The Law of Contract: Summary notes

Definition of contract.

A contract may be defined as an agreement which the law recognizes as binding on the parties to it. The word binding is used, for there are some contracts which are valid but are not enforceable, e.g. social invitation or a promise by a husband to his wife.

The majority of contracts in law are known as simple contracts, which mean that they can be made orally or in writing. It is a common fallacy that a con¬tract does not exist unless there is ‘something in writing’ but this is not true. Admittedly, an oral contract may be difficult to prove as the court has to decide whose contention to believe, but such difficulty does not affect the validity of the contract. Certain types of contracts are however required to be in writing, such as:

1.  Contracts for the sale of goods for two hundred shillings or more.
2.   Contracts for the sale of land.
3. Contracts of guarantee.
4. Contracts for the transfer of shares in a company limited.
5. The bill of exchange or promissory note.

Essentials of a valid contract.

In order to create a binding contract, certain basic requirements must be met. They are:

1. There must be offer and acceptance.
2. There must be an intention to create legal relations.
3. There must be consideration in case of simple contracts.
4. The parties must have capacity to contract.
5. The parties must consent free from mistake, fraud, duress, and undue influence.
6. The object of the contract must be legal.

If any of the above elements are missing the contract will be (i) void, or (ii) voidable, or (iii) unenforceable.

Voidable contracts have no legal effect. An example of such a contract is an agreement to sell goods to an infant other than necessaries.

Voidable contracts have legal effect until made void by the action of one of the parties. For example, a contract induced by misrepresentation can be avoided by the misled party.

Unenforceable contracts are valid but are not enforceable at law because of the absence of (1) evidence of contract or (2) the form required by law. An example is a contract of guarantee not evidenced by writing as required by the Law of Contract Act.

Offer and acceptance.

Dealing with the first requirement of a valid contract, the rule is that the parties should have reached a final agreement, i.e. one party called the offer or must make an offer and that offer must be accepted by the other party called the offeree. As soon as that happens there is a contract provided the other essentials are present in the formation of the contract.

Rules of offer. An offer may be made orally, in writing, or by conduct.

An offer may be made to a definite person or a group of persons, in which case only that person or group may accept, or to the world-at large, where it may be accepted by any person complying with the terms of the offer ( Carlill v Car¬bolic Smoke Ball Co 1893).

The offer must be communicated to the offeree. A person cannot accept an offer that he does not know exists (R. v. Clarke 1927).

The offeror cannot bind the other party without his consent, or acceptance actually communicated to the offer or ( Felthouse v Bindley 1862).

An offer must be distinguished from an invitation to treat.

The offer can easily be confused with many other things, such as adverts in the newspapers or postal inquiries. If you see an article in a shop-window at a certain price, you cannot go into the shop and demand it at that price as of right. The shop-keeper is perfectly within his right to refuse to sell it to you.

Where goods are displayed in a shop-window or on shelves in a self-service store, the display is regarded as an invitation to treat, not an offer to sell. (Pharmaceutical Society of Britain v Boots Chemist, 1953). At an auction the bid is the offer, the auctioneer’s request for bids is merely an invitation to treat. The sale is complete when the hammer falls,and until that time a bid may be withdrawn.

Termination of an offer.

An offer terminates:

1. By non- acceptance within the time stipulated for acceptance, or within a reasonable time.
2. By the death of either offeror or offeree before acceptance.
3. When it is rejected by the offeree or he makes a counter offer.
4. By revocation before acceptance. With regard to revocation of an offer this must be communicated to the offeree before acceptance. It may be made directly by the offeror himself or indirectly (Dickinson v Dodds 1876) but is of no effect until it is actually brought to the notice of the offeror (Byrne v Van Tienhoven 1880).

Option.

Where the offeror promises to keep his offer open for a specified time, he can revoke it any time before the expiration of the specified time, unless the promise to keep the offer open is supported by deed or consideration.

Acceptance.

