The Modern Law of Contract by Richard Stone 10t..


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The Modern Law
Tenth Edition
The Modern Law of Contract
is a clear and logical introductory textbook, written by a
leading author and lecturer with over thirty years teaching and examining experience.
Offering a carefully tailored overview of all key topics for LLB and GDL courses, this
tenth edition has been thoroughly updated and presents learning features that will help
Understand and remember core topics:
boxed chapter summaries offer a useful
cult concepts
Identify important cases and assess their relevance
: Key Case features highlight
cant cases
ect on how contract law operates in context:
highlighted For Thought
features ask students to consider what if scenarios, while In Focus features offer
Consolidate learning and prepare for assessment:
the books Companion
Website presents chapter-
by-chapter Multiple-Choice Questions; a Flashcard glos-
The Modern Law of Contract
enables undergraduate
students of contract law to fully engage with the topic and gain a profound understanding
of this fundamental area.
Richard Stone
is Professor of Law at the University of Lincoln.
THE MODERN LAW
Tenth Edition
Richard Stone
Tenth edition published 2013
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
2013 Richard Stone
The right of Richard Stone to be identi
ed as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
All rights reserved. No part of this book may be reprinted or
reproduced or utilised in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
Contents
Preface
Guide to Using the Book
xviii
Guide to the Companion Website
xx
Table of Cases
xxiii
Table of Legislation
xlv
Table of International Instruments
li
Introduction
1
Forming the Agreement
29
Consideration and Other Tests of Enforceability
89
Intention to Create Legal Relations
139
155
The Contents of the Contract
187
Clauses Excluding or Limiting Liability
227
Misrepresentation
273
303
Duress
333
Undue In
349
Illegality and Public Policy
379
409
Discharge by Performance or Breach
433
459
Index
Preface
Guide to Using the Book
xviii
Guide to the Companion Website
xx
Table of Cases
xxiii
Table of Legislation
xlv
Table of International Instruments
li

1
1.2 Introduction
2
1.3 Contractual theory
5
1.4 The classical law of contract
6
1.5 The subject matter of contract law
8
2.9 Tenders
45
46
49
125
3.14 Other types of estoppel
128
3.15 Alternative tests of enforceability
129
3.16 Summary of key points
136
3.17 Further reading
137

4 INTENTION TO CREATE LEGAL RELATIONS
139
4.2 Introduction
140
4.3 Domestic agreements
142
4.4 Commercial agreements
146
4.5 Collective agreements
150
4.6 Is a requirement of intention necessary?
152
4.7 Summary of key points
153
4.8 Further reading
153

156
5.2 Introduction
156
5.3 The rationale for the doctrine
157
5.4 Development of the doctrine
160
5.5 Evading the doctrine
163
5.6 The Contracts (Rights of Third Parties) Act 1999
164
5.7 Damages on behalf of another
169
5.8 The trust of a promise
173
5.9 Collateral contracts
174
5.10 The tort of negligence
175
5.11 Statutory exceptions
178
5.12 Privity and exclusion clauses
178
5.13 Imposing burdens: restrictive covenants
182
5.14 The role of the law of tort
184
5.15 Summary of key points
184
5.16 Further reading
185

6 THE CONTENTS OF THE CONTRACT
187
6.2 Introduction
188
230
236
7.6 Statutory controls
246
7.7 Unfair Contract Terms Act 1977
246
7.8 Unfair Terms in Consumer Contracts Regulations 1999
264
7.9 Proposals for reform
269
7.10 Summary of key points
271
7.11 Further reading
272

8 MISREPRESENTATION
273
8.2 Introduction
274
nition of misrepresentation
277
8.4 Remedies for misrepresentation
286
8.5 Exclusion of liability for misrepresentation
298
8.6 Summary of key points
301
8.7 Further reading
302

9 MISTAKE
303
9.2 Introduction
304
9.3 Categories of mistake
305
9.4 Mistakes nullifying agreement (‘common mistake’)
307
9.5 Mistakes negativing agreement
313
9.6 Mistake in equity
324
9.7 Forms of equitable relief
326
9.8 Contracts signed under a mistake
328
9.9 Conclusions on ‘mistake’
330
9.10 Summary of key points
331
9.11 Further reading
332

333
10.2 Introduction
334
10.3 Duress by threats of violence or other coercion
335
10.4 Economic duress
339
10.5 Remedies for duress
345
10.6 Summary of key points
346
10.7 Further reading
346

11 UNDUE INFLUENCE
350
11.2 Introduction
350
11.3 Actual undue in
353
11.4 Presumed in
uence: recognised relationships
354
11.5 Presumed in
uence: other relationships
356
11.6 Relevance of the disadvantageous nature of the transaction
358
11.7 Summary of current position on presumed undue in
360
11.8 Undue in
uence and third parties
362
11.9 Remedies for undue in
371
11.10 Unconscionability and inequality of bargaining power
373
11.11 Summary of key points
376
11.12 Further reading
376

12 ILLEGALITY AND PUBLIC POLICY
380
12.2 Introduction
381
12.3 Rationale for the unenforceability of illegal contracts
381
12.4 Categories of illegality
382
12.5 Contract to indemnify
389
12.6 Effects of illegality: enforcement
391
12.7 Effects of illegality: recovery of money or property
393
12.8 Exceptions to the general rule
395
397
12.10 Proposals for reform
398
12.11 Agreements contrary to public policy
399
12.12 Contracts concerning marriage
399
12.13 Contracts promoting sexual immorality
401
12.14 Contracts to oust the jurisdiction of the courts
402
12.15 The Human Rights Act 1998
404
12.16 Contracts in restraint of trade
405
12.17 Effect of contracts void at common law
406
12.18 Wagering contracts
406
12.19 Summary of key points
407
12.20 Further reading
407

13 FRUSTRATION
409
13.2 Introduction
410
13.3 Frustrating events
413
13.4 Limitations on the doctrine
418
13.5 Effects of frustration: common law
421
13.6 Effects of frustration: the Law Reform (Frustrated Contracts) Act 1943
423
13.7 Summary of key points
430
13.8 Further reading
431

14 DISCHARGE BY PERFORMANCE OR BREACH
433
14.2 Introduction
434
14.3 Discharge by performance
435
14.4 Tender of performance
441
14.5 Time for performance
441
14.6 Discharge by breach
443
14.7 Some special types of breach
451
14.8 Anticipatory breach
454
14.9 Effect of breach: right of election
454
14.10 Summary of key points
457
14.11 Further reading
458

459
15.2 Introduction
460
15.3 Damages: purpose
461
15.4 Damages: measure
464
476
15.6 Limitations on recovery
482
15.7 Liquidated damages and penalty clauses
492
15.8 Restitution and unjust enrichment
494
Preface
The aim of this book is to provide a comprehensive but readable account of what I have
termed the modern law of contract. By this I mean the law of contract as applied by the
rst century. This I see as being still rooted in the forms
of the classical theory of contract (which is generally accepted as dating from the late
that appear in each chapter are intended to stimulate students into thinking about issues
for themselves, and developing a critical approach to the law not simply accepting what
this reason no answers are provided to these questions.
New case law covered in this edition includes the decisions of the Supreme Court in
(2011) and the Court of Appeal in
Preface
Finally, my thanks to my publishers, Routledge, and in particular Emma Nugent, for their
patience and assistance in seeing this edition through to publication, and to my wife,
Maggie, for her support during the writing process.


Guide to Using the Book


The Modern Law of Contact

is rich in features designed to support and reinforce your
learning. This Guided Tour shows you how to make the most of your textbook by
illustrating each of the features used by the author.
XVIII


Chapter Overviews

These overviews are a brief introduction
of the core themes and issues you will
encounter in each chapter.





C

T
o
e



7.1
OVERVIEW

This chapter deals with the situations w
h
for breach of contract by including excl
u
area governed by both common law an
d
law rules were developed earlier to deal
partiesThecommonlawislookedat

Diagrams

Visual learners are catered for via a series
of diagrams and tables which help
facilitate the understanding of concepts
and interrelationships within key topics.

D

V
o
f
a
Figure 3.1

For Thought

For Thought boxes encourage discussion
on topical issues and help you to critique
current law and re
ect on how and in
which direction it may develop in the
future.




o
c
w
f



For Thought



If you are invited to take part in a lo
t
written agreement as to how the prize

Key Cases

highlighted in text boxes for ease of
reference. The facts and decisions are
presented to help you reach an under-
standing of how and why the court
reached the conclusion it did.





K

A
h
r
p
s
r




Key Case


RTS Flexible Systems Ltd
(UK Production)
(2010)



Facts:

The parties were in negotiatio
n
work. Work started on the basis of a
L
intended that there should be a form
a
ment on many terms, including the p
r

nalised or signed. On a preliminary is
Chapter Summaries
The essential points and concepts
covered in each chapter are distilled into

3.16
SUMMARY OF KEY POINTS

Promises can be enforceable
by consideration, or where the

Englishlaw.
Further Reading
Selected further reading is included at the
end of each chapter to provide a pathway
for further study.
11.12
FURTHER READING

Auchmuty
,

Birks
and
Chin Nyuk
Yin
,
Companion Website
Signposts to relevant material available on
the book’s popular Companion Website
are included at the end of each chapter.
COMPANION WEBSITE


Testyourunderstandingofthechapter
skey
ÔIn FocusÕ
The ‘In Focus’ icon highlights sections
that offer commentary on and critical
evaluation of the law.

2.4.1
IN FOCUS: AGREEM
It has been argued by Collins
courts are not actually lookin

parties can reasonably su
it can be relied upon.
8


Guide to the Companion Website

For Lecturers
Testbank

Diagrams
An excellent resource, which will appeal
to students; this is probably the best I
have seen for any subject!
Valerie
Humphreys, Deputy Head of School
of Law, Birmingham City University

Visit
The Modern Law of Contract

s
Companion Website to discover a compre-
hensive range of resources designed to
enhance the teaching and learning
experience for both students
and lecturers.

A free suite of exclusive resources
developed to help you to teach the law
of contract.


Download a fully customisable bank of
questions which test your students
understanding of contract law. These can
be migrated to your universitys Visual
Learning Environment so that they can be
customised and used to track student
progress.


Use diagrams from the text in your own
lecture presentations with our PowerPoint
slides.

XX

A
to
h
H
o
V
V
C
h
e
e
a


For Students


Multiple-choice questions

Glossary terms and
ashcards

Legal skills guide

Questions and Answers

Explore further

Test your progress by tackling a series of
chapter-
by-chapter Multiple-Choice
Questions. Each answer links you back to
the text for further study.




Look up the essential contract law terms
in our handy online Glossary or check your
knowledge with our interactive Flashcards.



Improve your essential legal skills with our
practical guides to the important subjects
in contract law, including Forming the
Agreement and Remedies.



Hone your writing skills by taking on a
questions, and comparing your ideas with
the authors fully worked model answers.



Investigate contract law further with a
series of chapter-
by-chapter weblinks.


XXI
Guide to the Companion Website

T
e
c
Q
Q
t
th

I
m
p
in
A
A
Table of Cases
21st Century Logistic Solutions Ltd v Madysen Ltd [2004] EWHC 231, [2004]
2 Lloyd’s Rep 92 ..........................................................................................................
392
A to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974) (4) SA 392(C) (South Africa) ......
81
AEG (UK) Ltd v Logic Resource Ltd [1996] CLC 265, CA .......................
199
Actionstrength Ltd v International Glass Engineering [2003] 2 All ER 615
32
Adams v Lindsell (1818) 1 B & Ald 681, 106 ER 250 .................
35
Addis v Gramophone Company Ltd [1909] AC 488 ........................................................
472
Adler v Dickson [1955] 1 QB 158, [1954] 3 All ER 397 ..............................................
178
Aerial Advertising Co v Batchelors Peas [1938] 2 All ER 788 .........................................
453
Aiken v Short (1856) 1 H & N 210, 156 ER 1180 .............................................................
496
Ailion v Spiekermann [1976] Ch 158, [1976] 1 All ER 497 .......................................
388
Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101 ......................
240
Al-Kishtaini v Shanshal [2001] 2 All ER Comm 601.........................................................
394
Alan (WJ) & Co v El Nasr [1972] 2 All ER 127 ..........................................................
119

[1976] 3 All ER 129 ............................................................................
170
Albert v Motor Insurers Bureau [1971] 2 All ER 1345 ......................................
140
Alderslade v Hendon Laundry [1945] KB 189, [1945] 1 All ER 244 .................................
238
Alexander v Rolls Royce Motor Cars Ltd [1996] RTR 95 ................................................
473

[1986] AC 785 ..........................................................................................
175
Allcard v Skinner (1887) 36 Ch D 145
351
Allen v Pink (1838) 4 M & W 140 .....................................................................................
202
Allen v Rescous (1676) 2 Lev 174 ...................................................................................
384
Amalgamated Investment & Property Co Ltd v John Walker & Sons
[1976] 3 All ER 509 .............................................................................
Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd
[1981] 2 WLR 554, [1982] QB 84, [1981] 3 All ER 577 .........................................
121
Table of Cases
Argy Trading Development Co Ltd v Lapid [1977] 1 WLR 444 ........................................
117
Ariel Advertising Co v Batchelors Peas [1938] 2 All ER 788 ...........................................
453
Armhouse Lee Ltd v Chappell (1996)
The Times
, 7 August ....................................
402
Armstrong v Jackson [1917] 2 KB 822 ....................................................................
282
Asfar v Blundell [1896] 1 QB 123 ....................................................................................
414
Ashington Piggeries v Christopher Hill [1972] AC 441 ....................................................
222
Ashmore v Corporation of Lloyd’s (No 2) [1992] 2 Lloyd’s Rep 620........................
213
Ashmore, Benson, Pease & Co Ltd v AV Dawson Ltd [1973] 2 All ER 856 .....................
392
Askey v Golden Wine Co Ltd [1948] 2 All ER 35, 92 Sol Jo 411, KBD ...........................
390
Associated Japanese Bank Ltd v Credit du Nord SA [1988] 3 All ER 902 ........
311
Astley v Reynolds (1731) 2 Stra 915........................................................................
335
Atkinson v Denby (1862) 7 H & N 934, 158 ER 749 ........................................................
396
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833,
[1989] 1 All ER 641 ....................................................................
9
Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH,
[1976] 1 Lloyd’s Rep 250 ............................................................
490
Attorney General v Blake (Jonathan Cape Ltd third party) [2001] 1 AC 268, [2000]
rming on other grounds
[1998] Ch 439, [1998]
[1997] Ch 84, [1996] 3 All ER 903,
Ch D .......................................................................................................
464
Attorney General v R [2003] UKPC 22, [2003] EMLR 24 ................................
334
Attorney General for Belize v Belize Telecom Ltd [2009] UKPC 10, [2009]
1 WLR 1988 .........................................................................................................
211
Atwood v Small (1838) 6 Cl & F 232 ................................................................................
283
Australian Steel and Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 202 .....................
284
Avery v Bowden (1855) 5 E & B 714
456
Avon Finance Co Ltd v Bridger [1985] 2 All ER 581 ........................................................
364
Avraamides v Colwill [2006] EWCA Civ 1533 ..................................................................
166
Awilco A/S v Fulvia SpA di Navigazione,
[1981]
1 All ER 652 .................................................................................................
448
Awwad v Geraghty & Co [2000] 1 All ER 608 ..................................................
384
B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419
343
BMTA v Salvadori [1949] Ch 556
184
BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925
426
BS & N Ltd v Micado Shipping Ltd (Malta) (No 2) [2001] 1 All ER Comm 240, CA .........
451
Baburin v Baburin [1991] 2 Qd R 240 .............................................................................
374
Backhouse v Backhouse [1978] 1 All ER 1158 ...............................................................
374
Bainbrigge v Browne (1881) 18 Ch D 188 .......................................................................
354
Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA 274, [2002]
1 All ER (Comm) 737 ....................................................................................................
133
Bairstow Eves London Central Limited v Smith [2004] EWHC 263 ................................
268
Baker v Jones [1954] 2 All ER 553 ..................................................................................
403
Baker v White (1690) 2 Vern 615, 23 ER 740 ..........................................................
401
Balfour v Balfour [1919] 2 KB 571 ...............................................
9
Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc 1994 SC 20 ..............
486
Balmoral Group Ltd v Borealis (UK) Ltd [2006] EWHC 2531 (Comm), [2006]
2 CLC 220 ..............................................................................................................
57
Bank Line v Arthur Capel Ltd [1919] AC 435 ..................................................................
416
Bank of Credit and Commerce International SA v Aboody [1990]
1 QB 923, [1992] 4 All ER 955 .............................................................
352
Table of Cases
Bank of Credit and Commerce International SA v Ali [2001] 1 All ER 961 ......................
205
Table of Cases
Brigden v American Express [2000] IRLR 94 ..................................................................
247

[1975] QB 929, [1974] 3 All ER 88 ................................................................
67
Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34, [1982] 1 All ER 293 ...................................
67
British Commonwealth Holdings plc v Quadrex Holdings Inc [1989]
QB 842, [1989] 3 All ER 492 ........................................................................................
443
British Crane and Hire Corporation Ltd v Ipswich Plant Hire Ltd [1975]
QB 303 ...........................................................................................................
209
British Motor Trade Association v Gilbert [1951] 2 All ER 641 ........................................
479
Table of Cases
Chandler v Webster [1904] 1 KB 493 ..............................................................
422
Chanter v Hopkins (1838) 3 M & W 252 ..........................................................................
241
Chapelton v Barry UDC [1940] 1 KB 532, [1940] 1 All ER 356 ........................
231
Chaplin v Hicks [1911] 2 KB 786 .....................................................................................
465
Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87, [1959] 2 All ER 701 .........
11
Charles Rickards Ltd v Oppenheim [1950] 1 KB 616, [1950] 1 All ER 420 .............
115
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009]
1 AC 1101 ....................................................................................................
204
Cheese v Thomas [1994] 1 All ER 35 ......................................................................
289
Chester Grosvenor Hotel v Alfred McAlpine Management Ltd (1991)
56 BLR 115 ..................................................................................................................
25
Table of Cases
Craven-Ellis v Canons Ltd [1936] 2 KB 403 ............................................................
499
Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 ..
357
Cremdean Properties Ltd v Nash (1977) 244 EG 547 .....................................................
299
Cresswell v Potter [1978] 1 WLR 255 ......................................................................
374
Crest Homes (South West) Ltd v Gloucestershire County Council (1999)
unreported, 22 June, CA
210
Cricklewood Property Investment Trust v Leighton’s Investment Trusts Ltd
[1945] AC 221, [1945] 1 All ER 252 ..............................................................................
421
Cullinane v British ’Rema’ Manufacturing Co Ltd [1954] 1 QB 292, [1953]
2 All ER 1257 .......................................................................................................
469
Cundy v Lindsay (1878) 3 App Cas 459 ..................................................
306
Currie v Misa (1875) LR 10 Ex 153 ....................................................................................
94
Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805 ...........................
231
Cutter v Powell (1785) 6 Term Rep 320, [1775–1802] All ER Rep 159 ............
436
Czarnikow v Roth Schmidt & Co [1922] 2 KB 478 ..........................................................
404
D and C Builders v Rees [1966] 2 QB 617, [1965] 3 All ER 837 ..........
119
D and F Estates Ltd v Church Commissioners for England [1989] AC 177 ....................
176
DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716.......................................................
172
Daily Mirror Newspapers Ltd v Exclusive News Agency (1937) 81 SJ 924
390
Dakin v Lee [1916] 1 KB 566 .....................................................................................
438
Darke v Strout [2003] EWCA Civ 176 ..............................................................................
143
Darlington Borough Council v Wiltshier Northern Ltd [1995]
3 All ER 895, [1995] 1 WLR 68 .............................................................
158
Daulia v Four Millbank Nominees Ltd [1978] 2 All ER 557 ............................................
72
Daventry District Council v Daventry & District Housing Ltd [2011]
EWCA Civ 1153, [2012] 1 WLR 1333, CA ....................................................................
328
Davies v Presbyterian Church of Wales [1986] 1 WLR 323 .............................................
150
Davis Contractors Ltd v Fareham UDC [1956] AC 696, [1956] 2 All ER 145...........
412
De La Bere v Pearson [1908] 1 KB 280 .............................................................................
99
De Mattos v Gibson (1858) 4 De G & J 276, 45 ER 108 ..............................................
182
De Meza v Apple [1975] 1 Lloyd’s Rep 498.....................................................................
491
Table of Cases
Dominion Corporate Trustees Ltd v Dominion Trust Ltd [2010] EWHC 1193 .................
448
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, [1969] 2 All ER 119 ...........
291
Drennan v Star Paving Company (1958) 51 Cal 2d 409, 333 P 2d 757 ......................
71
Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250 ........................................
162
Duffen v Fra Bo SpA [2000] 1 Lloyd’s Rep 180 ...............................................................
494
Dunbar Bank plc v Nadeem [1998] 3 All ER 876 .............................................................
371
Dunlop v Lambert (1839) 6 Cl & F 600, 7 ER 824
170
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd
[1915] AC 79 ........................................................................................................
493
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 ........
95
Dunnachie v Kingston-
3 All ER 1011 ...............................................................................................................
47
Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd [1968]
2 QB 839, [1968] 2 All ER 987 .............................................................................
120
Durham Tees Valley Airport Ltd v BMI Baby Ltd [2010] EWCA Civ 485, [2011]
1 All ER (Comm) 731, CA .............................................................................................
465
EE Caledonia Ltd v Orbit Valve plc [1994] 1 WLR 1515 ..........................................
237
East v Maurer [1991] 2 All ER 733 .............................................................
16
Eastwood v Magnox Electric [2004] UKHL 35, [2004] 3 All ER 991 ................................
472
EasyFind (NSW) Pty Ltd v Paterson (1987) 11 NWSLR 98 .............................................
317
Ecay v Godfrey (1947) 80 Lloyd’s LR 286 ...............................................................
190
Edgington v Fitzmaurice (1885) 29 Ch D 459 ..................................................
278
Edmonds v Lawson [2000] 2 WLR 1091 ...................................................................
99
Edwards v Chester
eld Royal Hospital NHS Foundation Trust;
Botham v Ministry of Defence [2011] UKSC 58, [2012] 2 All ER 278, SC ...................
472
Edwards v Skyways [1964] 1 WLR 349, [1964] 1 WLR 349,
108 Sol Jo 279, QBD ...........................................................................................
147
Edwards v SOGAT [1971] Ch 354 ...................................................................................
384
Edler v Auerbach [1950] 1 KB 359, HC ...........................................................................
381
Elder, Dempster & Co v Paterson, Zochonis & Co [1924] AC 523 ..................................
179
Electricity Supply Nominees v IAF Group [1993] 3 All ER 372 ........................................
246
Ellesmere v Wallace [1929] 2 Ch 1 ..................................................................................
163
Ellis v Barker (1871) 7 Ch App 104 ..................................................................................
354
Entores v Miles Far East Corp [1955] 2 QB 327, [1955] 2 All ER 493 .....................
26
Table of Cases
Table of Cases
Golden Strait Corporation v Nippon Yusen Kubishika Kaisa [2007]
UKHL 12, [2007] 3 All ER 1 ..........................................................................................
471
Goldsworth v Brickell [1987] 1 All ER 853 .......................................................................
357
Good v Cheeseman (1831) 2 B & Ad 328........................................................................
126
Goodwill v Pregnancy Advisory Service [1996] 1 WLR 1397 ..........................................
176
Gordon v Gordon (1816–21) 3 Swans 400, 36 ER 910 ...................................................
282
Gore v Van der Lann [1967] 2 QB 31, [1967] 1 All ER 360 ..............................................
179
Gorham v British Telecommunications plc [2000] 4 All ER 867 ......................................
197
Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000]
1 WLR 2333 .................................................................................................................
297
Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560
293
Granatino v Radmacher [2010] UKSC 42, [2010] 3 WLR 1367 ...............................
400
Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd [2003]
EWCA Civ 570, [2003] 2 Lloyd’s Rep 356
260
Gray v Barr [1971] 2 QB 554, [1971] 2 All ER 949 ...........................................................
390
Great Northern Railway Co v Witham (1873) LR 9 CP 16 .................................................
71
Great Peace Shipping Ltd v Tsavliris,
The Great Peace
[2002]
EWCA Civ 1407, [2002] 4 All ER 689 ...................................................
306
Grif
th v Brymer (1903) 19 TLR 434 ........................................................................
306
Grif
Table of Cases
Hayes v James and Charles Dodd [1990] 2 All ER 815 ..................................................
473
Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1, [1991] 1 All ER 545 .................
497
Hedley Byrne & Co v Heller & Partners [1964] AC 465, [1963]
2 All ER 575 ................................................................
176
Table of Cases
Investors Compensation Scheme Ltd v West Bromwich Building
484
Kendall (Henry) & Sons v Lillico (William) & Sons Ltd [1969] 2 AC 31 .....................
232
King’s North Trust v Bell [1986] 1 All ER 423 ...................................................................
363
Table of Cases
Lawrence v Fox 20 NY 268 (1859) ..................................................................................
160
Leaf v International Galleries [1950] 2 KB 86, [1950] 1 All ER 693 ..........................
288
Lee v GEC Plessey Telecommunications [1993] IRLR 383 .....................................
112
Lee v Showmen’s Guild of Great Britain [1952] 2 QB 329 ..............................................
403
Leeder v Stevens [2005] EWCA Civ 50, 149 SJLB 112...........................................
356
Lefkowitz v Great Minneapolis Surplus Stores (1957) 86 NW 2d 689
42
Legione v Hateley (1983) 152 CLR 406 ...........................................................................
132
Leighton v Michael [1996] ICR 1091 (EAT) ......................................................................
392

[1985] 2 All ER 796, [1985] 1 WLR 925 .......................................
34
Les Affréteurs Réunis SA v Leopold Walford (London) Ltd [1919] AC 801 .............
173
L’Estrange v Graucob [1934] 2 KB 394 ....................................................
10
Table of Cases

[1996] AC 650 ...........................................................................................
181
Mahmoud and Ispahani,
[1921] 2 KB 716 .................................................
383
Malik v Bank of Credit and Commerce International SA [1998]
...............................................................................205
Malins v Freeman (1837) 2 Keen 25 ........................................................................
327
Malpass,
[1985] Ch 42 .................................................................................................
85
Table of Cases
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd,
The Eurymedon
[1975] AC 154, [1974] 1 All ER 1015 ..............................
8
Newbigging v Adam (1886) 34 Ch D 582 ........................................................................
293
Newtons of Wembley v Williams [1965] 1 QB 560 ..........................................................
290
Table of Cases
Pars Technology Ltd v City Link Transport Holdings Ltd [1999]
EWCA Civ 1822, 13 July ................................................................................................
50
Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791,
[1978] 1 All ER 525 ..............................................................................................
485
Partridge v Crittenden [1968] 2 All ER 421 ............................................................
41
Patel v Ali [1984] Ch 383, [1984] 1 All ER 978 .................................................................
505
Payne v Cave (1789) 3 Term Rep 148 ...................................................................
47
Payzu Ltd v Saunders [1919] 2 KB 581
488
Pearce v Brooks (1866) LR Ex 213 ..........................................................................
401
Peart Stevenson Associates Ltd v Holland [2008] EWHC 1868......................................
300
Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd
[2006] 2 Lloyd’s Rep 511 .............................................................................................
283
Percy v Board of National Mission of the Church of Scotland [2005]
.............................................................................................150
.......
414
Pitchmastic plc v Birse Construction Ltd (2000)
The Times
, 21 June (QBD) ....................
50
Table of Cases
R v Karamjit Singh Dhillon [2007] Crim LR 760, (2000)
The Times
,
April .......................
38
R v Olugboja [1981] 3 All ER 443 ....................................................................................
338
R & B Customs Brokers v UDT [1988] 1 All ER 847 .......................................
220
R Leslie Ltd v Reliable Advertising Agency Ltd [1915] 1 KB 652 ....................................
389
RTS Flexible Systems Ltd v Molkerei Alois Muüller GmbH & Company
KG (UK Production) [2010] SC 14, [2010] 1 WLR 753 .............................
55
Radcliffe v Price (1902) 18 TLR 466 ................................................................................
354
Radford v De Froberville [1978] 1 All ER 33 ....................................................................
466
Raf
es v Wichelhaus (1864) 2 H & C 906, 159 ER 375 .....................................
306
Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 ............................
206
Ramsgate Victoria Hotel Co v Monte
ore (1866) LR 1 Ex 109
76
Rann v Hughes (1778) 7 Term Rep 350n, 4 Bro PC 27 .....................................................
93
Reading Festival Ltd v West Yorkshire Police Authority [2006] EWCA
Civ 524, [2006] 1 WLR 2005 ........................................................................................
106
Reardon Smith Line Ltd v Hansen-Tangen [1976] 2 Lloyd’s Rep 621,
[1976] 1 WLR 989, [1976] 3 All ER 570 ................................................................
203
Redgrave v Hurd (1881) 20 Ch D 1 .........................................................................
278
Reese Silver Mining Co v Smith (1869) LR 4 HL 64 ........................................................
290
Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 361 .................................
255
Reid-Newfoundland Co v Anglo-American Telegraph Co Ltd [1912] AC
.................
479
Rice (trading as Garden Guardian) v Great Yarmouth Borough Council
()The Times
, 26 July ........................................................
447
Richardson v Mellish (1824) 2 Bing 229 ..........................................................................
381
Riverlate Properties Ltd v Paul [1975] Ch 133, [1974] 2 All ER 656 ................................
327
Roberts v Leicestershire County Council [1961] Ch 555, [1961]
2 All ER 545 .................................................................................................................
3
Robertson v Jackson (1845) 2 CB 412
201
Robinson v Harman (1848) 1 Exch 850 ...........................................................
461
Robinson v HM Customs and Excise (2000)
The Times
, 28 April ...................................
149
Roger v Comptoir d’Escompte de Paris (1869) LR 2 CP 393 .........................................
102
Rolls-Royce Power Engineering plc v Ricardo Consulting Engineers Ltd
[2003] EWHC 2871 (TCC) ............................................................................................
172
Rosario v Nadell Patisserie Ltd [2010] EWHC 1886 (QB), [2010] All ER (D)
288 (Jul) .....................................................................................................................
50
Roscorla v Thomas (1842) 3 QB 234.................................................................
95
Rose (Frederick E) (London) Ltd v William H Pim Jnr & Co Ltd [1953]
2 QB 450, [1953] 2 All ER 739 .............................................................................
315
Rose and Frank Co v JR Crompton and Bros Ltd [1923] 2 KB 261,
[1925] AC 445 ..................................................................................................
9
Ross v Caunters [1980] Ch 287
176
Routledge v Grant (1828) 4 Bing 653, 130 ER 920 ...........................................................
76
Routledge v McKay [1954] 1 All ER 855, [1954] 1 WLR 615 ...........................
191
Rowland v Divall [1923] 2 KB 500 ...........................................................................
219
Table of Cases
Sadler v Reynolds [2005] EWHC 309 ..............................................................................
143
Salisbury (Marquess) v Gilmore [1942] 2 KB 38 ..............................................................
118
Sanders v Ernest A Neale Ltd [1974] 3 All ER 327, [1974] ICR 565, NIRC ...............
17
Saunders v Edwards [1987] 2 All ER 651 ................................................................
385
Table of Cases
Snelling v Snelling [1973] 1 QB 87, [1972] 1 All ER 79 ....................................................
179
Snookes v Jani-King (GB) Ltd [2006] ILPr 18 ..................................................................
258
Solle v Butcher [1950] 1 KB 671, [1949] 2 All ER 1107 .......................................
324
Table of Cases
Tekdata Interconnections Ltd v Amphenol [2009] EWCA Civ 1209,
[2010] 2 All ER (Comm) 302 .....................................................................................
56
Templiss Properties Ltd v Hyams [1999] EGCS 60 .........................................................
327
Tenant Radiant Heat Ltd v Warrington Development Corporation
[1988] EGLR 41 ............................................................................................................
491
Table of Cases
Vitol SA v Norelf Ltd,
[1996] AC 800, [1996] 3 All ER 193,
[1996] QC 108, CA,
[1994] 4 All ER 109,
59
W v Essex CC [1999] Fam 90, [1998] 3 All ER 111 ...........................................................
12
WH Smith & Sons v Clinton (1909) 99 LT 840 .................................................................
390
WWF-World Wide Fund for Nature v World Wrestling Federation
Entertainment Inc [2007] EWCA Civ 286, [2008] 1 All ER 74 .......................................
481
Wales v Wadham [1977] 1 WLR 199 ...............................................................................
281
Walford v Miles [1992] 2 AC 128, [1992] 1 All ER 453, [1992]
1 All ER 452 ...............................................................................................
24
Walker v Boyle [1982] 1 WLR 495 ...................................................................................
298
Wallis, Son and Wells v Pratt [1910] 2 KB 1003 ..............................................................
237
Walsh v Lonsdale (1982) 21 Ch D 9 ..................................................................................
92
Walters v Morgan (1861) 3 De GF & J 718, 45 ER 1056
505
Waltons Stores (Interstate) Ltd v Maher (1988)
164 CLR 387, 76 ALR 513 ...........................................................................
120
Ward v Byham [1956] 2 All ER 318
98
Warlow v Harrison (1859) 1 E & E 309, 29 LJ QB 14 ...................................................
47
Warner Bros v Nelson [1937] 1 KB 209, [1936] 3 All ER 160 ..........................................
506
Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA
.........................................................253
Watkin v Watson-Smith (1986)
The Times
, 3 July ...........................................................
374
Watts v Morrow [1991] 4 All ER 937 ................................................
466
Watts v Spence [1976] Ch 165, [1975] 2 All ER 528 .......................................................
295
Welby v Drake (1825) 1 C & P 557 ..................................................................................
126
Wells (Merstham) Ltd v Buckland Sand and Silica Co Ltd [1965]
2 QB 170, [1964] 1 All ER 41 .......................................................................................
174
Wenckheim v Arndt (1861–1902) 1 JR 73 (New Zealand) .................................................
81
West Sussex Properties Ltd v Chichester DC [2000] NPC 74 ........................................
325
Wheeler v Quality Deep Trading Ltd [2005] ICR 265 .......................................................
388
Table of Cases
Wiseman v Virgin Atlantic Airways Ltd [2006] EWHC 1566, 103 LSG 29 ...............
476
With v O’Flanagan [1936] Ch 575
278
Wolverhampton Corporation v Emmons [1901] 1 KB 515 ..............................................
503
Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd
[1980] 1 All ER 571, [1980] 1 WLR 277 ............................................
162
Woolcutt v Sun Alliance and London Insurance Ltd [1978] 1 All ER 1253 ......................
282
Wormell v RHM Agriculture (East) Ltd [1987] 3 All ER 75
222
Wright v Carter [1903] 1 Ch 27 ........................................................................................
354
Wroth v Tyler [1974] Ch 30, [1973] 1 All ER 897 ..............................................................
488
Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974]
2 All ER 321 .........................................................................................
478
Yorkshire Bank plc v Tinsley [2004] 3 All ER 463 ............................................................
372
Young v Thames Properties Ltd [1999] EWCA Civ 629 ...................................................
439

