Contract LAW

2008 October Contract Law

Hasitha Veenath Kodithuwakku BTEC HND in QS & BE QS/08/23

Contents Executive summary ............................................................................................................................ - 3 Introduction........................................................................................................................................ - 4 Formation ........................................................................................................................................... - 5 Offer ............................................................................................................................................... - 5 Acceptance ..................................................................................................................................... - 7 Intention to create legal relations ................................................................................................ - 12 Social and Domestic agreement ............................................................................................... - 12 Business or Commercial agrrement ......................................................................................... - 13 Consideration ............................................................................................................................... - 14 Types of Consideration ............................................................................................................. - 14 RULES GOVERNING CONSIDERATION ...................................................................................... - 15 Part Payments of Debts ............................................................................................................ - 18 Promissory Estoppel ................................................................................................................. - 19 Capacity ........................................................................................................................................ - 20 MINORS .................................................................................................................................... - 20 MENTAL INCOMPETENTS ......................................................................................................... - 21 Bankruptcy ............................................................................................................................... - 22 Enemy aliens and/or terrorists................................................................................................. - 22 Business entities ....................................................................................................................... - 22 Consent ........................................................................................................................................ - 23 Mistake ..................................................................................................................................... - 23 Misrepresentation .................................................................................................................... - 27 Types of Misrepresentation ..................................................................................................... - 27 Duress ....................................................................................................................................... - 29 Duress to the person ................................................................................................................ - 29 Duress to goods ........................................................................................................................ - 29 Undue Influence ....................................................................................................................... - 30 Unconscionable conduct .......................................................................................................... - 31 Hasitha Veenath

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LEGALITY ....................................................................................................................................... - 32 Content ............................................................................................................................................. - 34 Representation ............................................................................................................................. - 34 Terms ............................................................................................................................................ - 35 Condition .................................................................................................................................. - 35 Warranty .................................................................................................................................. - 35 Intermediate terms .................................................................................................................. - 36 Termination of a contract ................................................................................................................ - 36 Termination by Frustration .......................................................................................................... - 36 Termination by breach ................................................................................................................. - 37 Actual breach............................................................................................................................ - 37 Anticipatory Breach .................................................................................................................. - 38 Conclusion ........................................................................................................................................ - 39 Reference List ................................................................................................................................... - 40 -

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Executive summary

This report is in based on the assignment which was given by Mr. Seewali Amithirigala. Under his excellent guidance I tried my best to collect relevant information about contract law from every resource I could reach. To that I have gone through some books as well as surfed through some websites. Lectures conducted and the notes given by Mr. Seewali were also very helpful when preparing the report. The report will discuss about formation, Contents, Termination of a contract. Each part is separately discussed using sub categories. All relevant rules are explanatorily discussed in each sub category. By completing this report I have accomplished more than a reasonable knowledge about CONTRACT LAW.

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Introduction A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire.

By classification a contract may be a… •

Contract by deed A formal legal document is signed, witnessed and delivered to create contract.

•

Simple contracts These are informal and may be made in writing, orally or they may be implied from

Those can either be a bilateral contract (exchange of one promise for another) or a Unilateral contract (an agreement to pay in exchange for performance, if the potential performer chooses to act).

Elements of a Contract Essential elements of a contract are accordingly consideration, Intention to create legal relations, Capacity, Consent and Legality. A contract which possesses all these requirements is said to be valid. In addition, a contract consists of various terms & representations. The absence of an essential element will render the contract to be void.

Termination of a contract There are many ways to terminate the obligations of a contract. Most often, parties conclude their contract obligations by performing them. However, sometimes problems arise and parties cannot or will not complete their obligations under the contract. Therefore, contracts may be terminated by reasons of rescission, breach, or impossibility of performance.

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Contract Law Formation It is generally accepted that four essential elements are necessary for contract formation: 1. 2. 3. 4.

an agreement; consideration (generally, the supply of money, property or services); certainty in what the contract requires to be done, or restricts from being done; intention by the parties to enter into legal relations

The foundation of the legal relations called contract is the agreement of the parties. In order for an agreement to be a contract (or a variation to an existing contract) it must be supported by consideration. The agreement must also be sufficiently certain and complete to be enforced in the courts and the parties must have intended their agreement to be a contract. The absence of any of these elements will signify either that there is in law no agreement or that the agreement is not enforceable as a contract. The first requisite of any contract is an agreement. At least two parties are required in a contract; one of them, the Offeror, makes an offer which the other, the offeree, accepts. An agreement between two parties only exists when the offer made by the Offeror is accepted by the offeree. Simply an agreement consists of offers and Acceptances. Offers and Acceptances can be fulfilled basically in two ways. o Express o Implied

-stated in written or spoken words -from the conduct of the parties/indicated

Offer An offer is an indication by one person ("offeror") to another ("offeree") of the offeror's willingness to contract on certain terms without further negotiations. General Rules 1. Communication must Occur The offer must be communicated to the offeree by the Offeror or another party on behalf of the Offeror. 2. Offers made may be to a person, a group of people or to the world at large To a person- a bilateral offer which only an appointed person can accept. To a group of people- one member of a class or group can accept the offer. To the world at large- anyone who sees or hears the offer can accept it. This is a unilateral offer. 3. An invitation to treat is not an Offer Genuine offer is different from what is known as an "invitation to treat"; where a party is merely inviting offers, which he is then free to accept or reject.

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"An invitation to treat is an expression of willingness to negotiate. A person making an invitation to treat does not intend to be bound as soon as it is accepted by the person to whom the statement is addressed." - Professor Burrows-

Some of the invitations to treat are as follows… AUCTIONS In an auction, the auctioneer's call for bids is an invitation to treat. The bids made by persons at the auction are offers, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted. DISPLAY OF GOODS The display of goods with a price ticket attached in a shop window or on a supermarket shelf is not an offer to sell but an invitation for customers to make an offer to buy. ADVERTISEMENTS Advertisements of goods for sale are normally interpreted as invitations to treat. See: However, advertisements may be construed as offers if they are unilateral, open to the entire world to accept (e.g., offers for rewards). MERE STATEMENTS OF PRICE A statement of the minimum price at which a party may be willing to sell will not amount to an offer. TENDERS Where goods are advertised for sale by tender, the statement is not an offer, but an invitation to treat; that is, it is a request by the owner of the goods for offers to purchase them. The process of competitive tendering came under scrutiny in the following cases:

4. A request for information is not an offer When someone asks for information about something; as law presumes it won’t recognized as an offer. For an example; when a person asks from a landowner “if you are going to sell this land, what would be the minimum price?” Then the owner replies mentioning the minimum prize, but it won’t be an indication that he will sell the land. Offeror can’t sue the land owner if he refuses to sell the land at that prize as a breach of contract.

