintenance while he was living in Sri Lanka. Once he left they separated and Mr. Balforstopped payments. Mrs. Balfor brought an action against him to enforce paymentsThe court held: There was no enforceable agreements there was not enough evidence to suggestthat they were intended to be legally bounded by the promise.

Vs

Merritt vs Merritt Notwithstanding the domestic context and although married, the couple were estranged at the timethe agreement was made. Therefore, any agreement between was made with the intention to create

legal relations (commercial agreement).

Jones vs PadavattonAn agreement whereby a mother bought a house in London for her daughter to rent whilstattempting the bar examination. It was held not to be legally binding.

Parker vs ClarkeThe defendants invited the plaintiffs to live with them. There was a detailed agreement abouthousehold expenses and that the defendants would leave the plaintiffs a share of their property intheir will.On the strength of their agreement, the plaintiffs sold their own home and lent money to their

daughter. It was held that there was an intention to create legal relations.

Simkins vs PaysA woman, her granddaughter and a paying boarder all took part in a weekly competition organized by a Sunday newspaper. The agreements over postage was informal and the entries were made inthe grandmother’s name. One week they won 750 pounds. The paying boarder was derived a thirdshare by the two.


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The court held: There was a legally binding agreement that any price should be derived betweenall three.

Commercial Agreements

Rose & Frank vs Crompton BrosA commercial agreement by which A appointed B to be its distributer in the USA expressly statedthat it was “Not subjected to any legal jurisdiction” in either country. A terminated the contractthey had without giving notice as required, and refused to deliver goods.Held: Although this was clearly a business agreement which appeared to be a contract, the expressstatements that there should be no legal consequences was enough to show that this was notintended to be a contract.

Edwards vs SkywaysIn a case involving an “ex gratia” payment. Megan J emphasized that there is a strong presumptionthat commercial agreements are meant to be legally binding.

In which types of cases the burden of proof is on the person seeking to rebut the presumption.

Intention to create legal relation is judged is judged objectively through the use of being rebutted.When one consider commercial agreements it is presumed that the parties intended to be legally bound, unless there are clear words indicating the absence of a promise or that the parties intendto be bound in honour only. In Jones vs Vernon it was held where a contract is binding in a honouronly or the honour clause is used this meant there was no contract.

N.B. The fact of a breakdown of the relationship takes agreement outside the scope of the domesticagreement.In Merrit vs Merrit Denning LJ said that it’s all together different when the parties are not livingin amity but are separated or about to separate they then bargain keenly, they do not rely onhonorable understanding, they want everything cut and dried .And it may safely be presumed thatthey intend to create legal relations.In order to rebut the presumption , against intention to create legal relations , it is unlikely that thecourt will find any express statement of the parties to be conclusive since it is here that the policyelement of the doctrine is at its strongest. Not withstanding the policy driven position , the courtshave always been willing to find social/domestic agreements enforceable in certain cases. It is notalways easy to identify the evidence which cause the presumption to be rebutted , but factors suchas : 1) certainty of terms 2) seriousness and 3) reliance (all three can be seen in Parker vs Clarke).

Commercial Agreements

One may find a company who advertises may seek to reply on the absence of intention to createlegal relations, in order to avoid being held to be exact words of an advertisement.In Batman vs Raptor Insurances (1886) the plaintiff had booked an holiday through a tour operator,the tour operator was a member Raptor, the operator had become insolvent. The issue was whetherthe raptor notice display on the tour operator premises amounted to a binding offer of protection,so that the customers were entitled to be reimbursed the full cost of the holiday.The court rejected the arguement that this promise was not allowed.


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The majority said that the notice was intended to be binding and would be read by customersconstituting a binding offer which a customer could accept by booking a holiday with the touroperator.In Ford Motor company vs A.V.E.F.W The court faced the question of whether a collective bargaining agreement between union and management was legally binding. it was clearly a

commercial matter and therefore it ought to have been legally binding. The burden of proof is onlayer on the union which sought to deny the contractual intention and the court found in the union'sfavour. In doing so the court relied on evidence from the industrial relations expert, which wasgeneral rather than relevant to the particular agreement and so the courts from a policy stand pointfound that there was no contract in terms of intentions to create legal relations.