Acceptance is the assent given to an offer, and must be as specified in the offer if a mode of acceptance is stipulated, otherwise according to normal business usage — may be oral, in writing or by conduct.

Acceptance must be unqualified and unconditional. If the acceptor varies the terms of the offer, it amounts to rejection or to counter-offer, which destroys the original offer (Neal v Merrett).

Acceptance subject to contract is construed as meaning that the parties do not intend to be bound until a formal contract is prepared (Eccles v Bryant) but it is important to examine the-actual words used by the parties (Branca v Cobarro 1947).

Where an offer is made and accepted by letters sent through post, the contract is made the moment the letter of acceptance is posted provided that it is properly addressed and posted even though it never reaches its destination (Household Fire Insurance Co v Grant 1876).

Where a tender is made for supply of a certain quantity of goods or specific services, a contract is made when the tender is accepted. Where a tender is a standing offer to supply goods or services required by the buyer, a separate acceptance is made each time an order is placed.

Consideration.

The law will not enforce a simple contract unless it is supported by valuable consideration which was defined in the case of Currie v Misa (1875) as : some right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

Consideration to support a simple contract may be executed or executory, but it must not be past. Executed consideration is a consideration which is completely performed by one party immediately the contract is entered into. While executory consideration is a promise to confer a benefit or to suffer some detriment at a future time.

Rules of consideration are:

1. It must be real (White v Bluett) and beyond what a person is alreadybound to do (Stilk v Myrick 1807).
2. It need not be adequate. The general rule is that the parties are, free to make what contracts they desire and agree on their own price for goods or services.
3. Consideration must not be past. A benefit given in the past cannot support a present promise (Roscorla v Thomas 1842).
4. Consideration must move from the promissee. This means that no one can enforce another’s promise unless he has been a party to a contract, and provided consideration to the promisor (Dunlop v Selfridges, 1915).

Exceptions to the rule are:

1. A beneficiary under a trust may sue the trustees to enforce the trust obligations.
2. An assignee of contractual right may sue the debtor in his own name.
3. A holder of a bill of exchange can sue the drawer or indorser if the drawee fails or refuses to pay on the bill when it becomes due for pay¬ment.
4. Under the provisions of Road Traffic Acts, a third party may sue the insurance company for injuries caused by the driver of insured vehicle.
5. Consideration must be legal (Pearce v Brooks 1866).

Capacity.

Generally speaking every person is presumed by law to be competent to contract, but certain categories of persons due to age, status, or mental instab¬ility have certain disabilities in this connection. The special rules affecting such a class of persons are as follows:

Infants or Minors. A minor or an infant is a person under the age of 18 years, and is deemed to have attained his full age or majority at the first moment of time on his 18th birthday. Contracts with minors fall into three classes:

1. Binding contracts which are: (i) contracts for necessaries, i.e. goods suitable to the conditions in life of a minor and his actual requirements atthe time of sale and delivery (Nash v Inman 1908). (ii) Beneficial contractsof service, i.e. contracts for training, education, apprenticeship and similar items are binding if they are taken as a whole, for minor’s benefit (Doyle v White City Stadium 1935) and (Roberts v Gray 1913).
2. Void contracts; Section 1 of the Infants’ Relief Act 1874 provides the following contracts as absolutely void:

(a)       Any agreement for the repayment of money lent or to be lent.

(b)       Any contract for goods supplied, other than necessaries.

(c)       All accounts stated.

3 Voidable contracts. Such contracts are contracts of a continuing nature and contracts under which a minor acquires an interest in property of a permanent kind, e.g. leases of property, partnership agreements, or shares in a company are described as voidable because they will be binding on a minor unless he repudiates them before he reaches his majority or within a reasonable time of attaining it.

Insane and drunken persons. Contracts entered into by an insane person are voidable, but liability exists to pay a reasonable price for ‘necessaries’. For an insane person to avoid a contract he must prove:

1.  That he was insane at the time of making the contract and he was incapable of understanding the importance of the transaction and
2. The other party knew of his position.