Harvey v Facey (1893) The plaintiffs sent a telegram to the defendant, "Will you sell Bumper Hall Pen? Telegraph lowest cash price". The defendants reply was "Lowest price $900". The plaintiffs telegraphed that he accepted the offer. When defendant refused to sell, plaintiff sued him for breach of contract. It was held by the Privy Council that the defendant’s telegram was not an offer but simply an indication of the minimum price the defendants would want, if they decided to sell. The plaintiff’s second telegram could not be an acceptance.

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5. An offer differs from an option From the word option generally it means a choice, an alternative, or a chance. In a contract; option is a promise given by the Offeror to the offeree, related to the subject they have agreed to contract. Simply owner of the property agrees not to sell it for a particular period of time by having something of value from the offeree (ex: an advance payment). This gives the offeree a protection from the offeror's ability to revoke the contract inside the agreed period of time. Sometimes paying a deposit won’t be an option but only an element of keeping faith within the two parties unless there are special terms mentioned inside the agreement that a deposit will convert as an option.

Goldsborough mort v Quinn (1910) Defendant for valuable consideration gave plaintiffs an option for a week to purchase some land, but before the week had elapsed he purported to revoke his offer. Plaintiffs, notwithstanding the alleged repudiation, accepted the offer within the week, and brought a suit for specific performance of the agreement: Held the option having been given for value was not revocable, and the acceptance of the offer by plaintiffs constituted a binding contract, which was enforceable by specific performance.

6. The offeree must be made aware of all terms Law presumes an agreement made between two parties won’t be legally binding unless there is true meeting of the minds. The offeree should be aware by the Offeror about all the terms of the offer at the time it is made.

Acceptance An acceptance is a final and unqualified acceptance of the terms of an offer. To make a binding contract the acceptance must exactly match the offer. The offeree must accept all the terms of the offer. However, in certain cases it is possible to have a binding contract without a matching offer and acceptance.

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Rules 1. The Offeree must respond to and rely on the offer An offeree may perform the act that declares acceptance of an offer, with knowledge of that offer, but for a motive other than accepting the offer. The question that then arises is whether his act leads to a valid acceptance. The position seems to be that: (a) An acceptance which is wholly motivated by factors other than the existence of the offer has no effect. R v Clarke (1927) 40 CLR 227 (b) Where, however, the existence of the offer plays some part, however small, in persuading a person to do the required act, there is a valid acceptance of the offer. Williams v Carwardine (1833) 5 Car & P 566. 2. Acceptance must be unconditional/no counter-offers If the offeree puts a condition in the acceptance, then it will not be binding. If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply also cannot consider as an acceptance. Instead, the reply is treated as a "counter offer", which the original Offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted. But when an offeree tries to clarify the offer and its terms is not considered as a counter offer. Hyde v Wrench (1840) 6 June W offered to sell his estate to H for ?1000; H offered ?950 27 June W rejected H's offer 29 June H offered ?1000. W refused to sell and H sued for breach of contract. Lord Langdale MR held that if the defendant's offer to sell for ?1,000 had been unconditionally accepted, there would have been a binding contract; instead the plaintiff made an offer of his own of ?950, and thereby rejected the offer previously made by the defendant. It was not afterwards competent for the plaintiff to revive the proposal of the defendant, by tendering an acceptance of it; and that, therefore, there existed no obligation of any sort between the parties.

3. Acceptance must confirm to the condition set The offer may specify that acceptance must reach the Offeror in which case actual communication will be required. Then the offeree must send the acceptance through the specified method of communication. Holwell Securities v Hughes [1974] 1 All ER 161. If a method is prescribed without it being made clear that no other method will suffice then it Tinn v Hoffman (1873) 29 LT 271 seems that an equally advantageous method would suit.

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If there is no indication of a communication method offeree should use whatever the method that suits the situation.

4. Acceptance via instantaneous communication generally occurs when it is received. Instantaneous communication methods are usually telephone, fax, telex, e-mail etc. acceptance through these considered to reach agreement when the Offeror at the time he receives it. • Via telephone - In a telephone acceptance it does not occur until the acceptance statement is repeated and clearly heard by the Offeror. • Via Fax and E-mail – A valid acceptance is recognized or resolved by reference to the intentions of the parties, sound business practice or some by judging where the risk should lie. Generally an acceptance received by fax in a peak working hour is considered valid as when it is reached the offerors’ fax machine. Acceptance by an e-mail is generally considered valid as when the Offeror logs in to his email account. 5. Acceptance must be Expressed in words or implied The offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should amount to an acceptance. So the acceptance must expressed in written or spell out words or implied by conduct. Felthouse v Bindley (1862) 11 CBNS 869. Implied by conduct- Brogden v Metropolitan Ry Co (1877) 2 App Cas 666 6. Acceptance must be communicated by the offeree or an authorized agent The acceptance must be communicated by the offeree or someone authorized by the offeree. If someone accepts on behalf of the offeree, without authorization, this won’t be a valid acceptance. Powell v Lee (1908) 99 LT 284.The plaintiff applied for a job as headmaster and the school managers decided to appoint him. One of them, acting without authority, told the plaintiff he had been accepted. Later the managers decided to appoint someone else. The plaintiff brought an action alleging that by breach of a contract to employ him he had suffered damages in loss of salary. The county court judge held that there was no contract as there had been any authorized communication of intention to contract on the part of the body, that is, the managers, alleged to be a party to the contract. This decision was upheld by the King's Bench Division.

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7. Acceptance must occur within a specified or reasonable time

Postal rules for offers and acceptances Postal offer rule An offer and even revocation /withdrawal of an offer by letter is not valid until it is received by the offeree. Postal acceptance rule If the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted. This rule only applies when, impliedly or clearly, the parties have in contemplation post as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. (Adams v. Lindsell (1818) 106 ER 250).

There will not be an Agreement when there is… •

Revocation of offers

The offer may be revoked by the offeror at any time until it is accepted. Unless and until the revocation is communicated to the offeree, it is ineffective. Byrne v Van Tienhoven (1880) 5 CPD 344. The revocation need not be communicated by the offeror personally, it is sufficient if it is done through a reliable third party. See: Dickinson v Dodds (1876) 2 ChD 463. Where an offer is made to the whole world, it appears that it may be revoked by taking reasonable steps. See: Shuey v United States [1875] 92 US 73. Once the offeree has commenced performance of a unilateral offer, the offeror may not revoke the offer. Errington v Errington [1952] 1 All ER 149

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•

Rejection

A rejection of an offer must be clearly distinguished from a request for further information or clarification. A rejection must be expressed clearly in spoken or written words or implied by conduct. A counter-offer clearly rejects the offer. •

Lapse Lapse of time

Where an offer is stated to be open for a specific length of time, then the offer automatically terminates when that time limit expires. Where there is no express time limit, an offer is normally open only for a reasonable time. Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109. No fulfillment of conditions An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer will lapse. Financings Ltd v Stimson [1962] 3 All ER 386. The Death of either Party This will generally cause an offer to lapse. The offeree cannot accept an offer after notice of the offeror's death. However, if the offeree does not know of the offeror's death, and there is no personal element involved, then he may accept the offer. Bradbury v Morgan (1862) 1 H&C 249.