The problem with the area of law differences can exist in identifying the type of contract

(commercial/social) for the purposes of the application of presumptionsThe difficulty is illustrated in Sadler vs Reynolds , in this case the claimant was a journalistic cub professional ghost worker , who sought damages for breach of an alleged oral contract to ghostwrite the autobiography of a well known business man , that the agreement had been made

following a number of meetings including one at at which their wives had been present , and theclaimant had been charged with securing a reputably publisher that the parties had agreed to share proceedings and that he had came up with a number of ideas in writing this "agreement".The evidence was that after an agreement had been advance with another writer for the writingand publication of the autobiography. The judge considers that given the context and nature of the party dealing this agreement fell somewhere between a transaction that was obviously commercialand a social agreement. On the facts the judge considered that had the onus of establishing anintention to create legal relation. Although this Ono's was heavy as in the case of a purely socialcontract.Interestingly in the case it was held that the claimant had discharge his burden of proof that therewas intention to create legal relations the defendant knew that the claimant was an experience journalist and had been previously employed as an ghost worker , they had met to discuss the possibility of the claimant ghost working his autobiography and plan to make money from thetransaction.It means therefore that it is evident that in the case of a contract that is clearly commercial thestarting point will be the application of presumption in favour of an existence of an intention to belegally bound and it seems difficult to justify the conclusion in Sadler vs Reynolds , that theagreement was anything other than a commercial agreement for profit.

Consideration

Definition:


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Consideration for a particular promise exist where some right, interest, profit or benefit occurs (orwill occur) to the promisor as a direct result of some forbearance, detriment, loss of responsibilitythat has been given, suffered or undertaken by the promisee (Currie v Misa).Key terms:Promisor: the person who makes the offer or promise. (Benefits)

Promisee: the person carrying out the act to accept the promise/offer. (Forebears)Consideration can be:1. A benefit to one party or detriment to another.

2.

The price paid for a promise.

3. The element of exchange.

Kinds of Consideration

Executory: a promise to do something in the future.

Executed: an act wholly performed at the time the contract is entered into.

Past Consideration: something already completed before the promise is made cannot amount to

consideration.

N.B The claimant is usually the promisee while the defendant is usually the promisor.

Past Consideration:

Roscorla v Thomas,

D sold a horse to P for £30. After sale he promises that the horse was free from lice, which turned

out not to be true. Held, P could not be sued on promise as he had already agreed to pay for the

horse when the promise was made.

Re McArdle, a promise was made to pay money in return for post services. Held, that his was past

consideration and therefore not valid.

EXCEPTION


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Where a service is rendered at the request of the promisor, on the understanding that payment will

be made, a subsequent promise to pay a certain sum will be enforced provided that the payment

would be legally enforceable if it had been promised in advance.

Exception to Past Consideration

(1. If something is done in a business context and it is clearly understood by both sides that it will

be paid for, the past consideration will be valid. See Re Casey’s Potents. )

Lampleigh v Braithwait,

After killing a man D asked C to do all he could for him to get pardon from the king. C did

this at great trouble and expense, when he claimed the amount promised, D said his actions

were past consideration. Held, C was entitled to his money, as he acted on his request and it

as clear at the time D asked him for help that he would be paid for his trouble.

Pao On v Lav Yiu Long [P.O V L.Y.L] (two first words not English)

The Privy Council laid down three conditions which must be satisfied to invoke the doctrine of

Lampleigh v Braithwait:

1. The act must have been done at the request of the promisor.

2. It must have been understood that a payment was to be made for the services when it was

requested.

3. The contract (had it been made in the normal way) must have been a legally enforceable

one.

Rules Governing Consideration

1) Consideration must move from the promisee

A promise is enforceable if it is supported by consideration from the promisee.Tweddle v Atkinson,(use facts from second mention of the case).

Tweddle promised William Guy that he would pay a sum of money to his child vice versa. Upon

marriage of the two children of each other, however, Guy failed to pay the son of Tweddle, who

sued his executor for the amount promised.


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Held, the son could not enforce the promise made to his father, as he himself did not give

consideration for it, it was his father who had done this instead.

Although consideration must move from the promisee, it does not necessary have to move to the

promisor. The promisee may provide consideration to a third party, if it is agreed at the time the

partier contracted (Bolton v Madden).

Din lop v Selfridge,

An act or forbearance of one party, or the promise thereof, is the party of which the promise of the

other is brought, and the promise thus given for value is enforceable.

2) Consideration need not be adequate

Adequacy is a question of fact. It need not equal in value the consideration provided by the other

party. It is for the parties themselves to make their own bargain:

Chappel Co. V Nestle Co,

It was held that even the most worthless item can be good consideration. A contracting party can

stipulate for what consideration he chooses.

Trifling consideration was held valid in De La Bere v Pearson.

3)

Consideration must be sufficient

Suffi crency is a question of law. Consideration must have some vale in the eyes of the law.

Traditionally, the following have no value in the eyes of the law:

1) A promise to perform an existing public duty:

• Collins v Godefroy,

Godefroy promised Collins a certain sum of money to come to court after he was suspended to

attend.Held, Collins was bound to come to court anyways and that it was not good consideration

to do so.

