Mistake in respect of documents

There are two mechanisms for dealing with mistakes in written contracts:

• Rectification

Where the written document fails to state the actual intentions of the parties, it may be altered under the equitable doctrine of rectification.  In Joscelyne v Nissen the plaintiff agreed to transfer his car hire business to his daughter, in return for her agreeing to pay certain household expenses, although this was not stated in a later written contract. The father was entitled to have the agreement rectified to include the terms agreed.

• Non est factum

Where a party signs a contract, they will usually be bound by its terms. It is assumed that the signatory has read, understood and agreed to the terms as stated, and the courts are generally reluctant to interfere in such circumstances.  Where, however, someone signs a document under a misapprehension as to its true nature, the law may permit them to claim non est factum, that is, that the document is not their deed. Originally, the mistake relied on had to relate to the type of document signed, but it is now recognised that the defence is open to those who have made a fundamental mistake as to the content of the document they have signed. However, the person signing the document must not have been careless with regard to its content. In Saunders v Anglia Building Society Mrs Gallie, a 78 year old widow, signed a document without reading it, as her glasses were broken. She had been told, by a person named Lee, that it was a deed of gift to her nephew, but it was in fact a deed of gift to Lee. Lee later mortgaged the property to the respondent building society. Mrs Gallie sought to repudiate the deed of gift on the basis of non est factum. Her action failed; she was careless in not waiting until her glasses were mended. Furthermore, the document was not fundamentally different from the one she had expected to sign. She thought that she signed a document transferring ownership and that was the effect of the document. The conditions laid down in Saundersfor non est factum to apply were confirmed in Avon Finance Co Ltd v Bridger This decision can be contrasted with a later successful reliance on the defence in Lloyds Bank plc v Waterhouse where the defendant, who was illiterate, intended to provide a guarantee in relation to his son’s purchase of a farm. In actual fact, the document he signed was a guarantee in relation to all of his son’s liabilities. In the Court of Appeal, it was decided that the father could rely on non est factum. He had not been careless – he had questioned the extent of his liability – and the document was fundamentally different from that which he had expected to sign.

MISREPRESENTATION

As was seen in Chapter 6, a statement which induces a person to enter into a contract, but which does not become a term of the contract, is a representation. A false statement of this kind is a misrepresentation and renders the contract voidable. The innocent party may rescind the contract or, in some circumstances, claim damages

Misrepresentation can be defined as ‘a false statement of fact, made by one partybefore or at the time of the contract, which induces the other party to enter into the contract’. The following points follow from this definition.

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Unilateral mistake

This occurs where only one of the parties to the agreement is mistaken as to the circumstances of the contract, and the other party is aware of that fact.

            Most cases of unilateral mistake also involve misrepresentation  although this need not necessarily be so. It is important to distinguish between these two elements: whereas unilateral mistake makes a contract void and thus prevents the passing of title in any property acquired under it, misrepresentation merely makes a contract voidable and good title can be passed before the contract is avoided. This distinction will be seen in Ingram v Little and Phillips v Brooks A further important distinction relates to remedies available: damages are not available for mistake but, where there has been a misrepresentation, damages may be awarded.

            The cases involving unilateral mistake relate mainly to mistakes as to identity. A contract will only be void for mistake where the seller intended to contract with a different person from the one with whom he did actually contract.

            In Cundy v Lindsay a crook named Blenkarn ordered linen handkerchiefs from Lindsay & Co, a Belfast linen manufacturer. His order, from 37 Wood Street, was signed to look as if it were from Blenkiron & Co, a reputable firm which was known to Lindsay and which carried on business at 123 Wood Street. The goods were sent to Blenkarn, who sold them to Cundy. Lindsay successfully sued Cundy in the tort of conversion. It was held that Lindsay had intended only to deal with Blenkiron & Co, so the contract was void. Since there was no contract with Blenkarn, he received no title whatsoever to the goods and, therefore, could not pass title on to Cundy. The case is generally taken to indicate that, if you do not deal face to face, the identity of the other party is fundamental. This was confirmed in Shogun Finance Ltd v Hudson  despite the fact that the decision defeated the objective of s 27 of the Hire Purchase Act 1964 to protect the innocent third party purchaser of a hire purchase motor vehicle. In that case, a con man obtained a car on hire purchase, using the identity of a Mr Patel, via a stolen driving licence. His contract was with the finance company, not the garage with whom he negotiated, so he did not deal face to face. The con man sold the car to Hudson and disappeared without paying the hire purchase instalments. The finance company sought damages in the tort of conversion from Hudson, on the basis that he had no title to the car. It should be noted that where goods are acquired on hire purchase, ownership does not pass until all instalments are paid, so that the con man had no title to pass to Hudson. However, s 27 gives title to the innocent third party purchaser of a motor vehicle from a ‘debtor’ who acquired it on hire purchase. Nevertheless, the Court of Appeal held that, as the contract was not made face to face, the contracting party’s identity was crucial, so the hire purchase contract was void for mistake. As it was void, there was no ‘debtor’ within the meaning of s 27; Hudson was not protected and was liable in conversion. An appeal to the House of Lords in 2003 was dismissed, confirming, by a bare majority, that s 27 did not operate to give good title to Mr Hudson. Also of interest were dicta relating to impersonation by telephone, videophone and by e-shopping.

