contract explanation

8/3/2019 Contract Explanation

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Explain the meaning of the following:(a) a unilateral contract;(b) a collateral contract.

This question requires candidates to explain the meaning oftwo types of contract; the unilateral contract and the collateralcontract,which differ in the manner in which they come into existence.a) A unilateral contract is one where one party promises

something in return for some action on the part of anotherparty. In relation to unilateral contracts, revocation is notpermissible once the offeree has started performing the taskrequested. Reward cases are examples of such unilateral

promises. There is no compulsion placed on the partyundertaking the action but it would seem to be unfair if thepromisor were entitled to revoke their offer just before theofferee was about to complete their part of the contract. Anexample of unilateral contracts may be seen in Carlill vCarbolic Smoke Ball Co (1893) where the company promisedto pay 100 to anyone who caught influenza after using theirproduct. No one was forced to buy the product but once theydid and started using it the company was bound by its

promise. In Errington v Errington (1952), a father promisedhis son and daughter-in-law that he would convey a house tothem when they had paid off the outstanding mortgage.After the father's death, his widow sought to revoke thepromise. It was held that the promise could not be withdrawnas long as the mortgage payments continued to be met.

b) A collateral contract arises where one party promisessomething to another party if that other party enters into acontract with a third party, for example, A promises to give Bsomething if B enters into a contract with C. In such asituation, the second party can enforce the original promise,that is, B can insist on A complying with the original promise.It may be seen from this that, although treated as anexception to the privity rule, a collateral contract conformswith the requirements which relate to the establishment ofany other contract: consideration for the original promisebeing the making of the second contract. An example of theoperation of a collateral contract will demonstrate, however,the way in which the courts tend to construct collateralcontracts in order to achieve what they see as fair dealing. In

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Shanklin Pier v Detel Products Ltd (1951), the plaintiffscontracted to have their pier repainted. On the basis ofpromises as to its quality, the defendants persuaded the piercompany to insist that a particular paint produced by Detel

be used. The painters used the paint but it provedunsatisfactory. The plaintiffs sued for breach of the originalpromise as to the suitability of the paint. The defendantscountered that the only contract they had entered into wasbetween them and the painters to whom they had sold thepaint, and that as the pier company were not a party to thatcontract they had no right of action against Detel. The piercompany were successful. It was held that, in addition to thecontract for the sale of paint, there was a second collateral

contract between the plaintiffs and the defendants by whichthe latter guaranteed the suitability of the paint in return forthe pier company specifying that the painters used it.

OFFERAn offer sets out the terms upon which an individual is willingto enter into a binding contractual relationship with anotherperson. It is a promise to be bound on particular terms, which iscapable of acceptance. The essential factor to emphasise about

an offer is that it may, through acceptance by the offeree,result in a legally enforceable contract. The person who makesthe offer is the offeror; the person who receives the offer is theofferee.Offers, once accepted, may be legally enforced but not allstatements will amount to an offer. It is important, therefore, tobe able to distinguish what the law will treat as an offer fromother statements, which will not form the basis of anenforceable contract. An offer must be capable of acceptance.

It must therefore not be too vague (Scammel v Ouston (1941)).In Carlill v Carbolic Smoke Ball Co (1893) it was held that anoffer could be made to the whole world and could be acceptedand made binding through the conduct of the offeree.In addition an offer should be distinguished, from the following:(i) a mere statement of intention, which cannot form the basisof a contract even although the party to whom it was madeacts on it (Re Fickus (1900)).(ii) a mere supply of information, as in Harveyv Facey (1893)

where it was held that the defendants telegram, in which hestated a minimum price he would accept for property, was

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simply a statement of information, and was not an offercapable of being accepted by the claimant.

COUNTER-OFFER

A counter-offer arises where the offeree tries to change theterms of the original offer that has been made rather thandirectly accepting it. The consequence of making a counter-offer is to bring the original offer to an end so it is no longerpossible for that original offer to be accepted at a later time.For example, in Hyde v Wrench (1840), Wrench offered to sellhis farm for 1,000. Hyde offered 950, which Wrench rejected.Hyde then informed Wrench that he accepted the original offer.It was held that there was no contract. Hydes counter-offer had

effectively ended the original offer and itwas no longer open to him to accept it.A counter-offer must not be confused with a request forinformation. Such a request does not end the offer, which canstill be accepted after the new information has been elicited.See Stevenson v McLean (1880), where it was held that arequest by the offeree as to the length of time the offerorwould give for payment did not terminate the original offer,which he was entitled to accept prior to revocation.

UNILATERAL OFFERA unilateral offer is one where one party promises something inreturn for some action on the part of another party. In relationto unilateral offers, revocation is not permissible once theofferee has started performing the task requested.Reward cases are examples of such unilateral promises. Thereis no compulsion placed on the party undertaking the actionbut it would seem to be unfair if the promisor were entitled torevoke their offer just before the offeree was about to completetheir part of the contract. An example of unilateral contractsmay be seen in Carlill v Carbolic Smoke Ball Co (1993),where the company promised to pay 100 to anyone whocaught infl uenza after using their product. No one was forcedto buy the product but once they did and started using it, thecompany was bound by its promise. In Errington v Errington(1952), a father promised his son and daughter-in-law that hewould convey a house to them when they had paid off theoutstanding mortgage. After the fathers death, his widowsought to revoke the promise. It was held that the promise

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could not be withdrawn as long as the mortgage paymentscontinued to be met.

WAYS IN WHICH AN OFFER CAN COME TO AN END AND,NO LONGER BE OPEN TO ACCEPTANCE. THESE ARE ASFOLLOWS:(i)REJECTION OF OFFERSExpress rejection of an offer has the effect of terminating theoffer. Once rejected the offeree cannot subsequently retractand accept the original offer. A counter-offer, where the offereetries to change the terms of the offer, has the same effect(Hyde v Wrench (1840)).A counter-offer must not be confused with a request for

information. Such a request does not end the offer, which canstill be accepted after the new information has been elicited(Stevenson v McLean (1880)).

(ii)REVOCATION OF OFFERSRevocation, the technical term for cancellation, occurs whenthe offeror withdraws their offer. There are a number of pointsthat have to be borne in mind in relation to revocation, asfollows:

An offer may be revoked at any time before acceptanceOnce revoked, it is no longer open to the offeree to accept theoriginal offer (Routledge v Grant (1828)). The corollary of thispoint is, of course, that once the offer is accepted it cannotsubsequently be withdrawn. Revocation is not effective until it is actually received by theofferee

This means that the offeror must make sure that the offeree ismade aware of the withdrawal of the offer; otherwise it might

still be open to the offeree to accept the offer. This appliesequally when the offeror uses the post towithdraw the offer, as the postal rule does not apply in relationto the withdrawal of offers (Byrne v Van Tienhoven (1880)). Communication of revocation may be made through a reliablethird partyWhere the offeree finds out about the withdrawal of the offerfrom a reliable third party, the revocation is effective and theofferee can no longer seek to accept the original offer

(Dickinson v Dodds (1876)).

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A promise to keep an offer open is only binding where there isa separate contract to that effect This is known as an optioncontract, and the offeree/promisee must provide considerationfor the promise to keep the offer open. If the offeree does not

provide any consideration for the offer to be kept open, thenthe original offeror is at liberty to withdraw the offer at anytime (Routledge v Grantabove). In relation to unilateral contracts, revocation is notpermissible once the offeree has started performing the taskrequestedA unilateral contract is one where one party promisessomething in return for some action on the part of anotherparty. Rewards for finding lost property are examples of such

unilateral promises. There is no compulsion placed on the partyundertaking the action, but it would be unfair if the promisorwere entitled to revoke their offer just before the offeree wasabout to complete their part of the contract (Errington vErrington and Woods (1952)).(iii) Lapse of offersOffers lapse and are no longer capable of acceptance in thefollowing circumstances: At the end of a stated period

It is possible for the parties to agree, or for the offeror to set, atime limit within which acceptance has to take place.If the offeree has not accepted the offer within that period, theoffer lapses and can no longer be accepted. After a reasonable timeWhere no time limit is set, then an offer will lapse after thepassage of a reasonable time. What amounts to a reasonabletime is, of course, dependent upon the particular circumstancesof each case. Where the offeree dies

This automatically brings the offer to a close. Where the offeror dies and the contract was one of a personalnatureIn such circumstances, the offer automatically comes to an end,but the outcome is less certain in relation to contracts that arenot of a personal nature (Bradburyv Morgan (1862)).