Possible Outcomes after an offer

Offer

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Acceptance (by offeree)

Agreement

Revocation (by Offeror)

No Contract

Rejection (by offeree)

No Contract

Lapse

No Contract

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Intention to create legal relations The parties must intend the agreement to be legally binding. But how can the court find out what is in the parties' minds? The nearest the courts can get to discover this intention is to apply an objective test and judge the situation by what was said and done. To accomplish that the court may ask the question “would the words or conduct of the parties lead a reasonable person to conclude, on the balance of probabilities, that they intended to be legally bound?” From then on the court may proceed with the presumptions. As law Presumes there are two presumptions about legal intentions.

Social and Domestic agreement This group covers agreements between family members, friends and workmates. The law presumes that social agreements are not intended to be legally binding. Lens v Devonshire Club (1914) The Times, December 4. However, if it can be shown that the transaction had the opposite intention, the court may be prepared to rebut the presumption and to find the necessary intention for a contract. The cases show it is a difficult task to rebut such a presumption. Agreements between a husband and wife living together as one household are presumed not to be intended to be legally binding, unless the agreement states to the contrary. Balfour v Balfour [1919] 2 KB 571. The presumption against a contractual intention will not apply where the spouses are not living together in amity at the time of the agreement. Merritt v Merritt [1970] 2 All ER 760. If a social agreement will have serious consequences for the parties, this may rebut the presumption. Parker v Clarke [1960] 1 All ER 93.

It seems that agreements of a domestic nature between parent and child are likewise presumed not to be intended to be binding. Jones v Padavatton [1969] 2 All ER 616. Where the parties to the agreement share a household but are not related, the court will examine all the circumstances. Simpkins v Pays [1955] 3 All ER 10.

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Business or Commercial agrrement In business agreements the presumption is that the parties intend to create legal relations and make a contract. This presumption can be rebutted by the inclusion of an express statement to that effect in the agreement. Rose and Frank Co v Crompton Bros Ltd [1925] AC 445. Similarly, football pools stated to be "binding in honor only" are not legal contracts so that a participant may not recover his winnings. Jones v Vernons Pools [1938] 2 All ER 626. Contractual intention may be negatived by evidence that "the agreement was a goodwill agreement ? made without any intention of creating legal relations" Orion Insurance v Sphere Drake Insurance [1990] 1 Lloyd's Rep 465. If a clause is put in an agreement and the clause is ambiguous then the courts will intervene and interpret it. Edwards v Skyways [1964] 1 All ER 494. Contractual intention may be negatived by the vagueness of a statement or promise. JH Milner v Percy Bilton [1966] 1 WLR 1582.

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Consideration The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other. (Note: if a contract is made by deed, then consideration is not needed.) For example, if one party, A (the promisor) promises to paint the house of another, B (the promisee), A's promise will only be enforceable by B as a contract if B has provided consideration. The consideration from B might normally take the form of a payment of money but could consist of some other service to which A might agree. So a consideration can be defined as the value you give for another person’s promise.

This definition expresses consideration as consisting of a detriment to the promisee or a benefit to the promisor: "Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other." -Lush J. in Currie v Misa (1875)-

Another definition… "An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable." -Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915]-

Types of Consideration 1. EXECUTORY CONSIDERATION Consideration is called "executory" where there is an exchange of promises to perform acts in the future, for e.g. a bilateral contract for the supply of goods whereby A promises to deliver goods to B at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach of contract and B can sue. If A delivers the goods his consideration then becomes executed.

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2. EXECUTED CONSIDERATION If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration, For e.g. in a unilateral contract where A offers $50 reward for the return of her lost handbag, if B finds the bag and returns it, B's consideration is executed. 3. FORBEARANCE When the promisee provides a consideration that he will suffer a loss for the promise made, it is referred as forbearance. For e.g. one promises to transfer ownership of his property the other party gives a consideration that he will not sue him for a large sum of money that the promisor owes. *whenever there is no consideration made on behalf of a promise, it is considered as a Gratuitous Promise where it doesn’t contain a validation unless the promise is made in a formal contract. Promisee cannot enforce the promisor to complete the promise in such a situation.

RULES GOVERNING CONSIDERATION

1. CONSIDERATION MUST NOT BE PAST If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. The rule is that past consideration is no consideration, so it is not valid and cannot be used to sue on a contract. For example, A gives B a lift home in his car. On arrival B promises to give a $5 towards the petrol. A cannot enforce this promise as his consideration, giving B a lift, is past. Re McArdle [1951] 1 All ER 905. A wife and her three grown-up children lived together in a house. The wife of one of the children did some decorating and later the children promised to pay her ?488 and they signed a document to this effect. It was held that the promise was unenforceable as all the work had been done before the promise was made and was therefore past consideration.

EXCEPTIONS TO THIS RULE: •

PREVIOUS REQUEST

If the promisor has previously asked the other party to provide goods or services, then a promise made after they are provided will be treated as binding.

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•

BUSINESS SITUATIONS

If something is done in a business context and it is clearly understood by both sides that it will be paid for, then past consideration will be valid. See: Note: The principles in Lampleigh v Braithwait as interpreted in Re Casey's Patents were applied by the Privy Council in: •

THE BILLS OF EXCHANGE ACT 1882

Under s27(1) it is provided that any antecedent debt or liability is valid consideration for a bill of exchange. For example, A mows B's lawn and a week later B gives A a cheque for $10. A's work is valid consideration in exchange for the cheque. 2. CONSIDERATION MUST BE SUFFICIENT BUT NEED NOT BE ADEQUATE Providing consideration has some value, the courts will not investigate its adequacy. Where consideration is recognized by the law as having some value, it is described as "real" or "sufficient" consideration. The courts will not investigate contracts to see if the parties have got equal value. Chappell & Co Ltd v Nestle Co Ltd [1959] 2 All ER 701. Nestle were running a special offer whereby members of the public could obtain a music record by sending off three wrappers from Nestle's chocolate bars plus some money. The copyright to the records was owned by Chapple, who claimed that there had been breaches of their copyright. The case turned round whether the three wrappers were part of the consideration. It was held that they were, even though they were then thrown away when received.

3. CONSIDERATION MUST MOVE FROM THE PROMISEE The person who wishes to enforce the contract must show that they provided consideration; it is not enough to show that someone else provided consideration. The promisee must show that consideration was provided by him. The consideration does not have to move to the promisor. Dunlop Pneumatic tyre co ltd v Selfridge co ltd (1915)AC 847 4. FOREBEARANCE TO SUE If one person has a valid claim against another, but promises to forbear from enforcing it, that will constitute valid consideration if made in return for a promise by the other to settle the claim.