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Mutual mistake

This occurs where the parties are at cross-purposes. They have different views on the facts of the situation, but they do not realise it. However, an agreement will not necessarily be void simply because the parties to it are at cross-purposes. In order for mutual mistake to be operative, that is, to make the contract void, the terms of agreement must comply with an objective test. The court will try to decide which of the competing views of the situation a reasonable person would support, and the contract will be enforceable or unenforceable on such terms.

                In Smith v Hughes the plaintiff offered to sell oats to the defendant, Hughes. Hughes wrongly believed that the oats were old, and on discovering that they were new oats he refused to complete the contract. It was held that the defendant’s mistake as to the age of the oats did not make the contract void.

            In Scriven Bros v Hindley & Co the defendants bid at an auction for two lots, believing both to be hemp. In fact, one of them was tow, an inferior and cheaper substance. Although the auctioneer had not induced the mistake, it was not normal practice to sell hemp and tow together. It was decided that, in such circumstances, where one party thought that he was buying hemp and the other thought that he was selling tow, the contract was not enforceable.

            If the court is unable to decide the outcome on the basis of an objective ‘reasonable person’ test, then the contract will be void, as was illustrated in Raffles v Wichelhaus  where the defendants agreed to buy cotton from the plaintiffs. The cotton was to arrive ex Peerless from Bombay. There were, however, two ships called Peerless sailing from Bombay, the first in October and the second in December. Wichelhaus thought that he was buying from the first, but Raffles thought that he was selling from the second. Under the exceptional circumstances, it was impossible for the court to decide which party’s view was the correct one. It was decided, therefore, that the agreement was void for mutual mistake.

In respect of mutual mistake, equity follows the common law.

In Tamplin v James James purchased a public house at auction.  Hehad

wrongly believed that the property for sale included a field which the previous publican had used. The sale particulars stated the property for sale correctly, but James did not refer to them. When he discovered his mistake, James refused to complete the transaction. It was held that, in spite of his mistake, an order of specific performance would be granted against James. Objectively, the reasonable man would assume that the sale was made on the basis of the particulars (see also Centrovincial Estates plc v Merchant Assurance Co Ltd and Great Peace Shipping Ltd v Tsavliros Salvage Ltd

            The role of equity was considered in Clarion Ltd v National Provident Institution  where one party’s mistake as to the effect of the terms of a contract did not allow the contract to be rescinded. It was held that equity did not provide a remedy simply because of a bad bargain; mistake would only operate in equity where it related to the subject matter of the contract, the terms of the contract or the identity of the contracting party. The decision has been the subject of criticism as its effect is to narrow equitable relief to the same circumstances as common law.

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VITIATING FACTORS

Vitiating factors are those elements which make an agreement either void or voidable, depending on which vitiating factor is present. The vitiating factors are:

• mistake;

• misrepresentation;

• duress;

• undue influence; and

• public policy, rendering contracts void/illegal.

MISTAKE

Generally speaking, the parties to a contract will not be relieved from the burden of their agreement simply because they have made a mistake. If one party makes a bad bargain, that is no reason for setting the contract aside. Very few mistakes will affect the validity of a contract at common law, but where a mistake is operative it will render the contract void. This has the effect that property which is transferred under operative mistake can be recovered, even where it has been transferred to an innocent third party.

            However, in cases where the mistake is not operative, an equitable remedy such as rescission may be available. The grant of such remedies is in the court’s discretion and subject to the principles of equity. In Leaf v International Galleries  there was a contract for the sale of a painting of Salisbury Cathedral, which both parties believed to be by Constable. Five years later, the buyer discovered that the painting was not by Constable but was refused rescission because of the lapse of time since purchase.