INVITATION TO TREAT

Invitations to treat are distinct from offers in that rather thanbeing offers to others, they are in fact invitations to others to

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make offers. The person to whom the invitation to treat is madebecomes the actual offeror, and the maker of the invitationbecomes the offeree. An essential consequence of thisdistinction is that, in line with the ordinary rules of offer and

acceptance, the person extending the invitation to treat is notbound to accept any offers subsequently made to them.

The following are examples of common situations involvinginvitations to treat:(i) the display of goods in a shop window The classic case inthis area is Fisher v Bell (1961) in which a shopkeeper wasprosecuted for offering offensive weapons for sale, by havingflick-knives on display in his window. It was held that theshopkeeper was not guilty as the display in the shop window

was not an offer for sale but only an invitation to treat.(ii) the display of goods on the shelf of a self-service shop Inthis instance the exemplary case is Pharmaceutical Society ofGreat Britain v Boots Cash Chemists (1953). The defendantswere charged with breaking a law which provided that certaindrugs could only be sold under the supervision of a qualifiedpharmacist. They had placed the drugs on open display in theirself-service store and, although a qualified person wasstationed at the cash desk, it was alleged that the contract of

sale had been formed when the customer removed the goodsfrom the shelf. It was held that Boots were not guilty. Thedisplay of goods on the shelf was only an invitation to treat. Inlaw, the customer offered to buy the goods at the cash deskwhere the pharmacist was stationed.(iii) a public advertisement Once again this does not amountto an offer. This can be seen from Partridge v Crittenden (1968)in which a person was charged with offering a wild bird forsale contrary to the Protection of Birds Act 1954, after he hadplaced an advert relating to the sale of such birds in amagazine. It was held that he could not be guilty of offering thebird for sale as the advert amounted to no more than aninvitation to treat.(iv) a share prospectus Contrary to common understandingsuch a document is not an offer. It is merely an invitation totreat, inviting people to make offers to subscribe for shares in acompany.

TENDERS

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These arise where one party wishes particular work to be doneand issues a statement asking interested parties to submit theterms on which they are willing to carry out the work. In thecase of tenders, the person who invites the tender is simply

making an invitation to treat. The person who submits a tenderis the offeror and the other party is at liberty to accept or rejectthe offer as they please.

The effect of acceptance depends upon the wording of theinvitation to tender. If the invitation states that the potentialpurchaser will require to be supplied with a certain quantity ofgoods, then acceptance of a tender will form a contract andthey will be in breach if they fail to order the stated quantity ofgoods from the person submitting the tender. If, on the other

hand, the invitation states only that the potential purchasermay require goods, acceptance gives rise only to a standingoffer.In this situation there is no compulsion on the purchaser to takeany goods, but they must not deal with any other supplier.Each order given forms a separate contract and the suppliermust deliver any goods required within the time stated in thetender. The supplier can revoke the standing offer but theymust supply any goods already ordered (Great Northern

Railwayv Witham (1873)).

ACCEPTANCEAcceptance is necessary for the formation of a contract. Oncethe offeree has accepted the terms offered, a contract comesinto effect. Both parties are bound: the offeror can no longerwithdraw their offer, nor can the offeree withdraw theiracceptance.

Rules of acceptance(i) Acceptance must correspond with the terms of the offer.

Thus, the offeree must not seek to introduce newcontractual terms into their acceptance (Neale v Merrett(1930)).

(ii) A counter-offer does not constitute acceptance Hyde vWrench. Analogously, a conditional acceptance cannot

create a contract relationship (Winn v Bull (1877)).

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(iii) Acceptance may be in the form of express words, eitheroral or written. Alternatively acceptance may be impliedfrom conduct (Brogden v Metropolitan Railway Co (1877).

(iv) Generally, acceptance must be communicated to the

offeror. Consequently, silence cannot amount toacceptance (Felthouse v Bindley(1863)).

(v) Communication of acceptance is not necessary, however,where the offeror has waived the right to receivecommunication. Thus in unilateral contracts, such asCarlill v Carbolic Smoke Ball Co (1893), acceptanceoccurred when the offeree performed the required act.

Thus, in the Carlill case, Mrs Carlill did not have to informthe Smoke Ball Co that she had used their treatment.

(vi) Where acceptance is communicated through the postalservice then it is complete as soon as the letter, properlyaddressed and stamped, is posted. The contract isconcluded even if the letter subsequently fails to reachthe offeror (Adams v Lindsell (1818)). However, thepostal rule will only apply where it is in the contemplationof the parties that the post will be used as the means ofacceptance. If the parties have negotiated either, face toface, in a shop, for example, or over the telephone, then

it might not be reasonable for the offeree to use the postas a means of communicating their acceptance and theywould not gain the benefit of the postal rule. The postalrule applies equally to telegrams (Byrne v VanTienhoven). It does not apply, however, when means ofinstantaneous communication are used (Entores v MilesFar East Corp (1955)). In order to expressly exclude theoperation of the postal rule, the offeror can insist thatacceptance is only to be effective on receipt (HolwellSecurities v Hughes (1974)). The offeror can also requirethat acceptance be communicated in a particularmanner. Where the offeror does not insist thatacceptance can only be made in the stated manner, thenacceptance is effective if it is communicated in a way noless advantageous to the offeror (Yates Building Co v JPulleyn & Sons (1975)).

REVOCATION

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Revocation is the technical term for the cancellation of an offerand occurs when the offeror withdraws their offer. The rulesrelating to revocation are as follows:(i) An offer may be revoked at any time before acceptance.

However, once revocation has occurred, it is no longeropen to the offeree to accept the original offer(Routledge v Grant(1828)).

(ii) Revocation is not effective until it is actually received bythe offeree. This means that the offeror must make surethat the offeree is made aware of the withdrawal of theoffer, otherwise it might still be open to the offeree toaccept the offer (Byrne v Tienhoven (1880)).

(iii) Communication of revocation may be made through a

reliable third party. Where the offeree finds out about thewithdrawal of the offer from a reliable third party, therevocation is effective and the offeree can no longer seekto accept the original offer (Dickinson v Dodds (1876)).

(iv) A promise to keep an offer open is only binding wherethere is a separate contract to that effect. Such anagreement is known as an option contract, and it must besupported by separate consideration for the promise tokeep the offer open.

(v) In relation to unilateral contracts, i.e. a contract where oneparty promises something in return for some action onthe part of another party, revocation is not permissibleonce the offeree has started performing the taskrequested (Errington v Errington & Woods (1952)).

AGREEMENT SUBJECT TO CONTRACTAny agreement subject to contract is not binding, but merelysignifies the fact that the parties are in the process of finalising

the terms on which they will be willing to be bound (Winn v Bull(1877)). However, the mere fact that a person adds aqualification to their acceptance may not prevent acceptancefrom taking place. Thus in Society of Lloyds v Twinn (2000) itwas held that it was a question of fact in each case whetherthere was an unconditional acceptance plus a collateral offer(which there was in the present case) or a counter-offer (that is,a conditional acceptance I only accept the offer if . . .) whichrejected the offer.

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THE POSTAL RULEWhere acceptance is through the postal service, acceptance iscomplete as soon as the letter, properly addressed and

stamped, is posted. The contract is concluded, even if the lettersubsequently fails to reach the offeror. Thus in Adams vLindsell (1818), the defendant made an offer to the plaintiff on2 September. Due to misdirection, the letter was delayed. Itarrived on 5 September and Adams immediately posted anacceptance. On 8 September, Lindsell sold the merchandise toa third party. On 9 September, the letter of acceptance fromAdams arrived. It was held that a valid acceptance took placewhen Adams posted the letter. Lindsell was, therefore, liable for

breach of contract. The postal rule applies equally to telegrams (Byrne v VanTienhoven (1880)), but it does not apply when means ofinstantaneous communication are used (Entores v Far EastCorp (1955). Also the postal rule will apply only where it is inthe contemplation of the parties that post will be used as themeans of acceptance. If the parties have negotiated either faceto face, for example in a shop, or over the telephone, then itmight not be reasonable for the offeree to use post as a means

of communicating their acceptance and they would not gain thebenefit of the postal rule.Where acceptance is by e-mail; it has been argued that thissituation should be treated as a face to face situation wherereceipt only occurs when the recipient reads the e-mail.(Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellshaft mbH (1983)). Where theagreement is conducted on the Internet, regulation 11 of theElectronic Commerce (EC Directive) Regulations 2002 indicatesthat the contract is concluded when the service providersacknowledgment of receipt of acceptance is received byelectronic means.