[1991] 1 Lloyd’s Rep 493 ..................................................................
133
Zockoll Group Ltd v Mercury Communications Ltd [1999] EMLR 385 ...........................
253
Table of Legislation
Statutes
Access to Justice Act 1999 ...................
384
Apportionment Act 1870—
s 2 ......................................................
437
s 5 ......................................................
437
Arbitration Act 1996 ..............................
403
s 69 ....................................................
404
s 69(3) ................................................
404
s 69(3)(a)–(d) .......................................
404
Bills of Exchange Act 1882—
s 27 ....................................................
102
Carriage of Goods by Sea Act 1971 .......
23
Carriage of Goods by Sea Act 1992 ....
170
Chancery Amendment Act 1858
(Lord Cairns’ Act)—
s 2 ......................................................
478
Children Act 1989 ....................................
12
Companies Act 1948 ...............................
92
Companies Act 1985 ...............................
92
s 14 ....................................................
168
s 350 ....................................................
92
Companies Act 1989 ...............................
92
s 1 ........................................................
92
s 108 ..........................................120,
Companies Act 2006—
s 44 ......................................................
92
s 44(1) ..................................................
92
s 44(2) ..................................................
92
s 45 ......................................................
92
s 46 ......................................................
92
s 46(2) ..................................................
92
Consumer Credit Act
32
267
s 44 ....................................................
277
s 60 ....................................................
277
s 61(1) ................................................
277
s 65 ....................................................
277
s 67 ........................................
78
s 129 ..................................................
267
s 136 ..................................................
267
s 167(2) ..............................................
277
Consumer Credit Act 2006—
ss 140A–140C
375
Consumer Protection Act 1987 .............
471
Contracts (Rights of Third Parties)
31
s 1 ..........................................
164
s 1(1) ..................................................
164
s 1(1)(a) ..............................................
164
s 1(1)(b) ..............................
164
s 1(2) ..................................
164
s 1(3) ..................................................
166
s 1(4) ..................................................
166
s 1(5) ..................................................
166
s 1(6) ..................................................
166
s 2 ..............................................
166
s 2(1) ..................................................
166
s 2(2) ..................................................
166
s 2(3) ..................................................
166
s 3 ......................................................
167
s 3(2) ..................................................
167
s 3(3) ..................................................
167
s 3(4) ..................................................
167
s 3(5) ..................................................
167
s 3(6) ..................................................
167
s 4 ......................................................
168
s 5 ......................................................
168
s 6 ......................................................
168
s 6(1) ..................................................
168
s 6(2) ..................................................
168
s 6(3) ..................................................
168
s 6(6) ..................................................
168
s 6(8) ..................................................
168
s 7(1) ..................................................
169
s 7(2) ..................................................
167
s 10(2) ................................................
164
s 10(3) ................................................
164
Table of Legislation
XLVII
Occupiers’ Liability Act 1984 ................
247
Offences Against the Person Act 1861—
s 18 ....................................................
391
Of
Table of Legislation
XLVIII
Third Parties (Rights Against
Insurers) Act 1930 ........................
178
Third Parties (Rights Against
Insurers) Act 2010 ........................
178
Timeshare Act 1992—
s 5 ................................................
79
s 6 ................................................
79
Trade Descriptions Act 1968—
s 11 ......................................................
40
Trade Unions and Labour Relations
s 179 ..........................................
141
Unfair Contract Terms Act 1977 ...
4
s 1(1) ..................................................
249
s 1(3) ..................................................
247
s 1(3)(b) ..............................................
247
ss 2–7
247
ss 2–4
246
s 2 .........................................
238
s 2(1) ..........................
247
s 2(2) ..................................
167
s 3 ...........................
247
s 3(1) ..........................................
249
s 3(2) ..................................................
250
s 3(2)(a) ......................................
250
s 3(2)(b) ..............................
250
s 3(2)(b)(i)
250
s 3(2)(b)(ii) ...................................
250
s 4 ......................................
247
s 4(1) ..................................................
262
s 4(2) ..................................................
262
s 4(2)(a) ..............................................
262
s 4(2)(b) ..............................................
262
ss 5–7
248
s 5 ......................................................
262
s 5(1) ..................................................
262
s 5(1)(a) ..............................................
262
s 5(1)(b) ..............................................
262
s 5(2) ..................................................
262
s 5(2)(a) ..............................................
262
s 5(2)(b) ..............................................
262
s 5(3) ..........................................
262
s 6 .................................
9
s 6(1) ..................................................
263
s 6(4) ..................................................
263
s 7 .....................................
247
s 7(2) ..................................................
264
s 7(3) ..................................................
264
s 7(3A) ................................................
263
s 7(4) ..................................................
263
s 8 ..............................................
264
s 9 ......................................................
243
s 11 ...................................
249
s 11(1) ........................................
253
s 11(2) ................................................
255
s 11(4) ................................................
255
s 11(5) ................................................
255
s 12 ....................................
250
s 12(1A) ..............................................
251
s 12(3) ................................................
251
s 13 ....................................
248
s 13(1) ................................................
248
s 14 ....................................................
247
Sch 1 ..........................................
246
Sch 1, para 2 .....................................
247
Sch 2 ...................................
19
Sch 2, para 1 .....................................
246
Unsolicited Goods and
Services Act 1971 ..........................
59
Secondary Legislation
Cancellation of Contracts Made in a
Consumer’s Home or Place
Table of Legislation
Consumer Credit (Amendment)
Regulations 2010, SI 2010/1969..
277
Consumer Protection (Distance
SI 2000/2334 .............
23
reg 3(1) .................................................
79
reg 5 .....................................................
79
reg 5(1) .................................................
79
reg 6 .....................................................
79
reg 10 ...................................................
79
reg 11 ...................................................
79
reg 12 ...................................................
79
reg 24 ...................................................
59
reg 24(1)(b) ...........................................
59
reg 24(4) ...............................................
59
Sch 1 ....................................................
79
Sch 2 ....................................................
79
Consumer Protection from Unfair
Trading Regulations 2008,
SI 2008/1277 ...................
40
reg 5 .....................................................
40
reg 5(2)(a) .............................................
40
reg 5(4) .................................................
40
Control of Gold, Securities,
Payments and Credits
(Republic of Iraq) Directions
1990, SI 1990/1616 .....................
394
Defence of the Realm Regulations ........
385
Electronic Commerce (EC Directive)
SI 2002/2013 .........
24
reg 10 ...................................................
80
reg 11 ...................................................
69
reg 11(1)(a) ...........................................
69
reg 11(1)(b) .....................................
69
reg 11(2) ...............................................
79
reg 11(2)(a), (b) .....................................
69
reg 11(3) .........................................
69
reg 11(4) ...............................................
79
reg 12 .............................................
69
reg 12(2) ...............................................
79
reg 12(3) ...............................................
79
reg 12(4) ...............................................
79
reg 13 ...................................................
69
reg 15 ...................................................
69
Employment Equality (Religion or
SI 2003/1660 ...............................
405
Table of Legislation
XLVI
Criminal Justice Act 1993—
s 52 ....................................................
276
Criminal Justice and Policy Act 2001—
s 46 ....................................................
401
Criminal Law Act 1977 ..................
382
s 1 ......................................................
383
s 5 ......................................................
383
Electricity Act 1989 .................................
12
Employment Rights Act 1996—
s 1 ........................................................
32
s 123(1) ..............................................
472
Enterprise Act 2002 ...............................
269
Equal Pay Act 1970 ...............................
218
s 3 ................................................
24
Equality Act 2006—
Pt 2 ....................................................
405
Equality Act 2010 ............................
40
Family Law Act 1996 .............................
400
Financial Services Act 1986—
s 132 ..................................................
397
Table of International
Conventions
European Convention for the Protection of
Freedoms 1950 ............
394
Art 2 ...................................................
404
Art 6 .............................................
32
Art 8 ...........................................
404
Art 9 ...................................................
405
Art 14 .................................................
405
European Convention for the
Protection of Human Rights
and Fundamental Freedoms
1950, Protocol No 1—
Art 1 ...........................................
394
European Convention for the
Protection of Human Rights
and Fundamental Freedoms
1950, Protocol No 12 ...................
405

Directives
Directive 86/653/EEC on commercial
23
Directive 87/102/EC on consumer
credit ............................................
277
Directive 93/13/EEC on unfair
terms in consumer contracts .
23
Directive 97/7/EC on distance
23
79
Directive 99/44/EC on certain
221
Directive 2000/31/EC on
electronic commerce .........
24
Art 11 .............................................
68
Art 11(3) ...............................................
69
Directive 2004/18/EC on public
sector procurement .......................
46
Legislation
BGB (Germany)—
Art 242 ...............................................
275
Civil Code (France)—
Art 1134 .............................................
275
Hague-Visby Rules on International
(Brussels 1924) ..............................
23
Restatement 1932 (First
restatement) (USA) .......................
131
Restatement (Second
restatement) (USA) ...........
60
s 45 ......................................................
71
s 69 ......................................................
60
s 75 ....................................................
131
s 90 ................................................
132
s 208 ..................................................
375
Uniform Commercial Code (USA)
78
s 1–203 ..............................................
275
s 2–207 ................................................
52
s 2–302 ..............................................
374
United Nations Convention on
Contracts for the International
(Vienna Convention) .......................
23
Art 19 ...................................................
52

1
Introduction

Contents
1.1
1.2
Introduction
1.3
5
1.4
6
1.5
8
1.6
The Modern Law of Contract
■
What is meant by the ‘classical’ law of contract? This refers to a body of rules,
■
What is the ‘subject matter’ of contract law? Is it simply a matter of enforcing prom-
■
■
How is ‘contract’ distinguished from other areas of law involving civil obligations,
such as tort and restitution? The ‘voluntary exchange’ is one of the distinguishing
■
How far is the law of contract governed by general principles, as opposed to speci
land, credit? It is argued that there is still room for general principles.
■
What techniques for the analysis of contract can be adopted? Consideration is given

doctrinal analysis (looking simply at cases and statutes);


socio-
economic analysis (drawing on other disciplines to help explain the law);
and


■
International in
uences on English contract law, including developments towards a
European contract law.

1.2
and principles are derived from case law, and the application of the doctrine of precedent.
There are, however, increasing areas that are affected by statutory provisions, and in
particular regulations in the area of consumer contracts that derive from law emanating
from the European Union.
The rules forming the English law of contract are, subject to the intervention by statute,
1.2.1
FORMATION
If agreements are being analysed, the courts need to have some rules for establishing
when an agreement has been reached. English law does this not by using formalities in
Introduction
words and actions, viewed objectively, suggest that they had reached an agreement. In
particular, courts will normally look for an offer by one party that has been unequivocally
accepted by the other party.
Problems in this area can arise when the parties are contracting at a distance, by post
of mind by the time its message is received, and there will be dif
cult questions relating to
when exactly a communication takes effect.
The issues relating to formation are dealt with in
1.2.2
Just because the parties have made an agreement, this does not necessarily mean that it
1.2.3
CONTENTS OF THE CONTRACT
Once an agreement has been made, disputes may arise as to what exactly its terms were
intended to be. Even if the agreement is in writing there may be arguments that it is not
The Modern Law of Contract
may be entirely reasonable in many cases, but the courts will look at them very
1.2.4
Introduction
involve illegality, or are otherwise contrary to public policy. Dif
culties can arise where a
illegally – for example, a contract to buy alcohol, where the seller’s licence has expired. The
1.2.5
FRUSTRATION
1.2.6
PERFORMANCE, BREACH AND REMEDIES
The Modern Law of Contract
subject of regular academic discussion over the last 50 years.
1
Moreover, even texts aimed
at practitioners are unable to ignore it.
titioner’s text, has an introductory chapter dealing with the ‘nature of contract’. Its more
recently published rival, Furmston’s
,
2
goes even further, including a
rst chapter on ‘General Considerations’ (written by Professor Roger Brownsword).
3

regard as still the dominant approach, certainly within the decisions of the courts on
1.4
THE CLASSICAL LAW OF CONTRACT
It is generally accepted in modern writings on the English law of contract that during the
1
See, for example, Macaulay, 1963; Gilmore, 1974; Simpson, 1975a; Macneil, 1978; Atiyah, 1979; Wightman,
1996; Brownsword, 2000; and Collins, 2003.
2
3
Contract Law: Themes for the Twenty-
rst Century
London: Butterworths, cited here as ‘Brownsword, 2000’. Unfortunately, the pagination is not the same in the
two versions of the text. The references here are therefore to paragraph numbers, rather than to pages. Lord
Steyn in the Preface to Furmston, 1999, commented that Brownsword’s chapter ‘examines the grand themes
of our contract law in an impressive style. Nothing quite like it has ever been published in English law.’
4
Wightman, 1996, p 49. See also Brownsword, 2000, para 2.2.
of Wightman’s book, entitled ‘The
Invention of Classical Contract’, provides a useful summary of the development of the classical theory and
5
rst edition appeared in 1790, and Anson, whose
rst published in 1879.
6
See, in particular, Gilmore, 1974; Horwitz, 1974; Atiyah, 1979. Note that Horwitz’s view of the historical devel-
opment of contract was strongly challenged by Simpson, 1979.
7
In other words, each party will seek to organise and operate the contract in a way that produces the maximum
t to that party.
Introduction
‘Freedom of contract’ in this context has two main aspects.
8
rst is that it is the
8
Brownsword, 2000, para 2.5. Brownsword also identi
es ‘sanctity of contract’ – the fact that ‘parties are to
be held to the agreements that they have freely made’: ibid, para 2.8. This seems to be a consequence of
freedom of contract, rather than an element in it, however. Such a principle might also apply even in the
absence of party freedom and term freedom.
9
10
This does not, however, take account of the role of the contract under seal, or deed, where no mutuality is
required for a promise to be binding. See further on this,
11
A particularly clear example of this is the Court of Appeal’s decision in
formulation of the doctrine of consideration, while in fact the decision departed signi cantly from it: see
further,
The Modern Law of Contract
reconcile the fact that it is still rooted in classical theory, at least in the way in which its
concepts are expressed, while at the same time developing away from it. This is the reason
why this book has adopted a format and chapter division which is largely traditional. It is
substance of many of their decisions, however, and virtually all the interventions of
Parliament, are taking the law in new directions. The form may be ‘classical’, but the
content is ‘modern’, and this tension must be kept in mind in considering all that follows.
With this background to the development of the English law of contract in mind, we can
now turn to the question of what exactly is meant by the ‘law of contract’. What is its
scope, and what are its boundaries?
1.5
THE SUBJECT MATTER OF CONTRACT LAW
What is the law of contract about? This is a question to which, perhaps surprisingly, there
is no clear, universally accepted answer. There are, however, several candidates for the
basis of the legal enforceability of contractual obligations. They can be viewed, for example,
(a)
enforcing promises; or
(b)
12
Burrows, 1998, p 3: see also Fried, 1981.
13
See Lord Wilberforce in
New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd, The Eurymedon
Introduction
supply goods which are satisfactory is imposed by statute and cannot be avoided in a
14
it is not necessary to use the language of ‘promises’ to explain this
Even in commercial transactions, as the case in which Lord Wilberforce made the state-
ment quoted above demonstrated, there are also some situations where contractual rights
and liabilities are assumed to exist, but it is dif
cult to see that there has been any making
of promises. The parties in the case that Lord Wilberforce was discussing assumed that
stevedores unloading goods from a ship would have the bene
t of an exemption clause
14
See Sale of Goods Act 1979, ss 13 and 14, and the Unfair Contract Terms Act 1977, s 6, discussed in
Chapter 6
15
16
17
Brownsword, 2000, para 1.11.
18
Atlas Express Ltd v
( Chapter 10 , 10.4.2). The main exception to this principle is to be found in the concept of promissory estoppel:
Trust Ltd v High Trees House Ltd
[1947] KB 130; [1956] 1 All ER 256. Even here it should be noted that the
gratuitous promise became unenforceable once the conditions that gave rise to its being made had disap-
peared (that is, the Second World War had come to an end). See further,
19
The Modern Law of Contract
effect to what they see as being the intentions of the parties. This area, as an element in
indication, however, that a ‘promise’ is not in itself suf
cient as a basis for identifying
23
LÕEstrange v F Graucob Ltd
[1934] 2 KB 394 – party held to an unread term in a signed
contract. See, further,
24
25
Collins, 2003, p 29. These themes are, in Collins’ view, well illustrated by the case of
[1974] 3 All ER 616; [1974] 1 WLR 1308.
26
Chapter 3
27
That is, those not created by deed.
Introduction
car, and her nephew is providing nothing of real value in exchange. Nevertheless, the
courts would treat this as a binding contract (subject to their being satis
ed that there was
an intention to create legal relations). The application of this approach in a more commer-
,
28
where
the provision of the wrappers from bars of chocolate was held to be part of the considera-
tion for the supply of a gramophone record. This was the case even though the wrappers
were worthless and were thrown away by the company when received. The transaction
had the trappings of exchange, but was in essence a ‘free gift’. Nevertheless, it was treated
The reason for this relates to the fact that the courts are generally keen to adopt an
approach that complies with the intention of the parties. If the parties, knowing the English
effect a gift, they have probably done so in order to make their agreement legally enforce-
able, without going to the trouble of using a deed. The courts should therefore be prepared
to give effect to that intention and treat the transaction as a binding contract.
For Thought

t was there to NestlŽ
cient to constitute consideration?

We can, therefore, if we exclude contracts made by deed, argue for ‘exchange’ as being
at the heart of contract. But here, similar to the way in which with the notion of ‘promise’
we needed to include implied, imputed and constructed promises, we will need to
include ‘sham’ exchanges in order to make the approach work. And if we do that, we
may well feel that we have still not really got very near to the essence of what makes a
nd a straightforward answer to the
question of what contract ‘is’. As Brownsword points out, 
nding an ‘essential de
cient’ elements) is more dif
cult than approaching
it as a ‘. . . cluster concept (in which several elements are identi
ed with the usage, but
28
– Chapter 3 , 3.7.1. 29
Brownsword, 2000, para 1.1.
30
Though this is now largely not a matter of choice, but the result of the terms automatically implied by the Sale
The Modern Law of Contract
the price charged. In more complex contracts there may be many more risks, which the
1.5.1
VOLUNTARY TRANSACTIONS
The approach of this book is, therefore, as indicated in the previous section, that the
subject matter of the law of contract comprises transactions under which people, more or
less voluntarily, assume obligations towards each other,
32
property (including money) or the provision of services. The transactions are only ‘more or
choice in this sense, for example, as regards a decision to buy a new CD player, there is

34
in relation to a fostering agreement that was closely regulated by regula-
tions made under the Children Act 1989. As Stuart-Smith LJ in the Court of Appeal
35

A contract is essentially an agreement that is freely entered into on terms that are
freely negotiated. If there is a statutory obligation to enter into a form of agreement
the terms of which are laid down, at any rate in their most important respects, there

We may therefore use the de
nition at the beginning of this paragraph, in terms of
voluntary transactions, as a broad indication of the situations with which we are concerned.
31
32
Introduction
1.6
36
The most accessible route into Macneil’s writings is through the collection of extracts from his articles edited
by Campbell and published in 2001. This is cited in this book as Campbell, 2001. It should be noted, however,
that the extracts omit most of Macneil’s footnotes, so that for a full appreciation of his work
reference should be made to the original texts (see the comments in the Preface to Campbell, 2001).
37
38
The Modern Law of Contract
41

culty with dealing with contractual modi
cation leads to a further important
insight from Macneil’s work concerning the limitations of classical theory. Macneil referred
to this as the problem of ‘presentiation’.
42
To presentiate is, according to the
Dictionary
, to ‘make or render present in place or time, to cause to be perceived or realised
as present’.
43
In terms of the law of contract, Macneil used this to refer to the process
41
An obvious example of this process is the effect of the development of the doctrine of promissory estoppel
Introduction
1.7
CONTRACT, TORT AND RESTITUTION
It is generally recognised that there are three main strands to English law relating to civil
liability – contract, tort and restitution. To what extent are these distinct, and is there any
Figure 1.1

49
In discussions of the law of obligations it is not uncommon to use the term ‘tort’ to mean, in effect, the tort
of negligence. It should not be forgotten, however, that tort encompasses a wider area than that, including
assault, nuisance, defamation and the interference with others’ contractual rights.
50
For a further example of dual liability in tort and contract, see the area of negligent misstatements, dealt with
The Modern Law of Contract
The third element in the law of obligations – restitution – has been recognised much
more recently as a separate head.
51
The aim of the law of restitution is to prevent ‘unjust
enrichment’. Thus, where a person has been paid money as a result of a mistake, the law
of restitution provides the means by which it may be recovered. There is no need for the
the person who has been unjustly enriched to fall below an accepted standard, as in
tort. Restitution has links with contract, however, in that it is not infrequently used in
situations where the parties have been attempting to make a contract, but this has for
some reason failed.
ts, can be
recovered). In tort, on the other hand, the normal measure is to put the claimant into the
position he or she would have been in had the tort not occurred. This will generally be
backward-looking, compensating for loss and damage caused, but not taking into account
52
51
52
East v Maurer
[1991] 2 All ER 733 for an example of a case where the tort measure took account of
a certain type of lost pro
t. The case is discussed in
53
Generally referred to in this context as the ‘reliance’ interest.
Introduction
The consequences of this can be seen by looking at its effect on the way in which the
novice law student learns about the law of contract. This in turn will affect the practitioner’s
ment of contractual doctrine as developed by the courts. The reality is that the contracts
falling within ‘specialist’ areas are often treated for didactic purposes as being best dealt
with separately from the general law. The LLB course, therefore, will typically have a
Contract Law course, but also separate courses on Employment Law, Land Law, Consumer
54
55
The Modern Law of Contract
on which particular types of contract need to have special provisions, this should be a
situation of last resort. In general, the development of principles in one area should be
seen as enlightening and informing their application in other areas, so that there is a
the courts have seen an increasing need to protect the consumer against unfair and unrea-
sonable terms in contracts drawn up by businesses. The consumer suffers from ignorance
(not understanding the effect of the terms being put forward) and lack of bargaining power
(there may be no real choice to contracting on the terms put forward). It was for this reason
that in the exemption clause area the courts developed strict rules of incorporation and
construction, and the doctrine of ‘fundamental breach’.
59
by parliamentary intervention in the form of the Unfair Contract Terms Act 1977, and
European controls through the Unfair Terms in Consumer Contracts Regulations of 1994
60
The governing principle here is that the consumer is the ‘weaker party’ and
therefore needs protection. But is this identi
cation of the consumer for protection an
indication that there are two distinct types of contract – the consumer contract and the
business contract – or is it simply a question of degree? There may well be, and often are,
59
60
61
– Chapter 10 , 10.4.2. 62
As suggested by Lord Scarman in
Pao On v Lau Yiu Long
– Chapter 10
63
Introduction
attempt to exclude liability is ‘unreasonable’.
64
64
That is, it does not satisfy the ‘requirement of reasonableness’ in s 11.
65
that it may be used more generally –
Overseas Medical Supplies Ltd v Orient Transport Services Ltd
Lloyd’s Rep 273 (
For Thought

What reasons might there be for arguing that the courts should not take account of
1.9
DIFFERENT APPROACHES TO ANALYSING CONTRACT
The approach in this book is, for the most part, to analyse the law of contract within its own
terms. In other words, the focus will be on analysing the relevant cases and statutes,
examining how contractual principles have developed through them, and critically
Figure 1.2

The Modern Law of Contract
appraising the end result. This does not mean that issues of social and political context, or
legal history, should be ignored. Consideration of such matters is often essential in making
any full appraisal of the relevant legal rules. The initial focus, however, is on the law as it
1.9.1
ECONOMIC ANALYSIS
Other approaches are, of course, possible. Since contract is intimately linked with the
commercial world, it is not surprising that attempts have been made to analyse it in terms
rules of contract can have a broader economic in
uence. To take a simple example, as
regards consumer contracts, it may be thought desirable that producers of goods should
be strictly liable for the quality of what they sell. If they are to be liable, however, they may
need either to introduce strict quality control procedures, or to take out insurance. The
costs of either of these two measures will almost certainly be added to the price of the
goods. In economic terms, therefore, the cost of greater consumer protection is higher
conclusion that standard form contracts are more economically ef
cient than those that
are individually negotiated) and ‘adjudication costs’ (which may suggest that it is more
cient to have 
xed rules of law, rather than leave it to judges to resolve
disputes ‘on their merits’). To take an example from the law on exclusion clauses,
66
decision of the House of Lords in the case of
Photo Production Ltd v Securicor Transport
,
67
upholding a very widely based clause excluding one of the parties from virtually all
liability for breach of contract, might be analysed in economic terms as follows. First, it
66
67
68
See, in particular, Kronman and Posner, 1979; Posner, 1992.
69
Kronman and Posner, 1979, p 1.
70
Ibid. In this simple example, Kronman and Posner speci
cally exclude consideration of any adverse effects
on third parties. If such effects were to be greater than the increase brought about by A and B’s exchange,
Introduction
of strong challenges,
71
but the important point here is to note the
conclusion. There is no doubt that analysing the economic effects of contract law is a valid
1.9.2
SOCIO-POLITICAL ANALYSIS
A further way of looking at the law of contract is from a socio-
we all have some political assumptions in the background, even if we are looking at
contract cases purely within their own terms. It is, for example, impossible to debate the
merits of numerous contract principles without some notion of the value or otherwise of
the idea of ‘freedom of contract’, which is, of course, a political concept. Some writers feel,
however, that this political/ideological background, be it capitalist, Marxist or whatever,
rst edition of
,
72

es the purpose of the law of contract as the channelling and regula-
71
See, for example, Leff, 1974; Atiyah, 1986, Ch. 7. Macneil argues that adherence to neo-
The Modern Law of Contract
approach, at least as far as some members of the House of Lords were concerned, in that
they felt bound to follow what was regarded as an established rule that part-
debt could never discharge the debtor’s liability for the balance, even if the creditor had
promised to treat it as so doing. ‘Consumer-
where a court recognises that individuals may be in a weak position as regards dealings
with large organisations, and that the rules of contract therefore need to be developed and
applied so as to protect them. Examples of this type of approach would include
,
78
in which an advertiser was bound by a promise made to
consumers who had relied on the advert; or the pre-1977 exclusion clause cases,
79
where
the courts devised rules to prevent large organisations from imposing wide clauses
exempting them from liability to people who bought their products and services.
The third approach identi
1.9.3
EMPIRICAL RESEARCH
Finally, contract may be approached from the bottom rather than the top. In other words,
oped, the focus could be on how contract law operates in people’s day-
1.9.4
WHICH APPROACH?
As has been indicated above, the approach taken here is primarily based on looking at
legal materials within their own terms. At appropriate points throughout the book, however,
aspects of one or more of the alternative approaches outlined above will be referred to, in
order to produce a fuller understanding of the way in which the law has developed, or is
likely to develop in the future.

1.10
INTERNATIONAL INFLUENCES
cant international impact. The contract law of North America and much of the
Commonwealth still derives many of its basic principles from the ‘classical’ English law of
78
– Chapter 2 , 2.7.8. 79
80
See, in relation to the United States, the seminal work of Macaulay, 1963; and, in relation to this country,
Beale and Dugdale, 1975, Lewis, 1982 and Yates, 1982, pp 16–33.
Introduction
81
They were enacted into English law by the Carriage of Goods by Sea Act 1971.
82
That is, the United Nations Convention on Contracts for the International Sale of Goods 1980.
83
icting views among senior English judges on the merits of mandatory attempts at uni
cation in the
The Modern Law of Contract
directive on electronic contracts
92
has been implemented by the Electronic Commerce (EC
Directive) Regulations 2002.
93
There have also been signi
cant effects on employment
contracts, particularly in relation to sex discrimination.
94

To some extent, for example, in the protection of consumers, the European approach
merely re
ects concerns that exist independently in English law. This is illustrated by the
For Thought

Is a concept of Ôgood faithÕ likely to produce more or less uncertainty in the law? Could
this be a reason why the courts oppose its use, particularly in relation to business to

Despite this judicial hostility, the concept of ‘good faith’ does now exist in some parts of
English law.
Both the Commercial Agents (Council Directive) Regulations 1993
100
Terms in Consumer Contracts Regulations 1999,
101
following the wording of the directives
on which they are based, impose obligations of ‘good faith’ on the contracting parties. The
reaction of the House of Lords to the introduction of this concept in the 
rst case in which
esh by regarding it as requiring fair and
92
93
SI 2002/2013 – see, further,
94
For example, it was as a result of European law that s 3 of the Equal Pay Act 1970 implied into every
contract of employment an ‘equality clause’ aimed at ensuring that men and women receive equal treat-
95
Chapter 11 , 11.5 and 11.9. 96
In particular, by Lord Scarman in
National Westminster Bank v Morgan
He took a similar line in Pao On v Lau Yiu Long
[1980] AC 614; [1979] 3 All ER 65.
97
98
Courtney and Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd
May and Butcher v R [1934] 2 KB 17. 99
100
101
102
Director General of Fair Trading v First National Bank plc
[2002] UKHL 52; [2002] 1 All ER 97, per Lord
Bingham, para 17, p 108. Lord Steyn went further and suggested that the concept should not be limited to
procedural fairness: ibid, paras 36–37, p 113. The House was in this case concerned with the UTCCR 1994.
Introduction
103
Brownsword, 2000, Ch. 5.
104
See, for example, Professor Bridge’s characterisation of it as ‘visceral justice’, leading to impressionistic
making and undesirable uncertainty in commercial transactions: Bridge, 1999, p 140.
105
Brownsword, 2000, para 5.22.
106
107
108
109
A useful collection of essays on this development is to be found in Vogenauer and Weatherill, 2006.
110
111
112
The Modern Law of Contract
113

when transposing EU directives in the area of contract law into national legislation.
They could also draw on the CFR when enacting legislation on areas of contract law
which are not regulated at Community level.

European Contract Law, which would be available for parties to opt in to through a
choice of law clause in their contract. The CFR project has been taken forward by
the European Commission as part of a broader project aimed at the harmonisation of
all private law, and in 2009 it published a Draft Common Frame of Reference (which
draws extensively on the Principles of European Contract Law produced by the
114
This has now been followed by a Green Paper on a European
Contract Law,
115
which raised various possibilities for the status of any European
Contract Law – from simple publication to the issue of a Regulation replacing national
law with the European law. The UK Ministry of Justice opened a consultation on this
in August 2010, and reported to the European Commission in February 2011.
116

there was insuf
cient evidence of a problem with the current arrangements to
suggest that any of the options beyond the use of the [Common Frame of Reference]
as a toolbox for legislators and the publication of the work of the Expert Groups
would be proportionate and necessary. The Government could therefore only
support only these options (1 and 2a of the Commission’s Green Paper) and could
before any of the other options could be considered there would need to be a full
and thorough analysis of the evidence and potential impacts.

It does not appear, therefore, that there will be any swift move towards a European Contract
Law. The most likely outcome is perhaps an optional instrument, allowing the European
code to be used at the choice of the parties. Reference to the provisions of the Draft
Common Frame of Reference is made at various points in later chapters, in particular
where this illustrates a possible alternative to the current English law approach.
nal area identi
ed at the start of this section as contributing to the growing impor-
tance of the international context of contract law is the growth in telecommunications and
113
nal, para 2.1.2.
114
Introduction
future for much consumer shopping. The ability to access websites offering wide ranges
of consumer products, and to order them online, is increasing all the time. In such
transactions, the ease with which orders may be placed, and payment (by credit card)
Brownsword
,
H


,
The Relational Theory of Contract: Selected Works of Ian
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contractual relations in business
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Wheeler
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Oxford
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The Modern Law of Contract
Atiyahs Introduction to the Law of Contract
Oxford
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The Harmonisation of European Contract Law
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2
Forming the
Agreement

Contents
2.1
2.2
Introduction
2.3
31
2.4
General lack of formal requirement
32
2.5
The external signs of agreement
34
2.6
Historical background
35
2.7
Offer
2.8
44
2.9
Tenders
2.10
2.11
2.12
The Modern Law of Contract
OVERVIEW
Agreement is central to the English law of contract. In most cases that are adjudicated,
Formalities. To what extent does English law use formal mechanisms to decide
More generally there is no requirement of writing or other formality. The courts decide
The most common indicators will be a matching offer and acceptance. The iden-
cation of a matching offer and acceptance is the most common way for the courts
nd that an agreement has been made.
An offer must be distinguished from an invitation to treat, and an acceptance from a
counter offer.
Particular problems arise in relation to the following:
Unilateral (as opposed to bilateral) contracts. The offer in a unilateral contract
The battle of the forms. Where both parties try to contract on their own
standard terms, and these are inconsistent, which should prevail?
Revocation of offers. An offer can generally be revoked at any time before it is
accepted, provided that the revocation is communicated to the offeree.
Certainty. The courts require an agreement to be certain, and will not enforce an
agreement to agree.
INTRODUCTION
Forming the Agreement
Another reason for the courts’ involvement may, however, be where there is a dispute
1
The Modern Law of Contract
Although, in practice, the vast majority of such contracts were put into written form, this
formulation left open the possibility of a verbal contract being evidenced by, for example, a
the guarantor.
recover under an alleged oral guarantee of payment given by the party for whom the
not succeed because an oral guarantee was unenforceable by virtue of s 4 of the 1677 Act.
In the House of Lords, the claimant argued that even if the Act applied, the defendant
should not be allowed to rely on it, on the grounds that it would be unconscionable to do
so. The claimant’s argument was based on ‘estoppel’ – a concept, which, when it oper-
ates, prevents a party to an action relying on a point, where their words or behaviour have
previously indicated that they would not rely on it. The defendant had allowed the claimant
to run up the debt owed by the main contractor, knowing that it was relying on the guar-
antee. It was held that the effect of s 4 could not be overturned by an estoppel, at least not
unless there had been a speci
c assurance that the statute would not be relied on.
The case emphasises the continuing importance of the Statute of Frauds in this area,
and the need to ensure that any ‘promise to answer for the debt, default or miscarriages of
2.4
GENERAL LACK OF FORMAL REQUIREMENT
In most cases, however, English law imposes no formal requirements and looks simply
3
Wilson v First County Trust Ltd
statutory rule which renders a consumer credit totally unenforceable if certain formalities have not been
Lords, however, reversed this decision, on the basis that the Human Rights Act 1998 did not apply to the
contract in question (which was made prior to 2 October 2000), and because in any case the provisions were
4
5
Forming the Agreement
put into writing, or signed, nor does any particular form of words have to be used. A purely
verbal exchange can result in a binding contract. All that is needed is an agreement. This
simple assertion, however, masks a considerable problem in identifying precisely what is
meant by an agreement. This may seem easy enough: it is simply a question of identifying
2.4.1
IN FOCUS: AGREEMENT OR RELIANCE?
It has been argued by Collins that the ‘objective’ approach to ‘agreement’ means that the
6
See below, 2.12.6.
7
See Gardner, 1992, p 171.
8
9
See the approach of Steyn LJ in
Trentham Ltd v Archital Luxfer
[1993] 1 Lloyd’s Rep 25, p 27 – discussed
below, 2.11.5.
The Modern Law of Contract
2.4.2
Although it is clear that an objective approach to agreement has to be adopted, as has been
there are different types of objectivity. There is (a)
‘promisor objectivity’, where the court tries to decide what the reasonable promisor would
have intended; (b) ‘promisee objectivity’, where the focus is on what the reasonable person
2.4.3
STATE OF MIND
The objective approach must, however, take account of all the evidence. Even if A has
acted in a way that would reasonably cause B to assume a particular state of mind as
regards an agreement, if B’s behaviour, objectively viewed, indicates that such an assump-
,
12

for example, was a case concerning the sale of a ship, where the point at issue was
10
11
12
13
[1985] 1 WLR 925.
Forming the Agreement
have been made to apply a more general test of ‘agreement’. This involves taking offer and
acceptance as the normal basis for the creation of a contract, but recognising that not all
2.7.1
DISTINCTION FROM ÔINVITATION TO TREATÕ
14
This is similar to the approach taken in the European Draft Common Frame of Reference – see Book II,
15
See, in particular,
The Modern Law of Contract
the party from whom it emanated has put itself in the position where it can become legally
bound simply by the other party accepting. It must be clear, therefore, that the statement
or action indicates an intention to be bound, without more. The courts have traditionally

Gibson v Manchester City Council (1979)
Council, which was at the time under the control of Conservative Party members,
decided that it wished to give its tenants the opportunity to purchase the houses which
they were renting. Mr Gibson wished to take advantage of this opportunity and started
16
17
18
Ibid, p 586. Ormrod LJ agreed with Lord Denning, but also held that an agreement could be found using the
traditional offer and acceptance analysis. Lane LJ dissented.
Forming the Agreement
The narrowness of the distinction being drawn can be seen by comparing this case with
Storer v Manchester City Council
,
19
where on very similar facts a contract was held to
2.7.2
IN FOCUS: THE POLITICAL CONTEXT
Before leaving these cases, it should be noted that there was potentially a political dimen-
Storer
was at the time a very controversial political issue, with the Conservative Party strongly
in favour and Labour vehemently opposed. In Manchester, the local electors had decided
to vote in a Labour Council, and it might have been reasonable to assume that one of
the reasons for this was opposition to the previous Conservative Council’s approach
to the sale of council houses. In such a situation, to decide strongly in favour of enforcing
the sale of a council house (particularly since there were, apparently, ‘hundreds’ of
20
the judges that would have the effect of disregarding the wishes of the electorate.
Where the case was clear-
Storer
), the courts would be obliged to respect the
individual’s vested rights; where there was ambiguity, however (as in
), there would
be an argument for deciding the case in a way that complied with the political decision
indicated by the results of the election. There is, of course, no indication in the speeches
in the House of Lords of any such political considerations having any effect on their
Lordships’ opinions. However, it has been strongly argued that judges can be in
consciously or unconsciously, by political matters,
21
Storer

decisions are good examples of the fact that decisions on the law of contract operate in
a social and political context, and their interrelationship with that context should not
be ignored.