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Alliance Bank v Broom (1864) 2 Dr & Sm 289. The defendant owed an unsecured debt to the plaintiffs. When the plaintiffs asked for some security, the defendant promised to provide some goods but never produced them. When the plaintiffs tried to enforce the agreement for the security, the defendant argued that the plaintiffs had not provided any consideration. It was held that normally in such a case, the bank would promise not to enforce the debt, but this was not done here. By not suing, however, the bank had shown forbearance and this was valid consideration, so the agreement to provide security was binding.

5. EXISTING PUBLIC DUTY If someone is under a public duty to do a particular task, then agreeing to do that task is not sufficient consideration for a contract. Collins v Godefroy (1831) 1 B & Ad 950. If someone exceeds their public duty, then this may be valid consideration. See: Glassbrooke Bros v Glamorgan County Council [1925] AC 270. 6. EXISTING CONTRACTUAL DUTY If someone promises to do something they are already bound to do under a contract, that is not valid consideration. Contrast: Stilk v Myrick (1809) 2 Camp 317. Two out of eleven sailors deserted a ship. The captain promised to pay the remaining crew extra money if they sailed the ship back, but later refused to pay. It was held that as the sailors were already bound by their contract to sail back and to meet such emergencies of the voyage, promising to sail back was not valid consideration. Thus the captain did not have to pay the extra money.

The principle set out in Stilk v Myrick was amended by the following case. Now, if the performance of an existing contractual duty confers a practical benefit on the other party this can constitute valid consideration. Williams v Roffey Bros Ltd [1990] 1 All ER 512. 7. EXISTING CONTRACTUAL DUTY OWED TO A THIRD PARTY If a party promises to do something for a second party, but is already bound by a contract to do this for a third party, this is good consideration.

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Scotson v Pegg (1861) 6 H & N 295. Scotson contracted to deliver coal to X, or to X's order. X sold the coal to Pegg and ordered Scotson to deliver the coal to Pegg. Then Pegg promised Scotson that he would unload it at a fixed rate. In an action by Scotson to enforce Pegg's promise, Pegg argued that the promise was not binding because Scotson had not provided consideration as Scotson was bound by his contract with X (a third party) to deliver the coal. It was held that Scotson's delivery of coal (the performance of an existing contractual duty to a third party, X) was a benefit to Pegg and was valid consideration. It could also been seen as a detriment to Scotson, as they could have broken their contract with X and paid damages.

Part Payments of Debts

If one person owes a sum of money to another and agrees to pay part of this in full settlement, the rule at common law is that part-payment of a debt is not good consideration for a promise to forgo the balance. Thus, if A owes B $50 and B accepts $25 in full satisfaction on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-payment. This is because he is already bound to pay the full amount, an agreement based on the same principle as Stilk v Myrick (1809). Since these factors are not supportive for the debtors courts have decided after Pinnel’s case(1602) to protect them recognizing some exemptions to the part payment rule. Situations where part payment provides sufficient consideration a. If the part payment paid before the due date (but not on the due date) is considered as a reasonable consideration. For example; let’s assume a person owes to a creditor $1,000 and due to be paid in a weeks’ time. Suddenly the creditor urgently needs money to pay his bills. The debtor who heard this an makes an offer to pay $600 on the next morning as the full payment. If the creditor accepts this and receive $600 from the debtor then the creditor won’t be allowed to sue the debtor for the rest $400. b. Transfer of ownership of a physical property/object or part payment plus ownership is a sufficient consideration for a full payment. Even the property value is worth less than the payment owed, if the creditor accepts it he can’t sue for the rest of the payment.

c. Lesser amount paid at a different place or in different currency may be sufficient consideration.

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d.

A lesser amount paid by a third party such as a friend or a relative of the debtor is sufficient consideration. A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the part-payment is made by a third party on condition that the debtor is released from the obligation to pay the full amount.

e. A promise made not to take a legal action may be sufficient consideration to discharge a debt if the person threatening the action genuinely believes it could succeed.

Promissory Estoppel This doctrine provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The principle is that if someone (the promisor) makes a promise, which another person acts on, the promisor is stopped (or estopped) from going back on the promise, even though the other person did not provide consideration (in so far as is it is inequitable to do so). This remedy acts on where… • • •

The promisee relied on the agreement and would suffer loss if it were broken. It would be grossly unfair to allow the promisor who was the dominant party, to break the agreement. As it was in the Waltons v Maher case (1988) the Higher court established that, this rule can be used by the plaintiff as a sword or even as a shield against the defendant and also to deny the agreement if the silence of one party during negotiations led into assume there was a legal agreement.

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Capacity MINORS At common law persons under the age of 21 were designated "infants" and had only a limited capacity to contract. From January 1, 1970, the Family Law Reform Act 1969 reduced the age of majority to 18 and authorized the term "minor" as an alternative to "infant." The capacity of a minor to contract is still regulated by the common law, modified by the Minors' Contracts Act 1987 which repealed a troublesome statute, the Infants Relief Act 1874. The general principle is that a contract made by a minor with an adult is binding on the adult but not on the minor. If, after attaining his majority, he ratifies it by an act confirming the promise he made when a minor, he is bound. There need be no consideration for the act of ratification. A contract by a minor is not void and any money or property transferred by him under the contract can be recovered only if there has been a total failure of consideration. There are three exceptional cases where a minor is to some extent bound. Necessaries A minor is bound to pay for necessaries (food, clothing, lodging, education etc.) supplied to him under a contract. -The Sale of Goods Act 1979 s.3, re-enacting the Act of 1893-

'Necessaries' in this section means goods suitable to the condition of life (social status and wealth) or without which a person cannot reasonably exist of such minor and to his actual requirements at the time of sale and delivery." The nature of the minor's liability for necessary goods is uncertain. The fact that the Sale of Goods Act makes him liable only for goods "sold and delivered" and to pay, not any agreed price, but a reasonable price, suggests quasi-contractual liability-he must pay, not because he has contracted to do so, but because the law requires him to recompense the seller for a benefit conferred and accepted. Some dicta support this view but others treat the minor's liability as contractual. A contract is not binding on a minor merely because it is proved to be for the minor's benefit; but a contract which would otherwise be binding as a contract for necessaries is not so if it contains harsh and onerous terms: Fawcett v. Smethurst (1914) 84 LJKB 473, (Atkin J). Beneficial contracts of service It is for the minor's benefit that he should be able to obtain employment which wou1d be difficult if he could not make a binding contract. So where a young railway porter agreed to join an insurance scheme and to forgo any claims he might have under the Employers' Liability Act, he had forfeited his rights under the Act, the contract as a whole being for his benefit: Clements v London & North Western Railway [1894] 2 QB 482, CA. Contracts enabling a minor to pursue a career as a professional boxer and as an author have been held binding as being for their benefit. Acquisition of property with obligations. Hasitha Veenath