CONSIDERATIONEnglish law does not enforce every promise which is made. Oneway in which the courts limit the type of promise that they haveto deal with is through the operation of the doctrine ofconsideration. English law does not enforce gratuitous

promises, i.e. promises given for no return, unless of coursesuch promises are given by way of a formal deed. For a simple

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promise to be enforceable in a court of law it is necessary thatthe person to whom the promise was made, the promisee,should have done something in return for the promise from thepromisor.

That something done in return for a promise is considerationand can therefore be understood as the price paid for apromise. The element of bargain implicit in the idea ofconsideration may be seen in Sir Frederick Pollocks definitionof it, subsequently adopted by the House of Lords in Dunlop vSelfridge (1915), as:An act or forbearance of one party, or the promise thereof, isthe price for which the promise of the other is bought, and thepromise thus given for value is enforceable. An alternative and

shorter definition of consideration is some benefit to thepromisor or detriment to the promisee. It is important to notethat it is not necessary for both elements in the definition to bepresent to support a legally enforceable agreement. Althoughin practice there usually is a reciprocal exchange of benefit anddetriment it is nonetheless possible for a promisee to provideconsideration for a promise without their action directlybenefiting the promisor. As long as the promisee acts to theirdetriment it is immaterial whether that act actually benefits the

promisor or not. The promise will still have providedconsideration and the promise made to elicit the promiseesaction will be legally enforceable against the promisor.

CONSIDERATION CAN BE DIVIDED INTO THE FOLLOWINGCATEGORIES:(i) Executory Consideration is the promise to perform anaction at some future time. One party to a contractualagreement may pay money to another on the understandingthat the latter will perform some act for them in the future. Oralternatively they might provide an immediate benefit for theother party on the understanding that the latter will provide areciprocal benefit in the future. Contracts may also be madesolely on the basis of an exchange of promises as to futureaction, without the need for any present action. In suchcircumstances the mere promises provide mutual/reciprocalconsideration and any such agreement entered into is legallybinding and enforceable in a court of law. Such a contract isknown as an executory contract.

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(ii) Executed Consideration, as may be gathered from theterm, refers to consideration that has actually been carried out,thus making the promise for which it was performedenforceable. In the case of unilateral contracts, where the

offerer promises something in return for the offerees doingsomething, the original promise only becomes enforceablewhen the offeree has actually performed the required act. Theaction requested does not have to be performed but once it isdone then the original promise becomes legally enforceable.For example if A offers a reward for the return of their lost dog,the reward only becomes enforceable once it has been foundand returned to them.(iii) Past Consideration does not actually count as valid

consideration; therefore no agreement resting on pastconsideration is legally enforceable. Normally consideration isprovided either at the time of the creation of a contract or at alater date. In the case of past consideration, however, theaction done is performed before the promise. Such prior actionis not deemed sufficient to support the later promise.

Thus in Re McArdle (1951) a number of children were entitledto a house on the death of their mother. Whilst the mother wasalive a son and his wife had lived with her, and the wife made

various improvements to the house. The children laterpromised that they would pay the wife 488 for the work shehad done. It was held that as the work was completed beforethe promise was given, it was past consideration and the laterpromise could not be enforced.

There are exceptions to the rule that past consideration will notsupport a valid contract. For example where the promiseperformed the action at the request of the promisor andpayment was expected, then any subsequent promise to paywill be enforceable. Thus in Re Caseys Patents (1892) the jointowners of patent rights asked Casey to find licensees to workthe patents. After he had done as requested they promised toreward him. When one of the patent holders died his executorsdenied the enforceability of the promise made to Casey on thebasis of past consideration. It was held that the promise madeto Casey was enforceable on the basis that there had been animplied promise to reward him before he had performed hisaction. The later promise merely fixed the extent of thatreward. Also under s.27 of the Bills of Exchange Act 1882 past

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consideration can create liability on a bill of exchange and acheque.

CONSIDERATION MUST BE SUFFICIENT BUT NEED NOT BE

ADEQUATE

The statement that consideration must be sufficient but neednot be adequate refers to the fact that it is for the partiesthemselves to determine the terms of their contract. Indeciding the contractual validity of any agreement, the courtwill merely look to ensure that there is some element thatconstitutes valid consideration. As long as it finds formalconsideration, the court will not intervene to require

substantive equality in the value of the goods or promisesexchanged, as long as the agreement has been freely enteredinto. Thus in Thomas v Thomas (1842) the executors of a manswill promised to let his widow live in his house in return for rentof 1 per year. It was held that 1 was sufficient considerationto validate the contract, although it did not represent anadequate rent in economic terms. Equally, in Chappell & Co vNestle Co (1959), it was held that a used chocolate wrapperwas sufficient consideration to form a contract, even although it

had no economic value whatsoever to Nestle.It has generally been accepted that performance of an existingduty does not provide valid consideration (Glassbrook vGlamorgan CC (1925) and Stilkv Myrick(1809)). However, themore recent authority of Williams v Roffey Bros (1990) hasindicated a contrary possibility.

PRIVITY OF CONTRACTThe doctrine of privity in contract law provides that a contractcan only impose rights or obligations on persons who areparties to it. Its operation may be seen in Dunlop v Selfridge(1915). Dunlop sold tyres to a distributor, Dew and Co, onterms that the distributor would not sell them at less than themanufacturers list price, and that they would extract a similarundertaking from anyone they supplied with tyres. Dew and Coresold the tyres to Selfridge who agreed to abide by therestrictions and to pay Dunlop 5 for each tyre they sold inbreach of them. When Selfridge sold tyres at below Dunlops

list price, Dunlop sought to recover the promised 5 per tyre

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sold. It was held that Dunlop could not recover damages on thebasis of thecontract between Dew and Selfridge to which they were not aparty.

There are a number of ways in which consequences of theapplication of strict rule of privity may be avoided to allow athird party to enforce a contract. These occur at both commonlaw and under statute.

HOW THE DOCTRINE OF PRIVITY CAN BE AVOIDEDa)Common law the beneficiary sues in some other capacity.A person who was not originally party to a particular contract

may, nonetheless, acquire the power to enforce the contractwhere they are legally appointed to administer the affairs ofone of the original parties. An example of this can be seen inBeswick v Beswick (1967) where a coal merchant sold hisbusiness to his nephew in return for a consultancy fee of610 shillings (in pre-decimal currency) during his lifetime, andthereafter an annuity of 5 per week payable to his widow.After the uncle died, the nephew stopped paying the widow.When she became administratrix of her husbands estate, she

sued the nephew for specific performance of the agreement inthat capacity as well as in her personal capacity. It was heldthat, although she was not a party to the contract andtherefore could not be granted specific performance in herpersonal capacity, such an order could be awarded to her asthe administratrix of the deceased persons estate. the situation involves a collateral contract.A collateral contract arises where one party promisessomething to another party if that other party enters into acontract with a third party, for example, A promises to give Bsomething if B enters into a contract with C. In such a situation,the second party can enforce the original promise, that is, Bcan insist on A complying with the original promise. In ShanklinPier v Detel Products Ltd (1951), the plaintiffs contracted tohave their pier repainted. On the basis of promises as to itsquality, the defendants persuaded the pier company to insistthat a particular paint produced by Detel be used.

The painters used the paint but it proved unsatisfactory. Theplaintiffs sued for breach of the original promise as to thesuitability of the paint. The defendants countered that the only

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contract they had entered into was between them and thepainters to whom they had sold the paint, and that as the piercompany were not a party to that contract they had no right ofaction against Detel. The pier company were successful. It was

held that, in addition to the contract for the sale of paint, therewas a second collateral contract between the plaintiffs and thedefendants by which the latter guaranteed the suitability of thepaint in return for the pier company specifying that the paintersused it. There is a valid assignment of the benefit of the contractA party to a contract can transfer the benefit of that contract toa third party through the formal process of assignment.

The assignment must be in writing, and the assignee receives

no better rights under the contract than the assignorpossessed. The burden of a contract cannot be assignedwithout the consent of the other party to the contract. Where it is foreseeable that damage caused by any breach ofcontract will cause a loss to a third party.In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd(1994), the original parties had entered into a contract for workto be carried out on property with the likelihood that it wouldsubsequently be transferred to a third party. The defendants

poor work, amounting to a breach of contract, only becameapparent after the property had been transferred. There had been no assignment of the original contract and,normally, under the doctrine of privity, the new owners wouldhave no contractual rights against the defendants and theoriginal owners of the property would have suffered only anominal breach as they had sold it at no loss to themselves.Nonetheless, the House of Lords held that, under suchcircumstances, and within a commercial context, the originalpromisee should be able to claim full damages on behalf of thethird party for the breach of contract. One of the parties has entered the contract as a trustee for athird party.