Drunken persons are treated in a similar way.

Corporations. They are limited in their contractual capacity by the Ultra Vires Rule. Statutory corporations can make contracts only within the scope of the creating statute. Any contract outside this is ultra vires and void.

Companies registered under the Companies Act have their powers specified in the objects clause of the Memorandum of Association. and any act in excess of the power given in this Memorandum is ultra vires and void (Ashbury Railway

`Mistake.

In some cases a person may escape liability by showing that he was mistaken about what he had agreed to, and that there was therefore no real agree¬ment and so no contract at all. There are several classification of mistake which would affect a contract. The most modern, and the one readily accepted by the courts is the classification between common, mutual and unilateral mistakes.

A common mistake exists where both parties make the same mistake about one subject matter. An example of this type of mistake is where the parties contract over a subject matter which they believe to be in existence but which does not in fact exist.

A mutual mistake exists where both parties make a mistake about different subject matter. An example of this type of mistake is mistake as to the identity of the subject matter (Raffles v Wichelhaus 1864).

A unilateral mistake exists where only one party makes the mistake. Examples of this type of mistake are mistake as to the identity of the parties; and mistake as to the nature of a document signed.

A mistake by one contracting party as to the identity of the other party will only render the contract void if the identity of the other party was material to the contract, i.e. if the contract would not have entered into had the true identity of the other party been known (Cundyv Lindsay 1878). If however, the mistake is only as to the character of the other party, the contract is not void for mistake but at the most may be voidable for fraud (Phillips v Brooks 1919).

Misrepresentation.

A misrepresentation is an untrue precontractual statement of fact made by one party to the contract, to the other which induces the other to enter into contract. A misrepresentation is only actionable if it actually induced the innocent party to enter into the contract. Thus no cause of action will lie if the representee did not allow the untrue statement to influence his decision to enter into the contract. Where it is proved that the contract was due to misrepresentation of a material fact, the contract may be set aside at the option of the innocent party.

A distinction must be made between fraudulent and innocent misrepresentation ( Derry v Peek 1889). The test for fraud is the absence of honest belief, i.e. knowingly making a false statement or being reckless as to its veracity. A fraudulent misrepresentation is committed when a person makes a false statement of fact, knowing it to be false, or without believing it to be true, or recklessly care-less whether it be true or false.

A misrepresentation is innocent when it is made innocently with an honest belief in its truth, and without any intention of deceiving the other contracting party.

Remedies for fraudulent misrepresentation. 

A person misled by fraudulent misrepresentation may claim the following remedies:

(i) damages, if he has suffered a loss;

(ii) affirm the contract and sue in the tort of deceit;

(iii) refuse to perform the contract, and plead fraud in defence if sued for the breach of con-tract; and

(iv) bring an action for recission of the contract.

Remedies for innocent misrepresentation.

In the case of innocent misrepre¬sentation, damages are not recoverable; the court will only allow the rescission if the contract is still executory.

Contracts uberrimae fidei

Generally the parties to the contract are not required to volunteer any information to each other. The duty which the law imp-oses upon persons negotiating a contract is to refrain from active misstatement. But there are some contracts in respect of which one or both the parties are re-quired to disclose all the material facts known to them which might influence the other party’s decision to enter into a contract or not. If a party fails in this duty, the contract will be voidable at the option of the other party. These contracts are called contracts uberrimae fidei, i.e. of the utmost good faith.

Contracts belonging to this category are as follows:

1.  Contract of insurance.
2. (c)       Contracts for the sale of land. The seller must disclose defects, if any, affecting his title to the property for sale.
3. Partnership agreements.
4. Prospectus.

Duress.

Free consent is essential ingredient of a valid contract. Where consent is obtained by terror, threat of violence or imprisonment, it is said to be made under duress. It also includes threatened criminal prosecution of a member of a family. For a duress to be actionable it must be related to one’s person and not to his goods only.