For Thought

19
20
See Lord Diplock [1979] 1 All ER 972, p 973; [1979] 1 WLR 294, p 296. In a front-
page story on 9 March 1979,
the day after the Lords’ ruling,
reported that there were 350 other sales that were affected by
the Lords’ ruling in Manchester alone, with doubts being raised about sales in other local authority areas.
21
See, in particular, Grif
th, 1997.
The Modern Law of Contract
2.7.3
SELF-SERVICE DISPLAYS
Another area of dif
culty arises in relation to the display of goods in a shop window, or on

edly the intention of all concerned that this should be possible. The display of goods is
therefore an invitation to treat and not an offer.
With respect to the Court of Appeal, the conclusion that was reached was not necessary
to avoid the problem of the customer becoming committed too soon. It would have been
quite possible to have said that the display of goods is an offer, but that the customer does
not accept that offer until presenting the goods to the cashier.
24
course, also have meant that the sale took place at the cash desk and that no offence was
22
concepts in a criminal context by Smith, 1972. 23
24
As was pointed out at the time by, for example, Williams, 1953. See also Unger, 1953. Montrose, 1955,
however, prefers the analysis adopted in the
Forming the Agreement
2.7.4
IN FOCUS: THE SOCIAL AND ECONOMIC CONTEXT
The decision in this case was treated by the Court of Appeal very much as a ‘technical’ one
on the law of contract. There were, however, several other broader issues that were involved
in it. First, there was the issue of the degree of supervision necessary to protect the public
in relation to the sale of certain types of pharmaceutical product. Second, there was the
potential effect on the employment position of pharmacists – the self-
would probably have the effect of reducing the number of pharmacists that Boots, or other
service system, would need to employ. Third, there was the ques-
2.7.5
SHOP WINDOW DISPLAYS
The slightly different issue of the shop window display was dealt with in
charged with an offence under s 1(1) of the Restriction of Offensive Weapons Act 1959,
namely ‘offering for sale’ a ‘
knife’. It was held by the Divisional Court that no offence
had been committed, because the display of the knife was an invitation to treat, not an offer.
Lord Parker had no doubt as to the contractual position:

It is clear that according to the ordinary law of contract the display of an article with
a price on it in a shop window is merely an invitation to treat. It is in no sense an offer
30

No authority was cited for this proposition, but the approach is certainly in line with that
case. There has never been any challenge to it, and it must be taken to
represent the current law on this point. It was followed in
,
31
where a
charge of ‘offering for sale’ obscene articles, contrary to the Obscene Publications Act
1959, failed because the items were simply displayed in a shop window.
25
26
27
28
This was recognised by Romer LJ, ibid, p 408; p 485.
29
30
31
The Modern Law of Contract
2.7.6
ISSUES OF PRINCIPLE
What are the principles lying behind the decisions in relation to self-
service stores and
, the court stressed the need for the shopper to be allowed
a ‘change of mind’. As we have seen, however, that does not necessarily require the offer
to be made by the customer, just that the acceptance of the offer should be delayed
your window; can I inspect it?’ or ‘can you tell me more about it?’, which would simply be
a stage in negotiation. There is no need, therefore, to protect the
shop window display simply an invitation to treat.
The most likely candidate as an alternative principle on which the decisions are based
is freedom of contract. That freedom includes within it the principle that a person can
choose with whom to contract – ‘party freedom’.
32
32
See Brownsword, 2000, para 2.10.
33
34
See Beale, 1995a, p 190; Brownsword, 2000, para 2.15; Collins, 2003, p 33.
35
See the Equality Act 2010, which has consolidated all the previous legislation.
36
Note that the common law did in fact also recognise some restriction on party freedom as regards common
HalsburyÕs Laws
, Vol 5(1), para 441 and Vol 24, para 1113.
37
38
Ibid, reg 5(2)(a) and (4).
39
[1972] AC 153; [1971] 2 All ER 127. Note that Tesco was found to have a defence under the statute.
Forming the Agreement
2.7.7
ADVERTISEMENTS
Where goods or services are advertised, does this constitute an offer or an invitation to
treat? It would be possible here for the law also to base its principles on ‘party freedom’:
that is, a person putting forward an advertisement should not be taken to be waiving the
right as to whom he or she chooses to contract with. In fact, however, the cases in this area
show the courts adopting an approach based on pragmatism, rather than on the ‘party
freedom’ principle. The answer to the question ‘is this advertisement an offer?’ will gener-
40
41
42
43
44

Partridge v Crittenden (1968)
ed’ section of a periodical,
nches for sale at 25s each. He was charged under the Protection
of Birds Act 1954 with ‘offering for sale’ a live wild bird, contrary to s 6(1).
It was held that he had committed no offence, because the advert was an invita-
tion to treat and not an offer. The court relied heavily on
,
44
and appeared to
feel that this kind of advertisement should be treated in the same way as the display of
goods with a price attached. Lord Parker also pointed out that if it was an offer, this
would mean that everyone who replied to the advertisement would be accepting it, and
would therefore be entitled to a bramble
nch. Assuming that the advertiser did not have
nches, this could not be what he intended. The adver-
tisement was only an invitation to treat.
The Modern Law of Contract
This decision is in line with the concept of ‘party freedom’, in that it leaves the advertiser free
to decide whom to contract with. In addition, the ‘limited stock’ argument gives a very strong
ground to suggest that this advertisement, as will be the case with most advertisements for
the sale of goods, was not intended to constitute an offer. As with
, this is
an analysis based on ‘promisor objectivity’, looking at what the reasonable advertiser would
be taken to have meant by the advert.
This does not mean, however, that all newspaper advertisements will be treated as
invitations to treat. If the guiding principle is promisor objectivity, rather than party freedom,
then provided that the wording is clear and there are no problems of limited supply, there
seems to be no reason why such an advertisement should not be an offer. If, for example,
nches for sale. The 
100 replies enclosing 25s will secure a bird’, then in all probability this would be construed
as an offer. An advertisement of a similar kind was held to be an offer in the American case
Lefkowitz v Great Minneapolis Surplus Stores
,
45
where the defendants published an
advertisement in a newspaper, stating: ‘Saturday 9 am sharp; three brand new fur coats,
rst served, $1 each.’ The plaintiff was one of the 
rst three
rm refused to sell him a coat, because it said the offer was only open
to women. The court held that the advertisement constituted an offer, which the plaintiff
had accepted, and that he was therefore entitled to the coat.
For Thought

Would it have made any difference to the courtÕs decision in
ment had indicated that there were just three coats available, but had not said ÔÞ
rst servedÕ?

Clearly, in this case, the court was rejecting any argument based on party freedom. In this
context any such freedom was waived by making such a speci
c offer to the general
were entitled to take advantage of the bargain. The use of such an approach here only
serves to highlight the anomaly of the cases on shop sales discussed in the previous
2.7.8

In England, the most famous case of an advertisement constituting an offer is
.
46

45
46

Carlill v Carbolic Smoke Ball Co (1893)
The manufacturers of a ‘smoke ball’ published an advertisement at the time of
uenza epidemic, proclaiming the virtues of their smoke ball for curing all kinds of
used it as directed, and then caught in
uenza, would be paid £100. Mrs Carlill, having
uenza, claimed £100
Forming the Agreement
from the company. The company argued that the advertisement could not be taken to
be an offer that could turn into a contract by acceptance. They claimed that it should
be regarded as a ‘mere puff’, which meant nothing in contractual terms. There was,
however, apparent evidence of serious intent on the part of the defendants. The adver-
sincerity in this matter’. The defendants raised two further objections. First, they argued
that the advertisement was widely distributed, and that this was therefore not an offer
made to anybody in particular. Second, the defendants said that Mrs Carlill should have
statement about the £1,000 deposit meant that reasonable people would treat the offer
to pay £100 as one that was intended seriously, so that it could create a binding
obligation in appropriate circumstances, such as those that had arisen. As to the wide
distribution of the advert, the court did not regard this as a problem. Offers of reward
2.7.9
IN FOCUS: CONSUMER PROTECTION
case has been viewed as giving a surprisingly broad scope to the situations
49
Simpson has pointed out that there was much
concern at the time about advertisements for dubious ‘medicinal’ products,
50
uenced the court towards 
nding liability. Nowadays, it would be expected that
such situations would be more likely to be dealt with by legislation,
51
as the Advertising Standards Authority. This is certainly true of many advertising slogans
47
(1833) 5 C & P 566 – see below, 2.12.17.
48
– 49
50
51
For example, the Consumer Protection from Unfair Trading Regulations 2008.
The Modern Law of Contract
Figure 2.1

52
53
Forming the Agreement
bilateral. A has committed himself to pay the £20 in certain circumstances, but B has made
54
55
The Modern Law of Contract

. . . in the context, a reasonable invitee would understand the invitation to be saying,
quite clearly, that if he submitted a timely and conforming tender it would be consid-
ered, at least if any other such tender were considered.
56

By applying this test of ‘promisee objectivity’ to the circumstances, the court concluded
that the defendant was in breach of an implicit unilateral contract, under which it promised
that if a tender was received by the speci
ed deadline, it would be given due considera-
tion. The promise was not made explicitly, and indeed the defendant claimed that no such
promise was intended,
57
but because it was reasonable for the plaintiff to have assumed
that such a promise was implied, the court found that there was a contractual relationship
inviting tenders must therefore either explicitly state the terms on which responses will be
considered, or be bound by the reasonable expectations of those who put in tenders.
This decision places some limits on the freedom of the party inviting tenders, but limits
which can be avoided by careful wording of the tender documentation. Much more strin-
gent controls exist over tendering in a range of public sector contracts as a result of
56
57
Brownsword uses this case as an example of the fact that an analysis of contract based on the making of
express promises does not accord with the actual practice of the courts (Brownsword, 2000, para 1.10).
58
Procurement Directive (2004/18/EC).
59
See, for example, SI 2006/5, reg 30.
60
Forming the Agreement
the case in relation to any other type of sale by auction.
62
the auctioneer will be entitled to reject any of the bids made, and will not be obliged to sell
to the highest bidder.
There are two situations, however, which require special consideration. The 
rst is
where the auction sale is stated, in an advertisement or in information given to a particular
bidder, to be ‘without reserve’. This situation was 
62
(1789) 3 Term Rep 148.
63
64
65

Barry v Heathcote Ball & Co (Commercial Auctions) Ltd (2001)
The claimant attended an auction to bid for two new machines that were being
‘without reserve’. The claimant had been told this by the auctioneer when viewing the
machines. The machines were worth about £14,000 each. When they came up for sale,
there were no bids apart from one from the claimant, who bid £200 for each machine.
The auctioneer refused to accept this, and withdrew the machines from the sale. They
were subsequently sold privately for £750 each. The claimant sued the auctioneer for
breach of contract. The trial judge held in his favour, on the basis of there being a collat-
eral contract with the auctioneer to sell to the highest bidder. The claimant was awarded
rmed the decision of the trial judge. It followed the
reasoning adopted by the court in
Warlow v Harrison
sale ‘without reserve’ is making a binding promise to sell to the highest bidder. It made
no difference that in
Warlow v Harrison
whereas here it was known. Moreover, the action of the auctioneer in this situation was
tantamount to bidding on behalf of the seller, which is prohibited by s 57(4) of the Sale
The Modern Law of Contract
This case is useful modern con
66
Forming the Agreement
which the invitation to bid was framed. In terms of ‘offer and acceptance’, the inviter was
entering into two unilateral contracts with the two bidders to the effect: ‘If you submit the
highest bid, then we promise to sell the shares to you.’
69

The result in
Harvela
other way, it would have made conducting sales by means of con
dential bids much more
cult. It may well be, therefore, that considerations of the impact on commercial practice
helped to push the House towards the conclusion it reached.
70

2.11
ACCEPTANCE
2.11.1
DISTINCTION FROM COUNTER OFFER
Where parties are in negotiation, the response to an offer may be for the offeree to suggest
slightly (or even substantially) different terms. Such a response will not, of course, be an
acceptance, since it does not match the offer, but will be a ‘counter offer’. During lengthy
negotiations, many such offers and counter offers may be put on the table. Do they all
remain there, available for acceptance at any stage? Or is only the last offer, or counter
offer, the one that can be accepted? This issue was addressed in the following case.
69
This analysis appears most fully in the speech of Lord Diplock: [1986] 1 AC 206, p 224; [1985] 2 All ER 966,
p 969. Note that here the offer in the unilateral contract was not implicit, but was explicitly made as part of
70
See, for example, Wheeler and Shaw, 1994, pp 229–30.
71
72
Note, however, that a right of cancellation exists under some consumer contracts – discussed below, 2.14.
73

Hyde v Wrench (1840)
73

Facts:
D offered to sell a farm to P for £1,000. P offered £900, which was rejected. P
then purported to accept the offer to sell at £1,000. D refused to go through with the
transaction, and P brought an action for speci
c performance.
The Modern Law of Contract
The court held that a rejection of an offer in effect destroyed it. It could not later
be accepted. Moreover, a counter offer operated in the same way as a rejection. P’s
counter offer of £900 therefore had the effect of rejecting and destroying D’s original
offer to sell at £1,000. P could not accept it. In effect, P’s 
nal communication had to be
treated not as an acceptance, but as a further offer to buy at £1,000, which D was free
to accept or reject.
The answer to the question posed above, therefore, is that only the last offer submitted
survives and is available for acceptance. All earlier offers are destroyed by rejection or
counter offer. The courts have not been explicit about the reasons for this rule, but it may
well be that it is intended to prevent the ‘counter offeror’ having the best of both worlds –
trying out a low counter offer, while at the same time keeping the original offer available for
74

It should be noted, however, that the courts will not necessarily require exact precision,
if it is clear that the parties were in agreement. An example of this approach can be found
in the unreported case of
Pars Technology Ltd v City Link Transport Holdings Ltd
,
75
where
74
75
76
77
Pitchmastic plc v Birse Construction Ltd (2000) The Times
(QBD). Note, however, that there is an
that the rules as to the effect
of rejection of an offer may not apply to those falling within Pt 36 of the CPR – see also Stone, 2001, p 23.
[2010] EWHC 1886, where Tugendhat J applied a traditional offer/
counter-
offer approach to Pt 36 negotiations.
Forming the Agreement
2.11.2
REQUEST FOR INFORMATION
In some situations, however, it may be quite dif
78
Figure 2.2

The Modern Law of Contract
2.11.3
BATTLE OF THE FORMS
79
80
[2001] EWCA Civ 938. The case is discussed by Ross, 2001. See also, for a similar result,
[2010] EWHC 1828.
81
Force majeure
clauses are discussed in
82
This appears to have been the approach adopted by the judge at 
rst instance in
[2001] EWCA Civ 938.
83
84
85
Both of these are reproduced in Wheeler and Shaw, 1994, p 208.
Forming the Agreement
approaches attempt to 
nd a contract wherever possible. In contrast, the strict application
of the classical offer and acceptance principles suggests that the third of Denning’s
possible solutions is the right answer, and that there is no contract at all. Nevertheless,
there is a reluctance even in the English courts to come to this conclusion, because it will
often be the case that the parties are willing, or indeed keen, to have a contract, and will
often have carried on their business as if such a contract had been validly made. If they are
cult to
unscramble their respective rights and liabilities.
86

2.11.4
THE TRADITIONAL VIEW
Because it provides a good example of the way in which the courts have generally tackled
86
contract’ or ‘restitution’ – for which
87
88

Butler Machine Tool Co Ltd v Ex-Cell-O Corp (England) Ltd (1979)
Facts:
The buyers wished to purchase a machine for their business. On 23 May, the
sellers offered to sell them one for £75,535, with delivery in 10 months. The offer incor-
porated the sellers’ standard terms, which were said to prevail over any terms in the
buyers’ order. It also contained a price variation clause, allowing the sellers to increase
the price in certain situations. The buyers responded with an order on 27 May. This
order incorporated the buyers’ terms, which did not include a price variation clause. It
also included a tear-
off acknowledgment slip, stating: ‘We accept your order on the
For Thought

The Modern Law of Contract
Lord Denning would have liked to decide for the buyers on the basis that the overall nego-
2.11.5
SUBSEQUENT DEVELOPMENTS
Trentham Ltd v Archital Luxfer
the plaintiffs (Trentham) were the main contractors on a
building contract. They entered into negotiations with the defendants (Archital), for sub-
89
90
[1993] 1 Lloyd’s Rep 25.
91
Forming the Agreement
(c)
case), rather than executory, is of considerable importance – it will almost certainly
preclude, for example, an argument that there was no intention to create legal rela-
tions, or that the contract is void for vagueness or uncertainty.
(d)
If a contract only comes into existence during and as a result of performance of the
95
[1993] 1 Lloyd’s Rep 25, p 27, citing
Trollope & Colls v Atomic Power Construction Ltd
[1963] 1 WLR 333.
96
97
Such remedies are discussed in

RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK
Production) (2010)
The parties were in negotiation in relation to supply equipment and associated
The Modern Law of Contract
terms applied. The Court of Appeal held that there was no contract at all. The parties
appealed to the Supreme Court.
98
Stone, (2012). 99
100
Forming the Agreement
Butler Machine Tool v Ex-Cell-O
. The Court of Appeal disagreed with this
approach. It held that a straightforward offer and acceptance analysis should be used. On
this basis, the seller’s acknowledgment of the buyer’s order was a counter offer to supply
In other words, the contract was accepted by conduct. This type of acceptance is
101

2.12
2.12.1
ACCEPTANCE BY CONDUCT
101
For other examples of the courts using an offer and acceptance approach in battle of the forms cases, see
Balmoral Group Ltd v Borealis (UK) Ltd
Sterling Hydraulics Ltd v Dichtomatik Ltd
[2007] 1 Lloyd’s Rep 8.
102
See below, 2.12.14.
103
Assuming that the approach adopted in
The Modern Law of Contract
by the courts, with the most recent example being the Court of Appeal decision in
Tekdata
(above, 2.11.5).
What is the position if there is conduct by one party that objectively indicates an inten-
tion to accept, but the other party is unaware of it? It is to that issue that we now turn.
2.12.2
ACCEPTANCE BY SILENCE
2.12.3
ACCEPTANCE BY SILENCE IN BILATERAL CONTRACTS
In relation to bilateral contracts, the position is different. The leading authority is
.
106

105
106
rmed (1863) 1 NR 401.
107

Felthouse v Bindley (1862)
An uncle was negotiating to buy a horse from his nephew. The uncle wrote to his
nephew offering a particular sum and saying ‘If I hear no more about him, I consider the
horse mine’. The nephew did not respond, but told an auctioneer to remove this horse
from a forthcoming auction. The auctioneer omitted to do so, and the horse was sold to
Forming the Agreement

We have all been brought up to believe it to be axiomatic that acceptance of an offer
cannot be inferred from silence, save in the most exceptional circumstances.
108

No court has challenged the correctness of the general principle said to be established by
109
gous situation of acceptance of a repudiatory breach of contract, the House of Lords has
Vitol SA v Norelf Ltd

110
that silence and inaction can be effective provided
that they can be regarded as ‘clear and unequivocal’ and the other party has notice. If the
same approach can be applied to acceptance of an offer, this will presumably fall within
the ‘exceptional circumstances’ referred to by Robert Goff J. In most cases, however,
2.12.4
INERTIA SELLING
During the 1960s, a related problem arose out of the growing practice of what came to be
2.12.5
CONCLUSIONS ON ÔSILENCEÕ
The basic rule, therefore, as derived from
and reinforced by the
Unsolicited Goods and Services Act 1971 and the Consumer Protection (Distance Selling)
108
109
See, for example, Miller, 1972.
110
Vitol SA v Norelf Ltd
The Modern Law of Contract
an unwilling offeree, there is no authority which speci
cally precludes the possibility of
an offeree choosing to enforce a contract against an offeror who has stated that he
will presume acceptance from non-
2.12.6
ACCEPTANCE BY POST
A requirement of communication will not, however, answer all problems. In the modern
114
Forming the Agreement
see, there are some cases which suggest that it may be possible to accept an offer of
which you are unaware.
115
These cases are of dubious authority, however, and can only
possibly apply in very restricted circumstances. In any case, they simply suggest that in
some situations, communication of an offer may not be necessary. Where communication
of the offer is required, which is the case in virtually all situations, it is safe to say that
communication means that the person to whom the offer is addressed is aware of it. Why
should the position be any different as regards acceptances?
The problem 
rst arose in relation to the post, where the delay is likely to be longest.
115
See below, 2.12.17.
116
117

Adams v Lindsell (1818)
For Thought

Does the courtÕs justiÞ
cation for the postal rule still apply, in an era of much more sophis-
The Modern Law of Contract
cation of the postal rule has been argued to be based on agency – that
is, that the Royal Mail was acting as agent for the offeror in receiving the acceptance from
the offeree. But this analysis was strongly criticised in
Henthorn v Fraser
.
118
is more obviously acting as agent for the offeree rather than the offeror and, in any case, if
it is acting as agent at all, it would be more accurate to describe it as agent for the physical
2.12.7
IN FOCUS: THE PENNY POST AND CONTRACT LAW
Gardner, adopting a ‘critical legal studies’ approach, has suggested that the real reasons
for the way in which the postal rule developed are to be found in enthusiasm for the newly
119
2.12.8
LIMITATIONS ON THE POSTAL RULE
The rule that comes from
118
[1892] 2 Ch 27 – see, in particular, the judgment of Kay LJ. Gardner, 1992, describes the case as ‘exploding’
119
Gardner, 1992.
120
Household Fire and Carriage Accident Insurance Co v Grant
(1879) 4 Ex D 216.
121
Bruner v Moore
[1904] 1 Ch 305 (exercise of an option).
122
Byrne v van Tienhoven
(1880) 5 CPD 344.
123
Henthorn v Fraser
[1892] 2 Ch 27.
124
Forming the Agreement
nal limitation that must be noted is that the rule can always be displaced by the
offeror. The offer itself may expressly, or possibly impliedly, require the acceptance to take a
for example, it was held that an offer that was
made by telegram impliedly required an equally speedy reply. A reply by post would not
therefore take effect on posting. (There seems no reason, however, why it should not take
effect on arrival, provided that the offer was still open.) Any implication from the form of the
offer should, of course, be looked at alongside the more general rule as to what is reason-
2.12.9
ACCEPTANCE BY PRIVATE COURIER
The cases that have been discussed in the previous section were all concerned with the
service provided by the Royal Mail. Recently, there has been a growth in the availability of
tions creating a contract. Does the postal rule apply to acceptances sent by such means?
There is no authority on this point. There are two possible lines that the law might take.
First, it might be argued that the reasons for applying the postal rule in

125
126
127
128
The Modern Law of Contract
postal rule itself should be reviewed. As will become apparent from the following section,
there has been no move by the courts in recent years to extend the postal rule to other
media, and this may be an indication of an acceptance that in the modern context, the
approach has much less to recommend it than it did at the time it was
European Draft Common Frame of Reference did not feel the need to include anything
equivalent to it. While there have been no moves in the English courts to overrule
owing from it, it may well be that the tendency will be to limit its
ne it strictly to the area of communications via the Royal Mail.
2.12.10
ACCEPTANCE BY ELECTRONIC COMMUNICATION
In the modern world, contracts may well be made by much more sophisticated means of
2.12.11
THE
APPROACH
The starting point for the law in this area is the case of
Entores v Miles Far East Corp
.
129

This was concerned with communications by telex machine. The ‘telex’ system involved a
message being typed on a special machine attached to a phone line. On being received on
the recipient’s machine, the message would be typed out on a roll of paper. The system is
129
Forming the Agreement
130
The fact that an extension of the postal rule was rejected in
Entores
is thus more
easily explained on the basis of an unwillingness to allow that anomalous approach to be
applied more widely, rather than a logical necessity based on an analysis of the types of
There is perhaps a slightly stronger analogy, at least as regards faxes, when the ques-
tion of what happens when there are problems with the communication is considered. As
we have seen, Lord Denning took the view that in instantaneous communications it is
generally up to the person sending the communication to ensure that his or her message
130
131
132
133
The Modern Law of Contract
There was some dispute as to who had said exactly what, and when. There was no doubt,
134
Figure 2.3

Forming the Agreement
2.12.12
TIME OF ACCEPTANCE
It is important to remember that, as noted above, the court in
Entores
was concerned with
where the contract was made, rather than the
135
136
137
138
[1995] Com LC 1011.
For Thought

What do you think Lord DenningÕs answer to this would have been in
Entores,

Two cases subsequent to
Entores
have considered this issue, again in relation to telexes.
,
135
drawal of a ship from a charterparty. It was held to be effective when it was ‘received’ on
the charterers’ telex machine during of
ce hours, although it was not actually read until the
following morning. In
,
136
the House of Lords was dealing with
Entores
, and approved the
The Modern Law of Contract
relation to messages left on a telephone answering system: that is, the message should
only be regarded as communicated once a reasonable time has elapsed to allow it to be
heard by the offeror.
If this line is to be taken, it is clearly to the advantage of the acceptor, in that it allows
an acceptance to be treated as effective although the offeror may be unaware of it (as is
, the counter-
argument to those
have always made it clear that the offeror can specify and insist on a particular mode of
acceptance. If actual communication is required, this should be spelt out in the offer. If this
is not done, the acceptor must be allowed to proceed on the basis that the acceptance will
be read at a time that could reasonably be expected in the normal course of events.
2.12.13
It is likely that in the future an ever-
increasing amount of business will be conducted over
139
The Times
, 21 September.
Forming the Agreement

the service provider has to acknowledge receipt of the recipient’s order without
undue delay and by electronic means;
140


the order and the acknowledgment of receipt are deemed to be received when
the parties to whom they are addressed are able to access them.

These provisions are much vaguer than earlier drafts, which seemed to assume that it is
the owner of the website who will be making the offer, and the purchaser who will be
that the service provider will be seen as making an invitation to treat, with the purchaser
making the offer, this would have meant that the requirements of the Directive would have
nal draft, however, seems apt to cover the situation where it is
the customer who makes the offer. In such a situation, English law in any case requires the
offer to be accepted before it is effective, and this will satisfy the need for an acknowledg-
ment of the order. If the offer is made by the website owner, however, and accepted by the
customer, the Directive will place an additional requirement on the website owner to
acknowledge the acceptance. In all cases, however, the Directive makes the test of when
a communication takes place the point at which it can be accessed by the recipient.
The Directive was implemented in English law by the Electronic Commerce (EC Directive)
the relevant sections of which came into force on 31 August 2002.
Regulation 11, entitled ‘placing of the order’, which deals with the matters covered by
Art 11 of the Directive, states as follows:

Unless parties who are not consumers have agreed otherwise, where the
recipient of the service places his order through technological means, a
service provider shall –

acknowledge receipt of the order to the recipient of the service without
undue delay and by electronic means; and
(b)
make available to the recipient of the service appropriate, effective
and accessible technical means allowing him to identify and correct
input errors prior to the placing of the order.

(2)
(a)
the order and the acknowledgment of receipt will be deemed to be
received when the parties to whom they are addressed are able to

the acknowledgment of receipt may take the form of the provision of
140
But this requirement does not apply where the contract is concluded exclusively by the exchange of email
141
The Modern Law of Contract
the service provider to make available to the customer appropriate, effective and
essible technical means allowing him to identify and correct input errors prior to the
placing of an order. Regulation 12 then provides that order in reg 11(1)(b) means the
tractual offer. The service provider will thus be able to argue that any screen which
it displays in response to a customers initial order is simply ful
lling the requirements
of reg 11(1)(b), and that reg 12 means that this must be taken as preceding the contrac-
tual offer. The contractual offer then becomes the customers clicking of a button
to regulate the situation in this way to their own advantage? Is there a need for further
ACCEPTANCE IN UNILATERAL CONTRACTS
culties arise in connection with acceptances in unilateral contracts. We have
already seen that one of the characteristics of the unilateral contract is that the accept-
ance occurs through the performance of an act, rather than the expression of agreement.
It has also been noted that, in certain cases, the offeror in a unilateral contract may be
Forming the Agreement
142
there may be an argument for saying that a unilateral contract does not really involve an
agreement at all, but rather simply a promise which becomes enforceable once a certain
lled. This issue will be considered further once certain other dif
culties with
acceptance in unilateral contracts have been considered.
There is, 
142
[1893] 1 QB 256.
143
144
145

Errington v Errington (1952)
146

A father had promised his son and daughter-
in-law that if they paid off the mort-
gage on a house owned by the father, he would transfer it to them. The young couple
started to make the required payments, but made no promise that they would continue.
This appeared to be, therefore, a unilateral contract. The father died, and his repre-
sentatives denied that there was any binding agreement in relation to the house. They
argued that his offer could be withdrawn, because there had not been full acceptance.
The Modern Law of Contract
The Court of Appeal refused to accept that the offer could be withdrawn. Lord
Denning recognised that this was a unilateral contract, but nevertheless held that the
offer could not be withdrawn:
147

2.12.15
IN FOCUS: AN EXCEPTION Ð OR AGENCY?
culties for such a conclusion is the earlier House
of Lords’ decision in
Luxor (Eastbourne) Ltd v Cooper
company wished to sell some cinemas, and Cooper agreed to act as agent and try to
provide a purchaser, at a price of not less than £185,000. He was to be paid his commission
147
148
This could be seen as adding support to arguments that the basis of contractual liability is ‘reasonable
reliance’, rather than ‘consideration’ or ‘promise’ – see
149
150
151
152
153
Forming the Agreement
2.12.16
POSITION IN ÔREWARDÕ CONTRACTS
cant, however, that in both
the offeror was aware that
the other person had embarked upon performance. In such a situation it is relatively easy to
154
155
[1941] AC 108, pp 124–25; [1941] 1 All ER 33, p 44. The issues involved in treating the agency contract as
unilateral rather than bilateral are fully discussed in Murdoch, 1975.
156

See, for example, the comments of Lord Wright [1941] AC 108, p 138: ‘It would be strange if what was
preliminary . . . should control the freedom of the action of the principal in regard to the main transaction . . .’
158
159
[1974] 1 QB 781.
The Modern Law of Contract
by the courts is not clear.
On the other hand, where the offer, such as the offer of a reward
or prize, is one that is made to the world, it is by no means certain that precisely the same
2.12.17
ACCEPTANCE IN IGNORANCE OF AN OFFER
It would seem logical that there can be no acceptance of an offer of which the person
accepting was ignorant. Some problems have arisen, however, in relation to certain types
2.12.18
UNILATERAL CONTRACTS AND ÔAGREEMENTÕ
Having looked at the issues surrounding the question of acceptance in unilateral contracts,
160
161
(1891) 64 LT 594.
162
163
164
Forming the Agreement
A promise by a mother to pay her daughter £500 on her eighteenth birthday is not enforce-
2.12.19
A situation similar to the unilateral contract cases on ‘accepting’ a reward of which one is
unaware can arise in a bilateral contract if there are matching ‘cross-
offers’. Suppose, for
165
Even this may not be necessary, if
(1891) 64 LT 594 is good law – see above, 2.12.17.
166
167
(1873) 29 LT 271.
168
(1789) 3 Term Rep 148.
The Modern Law of Contract
The general rule will apply despite the fact that the offeror may have promised to keep
the offer open for a speci
ed time.
169
The reason for this is that before there is an accept-
ance, there is no contract, and if there is no contract, then the offeror cannot be legally
bound to a promise. If the offeree has paid for the time allowance in some way (that is, has
given consideration for the promise to keep the offer open), as may well be the case with
the exercise of an option, then it will be upheld. In the absence of this, however, there can
be no complaint if the offer is withdrawn.
Figure 2.4

169
(1828) 4 Bing 653; 130 ER 920.
Forming the Agreement
2.13.1
NEED FOR COMMUNICATION
Revocation of an offer must be communicated to be effective. This was implicit in the deci-
Byrne v van Tienhoven

170
in which the withdrawal of an offer, which was sent
by telegram, was held not to take effect until it was received. The

171

postal rule does not apply to revocations of offers, but there may still be dif
culties as
to what exactly amounts to communication and when a revocation takes effect. The
issues are much the same as those dealt with in the section on acceptance by electronic
172
and are not discussed again here.
It is clear, however, that communication of revocation need not come directly from the
offeror. Provided that the offeree is fully aware at the time of a purported acceptance that
the offeror has decided not to proceed with the contract, the offer will be regarded as
having been revoked and no acceptance will be possible. This was the position in the
For Thought

What problems might arise if English law took the view that a person who has promised to


Dickinson v Dodds (1876)
173

Facts:
On 10 June Dodds offered to sell a property to Dickinson, with the offer to be
held over to 12 June. On 11 June Dickinson was told by a third party that Dodds was
negotiating with Allan for the sale of property that he had previously offered to Dickinson.
Dickinson tried to accept the offer on the afternoon of the 11 June and the morning of
the 12 June, but Dodds had already sold to Allan before he was aware of Dickinson’s
acceptance. Dickinson sued for breach of contract.
Dickinson knew that Dodds was no longer minded to sell the property to him ‘as plainly
and clearly as if [the defendant] had told him in so many words, “I withdraw the offer”?’.