There exists the possibility that a party to a contract can createa contract specifically for the benefit of a third party. In suchlimited circumstances, the promisee is considered as a trusteeof the contractual promise for the benefit of the third party. Inorder to enforce the contract, the third party must act throughthe promisee by making them a party to any action. For a

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consideration of this possibility, see Les Affreteurs Reunis SA vLeopold Walford (London) Ltd(1919).

The other main exception to the privity rule at common law isagency, where the agent brings about contractual relations

between two other parties even where the existence of theagency has not been disclosed.

b)StatuteThe first area in which statute has intervened in relation to thedoctrine of privity is in relation to motor insurance where thirdparties claim directly against the insurers of the party againstwho they have a claim.

The most significant alteration of the operation of the doctrine

of privity however, has been made by the Contracts (Rights of Third Parties) Act 1999 which sets out the circumstances inwhich third parties can enforce terms of contracts. In order forthe third party to gain rights of enforcement, the contract inquestion must, either, expressly confer such a right on them or,alternatively, it must have been clearly made for their benefit(s.1). The contractual agreement must actually identify thethird party, either by name, or as a member of a class ofpersons, or answering a particular description. The third person

need not be in existence when the contract was made, so it ispossible for parties to make contracts for the benefit of unbornchildren.

This provision should also reduce the difficulties relating to pre-incorporation contracts in relation to registered companies.

The third party may exercise the right to any remedy whichwould have been available had they been a party to thecontract.Such rights are, however, subject to the terms and conditionscontained in the contract and they can get no better right thanthe original promisee.Section 2 of the Act provides that, where a third party hasrights by virtue of the Act, the original parties to the contractcannot agree to rescind it or vary its terms without the consentof the third party; unless the original contract contained anexpress term to that effect.Section 3 allows the promisor to make use of any defences orrights of set-off they might have against the promisee in anyaction by the third party. Additionally, the promisor can alsorely on any such rights against the third party.

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Section 5 removes the possibility of the promisor suffering fromdouble liability in relation to the promisor and the third party.It provides, therefore, that any damages awarded to a thirdparty for a breach of the contract be reduced by the amount

recovered by the original promisee in any previous actionrelating to the contract.

The Act does not alter the existing law relating to negotiableinstruments, s.14 of the Companies Act 1985, contracts ofemployment, or contracts for the carriage of goods.

INTENTION TO CREATE LEGAL RELATIONS.A contract is defined as a binding agreement, however in orderto limit the number of cases that might otherwise be brought,the courts will only enforce those agreements which the partiesintended to have legal effect. Although expressed in terms ofthe parties intentions, the test for the presence of suchintention is an objective, rather than a subjective, one.Agreementscan be divided into two categories, in which differentpresumptions apply.(i) Domestic and social agreementsIn these agreements, there is a presumption that the parties do

not intend to create legal relations (Balfourv Balfour (1919)).However, any such presumption against the intention to createlegal relations in such relationships may be rebutted by theactual facts and circumstances of a particular case as may beseen in Merrittv Merritt(1970).(ii) Commercial agreementsIn these situations, the strong presumption is that the partiesintend to enter into a legally binding relationship inconsequence of their dealings (Edwards v Skyways (1964)).

However, as with other presumptions, this one is also open torebuttal. In commercial situations, however, the presumption isso strong that it will usually take express wording to thecontrary to avoid its operation as may be seen in Rose andFrank Co v Crompton Bros (1925).

PRESUMPTION AND REBUTTAL

A presumption is a legal assumption which must apply until thecontrary is proved. In other words the court will assume that a

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particular state of affairs, or legal relationship, exists, until the

contrary is shown by the other party, seeking to remove the

presumption. Where a party can provide evidence to support a

conclusion contrary to the original presumption, then that

presumption is said to have been rebutted.

DOCTRINE OF PROMISSORY ESTOPPEL.English law does not enforce gratuitous promises unless theyare made by deed. Consideration has to be provided as theprice of a promise. This is equally the case where a partypromises to give up some existing rights that they have. Thus,at common law, if A owes B 10, but B agrees to accept 5 infull settlement of the debt, Bs promise to give up existing

rights must be supported by consideration on the part of A. Thisprinciple, that a payment of a lesser sum cannot be anysatisfaction for the whole, was originally stated in Pinnels case(1602), and reaffirmed in Foakes v Beer (1884). This principlehas been reconfirmed in the more recent case of ReSelectmove Ltd(1994).However, the equitable doctrine of promissory estoppelsometimes can be relied upon to prevent promisors from goingback on their promises. The doctrine first appeared in Hughes v

Metropolitan Railway Co (1877) and was revived by LordDenning in the High Trees case (Central London Property TrustLtdv High Trees House Ltd(1947)).Estoppel arises from a promise made by a party to an existingcontractual agreement. The promise must have been madewith the intention that it be acted upon and must actually havebeen acted on (W.J. Alan & Co v El Nasr Export & Import Co(1972)).It only varies or discharges rights within a contract. It does not

apply to the formation of contract, and therefore it does notavoid the need for consideration to establish a contract in thefirst instance (Combe v Combe (1951)).It normally only suspends rights, so it is possible for thepromisor, with reasonable notice, to retract the promise andrevert to the original terms of the contract (Tool MetalManufacturing Co v Tungsten Electric Co (1955)). Rights maybe extinguished, however, in the case of a non-continuingobligation, or where the parties cannot resume their original

positions (D & C Builders v Rees (1966)).

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It is also essential that the promise relied upon must be givenvoluntarily. As an equitable remedy the benefit of promissoryestoppels will not be extended to those who have behaved inan inequitable manner (D & C Builders v Rees (1966)).

TERMS AND MERE REPRESENTATIONS

As the parties to a contract will be bound to perform anypromise they have contracted to undertake, it is important todistinguish between such statements that will be consideredpart of the contract, i.e. terms, and those other pre-contractualstatements which are not considered to be part of the contract,i.e. mere representations. The reason for distinguishingbetween them is that there are different legal remediesavailable if either statement turns out to be incorrect.A representation is a statement that induces a contract butdoes not become a term of the contract. In practice it issometimes difficult to distinguish between the two, but inattempting to do so the courts will focus on when thestatement was made in relation to the eventual contract, theimportance of the statement in relation to the contract andwhether or not the party making the statement had specialist

knowledge on which the other party relied (Oscar Chess vWilliams (1957) and Dick Bentley v Arnold Smith Motors(1965)).

EXPRESS AND IMPLIED TERMS

Express terms are statements actually made by one of theparties with the intention that they become part of the contract

and thus binding and enforceable through court action ifnecessary. It is this intention that distinguishes the contractualterm from the mere representation, which, although it mayinduce the contractual agreement, does not become a term ofthe contract.Failure to comply with the former gives rise to an action forbreach of contract, whilst failure to comply with the latter onlygives rise to an action for misrepresentation.Such express statements may be made by word of mouth or in

writing as long as they are sufficiently clear for them to beenforceable. Thus in Scammel v Ouston (1941) Ouston had

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ordered a van from the claimant on the understanding that thebalance of the purchase price was to be paid on hire purchaseterms over two years. When Scammel failed to deliver the vanOuston sued for breach of contract without success, the court

holding that the supposed terms of the contract were toouncertain to be enforceable. There was no doubt that Oustonwanted the van on hire purchase but his difficulty was thatScammel operated a range of hire purchase terms and theprecise conditions of his proposed hire purchase agreementwere never sufficiently determined.Implied terms, however, are not actually stated or expresslyincluded in the contract, but are introduced into the contract byimplication. In other words the exact meaning and thus the

terms of the contract are inferred from its context. Impliedterms can be divided into three types.Terms implied by statuteIn this instance a particular piece of legislation states thatcertain terms have to be taken as constituting part of anagreement, even where the contractual agreement betweenthe parties is itself silent as to that particular provision. Forexample, under s.5 of the Partnership Act 1890, every memberof an ordinary partnership has the implied power to bind the

partnership in a contract within its usual sphere of business.That particular implied power can be removed or reduced bythe partnership agreement and any such removal or reductionof authority would be effective as long as the other party wasaware of it. Some implied terms, however, are completelyprescriptive and cannot be removed.Terms implied by custom or usageAn agreement may be subject to terms that are customarilyfound in such contracts within a particular market, trade orlocality. Once again this is the case even where it is notactually specified by the parties. For example, in Hutton vWarren (1836), it was held that customary usage permitted afarm tenant to claim an allowance for seed and labour onquitting his tenancy. It should be noted, however, that customcannot override the express terms of an agreement (Les