• If he does more than his duty, then there is consideration (Glasbrook Bros v

Glamorgan).


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During a miner’s strike, James, manager, requested the police superintendent to provide extra

forces to protect the working men against strikers. The superintendent thought the men were

adequately protected, but on James insistence an additional 70 men were provided. The owners

were sent a bill for additional police men, which they refused to pay on grounds that the police

officers were only performing their legal duty to protect the public.

It was held that although police cannot accept extra money for doing their normal statutory

duty, when special services are required beyond the normal call of their duty, they are entitled to

be recompensed.

2) A promise to fulfil an existing duty owed to the same person:

• In Stilk v Myrick [1809] performing an existing contracted duty was not good

consideration for a promise on a ship owned by Myrick for a monthly promising to do anything

needed in the voyage regardless of emergencies, (therefore not withstanding the emergencies that

arose, the men were under an existing duty as promised to do anything needed in the voyage).

After the ship decked two men deserted, and after failing to find replacement, the captain

promised the crew the wages of those two men divided between them if they fulfilled the duties

of the missing crewmen as well as their own. After returning home the captain refused to pay the

crew men the money he had promised them.

Their decision was argued on the basis of Harris v Watson, where it was decided that, “noaction would lay at suit of a sailor on a promise of a captain to pay him extra wages, in

consideration of his doing more than the ordinary share of duty in navigating the ship; and his

lordship said, that if such a promise could be enforced, sailors would in many cases suffer a

ship to sink unless the captain would accede to any entrouogent demand they might think

proper to make.”

Hartley v Ponsonby, (36-19-5)

A ship left England for Bombay with a crew of 36. By the time it arrived, only 19 remained

of whom only 5 were able seamen. The captain promised the remaining able seamen an extra

£40 for completing the voyage. It was held that the seamen had provided good consideration

as what they were now being asked to do was different to what they had agreed to do when

there was a full crew.


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Commentators

Modern commentators say that the decision by the judge not to award the money to the plaintiff

was based at least partly on public policy; should he have done so it would have create a precedent

that would risk new members blackmailing captains into giving them more money. It is accepted

that the decision would be likely to be different should it have been made in modern times; because

of the doctrine of economic divers it would be difficult for such blackmail to be enforced in court.

In Hartley v Ponsonby, where it was ruled that although Stilk v Myrick, was still valid, they would

be due the money if the situation created by the desertion of the crew changed their duties to an

extent that they would not be bound to continue under the existing contract. Another (albeit

controversial) exception is in Williams v Roffey Bros & Nicholls, in varying a contract, the court

will be quick to find consideration if “practical benefits” are given from one party to another.

Exception to the Rule in Stilk v Myrick

In Williams v Roffey Bros & Nicholls, Roffey Bros was contracted by Shepherds Bush Housing

Association to refurbish 27 flats. They subcontracted carpentry to Williams for £20,000 payable

in installments. Some work was done and £ 16,200 was paid. Then Williams ran into financial

difficulty because the price was too low. Roffey Bros was going to be liable under the late penality

clause for completion, so they promised an extra £575 per flat for on time completion. Williams

did eight flats and stop because he only got £1500. Williams claimed sum promised.

Held, Williams had provided good consideration even though he was merely performing a

pre-existing duty. The concept of economic divers provided on answer to Stulk’s old problem. The

test for understanding whether a contract would legitimately be varied was set out as follow:

i) If A has a contract with D for work.

ii) Before it is done, A has reason to believe B may not be able to complete

iii) A promises B more to finish on time

iv) A ‘obtain is practice a benefit, or obviates a disbenefit’ from giving the promise.

v)

There is no an economic diver or fraud. Then practical benefit constitutes good

consideration.

In commenting on the earlier case of Stilk v Myrick Glidewell LJ said, “It is not in my view

surprising that the principle enunciated in relation to the rigours of seafaring life during the


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Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement

and limitation in its application to present day.

Russell LJ said, “The courts nowadays should be more prepared to find [considerations]

existence so as to reflect the intention of the parties to the contract.

b) A request to avoid part-payment of a debt.

The basic rule is that payment of a smaller. Sum will not discharge the duty to pay the high sum:

Pinnel’s case,

It was opened that a part payment of a debt could not extinguish the obligation to pay the whole.

The rule is that payment of a lesser sum on the day in satisfaction of a greater cannot be any

satisfaction for the whole; it appears to the judges that by no possibility, a lesser sum can be a

satisfaction to the plaintiff for a greater sum. The rule is obiter dicta.

