CONTRACT LAW

Updated: Aug 5

This is a sample from the Contract Law Core Series.

CONTRACT LAW


Private Law Tutor Publishing


Chapter 1 - Introduction/Overview


Chapter 2 - Offer


Chapter 3 - Acceptance/Revocation


Chapter 4 - Consideration


Chapter 5 – Duress


Chapter 6 – Promissory Estoppel


Chapter 7 - Intention to Create Legal Relations


Chapter 8 - Privity of Contract


Chapter 9 - Terms of the Contract


Chapter 10 - Exemption Clauses


Chapter 11 – Misrepresentation


Chapter 12 - Mistake


Chapter 13 - Frustration


Chapter 14 - Remedies



Welcome/Introduction/Overview


This book provides you with basic information as a basis for you to form your own critical opinions on this area of law. Once you have mastered the basics, you will be inspired to question contract principles in your essays and apply them in mock client advisory scenarios. Again, for your convenience, we have published a book with examples of how to answer such questions and how to apply your knowledge as effectively as possible to help you get the best possible marks.


This aid is a fully-fledged source of basic information, which tries to give the student comprehensive understanding for this module. However, it is recommended that you compliment it with the further reading suggestions provided at the end of each topic, as well as read the cases themselves for more in-depth information. This book provides an analysis of the basic principles of modern Contract Law. The following is a summary of the Book content:


· An introduction to the Law of Contract;

· How contracts are formed;

· What goes into a contract: Its content;

· The means of obtaining remedies when there is a breach of contract;


The aim of this Book is to:


· Provide an introduction to anyone studying or interested in studying Law to the key principles and concepts that exist in the Law of Contract.

· To provide a framework to consider Contract Law within the context of examinations.

· Provide a detailed learning resource in order for legal written examination skills to be developed.

· Facilitate the development of written and critical thinking skills.

· Promote the practice of problem solving skills.

· To establish a platform for students to gain a solid understanding of the basic principles and concepts of Contract Law, this can then be expanded upon through confident independent learning.


Through this Book, students will be able to demonstrate the ability to:


· Demonstrate an awareness of the core principles of Contract Law.

· Critically assess challenging mock factual scenarios and be able to pick out legal issues in the various areas of Contract Law.

· Apply their knowledge when writing a formal assessment.

· Present a reasoned argument and make a judgment on competing viewpoints.

· Make use of technical legalistic vocabulary in the appropriate manner.

· Be responsible for their learning process and work in an adaptable and flexible way.


Studying Contract Law


Contract is one of the seven core subjects that the Law Society and the Bar Council deem essential in a qualifying law degree. Therefore, it is vital that a student successfully pass this subject to become a lawyer. Additionally, a knowledge and understanding of contractual principles is needed in order to study other law subjects such as company, employment, international trade, commercial, or even family law. The primary method by which your understanding of the law of contract will develop is by understanding how to solve problem questions. You will also be given essay questions in your examinations. The methods by which these types of question should be approached are somewhat different.


Tackling Problems and Essay Questions


There are various ways of approaching problem questions and essay questions. We have provided students with an in-depth analysis with suggested questions and answers at the end of each chapter.


Chapter 1 - Introduction to Contract law


The General Ideology

The origins of the principle of a ‘contract’ can be traced back to the Middle Ages. Much of modern contract law developed in the nineteenth century alongside economics, and played a large part in the Industrial Revolution. Contract Law has an extremely broad application in practice, from consumer transactions in shops and online, to the commercial sale of goods in business and the supply of individual’s services and skills. It also includes distribution of goods, franchising products, licensing, intellectual property trade and ownership, finance, security, and even employment, as contracts are essential ingredients in this type of formal relationship. A good understanding of Contract Law is fundamental for all of these many areas of law, because each of them is linked to Contract Law’s basic and general principles. This can also be said for many other types of commercial transactions. Many contract disputes are often left to be resolved by law firms, but can also be settled outside of court due to, as you will learn, what the contracts themselves provide in terms of protection.


When reading the easily laid out chapters and sections in this application, you will learn that many modern business transactions are difficult to join with some well-established principles of Contract Law. This is a common thing when you reach the more advanced contract work in practice, where the impetus is mainly directed towards drafting contracts in order to avoid the application of the law. On the other side of the coin, there is equally strong impetus to test and push the boundaries of the existing laws. This is, for the most part, the case in transactions applicable to the Sale of Goods. It is noteworthy to reflect on the words on Professor Mckendrick (2008) here, who has suggested: "My own view is that we are moving slowly in the direction of a law of contracts [not contract] as the 'general principles' decline in importance.” Despite this, there will always be general principles to guide the courts and upcoming lawyers, such as yourself, when tackling contract disputes.