Undue influence.

A contract is said to be induced by undue influence where one of the parties is in a position to dominate the will of another, preventing him from exercising a free judgement on the matter. A person may avoid the contract by proving that (i) the other party dominated his will, and (ii) the contract is substantially unfair to him.

Presumption of undue influence arises in the following relationships:

1.  Trustee and benefidiary.
2.   Advocate and his client.
3. Doctor and his patient.
4. Religious leader and his follower.
5.   Teacher and his pupil.
6. Parent and child. Guardian and ward.

Although the existence of the above listed relationship creats strong presumption of undue influence, this presumption may be rebutted by proving that:

1.  the plaintiff had independent source of advice; and
2. no undue advantage had been taken of his inferior position.

Illegal Contracts.

The law relating to illegal contracts is based on the maxim ex turpi cause non oritur actio. This means that no cause of action arises froman illegal transaction. Certain contact are illegal by a statute; while other are illegal because they are against the rules of public policy. These are as follows:

1. Agreement to commit a crime or civil wrong.
2. Agreement designed to defraud the inland revenue.
3. Agreements containing sexually immoral elements.
4. Agreements interfering with the sanctity of marriage.
5. Agreements affecting the freedom of marriage.
6. Agreements which oust the jurisdiction of the courts.
7. Agreement tending to promote corruption in public service.
8.   Agreements to break the laws of a friendly country.
9. Agreements of champerty and maintenance.

Effects of illegality.

Where an agreement is made which is rendered unlawful by statute or unlawful at common law, the effects of illegality are the same. That is, all such contracts are void, and the parties involved cannot sue each other for their breach, nor can they recover money paid or goods delivered.

Discharge of Contract.

A contract may be discharged or terminated in one of the following ways:

1. Discharge by agreement. Discharge by agreement may take one of three forms. The first of these is waiver. This means that the parties to the ag¬reement say that it shall no longer be binding. Secondly. there may be a substituted contract when new terms are agreed upon or new parties take part in an agreement, in reality a new contract arises (novation).Thirdly, the contract may itself contain provisions about how it can be discharged.
2. Discharge by performance. If both parties to a contract perform their promises the contractual relation is terminated. Before a contract could be deemed to be discharged under this heading, it must be proved that the contractual obligations have been discharged precisely and exactly in accordance with the contract (Cutter v Powell, 1975).
3. Discharge by breach. If there is a breach of contract by one party it may give the innocent party the right to treat the contract as discharged. Bre¬ach may be by express repudiation, by rendering the performance of the contract impossible, or merely by failure to perform. The breach may take place during performance of a contract or even before performance is due (anticipated breach). Before there is a breach of contract a vital part of the contract must be affected; it must be a breach of a condition rather than warranty.
4. Discharge by frustration. A contract may be discharged by subsequent impossibility, the contract being said to be frustrated. This acts as discharge in the following circumstances:

(a) Where there is destruction of subject matter by an accident of the particular thing upon which the contract is based (Taylor v Cald¬well 1865).

(b)Where the impossibility is caused by a change in law.

(c)Where the contract depends upon the occurrence of a particular event which does not take place (Krell v Henry 1903).

(d Where a person bound by a contract to perform personal services is unable to carry them out because of death or serious illness.

(e)Where through a change in circumstances the contract as a commercial undertaking is frustrated, but increased costs or delays are not in themselves enough.

Limitations Act.

Contracts entered into for a certain time are discharged when that time has passed. Besides the Limitations Act provides that actions on simple contracts as well as contracts under deed are barred after six years, In actions for personal injuries arising out of a contractual duty, the right of action is barred after three years.

Finally, there may be discharge of a contract by death. Thus, if a person involved in a contractual agreement dies, and the contract is for personal services, it becomes unenforceable.

The alteration of a material part of a deed or written contract by one party (and without the consent of the other contracting party) may act as a dis¬charge. Again, a merger or bankruptcy may discharge a contract in this way.