Dodds was not in breach, because no contract had been formed with Dickinson.
The reasoning of at least some of the judges in this case was clearly in
uenced by the idea
2.13.2
As well as being communicated expressly, an offer may be revoked by implication. We
have seen that a rejection of an offer, or a counter offer, automatically means that the offer
170
171
172
173
174
The Modern Law of Contract
175
,
176
Court of Appeal held that a second offer made to the same offeree will generally have the
effect of impliedly revoking the 
rst offer, though this might be otherwise if the offeree had,
2.13.3
REVOCATION AND TENDERS
The ability of an offeror to revoke an offer, even when it has been stated that it will remain
ed period, has the potential to cause dif
culties in large-
scale contracts,
where a main contractor may tender for work using a price on the basis of offers received
from sub
contractors. What is the position if the main contractor’s tender is successful, but
contractor then says that the offer to do the work at the speci
ed price is withdrawn?
There is no English authority on this issue,
but the application of the principles outlined
contractor was entitled to withdraw.
Concern about the dif
culties that this might cause for contractors led the Law Commission
in 1975 to make some provisional proposals that in certain circumstances a promise to keep
an offer open for a speci
ed time should be binding, bringing English law into line with what
the Law Commission found to be the position in other European jurisdictions (including
Scotland) and under the Uniform Commercial Code in the United States.
ness practice in this country by Lewis, however,
found that the problem was not regarded
as being as serious as the Law Commission had supposed. Moreover, even where dif
culties
175
Hyde v Wrench
(1840) 3 Beav 334; see above, 2.11.1.
176
177
178
All ER 1593; [1970] 1 WLR 241. 179
There are some American cases, but they are con
icting: see
Drennan v Star Paving Company
(1958) 333 P 2d 757.
180
Law Commission Working Paper No 60, ‘Firm Offers’.
181
Forming the Agreement
Consumer Credit Act 1974, ss 5 and 6 of the Timeshare Act 1992, and the Cancellation of
182
183
184
SI 2000/2334, reg 3(1).
185
SI 2000/2334, reg 5(1).
186
nancial services’ is given in Sched 2. Contracts for such services do, however,
The Modern Law of Contract
The Regulations also contain provisions as to the manner in which notice can be given,
2.14.1
IN FOCUS: AN EXCEPTION OR A CHANGE IN THE COMMON LAW?
The effect of these Regulations is that there is a wide range of consumer contracts where the
traditional contractual rule that an acceptance cannot be withdrawn no longer applies. Does
this pose a threat to the continuation of the traditional rule? Probably not. The rationale for
the Regulations is the avoidance of the risk of consumers being treated unfairly. Although it
is possible that a similar approach could be adopted in a business context, in situations of
unequal bargaining power, it seems unlikely that this will happen. Indeed, the English courts
c provision has been made to
protect consumers. The argument would probably be that now that Parliament has inter-
vened to deal with this area, the courts should not rush to depart from established principle
in those areas not covered by such intervention. The assumption will be that Parliament
ed areas.
2.14.2
WITHDRAWAL BEFORE ÔCOMMUNICATIONÕ?
There is one area, however, where the possibility of withdrawal from a seemingly binding
agreement arises under classical contractual doctrine – that is, in relation to situations
where the law deems acceptance to take effect at a point in time before that at which it
actually comes to the attention of the offeror. The most obvious example of this is the

193
194
It may also apply, however, in relation to, for example,
acceptances by telex, fax or email, which are received during of
ce hours but not read until
some time later, or messages left on a telephone answering machine. As we have seen, the
2.14.3
FORMALIST APPROACH
If a ‘formalist’ approach is taken to this issue,
195
2.14.4
PURPOSIVE APPROACH
This is not the only possible approach, however. It might also be argued that the purpose
of the postal rule is to provide a bene
t to the acceptor. As we have seen, the main reason
192
193
194
195
Forming the Agreement
was that such a rule allowed the acceptor to proceed
on the basis that a contract had been made, and that this promoted business ef
ciency. If
that is the case, it might be argued that it is a little odd to then apply the rule in a way that
is to the acceptor’s disadvantage. Moreover, if, as must be the case for there to be any
2.14.5
UNFAIRNESS TO OFFEROR
To allow withrawal is said by some to be too favourable to the acceptor. The example is
given of an acceptance of an offer to buy shares, or goods that have a highly 
2.14.6
GUIDANCE FROM AUTHORITY
Attempts to argue the case from 
rst principles, then, may lead to different conclusions.
196
The Modern Law of Contract
2.15
CERTAINTY IN OFFER AND ACCEPTANCE
Even though the parties may have appeared to make an agreement by the exchange of a
matching offer and acceptance, the courts may refuse to enforce it if there appears to be
uncertainty about what has been agreed, or if some important aspect of the agreement is
left open to be decided later. In
,
201
for example, the parties had agreed
to the supply of a lorry on ‘hire purchase terms’. The House of Lords held that in the
view of this situation is that there is in effect an agreement that the customer will pay a
‘reasonable price’ for the work that is done. What is a reasonable price is a question of
2.15.1
MEANINGLESS PHRASES

204
lous party to include some meaningless phrase in an agreement, which would then allow
him to escape from the contract if he wished on the basis of uncertainty. To have such an
effect, however, the phrase must relate to some signi
cant aspect of the contract. If it can
201
202
Note that the Court of Appeal had agreed with the judge at 
rst instance that there was suf
cient informa-
Forming the Agreement
,
205
where the contractual documentation contained
the statement ‘we are in agreement that the usual conditions of acceptance apply’. Since
there were no ‘usual conditions’, it was held that this was simply a meaningless phrase,
2.15.2
205
206
207
208
That is, they adhere to the myth of ‘presentiation’ – see
209

Walford v Miles (1992)
209

The parties had reached agreement on the basic terms of the sale of a business.
This was ‘subject to contract’. The defendants, the vendors, separately agreed that
they would cease negotiations with anyone else. Subsequently, however, they sold to a
third party. The plaintiffs sought damages for breach of a collateral contract not to
The Modern Law of Contract
The House of Lords con
rmed that there could not be a ‘contract to negotiate’.
The positive obligation alleged was therefore ruled out on the basis of the reasons given
Courtney v Tolaini
. As regards the ‘lock-
out’ agreement not to negotiate with anyone
else, this was similarly unenforceable on grounds of uncertainty, since it was for an
ed time. It was not satisfactory to argue that it should continue for a ‘reason-
able time’. A reasonable time would only come to an end when negotiations broke
2.15.3
IN FOCUS: CONTRACTUAL PRINCIPLE VERSUS
This reluctance to allow for the kind of arrangement that the parties had put into their contract
can be seen as an example of the English courts’ refusal to take
account of the ongoing, relational nature of many contracts.
2.15.4
OBLIGATIONS DISTINGUISHED FROM ÔMACHINERYÕ
210
211
212
See, for example, Brown, 1992; Cumberbatch, 1992; Neill, 1992; Buckley, 1993; Steyn, 1997, p 439. Lord
Steyn expressed the hope that if the matter were to be raised again ‘with the bene
t of fuller argument . . .
the concept of good faith would not be rejected out of hand’.
213
See, for example, Brownsword, 2000, para 5.17.
214
215
216
Forming the Agreement
will often be prepared to assume that a ‘reasonable price’ was intended. They will also be
prepared to give effect to an agreement where property is to be valued by an independent
217
218
[1987] 2 Lloyd’s Rep 166. See also
[1985] Ch 42.
219
A similar approach was taken by the Court of Appeal in
The Modern Law of Contract
221

2.16
SUMMARY OF KEY POINTS
■
Formality is not generally required in making a contract, just a matching offer
and acceptance. Exceptions include contracts concerning land and consumer
credit agreements.
■
An offer must be distinguished from an invitation to treat. Displays of goods
and many advertisements are invitations to treat.
■
An acceptance to be effective must precisely match the offer. Introduction of
new terms will constitute a ‘counter offer’ rather than an acceptance.
■
Acceptance can be by words or conduct, but must generally be
communicated to the offeror. In some unilateral contracts (e.g. reward
■
Acceptance by post takes effect on posting. Acceptance by telephone or
electronic means will take effect when the acceptance is received (though
physical receipt, rather than being read, may be suf
cient for communications
ce hours).
■
An offer can generally be withdrawn at any time before acceptance, even if
the offeror has indicated that it will be left open for a particular time.
Revocation must be communicated to the offeree.
■
In some unilateral contracts, revocation may not be permitted once
■
If an agreement is uncertain on an important issue, or leaves it open to be
decided, there will be no contract. An ‘agreement to agree’ is not a binding

Forming the Agreement
2.17
FURTHER READING
■
Evans
, ‘
■
Gardner
, ‘
Trashing with Trollope: a deconstruction of the postal rules
■
Goodrich
, ‘
The posthumous life of the postal rule: requiem and revival of
’,
Mulcahy
and
Wheeler
,
,
Glasshouse Press

■
Howarth
, ‘
■
Hudson
, ‘
■
McClintock
, ‘
■
Mitchell
, ‘
■
Mitchell
and
Phillips
, ‘
The contractual nexus: is reliance essential
■
Rawlings
, ‘
■
Steyn
, ‘
lling the reasonable expectations of honest men
■
Stone
, ‘
Forming contracts without offer and acceptance, Lord Denning and the
2012 ] 4 WebJCLI

COMPANION WEBSITE

■
Revise and consolidate your knowledge of Formation by tackling a series of
Choice Questions on this chapter

■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
tune your legal skills by reading our tips and suggestions for Formation
problem questions
■
Explore Formation further by accessing a series of web links


3
Consideration
and Other Tests
of Enforceability

Contents
3.1
3.2
Introduction
3.3
3.4
Consideration or reliance?
93
3.5
125
3.14
128
3.15
Alternative tests of enforceability
129
3.16
136
3.17
Further reading
137

The Modern Law of Contract
OVERVIEW
This chapter is concerned with the issue of the enforceability of promises. How does
Deeds. These constitute a means of indicating an intention to make an enforceable
promise through formal means that is, putting the promise into a particular type of
contract law. It means, in effect, that promises do not have to take any particular
form, or be put in writing, but will be enforceable if there is mutuality in the agree-
What is meant by the requirement that consideration must be suf
cient,
Can an action already performed (past consideration) be consideration for a
new promise? (Generally, it cannot.)
The answer will depend on the type of duty.
Promissory estoppel. This doctrine allows a promise unsupported by
consideration to be enforced generally in the context of the variation of an
Part payment of debts. Generally, part payment of a debt is not good consideration
for the remission of the balance, unless promissory estoppel applies.
Alternative tests of enforceability. Other jurisdictions use reliance as a test of
enforceability alongside consideration. To date, English law has made limited use of
INTRODUCTION
In the previous chapter, the factors which lead a court to conclude that there is suf
cient
agreement for there to be a binding contract were discussed. In this chapter the
Consideration and Other Tests of Enforceability
example, as a result of changed circumstances? English contract law does not make this
held to that promise.
In response to these problems, the English courts have developed a concept that is
now generally referred to as ‘promissory estoppel’. This is a secondary test of the enforce-
ability of a promise, which does not replace ‘consideration’, but operates in certain speci
situations, particularly in relation to the variation of contracts and the part payment of
concept of promissory estoppel go further and argue that it is simply an example of a more
ranging test of enforceability which should be regarded as sitting alongside or even
replacing consideration. This argument is based around the concept of ‘reasonable reli-
ance’, and suggests that it is in effect where the promisee has reasonably acted in reliance
on the promisor’s promise that that promise should be treated as enforceable. This
approach has received more acceptance in other common law jurisdictions (e.g. USA,
Australia) than it has in the English courts. The issues raised by this analysis are discussed
towards the end of this chapter.
nal test of enforceability discussed in this chapter is the ‘deed’. This is a test
based on the form of the agreement rather than its content, and can operate to make one-
sided agreements (such as the promise to make a gift) enforceable, even though there is
no consideration for the promise.
These tests of enforceability are not necessarily conclusive of the issue, however. The
1
Indeed, it was probably suf
cient for the document to indicate on its face that it was ‘sealed’, without the
Working Paper No 93, paras 4.2–4.3.
2
This followed from the Law Commission Report No 163,
.
3
Section 1(1)(a); nor is there any limitation on the substances on which a deed may be written. At one time,
deeds were traditionally written on parchment rather than paper.
The Modern Law of Contract
4
‘Valid execution’ for an individual means that the document must be
signed in the presence of a witness who attests to the signature.
5
In addition there is a
requirement of delivery – the document must be ‘delivered as a deed by [the person
executing it] or a person authorised to do so on his behalf’.
6
under the Companies Acts, the position is governed by ss 44 and 46 of the Companies
Act 2006. The ‘execution’ of a document by a company can take effect either by the
xing of its common seal,
7
3.3.1
IN FOCUS: PRACTICAL USE OF DEEDS
Deeds may be used even where the transaction is supported by consideration.
12
traditionally been done in relation to complex contracts in the engineering and construc-
tion industries. This is probably because, by virtue of the Limitation Act 1980, the period
within which an action for breach of an obligation contained in a deed is 12 years,
13

4

Section 1(3)(a). It may also be signed at the relevant person’s direction, but it must still be in his presence
and, in this case, in the presence of two witnesses who must each attest the signature: ibid.
6
7
8
Section 44(2). The document should make it clear that it is being executed by the company.
9
Law of Property (Miscellaneous Provisions) Act 1989, s 1(2).
10
11
() 12
The only situation in which a contract must be made by deed to have full effect is a lease of land for more
than three years: Law of Property Act 1925, ss 52 and 54(2). Even here the lease will have some effect in
equity, and will be enforceable, provided it is in writing (
Walsh v Lonsdale
any intervening third party rights (for example, if the landlord sells the land).
13
Consideration and Other Tests of Enforceability
3.4
CONSIDERATION OR RELIANCE?
For contracts that are not made in the form of a deed, ‘consideration’ is generally used as
the test of enforceability, and it is to this that we now turn.
law. This provides that no matter how much the parties to a ‘simple contract’ may wish it
to be legally enforceable, it will not be so unless it contains ‘consideration’. What does the
word mean in this context? It is important to note that it does not have its ordinary,
everyday meaning. It is used in a technical sense. Essentially, it refers to what one party to
an agreement is giving, or promising, in exchange for what is being given or promised from
the other side. So, for example, in a contract where A is selling B 10 bags of grain for £100,
tion of this, B is paying £100. Or, to look at it the other way round, B is paying A £100. In
consideration for this, A is transferring to B the ownership of the grain. From this example
it will be seen that there is consideration on both sides of the agreement. It is this mutuality
which makes the agreement enforceable. If B simply agreed to pay A £100, or A agreed to
give B the grain, there would be no contract. The transaction would be a gift and would not
be legally enforceable.
The history of the development of this doctrine is a matter of controversy. Some
writers have argued that a study of the history of the English law of contract shows
rst referred to by the judges, meant simply a ‘reason’ for
enforcing a promise.
15
According to this view, such ‘reasons’ could be wide-ranging. It
16
and probably not until the
production of the 
14
15
The Modern Law of Contract
that you will pay for what has been done. This is suggested to be a more accurate way of
analysing many contractual situations than in terms of the mutual exchanges of promises,
19
accepted, it then opens the door to enforcing agreements where there is nothing that the
classical law would recognise as ‘consideration’, provided that there is ‘reasonable reli-
ance’. This is accepted to a greater or lesser extent by many common law jurisdictions,
20

but has only received limited support to date by the English courts – though some recent
decisions purportedly based on ‘consideration’ can be argued to be more accurately
concerned with ‘reliance’.
21

19
20
For example, the United States, Australia, New Zealand and Canada – see below, 3.15.2.
21
512 – discussed below, 3.9.9.
22
See below, 3.15.1.
23
Consideration and Other Tests of Enforceability
3.6
MUTUAL PROMISES
clear, however, that a promise to act can in itself be consideration. Lord Dunedin, in
Pneumatic Tyre Co Ltd v Selfridge & Co Ltd
,
24
for example, approved the following state-
ment from Pollock, 1902 (emphasis added):

An act or forbearance of the one party,
or the promise thereof
which the promise of the other is bought, and the promise thus given for value is
enforceable.

Suppose, then, continuing the example used above, that on Monday, A promises that he
promises, again on Monday, that when it is delivered she will pay £100. There is no doubt
that there is a contract as soon as these promises have been exchanged, so that if on
Tuesday B decides that she does not want the grain and tries to back out of the agree-
ment, she will be in breach of contract. But where is the consideration? On each side, the
24
Figure 3.1

The Modern Law of Contract
giving of the promise is the consideration. A’s promise to transfer the grain is consideration
for B’s promise to pay for it, and vice versa. The problem is that this does not 
t easily with

Thomas v Thomas (1842)
The testator, Mr Thomas, before his death, expressed a wish that his wife
should have for the rest of her life the house in which they had lived. After his death, his
executors made an agreement with Mrs Thomas to this effect, expressed to be ‘in
consideration’ of the testator’s wishes. There was also an obligation on Mrs Thomas to
25
26
Though Treitel has suggested that an unenforceable promise may nevertheless constitute a bene
t or
Consideration and Other Tests of Enforceability
This approach to the question of ‘adequacy’ may be seen as 
owing from a ‘freedom of
contract’ approach. The parties are regarded as being entitled to make their agreement in
to be making a bad bargain is no reason for the court’s interference. They are presumed to
3.7.1
ECONOMIC VALUE
Turning to the question of the ‘suf
his father’s property. It was held that this was not an enforceable agreement, because the
son had not provided any consideration. As Pollock CB explained:
33

property he liked; and the son’s abstaining from what he had no right to do can be

pay £1 per year, and to keep the house in repair. It was argued that there was no
contract here, because Mrs Thomas had provided no suf
cient consideration.
Held:
The statement that the agreement was ‘in consideration’ of the testator’s wishes
was not using ‘consideration’ in its technical contractual sense, but was expressing the
motive for making the agreement. The actual ‘consideration’ was the payment of £1
and the agreement to keep the house in repair. Either of these was clearly recognised
as good consideration, even though the payment of £1 could in no way be regarded as
anything approaching a commercial rent for the property.
29
See note 27, above. Campbell has argued that the fact that there appear to be exceptions to the basic
be relevant in raising suspicions of, for example, duress or undue in
The Modern Law of Contract
The courts have not been consistent in this approach, however. In the American case of
,
34
a promise not to drink alcohol, smoke tobacco or swear was held to be
Ward v Byham

35
it was suggested that a promise to ensure that
Even in cases which have a more obvious commercial context, the requirement of
economic value does not seem to have been applied very strictly. An example is
.
36


Chappell & Co v Nestlé Co Ltd (1960)
Facts:
This case arose out of a ‘special offer’ of a familiar kind, from Nestlé, under
which a person who sent in three wrappers from bars of their chocolate could buy a
record,
34
(1891) 27 NE 256; 124 NY 538. This case may re
ect the greater willingness of United States courts to
accept ‘reasonable reliance’ as a basis for contractual liability – see below, 3.15.2.
35
36
37
Consideration and Other Tests of Enforceability
For Thought

in radio programmes where advice
ed recipients of advice?


De La Bere v Pearson
38
39
This, in effect, would now be likely to be the position under the tort of negligent misstatement – discussed in
40
41
The Modern Law of Contract

On balance, we take the view that pupils such as the claimant provide consideration
for the offer made by chambers . . . by agreeing to enter into the close, important
and potentially very productive relationship which pupillage involves.

The court was therefore prepared to accept the general bene
ts to chambers in the oper-
cient to amount to consideration in relation to
ning with any precision the economic value of
As these cases illustrate, the requirement of ‘economic value’ is not particularly strict.
Indeed, in the overall pattern of decisions in this area, it is the case of
42
See Treitel, 1976, and also 2011, p 75.
43
44
45
Ibid. Atiyah, of course, argues for a broader concept of consideration anyway, as simply being a ‘reason’ for
the enforcement of a promise or obligation. This is discussed further at 3.15.1.
46
Consideration and Other Tests of Enforceability
A more recent example of the same approach is
.
47

47
48
49
50
51
52

Re McArdle (1951)
Facts:
William McArdle left a house to his sons and daughter. One of the sons was
living in the house, and he and his wife carried out various improvements to it. His wife
then got each of his siblings to sign a document agreeing to contribute to the costs of
the work. The document was worded in a way which read as though work was to be
3.8.1
THE COMMON LAW EXCEPTIONS
The doctrine of past consideration is not an absolute one, however. The courts have
always recognised certain situations where a promise made subsequent to the perform-
ance of an act may nevertheless be enforceable. The rules derived from various cases
have now been restated as a threefold test by the Privy Council in
Pao On v Lau Yiu Long
.
49

Lord Scarman, delivering the opinion of the Privy Council, recognised that:
50

. . . an act done before the giving of a promise to make a payment or to confer some
The Modern Law of Contract
Third, the payment, or conferment of other bene
ts, must have been legally enforceable
had it been promised in advance. There is little that needs to be said about this. It simply
means that the usual requirements for a binding agreement must apply.
The effect of these tests is that consideration will be valid to support a later promise,
provided that all along there was an expectation of reward. It is very similar to the situation
where goods or services are provided without the exact price being speci
seen, the courts will enforce the payment of a reasonable sum for what has been provided.
That is, in effect, also what they are doing in situations falling within the three tests outlined
tion of the parties, taking an approach based on third party objectivity.
53

It can also be argued that the whole common law doctrine of ‘past consideration’ could
be dealt with more simply, and with very similar results, by an overall principle of ‘reason-
able reliance’. Thus, in
, the son did the work before any promise was made by
his siblings. He did not, therefore, act in reliance on their promises. By contrast, in
Re CaseyÕs Patents
, the work was done in reliance on a promise
one general principle governing all situations, rather than stating a general rule and then
making it subject to exceptions. This is not, so far, however, the approach of the English
courts, which prefer to adhere to at least the form of classical theory.
3.8.2
EXCEPTIONS UNDER STATUTE
Two statutory exceptions to the rule that past consideration is no consideration should be
y noted. First, s 27 of the Bills of Exchange Act 1882 states that:

Valuable consideration for a bill [of exchange] may be constituted by (a) any consid-
cient to support a simple contract, (b) an antecedent debt or liability.

tion for a promise,
54
can be so where it is owed by a person receiving the bene
t of a
promise contained in a bill of exchange.
which provides that where a person liable or accountable for a debt
55
right ‘shall be treated as having accrued on and not before the date of the acknowledg-
56
relevance of this provision to the current discussion is that if the acknowledgment is in the
form of a promise,
57
it will have the effect of extending the limitation period for recovery of
the debt, even though no fresh consideration has been given. The statute is thus in effect
allowing ‘past consideration’ to support a new promise.

3.9
PERFORMANCE OF EXISTING DUTIES
Can the performance of, or the promise to perform, an act which the promisor is already
under a legal obligation to carry out, ever amount to consideration? Three possible types
of existing obligation may exist, and they need to be considered separately. These are 
53
54
(1869) LR 2 CP 393.
55
56
57
Surrendra Overseas Ltd v Government of Sri Lanka
[1977] 1 WLR 565, p 575.
Consideration and Other Tests of Enforceability
where the obligation which is alleged to constitute consideration is already imposed by a
separate public duty; second, where the same obligation already exists under a contract
with a third party; and, third, where the same obligation already exists under a previous
contract with the same party by whom the promise is now being made.
3.9.1
EXISTING DUTY IMPOSED BY LAW: PUBLIC POLICY
Figure 3.2

58
59
The Modern Law of Contract
In cases where the possibilities for extortion are less obvious, there has been a greater
willingness to regard performance of an existing non-
consideration, though it must be said that the clearest statements to that effect have come
from one judge, that is, Lord Denning. In
Ward v Byham
,
60
look after her illegitimate child. The father promised to make payments, provided that the
child was well looked after and happy, and was allowed to decide with whom she should
live. Only the looking after of the child could involve the provision of things of ‘economic
cient to amount to consideration, but the mother was already obliged to do this.
Lord Denning had no doubt that this could, nevertheless, be good consideration:
61

I have always thought that a promise to perform an existing duty, or the performance
of it, should be regarded as good consideration, because it is a bene
t to the person

The other two members of the Court of Appeal were not as explicit as Lord Denning, and
seem to have regarded the whole package of what the father asked for as amounting to
good consideration. This clearly went beyond the mother’s existing obligation, but, as has
62
60
61
62
63
64
65
[1991] 1 QB 1; [1990] 1 All ER 512 – discussed below, at 3.9.9.
Consideration and Other Tests of Enforceability
3.9.2
PUBLIC DUTY: EXCEEDING THE DUTY
Whatever the correct answer to the above situation, it is clear that if what is promised or
done goes beyond the existing duty imposed by law, then it can be regarded as good
consideration. This applies whatever the nature of the duty, so that even as regards
cials, consideration may be provided by exceeding their statutory or other legal
rmed in
.
66

For Thought


Glasbrook Bros v Glamorgan CC (1925)
Facts:
In the course of a strike at a coal mine, the owners of the mine were concerned
repair should not be prevented from carrying out their duties. They sought the assist-
ance of the police in this. The police suggested the provision of a mobile group, but the
66
The Modern Law of Contract
eld Utd FC
,
67
which concerned the provision of policing for football
rmed the approach taken in
. Moreover, in applying the
predecessor to s 25 of the Police Act 1996,
68
decided to hold matches and requested a police presence, such presence could consti-
necessary to maintain the peace. A ‘request’ for a police presence could be implied if
police attendance was necessary to enable the club to conduct its matches safely. The
football club was therefore held liable to pay for the services provided. If, however, the club
disagrees with the police as to the level of policing required, and speci
cally asks for a
lower level of attendance, there will be no implied request for the higher level of provision
that the police may think appropriate. The club will only be liable to pay for the services
which it actually requested. This was the view of the Court of Appeal in
3.9.3
EXISTING CONTRACTUAL DUTY OWED TO THIRD PARTY
If a person is already bound to perform a particular act under a contract, can the
performance of, or promise to perform, this act amount to good consideration for
67
68
That is, Police Act 1964, s 15, which used the same wording as s 25 of the 1996 Act.
69
Reading Festival Ltd v West Yorkshire
[2006] EWCA Civ 524, [2006] 1 WLR 2005.
70
71
Consideration and Other Tests of Enforceability
3.9.4
IN FOCUS: AN ALTERNATIVE VIEW OF

, Byles J, was not convinced that the uncle’s promise was

Shadwell v Shadwell (1860)
could be used as consideration for the uncle’s promise, on the basis that that promise
was in effect an inducement to the nephew to go through with the marriage. Erle CJ
recognised that there was some delicacy involved in categorising the nephew’s marriage
the promise to pay the annuity.
72
This is no longer the case as a result of the Law Reform (Miscellaneous Provisions) Act 1970, s 1.
73
74
[1969] 2 All ER 616, p 621.
75
The Modern Law of Contract
3.9.5
DUTY TO THIRD PARTY: COMMERCIAL APPLICATION
The approach taken in
was subsequently applied in a commercial
where it was held that the delivery of a cargo of coal to the
defendant constituted good consideration, even though the plaintiff was already contractu-
t of a direct obligation which he can enforce.

3.9.6
PERFORMANCE OR PROMISE?
In all three cases so far considered, it has been
performance
which has constituted the consideration. Can a promise to perform an existing obligation
also amount to consideration? Take the example used at the start of this section, where A
is bound to deliver goods to B on 1 June, and C promises A £5,000 if he does so. We have
ed date, he will, on the basis of

, be able to recover the promised £5,000 from C. What if, however, A
also promises to C that he will deliver by 1 June? In other words, the contract, instead of
being unilateral (‘if you deliver to B by 1 June, I promise to pay you £5,000’) becomes
pre-
existing contractual obligation to a third party can be valid consideration.

Given the general approach to consideration, under which promises themselves can be
good consideration, this decision is entirely consistent. The law on this point is, therefore,
76
77
78
79
80
Consideration and Other Tests of Enforceability
3.9.7
EXISTING DUTY TO THE SAME PROMISOR

Stilk v Myrick (1809)
Facts:
81
culty which the classical doctrine of consideration has in dealing with relational
contracts, where the modi
cation of obligations may well be necessary and expected: see
82
83
See, for example, Gilmore, 1974, pp 22–28; Luther, 1999.
84
85
The Modern Law of Contract

There was no consideration for the ulterior pay promised to the mariners
who remained with the ship. Before they sailed from London, they had undertaken
to do all that they could under all the emergencies of the voyage. They had
3.9.8
GOING BEYOND THE EXISTING DUTY
that if the crew had gone beyond their existing duty, they would
have provided good consideration. In addition to the examples given by Lord Ellenborough,

86
give rise to a situation falling outside the normal hazards of the voyage. In this case, a ship
which had started out with a crew of 36 had, at the time that the relevant promise was
made to the plaintiff, only 19 left, of whom only four or 
ve were able seamen. In this situ-
ation, it was held that the voyage had become so dangerous that it was
unreasonable to require the crew to continue. In effect (though the decision does not use
this terminology), the original contract with the plaintiff had been ‘frustrated’ (i.e., had
become radically different from what was originally agreed),
87
and therefore a fresh
contract on the revised (more favourable) terms could be created. The performance of, or
promise to perform, actions which are inside an existing duty cannot, however, amount to
3.9.9
A RECONSIDERATION:

88

Stilk v Myrick

.
91

86
87
88
89
See, for example, Gilmore, 1974, pp 22–28; Luther, 1999.
90
Atlas Express v Kafco
[1989] QB 833; [1989] 1 All ER 641.
91
Consideration and Other Tests of Enforceability
In considering the defendants’ argument that there was no consideration, Glidewell LJ 
ts (as identi
ed by counsel for the defendants) that accrued to the
defendants from the plaintiffs’ continuation with the contract. These were:
92

. . . (i) seeking to ensure that the plaintiff continued work and did not stop in breach
contract; (ii) avoiding the penalty for delay; and (iii) avoiding the trouble
92

Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991)
Facts:
The case concerned a contract to refurbish a block of 
ats. The defendants
were the main contractors for this work, and had engaged the plaintiffs as sub-
contractors to carry out carpentry work. The agreed price for this was £20,000. Part
way through the contract, the plaintiffs got into 
nancial dif
culties, at least in part
because the contract price for the carpentry work was too low. The defendants were
For Thought

ats, rather than the defendants taking the initiative in offering

The Modern Law of Contract
3.9.10

93

from
wholly clear from the judgments. Similar bene
ts to those identi
ed could be said to have
been present in
. For example, as a result of his promise, the captain did not
have to seek replacement crew, avoided delays, and made sure the existing crew continued
94
The main reason for distinguishing
related to the alternative, public policy basis for the decision mentioned above. In other
words, the court regarded it as signi
cant that there was in
of improper pressure having been put on the defendants. Indeed, it was they who
suggested the increased payments.
The result is that the position as regards duties owed to the promisor is closely
assimilated to the position in relation to duties owed to third parties. Thus, Glidewell LJ
summarised the current state of the law as follows:
95

. . . (i) if A has entered into a contract with B to do work for, or to supply goods or
t, or obviates a disbene
t; then (v) the bene
t to B is capable of
being consideration for B’s promise, so that the promise will be legally binding.


cant as regards de
ning the limits of valid considera-
tion, and undoubtedly has the effect of widening those limits. Promises to perform existing
93
, see Halson, 1990; Hird and Blair,
94
Lee v GEC Plessey Telecommunications
[1993] IRLR 383, discussed below.
95
96
Consideration and Other Tests of Enforceability
The approach taken in
instance decisions concerning commercial contracts – that is,

Machinery Ltd v Emba Machinery AB
withdrawing from a contract was held to be suf
cient ‘practical bene
t’ to provide consid-
eration for a new promise designed to keep them ‘on board’. In
Telecommunications
context of a contract of employment, employees provide suf
cient consideration for an
award of enhanced pay or redundancy terms by continuing to work under the contract. The
abandoning by the employee of any argument that the pay should be even higher or the
terms even more favourable means that ‘the employer has secured a bene
t and avoided
97
[1990] 2 Lloyd’s Rep 526.
98
[1998] 2 Lloyd’s Rep 429.
99
100
101
[2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128.
102
[2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128, para 107.
103
[2004] EWHC 2576; [2005] 1 Lloyd’s Rep 128, para 109.
The Modern Law of Contract
part in extracting the promise) that they should be able to recover this. The application of
would also lead to the seamen being able to recover, on the
basis that their continued crewing of the ship was based on the promise of extra payment.
The questions then become issues of fact: Was any improper pressure applied? Was there
any reliance?
104
3.9.11
LIMITATION ON

One limitation on the effect of the decision in
was made clear by the Court
The case concerned an assertion by a company that it had
made a binding contract with the Inland Revenue under which it could, effectively, pay off its
tax liabilities by instalments. The Inland Revenue argued that this agreement was not binding
on them, because the company provided no consideration for the agreement to accept
obliged to do. The Court of Appeal, while deciding the case in favour of the Inland Revenue
any agreement to pay by instalments. To treat this as providing consideration would be in
direct con
ict with the leading House of Lords’ decision on part payment of debts, that is,
. The effect of
Foakes v
is that promises relating to the payment of existing debts have to be treated as a sepa-
rate category from promises concerned with other types of existing contractual obligation.
In general, a promise to pay a debt in instalments after the due date (or the payment on the
due date of less than was owed) will not amount to consideration for any promise by the
partial payment was tendered). The reversing of the decision in
was a matter
for the House of Lords, or Parliament, and could not be undertaken by the Court of Appeal.
104
In other words, could it be shown that, as a matter of fact, the sailors did not rely on the promise, but would
105
106
For Thought

Would it make a difference in
if a ÔrelianceÕ analysis were adopted? The
t, such as
payment early or, perhaps, in a different place.
107

Consideration and Other Tests of Enforceability
3.10
CONSIDERATION AND THE VARIATION OF CONTRACTS
The above discussion leads conveniently into a review of the more general issue of the way
in which the doctrine of consideration affects the freedom of parties to vary the obligations
under a contract which they have entered into. This is an area where classical theory has
culty in coping with the ‘relational’ aspect of many contracts.
108

3.10.1
NEED FOR ACCORD AND SATISFACTION
We have already referred to the general principle under classical theory that for a contract
to be altered, there must be consideration. To use the language often adopted by the
courts, ‘accord and satisfaction’ must be present: ‘accord’ meaning agreement and ‘satis-
faction’ essentially consideration. The approach taken in
,
109
as rede
ned in
,
110
ts into this general principle. The same approach applies where a
contract is brought to an end by mutual agreement. As long as there are outstanding obli-
gations on both sides of the contract, the agreement to terminate will be binding. The
foregoing of the existing rights under the contract will amount to good consideration for
the promise to release the other party from his or her obligation.
3.10.2
THE CONCEPT OF ÔWAIVERÕ
Over the years, however, this approach, though still applied where appropriate, has often
been found in practice to be too restrictive. Why should parties who are on an equal
so, without worrying about the technicality of ‘consideration’? Various concepts have been
used to allow more 
exibility, and to give some force to agreed variations, even where
these are not supported by consideration.
111
this principle, a person who ‘waives’ (that is, promises not to enforce) certain rights under
a contract for a period of time may be stopped from later insisting on performance in
108
109
110
111
This, it may be suggested, illustrates the weakness of the classical doctrine of consideration: the more the
exceptions mount, the less it can really be said to provide a coherent governing principle.
112
113
The Modern Law of Contract
however, did not sue for breach of contract as soon as the date had passed, but continued
to seek delivery. This was regarded as the buyer having waived the right to delivery at a
Although there was continued delay, the buyer would not have been able to refuse
nished in April, May or June 1948. By the end of June,
however, the buyer’s patience ran out, and on 29 June 1948 he told the suppliers that
unless the car was delivered by 25 July 1948, he would not accept it. The car was not in
nished until 18 October 1948. The suppliers then sued for non-
basis of the buyer’s waiver of the original term specifying a date for delivery. The Court of
Appeal, however, did not accept that such a waiver was permanent in its effect. As Lord
114

It would be most unreasonable if, having been lenient and having waived the initial
expressed time, [the buyer] should thereby have prevented himself from ever there-
after insisting on reasonably quick delivery. In my judgment, he was entitled to give
a reasonable notice making time of the essence of the matter.

On the facts, the notice of four weeks given on 29 June 1948 was reasonable and, once it
had expired, the buyer – having waited many months for his car – was entitled to cancel
the contract. A waiver of rights will, therefore, generally be capable of withdrawal on the
giving of reasonable notice.
Looked at in this way, the concept of equitable waiver has clear links with the common
law concept of estoppel. This is the rule whereby, if A, a party to an action, has made
a statement of fact on which the other party, B, has relied, A will not be allowed to
115
existing fact, however. In
,
116
promise not to enforce a debt. Mrs Jorden had made repeated statements that she
would not enforce a bond for £1,200 issued by Money, which she held. On the basis of
that assurance, Money married. He then sought a declaration from the courts that the
rst instance, but the House of Lords took
a different view. Lord Cranworth LC, having stated the general principles of the doctrine
117

I think that that doctrine does not apply to a case where the representation is not
114
115
As will be seen from this description, estoppel is based on reliance. Waiver might also be said to be
based on the fact that a person relies on the other party’s promise not to enforce a particular contractual
116
117
Consideration and Other Tests of Enforceability
118
See Atiyah, 1986, at pp 234–38. The same point is made by Baker, 1979, p 27.
119
(1860) 9 CBNS 159; 142 ER 62 – see above, 3.9.3.
120
121
See, for example, Treitel, 2011, p 121.
122
Argy Trading Development Co Ltd v Lapid

3.10.3
IN FOCUS: AN ALTERNATIVE VIEW OF

Atiyah has argued forcefully that the orthodox view of
what lay behind the reason why counsel argued it on the basis of estoppel rather than
118
This was not that there was a lack of consideration for the promise not to
enforce the debt. Atiyah argues that the marriage would have provided such consideration,
since it was action taken in reliance on the promise (even though not requested by the
promisor).
119
The problem was that, at the time, the Statute of Frauds 1677 required such
a promise to be evidenced in writing. Since there was no writing available, the plaintiff tried
to plead the case in estoppel rather than contract. The Court, however, would not allow
this to be used as a means of circumventing the requirements of the Statute of Frauds. To
cant undermining of the statute
– ‘for it would have meant that any plaintiff who could show that he had altered his position
in reliance on the defendant’s promise could ignore the statute and rely on estoppel’.
120

3.10.4
THE ACCEPTED ANALYSIS
has been misunderstood (and not all commentators would agree
121
estoppel can only be used in relation to statements of existing fact.
122
simply because action was taken in reliance on a promise, this will not in itself generally
render the promise enforceable. To mitigate the practical problems caused by this
analysis, particularly where the parties are in agreement about wishing to vary the terms of
into a broader doctrine, generally referred to as ‘promissory estoppel’.

3.11
THE DOCTRINE OF PROMISSORY ESTOPPEL
The modern law on this topic, which gives rise to situations in which a contract can in
effect be varied without there being consideration, derives from
Trust Ltd v High Trees House Ltd
.

Central London Property Trust Ltd v High Trees House Ltd (1947)
Facts:
The plaintiffs were the owners of a block of 
ats in London, which they rented to
the defendants at a rent of £2,500 per annum. Following the outbreak of the Second
World War in 1939, the defendants were unable to 
nd suf
cient tenants to take the
ats, because of the large numbers of people leaving London. As a result, the plaintiffs
agreed that, in the circumstances, the rent could be reduced by half, to £1,250 per
The Modern Law of Contract
Denning’s main authority for his analysis of the position relating to the war years was the
these objections, and their treatment in subsequent case law, must now be considered.
Held:
rmed that the plaintiffs were entitled to recover the full rent from
the end of the war. Their promise to take less had clearly only been intended to last until
that point. On the more general issue, however, he considered that the plaintiffs would
not be able to recover the balance for the war years. The reason for this was that he
thought that there was a general equitable principle whereby:
123

A promise intended to be binding, intended to be acted upon, and in fact acted
on, is binding so far as its terms properly apply.