Sources of the Law of Contract


As we have established above, Contract Law is a broad subject with many specific applications into different areas of law and aspects of our daily personal and professional lives. We also saw that its origins are in the Middle Ages, with principles largely influenced by judge’s decisions in cases at the time. It was, and still is, mainly a common law subject. This means that its rules and principles have been expressed and established by the judiciary when they make judgments in real life cases. The main period of development of the common Law of Contract was in the nineteenth century, which, as a period of considerable commercial and industrial expansion, saw an increasing number of contract disputes brought before the courts.


An overriding principle generally followed by the courts at this time was that of freedom of contract, which states that parties of full capacity (i.e. not children or the mentally infirm) should be free to make whatever agreements they wish so long as they were not for an illegal purpose and subject only to remedies for recognised unfairness, such as misrepresentation or duress. An outcome of the principle of freedom of contract was the principle of sanctity of contract, namely that contracts freely entered into by people with full rational capacity ought to be enforced by the courts.


The Application of These Principles in Contract Law


The freedom and sanctity of contract principles was expressed by Sir George Jessel in Printing and Numerical Registering Co v Sampson (1875):


“... if there is one thing more than another that public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by Courts of Justice.”


This expression simply means that any competent and reasonable person has complete choice and mastery over how they enter and conclude their contracts. However, towards the end of the nineteenth century and throughout the twentieth century, there were an increasing number of Acts of Parliament that addressed the principle of freedom of contract. This was because it was increasingly recognised during this period that pure laissez-faire (do it yourself) application of the principle of freedom of contract often led to injustice. As a result of gross inequality of bargaining power between large companies on the one hand, and either consumers or employees on the other, freedom of contract could be abused; for example, in standard form contracts (template agreements) or through the wide use of exemption clauses (a term in a contract that seeks to restrict the rights of the parties to the contract).


The current position


A contract is an agreement that is binding and legally enforceable. This kind of agreement is the most frequently used kind of legal dealing and happens in nearly every case where something is sold or purchased, from selling a multi-million pound yacht to buying a lunchtime snack from your local supermarket. Some other examples of contracts include contracts for the sale of goods, sale of land, contracts of employment, contracts of hire, and contracts for the provision of services. Contracts can be made in writing, may be oral (spoken), or may be identified by someone’s actions. Most contracts have two parties, but there can be more. However, not every agreement will amount to a contract that can be enforced by law. Some social arrangements between people or contracts that offend public decency (i.e. I will pay you to expose yourself in Lincoln’s Inn) and public policy, or those that involve criminal acts, are all examples of contracts that a court would not be willing to consider binding, and are therefore unenforceable.


Different Ideologies of Contract Law


With the development of a free market in a globalised world based on the division of work, this capitalistic 21st century society required a flexible legal method of protecting the exchange of goods and services. Many legal practitioners decided to respond to this pressing social need from the beginning of the 20th Century. They transformed "Contract Law" from the unwieldy and complicated system it was since the sixteenth century into an instrument of virtually unlimited usefulness and applicability. Contract, therefore, became the crucial tool of the modern businessman, allowing him to go about his business in a rational way. Rational behaviour within the setting of modern society is only possible if agreements can be respected. The contract is, however, a tool that everyone can and does use in their everyday lives. For instance, when you buy a mobile phone, you are often receiving it for seemingly nothing on the condition that you pay a specific fee for your chosen telephone service for a certain period of time. In doing this, you are both exercising your own right to freedom of contract, in that you pick which tariff you use, and the sanctity doctrine, in that you expect that service to be maintained for a certain period in exchange for the money you provide the service provider in return.


The Market Principle


This principle promotes individualism and is a place for competitive exchange of goods and services. The functions of a contract are to facilitate competition as well as exchange. This ensures bargains must be kept subject to fraud, mistake coercion and so on, because it places emphasis on a duty to honour the agreement and not to behave in a way that will have a negative impact on the other party’s interest in the agreement. These include means such as misrepresentation and non-disclosure of information. A contract’s security gets recognised in one of the doctrines of law; that is the objective (factual) approach to contract intention. It also accommodates subjective (a subject's personal perspective, rather than that taken from an independent, objective angle) mistakes and third party purchasers. In order to protect an innocent party in the marketplace, Contract Law epitomises that people’s expectations measure in damages, as a realistic deterrent for the non-performance of an obligation by any of the contracting parties. The ground rules of contract, therefore, should be clear, with clearly defined penalties. This will, as a result, avoid market inconvenience. This is an underlying principle of Contract Law. It is to comply with creating a level playing field for competition, with no one being placed at a disadvantage at the expense of another taking advantage and benefiting from that profit. English Contract Law holds that it is paramount for a person to be able to achieve his/her goals, but not at the expense of another trying to achieve his/hers.