Application

Foakes v Beer,

Is a controversial application of the per-existing duty rule and a leading case from the House of

Lords on the legal concept of consideration. It establishes the role that prevents parties from

discharging an obligation by part performance, affirming Pinnel’s case. Beer agreed that she would

not take any action against Foakes for the amount owed if he would sign an agreement promising

to pay an initial sum of £500 and pay £150 duress yearly until the whole agreement was paid back.

Foakes was having financial difficulty, and so Beer waived any interest on the amount owed.

Foakes made the payment as agreed without any interest.

The House of Lords held ruling in favour of Beer. The reasoning behind their judgement

was that though the agreement did not contemplate the interest owed, it could still be implied in

an enforceable agreement. However, the promise to pay a debt was deemed not to be sufficient

consideration as there was no additional benefit moving from Foakes to Beer that was not already

owed to her. Even where the creditor promise that he would not sue for money owed, he may still

sue where there was part payment of debt.

Consideration is really the bargaining element of a contract, e.g. if A agrees to paint the room and

B promises to pay £300. The law of contract only enforces reciprocal agreements. If you want to


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make a gift then you have to draft a deed or covenant but for simple contract you do need

consideration.

In Re McArdle, when the repairs and decorations were carried out without request and after this

compensation was offered that was a gift. These are exceptions however, to the past consideration

rule.

Exception to Past Consideration rule where:

i) Services rendered for an implied promise of payment are an exception (Lampleigh v

Braithwait)

ii) Equally if you are looking at a commercial content, where for example you ask a

window cleaner to clean your windows, you are expected to pay. So if no price is

mentioned and you take your car to the garage and leave it, it may be that the court will

construe that given the commercial context a reasonable price maybe payable.

Consideration must move from the promisee

Only a person who has provided consideration can enforce the contract (Dunlop v Selfridge). For

sufficiency of consideration the doctrine of caveat emptor- let the buyer beware. May apply, the

courts will not inquire into the adequacy of the consideration.

One has to consider what has no value in the eyes of the law:

Where there is a public duty

If a promise is intended to be bonding the courts may not allow the promisor to go back on his

promise. The doctrines of promissory estoppel under certain circumstances will estoppel a

promisor from going back on his promise to accept a smaller sum in discharge of a larger sum.

(London Property Trust v High Trees)

The purpose of this lecture will be to describe:

i)

What consideration is.ii) Types of consideration.

iii) The proposition that consideration has to move from the promisee.

iv) Sufficiency of consideration & insufficiency of consideration.

v) Role of consideration in bringing a contract to an end.


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Emphasis should be also placed on the Dunlop v Selfridge as it highlights the bargaining elements

of consideration.

Past Consideration is where the promise is totally independent of the act and the promise comes

after the act. Thus is described as bad consideration because it lacks bargaining power. See

Roscorla v Thomas, if such a claim was brought today it would go under the Sale of Goods Act,

where defective goods are returned.

Note when looking at past consideration, it is not so much the chronology of the promise and the

act but, the independence of the promise from the act, and that’s why when you consider the

common law exception, you can see that the exceptions are an attempt to bring together into one

transaction the promise of payment or benefit and the act. One way this can happen is when there

is an initial request for service or act (Lampleigh v Braithwait). In the said case because the service

was asked for they (promise & act) were treated as a single transaction.

The value of consideration is always thought to be material. In Bolton v Madden, Lord Blackburn

said the adequacy of the consideration is a matter for the parties to consider and you do that at the

time of making the agreement, and it is not for the court to decide at-a-later date whether that

should be enforced or not.

Promise to perform an existing public duty

Word v Byham; The Father of the child promised to pay the mother provided that she could prove

the child was well looked after and happy. The mother claimed.

Held, the mother was entitled to sum promised as she had acted over and above public duty of just

feeding, maintaining and clothing the child she had to demonstrate that child was happy.

In Williams v Roffey Bros & Nicholls, there are a number of requirements that need to be

performed. First of all you need to look at the nature of the contract, it seem like the principle in

Williams only apply where there is a contract to supply goods or supply services in return for

payment. Note also it was the main contractor who invited the work so there could be argument of

economic duress. The court refused to extend the principle laid down within Williams v Roffey in

the context of contract other than contract for the supply of goods or services (Re Select move

Ltd). Although consideration is often spoken of as an important ingredient for the formation of a

contract, it can also be viewed as an ingredient in bringing a contract to an end. This is sometimes


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referred to as accord and satisfaction. Accord is the agreement and Satisfaction is the consideration,

but it operates in a negative way. Example, A is contracted to work Y for 3 years. At the end of

the first year both parties are sick of each other/ having disagreement. A decides he want to work

somewhere else and Y promise not to pay. This is a negative consideration and will bring the

contract to an end.

Part Payment of Debts

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 (existing duty).