These conditions were satis
ed on the facts of this case in relation to what had
happened during the war years, and the plaintiffs were bound by their promise, which
123
124
125
Birmingham and District Land v London and Northwestern Railway Co

Salisbury (Marquess) v Gilmore
[1942] 2 KB 38.
126
127
Consideration and Other Tests of Enforceability
3.12
PROMISSORY ESTOPPEL AND CONSIDERATION
Figure 3.3

128
129
edged reliance-
based theory of enforceability would be likely to require B’s reliance to be
‘reasonable’ – and perhaps foreseeable by A. See, further, below, 3.15.2.
The Modern Law of Contract
stage, however, it is suf
cient to note that the broad formulation of ‘promissory estoppel’
High Trees
establishing the borderlines of the doctrine can be viewed as supporting the view that it is
roots.
There are 
ve suggested limitations, of which four certainly apply: the status of the 
is less clear.
3.12.1
THERE MUST BE AN EXISTING LEGAL RELATIONSHIP
It is suggested that promissory estoppel cannot exist in a vacuum: there must be an

Combe v Combe (1951)
130

Facts:
130
131
Part of the reason for the decision was the fact that promissory estoppel could only be used as a ‘shield’
rather than as a ‘sword’: this is discussed further below, 3.12.3.
132
133
Waltons Stores (Interstate) Ltd v Maher
(1988) 76 ALR 513, discussed below,
134
135
Consideration and Other Tests of Enforceability
director fell within s 108, because ‘M Jackson’ was not the same as ‘Michael Jackson’.
The plaintiffs were prevented from recovering from him, however, on the basis that their
action in writing the words of acceptance on the bill (including the inaccurate name)
amounted to a promise that ‘acceptance in that form would be, or would be accepted by
them as, a regular acceptance of the bill’.
136
a promissory estoppel, because it would be inequitable to allow the plaintiffs to enforce
against the director personally. Such personal liability would not have arisen if the bill had
been in the proper form. To the argument that promissory estoppel only arises where there
is an existing contractual relationship, Donaldson J commented:
137

[T]his does not seem to me to be essential, provided that there is a pre-
relationship which could in certain circumstances give rise to liabilities and penalties.
Such a relationship is created by (a) s 108 of the Companies Act 1948, (b) the fact
that Mr Jackson was a director of Jacksons and (c) whatever contractual arrange-
136
137
138
139
That is, it was a representation made by a company which was about to become the employer of the plain-
tiff, to the effect that his new employment would be treated as continuous from that which he was about to
leave. This was important for the purpose of redundancy entitlement.
140
141
The third member of the Court of Appeal, Brightman J, also found for the plaintiff, on the basis that the
statutory presumption of continuous employment under s 9 of the Redundancy Payments Act 1965 could
not be rebutted in the light of the statement made by the new employer.
142
[1982] 1 Lloyd’s Rep 456.
143
Ibid, p 466. He relied to some extent on the comments of Robert Goff J in the 
rst instance decision in
Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd
[1981] 2 WLR 554.
The Modern Law of Contract
3.12.2
Under the normal rules for the creation of a contract, obligations may arise as soon as
promises have been exchanged. There is no need for either side to have relied on the
other’s promise in order to be able to enforce it. In relation to promissory estoppel,
however, the party trying to enforce the promise must have taken some action on it. This
to forgo the rest of the debt has shown suf
cient reliance to support an argument for
promissory estoppel.
3.12.3
THE DOCTRINE CAN ONLY BE USED AS A ÔSHIELD NOT A SWORDÕ
The third limitation again derives from
,
148
149
The Court of Appeal, including Lord Denning, thought that the
attempt by the wife to use promissory estoppel to enforce her husband’s promise was an
inappropriate use of the doctrine. Promissory estoppel could not form the basis of
144
145
146
Consideration and Other Tests of Enforceability
sword’.
150

existing relationships, rather than to create new ones. It does not mean, however, that
promissory estoppel can only ever be used by a defendant, and never by a claimant. For
example, a landlord might promise to waive an obligation to repair which would otherwise
fall on the tenant. Suppose that the landlord subsequently gives the tenant notice to quit
for failing to carry out repairs. The tenant could then go to court, as claimant, to challenge
the notice. Reliance would be placed on the landlord’s promise as having modi
ed the
tenant’s obligations. The principle stated in
would not prevent the tenant
from bringing the action against the landlord.
151

3.12.4
IT MUST BE INEQUITABLE FOR THE PROMISOR TO
Promissory estoppel is, as we have seen, derived from the concept of equitable waiver.

D and C Builders v Rees (1966)
Facts:
The plaintiff builders had done work for the defendants and were owed nearly
£500. After pressing for payment for some time, the plaintiff agreed to take £300 in
satisfaction of the account. Mrs Rees, who knew that the plaintiffs were in 
Held:
Lord Denning, in the Court of Appeal, held that although there was clearly a
promise here of a type which might raise promissory estoppel, the element of
intimidation in the defendant’s behaviour, knowingly taking advantage of the plaintiffs’
circumstances, meant that it was not inequitable to allow the plaintiffs to go back on
their promise. The other members of the Court of Appeal did not think it was even
153

For Thought

had been aware of Mrs ReesÕ Þ
nancial difÞ
culties and had themselves agreed to reduce

150
[1951] 2 KB 215, p 224; [1951] 1 All ER 767, p 772. This phrase was apparently used by counsel for the
The Modern Law of Contract
D and C Builders

3.12.5
THE DOCTRINE IS ONLY SUSPENSORY IN ITS EFFECT
Does the doctrine have a permanent, or only a suspensory effect? This 
nal limitation on
promissory estoppel is the one about which there is most uncertainty. There is no doubt
that in some circumstances a promissory estoppel will have a purely suspensory effect. In
154
[1981] 2 Lloyd’s Rep 695; [1982] 1 All ER 19.
155
156
157
A ‘relational’ contract, in other words – see
158
Consideration and Other Tests of Enforceability
Collier v P & MJ Wright (Holdings) Ltd
.
159
case concerned a partner who claimed that a creditor of a partnership had promised that
the partner could discharge his liability by paying off his share (i.e. one third) of the partner-
owed by the partnership as a whole. On a preliminary issue, the Court of Appeal held that
on these facts the partner had an arguable case for promissory estoppel, on the basis that
by paying his share he had discharged his full debt to the creditor. The court relied heavily
on Lord Denning’s
inequitable behaviour of the debtor, promissory estoppel would have operated to discharge
160

The conclusion must be, then, that it is not true to say that promissory estoppel can
operate in a suspensory way. The precise effect of promissory estoppel, in terms of
3.13.1
THE COMMON LAW POSITION
PinnelÕs Case
,
161

rmed by the House of Lords in
.
162
163

159
160
See also Austen-Baker, 2008.
161
162
163
It seems unlikely that a reliance-
based approach would come up with any different general rule on this
cult to see that a debtor who has made part payment has ‘relied’ on a promise to accept this
The Modern Law of Contract
The creditor will still be able to recover the balance of the debt, unless the debtor can show
goods, or services, instead of cash, this, if accepted by the creditor, will discharge the debt
fully, even if the value of what was supplied is less than the total amount owed: ‘The gift of
a horse, a hawk, or a robe, in satisfaction is good.’
164
date could never discharge a debt of £100, but if the debtor offered and the creditor
accepted a book worth £5 in satisfaction, the creditor could not then claim the balance of
cation for this rather odd rule is that the book must have been regarded by
the creditor as more bene
cial than money, otherwise it would not have been accepted,
and the court will not inquire further into the creditor’s motives.
Two other situations are recognised by the common law as enabling a debt to be
discharged, even though it has not been fully paid. The 
rst is where the payment is made
by a third party. For example, in
Hirachand Punamchand v Temple
,
165
the debtor’s father
made a payment in relation to a promissory note which was accepted by the creditor in full
Welby v Drake

166

.
167

Second, if a debtor owes money to several creditors, an agreement may be reached
whereby each of them is to receive a proportion of the money owed (a ‘composition agree-
ment’). In that situation, none of the creditors will be allowed to sue the debtor to recover
168

Both of these two situations may be explained on the basis that the creditor should not
must be supported by consideration in order to make it enforceable.
169

3.13.2
THE DECISION IN

PinnelÕs Case
, in that the debtor had paid early, and had
therefore in any case provided suf
cient consideration to discharge the whole debt, but it
rmed by the House of Lords in
.
164
165
166
167
168
(1831) 2 B & Ald 328.
169
For other possible explanations for these decisions, see Treitel, 2011, p 134.
170
See the comments of Gilmore, 1974, at pp 31–32.

Foakes v Beer (1884)
Facts:
Dr Foakes owed Mrs Beer a sum of money in relation to a judgment debt.
Mrs Beer agreed that Dr Foakes could pay this off in instalments. When he had done
so, Mrs Beer sued to recover the interest on the debt, in relation to the delay in the

Consideration and Other Tests of Enforceability
rmed in two cases that this is still the standard position as
regards part payment of debts.
rst is
,
171
172
.
173
In the latter case, the plaintiff started a county court action to recover a debt,
originally stated at £486.50 but later increased to £1,745.79. The defendant, as part of his
‘defence’ in relation to these proceedings, sent the plaintiff a cheque for £150, sending
for any other promise. The principles of

174

applied, and the plaintiff was free to pursue his claim for the balance which he alleged was
with whom Aldous LJ also agreed, decided the case on the different ground that, on the
PinnelÕs Case
remain good
3.13.3
THE EFFECT OF PROMISSORY ESTOPPEL ON

What is the effect, if any, of the doctrine of promissory estoppel on these principles? In this
171
172
173
174
– 175
176
[1991] 1 QB 1; [1990] 1 All ER 512.
177
The Modern Law of Contract
principle now known as ‘promissory estoppel’.
Beer.
Given that three of the four members of the House of Lords who delivered speeches
expressed some unhappiness about the outcome to which they felt that
178
so that they would gladly have accepted an escape route
approach taken in
was considered to have no relevance to the situation of part
payment of debts. This, then, was a further way in which Lord Denning’s decision in
London Property Trust Ltd v High Trees House Ltd
broke new ground. The case was
concerned, in effect, with the partial payment of a debt (that is, half the rent for the war
‘promissory estoppel’, can mitigate the harshness of the rule in
, in appro-
179
nitely be decided differently
if it came before the House of Lords again today. That would depend on what exactly Mrs
the previous section, the Court of Appeal, in
Collier v P & MJ Wright (Holdings) Ltd
recently expressed the view that by making a part payment which a creditor has agreed to
accept as discharging the debt, a debtor shows suf
cient reliance to support an argument
of promissory estoppel.
180
This decision was only on a preliminary issue, but it appears to
simply on the basis that the debtor has made the requested part payment. If that is the
has been considerably narrowed. It
would only apply where there was no true agreement to accept the part payment as
discharging the debt, or where it was not inequitable to allow the creditor to go back on
the promise to remit the debt.
181

3.14
OTHER TYPES OF ESTOPPEL
Before leaving this area, we should also note two other types of estoppel which can have
an effect on the operation of a contract. First, there is
where the parties to an agreement have acted on the basis that some provision in the
contract has a particular meaning. This type of estoppel will operate to prevent one of the
178
See (1884) 9 App Cas 605, p 613 (Lord Selborne); p 622 (Lord Blackburn); p 630 (Lord Fitzgerald).
179
[1991] 1 QB 1, a promise to accept a reduced rent could
amount to a binding variation of the contract, without the need to rely on promissory estoppel.
180
181
See also Austen-Baker, 2008.
182
Consideration and Other Tests of Enforceability
and went into liquidation, the liquidator sought a declaration to prevent the Bank using
money which it owed to AIP under another transaction in order to discharge ANPP’s debt.
It was argued that the guarantee was not binding, because it only referred to money owing
to the Bank itself, whereas the money had actually been lent by Portsoken. There was no
however, that all parties had acted on the basis that the wording of the guarantee referred
operated to prevent AIP arguing for a different meaning. Therefore, AIP’s liquidator could
not stop the Bank from using the money owed to AIP in the way it proposed.
183

A more recent con
rmation by the House of Lords of the concept of estoppel by
Johnson v Gore Wood & Co
.
184
that the compromise of an action by a company against a 
rm of solicitors did not preclude
the managing director of the company subsequently bringing a personal action against the
rm. This was not an ‘abuse of process’ because the House felt that the earlier negotia-
tions were based on the assumption that a further proceeding by the managing director
185

183
The Modern Law of Contract
binding. In particular, a promise unsupported by consideration cannot be enforced. As was
noted at the start of this chapter, however,
187
as an accurate description of what the courts actually do. Indeed, we have already seen
that there is a breach in the standard approach via the concept of promissory estoppel,
and a probable weakening of it via the case of
.
188

3.15.1
WHAT DOES ÔCONSIDERATIONÕ REALLY MEAN?
One of the leading English sceptics in relation to the traditional analysis of the doctrine of
187
188
189
Atiyah, 1986: this is in fact a revised version of an inaugural lecture delivered at the Australian National
University, Canberra, in 1971 and published by the Australian National University Press in the same year.
See also Atiyah, 1978, republished as
190
191
– 192
193
– 194
195
196
Consideration and Other Tests of Enforceability
earning more than her ex-
husband. This was a reason (or consideration?) for not enforcing
the husband’s promise. But, in general, where there has been reasonable reliance on a
promise, even if the promisee has not provided what we should recognise as ‘considera-
tion’ in the technical sense, Atiyah is of the view that the promise should be enforceable.
3.15.2
ÔRELIANCEÕ AS A TEST OF ENFORCEABILITY
197

This aspect of his theories about contract appears at greatest length in Atiyah, 1986,
arguments of Baker concerning ‘reasonable expectation’ as the basis of contractual liability: Baker, 1979.
199
200
The Modern Law of Contract
would regard as an orthodox de
nition of consideration based around the concept of
‘bargain’, it also included s 90,
204
which reads:

A promise which the promisor should reasonably expect to induce action or forbear-
nite and substantial character on the part of the promisee and which
the enforcement of the promise.

As will be seen, this provides a test for the enforceability of promises not based on ‘consid-
eration’ but on ‘reliance’, and this has remained a central part of the American law of
consideration its primary, if not sole, test of enforceability. Recent developments in
Australia can be seen as indicating a similar trend away from consideration.
For Thought

Would using ÔrelianceÕ in place of or alongside consideration as a test of enforceability
204
The process by which these two, rather contradictory, sections dealing with the basis of contractual
exist in the same document is entertainingly described by Gilmore, 1974, pp 60–65.
205
206
(1988) 164 CLR 387; 76 ALR 513. This case may be regarded as building on
CLR 406, where at least some members of the High Court of Australia had 
rst accepted that promissory
Consideration and Other Tests of Enforceability
link with the way in which promissory estoppel has been used in that jurisdiction. Brennan
208
209
210
The Commonwealth of Australia v Verwayen
Lloyd’s Rep 493.
211
Burbery Mortgage Finance and Savings Ltd v Hindsbank Holdings Ltd
[1989] 1 NZLR 356.
212
213
For the contrary argument that promissory estoppel should be con
ned to the area with which it was
cation of existing contracts), see
214
The Modern Law of Contract
215
Unless and until this happens, it cannot therefore be said
3.15.3
ÔPROMISEÕ AS A TEST OF ENFORCEABILITY
As has been pointed out earlier in this chapter,
218
there are dif
culties in 
tting a ‘promise’
215
Consideration and Other Tests of Enforceability
to keep a promise ‘is grounded in respect for individual autonomy and trust’.
221
More
222

An individual is morally bound to keep his promises because he has intentionally
invoked a convention whose function is to give grounds – moral grounds – for
another to expect the promised performance. To renege is to abuse a con
that he was free to invite or not, and which he intentionally did invite.

Part of Fried’s argument for putting ‘promise’ at the centre of contract is that the doctrine of
consideration is inadequate as a test of enforceability. He suggests that two principal
elements of the doctrine are mutually inconsistent. One says that the law is not concerned
This appears to support the idea that ‘the free
arrangements of rational persons should be respected’.
The second principle is that only
221
222
223
224
225
226
227
228
229
230
The Modern Law of Contract
should have realised that others would assume from his words and actions that he was
intending) to bind himself legally. As we saw above,
231
this is also an issue in relation to
attempts to give a broad de
nition to ‘consideration’. The issue of intention to create legal
relations, and its role in the formation of contract, is considered fully in the next chapter.

3.16
SUMMARY OF KEY POINTS
■
Promises can be enforceable when they are contained in a deed, supported
by consideration, or where the doctrine of promissory estoppel applies.
■
Consideration is the primary basis on which promises are enforceable in
English law.
■
Consideration can take the form of an action, or a promise to act. It need not
cient’ (i.e. an act or
promise of a type recognised by the law).
■
Consideration generally needs to have some economic value, but there are
some apparent exceptions to this.
■
Past consideration is no consideration, except where there has been a prior
request, and the situation is one in which payment would be expected.
■
where the duty is owed to a third party;

where the performance goes beyond what is required by the existing
duty (either under law, or owed to another party);

where the performance results in a ‘practical bene
t’ to the other
(1990)).

■
Part payment of a debt will never be good consideration for a promise to
discharge the debt, but may give rise to an issue of ‘promissory estoppel’.
■
A promise not to insist on strict rights under a contract will be binding where
the doctrine of promissory estoppel applies. This can apply to a promise to
■
Promissory estoppel applies where:

there is a variation of an existing legal relationship;

the promisee has relied on the promise;

it is used as a shield not a sword;

it would be inequitable to allow the promisor to go back on the promise.

■
Some other common law jurisdictions (e.g. USA, Australia) accept ‘reasonable
reliance’ as a basis for the enforceability of promises. English law does not do
231

Consideration and Other Tests of Enforceability
3.17
FURTHER READING
■
Adams
and
Brownsword
, ‘
■
Atiyah
, ‘
Contracts, promises and the law of obligations
■
Atiyah
, ‘
Consideration: a re-
Atiyah
,
,
Oxford
Clarendon Press

■
Austen-Baker
, ‘
PinnelÕs case: Collier v P & MJ
Wright (Holdings) Ltd
’ (
■
Campbell
, ‘
■
Fried
,
,
Harvard University Press

■
Halson
, ‘
■
Halson
, ‘
The offensive limits of promissory estoppel
■
Hird
and
Blair
, ‘
revisited
■
O’Sullivan
, ‘
’ (
■
Thompson
MP
, ‘
Representation to expectation: estoppel as a cause of action
■
Treitel
, ‘
Consideration: a critical analysis of Professor Atiyah’s fundamental
restatement

COMPANION WEBSITE

■
Revise and consolidate your knowledge of Consideration by tackling a series of
Choice Questions on this chapter

■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
Explore Consideration further by accessing a series of web links


4
Intention to Create

Contents
4.1
4.2
Introduction
4.3
Domestic agreements
142
4.4
Commercial agreements
146
4.5
Collective agreements
150
4.6
Is a requirement of intention necessary?
152
4.7
153
4.8
Further reading
153

4.1
OVERVIEW
There may be situations where, despite the identi
cation of an agreement and consideration,
the courts feel that an agreement should not be enforced because the parties did not intend
that it should create legal relations. The main approach is based on two presumptions:
■
If the agreement is a ‘domestic’ agreement the courts will presume that it is not
intended to be legally binding. It will be up to the party wishing to enforce to overturn
that presumption.
■
If the agreement is ‘commercial’ the courts will presume that it is intended to be
legally binding. It will be up to the party wishing to escape from the agreement to
prove that the presumption should be overturned.

The Modern Law of Contract
The most frequent issues relate to the categorisation of the agreement (as domestic or
commercial), and the evidence that is necessary to overturn the presumption.
4.2.1
IN FOCUS: HIDDEN POLICY CONSIDERATIONS?
Collins has suggested that the ‘objective’ approach may well not coincide with reality:
3

In cases where the issue is litigated, it seems likely that one party intended a legal
agreement and the other wanted the agreement to be merely morally binding. This
contradiction removes any possibility of justifying the limits of contracts on the basis
of the joint intent of the parties. We are forced to the conclusion that the courts must
1
2
3
4
Coward v Motor InsurersÕ Bureau
p 536, and by Lord Cross in
Albert v Motor InsurersÕ Bureau
[1971] 2 All ER 1345, pp 1369–70.
Intention to Create Legal Relations
5
6
Compare the European Draft Common Frame of Reference Article II.–4:102.
7
See below 4.6. See also Trade Union and Labour Relations (Consolidation) Act 1992, s 179 – discussed,
further, below, 4.5.
8
9
5
of asking what the reasonable person in the position
6

Although this approach may be used as a device to bring ‘policy’ considerations into
the law, it is also capable of acting as a means of coming to an ‘objective’ view in an area
where the parties’ evidence as to their respective states of mind is in con
4.2.2
USE OF FORMALITY?
Another way of approaching the issue of ‘intention’ would be through formal requirements.
It would be possible to require, for example, that an agreement, to be legally binding,
rming that it is intended to be legally
binding. In one particular situation, relating to the enforceability of collective agreements
The Modern Law of Contract
10
approach, based on what a reasonable person in the position of the parties would have
been likely to have intended. This approach is assisted by the ‘presumptions’ as to inten-

Balfour v Balfour (1919)
Facts:
Intention to Create Legal Relations
14
15
16
17
Albert v Motor InsurersÕ Bureau
[1971] 2 All ER 1345, where, in relation to a very similar situation, Lord
Cross (who alone dealt with the issue in the House of Lords) took the view that there was an intention to enter
into a contract (despite the fact that it was unlikely that either party would have considered taking legal action
to enforce it).
18
19
[2003] EWCA Civ 176.
£1,500, there seems little reason to deny this agreement the status of a contract, and it
should be presumed to be binding unless there is evidence to the contrary. A recent
decision of the High Court, however, has cast some doubt on this. It suggests that there
The Modern Law of Contract
20
21
22
23
24
that is of relevance to the large number of people involved in national lottery

Simpkins v Pays (1955)
20

Facts:
Three women, the plaintiff, the defendant and the defendant’s granddaughter
For Thought

If you are invited to take part in a lottery syndicate, should you insist that there is a
written agreement as to how the prize is to be divided in the event of a win?


needs to be contrasted with a more recent decision on similar facts. In
Intention to Create Legal Relations
25
26
27
28
Ibid, p 622. He found, however, that the contract could not have been intended to last for more than 
29
30
(the defendants) and help look after them. In exchange, the plaintiffs were promised
work out, and the plaintiffs, having moved out, sued for damages. Devlin J noted that:
25

For Thought

Do you think the outcome would have been different if the plaintiffs had simply been
renting a house, and had terminated the tenancy, prior to moving in with the defendants?

Although the cases so far considered may suggest that it is relatively easy to see on which
The Modern Law of Contract
31
Danckwerts LJ delivered a judgment to the same effect, relying primarily on
KB 571. 32
That is, in the example just given, on the part of the newsagent to deliver papers each day, and on the part

rst arrangements were made, the mother and daughter were,
and always had been, to use the daughter’s own words, ‘very close’. I am satis
then or later when the house was bought. The daughter was prepared to trust the
mother to honour her promise of support, just as the mother no doubt trusted the
in honour only. The fact that the relationship was also governed by the Bar Council’s
Intention to Create Legal Relations
36
37
38
– 39
– 40
regulations, and that it was unlikely in practice that a chambers would sue a pupil who
defaulted, did not prevent it from being intended to be legally binding.
,
36
Megaw J emphasised that there will be a heavy onus on a
party to an ostensibly commercial agreement who wishes to argue that the presumption
has been rebutted.
A similar reluctance to overturn the presumption is shown by the House of Lord’s decision

Edwards v Skyways (1964)
Facts:
The plaintiff was a pilot who had been made redundant. As part of the
arrangements for this, he was offered and accepted a payment which was stated to be
’. The company then found that the terms which had been offered would be
more expensive for it than it had realised, and denied that there was any legal obligation
Held:
recognised that, prior to the offer being made, there had been no obligation to make
such a payment. Once it had been made, however, and accepted as part of the
redundancy arrangement, it was capable of being legally binding and there was no
evidence to overturn the presumption that this should be the case. The pilot succeeded
The Modern Law of Contract
41
Note also the formalities required for this type of contract by the Law of Property (Miscellaneous Provisions)
42
43
For Thought

If a newspaper publisher advertises that a particular DVD will be available as a Ôfree giftÕ

Intention to Create Legal Relations
44
45
46
(per Scrutton LJ).
47
Jones v Vernons Pools
[1938] 2 All ER 626;
[1939] 1 All ER 464.
48
(1999) unreported, 9 February, CA.
49
The Times
, 28 April.
An example of a successful attempt to exclude ‘intention to create legal relations’ in the
commercial context is to be found in
.
44
The Modern Law of Contract
50
Intention to Create Legal Relations
To make them legally binding would require clear and express provisions to that
effect.
Figure 4.1
The Modern Law of Contract
57
58
59
60
61
62
63
See European Draft Common Frame of Reference, Art II.–4:102.

4.6
IN FOCUS: IS A REQUIREMENT OF INTENTION NECESSARY?
At the beginning of this chapter, reference was made to the argument that the insistence
on a requirement of intention, in addition to the other elements of validly formed contract
(offer, acceptance, consideration), is unnecessary. This view has been taken by, for
57
58
Hepple argues that the
problems with this area derive largely from a failure to take account of the particular
approach to consideration adopted by Lord Atkin in
.
59
ning consideration in terms of ‘mutual promises’ or as ‘a bene
t received by one
party or a loss suffered by the other’, Lord Atkin failed to add that the bene
t or loss, or
indeed the mutual promises, ‘must be received as the price for the other’. Hepple argues
Intention to Create Legal Relations
agreement which contains these elements will, in the absence of speci
c and explicit
evidence to the contrary, be deemed to have made a bargain and therefore a binding
agreement. Although this has some attractions, it is submitted that it does not truly
represent the English common law approach to contracts. This is based not only in relation
to formation, but in many other areas as well, on the basis that the court is trying to
give effect to the intention of the parties. This is the overriding concept, and the evidence
If the agreement is social or domestic it will be presumed to be not intended
If the agreement is commercial it will be presumed to be intended to be legally
It is possible to overturn both presumptions, but it is easier to do so in relation
to social/domestic agreements, as opposed to commercial agreements.
Collective agreements are only binding if in writing and expressed to be so.
FURTHER READING
The gentlemans agreement in legal theory and in modern practice
Brown
Freeman
revisited
Hedley
and the enforceability of
informal agreements
Intention to create legal relations
Unger
Harvard
University Press
The Modern Law of Contract
COMPANION WEBSITE

Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Intention further by accessing a series of web links
5
Privity

Contents
5.1
5.2
Introduction
5.3
157
5.4
160
5.5
163
5.6
The Contracts (Rights of Third Parties) Act 1999
164
5.7
169
5.8
The trust of a promise
173
5.9
174
5.10
175
5.11
178
5.12
178
5.13
Imposing burdens: restrictive covenants
182
5.14
The role of the law of tort
184
5.15
184
5.16
Further reading
185

The Modern Law of Contract
OVERVIEW
The doctrine of privity states that only those who are parties to a contract can have rights
or liabilities under it. The doctrine is well established in English law, but also has a number
of exceptions to it. In particular, the Contracts (Rights of Third Parties) Act 1999 means that
there are many situations where the parties can choose to sidestep the doctrine. The order
of treatment here is:
The origins of the doctrine. What are the reasons underlying the doctrine, and how
The Contracts (Rights of Third Parties) Act 1999. This is a major exception to the
doctrine. It allows the parties to a contract to create bene
ts that are legally enforce-
able by a third party.
Damages on behalf of another. In some situations the courts allow a party to a
contract to recover damages for a loss suffered by a third party as a result of
a breach of contract.
The trust of a promise. This device has been used to create third party rights,
but has recently fallen into disuse and has probably been superseded by the
nd that there is in fact
a collateral contract with a third party, sitting alongside the main contract.
Statutory exceptions. There are some speci
c contracts (for example, certain types
of insurance contract) where statutes give rights to third parties.
ts of an
exclusion clause to third parties, and the courts have in some cases used agency
concepts to enable these to be enforceable or to modify tortious liability. The 1999
Act reduces the need for these devices to be used.
Imposing burdens:
Restrictive covenants are used in land law to impose burdens on third party
occupiers of land. Limited use of this approach has been made outside the
The tort of interference with contractual rights can be used to obtain an injunc-
tion to stop a third party encouraging a breach of contract.
INTRODUCTION
The essence of the doctrine of privity is the idea that only those who are parties to a
contract can have rights or liabilities under it. This doctrine has long been regarded as one
of the fundamental characteristics of the English law of contract. The effect of it is that if
the two parties to a contract agree that one of them will provide a bene
t to a third party,
the third party is unable to sue to enforce that agreement. Equally, should the parties agree
that an obligation should be imposed on a third party, they will be unable to force the third
party to undertake that obligation, even if he or she has previously agreed to do so.
The strict application of this doctrine, and in particular the rule relating to bene
ts, has
been found to be inconvenient in practice, and the courts have for a long time recognised
1
[1897] AC 59 – this is discussed further below, 5.4.2.
2
3
It is quite likely on the facts as given that only ‘reliance’ damages would be recoverable, the likely pro
ts from
Anglia Television Ltd v Reed
case and related issues below,
for avoiding its effect (e.g. allowing a party to recover damages on behalf of the third party
or constructing a collateral contract). In addition, Parliament has given parties the oppor-
cant part of the doctrine by virtue of the Contracts (Rights of Third
imposition of burdens has fewer exceptions to it, but restrictive
covenants controlling the use to be made of land can bind non-
tortious liability for interference with a contract has been used to circumvent the privity
5.3
THE RATIONALE FOR THE DOCTRINE
party bargain,
it follows that only those two parties whose dealings led to the creation of it will be
regarded as being able to enforce it or be sued under it. Even the classical law, however,
allowed for the possibility in certain circumstances for there to be multiparty contracts, for
The Modern Law of Contract
4
5
Treitel, 2011, p 621.
6
7
cult to see what ‘losses’ he could recover for in an action for damages; he will undoubtedly have
saved money through not smoking, and his health may well have improved. It is not a situation where an
order for speci
c performance would normally be regarded as appropriate – on this, see
8
9
See the comments to this effect by Steyn LJ in
Darlington Borough Council v Wiltshier Northern Ltd
All ER 895, p 904. later in this chapter, the courts have struggled to 
nd the best solution to this type
of situation – wishing in some cases to require the third party to bear the burden of
the obligation, while at the same time not undertaking a direct attack on the doctrine of
privity.
Even in the area of the imposition of burdens, therefore, the rule that only a party can
be affected by a contract is not necessarily appropriately applied in all situations. When we
turn to the conferring of bene
ts, there seems to be even less justi
cation for a strict
doctrine of privity. If A and B have agreed that C should have a bene
t under their contract,
why should C not be able to enforce this? Suppose, for example, that Alison promises
Bernard that she will pay £1,000 to Oxfam if Bernard gives up smoking for a year. This is a
contract that (subject to the question of intention to create legal relations)
4
enforceable by Bernard. However, the charity that is to bene
t will not at common law be
allowed to enforce, because it is not a party to the agreement. Treitel argues that the
5

A system of law which does not give a gratuitous promisee a right to enforce a
promise may well be reluctant to give this right to a gratuitous bene
ciary who is not
even a promisee.

This argument is open to the objection, however, that what is really contrary to the doctrine
of consideration is that a promise for which no consideration has been given should be
enforceable.
6
In the example used above, consideration has been given for Alison’s
promise by Bernard. There could be no objection to Bernard seeking to enforce it (though
his remedies might be limited).
7
If the charity were given a right to sue, Alison would be
under no greater obligation than she already is as regards Bernard. She can obviously only
be required to pay the money once, and there seems little reason why the charity should
not be able to sue her directly for it. The justi
cation becomes even less in a situation
where the third party has acted in reliance on the promise; as we have seen in
5.3.1
IN FOCUS: ARGUMENTS AGAINST PRIVITY
It seems, therefore, that the rationale for the doctrine of privity is by no means clear and
unanswerable. Moreover, there are several reasons why the doctrine may be said to be out
of tune with the modern English law of contract. First, there is the weakening of the doctrine
ed in the previous chapter. The concept of what constitutes consid-
,
8
be easier to regard third parties as having provided consideration. More importantly, there
is the growth of the area of ‘estoppel’, with the associated idea of ‘reliance’ as a basis for
the enforceability of promises attaining increasing importance. This would suggest that
10
Adams and Brownsword, 1990b.
11
12
Ibid. See also Adams and Brownsword, 1995, p 149.
13
See, for example, the 1937 recommendations of the Law Revision Committee (Sixth Interim Report, 1937,
14
t of Third Parties
, 1991.
15
16
17
See Cardozo CJ,
Ultramares Corp v Touche
(1931) 174 NE 441, p 444.
The second major reason why privity is out of tune with the modern law is that it does
not accord with the reality of many commercial contracts. As Adams and Brownsword
10
many commercial transactions (such as those surrounding construc-
tion contracts) do not simply involve two parties entering into an agreement. They involve
5.3.2
REFORM AT LAST
The doctrine has been ripe for reform for some time.
13
cant amendment took place
in 1999, by virtue of the Contracts (Rights of Third Parties) Act 1999. But this had to deal
contract. As the Law Commission recognised, in its working paper on the subject published
14
contracts can have far-
reaching effects. It used the example of a contract
The Modern Law of Contract
18
24
25
26
27
that William Tweddle was not the person to whom the promise was made, even though it
24
possible for the court to have found that he had provided consideration for the promise.
The agreement was clearly made in consideration of William’s marriage and, as we saw in
,
25
decided just a year before
Tweddle v Atkinson
),
going through with a marriage ceremony can be good consideration for a promise of
payment. This again indicates that the doctrine of privity is properly regarded as separate
from, though closely linked to, the doctrine of consideration.
5.4.1
AFFIRMATION BY THE HOUSE OF LORDS

Tweddle v Atkinson
was a decision of the court of Queen’s Bench, but the principle it was
taken to have been based on was reaf
rmed by the House of Lords in a commercial
Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd
,
26
which concerned an
attempt by Dunlop to control the price at which their tyres were sold to the public.
course, rely on the terms of its contract with Dew, because Selfridge was not a party to this

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)
Facts:
The Modern Law of Contract
28
See, for example, the comments of Lord Scarman in
Woodar Investment Development Ltd v Wimpey
Darlington Borough Council v Wiltshier Northern Ltd
[1995] 3 All ER 895, pp 903–04: ‘. . . there is no doctrinal, logical or policy reason why the law
should deny the effectiveness of a contract for the bene
t of a third party where that is the expressed inten-
Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board
500; Drive Yourself Hire Co (London) Ltd v Strutt
[1954] 1 QB 250.
29
30
of Lord Denning in
Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board
KB 500, and Drive Yourself Hire Company (London) Ltd v Strutt
[1954] 1 QB 250.
31
It recently received a full consideration in
Amsprop Trading Ltd v Harris Distribution Ltd
[1997] 2 All ER 990.
The doctrine of privity is not one for which the courts have shown any great affection,
28
it was again reaf
rmed by the House of Lords in 1968 in the case of
.
29

A nephew had bought his uncle’s coal merchant’s business, and had promised as part of
she survived) £5 a week. After his uncle’s death, the nephew refused to make the payments
to his aunt, and she sued. In the Court of Appeal, Lord Denning tried to open up a broad
exception to the doctrine of privity by relying on s 56(1) of the Law of Property Act 1925,

A person may take an immediate or other interest in land or other property, or the
t of any condition, right of entry, covenant or agreement over or respecting
land or other property, although he may not be named as a party to the conveyance

Lord Denning’s view (with which Danckwerts LJ agreed) was that this in effect abolished
the doctrine of privity in relation to written contracts, and therefore allowed Mrs Beswick
to sue her nephew on the promise made to her husband for her bene
30
Lords rejected this argument, deciding that the history and context of s 56 meant that it
c performance of the obligations contained in it. Thus, while
rming the doctrine of privity, the House of Lords found a way to achieve what was
clearly a just result.
5.4.2
A SPECIAL CASE: MULTIPARTY CONTRACTS
There is one situation that does not 
t neatly within the doctrine of privity, and that should
be noted before moving on to consider the more general attempts that have been made to
avoid the effects of the doctrine. This is the situation of the ‘multiparty’ contract.
For Thought

Could Dunlop have recovered any compensation from Dew? Was Dew in breach of its

32
33
It should be noted that under the modern law, this situation would be much more likely to be dealt with by
34
35
[1929] 2 Ch 1. Since the fees went towards the prize for winning the race, to have found otherwise might
have rendered the agreement unenforceable as a gaming and wagering contract within s 18 of the Gaming
does not appear to have been cited in the case.
party relationship.
Nevertheless, there are situations which are clearly governed by contract but which do not
fall into this pattern. Where each of a group of people contracts with one body, for example,
on joining a sports club, and agrees to abide by the body’s rules, can one member enforce
5.4.3
IN FOCUS: ANOTHER PROBLEM
analysis avoids any problems of privity, but creates dif
culties as
The Modern Law of Contract
36
Note, also, that some aspects of the law of agency, in particular, the concept of the ‘undisclosed principal’,
can be regarded as exceptions to privity.
37
38
39
40
41
42
ts or the impo-
sition of obligations). There have, however, been various attempts to evade the effects of
the doctrine, some of which have been more successful than others. The whole area must,
however, now be considered in the light of the Contracts (Rights of Third Parties) Act 1999.
This has fundamentally changed the position in relation to the conferring of bene
ts, but
has not altered the common law as regards imposing burdens. The order of treatment will
therefore be to look 
rst at the Act; then, brie
y, at the various devices which have been
used previously by the courts to confer bene
ts, and which may still be relevant in situa-
nally, at the common law rules relating to the
imposition of burdens.
36

5.6
THE CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
The Act received the Royal Assent on 11 November 1999, and applies to contracts made
5.6.1
THE MAIN EFFECT
The simplest reform would have been to say that third parties should be able to sue
t them. For reasons which were noted earlier,
40
Law Commission rejected this as being unacceptably wide, and opening the 
to litigation. It should only be where the contracting parties
t on
the third party that the right of action should arise. Even this would go too far, however. The
Law Commission in its Consultation Paper which preceded the Report gave the example
43
[2003] EWHC 2602; [2004] 1 Lloyd’s Rep 38.
44
[2005] 1 Lloyd’s Rep 688.
45
It has been claimed that the Act has led to a ‘proliferation’ of clauses to this effect: Beale, Bishop and
46
Prudential Assurance Co Ltd v Ayres
[2007] EWHC 775, [2007] 3 All ER 946; reversed on different grounds
) 47
Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening
1 CLC 460. (2)
section (1)(b) does not apply if on a proper construction of the contract
it appears that the parties did not intend the term to be enforceable by the
third party.