The Individualistic Ideology of Contract Law


Judges tend to not intervene with respect to contracts. Any potential party to a contract should enter the market using their own independent reasoning, in order to determine which bargains most potentially benefit them, strike them, and stick to them. The formal names that govern this behaviour are the doctrines of:


1) Freedom of contract

2) Sanctity


This freedom permits parties to freely choose others as consensual contractual partners. They need to be free to formulate and decide upon their own terms, as arguably no single definitive framework can possibly accommodate the unique distinctions of people’s characters that form what they want to see in a contract and how they want to benefit from it.


However, the development of many large corporate enterprises in both the public and private sectors has made it impossible for the weaker party to actually exercise freedoms, because of the pressure to forge an agreement with big companies. Therefore, a party could be held to the will of these more economically powerful contracting parties, as opposed to exercising their right to an equal tender on a level playing field. The sanctity of contract is also explicit in that parties should be treated as masters of their own bargains. Those entering into contracts should be able to maintain assurance that the terms of that agreement will be followed without breach, or a way in which the other party can exploit them to gain more than the original terms stated.


Consumer Welfare Principles


Consumer Welfare principles presuppose that consumer contracts must be regulated closely and commercial contracts, although competitive, must be subjected to far more regulation than market individualism. There are four main principles to consider:


1) Principle of Constancy: A person should not encourage another to act in a certain way or form a specific expectation and then act inconsistently with the encouragement.

2) Proportionality: Remedies subject to the seriousness of the breach.

3) Principle of Bad faith: A party citing a good legal principle in an attempt to exploit another consumer should not be allowed to exercise it. No man should be able to profit from his wrongdoing.

4) The Principle of Exploitation: A stronger party should be prohibited from exploiting the apparent weakness of another party’s bargaining situation and parties should be taken to have a relationship that will not lead to one exploiting the other.


The Nature of Agreement: The Objective Approach to Contract

Agreement occurs when one person makes an offer that is accepted by the other person. Provided consideration and intention to create legal relations are also present, there is a contract.


“A contract is an agreement giving rise to obligations which are enforced or recognised by law. The factor that distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting parties. This proposition remains generally true, even though it is subject to a number of important qualifications.” (Treitel: 13th Revised Edition 2011) Chapter 1 – 1-001.


However, the law applies an objective test rather than a subjective one - if there appears to be an agreement and one person believes there to be one, the other person will not be allowed to say there is not one.There are two exceptions to this. The court will look at the subjective reality, rather than the objective appearance, of agreement if:


1) One party knows that the other party has made a mistake in the terms of agreement - Hartog v Colin and Shields [1939] 3 All ER 566


Hartog v Colin and Shields [1939] 3 All ER 566

Facts: The defendants, Colin and Shields, sold animal hides. Hartog was a furrier (someone who sells fur products). Colin and Shields talked about selling Hartog 30,000 skins taken from Argentinian hares at “10d per skin” (equivalent to £1,250 today). As they were writing up their final offer, Colin and Shields accidentally wrote “30,000 skins at 10d per lb”. It was common knowledge in the industry that the skins of hares weigh, on average, 5oz. The final offer amounted to a third of the price originally talked about and verbally agreed to. Hartog attempted to make Shields and Colin honour this offer, which was extremely favourable for him.

Ratio: The Court held that the claimant must have realised the defendants’ mistake. Since this mistake related to a term of the contract, the contract became null and void.

Application: Hartog v Colin and Shields has gradually evolved into a very important precedent (something binding on all courts to apply in practice in future cases). This is especially true in modern society, where much of our shopping is now done on the internet. This is because many online businesses accidentally misprint the prices for their products. A lot of these websites use computer servers to automatically process customer details and payments that they make at the time, thereby creating the contract. All this can happen before the actual company owners find out that there have been misprints on their websites and, as such, the automated systems are selling products far below their actual value. For example, an online computer products retailer such as Amazon™ could advertise a tablet PC, which normally costs £300, for £30 or perhaps even £3. Any company that retails on the high street or online, can evade supplying goods of the misstated lower price if a court is able to find that the would-be purchasers must have known that the advertised price was clearly a mistake and were trying to take advantage of the situation.


2) The second exception is as seen in the cases of Scriven Bros v Hindley [1913] 3 KB 564


Scriven Bros v Hindley [1913]3 KB 564

Facts: Scriven Bros. lodged a bid at an auction hosted by Hindley and Co., where bales of hemp and tow were offered for auction. Their catalogue made the suggestion that one of the bundles of farm produce contained bales of hemp and tow. In reality, however, the bundle for auction only contained tow.