Affreteurs Reunnis SA v Walford(1919)).Terms implied by the courtsGenerally, it is a matter for the parties concerned to decide theterms of a contract, but on occasion the court will presume thatthe parties intended to include a term which is not expressly

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stated. They will do so where it is necessary to give businessefficacy to the contract.Whether a term may be implied can be decided on the basis ofthe officious bystander test. Imagine two parties, A and B,

negotiating a contract, when a third party, C, interrupts tosuggest a particular provision. A and B reply that that particularterm is understood. In just such a way, the court will decidethat a term should be implied into a contract.In The Moorcock (1889), the appellants, owners of a wharf,contracted with the respondents to permit them to dischargetheir ship at the wharf. It was apparent to both parties thatwhen the tide was out the ship would rest on the riverbed.When the tide was out, the ship sustained damage by settling

on a ridge. It was held that there was an implied warranty inthe contract that the place of anchorage should be safe for theship. As a consequence, the ship owner was entitled todamages for breach of that term.Alternatively the courts will imply certain terms into unspecificcontracts where the parties have not reduced the generalagreement into specific details. Thus in contracts ofemployment the courts have asserted the existence of impliedterms to impose duties on both employers and employees,

although such implied terms can be overridden by expresscontractual provision to the contrary.

TERMSContractual terms, are statements which form part of thecontract. Parties to a contract will normally be bound toperform any promise that they have agreed to and failure toperform will lead to an action for breach of contract, althoughthe precise nature of the remedy will depend upon the natureof the promise broken. Some statements do not form part of acontract, even though they might have induced the other partyto enter into the contract. These pre-contractual statementsare called representations.

The consequences of such representations being false is anaction for misrepresentation not an action for breach ofcontract, and leads to different remedies. It is important,therefore, to decide precisely what promises are included in thecontract. Once it is decided that a statement is a term, rather

than merely a pre-contractual representation, it is further

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necessary to decide which type of term it is, in order todetermine what remedies are available for its breach.

TERMS CAN BE CLASSIFIED AS ONE OF THREE TYPES.

CONDITIONSA condition is a fundamental part of the agreement it issomething which goes to the root of the contract. Breach of acondition gives the injured party the right either to terminatethe contract and refuse to perform their part of it, or to gothrough with the agreement and sue for damages. The classiccase in relation to breach of condition is Poussardv Spiers &Pond (1876) in which the plaintiff had contracted with thedefendants to sing in an opera they were producing. Due to

illness she was unable to appear on the first night, or for somenights thereafter. When Mme Poussard recovered, thedefendants refused her services as they had hired areplacement for the whole run of the opera. It was held that herfailure to appear on the opening night had been a breach of acondition, and the defendants were at liberty to treat thecontract as discharged

WARRANTIES

A warranty is a subsidiary obligation which is not vital to theoverall agreement, and in relation to which failure to performdoes not totally destroy the whole purpose of the contract.Breach of a warranty does not give the right to terminate theagreement.

The injured party has to complete their part of the agreement,and can only sue for damages. As regards warranties, theclassic case is Bettini v Gye (1876) in which the plaintiff hadcontracted with the defendants to complete a number ofengagements.He had also agreed to be in London for rehearsals six daysbefore his opening performance. Due to illness, however, heonly arrived three days before the opening night, and thedefendants refused his services. On this occasion it was heldthat there was only a breach of warranty. The defendants wereentitled to damages, but could not treat the contract asdischarged.For some time it was thought that these were the only twotypes of term possible, the nature of the remedy availablebeing prescribed by the particular type of term concerned. This

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simple classification has subsequently been rejected by thecourts as too restrictive, and a third type of term has emerged:the innominate term.

INNOMINATE TERMSIn this case, the remedy is not prescribed in advance simply bywhether the term breached is a condition or a warranty, butdepends on the consequence of the breach.If the breach deprives the innocent party of substantially thewhole benefit of the contract, then the right to repudiate willbe permitted; even if the term might otherwise appear to be amere warranty.If, however, the innocent party does not lose substantially the

whole benefit of the contract, then they will not be permittedto repudiate but must settle for damages, even if the termmight otherwise appear to be a condition. The way in which thecourts approach such terms may be seen in Cehave v Bremer(The Hansa Nord) (1976). In this case a contract for the sale ofa cargo of citrus pulp pellets, to be used as animal feed,provided that they were to be delivered in good condition. Ondelivery, the buyers rejected the cargo as not complying withthat provision, and claimed back the money they had paid to

the sellers.Subsequently the same buyers obtained the pellets, when thecargo was sold off, and used them for their original purpose. Itwas held that since the breach had not been serious, thebuyers had not been free to reject the cargo, and the sellershad acted lawfully in retaining the money paid.

breach of contract, paying attention to anticipatorybreach.

Breach of contract occurs when one of the parties to thecontract fails to perform their part of the agreement, eitherfully or partially i.e. they fail completely to perform what theyhave contracted to do, or they perform their obligation in adefective manner. As a consequence of this failure the courtmay award remedies against the party in breach of the

contract, the most usual of which is damages.

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Usually breach of contract only becomes apparent at, or after,the time set for the performance of the contract. Anticipatorybreach, however, occurs before the due date of performance. Itoccurs where one of the parties shows a clear intention not to

be bound by their agreement and indicates that they will notperform their contractual obligations on the actual due date ofperformance.In the situation of anticipatory breach, the innocent party cansue for damages immediately they are made aware of thebreach.However, they are not required to take immediate action. Theycan, if they so choose, wait until the actual time forperformance before taking action. If they do elect to wait until

the set time for performance, then they are entitled to makepreparations for performance of their part of the contract; andclaim the agreed contract price. In White & Carter (Councils) vMcGregor (1961), McGregor contracted with the plaintiffs tohave advertisements placed on litter bins which were suppliedto local authorities. The defendant wrote to the plaintiffs askingthem to cancel the contract. The plaintiffs refused to cancel,and produced, and displayed, the adverts as required under thecontract. They then claimed payment. It was held that the

plaintiffs were not obliged to accept the defendantsrepudiation, but could perform the contract and claim theagreed price.Anticipatory breach can take either of two specific forms:express anticipatory breach or implied anticipatory breach.Express anticipatory breach occurs where one of the partiesdeclares, before the due date of performance, that they haveno intention of complying with the terms of the contractualagreement. An example of this may be seen in Hochsterv DeLa Tour(1853). In April, De La Tour engaged Hochster to act ashis courier on his European tour, starting on 1 June. On 11 MayDe La Tour wrote to Hochster stating that he would no longerbe needing his services. The plaintiff started proceedings forbreach of contract on 22 May, and the defendant claimed thatthere could be no cause of action until 1 June. It was held,however, that the plaintiff was entitled to start his action assoon as the anticipatory breach occurred, i.e. when De La Tourstated he would not need Hochsters services.Implied anticipatory breach does not arise from any directindication from either of the parties that they will not perform

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their contractual agreement, but results from the situationwhere one of the parties does something, which makessubsequent performance of their contractual undertakingimpossible. An example of this may be seen in Omnium

DEnterprises v Sutherland (1919). In this case the defendanthad agreed to let a ship to the plaintiff, but before the actualtime for performance, he actually sold the ship to anotherparty. It was held that the sale of the ship amounted to a clearrepudiation of the contract and that the plaintiff could sue forbreach of contract from that date, without having to wait untilthe actual date of performance of the contract.

REMEDIES AVAILABLE FOR BREACH OF CONTRACT.

This question invites candidates to examine the variousremedies that may be available to innocent parties when theysuffer as a consequence of a breach of contract.Breach of a contract occurs where one of the parties to theagreement fails to comply, either completely or satisfactorily,with their obligations under it. A breach of contract may occurin three ways:(i) where a party, prior to the time of performance, states thatthey will not fulfil their contractual obligation;

(ii) where a party fails to perform their contractual obligation;(iii) where a party performs their obligation in a defectivemanner.Any breach will result in the innocent party being able to suefor an appropriate remedy. In addition, however, somebreaches will permit the innocent party to treat the contract asdischarged In this situation they can refuse either to performtheir part of the contract, or to accept further performancefrom the party in breach.

The principal remedies for breach of contract are: damages; quantum meruit;

specific performance;

injunction.