            It is also important to appreciate that a mistake cannot affect a contract unless it exists at the time of contracting. In Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd  a company purchased property for redevelopment. Just after the contract, the property was given listed building status, which would restrict the intended development. The purchaser could not rescind the contract on the basis of a mistake that the property could be redeveloped as intended, because at the time of sale it could have been so developed.

            It is usual to divide mistakes into the following three categories:

• common mistake;

• mutual mistake; and

• unilateral mistake.

Common mistake

This is where both parties to an agreement share the same mistake about the circumstances surrounding the transaction. In order for the mistake to be operative, it must be of a fundamental nature

In Bell v Lever Bros Ltd  Bell had been employed as chairman of the company by Lever Bros. When he became redundant, they paid off the remaining part of his service contract. Only then did they discover that Bell had been guilty of offences which would have permitted them to dismiss him without compensation. They claimed to have the payment set aside on the basis of the common mistake that neither party had considered the possibility of Bell’s dismissal for breach of duty. It was held that the action must fail. The mistake was only as to quality and was not sufficiently fundamental to render the contract void. Similarly, in Leaf v International Galleries the mistake was held to be one of quality; the court found that the contract was for the sale of a painting of Salisbury Cathedral rather than a painting by Constable, and as such the mistake could not render the contract void.

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The Unfair Terms in Consumer Contracts Regulations

The first Unfair Terms in Consumer Contracts Regulations were enacted in December 1994  They were introduced to implement the European Unfair Contract Terms Directive Those original Regulations were repealed and replaced by the current Regulations which came into effect on 1 October 1999. The 1999 Regulations are intended to reflect closely the wording of the original, but they also introduced significant alterations.

            It has to be stated that there was some criticism that the previous Regulationsmerely introduced the Directive, without engaging in a comprehensive review of this area. Concern was expressed as to the precise way in which UCTA 1977 and the 1994 Regulations impacted on one another and how their interaction would affect consumer law generally. Unfortunately, the 1999 Regulations have done nothing to improve this general problem and, in this particular respect, the criticisms of the 1994 Regulations are still relevant.

            The 1999 Regulations apply to any term in a contract concluded between a seller or supplier and a consumer which has not been individually negotiated. The Regulations are, therefore, wider in scope than UCTA 1977, in that they cover all terms, not just exclusion clauses. However, reg 6 states that, apart from the requirement in respect of plain language, neither the core provisions of a consumer contract, which set out its main subject matter, nor the adequacy of the price paid are open to assessment in terms of fairness. The Regulations would, therefore, still appear to focus on the formal procedure through which contracts are made, rather than the substantive content of the contract in question.

            By virtue of reg 5, a term is unfair if, contrary to the requirements of good faith, itcauses a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. Schedule 2 sets out a long, indicative, but non-exhaustive, list of terms which may be regarded as unfair. Examples of terms included in this list are: a term which excludes or limits liability in the event of the supplier or seller causing the death or injury of the consumer; inappropriately excluding or limiting the legal rights of the consumer in the event of total or partial non-performance or inadequate performance; a term requiring any consumer who fails to fulfil his obligations to pay a disproportionately high sum in compensation; and a term enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract.

            Any such term as outlined above will be assumed to be unfair and, under reg 8, if a term is found to be unfair, it will not be binding on the consumer, although the remainder of the contract will continue to operate if it can do so after the excision of the unfair term.

            Two further provisions of the Regulations which are worthy of mention have been taken from the previous Regulations. First, there is the requirement that all contractual terms be in plain, intelligible language and that, when there is any doubt as to the meaning of any term, it will be construed in favour of the consumer This is somewhat similar to the contra proferentemrule in English common law.

           

Secondly, although the Regulations will be most used by consumers to defeat particular unfair terms, regs 10–12 give the Director General of Fair Trading the power to take action against the use of unfair terms by obtaining an injunction to prohibit the use of such terms. However, the power of the Director General to seek injunctions to control unfair contract terms has been extended to other qualifying bodies. These qualifying bodies are listed in Sched 1 to the Regulations and include the various regulatory bodies controlling the previous public utilities sector of the economy, the Data Protection Registrar and every weights and measures authority in Great Britain.

            Various aspects of the original Regulations, which have implications for the current Regulations, were examined by the House of Lords in Director General of Fair Trading v First National Bank (2001).