Remedies for Breach of Contract

On breach of contract, the principal remedies which are open to the innocent party are as follows:

1. Damages . Damages are a common law remedy, which may be claimed by an injured party as of right. ‘The rule of law is that where a party sustains a loss by reason of breach of contract, he is so far as money can do it, to be placed in the same position with respect to damages as if the contract had been performed’ (Robinson v Harman 1848). It is not however for every kind of damage that the plaintiff is entitled to recover compensation. In some cases the law deems the consequential loss which flows from a breach of contract too remote to merit compensation. Thus, only losses reasonably foreseeable are legally recoverable (Hadley v Baxendale 1854).Liquidated damages and penalty clause. It is possible for the parties themselves to agree in the contract on the damages to be paid for its breach. If such damages represent a genuine attempt to pre- estimate the loss, they are known as liquidated damages and are recoverable irrespective of the actual loss. If they are not, then they will be considered as a penalty and will be disregarded.
2. Specific performance. Specific perfromance is an order of the court requiring a person to carry out his contractual obligation. It may be granted in lieu of or in addition to damages but will generally not be granted where the court is satisfied that damages alone would compensate the innocent party. Nor will it be granted where the contract requires constant supervision such as with building contracts which are of continuing nature where the performance is usually by stages: Specific performance will not be granted for contracts involving personal skill.
3. Injunction. An injunction is an order restraining the doing, continuance or repetition of a wrongful act. In the law of contract an injunction may be granted to enforce a stipulation which must be negative . In Warner Brothers v Nelson 1937 the defendant agreed (i) to act for the plaintiff for a fixed period and(ii) not for any third party; and (iii) nor to engage in any other occupation without the plaintiff’s consent. It was held than an injunction may be granted only for (ii).

Quantum meruit. A claim for quantum meruit is a claim for the value of work done under a contract. It rests not on the original contract but on an implied promise through acceptance by the other party of the benefit of the work done. A claim under this heading also arises where the complete performance has been prevented by the act of the other party (Planche v Colburn).

Miscellaneous Topics

(1) Promissory Estoppel. In Central London Property Trust Ltd. v High Trees House Ltd. 1967 Denning J said that if one party promises another without consideration that legal rights due from the latter to the former will be suspended or extinguished, then the promisor will not be allowed to break his promise if the promise has been acted thereon.

(2) Doctrine of part perfromance. In certain circumstances, the courts will allow a contract to be proved by parol (ie. oral) evidence notwithstanding that the particular kind of evidence required by the statute is writing (as in contracts for the sale of land). This tolerance is based upon the equitable doctrine of part performance. The conditions which must be satisfied before it is invoked may be summarised as follows:

(a)The acts of part performance must be capable of referring not only to the contract which is sought to prove, but to no other source.

(b) That must make it a fraud on the part of the defendant to allege the want of writing.

(c)The contract to which the alleged acts of part performance refer must itself be capable of specific performance by the court.

(3) Quasi contract. A contract may be defined as an agreement between two or more persons which may be legally enforced if the law is properly invoked. In distinction to this, where one person has benefited unjustly at the expense of another, the law will, in certain circumstances, impose an obligation to repay money paid over. Such contracts are called quasi contracts because, although there is no agreement between the parties, they are put in a similar position to that of the parties to a contract. Thus the essential difference between quasi contract and a contract is that a contract arises from agreement, express or implied, between the parties whereas the obligation under a quasi-contract arises independently of agreement.

The following are examples of cases which are generally accepted as genuine quasi-contracts:

1. Money paid by the plaintiff to the defendant’s use. For example where the plaintiff has been compelled to pay money for which the defendant is laible (Brooks Wharf v Goodman Bros. 1937).
2. Money paid under a mistake of fact.
3.   Money paid under an ineffective contract.
4. Where money has been wrongfully received.
5. Claims on a quantum meruit.