DamagesEvery failure to perform a primary obligation is a breach ofcontract. The secondary obligation on the part of the contract-

breaker, by implication of the common law, is to pay monetarycompensation to the other party for the loss sustained by him

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in consequence of the breach (Photo Productions Ltd vSecuricor Transport Ltd(1980)). Such monetary compensationfor breach of contract is damages. There are two issues toconsider: remoteness and measure.

(i) Remoteness of damage This involves deciding how far down a chain of events adefendant is liable. The rule in Hadley v Baxendale (1845)states that damages will only be awarded in respect of losseswhich arise naturally, i.e. in the natural course of things; orwhich both parties may reasonably be supposed to havecontemplated, when the contract was made, as a probableresult of its breach.

The effect of the first part of the rule in Hadleyv Baxendale is

that the party in breach is deemed to expect the normalconsequences of the breach, whether they actually expectedthem or not.Under the second part of the rule, however, the party in breachcan only be held liable for abnormal consequences where theyhave actual knowledge that the abnormal consequences mightfollow. Thus in Victoria Laundry Ltd v Newham Industries Ltd(1949) the plaintiff was able to claim for damages with respectto the normal profits, but could not claim abnormal profits

which would have resulted from an especially lucrativecontract, which the defendant knew nothing about.(ii) Measure of damagesDamages in contract are intended to compensate an injuredparty for any financial loss sustained as a consequence ofanother partys breach. The object is not to punish the party inbreach, so the amount of damages awarded can never begreater than the actual loss suffered. The aim is to put theinjured party in the same position they would have been in hadthe contract been properly performed. Even damages of a non-financial nature can be recovered (Jarvis v Swan Tours Ltd(1973)).It is possible, and common in business contracts, for parties toan agreement to make provisions for possible breach by statingin advance the amount of damages that will have to be paid inthe event of any breach occurring. Damages under such aprovision are known as liquidated damages. They will only berecognised by the court if they represent a genuine pre-estimate of loss, and are not intended to operate as a penalty

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against the party in breach (Dunlop v New Garage & Motor Co(1915).Where a contract has been carried out, but one party refuses topay the agreed price, the claimant will usually sue for that

amount. Unsurprisingly, this is known as an action for theprice.

Quantum meruitQuantum meruit means that a party should be awarded asmuch as he had earned and such an award can be eithercontractual or quasi-contractual in nature. If the parties enter acontractual agreement without determining the reward that isto be provided for performance, then in the event of any

dispute, the court will award a reasonable sum.Payment may also be claimed on the basis ofquantum meruit,where a party has carried out work in respect of a void contract(Craven-Ellis v Canons Ltd(1936)).

Specific performanceAn order for specific performance requires the party in breachto complete their part of the contract. The following rulesgovern the award of such a remedy.

(i) specific performance will only be granted in cases wherethe common law remedy of damages is inadequate. It ismost commonly granted in cases involving the sale ofland, where the subject of the contract is unique.

(ii) specific performance will not be granted where the courtcannot supervise its enforcement. For this reason it willnot be available in respect of contracts of employment orpersonal service (Ryan v Mutual Tonitone WestminsterChambers Association (1893)).

(iii) specific performance, as an equitable remedy, will not begranted where the plaintiffs themselves have not actedproperly.

InjunctionThis is also an equitable order of the court, which directs aperson not to break their contract. An injunction will only begranted to enforce negative covenants within the agreement,and cannot be used to enforce positive obligations (WhitwoodChemical Co v Hardman (1891)). However, it can have the

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effect of indirectly enforcing contracts for personal service(Warner Bros v Nelson (1937)).Quasi-contractual remedies are based on the assumption that aperson should not receive any undue advantage from the fact

that there is no contractual remedy to force them to account.An important quasi-contractual remedy is an action for moneypaid and received. If no contract comes into existence forreason of a total failure of consideration, then under this action,any goods or money received will have to be returned to theparty who supplied them.

Explain in relation to remedies for breach of contract:(a) the difference between liquidated damages and

penalty clauses; (b) the duty to mitigate losses.This question requires an explanation of two aspects of the lawrelating to damages for breach of contract.a)Liquidated damages and penalty clausesIt is possible, and common in business contracts, for the partiesto an agreement to make provisions for possible breach bystating in advance the amount of damages that will have to bepaid in the event of any breach occurring. Damages under sucha provision are known as liquidated damages. They will only be

recognised by the court if they represent a genuinepreestimate of loss, and are not intended to operate as apenalty against the party in breach. If the court considers theprovision to be a penalty, it will not give it effect, but will awarddamages in the normal way.In Dunlop v New Garage and Motor Co (1915), the plaintiffssupplied the defendants with tyres, under a contract designedto achieve resale price maintenance. The contract providedthat the defendants had to pay Dunlop 5 for every tyre theysold in breach of the resale price agreement. When the garagesold tyres at less than the agreed minimum price, they resistedDunlops claim for 5 per tyre, on the grounds that itrepresented a penalty clause. On the facts of the situation, thecourt decided that the provision was a genuine attempt to fixdamages, and was not a penalty. It was, therefore, enforceable.In deciding the legality of such clauses, the courts will considerthe effect, rather than the form, of the clause as is seen inCellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd(1933). In that case, the contract expressly stated thatdamages for late payment would be paid by way of penalty at

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the rate of 20 per week. In fact, the sum of 20 pounds was inno way excessive and represented a reasonable estimate of thelikely loss. On that basis, the House of Lords enforced theclause in spite of its actual wording.

b)The duty to mitigate losses This rule relates to the rule that the injured party in thesituation of a breach of contract is under a duty to take allreasonable steps to minimise their loss. The operation of therule means that the buyer of goods that are not delivered, asrequired under the terms of a contract, has to buy thereplacements as cheaply as possible. Correspondingly, theseller of goods that are not accepted in line with a contractual

agreement has to try to get as good a price as they can whenthey sell them.In Payzu v Saunders (1919), the parties entered into a contractfor the sale of fabric, which was to be delivered and paid for ininstalments. When the purchaser, Payzu, failed to pay for thefirst instalment on time, Saunders refused to make any furtherdeliveries unless Payzu agreed to pay cash on delivery. Theplaintiff refused to accept this and sued for breach of contract.

The court decided that the delay in payment had not given the

defendant the right to repudiate the contract. As aconsequence, he had breached the contract by refusing furtherdelivery. The buyer, however, should have mitigated his loss byaccepting the offer of cash on delivery terms. His damageswere restricted, therefore, to what he would have lost underthose terms, namely, interest over the repayment period.In Western Web Offset Printers Ltd v Independent Media Ltd(1995), the parties had entered into a contract under which theplaintiff was to publish 48 issues of a weekly newspaper for thedefendant. In the action which followed the defendantsrepudiation of the contract, the only issue in question, was theextent of damages to be awarded. The plaintiff argued thatdamages should be decided on the basis of gross profits,merely subtracting direct expenses such as paper and ink, butnot labour costs and other overheads: this would result in atotal claim of some 177,000. The defendant argued thatdamages should be on the basis of net profits with labour andother overheads being taken into account: this would result in aclaim of some 38,000. Although the trial judge awarded thelesser sum, the Court of Appeal decided that he had drawn an

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incorrect analogy from cases involving sale of goods. In thissituation, it was not simply a matter of working out thedifference in cost price from selling price in order to reach anominal profit. The plaintiff had been unable to replace the

work due to the recession in the economy and, therefore, hadnot been able to mitigate the loss, and in the circumstanceswas entitled to receive the full amount that would have beendue in order to allow it to defray the expenses it would havehad to pay during the period the contract should have lasted.However, in relation to anticipatory breach of contract theinjured party can wait until the actual time for performancebefore taking action against the party in breach. In such asituation, they are entitled to make preparations for

performance, and claim the agreed contract price, even thoughthis apparently conflicts with the duty to mitigate losses ((White and Carter (Councils) v McGregor(1961) ).

In the law of contract describe the rules relating to:a)remoteness of damage;

b)the measure of damages.Damages is the common law remedy for breach of contractand, unlike discretionary equitable awards, is available as aright wherea pecuniary loss has been sustained by the innocent party. Indeciding what damages are to be paid, the courts deploy anumberof rules and principles to guide their action. These various rulesmay be considered under two headings: the rules relating toremoteness of damage and rules relating to the measure ofdamages.