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What effect does the Unfair Contract Terms Act 1977 have on the exclusion clause?

This Act represents the statutory attempt to control exclusion clauses. In spite of its title, it is really aimed at unfair exemption clauses, rather than contract terms generally. It also covers non-contractual notices which purport to exclude liability under the Occupiers’ Liability Act 1957. The controls under UCTA 1977 relate to two areas.

Negligence

There is an absolute prohibition on exemption clauses in relation to liability in negligence resulting in death or injury Exemption clauses relating to liability for other damage caused by negligence will only be enforced to the extent that they satisfy the requirement of reasonableness

In Smith v Bush the plaintiff bought a house on the basis of a valuation report carried out for her building society by the defendant. The surveyor had included a disclaimer of liability for negligence in his report to the building society and sought to rely on that fact when the plaintiff sued after the chimneys of the property collapsed. The House of Lords held that the disclaimer was an exemption clause and that it failed the requirement that such terms should be reasonable.

Contract

The general rule of the Act is that an exclusion clause imposed on a consumer  or by standard terms of business is not binding unless it satisfies the Act’s requirement of reasonableness. Effectively, therefore, the Act is dealing with clauses imposed by a person acting in the course of business. Section 12 states that a person deals as a consumer if he neither makes the contract in the course of business nor holds himself out as so doing and the other party does make the contract in the course of business. Additionally, where goods are supplied under the contract, they must be of a type normally supplied for private consumption and they must be so used.

The precise meaning of ‘acting in the course of business’ for the purposes of UCTA977 was considered in R & B Customs Brokers Co Ltd v UDT In deciding that the sellers of a car to a company could not rely on an exclusion clause contained in the contract, as the transaction had not been in the course of business, the Court of Appeal stated that the purchase had been: In reaching this decision, the Court of Appeal followed the House of Lords’ decision in Davies v Sumner which dealt with a similar provision in the Trade Descriptions Act 1968. This interpretation of s 12 was confirmed in Feldaroll Foundry plc v Hermes Leasing On facts similar to R & B Customs Brokers Co Ltd v UDT, a company was held not to act ‘in the course of business’, even though the contract stated the car was acquired for use in the business. It would seem, however, that the meaning of selling ‘in the course of business’ for the purposes of s 14 of the SoGA 1979 is different. Section 14, which implies conditions of satisfactory quality and fitness for purpose into contracts for the sale of goods applies where the seller ‘sells in the course of business’. The meaning of selling ‘in the course of business’ under s 14 of the SoGA 1979 is wide enough to cover incidental sales by, for example, the professions, local and central government departments and public authorities. The meaning of selling ‘in the course of business’ in the context of s 14 was examined in Stevenson v Rogers

            UCTA 1977 applies more specific rules to contracts for the sale of goods; which rules apply depends on whether the seller sells to a person ‘dealing as a consumer’ (as defined in s 12 of UCTA 1977; such sales are commonly referred to as ‘consumer sales’). Under s 6 of UCTA 1977, the implied term of s 12 of the SoGA 1979 cannot be excluded in consumer or non-consumer sales.

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Does the exclusion clause effectively cover the breach?

As a consequence of the disfavour with which the judiciary have looked on exclusion clauses, a number of rules of construction have been developed which operate to restrict the effectiveness of exclusion clauses. These include the following:

• The construction of the clause

The court will determine whether the clause, on its construction, covers what has occurred. In Andrews v Singer  the plaintiffs contracted to buy some new Singer cars from the defendant. A clause excluded all conditions, warranties and liabilities implied by statute, common law or otherwise. One car supplied was not new. It was held that the requirement that the cars be new was an express condition of the contract and, therefore, was not covered by the exclusion clause, which only referred to implied clauses.