Subsections (1)(b) and (2) therefore operate to create a rebuttable presumption that if a
t on a third party, such a bene
t is intended to be legally
enforceable by that third party. A court faced with a promisor who denies that such legal
enforceability was intended will have to decide what the ‘proper construction’ of the
contract is. This will presumably mean applying an objective test of what reasonable
rst reported case on the Act,
,
43
rmed by the Court of Appeal in
Laemthong International
Lines Company Ltd v Artis (The Laemthong Glory) (No 2)
.
44
The latter case concerned a
t (as where an agent
is authorised to receive money owed to the agent’s principal, and is able to deduct its
commission from this) is not enough to satisfy this requirement.
47

The Modern Law of Contract
48
49
[2006] EWCA Civ 1533.
50
51
52
53
The intended third party bene
ciary need not be in existence at the time of the contract,
but must be expressly identi
ed in the contract by name, or as a member of a class, or as
48
Thus, unborn children, future spouses and companies
t. A contract
c performance in
the normal way.
51
If the term is an exclusion clause, the third party will be able to take
52

5.6.2
CHANGING THE AGREEMENT
An important issue that arises once third party rights are recognised in this way is the
extent to which the parties to the contract should be free to change, or even cancel, their
agreement. In other words, does the third party have a legal right as soon as the contract
is made, or only at some later stage? Normally, of course, the parties to an agreement can
change it in any way they wish, provided there is consideration for any such change.
53

Clearly, however, the right under s 1 would be of limited effect if the parties could at any
time withdraw the promised bene
t. At the same time, it would probably be restricting the
normal freedom of the parties too greatly to prevent all possibility of such change. The Act
The balance of s 2 lies in favour of the freedom of the contracting parties. Section 2(3)
provides that they can include a clause in their agreement which removes the need for
any consent by the third party to a variation, or which lays down different procedures
for consent from those contained in the Act. If no such clause is included, however, the
provisions of s 2(1) will operate. This provides that the parties may not rescind or vary
the contract so as to extinguish or alter the third party’s rights under it if one of three
ed. These are that:
(a)
the third party has communicated to the promisor (by words or conduct) his assent
to the relevant term (the ‘postal rule’ (see 2.12.6 above) does not apply here – s 2(2));
(b)
the third party has relied on the term and the promisor is aware of this; or
(c)
the third party has relied on the term and the promisor could reasonably be expected
to have foreseen that the third party would do so.

Where the situation is that the third party has relied on the promise, this reliance does
54
55
56
bought goods at a bargain price, or has acquired shares that have subsequently doubled
in value, will be enough to prevent A and B from cancelling the promise, provided that A
knew or could reasonably be expected to have known that T had acted in reliance on the
promise.
It is important to remember that these provisions relating to the ability of the parties to
5.6.3
have agreed otherwise in the contract,
54
the promisor can raise against the third party any
The Modern Law of Contract
57
58
59
or a term of a relevant contract against an agency worker. Relevant de
nitions of employee and worker
are those to be found in s 54 of the Minimum Wage Act 1998. For home worker, see s 35(2) of that Act,
and for ‘agency worker’ see s 34. A ‘relevant contract’ is one dealing with work falling within s 34(1)(a) of the
60
ned in s 6(6).
61
For the appropriate convention, depending on the mode of transport, see s 6(8).
62
[1975] AC 154 – see below, 5.12.1.
63
– 64
[1980] 1 WLR 277 – see below, 5.7.
5.6.4
PROTECTION FROM DOUBLE LIABILITY
The right of the promisee to enforce the contract is speci
cally preserved by s 4. In
order that the promisor does not face being liable to both the promisee and the third
party, however, s 5 provides that where the promisee has recovered compensation from
the promisor in relation to a term falling within s 1 of the Act, this must be taken into
account in any award subsequently made to the third party. The converse situation is not
cally dealt with, but it must be presumed that the courts would not allow the
promisee to recover where compensation has already been paid to the third party by the
promisor.
5.6.5
Section 6 excludes certain types of contract from the provisions of the Act. These include:
(a)
contracts on a bill of exchange, promissory note or other negotiable instrument;
57

(b)
58

(c)
59
and

or, if subject to an international transport
convention, by road, rail or air.

In relation to carriage contracts, however, the exception does not apply to reliance by a
third party on an exclusion or limitation of liability contained in such a contract. The exclu-
sion clause of the type considered in
The Eurymedon

62
could therefore now apply for the
t of the stevedores without the need to rely on agency.
5.6.6
EFFECT OF THE ACT
The Contracts (Rights of Third Parties) Act 1999 has the potential to lead to signi
changes in the way in which contracts can be enforced by third parties. For example, if
,
63
65
66
67
68
Not all commentators have welcomed the Act. Stevens, for example, has argued that the
reform was unnecessary, given the developments in remedies available to the promisee.
65

Moreover, the Act runs the risk of creating uncertainty and has left the law in an ‘incoherent
state’ doctrinally.
66
It must be remembered, however, that the main contracting parties are
still in control. They can decide that the provisions of the new Act should not apply, and
there will be nothing that the third party can do about it. They also have the freedom to
change their minds, subject to the provisions restricting variation or cancellation. Where,
however, the parties have decided that they wish to confer a bene
t on a third party, and
have put that clearly into their contract, the courts will be able to enforce their wishes
directly, rather than having to rely on the range of, at times, rather strained devices which
The extent to which these devices can be safely consigned to history is, however, not
of contract. The trial judge awarded £1,100 damages, but the defendants appealed against
this as being excessive. The Court of Appeal upheld the award, with Lord Denning holding
that Mr Jackson was entitled to recover damages on behalf of the rest of his family. In
particular, Lord Denning relied on the following quotation from Lush LJ in
LloydÕs v Harper
:
68

I consider it to be an established rule of law that where a contract is made with A for
t of B, and recover all that B
could have recovered if the contract had been made with B himself.

Lord Denning felt that this indicated that where one person made a contract that was
t others, such as the father booking a family holiday, a host making a
restaurant reservation for dinner or a vicar arranging a coach trip for the choir, and there
For Thought

Would the Act have made a difference to the outcome of
The Modern Law of Contract
69
70
71
72
t or appropriate compensation. In
Woodar
the House of Lords rejected
the idea that it was possible generally to circumvent the doctrine of privity in this way. The
was accepted as being right, either (according to Lord Wilberforce)
because it related to a special situation of a kind which perhaps calls for special treatment,
such as ordering a meal in a restaurant, or hiring a taxi for a group, or, more generally, because,
as James LJ had held in the Court of Appeal, Mr Jackson’s damages could justi
ably be
increased to take account of the fact that the discomfort of the rest of the family was part of
his loss, in that it contributed to his own bad experience. This did not constitute, however, any
cant exception to the doctrine of privity, and the more general basis on which Lord
Denning had upheld the award of damages was speci
cally rejected. Lord Denning was held
to have used the quotation from
LloydÕs v Harper
on which he relied out of context. As Lord

Linden Gardens Ltd v Lenesta Sludge Disposals Ltd (1993)
71

Facts:
73
74
75
Panatown Ltd v Alfred McAlpine Construction Ltd
[2000] 4 All ER 97.
76
The Modern Law of Contract
80
81
(TCC). [101]–[103]; DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716, [69]
The ‘broader ground’ argued by P was based on the speech of Lord Grif
ths in the
case. This amounted to a more direct challenge to the assumption that
a contracting party in this type of situation should only be able to recover nominal
damages. Lord Grif
ths gave an everyday example to show why that assumption should
80

To take a common example, the matrimonial home is owned by the wife and the
82
–– 83
84
85
86
87
88
89
See, for example, the comments of Dillon and Waite LJJ in
Darlington BC v Wiltshier Northern
, the issue of what damages a contracting party can recover can
be argued to be logically separate from the doctrine of privity.
82
If that approach is
followed, then the existence of the 1999 Act, which is concerned with privity rather than
damages, should not necessarily prevent further developments. Much will depend on how
those in the relevant industries, in particular the construction industry, formulate their
89
the situations where the trust device has been used are ones in which the parties could
now generally achieve their objective much more easily by using the provisions of the
Contracts (Rights of Third Parties) Act 1999.
The Modern Law of Contract
90
5.9
COLLATERAL CONTRACTS
says ‘if you enter into contract X, I will promise you Y’. The consideration for the promise
is the entering into contract X. It is quite possible for such an agreement to be made

For Thought

What would have been the position if the pier owners had relied on promotional material
published by the paint manufacturers, rather than direct communication with them?
Would the manufacturers have been making a promise in these circumstances?

In this case, there was a particular ‘main’ contract in prospect, that is, the purchase of the
paint to re
paint the pier. This will usually be the case, but the device can be used even
where there is no such contract speci
ed at the time of the promise. In
Wells (Merstham)
,
92
the plaintiffs, who were chrysanthemum growers,
bought sand produced by the defendants from a third party on the basis of the defendants’
assurances as to its iron oxide content. These assurances turned out to be unreliable, and
the plaintiffs sued the defendants for the resulting loss on the basis of a collateral contract.
The court held that although at the time the assurance was given there was no speci
93
[1990] 2 AC 605. Generally, where it is foreseeable that a negligent act will
result in physical harm, there will be a duty, but note
in the particular circumstances of the case it was not ‘just and reasonable’ to impose a duty even where
foreseeable physical harm had occurred.
94
95
, that is, with a view to a contract being made shortly. The plaintiffs
were entitled to succeed.
(in the way that the trust is), because in the end the claimant and defendant are found to
the courts at times, however, has been clearly as a means of avoiding the doctrine of
privity, in that they have not been over-
The Modern Law of Contract
96
Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] QB 758.
97
Chapter 8, in connection with the law relating to
98
99
100
Ross v Caunters [1980] Ch 287.
101
102
Goodwill v Pregnancy Advisory Service
[1996] 1 WLR 1397, concerning a failed vasectomy, where the
partner of the supposedly sterilised man became pregnant. She was not able to sue in tort, but the man
oor was laid by a subcontractor, who had been nominated by
t of a contract. It seems likely that
it should be regarded as limited to the particular circumstances of the negligent creation of
a will where, once the testator has died, there is no other way of holding the solicitor to
account for the negligence. Where the contracting party has a remedy in contract, the
courts are always going to be very reluctant to give a tortious remedy to a third party.
102

103
In this context, the failure of the solicitor in
to draw up the contract must be regarded as a
‘negligent omission’ rather than a deliberate refusal to perform.
It is probably also signi
cant that the majority of cases in which the courts have been
prepared to use the tort of negligence to give the third party a remedy have been situations
business’ claimant. Where the three parties concerned are involved in a
The Modern Law of Contract
104
Due to be replaced by the Third Parties (Rights against Insurers) Act 2010, which had not been brought into
force at the time of writing.
105
third party’s liability; and where a third party is accused of interfering with the contractual

Adler v Dickson (1955)
105

Facts:
Mrs Adler was a passenger on a cruise. She was injured when she fell from the
ship’s gangplank, which had been negligently left unsecured. Her contract was with the
shipping company, but she sued the master and boatswain personally, alleging negli-
gence. The contract contained a very broadly drawn exemption clause.
Held:
The Court of Appeal held that the exemption clause only protected the company
itself and not its employees, who were not parties to the contract with Mrs Adler. She
Since in this case the company had made clear that it would reimburse any damages
awarded against its employees, the decision had the effect of negating the bene
t of
the exclusion clause as regards the contracting party (that is, the company) as well. On the
facts, this was probably justi
able, in that the clause had not purported to protect the
106
107
108
109
If, however, a clause is speci
cally worded to have this effect, and there is evidence that
approach may have the
effect of frustrating their intentions. The courts have therefore sought ways to avoid applying
the doctrine of privity in such situations. One possibility, where the claimant has speci
promised not to sue the third party, is for the promisee to intervene to seek a stay of the
action. This was recognised as a possibility in
Gore v Van der Lann
where the plaintiff
was injured boarding a bus and sued the bus conductor, rather than the corporation that
ran the bus service. On the facts, however, there was no evidence of any contractual obli-
gation on the part of the corporation to reimburse the conductor, and therefore no grounds
for granting a stay of the action. A stay was granted on this basis, however, in
though this was not an exemption clause case. The plaintiff, the director of a
company, had agreed with his fellow directors that if any of them resigned, they would
forfeit the balance of a loan which each of them had made to the company. The plaintiff
resigned, and sued to recover his loan from the company. The company was not a party to
For Thought

Would the Contracts (Rights of Third Parties) Act 1999 be likely to make a difference to
Adler v Dickson

5.12.1
VICARIOUS IMMUNITY
Elder, Dempster & Co v Paterson, Zochonis & Co
,
109
the House of Lords allowed ship-
t of an exclusion clause (which was stated to apply to them)
The Modern Law of Contract
110
111
112
113
3 All ER 397. 114
subsequently rejected by the House of Lords in
.
110

The House ruled that the third party stevedores in this case were unable to rely on an
exclusion clause contained in a contract of carriage to which they were not parties. It
recognised, however, that it might be possible in some situations for a contracting party to
be regarded as the agent of someone who was involved in the performance of the contract,
for the purpose of bringing them into a contractual nexus with the other party. Lord Reid
ed four requirements that would need to be satis
111

I can see a possibility of success of the agency argument if [
rst] the bill of lading
makes it clear that the stevedore is intended to be protected by the provisions in it
which limit liability; [secondly] the bill of lading makes it clear that the carrier . . . is
also contracting as agent for the stevedore that these provisions should apply to the
stevedore; [thirdly] the carrier has authority from the stevedore to do that, or perhaps
cation by the stevedore would suf
ce; and [fourthly] that any dif
about consideration moving from the stevedore were overcome.

Satterthwaite & Co, The Eurymedon
.
112

There is no doubt that the contract constructed in
The Eurymedon
ction’ in the
sense that it is highly unlikely that any of the parties intended precisely such an arrange-
ment as the Privy Council found to have existed. On the other hand, the result is clearly
commercially convenient, since it is the clear desire and expectation of all concerned in
contracts of this kind that third parties who perform part of the contract should be able
t of any relevant exclusion clause. The decision has not, however,
contract device, it is not really an exception at all, since the individual who initially looks

New Zealand Shipping Co v Satterthwaite & Co, The Eurymedon (1975)
Facts:
The case again concerned the liability of stevedores for the negligent unloading
115
116
117
() 118
119
See the approach of the Supreme Court of Canada in
London Drugs Ltd v Kuenhe & Nagel International Ltd

120
like a non- contracting third party is found to be a party to a contract after all. The approach
The Eurymedon
The New York Star
,
115

and must now be regarded as an established principle that can be applied wherever
5.12.2
IN FOCUS: COMMON LAW REFORM OF PRIVITY?
In reaching its conclusion in
nature of
The Eurymedon
ne points of contract and agency. It consid-
5.12.3
MODIFICATION OF THE DUTY OF CARE
An alternative way of giving negligent third parties the bene
t of an exclusion clause has
been recognised in some cases. This treats the contract as part of the context in which the
negligence occurs, and is therefore relevant to de
ning the defendant’s duty of care. In
Southern Water Authority v Carey
,
120
argument, based on
The Eurymedon
failed, however, because of the rule of agency that
at the time of the contract. That was not the case here. The judge nevertheless decided in
negated any duty of care owed by the sub
contractors to the plaintiff. In the absence of a
duty of care, the tortious action must fail. The validity of this approach was subsequently
The Modern Law of Contract
121
122
123
124
125
rmed by the Court of Appeal in
Norwich City Council v Harvey
.
121
5.13.1
APPLICATION OUTSIDE LAND LAW
126
127
128
129
See below, 5.14.
130
in a way that was inconsistent with the charter. Knight Bruce LJ said that where a person
had acquired property from another with knowledge of a prior binding contract as to the
use of the property made with a third party:
126

. . . the acquirer shall not, to the material damage of the third person, in opposition
to the contract and inconsistently with it, use and employ the property in a manner
not allowable to the giver or seller.

Moreover, he considered that the rule applied in the same way to both land and personal
property. The same line was taken by the Privy Council in
.
127
The plaintiffs had chartered a ship which had subsequently been
sold. It was held that the new owner, the defendant, could be restrained by injunction from
using the ship in a way that would prevent the operation of the charter contract made by
the previous owner. It was regarded as signi
cant, however, that the new owner had been
aware of the existence of the charter at the time that the ship was bought.
5.13.2
THE CURRENT POSITION
The further development of this exception to privity was halted by the refusal of Diplock J

128
correctly based on equitable principles analogous to the law relating to ‘restrictive cove-
nants’. He took the view that these cases could be more properly viewed as falling within
the area where the law of tort could provide a remedy,
129
rather than as examples of a more
general exception to the doctrine of privity. This analysis was apparently accepted for the
following 20 years, but in 1979 Browne-Wilkinson J indicated that there might still be some
life in the equitable, restrictive covenant approach outside the area of land law. In
,
130
a loan had been made to buy shares. The lender argued
that the borrower was contractually bound to repay the loan and interest out of the
proceeds of any dealings with the shares. This was said to be a speci
cally enforceable
obligation. The shares were also subject to a charge by Lloyds Bank (presumably they had
been put up as security for a loan). The lender alleged that Lloyds’ rights over the shares
The Modern Law of Contract
131
132
5.14
THE ROLE OF THE LAW OF TORT
The cases and principles discussed in this section are in many ways the proper concern of
the law of tort. However, this is an area (of which there are several) in which the rigid divi-
acting in this way. To this extent, it can be said that a third party is bound by the provisions
against Ms Wagner preventing her from breaking her contract in this way. Her response
was to leave the jurisdiction, and to refuse to sing at either theatre. Lumley then sued Gye,
and it was held that he would be entitled to recover damages if Gye had intentionally inter-
fered with his contract with Wagner.
133
This remedy has also been held to be available
where goods are sold subject to a restriction on their disposal. In
BMTA v Salvadori
,
134
purchaser of a new car agreed not to sell it for a year without 
rst offering it to the plaintiff.
The defendant bought the car with knowledge of this restriction, and with the intention of
evading its effects, and was again held liable in tort. This would be the way, therefore, in
which, in the example given at the beginning of this chapter, the gallery owner might be
able to recover compensation from the new owner of the painting.
135

As has been noted above, this is an alternative way of analysing the outcome in cases
. It is, however,
more limited than the ‘restrictive covenant’ approach. Such covenants may, in certain
circumstances, bind even those who are unaware of them. The tort of interference with
contract, on the other hand, requires knowledge on the part of the tortfeasor. It is only
where he or she is aware of the other contract, and the fact that rights under it may be
affected, that the tortious remedy will be available to restrain, or provide compensation for,
the interference.
5.15
SUMMARY OF KEY POINTS
■
The essence of the doctrine of privity is that only those who are parties to a
consideration must move from the promisee.
The Contracts (Rights of Third Parties) Act 1999 enables the parties to a
contract to create a bene
t enforceable by a third party. This may be done
cally or implied from the wording of the contract.
damages recoverable on behalf of another mainly in consumer
contracts, but also in some commercial contexts;
trust of a promise;

There are also some speci
c statutory exceptions, e.g. re insurance.
t a third party by virtue of the 1999 Act, by using
The Eurymedon
(1975), or as a result of the
cation of a negligence duty owed by the third party.
There are few exceptions to the ban on the imposition of burdens on third
in land law (restrictive covenants);

The tort of intentionally inducing a breach of contract may be used to restrict
FURTHER READING
Brownsword
Brownsword
ts and
burdens of law reform
Burrows
The Contracts (Rights of Third Parties) Act and its implications for
commercial contracts
Privity the end of an era (error)
t of third parties
, Sixth Interim Report, 1937, Cmd 5449

t of third parties: in defence of the Third-Party
The Contracts (Rights of Third Parties) Act 1999
The Modern Law of Contract
Waddams
Johanna Wagner and the rival opera houses
COMPANION WEBSITE

Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Privity further by accessing a series of web links
6
The Contents of

Contents
6.1
6.2
Introduction
6.3
■
Is a pre-
■
Remedies for pre-
contractual statements. Where a statement is not part of the main
contract, the party to whom it was made may nevertheless have a remedy on the
basis of a collateral contract, or for misrepresentation.
The Modern Law of Contract
■
Express terms. The courts need to consider:

If a term has been put forward in writing, but not in a signed document, has it

The precise meaning of a term – this will generally only arise where the term is
written term (though there are exceptions). In business contracts the courts
■
Implied terms. There are two main bases on which terms may be implied:

Common law. Courts will normally only imply terms which are ‘necessary’, or
ll a clear gap in a contract of a common type (for example, landlord and

Statute. The main examples of statutorily implied terms are those contained in
the Sale of Goods Act 1979, relating mainly to the quality of goods.

■
Statutory controls. In relation to consumer contracts, all the terms of an agreement
must comply with the requirements of the Unfair Terms in Consumer Contracts

6.2
This chapter is concerned with the situation where the parties have ful
lled all the require-
1
This is particularly the case with ‘consumer’ contracts, or where clauses purporting to limit or exclude liability
are concerned.
2
3
See, in particular, the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 – discussed
below, 6.7.
Some of the problems in deciding what the terms of a contract are may be resolved by
Moreover, in certain situations, terms will be implied by statute, irrespective of the wishes
The order of treatment adopted here is to look 
rst at the question of pre-
statements, and the remedies that may be available for them. Second, the approach to
4
5
Which, of course, may not in the end correspond to what either party
really
intended – see, further,
6
7

Bannerman v White (1861)
Facts:
A prospective buyer of hops had been assured that sulphur had not been used
in their production. He had made it clear that he would not be interested in buying them
if it had. After he had bought them it turned out that sulphur had been used, and he
The Modern Law of Contract
Evidence, such as was given in this case, that the truth of a pre-
precondition of any binding agreement being reached will strongly support the view that it
8

In this case there was, in effect, a guarantee by the seller that sulphur had not been
used, breach of which entitled the buyer to reject the goods. Even where the matter is of
importance to the recipient of the statement, however, the maker will not be taken to have
independently. In
Ecay v Godfrey
,
9
the contract. The same principle will apply where such veri
cation would normally be
for example, in relation to the sale of houses, where a purchaser will generally be expected
to commission an independent survey, rather than relying on the statements of the seller.
10

consuming, however, and therefore
cient way of proceeding. In practice, in situations where it is not clear that the
pre-
contractual statement amounted to a precondition for making the contract, the courts
have developed three rather more speci
6.3.1
WAS THE CONTRACT PUT INTO WRITTEN FORM?
, there is generally no need for a contract to be put into writing in
order for it to be a valid agreement. On the other hand, if the parties have taken the trouble
to commit their contract to writing, the courts will be reluctant to 
nd that it does not
contain all the terms that were important to either party. Moreover, if a written contract has
nd it virtually impossible to depart from its
express provisions.
11
This is often referred to as the ‘parol evidence rule’, by virtue of which
the courts will be reluctant to accept oral evidence in order to add to the terms in what
the purchaser would not have bothered to inquire about the price and would not have
continued to negotiate towards a contract. The statement that sulphur had not been
8
For a further example of this approach, see
–‘’(that is, not in calf). The buyer had indicated that he would not bid for it if it was in calf. The apparently
Hopkins v Tanqueray
(1854) 15 CB 130 probably turns on the particular rules accepted
a contract. This was part of the reason for the rejection of an alleged term (relating to the
age of a motorcycle) in
.
12
The purchaser of the motorcycle had
prepared a ‘written memorandum’ at the time of the sale, but this was silent as to the age
of the machine. The Court of Appeal was not prepared to say that this de
nitely precluded
ed in the memorandum being part of the contract, but
13

. . . as a matter of construction, it would be dif
cult to say that such an agreement
form part of the bargain then made.

The rule is not an absolute one, however, and if the party can show that the term which was
not included was of the utmost importance, then the courts may be prepared to allow it to
be added. This is most likely to be the case where the written contract is in a standard
form, rather than the result of individual negotiation. An example is
Andrea Merzario Ltd
.
14
The plaintiffs had made a contract for the transport of machinery by
sea. They had made it clear to the defendants that it was of great importance that the
that the plaintiffs’ machinery would be carried below deck. The printed standard condi-
tions for the contract, however, allowed for freight to be carried on deck. The plaintiffs’
machinery was carried on deck and was lost overboard. It was held by the Court of Appeal
that in this case the verbal assurance took precedence over the written conditions. The
statement that the plaintiffs’ goods would be carried below deck was a contractual term,
and the plaintiffs were entitled to succeed.
6.3.2
WAS THE CLAIMANT RELYING ON THE SKILL AND KNOWLEDGE OF
If there is an imbalance of skill and knowledge relating to the subject matter of the contract
12
13
Ibid, p 859; p 622, per Lord Evershed MR.
14
15
16
17
The Modern Law of Contract
Other cases where the greater skill and knowledge of the defendant has been relevant
in giving contractual status to a pre-

18

19

20
(owner selling a heifer stating that there was ‘nothing wrong’ with her).
, if the facts recurred,
would be more likely nowadays to be dealt with as a negligent misrepresentation under
s 2(1) of the Misrepresentation Act 1967. The remedy in damages for misrepresentations
provided by this section was not, of course, available at the time.
21

6.3.3
IN FOCUS: LIABILITY OF PRIVATE SELLERS
Beale v Taylor

22
(discussed below, 6.6.12). Treitel sees this as inconsistent with
Beale v Taylor
).
23

Oscar Chess Ltd v Williams (1957)
rst registered in 1939. The garage
sued for breach of contract, arguing that the statement as to the age of the car was part
The Court of Appeal held that, on the basis of the fact that the plaintiffs here had
the greater skill and knowledge of such matters, the statement should not be regarded
as a term. The intelligent bystander, looking at all the circumstances, would not say that
the seller intended to guarantee the age of the car. The seller was in no position to do
so, since all he could rely on were the car’s registration documents, and he had no
18
19
20
21
6.3.4
conclusion of the contract, the more likely it is that it was a matter of importance to the
claimant, and should therefore be treated as a contractual term. It is certainly true that if
there is no signi
cant gap, the statement may well be treated as being intended to be part
of the contract, particularly if the agreement is not put into writing. It is by no means clear,
however, that the mere existence of a delay should be regarded as in itself reducing the
cance of the statement. Such delay may well have been caused by matters irrelevant
as far as the courts are concerned it will weaken the claimant’s case.
.
26
concerned the sale of a motorbike. The defendant, who was selling the bike, had told the
plaintiff that the date of the bike was 1942. In fact, it dated from 1930. A week elapsed
For Thought

the period have had to be to make the court take a different view of this aspect of

Would a gap of more than a day be too long?

As this last case shows, it must be remembered that none of the tests discussed here
is automatically conclusive of the issue. All may need to be considered and, if they point
26
27
In that respect, the case was therefore virtually identical to
[1957] 1 WLR 370. 28
Of course, in reaching a conclusion on this issue, judges may well be in
uenced, consciously or
unconsciously, by the question of where they feel that responsibility ‘ought’ to lie. This issue then ceases to
be purely factual.
The Modern Law of Contract
are available to a person who has made a contract in reliance on such a statement?
Although it may be argued that discussion of this issue is out of place in this chapter
nition, such statements are not part of the ‘contents of the contract’), it is
y at this stage, in order to understand fully
6.4.1
MISREPRESENTATION
The common law and equity recognised two remedies for misrepresentation. Provided
that there were no complicating factors, such as the involvement of third party rights,
rescission of the contract was the main remedy for all types of misrepresentation. If the
misrepresentation was made fraudulently, there was, in addition, the possibility of an
action in tort for deceit, which would provide for the recovery of damages.
29
Figure 6.1

29
Derry v Peek
(1889) 14 App Cas 337.
remedies are still available in appropriate cases. In addition, however, there is now the
called ‘negligent misrepresentation’ under s 2
of the Misrepresentation Act 1967.
For any of these remedies to be available, the statement must have been a representa-
law,
30
31
or a promise to act in a particular way in the future.
facility will be provided is not a ‘representation’, but a promise. A statement that the
32

However, a statement that the 
rm has already sold 1,000 similar systems, or that it has a
team of six service engineers, are representations which, if untrue, may give the other
party a remedy.
33
6.4.2
COLLATERAL CONTRACT
We have already encountered the concept of the collateral contract as a means of evading
the doctrine of privity by bringing apparent third parties into a contractual relationship, as
30
below.
31
The Modern Law of Contract
6.4.3
LIMITATIONS OF THE ÔCOLLATERAL CONTRACTÕ
As will be seen from these examples, the collateral contract is a very 
exible device. Its
disadvantage, compared to the action for misrepresentation, is that it will only provide a
remedy in damages, and will not allow the claimant the possibility of rescinding the main
contract. Moreover, the level of damages that can be awarded is more restricted than in
the case of actions for deceit, or under s 2(1) of the Misrepresentation Act 1967.
37

6.4.4
NEGLIGENT MISSTATEMENT
In 1963, the House of Lords con
rmed that the tortious action for negligence could provide
a remedy for negligent misstatements which have resulted in purely economic loss.
38
development of the law in this area over the past 50 years or so has been complicated, as

36
[1976] QB 801; [1976] 2 All ER 5. Note that Lord Denning also used the collateral contract analysis to 
nd the
Evans & Son Ltd v Andrea Merzario Ltd
[1976] 1 WLR 1078, whereas (as noted above,
at 6.3.1) the other members of the Court of Appeal found that the pre-
contractual promise had been incor-
porated into the main contract. This shows that the approaches taken to 
nding liability for pre-
statements are not necessarily mutually exclusive.
37
. The actions for deceit and under s 2(1) of the 1967 Act allow for recovery of
by the misrepresentation; in relation to a collateral contract, only losses which were in the reasonable
contemplation of the parties at the time of the contract will be recoverable.
38
Hedley Byrne & Co v Heller & Partners
[1964] AC 465; [1963] 2 All ER 575.
39
40
41
[1995] 2 AC 207; [1995] 1 All ER 691. See also the speech of Lord Steyn in
Williams v Nature Life Ltd
1 WLR 830, p 837, accepting ‘assumption of responsibility’ as the test for the existence of a duty. The
approach taken in
cation of a duty of care was also applied by the Court of
Gorham v British Telecommunications plc
[2000] 4 All ER 867.
42
43
The tortious remedy is discussed further in
44
45
46
6.4.5
CONCLUSION ON PRE-CONTRACTUAL STATEMENTS
The Modern Law of Contract
6.5
EXPRESS TERMS
In this section, we are concerned with terms that have without doubt been put forward by
one or other party as a term of the agreement. There may be disputes, however, as to
6.5.1
INCORPORATION
47
Whereas a ‘relational’ approach would allow later developments to be considered – see Macneil, 1978, and
Chapter 1
48
49
50

6.5.2
IN FOCUS: DO BUSINESSES NEED PROTECTING?
The approach taken in the
case is an unusual one in relation to a commercial
agreement. This aspect of the rule of incorporation has tended to be used mainly as a
means of protecting consumers, particularly in relation to exclusion clauses. Where parties
are contracting at arm’s length, in a business context, it would more commonly be the
case that the court would expect each party to take care over the obligations to which it
was committing itself. If they agree to unfavourable terms, then that is their own fault. It is
cant that the
decision has not so far led to many similar reported
,
51
the High Court, dealing with a preliminary issue, held
6.5.3
A MORE RELAXED APPROACH
A move towards a relaxed approach to incorporation is exempli
ed by the Court of Appeal
,
57
which was concerned with a consumer
contract. The claim concerned a ‘scratch card’ game operated by the defendants, Mirror
Newspapers. The claimant had obtained one of the scratch cards from a newspaper, from
which it appeared that he would win £50,000 if this was the prize on a particular day, which
could be discovered by ringing a particular telephone number. He rang the number
amount. It then transpired that, because of an error, a large number of winning cards
had been produced. The defendants therefore relied on Rule 5 of the rules applying to
had to do to draw it to the claimant’s attention. The court saw no reason why
this approach should not apply to the case before it. The clause was particularly,
and unusually, onerous in its effect. The plaintiffs had done nothing to draw it to the
defendants’ attention. It should be regarded as not having been incorporated into the
51
52
53
The Modern Law of Contract
The paper from which he obtained the number to ring to see if his card had ‘won’ stated
‘Normal Mirror Group rules apply’. The claimant argued that this was insuf
cient for the
The Court of Appeal agreed with the trial judge that a contract was made by an offer
who admitted buying a number of the relevant newspapers, must have seen the rules,
58
59
For Thought

What do you think the position would be if the consumer, unlike Mr OÕBrien, had paid a
cant sum for what he or she was expecting to obtain under the contract? Would
the courts adopt a different approach?