In Pinnel’s case, Cole owed Pinnel £8.50 which was due on 11 November. At Pinnel’s request

Cole paid £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 good consideration. However, it was also held that

agreement to accept part-payment would be binding if the debtor, at the creditors request provided

some fresh consideration. Consideration might be provided if the creditor agrees to accept:

i) Part-payment on an earlier date than the due date (i.e. as in Pinnel’s case itself) of the

creditor’s request.

ii) Chattel instead of money (a horse, hawk or robe maybe more beneficial than money) D

& C Builders v Rees

iii) Part-payment in a different place from that originally specified.

In Foakes v Beer, despite the harshness of the rule in Pinnel’s case, it was affirmed by the House

of Lords and still represents the law.

Exceptions to the RuleApart from the exceptions to the rule mentioned in Pinnel’s case itself, there are two other at

common law and one exception in equity.


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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 the condition that the debtor is released from the obligation

to pay the full amount see Punamchand V Temple. 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 part payment was valid consideration.

b) Composition Agreements

The rule does not apply to composition agreements. This is an agreement between a debtor and

group of creditors, under which the creditors agree to accept a percentage of their debts in full

settlement. Despite the absence of consideration the court will not allow an individual creditor to

sue the debtor for the balance (Wood v Roberts). The reason usually advance for this rule is that

to allow an individual creditor to claim the balance would amount to a fraud on the other creditor

who had all agreed to the percentage.

c) Promising Estoppel

The principal source is in the dicta of Denning J, in London Property Trust v High Trees. The

equitable doctrine provides a means of making a promise binding, in certain circumstances, in

the absence of consideration. The principle is that if someone (promisor) makes a promise, which

another person acts on, the promisor is estopped from going back on his promise, even though

the other person did not provide consideration (in so far as t is inequitable to do so). The creditor

will be barred from his legal rights where it is inequitable for him to enforce it.

Consideration must move from the promisee

Notes given for the same appear to be sufficient, and given the volume it appears to be highlyunlikely that a question would be based solely on the same rule


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Capacity (minors, insane persons).

In general all natural persons have full legal personality, and therefore, contractual capacity; that

is, they are fully capable of entering into contractual relations with other persons. However, certain

classes of natural persons lack full contractual capacity: minors, drunken persons, insane persons

and illiterates.

Minors

The age of adulthood or majority, 18 years, is set by legation, and is the age at which natural

persons generally become legally capable of entering into contracts. Minors thus generally lack

contractual capacity; however, in some circumstances, contracts made or purported to be entered

into by minors are binding; the validity and enforceability of such contracts are governed by

common law principles as amended by legislations.

Under general common law principles, contracts entered into by minors can be grouped into three

categories, as follows:

A.

Contract render void by statute (Jamaica is primarily governed by common law principles);B. Contract voidable at common law; and

C. Contract binding on the minor

Voidable Contacts.

Voidable contract contracts are contracts which remain binding on the minor unless he repudiates

them before becoming an adult, or within a reasonable period of time after attaining the age

adulthood. This category of contract is limited to those under which the minor acquires and interestin something permanent in nature, that is, out of which arise continuing obligations that are binding

on a minor e.g. leases of land, partnership agreements, and agreement to take shares not fully paid

up.


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Note, what is a reasonable time will depend on the circumstances of the case. In Edwards

v Carter , it was held that repudiation by a minor of a covenant in a marriage settlement four and a

half years after the minor had attained majority was unreasonably late and therefore ineffective.

Until minors decide to repudiate, he is fully liable to perform his obligations under the

contract. Thus, for instance, a minor who takes a lease property, including covenants to pay rent,

and a minor who takes up shares in a company is liable to pay calls on shares. Following

repudiation it is clear that minor ceases to be liable for future obligations under the contract, such

as rent due after the date, but there is some doubt as to whether he is liable to satisfy existing

obligations, such as payment of rent falling due before the repudiation.1 It seems the better view

is that minor is bound by obligations accruing before repudiation. Thus, in Blake v Concannon, it

was held that a minor who repudiated a tenancy on attaining his majority, having occupied the

premises for several months, was liable to pay a year’s rent, accruing while he was in possession.

Where a minor repudiates a contract, he may recover any money paid or property

transferred, but only where there has been total failure of consideration. The test for ‘total failure

of consideration’ is not whether the minor received any real advantage from the contract, but

whether he had obtained the very consideration which he had bargained for. In Steinberg v Scala,

a minor applied for and was allotted shares in a company; she received no dividends, and the value

of the shares remained low. 18 months after allotment, while she was still a minor, she was

repudiated the contract and sought to recover the amount she had paid on allotment and on the first

call. It was held that that she could not recover the money; there had been no total failure of

consideration, since, by allotting the shares to her, the company had done all that it had bargained

to do under the agreement.