• The contra proferentem rule

This requires that any uncertainties or ambiguities in the exclusion clause are interpreted against the person seeking to rely on it. In Hollier v Rambler  it was stated that as the exclusion clause in question could be interpreted as applying only to non-negligent accidental damage or, alternatively, as including damage caused by negligence, it should be restricted to the former, narrower interpretation. As a consequence, the plaintiff could recover for damages caused to his car by the defendants’ negligence. A more recent example of the operation of the contra proferentem rule may be seen in Bovis Construction Ltd v Whatlings Construction Ltd  The details of the contract between the two parties were based on a standard form and a number of letters. One of the letters introduced a term which limited the defendants’ liability in respect of time related costs to £100,000. The plaintiffs terminated the contract on the basis of the defendants’ lack of diligence in carrying out the contracted work. When they subsequently sued for £2,741,000, the defendants relied on the limitation clause. The House of Lords decided that as thedefendants had introduced the limitation clause, it had to be interpreted strictly, although not as strictly as a full exclusion clause. It was held that the term ‘timerelated costs’ applied to losses arising as a consequence of delay in performance, and not non-performance. The defendants had been guilty of the latter and were,therefore, fully liable for the consequences of their repudiatory breach. More recently, an ambiguous clause was considered by the Court of Appeal in The University of Keele v Price Waterhouse The appellant accountants claimed they were not liable to pay damages to the university, which had suffered loss of anticipated savings under a profit related pay scheme. The appellants had given negligent financial advice in relation to the scheme. A clause of the contract between the appellants and the university indicated that, subject to a cap on liability of twice the anticipated savings, the appellants accepted ‘liability to pay damages in respect of loss or damage suffered by the university as a direct result of our providing the Services’. The clause went on to say, ‘All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the Scheme’. The appellants contended that the second part of the clause protected them from liability. Clearly, the clause, taken as a whole, appeared contradictory; the first part limited liability in relation to anticipated savings, whilst the second part excluded any such liability. The Court of Appeal interpreted the clause as meaning that the second part applied only to exclude liability which exceeded the cap on liability in the first part.

• The doctrine of fundamental breach

In a series of complicated and conflicting cases, ending with the House of Lords’ decision in Photo Production v Securicor Transport  some courts attempted to develop a rule that it was impossible to exclude liability for breach of contract if a fundamental breach of the contract had occurred, that is, where the party in breach had failed altogether to perform the contract.  In Photo Production v Securicor Transport, the defendants had entered into a contract with the plaintiffs to guard their factory. An exclusion clause exempted Securicor from liability, even if one of their employees caused damage to the factory. Later, one of the guards deliberately set fire to the factory. Securicor claimed the protection of the exclusion clause. It was ultimately decided by the House of Lords that whether an exclusion clause could operate after a fundamental breach was a matter of construction. There was no absolute rule that total failure of performance rendered such clauses inoperative. The exclusion clause in this particular case was wide enough to cover the events that took place, and so Photo Production’s action failed.

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Has the exclusion clause been incorporated into the contract?

An exclusion clause cannot be effective unless it is actually a term of a contract. There are three ways in which such a term may be inserted into a contractual agreement.

By signature

If a person signs a contractual document then they are bound by its terms, even if they do not read it.

            In L’Estrange v Graucob a café owner bought a vending machine, signing a contract without reading it, which took away all her rights under the SoGA 1893. When the machine proved faulty, she sought to take action against the vendors, but it was held that she had no cause of action, as she had signified her consent to the terms of the contract by signing it and the exclusion clause effectively exempted liability for breach.

            The rule in L’Estrange v Graucob may be avoided where the party seeking to rely on the exclusion clause misled the other party into signing the contract, after a misleading oral explanation of the clause

By notice

Apart from the above, an exclusion clause will not be incorporated into a contract unless the party affected actually knew of it or was given sufficient notice of it. In order for notice to be adequate, the document bearing the exclusion clause must be an integral part of the contract and must be given at the time that the contract is made

            In Chapelton v Barry UDC the plaintiff hired a deck chair and received a ticket, which stated on its back that the council would not be responsible for any injuries arising from the hire of the chairs. After he was injured when the chair collapsed, Chapelton successfully sued the council. It was held that the ticket was merely a receipt, the contract already having been made, and could not be used effectively to communicate the exclusion clause.

            In Olley v Marlborough Court Hotel Ltd a couple arrived at a hotel and paid for a room in advance. On reaching their room, they found a notice purporting to exclude the hotel’s liability in regard to thefts of goods not handed in to the manager.A thief later stole the wife’s purse. It was held that the hotel could not escape liability, since the disclaimer had only been made after the contract had been formed.

            The notice given must be sufficient for the average person to be aware of it; if it is sufficient, it matters not that this contracting party was not aware of it. In Thompson v LM & S Railway a woman who could not read was bound by a printed clause referred to on a railway timetable and ticket because the average person could have been aware of it.

            Whether the degree of notice given has been sufficient is a matter of fact but, in Thornton v Shoe Lane Parking Ltd it was stated that the greater the exemption, the greater the degree of notice required.