6.5.4
60
61
See also Wedderburn, 1959. Treitel does not accept the Commission’s analysis of the rule as being ‘circular’
– see Treitel, 2011, pp 212–13.
62
63
The Modern Law of Contract
(b)
64
65
This is certainly the position as regards an ‘entire agreement’ clause, which has the effect of preventing
reliance on any alleged collateral contract:
The Inntrepreneur Pub Co (GL) v East Crown Ltd
[2000] 2 Lloyd’s
66
67
68
69
Palgrave, Brown & Son Ltd v SS Turid (Owners)
[1922] 1 AC 397.
70
allowed to prove this, and thus to ‘rectify’ the written document.
71
The parol evidence
rule may also be circumvented by showing the existence of a collateral contract. An
City of Westminster Properties v Mudd
,
72
73
This is perhaps not a true exception, since it concerns not
6.5.5
71
The remedy of ‘recti
cation’ is discussed further in
72
73
74
75
76
The Modern Law of Contract
84
85
86
87
P & S Platt Ltd v Crouch [2004] EWCA Civ 1110; [2004] 1 P & CR 18, at paras 39 and 52–57 – applying the restrictive approach to a case
concerned with s 62 of the Law of Property Act 1925. For discussion of this case, see Warwick, 2003.
88
89
90
Lord Hoffmann here cites
where a tenant giving notice to terminate a lease which was stated to expire on
effective, even though under the lease the date for termination would have been
January.
91
McMeel, 1998, p 390 – adopting and adapting an example used by Lord Hoffmann in
[1997] AC 749, p 774.
92
, Act III, Scene 3.
93
Although as McMeel (pedantically?) points out (McMeel, 1998, p 390), the creature would in fact be a
‘crocodile’ if it was on the Nile, since alligators are found in the Americas, rather than Africa.
94
The same point had been made previously by Lord Diplock:
95

95
Antaios Cia Naviera SA v Salen Redierna B, The Antaios
96
A similar approach is to be found in
Schuler AG v Wickman Machine Tool Sales Ltd

Bank of Credit and Commerce International SA v Ali (2001)
98

Facts:
An agreement was made by employees as part of a redundancy arrangement
99
‘stigma damages’ as a result of their innocent association with an organisation that had
been found to be carrying out its business in a corrupt and dishonest manner. The
The Modern Law of Contract
will continue to be a matter where there will be much scope for the particular opinions of
individual judges, and that the modern ‘contextual’ approach will not be likely to lead to an
increase in certainty, at least in the short term.
An example of the power of this approach to the construction of contracts is to be
found in the decision of the the House of Lords in
.
102


Chartbrook Ltd v Persimmon Homes Ltd (2009)
Facts:
The contract concerned a housing and commercial development on land owned
by the claimants. The dispute concerned the calculation of a ‘balancing payment’ to be
the residential properties exceeded what was expected at the time of the contract. The
102
103
104
105
of the reasonable third party the court should assume that that third party has knowledge
of the commercial context in which the clause was intended to operate. It is not necessary
6.5.6
IN FOCUS: REWRITING THE AGREEMENT
An example of the kind of radical rewriting of the words of a contract that can result from
the approach taken in
is shown by the Court of Appeal’s decision
Prudential Assurance Co Ltd v Ayres
.
107
The case concerned a complex sequence of
assignments of an underlease of a property, and the attempts to avoid liability attaching to
6.5.7
CONDITIONS, WARRANTIES AND INNOMINATE TERMS
Not all terms within a contract are of equal importance. In a contract for the provision of a
service, for example, terms specifying the dates on which the service is to be provided and
the date for payment will be likely to be more important than, for example, a term requiring
quence of breach of one of the 
rst two terms is probably going to be more serious than
106
107
108
The Modern Law of Contract
the latter, and may indeed result in the contract as a whole being terminated. The parties
may attempt to give effect to such differences in the status of various contractual provi-
sions by the way in which their agreement is drafted in respect of its ‘express terms’. There
is, in fact, a generally accepted hierarchy of terms, with ‘conditions’ being more important
relative status of the terms concerned, though any presumption to this effect may be
rebutted by other evidence.
109

109
Schuler AG v Wickman Tool Sales Ltd
[1974] AC 235; [1973] 2 All ER 39 – see below,
110
[1962] 2 QB 26; [1962] 1 All ER 474 – see below,
Chapter 14
Figure 6.2

the consequences of a breach of any particular obligation. They may also wish to agree in
advance the amount of damages that will be recoverable in such circumstances. The prin-
ciples governing such clauses, known as ‘liquidated damages’ clauses, are discussed in
Chapter 15
6.6
IMPLIED TERMS
6.6.1
TERMS IMPLIED BY THE COURTS
The general approach of the courts is that they are reluctant to imply terms. The parties are
6.6.2
TERMS IMPLIED BY CUSTOM
Provided that there is suf
cient evidence to establish the custom, the courts will be
111
cations for the use of implied terms, see Collins, 2003, pp 245–46.
112
113
114
The Modern Law of Contract
was that there was evidence that it was normal practice in the trade for liability to be
placed on the hirer, rather than the owner, in such circumstances. Lord Denning
115

The [hirers] themselves knew that 
rms in the plant hiring trade always imposed
conditions in regard to the hiring of plant: and that their conditions were on much the

115
116
117
(1999) unreported, 22 June, CA.
118
For Thought

6.6.3
TERMS IMPLIED IN FACT
The correct approach to this type of implication has recently been reconsidered by the
Attorney General for Belize v Belize Telecom Ltd
.
119
will be considered 
rst, however, before looking at the most recent decision.
6.6.4
THE
TEST
The starting point for the law in this area is the case of
.
120

119
120
Figure 6.3

The Modern Law of Contract
Note that the test being applied here is a stringent one. It is not based on the reasonable
expectation of the owner of the ship, but rather on what is necessary in order to make the
6.6.5
THE ÔOFFICIOUS BYSTANDERÕ TEST
The reason why necessity is a good test for the implication of terms is that it must be
regarded as a sure guide as to what the parties intended. If a contract will not work without
the inclusion of a particular term, it is a reasonable assumption that the parties intended
that term to be included. The courts have been prepared, however, to consider other tests
cious bystander’.
122
derives from the case of
Shirlaw v Southern Foundries
.
123
term may be implied where it is so obvious that it ‘goes without saying’, so that:
124

. . . if, while the parties were making their bargain, an of
cious bystander were to
suggest some express provision for it in the agreement, they would testily suppress


Collins, however, points out (2003, p 240) that, to the extent that this is based on identifying the objectives of
the contract, the process may prove dif
cult because the parties may often disagree as to those objectives.
122
cious’ means ‘meddling’ or being ‘too forward in offering unwelcome or unwanted services’ –
Chambers Dictionary
.
123
124

The Moorcock (1889)
This case concerned a contract which involved the plaintiff’s ship mooring at the
defendant’s wharf in the Thames. The Thames being a tidal river, at low tide the ship, as
The test is again a strict one, in that there will be relatively few provisions of such obvious-
cious bystander’ test. Moreover, it is not a particularly
easy one to apply, as is perhaps shown by the fact that in
ShirlawÕs
case itself, there was
125
would be in agreement – the matter may indeed have been left out of the contract ‘for fear of failure to reach
agreement’.
126
[1992] 2 Lloyd’s Rep 620.
127
[1992] 2 Lloyd’s Rep 620, p 623.
128
The Modern Law of Contract
cious bystander test, the judge did not think the tour operator would have said ‘of

129
130
131
132
Despite the fact that the House of Lords in this case protests that its decision is based on
‘necessity’, the case seems to be an example of a rather more relaxed approach to the
implication of a term ‘in fact’ than has been the case previously.
133
This trend may be seen
to be continued to some extent in the recent decision of the Privy Council in
Attorney
General for Belize v Belize Telecom Ltd
.
134

6.6.6
TERMS IMPLIED BY LAW
133
Collins suggests (2003, pp 245–46) that neither the ‘necessity’ test nor the ‘model contract’ approach
properly explain the reasons for implying terms. He suggests that the courts are in fact trying to achieve ‘a
The Modern Law of Contract
contract had they addressed themselves to the issue. Lord Denning thought that the
required term could not be implied on this basis, because it was highly unlikely that Shell
would have agreed to the inclusion of such a term if this had been requested by the garage
6.6.7
LIVERPOOL CITY COUNCIL v IRWIN
This type of implication of terms derives from the House of Lords’ decision in
.
139


Liverpool City Council v Irwin (1977)
The contract in this case was a tenancy agreement in relation to a block of 
The agreement said nothing about who was to be responsible for the maintenance of
the common parts of the block and, in particular, the lifts and rubbish chutes. The
tenants argued that a term should be implied that the City Council was responsible.
The House of Lords held that it was possible to imply a term to the effect that the
landlord should take reasonable steps to keep the common parts in repair.
138
139
It would clearly not have been possible to imply such a term using the Moorcock or the ‘of cious bystander’ test. It would have been quite possible to have a workable tenancy
agreement in which, for example, the responsibility for the common parts was shared
cious bystander suggesting that a term should
be included imposing liability on the landlord alone would have been unlikely to have been
considered to be stating the obvious, at least as far as the City Council was concerned.
What the House was in effect doing was to say that:
(a)
6.6.8
TERMS IMPLIED BY STATUTE
There are two reasons why it may be appropriate for Parliament to enact that certain provi-
sions should be implied into all contracts of a particular type. One relates to ef
ciency. If it
140
Such an approach is likely to be most useful in respect of ‘relational’ contracts – see Macneil, 1978, and
Chapter 1
141
142
143
[1992] 2 Lloyd’s Rep 620.
The Modern Law of Contract
is virtually universal practice for certain terms to be used in particular contractual relation-
ships, there is no need for the parties to state them speci
cally every time. In terms of
economic analysis, there is a saving in ‘transaction costs’. Rather than having to agree an
appropriate wording on each occasion, the parties can rely on the statutory formulation as
representing their obligations. In such a situation, however, there should be the possibility
of the parties being able to agree to depart from the statutory wording, if they so wish.
The second reason why terms might need to be implied by statute is for the protection
of one of the parties. It may be thought that a particular type of contractual relationship is
likely to involve inequality of bargaining power, so that, unless protective provisions are
implied, the weaker party may be forced into a very disadvantageous bargain. If this is the
reason for the implication, then it may well be that the obligation to include the term should
6.6.9
IN FOCUS: IMPLIED TERMS VERSUS FREEDOM OF CONTRACT
of Goods Act (‘SGA’) 1893 was intended to represent a codi
cation of current commercial
law and practice. Thus, the implied terms as to quality, contained in ss 13–15, were those
which merchants of the time would have expected to appear in any contract for the sale of
rst ground for implying terms, that is, business ef
ciency. In line with this approach, s 55 of the SGA 1893 allowed the parties to agree to
6.6.10
IMPLIED TERMS UNDER THE SALE OF GOODS ACT

Various terms are implied into all sale of goods contracts by virtue of ss 12–15 of the SGA
1979. Similar provisions are to be found in the Supply of Goods and Services Act 1982, but
these are not discussed here.
The implied terms under the SGA 1979 are all labelled as ‘conditions’ or ‘warranties’.
Breach of a condition will generally give the innocent party the right to repudiate the
144
See the UCTA 1977, s 6 – discussed further in
145
The discussion of these terms is in outline only. For a full treatment see, for example, Atiyah, Adams and
contract as well as claiming damages, whereas breach of warranty will only give a right to
146

6.6.11
Section 12 of the SGA 1979 is concerned with ‘title’ in the sense of the ‘right to sell’. There
time when property is to pass’. The condition will be broken if the goods belong to someone
else, or if they cannot be sold without infringing another’s rights, for example, in a trade
147
A breach of this condition will be regarded as constituting a ‘total failure of consid-
eration’. This has the potential to allow the purchaser to recover any money paid, even
though use has been made of the goods transferred. In
,
148
the plaintiff car
dealer had bought a car from the defendant. The car had previously been stolen, but
neither party was aware of this at the time. The plaintiff resold the car to a third party, from
whom it was reclaimed, some months later, by the true owner’s insurance company. The
plaintiff had to repay the purchase price to the third party, and then sought to recover what
reduction in the value of the car, which was demonstrated by the fact that the insurance
company had in fact sold it back to the plaintiff at much less than the original contract
price, the plaintiff was allowed to recover what he had paid to the defendant in full, on the
basis of a total failure of consideration. The use that the plaintiff had made of the car was
irrelevant. The essence of a sale of goods contract is not the use of the goods, but the
transfer of ownership. The breach of s 12 meant that ownership had never been trans-
ferred, and the plaintiff was therefore entitled to recover all his money.
, the plaintiff was a dealer who was primarily interested in the ability
to resell the car. The same principle, however, applies to a private purchaser. In
,
149
the plaintiff had bought a car which, unknown to him, was subject
to a hire purchase agreement, and was reclaimed by the 
nance company nearly a year
later. The plaintiff was allowed to recover the full purchase price from the defendant,
plaintiff thus had almost a year’s free use of the car. This decision has been the subject of
150
6.6.12
Section 13 says that where goods are sold by description, there is an implied condition
that they will match the description. The description may come from the seller or the buyer,
c as well as generic goods.
151
selection by the buyer, as in a self-
service shop, does not prevent the sale being by
description. Virtually all sales will, as a result, be sales by description, unless the buyer
indicates a particular article which he or she wishes to buy, without describing it in any
way, and the article itself has no label or packaging containing a description. There must,
146
The Modern Law of Contract
however, be some reliance on the description by the buyer in order for s 13 to apply.

152
concerned the sale
of a painting which turned out not to be by the artist to whom it was attributed in the cata-
logue. It was found as a matter of fact that the buyer had not relied on this attribution, and
therefore this was not a sale by description.
153

from statements of description. To
of quality, and not within s 13. Statements in advertisements can, however, be regarded as
Taylor
,
154
6.6.13
SATISFACTORY QUALITY
Where a sale of goods contract is made in the course of business, s 14(2) implies a term
applies to the implied term under s 14(3), was considered by the Court of Appeal in
.
155
The case concerned the sale by a 
sherman of his 
shing boat. The
court noted that the original wording of the relevant section in the Sale of Goods Act 1893
had limited liability to where the seller dealt ‘in goods of that description’. This limitation
had been removed, however, and did not appear in s 14 of the 1979 Act. The fact, there-
fore, that the 
sherman was not regularly in the business of selling 
shing boats did not
prevent this being a sale ‘in the course of business’, so that the implied term under s 14(2)
152
153
cant in this case that the seller professed no specialist knowledge, whereas the buyer was an
‘expert’ in paintings of the relevant type.
154
155
156
157
(d)
include the containers in which the goods are supplied, and may also include instructions
for use. If the goods are supplied in bulk, extraneous items which are concealed within
them may render the goods unsatisfactory. In
158
[2004] 2 Lloyd’s Rep 653.
159
160
SI 2002/3045 – the Regulations came into force on 31 March 2003. They were intended to give effect to the
European Directive on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees
nition of satisfactory quality, as indicated in the text, the
Regulations provide for additional remedies for consumers, including a right to demand free repair, or a
reduction in price for goods which are unsatisfactory.
161
The Modern Law of Contract
6.6.14
FITNESS FOR A PARTICULAR PURPOSE
If the buyer wants the goods for a particular purpose, and the seller is aware of this, then
by virtue of s 14(3) there will, in all sales in the course of a business, be an implied term that
the goods will be reasonably 
t for that purpose, unless:

. . . the circumstances show that the buyer does not rely, or that it is unreasonable
for him to rely on the skill and judgment of the seller.

162
but it will usually be more appropriate to use
s 14(2) in such circumstances. Section 14(3) may need to be relied on, however, if there is
162
[1903] 2 KB 148.
163
164
165
166
[1972] AC 441.
For Thought

Would it have made any difference if a signiÞ
cant proportion of people were sensitive to
Harris Tweed and the seller of the coat was aware of that fact?

The same approach was used by the House of Lords in
.
164
tted to the plaintiff’s 
boat. Replacement camshafts supplied by the defendant also failed. The plaintiff sold the
engine, with its latest replacement camshaft, and it was 
tted to another 
shing boat in
which it was apparently used without problem. The judge found that the problem of the
failure of the camshafts must have been caused by some unexplained idiosyncrasy of the
plaintiff’s 
shing boat. There was therefore no breach of the implied condition of 
tness for
rmed by the House of Lords, which also made clear
that where the problem arose from an abnormal or unusual situation not known to the
6.6.15
,
167
the Court of Appeal emphasised the need to distinguish care-
6.6.16
SALE BY SAMPLE
Where there is a sale by sample there is an implied condition, by virtue of s 15:
(a)
that the bulk will correspond with the sample in quality;
(b)
[repealed];
(c)
that the goods will be free from any defect, making their quality unsatisfactory, which
would not be apparent on reasonable examination of the sample.

This section does not seem to have given rise to any serious dif
culties in application.

6.7
STATUTORY CONTROLS
As we have seen, the contents of the contract may be subject to statutory control, in that
terms may be implied, and exclusion of such terms may be prohibited, by statute (for
example, the SGA 1979; the UCTA 1977). There is now, however, a broader control of the
contents of certain types of consumer contract, which results from the Unfair Terms in
168
These Regulations prohibit a wider range of
contractual clauses than simply the exclusion clauses affected by the UCTA 1977. The
Regulations thus represent a further inroad into the traditional common law principle that
the intention of the parties is paramount. Since, however, they relate most closely to the
type of control contained in the UCTA 1977, and overlap to a considerable extent with that
. It is important to remember,
however, that all clauses in consumer contracts, other than those which are ‘individually
negotiated’, or relate either to the de
nition of the main subject matter of the contract or to
the question of price or remuneration,
169
are subject to a test of ‘fairness’. They will be
regarded as ‘unfair’ if they ‘cause a signi
cant imbalance in the parties’ rights and obliga-
167
168
169
Ibid, reg 6.
170
Ibid, reg 5(1).
The Modern Law of Contract
considering the consumer’s reasonable expectations. This statutory framework means
■
■

the relevant skill and knowledge of the parties;

■
Express terms must be incorporated. Speci
c notice may need to be given of

Where a contract is in writing, the courts will be reluctant to receive evidence that some
other provision was intended to be included – the ‘parol evidence’ rule. Exceptions
relate to the importance of the alleged term, custom, and ambiguous terms.

■
Terms may be implied by custom, as question of fact, or as a matter of law.
■
Terms will only be implied as a question of fact where they are necessary for
cious bystander’ test.
■
Terms will be implied by law by the courts where a contract of a common type
■
Terms may be implied by statute – e.g. Sale of Goods Act 1979.


Unfair Terms in Contracts

6.9
FURTHER READING
■
Brownsword
, ‘
■
Gee
, ‘
■
Law Commission
,
■
McKendrick
, ‘


The rise of commercial construction in contract law
■
Mitchell
, ‘
Leading a life of its own? The roles of reasonable expectation in
■
Peden
and
Carter
JW
, ‘
Incorporation of terms by signature: L’Estrange Rules!
■
Phang
, ‘
cacy and the of
cious bystander – a modern
■
Staughton
, ‘
■
Wedderburn
KW
, ‘
1959 ] CLJ 58
COMPANION WEBSITE

■
Revise and consolidate your knowledge of Contents of the Contract by tackling a

■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
Explore Contents of the Contract further by accessing a series of web links

7
Clauses Excluding

Contents
7.1
7.2
Introduction
7.3
230
7.4
7.5
7.6
Statutory controls
246
7.7
Unfair Contract Terms Act 1977
246
7.8
Unfair Terms in Consumer Contracts Regulations 1999
264
7.9
Proposals for reform
269
7.10
271
7.11
Further reading
272

7.1
OVERVIEW
This chapter deals with the situations where parties attempt to exclude or limit their liability
for breach of contract by including exclusion or exemption clauses in the contract. It is an
area governed by both common law and statute. The statutory provisions were developed
The Modern Law of Contract
■
Common law

Rule of incorporation. Was the clause part of the contract? Was appropriate

Rule of construction. Does the wording of the clause make it clear that it
covers the breach that has occurred?

■
Statute

Unfair Contract Terms Act (UCTA) 1977. The statute makes some exclusion
or personal injury caused by negligence). Many other clauses are subject to a
test of ‘reasonableness’. Case law on the Act has tended to allow businesses
more freedom to exclude liability when contracting with each other than in

Unfair Terms in Consumer Contracts Regulations (UTCCR) 1999. These
regulations derive from a European directive. They impose a requirement of
‘fairness’ on most terms in consumer contracts. ‘Good faith’ is part of the test
of fairness.

■
Proposals for reform. The Law Commission has recommended that the law should
ed by combining the UCTA and the UTCCR into one statute.

7.2
liability of one of the parties in the event of certain types of breach. The exclusion may be
total, or may limit the party’s liability to a speci
ed sum of money. There is nothing inher-
ently objectionable about a clause of this kind. Provided that it has been included as a
7.2.1
IN FOCUS: EXCLUDING LIABILITY OR DEFINING OBLIGATIONS
1
See, for example, Yates, 1982, pp 11–33. For an analysis of exclusion clauses based around the allocation
of risks, see von Mehren, 1982.
2
The task is more dif
cult if the clause relates simply to consequential losses resulting from a breach, or is
7.2.2
UNEQUAL BARGAINING POWER
Part of the reason why the courts have thought it necessary to develop special rules for
exclusion clauses is that many such clauses are not simply the product of good contrac-
7.2.3
STATUTORY REGULATION
The Modern Law of Contract
8
we are therefore moving towards a situation where the law of contract controls ‘unfair’
moment, however, the body of case law directed at exclusion clauses is still of suf
importance to merit separate treatment. Despite the statutory interventions, the common
law remains very important, not least because its rules apply to all contracts, whereas the
UCTA 1977 and the UTCCR 1999 apply only in certain situations.

7.3
COMMON LAW RULES
The approach of the courts to exclusion clauses has not traditionally been to assess them
on their merits. In other words, they have not said ‘we think this clause is unreasonable in
its scope, or unfair in its operation, and therefore we will not give effect to it’. As has been
noted above, such an approach would have run too directly counter to the general ideas
9
It has been strongly criticised by Spencer, who has argued that the rule was based on a misapplication of the
parol evidence rule (see 6.3.1) and the defence of
(see 9.8): Spencer, 1973. He suggests that
the claimant should not be bound by the clause where ‘he did not mean to consent to the disputed term, and
although he appeared to consent to it, the other party either caused or connived at his mistake’: ibid, p 121.
Tilden Rent-a-Car Co v
(1978) 83 DLR (3d) 400, refusing to apply
LÕEstrange v Graucob
where the contract was made
in a ‘hurried, informal manner’ and it was clear to the other party that the signatory had not read the contract.
Trigg v MI Movers International Transport Services Ltd
Tilden

decision without reference to
LÕEstrange v Graucob
.
10
For the law relating to the general effect of these on contractual obligations, see
11
12
13
7.4.1
RELEVANCE OF TIME
forward will be important. If it is not put forward until after the contract has been made,
The Modern Law of Contract
17
British Crane and Hire Corp Ltd v Ipswich Plant Hire Ltd
303 – discussed in Chapter 6, 6.6.2. 18
[1969] 2 AC 31 – on appeal from
Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association
.
19
20
21
22
(1877) 2 CPD 416, p 423. The principle is stated in terms of the correct direction to a jury, since at that time
it was common for civil cases to be heard before a jury.
had been a regular user of the hotel, and therefore as a result of a long and consistent
17
might then be entitled to assume that the plaintiff had previously read the clause even if
Incorporation by a ‘course of dealing’ was considered in
Kendall (Henry) & Sons v Lillico
7.4.2
REQUIREMENT OF ÔREASONABLE NOTICEÕ

Parker v South Eastern Railway (1877)
21

Facts:
23
24
25
Indeed, Treitel (2011, p 240) suggests that the notice might not nowadays be regarded as suf

I am of the opinion, therefore, that the proper direction to leave to the jury in these
For Thought


7.4.3
INCORPORATION AND UNUSUAL EXCLUSIONS
decision is clearly helpful to the defendant. More recently, the courts have
adopted an approach that requires an assessment of the nature of the clause alongside
the amount of notice given. Thus, the more unusual or more onerous the exclusion clause,
The Modern Law of Contract
26
27
28
29
– 30
31
– 32
33
the greater the notice that will be expected to be given. In
,
26
example, Lord Denning commented that:
27

Some exclusion clauses I have seen would need to be printed in red ink on the face
of the document with a red hand pointing to it before the notice could be held to be

Thornton v Shoe Lane Parking Ltd
,
28
this approach was applied, so that a clause
7.4.4
IN FOCUS: A COMMON LAW TEST OF ÔREASONABLENESSÕ?
The approach taken in cases like
Thornton v Shoe Lane Parking
not solely procedural, but is affected by the substance of the clause. We have seen that
the same approach may be used in relation to other types of clause. Thus, in
34
LÕEstrange v Graucob
[1934] 2 KB 394 – above, 7.4.
35
Both of which are discussed below, 7.7 and 7.8.
36
37
– above, 7.4.1. in each case had speci cally drawn the other party’s attention to it, so that actual notice
was given, it seems likely that the courts would have held it to be incorporated and enforce-
34
It is only where there is reliance on ‘reasonable notice’, rather than actual knowl-
7.4.5
NEED FOR A ÔCONTRACTUALÕ DOCUMENT
In order to be effectively incorporated, the exclusion clause must generally be contained,

Chapelton v Barry UDC (1940)
36

Facts:
The plaintiff wished to hire a deckchair. He took a chair from a pile near a notice
The Modern Law of Contract
CONSTRUCTION
RULE

The rules of construction, like the rules for incorporation, are of general application, and
can be used in relation to all clauses within a contract, not just exclusion clauses. The more
Figure 7.1
38
39
40
41
The Modern Law of Contract
46
47
It is not clear why the drafters of contracts do not explicitly refer to negligence. Maybe there is a feeling that
the other party might be put off by such an explicit recognition of the possibility that their proposed
contracting partner will not take reasonable care in the performance of the contract.
48
49
Excluding liability for negligence giving rise to personal injury is now in any case prohibited by s 2 of the
UCTA 1977: below, 7.7.5.
50
Joseph Travers & Sons Ltd v Cooper
[1915] KB 73.
51
52
[1972] 2 QB 71; [1972] 1 All ER 399. This case has been criticised by Barendt, 1972.
53
This approach is stated in terms of excluding liability for the acts of the defendant’s ‘serv-
ants’ (that is, employees), but it will apply equally to the situation where the defendant is
potentially directly liable for negligence.
rst principle makes clear, if the drafter of a contract wishes to ensure that
negligence liability is covered, the safest way is to say so explicitly. The use of the
word ‘negligence’ is obviously suf
cient, but synonyms may also be enough. In
,
46
This is relatively straightforward. It is when the drafter of the contract decides to
use general words such as ‘any loss howsoever caused’ that dif
culties start to arise.
47

In that situation, the second and third principles stated by Lord Morton come into play.
54
[1922] 2 KB 87 – garage in possession of the plaintiff’s car with a view to selling it; clause
stating ‘Customers’ cars are driven by your staff at customers’ sole risk’ was wide enough to cover negli-
gence by the driver.
55
[1972] 2 QB 71; [1972] 1 All ER 399. Note that this case has been criticised by Barendt, 1972.
56
Below, 7.7.5.
57
EE Caledonia Ltd v Orbit Valve plc
Shell Chemical v P & O Tankers

[1995] 1 Lloyd’s Rep 297;
Toomey v Eagle Star Insurance
[1995] 2 Lloyd’s Rep 88; and
[1997] CLC 698.
58
Below, 7.7 and 7.8.
would read a clause as covering negligence, the courts will be prepared to allow exclusion
c reference to negligence, or the use of a general phrase clearly including
54
In the end, it is a matter of attempting to assess the intentions and reason-

Hollier v Rambler Motors (1972)
55

Facts:
The plaintiff’s car was at the defendant’s premises when it was damaged by 
re,
caused by the defendant’s negligence. There was a clause in the contract which stated
‘The company is not responsible for damage caused by 
re to customers’ cars on the
premises’.
Held:
related to 
res that arose without negligence on the part of the defendant (though as a
matter of law there would in fact be no liability in such a case). The clause was not, in
effect, an exclusion of liability, but simply a ‘warning’ that the defendant was not, as a
matter of law, liable for non-negligent 
re damage. If the defendant wanted to exclude
liability for negligence, this should have been done explicitly.
7.5.2
RELAXATION OF THE RULE OF CONSTRUCTION
More generally, the existence of stricter statutory controls over exclusion clauses has
encouraged the courts to take the line that there is no need for the rule of construction to
cial way to limit their scope. The consumer and the standard form
contract are dealt with by the UCTA 1977 (and now also by the UTCCR 1999).
58
negotiating at arm’s length should be expected to look after themselves. If they enter into
contracts containing exclusion clauses, they must be presumed to know what they are
doing. On three occasions since the passage of the UCTA 1977, the House of Lords has
The Modern Law of Contract
59
60
61
62
63
64
65
66
67
68
69
the ‘reasonableness’ test under the UCTA 1977 because, on its true construction, the clause did not cover
the loss for which the claimant sought to recover.
70
[1907] 1 KB 41.
71
[1980] 2 Lloyd’s Rep 601 – contract for
ground nut oil; goods supplied 50 per cent ground nut oil, 50 per cent soya bean oil.
72
73
For Thought

Is it right that all commercial agreements should be approached in this way? DoesnÕt the
fact that the parties to a business contract may be of very different bargaining strength
7.5.3
IN FOCUS: FUNDAMENTAL BREACH
some breaches of contract are so serious that no exclusion clause can cover them. This
was expressed in the so-called doctrine of fundamental breach. This doctrine found its
origins in shipping law, where there is strong authority that if a ship ‘deviates’ from its
agreed route, there can be no exclusion of liability in relation to events that occur after the
70
more generally to the law of contract, it took two forms. One was that there are certain
terms within the contract that are so fundamental that there cannot be exclusion for breach
of them. Such would be the situation where the contract stipulated for the supply of peas,
and beans were provided instead.
71
The supplier in such a case has departed so far from
able to allow
him to exclude liability. To do so would appear to make a mockery of the whole idea of a
supplies the same weight of coal, it surely ought not to be permissible to allow reliance on
a broadly written exclusion clause that states ‘the supplier may substitute any other goods
ed in the contract’. The rules of incorporation and construction do not
have any necessary effect on such a clause. The answer appeared to be to treat the
promise to supply potatoes as a ‘fundamental term’. Any breach of this term would provide
a remedy to the other party irrespective of an exclusion clause.
law, which similarly is concerned with the breach of a speci
c obligation regarded as being
central to the contract. The second form of the doctrine of fundamental breach was
different in that it looked not at the particular term that had been broken, but at the overall
effects of the breach that had occurred. If the breach was so serious that it could be said
to have destroyed the whole contract, then again, exclusion of liability should not be
possible. Two cases illustrate these two aspects of the doctrine:
Karsales v Wallis

72
HarbuttÕs Plasticine Ltd v Wayne Tank and Pump Co Ltd
.
73
Karsales v Wallis
The Modern Law of Contract
74
75
76
was for the supply of a Buick car, which the plaintiff had inspected and found to be in good
condition. When delivered (late at night), however, it had to be towed, because it was inca-
pable of self-propulsion. Amongst other things, the cylinder head had been removed, the
valves had been burnt out, and two of the pistons had been broken. The defendant
purported to rely on a clause of the agreement that stated:

No condition or warranty that the vehicle is roadworthy, or as to its age, condition or
tness for purpose is given by the owner or implied herein.

The county judge held for the defendant, but the Court of Appeal reversed this. The
majority of the Court (Lord Denning reached the same conclusion, but on slightly different
grounds) held that what had been delivered was not, in effect, a ‘car’. The defendant’s
‘performance’ was totally different from that which had been contemplated by the contract
(that is, the supply of a motor vehicle in working order). There was, therefore, a breach of
a fundamental term of the agreement, and the exclusion clause had no application.
HarbuttÕs Plasticine
, the contract involved the supply of pipework in the plaintiff’s
factory. The type of piping used was unsuitable, and resulted in a 
re that destroyed the
whole of the plaintiff’s factory. The obligation to supply piping that was 
t for its purpose
could clearly have been broken in various ways, not all of which would have led to serious
damage to the plaintiff’s premises. In this case, however, the consequences of the defend-
77
78
79
80
See also s 9 of the UCTA 1977, which con
rms the position that exclusion clauses always survive a breach
7.5.4
ANY BREACH, NO MATTER HOW SERIOUS, MAY BE EXCLUDED
The decision of the House of Lords in

81
nally con
that, in business to business contracts it was possible for liability for any breach to be
excluded, no matter how serious, or what its effect on the contract.

Photo Production Ltd v Securicor Transport Ltd (1980)
The plaintiffs owned a factory, and engaged the defendants to provide security
services, which included a night patrol. Unfortunately, one of the guards employed by
re on the premises that got out of
control, and destroyed the entire factory. Thus, rather than protecting the plaintiffs’
property as they had been contracted to do, the defendants could be said to have
achieved the exact opposite. The contract, however, contained a very broadly worded
exclusion clause, which, on its face, seemed to cover even the very serious breach of
the agreement that had occurred. The Court of Appeal took the view that this could not
protect the defendants. There had been a fundamental breach, and the exclusion
clause was ineffective.
The Modern Law of Contract
82
83
84
85
Note that the facts of this case would now fall within the scope of s 6 of the UCTA 1977 – see below, 7.7.19.
86
The decision in Photo Productions is a strong af
rmation of the ‘freedom of contract’
approach to commercial agreements, and a rejection of an ‘interventionist’ role for the
7.5.5
THE CURRENT POSITION
The demise of the doctrine of fundamental breach as a rule of law (and there has been no
attempt to revive it since the
law in this area. It may still be dif
cult to decide in particular cases, however, what to do
where a breach effectively negates the whole purpose of the contract. It is a matter of
The House of Lords took this opportunity to state its position with no possible
ambiguity. It ruled that there was no rule of law that a fundamental breach of contract
prevented an exclusion clause from being effective. The so-called doctrine of funda-
mental breach was in fact no more than an aspect of the doctrine of construction. Of
course, it was the case that the more serious the breach of contract, the clearer the
words would need to be which would exclude liability for it. But, if two businesses had
negotiated an agreement containing a clause that on its plain wording covered such a
breach, there was no reason why the courts should not give effect to it. In the present
case, the House, while noting the breadth of the exclusion clause, also noted that the
plaintiffs were paying a very low rate for the defendants’ services. It was therefore not
unreasonable that the defendants should have a low level of liability. The
case was not, however, that the clause such as that under consideration could be
enforced because it was reasonable in all the circumstances, but because on its true
construction it covered the breach.
87
88
89
90
91
92
The person was in fact the buyer of the goods, but the seller had not authorised delivery as was required by
93
The Modern Law of Contract
96
97
98
99
100
Unfair Terms in Contracts
, Law Com No 292, Scot Law Com No 199, Cm 6464, 2005.
101
UCTA 1977, Sched 2, para 1.
102
Very clear words would be needed to cover such a breach, and even then there would be
reluctance to apply the literal meaning where to do so would defeat the ‘main object’ of the
96

7.6
STATUTORY CONTROLS
In many situations, the common law controls discussed in the previous sections have
effectively been superseded by statutory controls contained in the Unfair Contract Terms
Act (UCTA) 1977 and the Unfair Terms in Consumer Contracts Regulations (UTCCR)
97
7.7.1
SCOPE OF THE UCTA 1977
There are certain contracts, listed in Sched 1, which are not within the scope of ss 2–4
(which are the main protective provisions) at all. These include:
101
(a)
(b)
contracts concerning the creation or transfer of interests in land: this includes
;
102

103
Contracts of marine salvage or towage, any charterparty of a ship or hovercraft, and any contract for the
carriage of goods by ship or hovercraft are subject to s 2(1) (which deals with death or personal injury
caused by negligence), but not to the other provisions of s 2, or ss 3, 4 or 7: UCTA 1977, Sched 1, para 2.
104
105
106
But note that where access is obtained to premises for recreational or educational purposes, any liability for
loss or damage from the dangerous state of the premises is not ‘business liability’ unless granting access
for such purposes falls within the business purposes of the occupier: UCTA, s 1(3)(b) as amended by the
107
Though the scope of s 6, which deals with sale of goods contracts, is wider – see 7.7.19, below.
108
Though a publicly funded University might be treated as a ‘public authority’, as it is in the Freedom of
Information Act 2000 (and, probably, for the purposes of the Human Rights Act 1998).
(c)
contracts concerning the creation or transfer of intellectual property rights (copy-
7.7.2
ÔBUSINESSÕ LIABILITY
The next limitation on the scope of the UCTA 1977 which must be noted appears in s 1(3).

. . . business liability, that is, liability for breach of obligations or duties arising (a)
from things done or to be done in the course of a business . . . or (b) from the occu-
pation of premises used for the business purposes of the occupier.
106

In general, therefore, the non-business contractor is free to include exclusion clauses,
without their being controlled by the UCTA 1977.
107
7.7.3
MEANING OF ÔBUSINESSÕ
Section 14 states that ‘“business” includes a profession and the activities of any govern-
ment department or local or public authority’. This leaves open the position of organisa-
108
The protective policy of
the UCTA 1977 would suggest that such situations ought to be covered. The phrase ‘in the
The Modern Law of Contract
109
These words have been criticised by Yates (1982, pp 75–81) in relation to their application to s 6 of the
UCTA 1977 (for which, see below, 7.7.19), and more generally in terms of logical inconsistency.
110
111
For which, see below, 7.7.11.
112
7.7.4
nal issue in relation to the scope of the UCTA 1977 concerns the types of clause that
are covered. As was noted at the start of this chapter, in drawing up a contract, it is
exclusion clause which states that in the event of a breach there will be no liability, or that
it will be limited to a particular sum. It is also possible, however, to attempt to achieve the
ne the obligations arising under the contract restric-
tively (‘disclaimers’), or make the enforcement of a liability subject to restrictive conditions
Section 13 makes it clear that all clauses of this kind which have the effect of excluding or
restricting liability are generally caught by the Act’s provisions. It states:
(1)
To the extent that this Part of the Act prevents the exclusion or restriction of
any liability, it also prevents:
(a)
making the liability or its enforcement subject to restrictive or onerous
(b)
excluding or restricting any right or remedy in respect of the liability, or
subjecting a person to any prejudice in consequence of his pursuing any
such right or remedy;
(c)
excluding or restricting rules of evidence and procedure; and (to that
extent) ss 2 and 5–7 also prevent excluding or restricting liability by
reference to terms and notices which exclude or restrict the relevant
obligation or duty.