Contracts binding on Minors

A minor is fully bound if he enters into a contract for necessaries. ‘Necessaries’ are defined by the

sale of goods legislation as ‘goods suitable to the condition in the life of such [minor]… and to his

actual requirements at the time of sale and delivery’. Furthermore, ‘where necessaries are sold and

delivered to a [minor]… he must pay a reasonable price therefor.2

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Case law is instructive in fleshing out the meaning of the term ‘necessaries’. These include not

only necessaries but also such essentials as:

i) Board and lodging;

ii) Medical care ( Peters v Fleming );

iii) Legal advice (Helps v Clayton);

iv) Food and clothing for minor’s wife or children (Chapple v Cooper ); and

v) Instruction in art or trade, or intellectual, moral and religious training may also be

deemed necessary, since ‘the proper cultivation of the mind is as expedient as the

support of the body.

Goods which are merely luxury are always excluded but luxurious articles of utility are in some

cases allowed. The question of necessity or otherwise is a mixed question both law and fact.

For a minor to be liable for necessaries, the onus is on the seller to prove not only that the items

sold minors were suitable to his station in life but also that he was not adequately supplied with

goods of that nature at the time of the sale. In Nash v Inman, where a tailor brought an action

against a Cambridge undergraduate (a minor) to recover £122, being the price of eleven (11) fancy

waistcoats supplied to him. The action was dismissed on the ground that the defendant was

sufficiently supplied with clothes suitable to his position. Therefore the seller of the ‘necessary’

acted at his own peril.

Even where a contract with a minor concerns the sale or supply of necessaries, it will be

avoided if it contain harsh or onerous terms which are disadvantageous to the minor; as in Fawcett

v Smethurst , where a car rental agreement provided that the minor was to be absolutely liable for

damage to the vehicle, whether or not it was caused by his fault or neglect.

Beneficial Contracts of service

Minors are bound by beneficial contracts of service, that is contracts under which minor obtains

education or training for a trade or profession. The contract in order to be valid, must be anemployment or apprenticeship contracts, or at least must be analogous to such contracts. Contracts

under this heading are binding on the minor only if they are proved to be substantially for his

benefit. However, other types of contract will not be binding on the minor merely because they are

beneficial to the minor. It is well established that trading is not binding on a minor, however

beneficial it may be for him. The case of Mercantile Union Guarantee Corporation Ltd v Ball , is


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instructive on this point, where a haulage contractor (a minor) was held not to be liable to pay

installments under a hire-purchase agreement in respect of a vehicle which he had hired for use in

his business. Also in Cowern v Nield , where a minor, contracted to sell and deliver a consignment

of hay, but failed to deliver, it was held that he was not liable to repay the price to the buyer.

Mentally Disorder Persons

Under the sale of goods legislation, a mentally disordered person is bound by contracts for

necessaries.3 As in the case of minors, the definition of necessaries is set by the legislation as

goods which are suitable (a) to the condition in life of the mentally incapable, and (b) to the actual

requirement of at the time of sale and delivery. A mentally disordered person must pay a reasonable

price, for necessary good provided under a contract which he purported to make.

As in the case of minors, the liability to pay is quasi-contractual, so that it arises only where the

goods are actually delivered to the mentally disordered person. There must have been some

element of consent on the part of the mentally disordered person, since the seller cannot force the

goods on him and then claim payment.

In the case of non-necessary goods, the mentally disordered person is bound by his contracts unless

he can show:

(i) That, owing to his mental condition, he did not understand what he was doing ( Boughton

v Knight ), and

(ii) That the other party was aware of his incapacity ( Molton v Camroux).

Lord Escher MR articulated the rule as follows:

When a person enters into a contract, and afterwards alleges that he was so insane at the time he

did not know what he was doing, and proves the allegation, the contract is as binding on him in

every respect, whether it is was executory or executed, as if he had been sane when he made it,

unless he can prove further that the person with whom he had contracted knew him to be soinsane as to not be capable of understanding what he was about.

Contracts made by a mentally disorder person during a lucid interval, and those made before but

ratified during a lucid interval, are binding on him ( Hall v Warren).

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The rule governing capacity of the mentally ill may, by analogy, be applied to the senile or

to persons suffering from ‘mental infirmity’. In Wiltshire v Cain, the plaintiff brought an action

for specific performance of an agreement for the sale of land. Counsel for the defendant, an elderly

gentleman, argued inter alia that at the time of making the agreement and for at least one year prior

to thereto, the defendant was suffering from a general loss of memory, metal debility and senile

decay and was incapable of understanding the meaning and the effect of the agreement. It was

further argued that the plaintiff was aware of his mental infirmity at the time of the agreement.