            In Interfoto Picture Library Ltd v Stiletto Programmes Ltd the Court of Appeal decided that a particular clause was not to be considered as imported into a contract, even though it had been available for inspection before the contract was entered into. The clause in question sought to impose almost £4,000 liability for any delay in returning the photographic negatives which were the subject of the contract. It was held, following Thornton v Shoe Lane Parking Ltd, that this penalty was so severe that it could not have been fairly brought to the attention of the other party by indirect reference; explicit notification was necessary where a clause was particularly onerous  and unusual. This is sometimes referred to as the red ink or red hand principle, and was recently re-examined in relation to scratch cards in O’Brien v MGN Ltd 

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Terms implied by statute

For example, under the SoGA 1979, terms relating to description, quality and fitnessfor purpose are all implied into sale of goods contracts.

Terms implied by custom

An agreement may be subject to customary terms not actually specified by the parties. For example, in Hutton v Warren it was held that customary usage permitted a farm tenant to claim an allowance for seed and labour on quitting his tenancy. It should be noted, however, that custom cannot override the express terms of an agreement

Terms implied by the courts

Generally, it is a matter for the parties concerned to decide the terms of a contract, but on occasion the court will presume that the parties intended to include a term which is not expressly stated. It will do so where it is necessary to give business efficacy to the contract.

            Whether a term may be implied can be decided on the basis of the ‘officious bystander’ test. Imagine two parties, A and B, negotiating a contract. A third party, C, interrupts to suggest a particular provision. A and B reply that that particular term is understood. In such a way, the court will decide that a term should be implied into a contract.

            In The Moorcock the appellants, the owners of a wharf, contracted with the respondents to permit them to discharge their ship at the wharf. It was apparent to both parties that, when the tide was out, the ship would rest on the river bed. When the tide was out, the ship sustained damage by settling on a ridge. It was held that there was an implied warranty in the contract that the place of anchorage should be safe for the ship. As a consequence, the shipowner was entitled to damages for breach of that term.

EXEMPTION OR EXCLUSION CLAUSES

In a sense, an exemption clause is no different from any other clause, in that it seeks to define the rights and obligations of the parties to a contract. However, an exemption clause is a term in a contract which tries to exempt, or limit, the liability of a party in breach of the agreement. Exclusion clauses give rise to most concern when they are included in standard form contracts, in which one party, who is in a position of commercial dominance, imposes their terms on the other party, who has no choice as far as the terms of the contract go. Such standard form contracts are contrary to the ideas of consensus and negotiation underpinning contract law; for this reason, they have received particular attention from both the judiciary and the legislature, in an endeavour to counteract their perceived unfairness. A typical example of a standard form agreement would be a holiday booking, made on the terms printed in a travel brochure.

            The actual law relating to exclusion clauses is complicated by the interplay of the common law, the Unfair Contract Terms Act 1977 and the various Acts which imply certain terms into particular contracts. However, the following questions should always be asked with regard to exclusion clauses:

• Has the exclusion clause been incorporated into the contract?

• Does the exclusion clause effectively cover the breach?

• What effect do UCTA 1977 and the Unfair Terms in Consumer Contracts

   Regulations 1999 have on the exclusion clause?

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Letters of comfort

Letters of comfort are generally used by parent companies to encourage potential lenders to extend credit to their subsidiary companies by stating their intention to provide financial backing for those subsidiaries. It is generally the case that such letters merely amount to statements of present intention on the part of the parent company and, therefore, do not amount to offers that can be accepted by the creditors of any subsidiary companies. Given the operation of the doctrine of separate personality, this effectively leaves the creditors with no legal recourse against the parent company for any loans granted to the subsidiary.

            In Kleinwort Benson v Malaysian Mining Corp the defendant company had issued a letter of comfort to the plaintiffs in respect of its subsidiary company, MMC Metals. However, when MMC Metals went into liquidation, the defendant failed to make good its debts to the plaintiffs.

            At first instance, the judge decided in favour of the plaintiffs, holding that, in such commercial circumstances, the defendants had failed to rebut the presumption that there had been an intention to create legal relations. On appeal, it was held that, in the circumstances of the instant case, the letter of comfort did not amount to an offer; it was a statement of intention which could not bind the defendants contractually. Therefore, the Malaysian Mining Corp was not legally responsible for the debt of its subsidiary.