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When a minor acquires "a subject of a permanent nature ? with certain obligations attached to it"-such as a leasehold, or shares in a company-he is bound by the obligations as long as he retains the subject. He must pay the rent or calls on the shares: London & North Western Railway v M'Michael (1850) 5 Ex 114. The contract is voidable by the minor-he may repudiate it any time during his minority or within a reasonable time thereafter. Restitution by a minor. Where a minor has obtained property under a contract which is not enforceable against him, the adult party who can neither sue for the price nor get the property back may suffer an injustice. Even where the minor has lied about his age, no action in deceit will lie because this would, in effect, enable the contract to be enforced against him; and for the same reason it is improbable that the minor would be stopped from asserting his true age. The Minors' Contracts Act 1987, s3, now affords a limited measure of redress. Where a contract made after the commencement of the Act is unenforceable against a defendant because he was a minor when it was made. "The court may, if it is just and equitable to do so, require the defendant to transfer to the plaintiff any property acquired by the defendant under the contract or any property representing it." Guarantee of a minor's contract Section 2 of the 1987 Act provides that a guarantee of a minor's contract is not unenforceable against the guarantor merely because the contract made by the minor is unenforceable against him on the ground that he is a minor. The section does not apply if the contract made by the minor is unenforceable against him for some other reason, for example misrepresentation or duress by the adult party. In such a case the guarantor would not be bound. MENTAL INCOMPETENTS The ancient rule of the common law was that a lunatic could not set up his own insanity (though his heir might) so as to avoid an obligation which he had undertaken. But by 1847 Pollock C.B. was able to say, in delivering the judgment of the Court of Exchequer Chamber in Moulton v. Camroux, 2 Ex 487, that "the rule had in modern times been relaxed, and unsoundness of mind would now be a good defense to an action upon a contract, if it could be shown that the defendant was not of the capacity to contract 'and the plaintiff knew it."' Cf. Imperial Loan Co. v. Stone [1892] 1 QB 599, CA. Section 3 of the Sale of Goods Act 1979 makes the same provision for persons who are incompetent to contract by reason of mental incapacity as for minors (see above). A lunatic so found by inquisition was held to be incapable of making a valid inter vivos disposition of property (although he could make a valid will) since this would be inconsistent with the position of the Crown under the Lunacy Acts: Re Walker [1905] 1 Ch 160. The Lunacy Acts have been repealed, but an order under the Mental Health Act 1983, may have the same effect as a finding of lunacy.

Drunkenness/drug abuse Hasitha Veenath

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Although individuals may have consumed a sufficient quantity of intoxicant or drug to reduce or eliminate their ability to understand exactly what they are doing, such conditions are selfinduced and so the law does not generally allow any defense or excuse to be raised to any actions taken while incapacitated. The most generous states do permit individuals to repudiate agreements as soon as sober, but the conditions to exercising this right are strict.

Bankruptcy If individuals find themselves in a situation where they can no longer pay their debts, they lose their status as creditworthy and become bankrupt. States differ on the means whereby their outstanding liabilities can be treated as discharged and on the precise extent of the limits that are placed on their capacities during this time but, after discharge, they are returned to full capacity.

Enemy aliens and/or terrorists During times of war or civil strife, a state will limit the ability of its citizens to offer help or assistance in any form to those who are acting against the interests of the state. Hence, all commercial and other contracts with the "enemy", including terrorists, would be considered void or suspended until a cessation of hostilities is agreed.

Business entities •

Corporations

The extent of an artificial person's capacity depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity, whether expressly or by implication, is "beyond the power" of the corporation, and so may be unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected. •

General and limited partnerships

There is a clear division between the approaches of states to the definition of partnerships. One group of states treats general and limited partnerships as aggregate. In terms of capacity, this means that they are no more than the sum of the natural persons who conduct the business. The other group of states allows partnerships to have a separate legal personality which changes the capacity of the "firm" and those who conduct its business and makes such partnerships more like corporations. •

Unions

In some states, trade unions have limited capacity unless any contract made relates to union activities.

•

Insolvency

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When a business entity becomes insolvent, an administrator, receiver, or other similar legal functionary may be appointed to determine whether the entity shall continue to trade or be sold so that the creditors may receive all or a proportion of the money owing to them. During this time, the capacity of the entity is limited so that its liabilities are not increased unreasonably and to the detriment of the existing creditors.

Consent If there is no ‘true meeting of the minds’ of the parties who are intend to contract with each other, under common law it is referred as an invalid contract. The parties who wish to make a legal relationship must have a genuine consent on the nature and scope of the contract. There are many ways that a genuine consent may be absent in a contractual agreement. Following discussion is about several ways of missing a genuine consent and the legal effects of this absence.

Mistake Mistake in the sense a misunderstanding of the parties about a fact in the contract. For a mistake to affect the validity of a contract it must be an "operative mistake", a mistake which operates to make the contract void. The effect of a mistake is: At common law, when the mistake is operative the contract is usually void from the beginning. Therefore, no property will pass under it and no obligations can arise under it. Even if the contract is valid at common law, in equity the contract may be voidable on the ground of mistake. Property will pass and obligations will arise unless or until the contract is avoided. However, the right to rescission may be lost. Common Mistake A common mistake is one when both parties make the same error relating to a fundamental fact. The cases may be categorized as follows: a.

Non existence

A contract will be void at common law if the subject matter of the agreement is, in fact, nonexistent. Couturier v Hastie (1856) 5 HL Cas 673 In addition, s6 of the Sale of Goods Act 1979 provides that: Where there is a contract for the sale of specific goods, and the goods without the knowledge of the sellers have perished at the time when the contract was made, the contract is void.

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b.

Own belongings

Where a person makes a contract to purchase that which, in fact, belongs to him, the contract is void. Cooper v Phibbs (1867) LR 2 HL 149 c.

Mistake as to quality

A mistake as to the quality of the subject matter of a contract has been confined to very narrow limits. According to: "A mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be." Lord Atkin in Bell v Lever Bros Ltd [1931] All ER 1. In cases since Bell v Lever Bros the courts have not been over-ready to find a mistake as to quality to be operative. Remedies Where a contract is void for identical mistake, the court exercising its equitable jurisdiction, can: • • •

Refuse specific performance Rescind any contractual document between the parties Impose terms between the parties, in order to do justice

Unilateral Mistake The case of unilateral mistake is where only one party is mistaken. The cases may be categorized as follows: a.

Mistake to the terms of the contract

Where one party is mistaken as to the nature of the contract and the other party is aware of the mistake, or the circumstances are such that he may be taken to be aware of it, the contract is void. For the mistake to be operative, the mistake by one party must be as to the terms of the contract itself. Hartog v Colin & Shields [1939] 3 All ER 566 A mere error of judgement as to the quality of the subject matter will not suffice to render the contract void for unilateral mistake. Smith v Hughes (1871) LR 6 QB 597

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Remedy Equity follows the law and will rescind a contract affected by unilateral mistake or refuse specific performance. b.