Field CJ commented:

A person may become of unsound mind because he has lost the ability of reason by disease, grief

or accident. Where a person in such condition can be shown not to have understood, because of

his mental condition, what he was doing and further, that the other party was aware of this

incapacity, then any contract, other than contract for necessaries, made by such a person is not

binding on him.

Drunken persons

Under the sale of goods legislation, a drunken person is bound to pay a reasonable price for

necessaries sold to him.4 Where a person enters into a contract in such a state of intoxication that

he did not understand what he was doing, and the other party was aware of that fact, the contract

is voidable at the drunkard’s option, but may be ratified later when the intoxication ceases.

Illiterates

At common law, the defence of non est factum (it is not [my] deed) may be available to anilliterate person who signs a document under a fundamental mistake as to its nature or theconsent.

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3. The doctrine of 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 entitledto 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 isa breach by the other. C is not a party to the contract and cannot sue A if A fails to pay C the sumof $ 100.

A classic authority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co [1915] AC847, where at 853, Viscount Haldane said:

My Lords, in the law of England certain principles are fundamental. One is that onlya person who was party to a contract can sue on it. Our law knows nothing of a jusquaesitum 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 BarwickCJ.

2. Privity and its Relationship to the Doctrine of Consideration

When looking at the doctrine of consideration we observed the rule that consideration must movefrom a promisee, or, in other words, that only a person who has provided consideration can enforcea promise. In the above example one could have argued that C could not sue on the basis that Chad 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 considerationrules. This question has generated considerable discussion in academic circles and there is adivision of opinion between those who say the rules are in fact one rule differently expressed andthose who argue that the two rules are distinct.

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


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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 Jand 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 breachof his or her obligations to a third party. In our example above, who can sue A, and what remediesare 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 possibleremedies 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 berecovered.

Critical to an understanding of the position of B in this context is the basic principle for theassessment of damages for breach of contract. As will be explored in more detail in the lectures onremedies, 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 positionis the same irrespective of whether or not A pays the sum of $ 100 to C. In special circumstancesit may be that B will suffer a real loss, in which case substantial damages which reflect the valueof 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 forB 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 ofcontract was recently confirmed by four members of the House of Lords in Alfred McAlpineConstruction 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.


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An illustration of the application of the principles is in New Zealand Shipping Co v A MSatterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. From this case set out:

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 rathera contract of exemption which is ancillary or collateral to other contractualarrangements which were necessary to achieve the carriage of the goods on the chosenvessel.

(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 thelaw 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, thetrustee, that has the effect of compelling B to sue A for breach of contract. In formal proceduralterms 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 withouta trustee holding property on trust for the beneficiary. The law a trusts has a broad and flexibledefinition of property. In this case the property is the promise made by the promisor. In otherwords, the contract between A and B, it is the promise made by A to B that is held on trust by Bfor C.

Second, for the trust to arise in this context, it must be established that there is an intention, at thetime of the contract between A and B, that B was contracting in the capacity of trustee. On intentionin 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 readilyamenable 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 basisof trusts but Dawson J did not?


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4. The legal rules governing contractual terms:

The terms of a contract are its content, and they define the rights and obligations arising from the

contract. Contractual terms may be expressed or implied.

Express terms are those specifically laid down by the contract, and they consist of express oral or

written statement made by the parties.

Implied terms are those which are not specified in the contract but which are implied either (i) by

statute, or (ii) by custom, or (iii) by the court.

Express Terms

A contract may be (i) purely written, (ii) purely oral (iii) partly written and partly oral. Generally,no formality is required for a term, whether oral or in writing (or partly orally or partly in writing),

to form part of a contract.

If the terms of a contract are in dispute, a court will determine what terms were decided on by the

parties. In respect of oral contracts, precise evidence may be required in order to clarify exactly

what the terms of the agreement were, as the dispute may turn on very fine details.

Proof of terms

Oral Contracts- Terms and representation

Statements made by parties can be categorized as (i) promises or (2) mere representations. Except

in the case of simplest transactions, there will generally be a period of negotiation before the final

terms of the contract are agreed. Promises (sometimes called “warranties”) made during

negotiations and not withdraw will generally form part of an oral contract and are therefore

binding. An action for damages will lie for breach of these terms.

However, there are some statements (often referred to as mere “puffs”) which cannot be

relied upon as terms of the contract because they are imprecise or were not meant to be taken

laterally. The courts must determine the category into which the statement fits.

The distinction between each type of statement is important as, on the one hand, the breach of

promise (which is a binding term) gives rise to the usual remedies for breach of contract (that is,

damages or recession). On the other hand failure to conform to a mere representation, though in


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some circumstances giving the right to rescind the contract, will not be remediable by damages

unless the representation was deliberately false (fraudulent), or made negligently in which case

actions in tort for damages will lie.