            It is important to note that the Kleinwort Benson case opens up the possibility that, under different circumstances, letters of comfort might be considered to constitute offers capable of being accepted and leading to contractual relations. Under suchcircumstances, the presumption as to the intention to create legal relations as they  normally apply in commercial situations will operate, though it is almost inconceivable that a court would decide that a letter of comfort amounted to an offer without also finding an intention to create legal relations.

CONTENTS OF A CONTRACT

CONDITIONS, WARRANTIES AND INNOMINATE TERMS

Once it is decided that a statement is a term, rather than merely a pre-contractual representation, it is necessary to determine which type of term it is, in order to determine what remedies are available for its breach. Terms can be classified as one of three types.

  

Conditions

A condition is a fundamental part of the agreement and is something which goes to theroot of the contract. Breach of a  condition gives the innocent party the right either to terminate the contract and refuse to perform their part of it or to go through with the agreement and sue for damages.

 Warranties

A warranty is a subsidiary obligation which is not vital to the overall agreement and does not totally destroy its efficacy. Breach of a warranty does not give the right to terminate the agreement. The innocent party has to complete their part of the agreement and can only sue for damages.

 IMPLIED TERMS

So far, all of the cases considered in this chapter have involved express terms: statements actually made by one of the parties, either by word of mouth or in writing. Implied terms, however, are not actually stated but are introduced into the contract by implication. Implied terms can be divided into three types.

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Domestic and social agreements

In this type of agreement, there is a presumption that the parties do not intend to create legal relations.

            In Balfour v Balfour a husband returned to Ceylon to take up employment and he promised his wife, who could not return with him due to health problems, that he would pay her £30 per month as maintenance. When the marriage later ended in divorce, the wife sued for the promised maintenance. It was held that the parties had not intended the original promise to be binding and, therefore, it was not legally enforceable.

            It is essential to realise that the intention not to create legal relations in such relationships is only a presumption and that, as with all presumptions, it may be rebutted by the actual facts and circumstances of a particular case. A case in point is Merritt v Merritt After a husband had left the matrimonial home, he met his wife and promised to pay her £40 per month, from which she undertook to pay the outstanding mortgage on their house. The husband, at the wife’s insistence, signed a note, agreeing to transfer the house into the wife’s sole name when the mortgage was paid off. The wife paid off the mortgage but the husband refused to transfer the house. It was held that the agreement was enforceable, as, in the circumstances, the parties had clearly intended to enter into a legally enforceable agreement.

            ‘Social’ agreements, such as lottery syndicates, have also been the subject of legal dispute. In Simpkins v Pays a relatively vague agreement about contribution to postage and sharing of any winnings in competitions made between a lodger, a landlady and her granddaughter was alleged not to be a contract for lack of intention to create legal relations. However, the court decided that there was a binding contract to share winnings, despite the apparently social nature of the agreement. The agreement was commercial in nature and related to a matter unconnected with the running of a household; there was a degree of mutuality in the agreement which indicated an intention that it was binding. In Albert v Motor Insurers’ Bureau an agreement between colleagues in relation to lifts to work was held to be a contract because there was intention to create legal relations. It was said to be unnecessary to show whether the parties had thought about whether there was a contract, nor did it matter that, if asked, they would have said that they would not have sued if the arrangement failed. Clearly, therefore, the presumption does not purport to find the actual intention of the parties. Perhaps the best advice, particularly in relation to lottery syndicates, is to reduce the agreement to writing so that there is written evidence that the parties did intend the agreement to be a binding contract.

Collective agreements

Agreements between employers and trade unions may be considered as a distinct category of agreement for, although they are commercial agreements, they are presumed not to give rise to legal relations and, therefore, are not normally enforceable in the courts. Such was the outcome of Ford Motor Co v AUEFW in which it was held that Ford could not take legal action against the defendant trade union, which had ignored previously negotiated terms of a collective agreement.

            This presumption is now conclusive by virtue of s 179 of the Trade Union and Labour Relations Act 1992, unless the agreement is in writing and expressly states that it is a binding agreement.

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Forbearance

Forbearance involves non-action or the relinquishing of some right. An example is forbearance to sue. If two parties, A and B, believe that A has a cause of legal action against B, then, if B promises to pay a sum of money to A if A will give up the right to pursue the action, there is a valid contract to that effect: A has provided consideration by giving up his right to have recourse to law. Such action would not amount to consideration if A knew that the claim was either hopeless or invalid, as was illustrated in Wade v Simeon where it transpired that the plaintiff had no legal claim for breach of the original contract.