Ratio: Lawrence J held that the auctioneer was unable to accept the highest (winning) bid because the bid was placed under misapprehension and mistake.

Application: Two parties cannot create a legal binding contract when the terms of the offer and acceptance do not match.


General Principle: You cannot escape a contractual agreement by saying you did not intend to form a contract.


Storer v Manchester City Council [1974] UKHL 6

Facts: Mr. Storer made an application to purchase the council house he was living in. The Manchester City Council sent him an agreement of sale. The Agreement for Sale had been completed and signed. However, the date on which the tenancy was to end and the beginning of the mortgage repayment period had not been filled. On 20th March, when Mr. Storer signed and returned the agreement, a new political party came into power and the local council’s policies changed. They decided to stop selling the properties unless the contracts had already been exchanged. Mr. Storer wanted to get a remedy to enforce what he believed to be an already binding contract. Manchester City Council argued that the clerk did not intend to offer the council house for sale when he sent the agreement of sale.

Ratio: The court held that agreement of sale was a firm offer which Mr. Storer had accepted. Lord Denning stated, "In contracts, you do not look into the actual intent of a man’s mind. You look at what he said and did."

Application: As Lord Denning says, “A contact exists when there is, to all outward appearances, a contract.” Saying you did not intend to create a contract is not a valid defence if all evidence provided demonstrates a willingness to be bound.


The Nature of Agreement: The Subjective Approach


As we have seen, Courts will set aside what a specific party was thinking at the time (their subjective intentions). Instead, the court places greater emphasis on what a rationally thinking individual would think under the very same conditions and situations. They look at the intentions on a more neutral factual basis (objective intent). Courts do not stray into the zone of what is in a person’s mind (such a thing is virtually impossible to prove). Instead, they look at arrangements from the perspective of a reasonable man. The subjective ‘meeting of minds’ is not needed for an arrangement or an agreement to become binding at law. The bigger picture is looked at– the whole situation. Courts examine the rationality behind the big picture, and whether or not the parties could be held to have possessed such an intention. If the various stages of this contractual test are not met, then the court will move to assume that the party having their intentions examined did not willingly intend to be bound by a binding legal contract. What we can see is that, in reality, there are somewhat difficult blurred lines crossing over someone’s objective and subjective intentions.


Consider the case of:


Leonard v. Pepsi Co. Inc. 88 F. Supp 2d 1 (S.D.N.Y. 1999)

Facts: Pepsi Co. released a commercial advertisement. This televised advert, showed a jet being offered in exchange for seven million of their ‘Pepsi points™.’ Mr Leonard gathered the requisite number of points. He then sent a his seven million Pepsi points to stake his claim for the jet, valuing each ‘Pepsi Point™’ at $1 each. Pepsi Co. refused to honour Mr Leonard’s offer, and he brought action against Pepsi.

Ratio: The court held that the advertisement on TV was not an offer that Mr. Leonard could accept. The advertisement was a ‘sales puff’ that was an obviously not meant to be binding.

Application: If the court had fallen on the side of the complainant by looking at his perspective through the subjective approach, it could be remotely (but, ultimately, not convincingly) conceived that Pepsi Co. had given off the impression in their advertising campaign that they were genuinely offering a military fighter jet, which they had in their possession, in exchange for seven million of their ‘Pepsi Points ™’.


The Elements of a Contract

In order for a contract to come into existence, one of the parties (namely the offeror) has to make an offer that is explicitly clear with certainty at the end and the other party (the offeree) has to respond in providing a statement that is just as clear, and with the certainty that they are willingly accepting the offer.


This can be broken down into three essential elements:


Agreement

Intention to create legal relations

Consideration

To include offer and acceptance

The intention to contract and the necessary capacity (capability)

Something being given by each party


If one of these elements missing = NO contract


Correct Form of the Contract


It does not usually have to be in writing. It can be oral, by inference or conduct, or by a combination of these things. Some kinds of contract/agreement must be made and/or evidenced in writing:


1. Contracts under seal (also known as ‘specialities’): Most formal contracts; all other contracts are called ‘simple’ contracts, whether in writing or not.


2. Contracts which must be in writing: Bills of exchange and promissory notes (The Bills of Exchange Act 1882), hire-purchase agreements (The Consumer Credit Act 1974), the sale of land (The Law of Property (MP) Act 1989).


3. Contracts which must be evidenced in writing: Contracts of guarantee (Statute of Frauds 1677).

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