Mistake to Identity

Here one party makes a contract with a second party, believing him to be a third party (someone else). The law makes a distinction between contracts where the parties are inter absents and where the parties are inter presents. Contract made inter absents Where the parties are not physically in each other’s presence, e.g., they are dealing by correspondence, and one party is mistaken as to the identity, not the attributes, of the other and intends instead to deal with some identifiable third party, and the other knows this, then the contract will be void for mistake. Contract made inter presents Where the parties are inter presents (face to face) there is a presumption that the mistaken party intends to deal with the other person who is physically present and identifiable by sight and sound, irrespective of the identity which one or other may assume. For such a mistake to be an operative mistake and to make the agreement void the mistaken party must show that: • • • •

They intended to deal with someone else; The party they dealt with knew of this intention; They regarded identity as of crucial importance; They took reasonable steps to check the identity of the other person

Mutual Mistake A mutual mistake is one where both parties fail to understand each other. Where the parties are at cross purposes In cases where the parties misunderstand each other's intentions and are at cross purposes, the court will apply an objective test and consider whether a 'reasonable man' would take the agreement to mean what one party understood it to mean or what the other party understood it to mean: * If the test leads to the conclusion that the contract could be understood in one sense only, both parties will be bound by the contract in this sense. * If the transaction is totally ambiguous under this objective test then there will be no consensus ad idem (agreement as to the same thing) and the contract will be void.

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Remedy If the contract is void at law on the ground of mistake, equity "follows the law" and specific performance will be refused and, in appropriate circumstances, the contract will be rescinded. However, even where the contract is valid at law, specific performance will be refused if to grant it would cause hardship.

Mistake relating to document Not My deed As a general rule, a person is bound by their signature to a document, whether or not they have read or understood the document. L'Estrange v Graucob [1934] 2 KB 394. However, where a person has been induced to sign a contractual document by misunderstanding something fundamentally different what they thought it was, the transaction will be voidable. Sometimes, the plea of non est factum, namely that 'it is not my deed' may be available. A successful plea makes a document void. It eventually became available to literate persons who had signed a document believing it to be something totally different from what it actually was. Foster v Mackinnon (1869) LR 4 CP 704 The use of the rule in modern times has been restricted. For a successful plea of non Est factum two factors have to be established: • •

The signer was not careless in signing; There is a radical difference between the document which was signed and what the signer thought he was signing.

The following decision of the House of Lords is the leading case on this topic. Saunders v Anglia Building Society (Gallie v Lee) [1970] 3 All ER 961

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Misrepresentation A misrepresentation is a false statement of fact made by one party to another, which, whilst not being a term of the contract, induces the other party to enter the contract. The effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.

Under common law the following statement of facts do not recognized as representations. • • • • •

Statement of law Statement of intention or expected future conduct Statements of opinion Puffery/ exaggerated sales talk Silence about an important fact

Types of Misrepresentation Once misrepresentation has been established it is necessary to consider what type of misrepresentation has been made. There are three types of misrepresentation: fraudulent, negligent and wholly innocent. The importance of the distinction lies in the remedies available for each type. Fraudulent Misrepresentation

Fraudulent misrepresentation was defined by Lord Herschell in Derry v Peek (1889) as a false statement that is "Made knowingly, or without belief in its truth, or recklessly, careless as to whether it be true or false." Therefore, if someone makes a statement which they honestly believe is true, and then it cannot be fraudulent. Derry v Peek (1889) 14 App Cas 337. The remedy is rescission (subject to exceptions discussed later) and damages in the tort of deceit. Hasitha Veenath

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Negligence Misrepresentation This is a false statement made by a person who had no reasonable grounds for believing it to be true. There are two possible ways to claim: either under common law or statute. Negligent misrepresentation under common law The House of Lords have held that in certain circumstances damages may be recoverable in tort for negligent misstatement causing financial loss: Hedley Byrne v Heller [1964] AC 465. Success depends upon proof of a special relationship existing between the parties. Such a duty can arise in a purely commercial relationship where the representor has (or purports to have) some special skill or knowledge and knows (or it is reasonable for him to assume) that the representee will rely on the representation.

The remedies are rescission (subject to exceptions discussed later) and damages in the tort of negligence (see later). Negligent misrepresentation under s2(1) MISREPRESENTATION ACT 1967 Section 2(1) of the Misrepresentation Act 1967 says that This provision does not require the representee to establish a duty of care and reverses the burden of proof. Once a party has proved that there has been a misrepresentation which induced him to enter into the contract, the person making the misrepresentation will be liable in damages unless he proves he had reasonable grounds to believe and did believe that the facts represented were true. Remedies: recent case-law has shown that the remedies available are as those available in fraud unless the representor discharges the burden of proof. In particular, damages will be based in the tort of deceit rather than the tort of negligence. Wholly innocent Misrepresentation This is a false statement which the person makes honestly believing it to be true. This kind a misunderstanding may arise when the representor did not notice a reckless indifferent about its truthfulness. The remedy is either (i) rescission with an indemnity, or (ii) damages in lieu of rescission under the courts discretion in s2(2) Misrepresentation Act 1967.

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Duress Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition." Black's Law Dictionary (8th ed. 2004) Duress in contract law falls into two broad categories: • •

Physical duress, and Economic duress

Physical duress Duress to the person Professor Ronald Griffin, Washburn University School of Law, Topeka, KS, puts physical duress simply: "Yo money o yo life." In Barton v. Armstrong [1976] AC 104, a decision of the Privy Council, Armstrong threatened to kill Barton if he did not sign a contract, which was set aside due to duress to the person. An innocent party wishing to set aside a contract for duress to the person need to prove only that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. Duress can be made also by social influence. Duress to goods In such cases, one party refuses to release the goods belonging to the other party until the other party enters into a contract with them. For example, in Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, the contract was set aside after Hawker Pacific's threats to withhold the helicopter from the plaintiff unless further payments were made for repairing a botched paint job. Economic duress Although hard bargaining occurs legitimately in commercial contracts, duress may be in the form of breaching an existing contract between the two parties unless the innocent party agrees to enter into another contract. Austin v. Loral. The contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract. The Elements of Economic Duress 1. Wrongful or improper threat: No precise definition of what is wrongful or improper. Examples include: morally wrong, criminal, or tortuous conduct; one that is a threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith." 2. Lack of reasonable alternative (but to accept the other party's terms). If there is an available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met. 3. The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, their background (especially their education), relationship of the parties, and the ability to receive advice. Hasitha Veenath

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4. The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress.