Promissory estoppel after Williams v Roffey Bros

It is likely that the decision in Williams v Roffey Bros will reduce the need for reliance on promissory estoppel in cases involving the renegotiation of contracts for the supply of goods or services, since performance of existing duties may now provide consideration for new promises. As was stated previously with regard to Re Selectmove Ltd however, the same claim cannot be made in relation to partial payments of debts. Those situations are still subject to the rule in Foakes v Beer as modified, uncertainly, by the operation of promissory estoppel. As estoppel is generally only suspensory in effect, it is always open to the promisor, at least in the case of continuing debts, to reimpose the original terms by withdrawing their new promise.

 Minors

A minor is a person under the age of 18 21 to 18 by the Family Reform The law tries to protect such persons by restrictingtheir contractual capacity and, thus, preventing them from entering  into disadvantageous agreements. The rules which apply are a mixture of common law and statute and depend on when the contract was made. Contracts entered into after 9 June 1987 are subject to the Minors’ Contracts Act 1987, which replaced the Infants’ Relief Act  1874. Agreements entered into by minors may be classified within three possible categories: valid; voidable; and void.

 Mental incapacity and intoxication

A contract made by a party who is of unsound mind or under the influence of drink or drugs is prima facie valid. In order to avoid a contract, such a person must show:

• that their mind was so affected at the time that they were incapable of     understanding the nature of their actions; and

• that the other party either knew or ought to have known of their disability. The person claiming such incapacity, nonetheless, must pay a reasonable price for necessaries sold and delivered to them. The Sale of Goods Act 1979 specifically applies the same rules to such people as those that are applicable to minors.

INTENTION TO CREATE LEGAL RELATIONS

All of the aspects considered previously may well be present in a particular agreement, and yet there still may not be a contract. In order to limit the number of cases that might otherwise be brought, the courts will only enforce those agreements which the parties intended to have legal effect. Although expressed in terms of the parties’ intentions, the test for the presence of such intention is once again objective, rather than subjective. For the purposes of this topic, agreements can be divided into three categories, in which different presumptions apply

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Knowledge of the offer

A person cannot accept an offer that he does not know about. Thus, if a person offers a reward for the return of a lost watch and someone returns it without knowing about the offer, he cannot claim the reward. Motive for accepting is not important, as long as the person accepting knows about the offer. In Williams v Carwadine a person was held to be entitled to receive a reward, although that was not the reason why he provided the information requested.

Rejection of offers

Express rejection of an offer has the effect of terminating the offer. The offeree cannot subsequently accept the original offer. A counter-offer, where the offeree tries to change the terms of the offer, has the same effect.

In Hyde v Wrench Wrench offered to sell his farm for £1,000. Hyde offered £950, which Wrench rejected. Hyde then informed Wrench that he accepted theoriginal offer. It was held that there was no contract. Hyde’s  counter-offer had effectively ended the original offer and it was no longer open to him to accept it; Hyde was now making a new offer to buy for £1,000, which Wrench could accept or reject.

A counter-offer must not be confused with a request for information. Such a request does not end the offer, which can still be accepted after the new information has been elicited. See Stevenson v McLean where it was held that a request by the offeree as to the length of time that the offeror would give for payment did not terminate the original offer, which he was entitled to accept prior to revocation. The issue was considered and clarified in Society of Lloyds v Twinn discussed in 5.3.1, below.

ACCEPTANCE

Acceptance of the offer is necessary for the formation of a contract. Once the offeree has assented to the terms offered, a contract comes into effect. Both parties are bound: the offeror can no longer withdraw his offer and the offeree cannot withdraw his acceptance.

OFFER, ACCEPTANCE AND THE CLASSICAL MODEL OF CONTRACT

The foregoing has presented the legal principles relating to offer and acceptance in line with the ‘classical model’ of contract. As has been stated, underlying that model is the operation of the market in which individuals freely negotiate the terms on which they are to be bound. The offeror sets out terms to which he is willing to be bound and, if the offeree accepts those terms, then a contract is formed. If, however, the offeree alters the terms, then the parties reverse their roles: the former offeree now becomes the offeror and the former offeror becomes the offeree, able to accept or reject the new terms as he chooses. This process of role reversal continues until an agreement is reached or the parties decide that there are no grounds on which they can form an agreement. Thus, the classical model of contract insists that there must be a correspondence of offer and acceptance, and that any failure to match acceptance to offer will not result in a binding contract.

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