(a) Remoteness of damageIt would be unfair if the party in breach of contract were held tobe liable for every consequence of their action no matter howfar down the chain of causation it appeared. In order to limitpotential liabilities, the courts have established clear rulesabout consequential liability in such a way as to deny theaward of damages for consequences that are deemed to be tooremote

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from the original breach. The rule relating to remoteness ofdamages was clearly stated for the first time in Hadley vBaxendale (1854) to the effect that damages will only beawarded in respect of losses which:

(i) arise naturally, i.e. in the usual course of events; or which(ii) both parties may reasonably be supposed to havecontemplated as a probable result of its breach when thecontract was made.As a consequence of the first part of the rule in Hadley vBaxendale, the party in breach is deemed to expect the normalconsequences of the breach, whether they actually expectedthem or not. It does not matter that they did not actually thinkof the consequences if those consequences were the natural

outcome of their breach.Under the second part of the rule, however, the party in breachcan only be held liable for abnormal consequences where theyhave actual knowledge that the abnormal consequences mightfollow. In Victoria Laundry Ltdv Newman Industries Ltd(1949)it was decided that the plaintiff could claim damages in relationto the loss of normal profits due to the defendants delay, asthat loss was a natural consequence of the delay. A secondclaim for damages in relation to an especially lucrative contract

failed, however, on the grounds that the loss was not a normalone, but was a consequence of an abnormal contract, aboutwhich the defendant knew nothing. The decision in the VictoriaLaundry case was confirmed by the House of Lords in TheHeron II (1969), although the actual test for remoteness wasreformulated in terms of whether the consequence should havebeen within the reasonable contemplation of the parties at thetime of the contract.(b) The measure of damages

The courts use a number of rules and principles to determinethe actual extent of monetary damages owed. The general ruleis that damages in contract are intended to be compensatoryrather than punitive. The aim is to put the injured party in thesame position they would have been in had the contract beenproperly performed. As the object is not to punish the party inbreach but to compensate the injured party for any financialloss sustained as a consequence of the other partys breach, sothe amount of damages awarded can never be greater than theactual loss suffered. It should be noted that the exact amountof the loss may differ depending on whether the innocent

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partys reliance interest or expectation interest is used as thecriterion against which damages are measured. In practice it isusually the expectation loss that is compensated except wherethis permits the innocent party to escape responsibility for any

loss they would have made in the contract in the absence ofbreach (see CCC Films (London) Ltdv Imperial Quadrant FilmsLtd(1985)).Where the breach relates to a contract for the sale of goods,damages are usually assessed in line with the market rule. Thismeans that if goods are not delivered under a contract, thebuyer is entitled to go into the market and buy similar goods,and pay the market price prevailing at the time. They can thenclaim the difference in price between what they paid and the

original contract price as damages. Conversely, if a buyerrefuses to accept goods under a contract, the seller can sell thegoods in the market, and accept the prevailing market price.Any difference between the price they receive and the contractprice can be claimed in damages.

The injured party is under a duty to take all reasonable steps tomitigate their loss. So in the above examples, the buyer ofgoods which are not delivered has to buy the replacements ascheaply as possible; and the seller of goods which are not

accepted has to try to get as good a price as they can whenthey sell them. In such a way they are expected to minimisetheactual loss they sustain, as may be seen in Payzu v Saunders(1919).

The foregoing has dealt with losses that are relatively easilyquantified in monetary terms but matters are morecomplicated when it comes to assessing damages for non-pecuniary loss.At one time, damages could not be recovered where the losssustained through breach of contract was of a non-financialnature. The modern position is that such non-pecuniarydamages can be recovered. Thus in Jarvis v Swan Tours Ltd(1973) it was held that the plaintiff was entitled to recover, not

just the substantial financial loss he suffered, but also for lossof entertainment and enjoyment which amounted to an evengreater sum.

The job of estimating damages may be made much simplerwhere the parties to an agreement make provisions for possiblebreach by stating in advance the amount of damages that will

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have to paid in the event of any breach occurring. Damagesunder such a provision are known as liquidated damages. Theywill be recognised by the court as long as they represent agenuine pre-estimate of loss, and are not intended to operate

as a penalty against the party in breach. If the court considersthe provision to be a penalty, it will not give it effect, but willaward damages in the normal way (Dunlop v New Garage &Motor Co (1915)).

In relation to contract law explain:(a) anticipatory breach of contract;(b) express anticipatory breach of contract;(c) implied anticipatory breach.

This question invites candidates to examine the legalconsequences of anticipatory breach of contract. In other wordswhat will be the legal effect where one of the parties to acontract, before the date of performance, indicates that theyhave no intention of complying with the terms of the contract,or alternatively it becomes apparent that they are no longer inthe position to perform the contract.(a) Breach of contract occurs when one of the parties to the

contract fails to perform their part of the agreement, eitherfully or partially. As a consequence of this failure the court mayaward remedies against the party in breach of the contract.Usually breach of contract only becomes apparent at, or after,the time set for the performance of the contract. Anticipatorybreach, however, occurs before the due date of performance. Itoccurs where one of the parties shows a clear intention not tobe bound by their agreement and indicates that they will notperform their contractual obligations on the actual due date of

performance.In the situation of anticipatory breach, the innocent party cansue for damages immediately they are made aware of thebreach. However, they are not required to take immediateaction. They can, if they so choose, wait until the actual timefor performance before taking action. If they do elect to waituntil the set time for performance, then they are entitled tomake preparations for performance of their part of thecontract; and claim the agreed contract price. In White & Carter

(Councils) v McGregor (1961), McGregor contracted with theplaintiffs to have advertisements placed on litter bins which

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were supplied to local authorities. The defendant wrote to theplaintiffs asking them to cancel the contract. The plaintiffsrefused to cancel, and produced, and displayed, the adverts asrequired under the contract. They then claimed payment. It was

held that the plaintiffs were not obliged to accept thedefendants repudiation, but could perform the contract andclaim the agreed price.Anticipatory breach can take either of two specific forms:express anticipatory breach or implied anticipatory breach.

(b) Express anticipatory breach occurs where one of theparties declares, before the due date of performance, that theyhave no intention of complying with the terms of thecontractual agreement. An example of this may be seen in

Hochster v De La Tour (1853). In April, De La Tour engagedHochster to act as his courier on his European tour, starting on1st June. On 11th May De La Tour wrote to Hochster stating thathe would no longer be needing his services. The plaintiffstarted proceedings for breach of contract on 22nd May, andthe defendant claimed that there could be no cause of actionuntil 1st June. It was held, however, that the plaintiff wasentitled to start his action as soon as the anticipatory breachoccurred. i.e. when De La

Tour stated he would not need Hochster's services.(c) As its title suggests, implied anticipatory breach does notarise from any direct indication from either of the parties thatthey will not perform their contractual agreement, but resultsfrom the situation where one of the parties does something,which makes subsequent performance of their contractualundertaking impossible. An example of this may be seen inOmnium DEnterprises v Sutherland (1919). In this case thedefendant had agreed to lease a ship to the plaintiff, but beforethe actual time for performance, he sold the ship to anotherparty. It was held that the sale of the ship amounted to a clearrepudiation of the contract and that the plaintiff could sue forbreach of contract from that date, without having to wait untilthe actual date of performance of the contract.

In relation to the law of contract explain the rulesrelating to:(a) remoteness of damage;(b) the measure of damages;

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(c) the duty to mitigate losses.

This questions asks candidates to consider the rules relating tothe award of damages for breach of contract.

Damages is the common law remedy for breach of contractand, unlike discretionary equitable awards, is available as aright where a pecuniary loss has been sustained by theinnocent party. In deciding what damages are to be paid, thecourts deploy a number of rules and principles to guide theiraction. These various rules may be considered under twoheadings: the rules relating to remoteness of damage and therules relating to the measure of damages.

(a) Remoteness of damageIt would be unfair if the party in breach of contract were held tobe liable for every consequence of their action no matter howfar down the chain of causation it appeared. In order to limitpotential liabilities, the courts have established clear rulesabout consequential liability in such a way as to deny theaward of damages for consequences that are deemed to be tooremote

from the original breach. The rule relating to remoteness ofdamages was clearly stated for the first time in Hadley vBaxendale (1854) to the effect that damages will only beawarded in respect of losses which:(i) arise naturally, i.e. in the usual course of events; or which (ii)both parties may reasonably be supposed to havecontemplated as a probable result of its breach when thecontract was made.As a consequence of the first part of the rule in Hadley vBaxendale, the party in breach is deemed to expect the normalconsequences of the breach, whether they actually expectedthem or not. It does not matter that they did not actually thinkof the consequences if those consequences were the naturaloutcome of their breach.Under the second part of the rule, however, the party in breachcan only be held liable for abnormal consequences where theyhave actual knowledge that the abnormal consequences mightfollow. In Victoria Laundry Ltdv Newman Industries Ltd(1949)it was decided that the plaintiff could claim damages in relationto the loss of normal profits due to the defendants delay, as

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that loss was a natural consequence of the delay. A secondclaim for damages in relation to an especially lucrative contractfailed, however, on the grounds that the loss was not a normalone, but was a consequence of an abnormal contract, about

which the defendant knew nothing. The decision in the VictoriaLaundrycase was confirmed by the House of Lords inThe Heron II (1969), although the actual test for remotenesswas reformulated in terms of whether the consequence shouldhave been within the reasonable contemplation of the partiesat the time of the contract.