Undue Influence Usually when there is true meeting of minds with genuine consent in a contract it says the relationship is Fiduciary. But when a person who has been induced to enter into a contract by persuasion of another (the wrongdoer) with a direct or indirect benefit, referred as undue influence and he is entitled to set that transaction aside as against the wrongdoer. The wrongdoer may be a stronger person than the innocent party. The effect of undue influence is to make the contract voidable or rescission of the contract. "Some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating and generally, though not always, some personal advantage gained." -Lindley LJ in Allcard v Skinner (1887) 36 Ch D 145Under common law there are two types of undue influences recognized which requires a different standard of proof for each. 1.

If the defendant occupied a legally recognized position of authority or influence over the plaintiff, there is a presumption of undue influence.

This comes under special relationships between the parties. Special relationships (in which the imbalance in the power between the parties) defined by the common law are such as; *Parent and child

*trustee and beneficiary

*doctor and patient

*Religious advisor and devotee Once this kind a relationship is proven, the court presumes that there was no genuine consent. But when the defendant proves that the plaintiff entered into the contract voluntarily this presumption will be rebutted. *Solicitor and client *guardian and ward

Allcard v Skinner (1887) 36 Ch D 145 In 1867 an unmarried woman aged 27 sought a clergyman as a confessor. The following year she became an associate of the sisterhood of which he was spiritual director and in 1871 she was admitted a full member, taking vows of poverty, chastity and obedience. Without independent advice, she made gifts of money and stock to the mother superior on behalf of the sisterhood. She left the sisterhood in 1879 and in 1884 claimed the return of the stock. Proceedings to recover the stock were commenced in 1885.

*In allcard v skinner case plaintiff succeeded in proving there was an undue influence as law presumed, but could not succeeded in reclaiming her property because she had not taken an action within a reasonable time. So special thing to note that if one wants to claim on undue influence, he or she has to take the decision within a reasonable time. Hasitha Veenath

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2.

If there were no legally recognized special relationship between the parties there is no presumption of undue influence.

In these cases it is necessary for the plaintiff to prove affirmatively that the defendant exerted undue influence on the plaintiff to enter into the particular contractual agreement which is impugned. Williams v Bailey (1866) LR 1 HL 200. The following questions may be asked to assure whether there was an Undue influence occurred. a. Did the defendant have influence or authority over the plaintiff? If the answer is yes then;

If No: Contract Valid

b. Was there a special relationship between the two parties? If the answer is yes then;

If No:

C1. Can the defendant prove that the plaintiff has entered into the contract voluntarily and did not acquire any benefit unfairly?

C2.Can the Plaintiff prove that he or she had entered into the contract under the strong influence of the defendant and acquired a benefit unfairly?

If the answer is yes then; Contract Valid

If the answer is yes then;

If No:

Plaintiff can rescind the contract if he is not too late. *special thing to consider that the only remedy in such cases is rescission and damages are not available.

Unconscionable conduct As law presumes in a contract where it was conducted unconscionably can be voided. In such a situation plaintiff must prove that he suffered a disability or weakness that made him the weaker party in the contract negotiation. He may have to prove that the stronger party took unfair advantages from his weakness and prevented the plaintiff from making decisions independently. Unconscionable conduct differ from undue influence where undue influence is concerned on whether the weaker party gave the true consent and unconscionable conduct concentrates on the true consent made due to a disability of the weaker party or not.

According to the common law these weaknesses may be limited education, literacy, severe illness, poverty, lack of experience, age conflicts, lack of legal knowledge etc. Hasitha Veenath

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Commercial bank v Amadio (1983) Unconscionable conduct under statute law Unconscionable conduct is prohibited under Commonwealth and state legislation, Consumer protection legislation, Contracts review act 1980 (NSW). *Under this contract review act it gives the authority to the courts to review unjust contracts. The courts may proceed with refusing to enforce unjust contracts, deleting the terms that make s a contract unfair, compensate or console a party which is not bonded to the contract, or even make orders for injunctions and for specific performance.

LEGALITY Contract will not be valid unless it is a lawful one even it satisfies all other essential elements of a contract. According to the common or statute law contract with an unlawful purpose is classified as illegal or void. Contracts are classified as illegal if they have a serious unlawful purpose. If the contract breaches are less serious it is considered as Void. Contracts rendered illegal by Statute or common law A contract may be expressly forbidden by a statutory provision. And certain contracts are regarded as illegal at common law on the ground that they would be harmful to society and therefore contrary to public policy. These contracts are totally unenforceable, because they are regarded as causing serious threats. They may be punished by fines or even by imprisonment. •

Contract to commit a crime or civil wrong If a contract deliberately commits a civil wrong or has its object as the deliberate commission of a crime, then it is illegal and the courts won’t enforce it. However if the parties are ignorant of the fact that by the contract they are committing a civil wrong, then it is not illegal. If one of the parties knows that the contract is illegal, then only the innocent party is entitled to rely on the contract. Clay v Yates(1856)

•

Contracts tending to lead to corruption in public life A contract for the acquisition of a title of honor or for the sale of public office will be Parkinson v College of ambulance (1925) illegal.

•

Contracts promoting sexual immorality A contract which directly or indirectly promotes sexual immorality is illegal. For example, the hire of a carriage to a known prostitute so that she could ply her trade

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more effectively was considered illegal unless the hirer was ignorant of the intended use in Pearce V Brooks (1866). •

Contracts prejudicial to the administration of justice In a situation like this an agreement neither to appear at the public examination of a bankrupt nor to oppose his discharge. Campion v The Public Service Employees Credit Union(1984)

•

Contracts prejudicial to public safety Under the trading with the enemy act 1939, it is an offence to trade or attempt to trade with the enemy and such contracts are therefore illegal. Also where a contract has its object the doing of an act is illegal by the law of a friendly country, it is illegal and void. Foster v Driscoll (1929)

•

Unlawful manner of performance A contract will become unlawful if the parties performs it in an illegal manner even the formation of the contract is lawful. St john’s shipping Corp v Rank Ltd (1957)

Contracts rendered void on ground by statute or common law Certain contracts are expressly declared to be void by statute and void at common law on the grounds of public policy. Consequently those do not impose penalties to the parties involved. •

Contracts which oust (dispel) Jurisdiction of the courts In the case Hyman v Hyman (1929), the House of Lords decided in that a wife could not validly contract with her husband not to apply for maintenance on a divorce, and that a contract of that kind did not prevent her from applying.

•

Contracts prejudicial to the status of marriage Marriage brokerage and contracts which attempts to prevent a party frommarrying is void and against public policy. Lowe v Peers (1768), Herman v Charles worth(1905)

•

Contracts in restraint of trade Contracts are void wholly or partially if they contain terms that unreasonably restrict a person’s freedom to carry on a trade, business or profession. Nordenfelt v Maxim Nordenfelt guns & Ammunition co (1894) Many employment contracts contain terms restricting employee’s activities during the course of employment and after its termination. Restraint terms also appear in commercial dealings between businesses such as where the purchaser of a business wishes to protect its goodwill.