Since the question of whether a statement is a contractual term (warranty) or mere representation

is a question of law, and not fact, the issue is one for the court to decide.

In making the determination the court will take various factors into account, including:

1) Importance of the truth of the statement ( Bannerman v White).

2) The length of time which had passed between the making of the statement and the final

agreement ( Routledge v McKay).

3) Whether the party making the statement was better placed than the recipient of the

statement to better verify the truth ( Dick v Harold ).

4)

Whether the contractual terms are later put in the written agreement ( Heilbut, Symons v

Buckleton)

5) The key factor in determining whether a statement is term is was laid down in Heilbut,

Symonds v Buckleton, the test is whether there is evidence of an intention (animus

contrahendi [intention to conclude]) by one party or both parties that there should be

contractual liability in respect of accuracy of statement.

In Oschar Chess Ltd v Williams, a car sales man sold a second hand car to a purchaser, in the

honest belief, based on reasonable grounds, that it was a 1948 model. This belief was based on the

fact that the date of the car included in vehicle registration book was 1948. It was held that in

producing the registration book, the sales man did not intend himself so as to warrant the accuracy

of the statement that was in the book.

By contrast, in Dick v Harold , a car sales man sold a car on the basis that milometer

showing that the vehicle had driven 20,000 miles, when in fact it had driven 100,000 miles. It was

held to have warranted the truth of the statement, thereby binding himself contractually.

Thus a statement will only be a term of the contract if the party making intended make himselfcontractually liable for truth of the statement; the court will also consider the totality of the

evidence.5

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Lord Denning per Oschar Chess Ltd v Williams, noted in part,

“… the best expressed ruling of Lord Holt, “was it intended as a warranty

or not? In applying Lord Holt’s test, some misunderstanding has arisen

as to the word ‘intended’. It is sometimes supposed that the tribunal must

look into the minds of the parties to see what they themselves intended.

This is a mistake. Lord Moulton made is quite clear that, “The intention

of the parties can only be deduced from the totality of the evidence. The

question of whether a warranty was intended depends on the conduct of

the parties, on their words and behavior, rather than on their thoughts. If

an intelligent bystander would reasonably infer that a warranty was

intended would suffice.”

Written Contracts

In the case of a written contract it is the duty of the court to interpret their terms. This is a matter

of law for the court,6 the court will not be obligated to incorporate into its interpretation, for

example, concessions made by the parties about the meaning of the contract ( Bahamas

International Trust Co Ltd v Threadgold ).

Signature

It is a fundamental principle that parties are bound by the content of the written contract and cannot

seek to amend or add to its terms after the fact. Once an agreement is signed, a party cannot use

the fact that he or she did not read the terms, as to avoid liability under the contract. In L’Estrange

v Graucob Ltd , the plaintiff purchased a slot machine, in so doing he signed an order form, and it

contained fined prints. Upon delivery of the machine the plaintiff found that it was not functioning

properly and brought an action on the said basis.

The court held that since the plaintiff had signed the agreement, the disputed term was valid. It

was immaterial that the plaintiff had not read the terms.

Notably, following the decision in Interfoto Picture Library Ltd v Stiletto Visual

Programmes Ltd , where a contract contains particularly onerous or unusual terms printed terms,

the party seeking to enforce such terms must prove that they were brought to the other party’s

attention.

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Parole Evidence Rule

There is a presumption that the written document contains all the terms of the contract, but the

presumption is rebuttable evidence that the parties did not intend the written document to be

exclusive, but wished it to be read in conjunction with oral statements. This is known as the parole

evidence rule. The rule has been described in the following terms:

It is firmly established rule that parole evidence cannot be admitted to add

to, vary or contradict a deed or other written instrument… parole evidence

will not be admitted to prove that some particular term, which has been

verbally agreed upon, had been omitted (by design or otherwise) from a

written instrument constituting a valid and operative contract.

The essence of the rule is that it prevents a party from adducing evidence which is extrinsic to a

written contract. In Hawrish v Bank of Montreal , a lawyer acting for a company agreed to

guarantee ‘all present and future debts’ of the client company, up to £6,000. The lawyer later

adduced evidence to show that the parties intended for guarantee to apply to an overdraft facility

of the company, and not all of its debts. It was held that the lawyer’s evidence was inadmissible.

Parole evidence is also admissible where, a signed document makes reference to another

document, they will both be read together ( Elias v George Sahely & Co). Where it is found that

the presumption in parole evidence rule has been rebutted, terms which are extrinsic to the written

contract, will be deemed to have been included in the written agreement. This is call

Documents

Contract Law (Cape Unit 2)