(b) The measure of damagesThe courts use a number of rules and principles to determine

the actual extent of monetary damages owed. The general ruleis that damages in contract are intended to be compensatoryrather than punitive. The aim is to put the injured party in thesame position they would have been in had the contract beenproperly performed. As the object is not to punish the party inbreach but to compensate the injured party for any financialloss sustained as a consequence of the other partys breach, sothe amount of damages awarded can never be greater than theactual loss suffered. It should be noted that the exact amount

of the loss may differ depending on whether the innocentpartys reliance interest or expectation interest is used as thecriterion against which damages are measured. In practice it isusually the expectation loss that is compensated except wherethis permits the innocent party to escape responsibility for anyloss they would have made in the contract in the absence ofbreach (see CCC Films (London) Ltdv Imperial Quadrant FilmsLtd(1985)).Where the breach relates to a contract for the sale of goods,damages are usually assessed in line with the market rule. Thismeans that if goods are not delivered under a contract, thebuyer is entitled to go into the market and buy similar goods,and pay the market price prevailing at the time. They can thenclaim the difference in price between what they paid and theoriginal contract price as damages. Conversely, if a buyerrefuses to accept goods under a contract, the seller can sell thegoods in the market, and accept the prevailing market price.Any difference between the price they receive and the contractprice can be claimed in damages.

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At one time, damages could not be recovered where the losssustained through breach of contract was of a non-financialnature. The modern position is that such non-pecuniarydamages can be recovered. Thus in Jarvis v Swan Tours Ltd

(1973) it was held that the plaintiff was entitled to recover, notjust the substantial financial loss he suffered, but also for lossof entertainment and enjoyment which amounted to an evengreater sum.

The job of estimating damages may be made much simplerwhere the parties to an agreement make provisions for possiblebreach by stating in advance the amount of damages that willhave to paid in the event of any breach occurring. Damagesunder such a provision are known as liquidated damages. They

will be recognised by the court as long as they represent agenuine pre-estimate of loss, and are not intended to operateas a penalty against the party in breach. If the court considersthe provision to be a penalty, it will not give it effect, but willaward damages in the normal way (Dunlop v New Garage &Motor Co (1915)).(c) The injured party is under a duty to take all reasonablesteps to mitigate their loss. So in the above examples, thebuyer of goods which are not delivered has to buy the

replacements as cheaply as possible; and the seller of goodswhich are not accepted has to try to get as good a price as theycan when they sell them. In such a way they are expected tominimise the actual loss they sustain, as may be seen in Payzuv Saunders (1919).

State and explain the remedies available for breach ofcontract.

This question invites candidates to examine the various

remedies that may be available to innocent parties when theysuffer as a consequence of a breach of contract.Breach of a contract occurs where one of the parties to theagreement fails to comply, either completely or satisfactorily,with their obligations under it. A breach of contract may occurin three ways:(i) where a party, prior to the time of performance, states thatthey will not fulfil their contractual obligation;(ii) where a party fails to perform their contractual obligation;

(iii) where a party performs their obligation in a defectivemanner.

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Any breach will result in the innocent party being able to suefor an appropriate remedy. In addition, however, somebreaches will permit the innocent party to treat the contract asdischarged. In this situation they can refuse either to perform

their part of the contract, or to accept further performancefrom the party in breach.

The principal remedies for breach of contract are:damages;quantum meruit;specific performance;injunction.

Damages

Every failure to perform a primary obligation is a breach ofcontract. The secondary obligation on the part of the contract-breaker, by implication of the common law, is to pay monetarycompensation to the other party for the loss sustained by himin consequence of the breach (Photo Productions Ltd vSecuricor Transport Ltd(1980)).Such monetary compensation for breach of contract isdamages. There are two issues to consider: remoteness andmeasure.

(i) Remoteness of damage This involves deciding how far down a chain of events adefendant is liable. The rule in Hadley v Baxendale (1845)states that damages will only be awarded in respect of losseswhich arise naturally, i.e. in the natural course of things; orwhich both parties may reasonably be supposed to havecontemplated, when the contract was made, as a probableresult of itsbreach.

The effect of the first part of the rule in Hadleyv Baxendale isthat the party in breach is deemed to expect the normalconsequences of the breach, whether they actually expectedthem or not.Under the second part of the rule, however, the party in breachcan only be held liable for abnormal consequences where theyhave actual knowledge that the abnormal consequences mightfollow. Thus in Victoria Laundry Ltd v Newham Industries Ltd(1949) the plaintiff was able to claim for damages with respectto the normal profits, but could not claim abnormal profits

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which would have resulted from an especially lucrativecontract, which the defendant knew nothing about.

(ii) Measure of damages

Damages in contract are intended to compensate an injuredparty for any financial loss sustained as a consequence ofanother partys breach. The object is not to punish the party inbreach, so the amount of damages awarded can never begreater than the actual loss suffered. The aim is to put theinjured party in the same position they would have been in hadthe contract been properly performed.Even damages of a non-financial nature can be recovered(Jarvis v Swan Tours Ltd(1973)).

It is possible, and common in business contracts, for the partiesto an agreement to make provisions for possible breach bystating in advance the amount of damages that will have to bepaid in the event of any breach occurring. Damages under sucha provision are known as liquidated damages. They will only berecognised by the court if they represent a genuinepreestimate of loss, and are not intended to operate as apenalty against the party in breach (Dunlop v New Garage &Motor Co (1915)).

Quantum meruitQuantum meruit means that a party should be awarded asmuch as he had earned, and such an award can be eithercontractual or quasi-contractual in nature. If the parties enterinto a contractual agreement without determining the rewardthat is to be provided for performance, then in the event of anydispute, the court will award a reasonable sum.Payment may also be claimed on the basis ofquantum meruit,where a party has carried out work in respect of a void contract(Craven-Ellis v Canons Ltd(1936)).Specific performanceAn order for specific performance requires the party in breachto complete their part of the contract. The following rulesgovern theaward of such a remedy.(i) specific performance will only be granted in cases where the

common law remedy of damages is inadequate. It is mostcommonly granted in cases involving the sale of land, wherethe subject matter of the contract is unique.

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(ii) specific performance will not be granted where the courtcannot supervise its enforcement. For this reason it will not beavailable in respect of contracts of employment or personalservice (Ryan v Mutual Tontine Westminster Chambers

Association (1893)).(iii) specific performance, as an equitable remedy, will not begranted where the plaintiffs themselves have not actedproperly.

InjunctionThis is also an equitable order of the court, which directs aperson not to break their contract. An injunction will only begranted to enforce negative covenants within the agreement,

and cannot be used to enforce positive obligations (WhitwoodChemical Co v Hardman (1891)). However, it can have theeffect of indirectly enforcing contracts for personal service(Warner Bros v Nelson (1937)).Quasi-contractual remedies are based on the assumption that aperson should not receive any undue advantage from the factthat there is no contractual remedy to force them to account.An important quasi-contractual remedy is an action for moneypaid and received. If no contract comes into existence for

reason of a total failure of consideration, then under this action,any goods or money received will have to be returned to theparty who supplied them.

In relation to remedies for breach of contract, explain:(a) the difference between liquidated damages andpenalty clauses;(b) the duty to mitigate losses.

This question requires an explanation of two aspects the lawrelating to damages for breach of contract. Every failure toperform a primary obligation is a breach of contract. Thesecondary obligation on the part of the contract-breaker, byimplication of the common law, is to pay monetarycompensation to the other party for the loss sustained by himin consequence of the breach (Photo Productions Ltd vSecuricor Transport Ltd(1980)). Such monetary compensation

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for breach of contract is damages. There are, however, twodistinct aspects to this general concept that have to beconsidered.(a) Liquidated damages and penalty clauses

It is possible, and common in business contracts, for the partiesto an agreement to make provisions

contract explanation

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