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Content Terms A term is a legally binding statement or a promise which may indicate how a contract should be performed. Parties will make various statements prior to those legally binding terms. They can be categorized as follows… • • • •

Opinions Puffery Invitation to treat Representations

– personal views of any party involved in the contract – Exaggerated sales talk – a request for offer -- statement of fact that persuades a party to enter into a contract

Representation Under common law from those statements mentioned above only the representations are classified as terms and therefore be legally binding. The Legal status (legally binding or not) of a Representation will depend on… •

High importance

If the importance of the statement is high, it could well be a term but if the other party did not rely on it, it could be a representation. The Oscar Chess Case (1957) •

Closeness to formation

A statement made close to the final agreement between the parties generally considered as a term even in normal circumstances those prior statements are considered as representations. •

Whether it is made to hide negative information

Whether the statement made to hide important information from other party about the contract which can make them to stop the contract is referred as misrepresentation. •

Sole reason for entry (only reason)

In a situation like this, the statement made is considered as a term.

• Reliance on special skills of representator When the person who made the statement has a special skill about the subject of the statement, the statement would probably be treated as a term. The dick Bentley case (1965) Hasitha Veenath

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•

Statement made during the negotiations has been left out from the written contract.

In such a situation, the Parol evidence rule comes into act. Statements like this normally are a representation when the contracting parties are intended to stick to the written agreement. Exceptions to the Parol Evidence rule In the following situations even when the parties intended to contain within the contract document it will create exceptions to the Rule. a. Where custom and usage indicates that the parties would have intended the statement to form part of the contract. b. Where there is evidence that meant the written documents are part of the agreement. c. Where the statements amounted to a separate contract that was made prior to the written one. d. Where the statements clarify and correct abstruse language in the written document. e. Where the true intentions of the parties are not clearly mentioned in the document.

Terms Condition When a term in a contract is vital to the operation of the contract, it is considered as a Condition. Generally there are two types of conditions.

Warranty Terms of lesser importance or side issues to the main scope of the contract are classified as warrantees. A Term is classified as a warranty or a condition considering the following facts. •

Was the term persuaded one party to enter into the contract? If it is yes then it is a condition, or else it is a warranty. Tramsway Advertising pty Ltd v Luna Park Ltd (1938)

•

Will the breach caused a serious loss to the innocent party? If yes then the term is a condition, or else a warranty. Bettini v Gye (1876)

Remedies for breaches of conditions and warrantees • •

Breach of condition – rescission and claim damages or claim damages and continue the contract damages Breach of warranty – only can claim for the damages

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Intermediate terms Sometimes a contact may contain terms which cannot easily categorized into a warranty or a condition after a breach of a contract. In such a situation the court will determine this term as a Intermediate term which usually gives the meaning that this term remains in-between a warranty and a condition. When this happens the court may inquire whether the innocent party has a serious effect of the breach. If it is so, then this intermediate term will be regarded as the equivalent of a breach of a condition. Other than those types of terms there are few more… • • • • • •

Uncertain terms – terms that are unclear. Implied terms – terms which are usually reads into a contract Meaningless terms – Terms which cannot be understand by a reasonable person Exclusion clauses – clause which limits liability under a contract Condition precedent - terms which initiates a duty. Condition subsequent - terms which brings a duty to an end

Termination of a contract If there is a start, there should be an end also. Same theory applies into a Contract. A termination of a contract occurs when the parties involved in it no longer bound by it. It will happen in a successful completion of a contract or completion is no longer possible. There are several ways that a contract could be discharge or terminate. 2. 3. 4. 5. 6. 7.

Frustration Breach Performance, actual or attempted Agreement between the contracting parties Operation of law As specified in a term of the contract

Termination by Frustration This occurs when an outside event not anticipated in a contract, changes the rights and obligations under the contract and it would be unfair to enforce the contract. Frustration may occur when… •

The subject matter of the contract is spoiled - If a contract is based on a particular object and when it is destroyed the contract comes to an end. Taylor v Caldwell (1863)

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•

An Event, on which the contract was based, does not occur.

•

Krell v henry (1903) There will be fundamentally different performance from the performance agreed The Codelfa Case (1982) under the original contra *In here it was found that there must not be a frustration when the changes in circumstances are allowed or was foreseeable in the contract. Even it’s not possible when a party in a contract made the changes.

•

•

Generally a contract becomes illegal due to a change made to the statute or common law. So there can be a Frustration through illegality. As an example, suppose a contract is made to supply elephant tusks, and to preserve wildlife habitats government releases a legislation to stop this activity. There the contract becomes illegal and it may end in a frustration. Contracts for a personal service will be frustrated if the person, who provides the service dies, is too ill to perform or has been imprisoned. Effect of frustration

The discharge by frustration only applies to the future of the contract and any obligation or right up to the frustration is still enforceable. The promises made up to the frustration must be performed and for breaches, remedies are allowed, but promises made for the time beyond the frustration do not have to be performed. Some of statutes made related to frustration… Frustrated contract Act 1959 (vic), Frustrated contract Act 1978 (NSW), Frustrated contract Act 1988 (SA).

Termination by breach Breach of a contract occurs when a one party fails to complete what has been agreed in the contract. This entitles the other party to treat the contract as discharged (a total breach) and sue for damages. Considering on the rights and remedies given, a breach can be categorized as:

Actual breach In here the breach of contract will occur when one party fails to perform the promised obligations or terms. • •

Fails to meet a condition – a total breach and innocent party can discharge the contract and sue for damages. Fails to meet a warranty - a partial breach where the innocent party still have to meet obligations but can sue for damages.

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Anticipatory Breach This type of a breach occurs where one party indicates by word or conduct that they imply to commit a fundamental breach. For example assume one party says that he is about to be bankrupted, and it will be a statement that implies a breach of contract. Transferring the contracted subject to someone else also implies by conduct that there will be a fundamental breach. As in an Actual breach innocent party can discharge the contract and claim damages.

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Conclusion

A contract may be defined as a legally binding agreement if it contains a valid offer and acceptance. The agreement will create rights and obligations that may be enforced in the courts. The normal method of enforcement is an action for damages for breach of contract, though in some cases the court may order performance by the party in default.

When Offer, Acceptance, Consideration and Intention to create legal relationship are presence it forms an apparent contract. When capacity of contractual parties connected to it, creates a valid contract. In addition, a contract consists of various terms & representations. The terms can be either conditions or warranties or intermediate terms which can be classified as a warranty or a term. Term may be inserted into the contract to exclude or limit one party's liability. The absence of an essential element will render the contract in to enforce by law.

Even though contract is created with these elements some factors may vitiate the contract. Those are absence of genuine consent & illegality of contracts.

A contract can be terminated in many ways. Those are by Performance, Agreement, Frustration, Breach, Operation of law, Term in contract. Sometimes contract can be transferred to another party.

Overall, contract law is an interesting area to study even at times it may be conflicting and sometimes it gives clear presumptions.

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Reference List

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