(2)
But an agreement in writing to submit present or future differences to arbitra-
tion is not to be treated under this Part of this Act as excluding or restricting
any liability.

nal words of s 13(1), which deal with avoiding liability by the
nition of contractual obligations,
109
do not apply to ss 3 or 4. As will be seen below, the
terms of s 3, which is concerned primarily with non-negligent contractual liability, are
ne obligations. Section 4 is concerned
with one particular type of clause, the indemnity clause, so that there is probably no need
for the provisions of s 13 to apply.
,
110
the House of Lords con
rmed that s 13 extends s 2 of the
UCTA 1977 to a clause which is in the form of a disclaimer, which in this case was given by
113
This is discussed further, below, 7.7.11.
7.7.5
EXCLUSION OF NEGLIGENCE UNDER THE UCTA 1977
Section 2 of the UCTA 1977 is concerned with clauses that attempt to exclude business
ned for the purposes of the Act in s 1(1) to cover the
breach:
(a)
of any obligation, arising from the express or implied terms of a contract, to take
reasonable care or exercise reasonable skill in the performance of the contract;
(b)
of any common law duty to take reasonable care or exercise reasonable skill (but not
(c)
of the common duty of care imposed by the Occupiers’ Liability Act 1957.

independent of any contract (sub-s (b)); and the statutory duty of care imposed on occu-
piers towards lawful visitors (sub-s (c)).
Section 2 states:
(1)
A person cannot by reference to any contract term or to a notice given to persons
generally or to particular persons exclude or restrict his liability for death or personal
injury resulting from negligence.
(2)
In the case of other loss or damage, a person cannot so exclude or restrict his
es the requirement
of reasonableness.
(3)
Where a contract term or notice purports to exclude or restrict liability for negligence
a person’s agreement to or awareness of it is not of itself to be taken as indicating

The level of control imposed by s 2 thus depends on the consequences of the negligence.
To the extent that the exclusion clause attempts to limit liability for death or personal injury
resulting from negligence, it will be totally ineffective (s 2(1)). As regards any other types of
loss or damage, the clause will be effective to the extent that the clause satis
es the
7.7.6
STANDARD TERMS AND CONSUMER CONTRACTS
Whereas s 2 is only concerned with the exclusion of negligence liability, s 3 covers all types
of liability arising under a contract, including strict liability, but is limited in the types of
contract which it affects. It states:
(1)
The Modern Law of Contract
114
(2)
As against that party, the other cannot by reference to any contract term:
(a)
when himself in breach of contract, exclude or restrict any liability of his in
respect of the breach; or
(b)
(i)
to render a contractual performance substantially different from that
which was reasonably expected of him; or
(ii)
in respect of the whole or any part of his contractual obligation, to render
es the requirement of
reasonableness.

The section is thus directed at situations where there is inequality of bargaining power, and
the claimant may have effectively been forced to accept a wide-ranging exclusion clause,
which may appear to operate unfairly. The section operates in relation to two types of
contract. First, it covers contracts where the claimant ‘deals as a consumer’. The de
(a)
(b)
(c)
in the case of a contract governed by the law of sale of goods or hire purchase, or
by s 7 of this Act, the goods passing under or in pursuance of the contract are of a
type ordinarily supplied for private use or consumption.

7.7.7
MEANING OF ÔIN THE COURSE OF A BUSINESSÕ

R and B Customs Brokers v UDT (1998)
The plaintiff was a private company involved in the export business. A car was
bought by the company for the personal and business use of the directors.
a business’, because the plaintiff’s business was not that of buying and selling cars. The
business was buying the car ‘as a consumer’ for the purposes of UCTA 1977.
cult to see, however, why the other contracting party should be any less protected
in such a situation than if dealing with a commercial organisation, which might well be in
115
–Chapter 6, 6.6.13. 116
() 117
[1999] 1 All ER 613 – discussed further above,
118
SI 2002/3045. The Regulations came into force on 31 March 2003.
119
Some doubt about the correctness of the decision in
expressed by the Court of Appeal in

115
type of goods supplied, there will be no possibility of excluding liability for the implied
the equivalent statutory implied terms in hire or hire purchase or other contracts involving
the supply of goods. The owner of a large number of messy dogs who buys an industrial
oor cleaner will now be treated as ‘dealing as a consumer’. There was no obvious
reason why such buyers should not be treated as ‘dealing as a consumer’ and the change
A person claiming to deal as a consumer does not have to prove this: the burden of
proof is on the party claiming that a person is not dealing as a consumer.
119

The Modern Law of Contract
120
121
Chester Grosvenor Hotel v Alfred McAlpine Management Ltd
(1991) 56 BLR 115.
122
7.7.8
STANDARD TERMS OF BUSINESS
The second type of contract that is covered by s 3 is one that is made on the basis of the
defendant’s ‘written standard terms of business’. This phrase is not further de
ned, but it
is to be assumed that the individual negotiation of some of the terms of the agreement will
not prevent them from being ‘standard’. In
St Albans City and District Council v International
,
120
the Court of Appeal rejected an argument that the terms were not
‘standard’ because the contract had been preceded by negotiation. The exclusion clause
itself will, however, presumably have to be part of the standard package. Regularity of use
will suggest that terms are ‘standard’, but it is not necessary that they are
used by
the party wishing to rely on them.
121
If the terms are those of a trade association which are
simply adopted by the mutual agreement of both parties, then presumably these will still
be treated as ‘standard terms’ if they are regularly used by the party whom the clause
concerned would bene
It is important to remember that this provision is not concerned directly with inequalities
in bargaining power. It is likely in practice (because of the way in which the requirement of
reasonableness operates) to bene
t the weaker party more frequently, but there is no
reason in theory why it should not be relied on by a large corporation which happens to
have made a contract on the basis of the standard terms of a much smaller and less
7.7.9
EFFECT OF S 3
The effect of s 3 is that, in relation to any contract within its scope, any attempt to exclude
or restrict liability by the non-consumer, or the party putting forward the standard terms,
will be subject to the requirement of reasonableness (s 3(2)(a)). Moreover, s 3(2)(b) goes on
(i)
to render a contractual performance substantially different from that which was
reasonably to be expected of him; or
(ii)
in respect of the whole or any part of his contractual obligation, to render no perform-

The point of the provisions in s 3(2)(b) is similar to that of s 13. It is trying to anticipate
attempts to exclude liability indirectly by the use of clauses that de
ne a party’s obligations
very restrictively. It would apply, for example, to a clause such as that used in
Wallis

122
For Thought


123
Watford Electronics Ltd v Sanderson CFL Ltd
[2001] EWCA Civ 317; [2001] 1 All ER Comm 696, where
the Court of Appeal took the view that an ‘entire agreement’ clause, which constituted an ‘acknowledgment
of non-reliance’ as regards pre-contractual representations, was not caught by s 3.
124
125
126
incapable of self-propulsion (though such a clause would probably also fall foul of the
special provisions relating to sale of goods contracts), or to a clause allowing a party who
had agreed to provide a cleaning service each month to miss several months in a row
without penalty.
123
Such clauses are permissible, but only to the extent that they satisfy the
requirement of reasonableness. This enables a court to distinguish clauses that are genuine
7.7.10
THE REQUIREMENT OF REASONABLENESS
The Modern Law of Contract
127
[1999] 2 Lloyd’s Rep 273.
128
7.7.11
Starting with the wording of s 11, it is clear that the point at which the clause should be
assessed is when the contract was created, and that the test is directed at the clause itself,
Overseas Medical Supplies Ltd v Orient Transport Services Ltd

127

(see 7.7.16 below) should be regarded with caution, as running against the clear wording
Figure 7.2

129
Watford Electronics Ltd v Sanderson CFL Ltd
[2001] EWCA Civ 317; [2001] 1 All ER Comm 696.
130
131
Overseas Medical Supplies Ltd v Orient Transport Services Ltd
[1999] 2 Lloyd’s Rep
273 – discussed below, 7.7.16.
considered. Where, however, a clause contains two separate exclusions or limitations, and
in particular if they are in two subclauses, it is appropriate to consider the reasonableness
of each subclause individually.
129
rmed by the Court of Appeal in
.
130

Where the clause is one that attempts to limit liability to a speci
c sum of money, rather
7.7.12
GUIDELINES IN SCHED 2
The only other part of the UCTA 1977 that provides guidance on the operation of the
reasonableness test is Sched 2. The role of the Schedule is indicated by s 11(2):

The Modern Law of Contract
132
133
7.7.13
JUDICIAL APPROACH TO ÔREASONABLENESSÕ Ð PRE-UCTA 1977
As far as the case law on ‘reasonableness’ is concerned, there are two House of Lords’
decisions which are worth noting, one applying a test of reasonableness which pre-dated
the UCTA 1977, the other dealing with the UCTA 1977 itself.
rst case is
.
132
concerned a contract for the sale of cabbage seed which turned out not to match its
description, with the result that the entire crop failed and the purchaser suffered a loss of
the price of the seed, which was under £200. The clause was subject to the test of reason-
ableness (now superseded by the UCTA 1977) contained in s 55(4) of the Sale of Goods
133
135
136
137
House was considering, but to negotiate more substantial compensation. As Lord Bridge
135

This evidence indicates a clear recognition by seedsmen in general, and the
[defendants] in particular, that reliance on the limitation of liability imposed by the
relevant condition would not be fair and reasonable.

This indicates that where the courts are dealing with a common type of contract within a
particular area of business activity, the practices of the trade or business are likely to be
of considerable relevance. In addition, the fact that all the circumstances must be
considered, and that the appeal courts are reluctant to interfere with decisions of the trial
has been found unreasonable in one situation, it will be precluded from use in others. This
element of uncertainty will pull in two directions. It will make those who wish to include
exclusion clauses cautious, and may encourage them to word clauses narrowly and
precisely. On the other hand, the claimant who wishes to challenge a clause may well be
7.7.14
THE UCTA 1977 IN THE HOUSE OF LORDS
The second House of Lords case which has discussed the concept of ‘reasonableness’ is
.
136
The case concerned a ‘disclaimer’ of liability for negligence put
from an alternative source, taking into account considerations of costs and time?
In this case, although the purchaser could have obtained another survey, it was
The Modern Law of Contract
138
139
140
141
142
7.7.15
INEQUALITY OF BARGAINING POWER
It is clear from the Sched 2 guidelines and the points made by the House of Lords in
that inequality of bargaining power is an important factor in deciding on the
question of ‘reasonableness’. The existence of inequality does not, however, automatically
render any exclusion unreasonable. This was illustrated by
.
138
A clause in a franchise agreement stated that any proceedings relating to the
7.7.16
ÔREASONABLENESSÕ IN THE COURT OF APPEAL
Several Court of Appeal decisions have involved a consideration of the test of reasonable-
ness. Two of these,

139
Thompson v T Lohan (Plant Hire)
,
140
143
[1998] 1 Lloyd’s Rep 498.
144
[1999] 2 Lloyd’s Rep 273.
145
146
147

. . . our conclusion on the particular facts of this case should not be treated as a
binding precedent in other cases where similar clauses fall to be considered but the
evidence of the surrounding circumstances may be very different.

Subsequent Court of Appeal decisions have, however, given some further guidance as to
factors that are relevant in applying the test. In
,
143
clause was contained in the standard trading conditions of the British International Freight
Association (BIFA). The Court of Appeal felt that it was relevant, particularly where the
parties were of equal bargaining power, that the clause was one which was in common use
and well known in the trade. It could therefore be taken to re
ect a general view as to what
was reasonable in the trade concerned. Although in
been found that there was an expectation in the trade that an exclusion clause which was
in common use would not in practice be relied on, that had not been shown to be the case
here. Although there was ‘no ready or frequent resort to the clause’, there was no evidence
of a recognition in the trade that the clause was unreasonable.
Overseas Medical Supplies Ltd v Orient Transport Services Ltd
,
144

which was also concerned with a clause (though a different one) contained in BIFA’s
standard trading conditions. The trial judge in this case held that the clause was unreason-
outlined various factors which are relevant to the decision on reasonableness.
145
pointed to eight relevant issues, namely: (1) the way in which the relevant conditions came
The Modern Law of Contract
148
149
150
[2003] EWCA Civ 570; [2003] 2 Lloyd’s Rep 356.
rst instance decision. Appealing decisions on ‘reasonableness’
may often turn out to be a fruitless exercise. In
Watford Electronics Ltd v Sanderson CFL
,
148
however, the Court of Appeal did intervene to 
nd that a clause which the trial judge
had regarded as unreasonable was in fact reasonable. Intervention was justi
ed because
the judge had misdirected himself on the proper basis for applying the reasonableness
test; it was not, therefore, simply a disagreement on the result of applying the proper test,
where intervention would presumably not generally be appropriate.

Watford Electronics Ltd v Sanderson CFL Ltd (2001)
Facts:
The contract was for the supply of computer software. It turned out not to func-
tion properly and caused the purchaser substantial losses. The supplier had included a
clause excluding its liability for indirect and consequential losses, and limiting any
compensation to a refund of the purchase price. The trial judge held that the supplier
could not rely on these clauses because they failed the ‘reasonableness’ test. The
Held:
In deciding that these provisions were not unreasonable, the Court of Appeal
took account of the fact that there had been considerable negotiation and the purchaser
had, as a result, gained the inclusion of a ‘best endeavours’ clause; there was no signif-
151
152
[2006] EWHC 2004, [2007] 1 Lloyd’s Rep 8.
153
was therefore reasonable. The most interesting aspect of the judgment, however, is prob-
nal paragraph of the judgment of Tuckey LJ, in which he again con
rmed the
reluctance of the appeal courts to interfere in commercial agreements. He commented:

I am pleased to reach this decision. The 1977 Act obviously plays a very important
role in protecting vulnerable consumers from the effects of draconian contract terms.
For Thought

How should the courts decide when, exceptionally, to intervene in business contracts?
The Modern Law of Contract
154
The clause, if dealing with negligence, however, may well be caught anyway by s 2: cf
[1987] 2 All ER 620.
155
7.7.17
Section 4 deals with ‘indemnities’. It states:
(1)
A person dealing as a consumer cannot by reference to any contract term be made
7.7.18
GUARANTEES OF CONSUMER GOODS
Section 5 is concerned with guarantees given by the manufacturers of consumer goods. It
(1)
In the case of goods of a type ordinarily supplied for private use or consumption,
where loss or damage:
(a)
arises from the goods proving defective while in consumer use; and
(b)
results from the negligence of a person concerned in the manufacture or distri-
restricted by reference to any contract term or notice contained in or operating
by reference to a guarantee of the goods.

(2)
(a)
goods are to be regarded as ‘in consumer use’ when a person is using them,
(b)
promise or assurance (however worded or presented) that defects will be
156
157
158
159
UCTA 1977, s 12. See the discussion above, 7.7.3.
160
161
162
[1999] QB 1028; [1999] 1 All ER 613.
163
UCTA 1977, s 6(4). The other implied terms as to quality only apply to sales in the course of a business.
164
165
Note that this section does not apply to guarantees given by a seller, or hirer, of goods.
156

The effect of such provisions in these contracts is covered by ss 6 and 7 of the UCTA 1977,
which are discussed below.
7.7.19
EXCLUSIONS IN CONTRACTS FOR THE SUPPLY OF GOODS
Exclusion of the implied terms in sale of goods contracts under the Sale of Goods Act (SGA)
and their equivalent in hire purchase contracts under the Supply of Goods (Implied
Terms) Act 1973 is governed by s 6 of the UCTA 1977. There is a total prohibition on the
exclusion or restriction of liability for breach of the implied term as to title (s 12 of the 1979
The Modern Law of Contract
166
167
168
169
Directive 93/13/EC.
170
171
rmed by the European Court of Justice in
Cape SNC v Idealservice Srl
I–9049; [2002] All ER (EC) 657. 172
173
price: reg 6(2) – see below.
As regards implied terms as to description, quality, 
tness for purpose, or compliance with
sample, the position is the same as under s 6 – that is, liability cannot be restricted as against
as person dealing as a consumer; otherwise, any clause must satisfy the requirement of
reasonableness.


7.7.20
EXCLUSION OF LIABILITY FOR MISREPRESENTATION
There are special provisions in s 8 of the UCTA 1977 in relation to liability for misrepresen-
tations. These are dealt with in
167

7.8
UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999
168

From 1 July 1995, certain contracts have been subject to regulations deriving from the
European Directive on Unfair Terms in Consumer Contracts.
169
7.8.1
APPLICATION OF THE REGULATIONS
The application of the Regulations is in some respects narrower than the UCTA 1977, but
174
7.8.2
TERMS ATTACKED
Regulation 8(1) provides that any ‘unfair term’ in a consumer contract ‘shall not be binding
on the consumer’. The test of ‘unfairness’ is contained in reg 5(1), and covers:

. . . any term which contrary to the requirement of good faith . . . causes a signi
The Modern Law of Contract
175
176
The test in reg 5(1) is therefore a composite one, ‘covering both the making and the
cant imbalance’ and ‘good faith’ to
the clause before it, the House was unanimous that it did not contravene the Regulations.
The provision for interest to be payable after judgment was not in itself unusual. The prob-
lems were created by the legislative framework, which restricted the power of the court to
award interest when giving a creditor time to pay a debt by instalments, rather than by the

Director General of Fair Trading v First National Bank plc (2002)
Facts:
A loan agreement issued by the bank provided that if the consumer defaulted on
term to which exception was taken, and about which the Director General received
complaints, was to the effect that interest on the outstanding debt would remain
payable even after a judgment of the court. Thus, a court might order the consumer to
pay off the debt by speci
ed instalments, but the effect of the contract was that interest
would continue to accrue at the contractual rate while the instalments were being paid.
The Director took legal action against the Bank, alleging that the term was in breach of
the Unfair Terms in Consumer Contract Regulations. The Court of Appeal concluded
177
In particular, there was a need to draw attention to the courts’ powers under the Consumer Credit Act 1974,
ss 129 and 136, which would allow it in appropriate circumstances to amend contractual provisions when
making a ‘time order’ for the payment of a debt. This would allow the court to incorporate the recovery of
interest into the calculation of instalment payments.
178
– 179
contractual provision itself. It was the powers and procedures relating to the making of
orders that needed to be addressed, in order to avoid any future unfairness.
177

Lord Steyn, while agreeing with Lord Bingham, took the view that ‘good faith’ was
concerned with substance as well as procedure, and will therefore overlap with the test of
cant imbalance’:
178

The examples given in Schedule 3 convincingly demonstrate that the argument of
the bank that good faith is predominantly concerned with procedural defects in
negotiating procedures cannot be sustained. Any purely procedural or even predom-
The Modern Law of Contract
180
See below, 7.8.3.
181
182
Ibid, para 11; p 105, quoting Chitty, 2004, para 15.025.
183
184
Note that the House of Lords was in fact considering the 1994 version of the Regulations, where the rele-
vant regulation (though worded identically to reg 6(2) in the 1999 Regulations) was reg 4(2).
185
186
The UTCCR 1999 do not apply to simply bad bargains. Regulation 6(2) provides that
ne the main subject matter of the contract, or concern the adequacy of
the price or remuneration for goods or services supplied, will not be assessed, provided
the debtor was ‘ancillary’ and not ‘concerned with the adequacy of the bank’s remunera-
183
reg 6(2)
184
and the fairness of the clause had to be considered.
The approach taken in this case suggested that courts would take a narrow view of
what is within the scope of reg 6(2). A similarly narrow approach to the scope of reg 6(2)
.
185
provision whereby an estate agent’s commission doubled from 1.5 per cent to 3 per cent
in the event of late payment fell within the scope of the fairness provisions of the Regulations
(and was found to be unfair). This was so, even though the format of the provision was to
state that the standard commission was 3 per cent with a reduction for early payment.
ce of Fair Trading v Abbey National plc

186
the Supreme Court held
that charges levied by banks on current accounts, including overdraft excess charges
(payable when a customer exceeds an agreed overdraft or goes overdrawn without having
arranged an overdraft), were part of the price for the banking services provided. As such
they were within the scope of reg 6(2) and so not susceptible to challenge by the Of
ce of
7.8.3
THE REQUIREMENT OF ÔPLAIN, INTELLIGIBLE LANGUAGEÕ
Regulation 7 requires that the seller or supplier should ensure that the terms of the contract
are expressed in ‘plain, intelligible language’: if there is doubt about the meaning of a
For Thought

Is the test of ÔunfairnessÕ under the UTCCR signiÞ
cantly different from the test of
ÔreasonablenessÕ under UCTA? Does it simply lead the courts to the same conclusions
by a slightly different route, or are there situations where a clause might be found to be
ÔunfairÕ but not ÔunreasonableÕ, or vice versa?

187
188
189
190
regulation simply gives statutory effect to the common law
contra proferentem
187
requirement to use plain, intelligible language goes further, however, and clearly strikes
against the use of complex, though unambiguous, legal jargon. There is no apparent sanc-
7.8.4
GENERAL SUPERVISION
ce of Fair Trading (OFT) is given a general supervisory role under reg 10. The power
previously lay with the Director General of Fair Trading. As a result of the Enterprise Act
2002, however, all powers previously exercised by the Director General are now in the
hands of the OFT itself. The supervisory role includes the power to receive complaints and
to seek injunctions restraining the use of unfair terms.
188
a new power to require traders to produce copies of their standard contracts in order to
or court order relating to the continuing use of an unfair term.
189
have been extensively used through the agency of the OFT’s Unfair Contract Terms Unit.
This has led to many cases (several hundred each year) in which terms investigated by the
ed or abandoned.
190
under the Regulations has been small, their effect has been felt through this less formal
enforcement action and has been signi
These supervision and enforcement powers may also be exercised, subject to super-
vision by the OFT, by the ‘qualifying bodies’ listed in Sched 1 to the Regulations. These
include various statutory regulators (that is, data protection, gas, electricity, water, tele-
communications), local authority trading standards departments and the Consumers
rst reported case under the Regulations,
Director General of Fair Trading v First
The Modern Law of Contract
193
Unfair Terms in Contracts
, Law Com No 292, Scot Law Com No 199, Cm 6464, 2005, para 1.14.
194
Unfair Terms in Comsumer Contracts: a new approach? Issues Paper
195
– 196

■
its substance and effect;

the circumstances in existence at the time it was made.

Lack of transparency could in itself render a clause unfair. Guidelines for ‘reason-
ableness’ (similar to those in Sched 2 to the UCTA 1977) will be included in the new
(f)
contra proferentem
rule will be given statutory force.
(g)
(h)
The burden of proof of ‘fairness and reasonableness’ in a consumer contract will rest
on the party seeking to rely on the clause.
(i)
(but not other terms) which are
contained in written standard terms will continue to be subject to the ‘fair and
reasonable test’, as under s 3 of the UCTA 1977. The effect of ss 2(1) and 2(2) of the
UCTA 1977 will also be preserved. The burden of proof will again rest on the party
seeking to rely on the clause.
(j)
The requirement of reasonableness imposed on attempts to exclude liability for the
tness for purpose in relation
to business to business contracts will no longer apply. If such exclusions are
contained in written standard terms, however, they will continue to be caught by the
replacement for s 3 of the UCTA 1977.
A new category of contract small business contracts (SBCs) will be created.
terms, other than core terms, which
have been put forward as part of the other partys written standard terms will be
subject to the test of fairness and reasonableness. The burden of proof, however, will
here rest on the party
Exclusion or limitation clauses are controlled at common law by the rules of
signed document or reasonable notice of it must have been given before or at
the time of the contract. The wider the clause the more notice must be given.
A course of dealing may also provide evidence of incorporation.
The Unfair Contract Terms Act 1977 deals with attempts to exclude business
liability.
Under UCTA, liability for negligence causing death or personal injury can
by negligence must satisfy the requirement of reasonableness.
supply of goods are strictly controlled; in general, no such exclusion is
satisfy the requirement of reasonableness.
The Modern Law of Contract
Other exclusion clauses in consumer contracts, or in written standard terms,
will be subject to the requirement of reasonableness.
The requirement of reasonableness looks at such things as the bargaining
strength of the parties, awareness of the clause, the ability to insure against
In business to business contracts the Court of Appeal is very reluctant to 
nd
exclusion clauses to be unreasonable.
The Unfair Terms in Consumer Contract Regulations 1999 subject all terms in
ning the parties principal
obligations, to a requirement of fairness.
FURTHER READING
Barendt
Unreasonable standard terms
,
B



1964
,
London
:
Unfair Terms in Contracts
Spencer
Signature, consent and the rule in
LEstrange v Graucob
von Mehren
, Vol vii,
International
Mohr/Nijhoff
Yates

Test your understanding of the chapters key terms by using the Flashcard glossary
Fine-tune your legal skills by reading our tips and suggestions for Exclusion
Clauses problem questions
Explore Exclusion Clauses further by accessing a series of web links
8
Misrepresentation

Contents
8.1
8.2
Introduction
8.3
nition of misrepresentation
277
8.4
Remedies for misrepresentation
286
8.5
Exclusion of liability for misrepresentation
298
8.6
301
8.7
Further reading
302

8.1
OVERVIEW
The concept of misrepresentation is concerned with pre-
induce a contract, but turn out to be false. There are other remedies for some false state-
ments of this kind, such as collateral contracts, but a claimant will often wish to rely on the
remedies for misrepresentation. The following issues are important in deciding if a remedy
■
nition. A misrepresentation must be

made by one party to the other;


a statement of existing fact or law;


generally in the form of a positive statement, rather than silence. There
are, however, a number of exceptions to this principle – for example, when
The Modern Law of Contract
Remedies for misrepresentation
Rescission of the contract. This is the main remedy which is available for all
types of misrepresentation, even if wholly innocent. Certain bars, such as
lapse of time, or the intervention of third party rights, will prevent rescission
Damages at common law. Damages are only available at common law if the
maker of the statement has acted fraudulently, or been negligent in one of the
limited situations where there is a duty of care (under the
Hedley Byrne v Heller
Damages under the Misrepresentation Act 1967, s 2(1). This is the most
powerful remedy available, providing damages unless the maker of the misrep-
resentation can prove that there were reasonable grounds for him or her to
Exclusion of liability for misrepresentation
Exclusion of liability is governed by s 3 of the Misrepresentation Act 1967,
which requires such clauses to satisfy the requirement of reasonableness.
Entire agreement clauses may prevent contractual liability for pre-
statements, but cannot circumvent s 3 of the 1967 Act.
INTRODUCTION
This chapter and the next three deal with problems which may arise out of behaviour that
takes place prior to a contract being formed. A party to a contract may, after a valid agree-
ment has apparently been concluded, nevertheless decide that it has turned out not to be
not be enforced. This may be the result of false information, a mistake as to some aspect
of what was agreed, the imposition of threats, or the application of improper pressure.
These situations are dealt with by the English law of contract by rules which are tradition-
ally grouped under the headings misrepresentation, mistake, duress and undue in
u-
ence. In such a situation, the party who is unhappy with the agreement may wish to
Misrepresentation
The Article recognises that negotiation is an important part of contractual dealings, but
that such negotiations do not always lead to a contract. There is nothing inherently wrong
in negotiations breaking down. Parties should be allowed to explore the possibilities of
making an agreement without the need to feel under any obligation to end up in a contract
with each other. This view is also that taken by English contract law. The Article goes
further, however, and in paras 3 and 4 makes a party who, in negotiating, is not genuinely
trying to reach an agreement liable for any losses which such behaviour may cause to the
other party. This positive obligation is not recognised by English law and ‘time-
wasters’ are
free to back away from a contract without penalty. Similarly, para 2 of the Article, which is
probably the most signi
cant provision, has the effect of placing a positive duty on parties
to negotiate in accordance with principles of ‘good faith and fair dealing’. There are two
points of contrast here with English law. First, the Article treats the negotiating process as
8.2.1
IN FOCUS: SHOULD THERE BE AN OBLIGATION TO NEGOTIATE
ÔIN GOOD FAITHÕ?
contractual obligations are common in other systems of law,
4
5
very limited recognition, however, under the classical law of contract.
6
introduced through the in
uence of European directives, such as those concerned with
7
or the rights of commercial agents.
8
The regulations
giving effect to these directives have used the language of good faith, and the English
1
The major exception to this is in relation to the tort of negligent misstatement, which is based on the exist-
ence of a ‘duty of care’ rather than the existence of a contract – see below, 8.4.4.
2
c obligation to negotiate in good faith was clearly rejected by the House of Lords in
Walford v Miles
[1992] 2 AC 128; [1992] 1 All ER 452 – see
3
There are, however, some limited circumstances where a failure to speak may amount to a misrepresenta-
tion. These are dealt with below at 8.3.3.
4
See, for example, French Civil Code, Art 1134; German BGB, Art 242.
5
For example, in the United States, ss 1–203 of the Uniform Commercial Code.
6
(‘the utmost good faith’) are the main exception, arising in relation
to insurance – see below, 8.3.3.
7
8
Commercial Agents (Council Directives) Regulations (1993).
9
Director General of Fair Trading v First National Bank plc
The Modern Law of Contract
analysis. This was of two business people, of equal bargaining power, negotiating at arm’s
length. In such a situation, the court’s attitude, based on ‘freedom of contract’, is that they
should as far as possible be left to their own devices. If one of the parties requires informa-
tion prior to a contract, then that party should ask questions of the other party. If what is
then said in response turns out to be untrue, then legal liability will follow, but if no such
request for information has been made, then it is not the court’s business to say to the
silent party ‘you should have realised that this information would have been important to
the other side, and you should therefore have disclosed it’.
ciency’. Information is valuable, and
those in possession of it should not necessarily be required to disclose it. If, for example,
8.2.2
OTHER REMEDIES FOR PRE-CONTRACTUAL STATEMENTS
It should be noted that there are some situations where Parliament has intervened, gener-
13
to impose an obligation of disclosure. An example is the
requirement under the Consumer Credit Act 1974 that the interest charged for credit
should be presented to the potential debtor in a standardised form (the ‘APR’) which
10
See, for example, Kronman, 1978, pp 13–25.
11
12
See, for example, Macaulay, 1963; Macneil, 1978.
13
And often in response to the requirements of European Union law.
Misrepresentation
8.3.1
STATEMENT BY ONE PARTY TO THE OTHER
Where a claimant is seeking to rescind a contract on the basis of a misrepresentation, or
to recover damages under s 2 of the Misrepresentation Act 1967,
18
the false statement must have been made by, or on behalf of,
19
the other contracting party.
If a person has entered into a contract on the basis of a misrepresentation by a third party,
this will have no effect on the contract, or on the person’s legal relationship with the other
contracting party. A person who buys shares in a company, on the basis of a third party’s
14
For the control of information given in advertisements, see the Consumer Credit Act (CCA) 1974, s 44 and
the Consumer Credit Advertisement Regulations 2010, SI 2010/1970. Breach of the Regulations is a criminal
offence: CCA 1974, s 167(2). For the control of information to be contained in credit agreements, see the
CCA 1974, s 60 and the Consumer Credit (Agreements) Regulations 1983, SI 1983/1553 (as amended most
recently by SI 2010/1969), implementing EC Directive 87/102. The sanction for non-
agreement made is ‘not properly executed’ and therefore only enforceable by order of the court: ss 61(1) and
15
See, for example, the Consumer Protection from Unfair Trading Regulations 2008.
16
17
rst stated in
Hedley Byrne & Co Ltd v Heller & Partners Ltd
ER 575 – see below, 8.4.4.
18
Below, 8.4.6.
19
For example, by an agent. A principal may be liable for false statements made by an agent even if these were
made without authority.
The Modern Law of Contract
20
21
The House of Lords speci
cally rejected any suggestion that the husband was acting as agent for the bank
Figure 8.1

statement that it has just made a substantial pro
t, cannot undo the share purchase if the
statement turns out to be untrue.
This general principle has been affected, at least in certain circumstances, however, by
the House of Lords’ decision in
.
20
misrepresentation to his wife as to the extent to which the matrimonial home was being
used as security for his business debts. On the basis of this misrepresentation, the wife
entered into a contract of guarantee with the bank, using the house as security. The House
of Lords held that because the bank should have been aware of the risk of misrepresenta-
legal advice, it could not enforce the contract of guarantee against her.
21
In effect, there-
fore, a misrepresentation made by a person who was not the other contracting party was
Misrepresentation
being used to rescind the contract. This decision and subsequent case law is discussed
8.3.2
STATEMENT OF EXISTING FACT OR LAW
In relation to the actions for rescission, deceit or under the Misrepresentation Act 1967, the
statement must be one of fact or law, not opinion.
25

22
See 11.8 below.
23
24
Hedley Byrne v Heller
principle – below, 8.4.4.
25
Hedley Byrne v Heller
type of action, a negligently given opinion can give rise to liability.
26
27
28
Chapter 6 , 6.4.2. See Notts Patent Brick and Tile Co v Butler
16 QBD 778 – a statement by a solicitor that he was ‘not aware’ of any restrictive covenants applying to a
piece of land, when in fact he had not checked the position, was held to be a misrepresentation.

For Thought

The Modern Law of Contract
29
30
31
would be a false representation as to the maker’s state of mind about the accuracy of the statement of law
).
32
Chapter 15 , 15.8.4. 33
34

Edgington v Fitzmaurice (1885)
Facts:
A company prospectus, designed to attract subscribers, contained false state-
raised would be used to make improvements to the business, by altering buildings,
The Court of Appeal held that this statement of intention could be treated as a
representation as to the directors’ state of mind at the time that the prospectus was
issued, and could thus be treated as a statement of fact. As Bowen LJ put it:
30

. . . the state of a man’s mind is as much a fact as the state of his digestion. It is
cult to prove what the state of a man’s mind at a particular
time is, but if it can be ascertained it is as much a fact as anything else. A misrep-
resentation as to the state of a man’s mind is, therefore, a misstatement of fact.

The directors, by misrepresenting their actual intentions, were making a false statement
A similar lack of belief in the truth of what is being said may also turn a statement of
opinion into a misrepresentation. It is a false statement of the person’s current state of mind.
It was traditionally thought that a false statement of law was not to be treated as a
statement of fact for the purposes of misrepresentation.
31
This point has been reconsid-
ered, however, in the light of the House of Lords’ decision in
.
32
Here the House overturned the long-
could not be used as the basis for an action for restitution of money paid. It had previously
been thought that this was only available in relation to mistakes of fact. If the courts have
here assimilated ‘law’ to ‘fact’, it seems that the same should apply to misrepresentations.
,
33
in which the judge held that the ‘misrepresentation of law’ rule has not survived
.
34
He took the view that:
Misrepresentation
35
36
37
This is similar to the situation where a statement of opinion can become a statement of fact because
the maker is aware of facts making the opinion untrue:
38
39
This does not apply where the statement is one of intention, and the intention later changes:
Wales v Wadham

8.3.3
MISREPRESENTATION BY SILENCE
In general, there is no misrepresentation by silence. Even where one party is aware that the
other is contracting on the basis of a misunderstanding of some fact relating to the
contract, there will generally be no liability. This is in line with the general approach outlined
at the beginning of this chapter, that English law imposes a negative obligation not to tell
There are, however, some exceptions to this. First, the maker of the statement must not

With v O’Flanagan (1936)
38

A doctor was seeking to sell his practice. He told a prospective purchaser that
the practice’s income was £2,000 per annum. This was true at the time, but as a result
of the vendor’s illness the practice declined considerably over the next few months, so
that by the time it was actually sold, its value had reduced signi
cantly, and takings
were averaging only £5 per week. The purchaser sought to rescind the contract.
The Court of Appeal held that the failure to notify the purchaser of the fact that
the earlier statement was no longer true amounted to a misrepresentation.
39
purchaser was entitled to rescind the contract.
The Modern Law of Contract
The third situation in which silence can constitute a misrepresentation is in relation to
40
which are treated as being ‘of the utmost
), and require the contracting party to disclose all relevant facts.
In an insurance contract, for example, there is an obligation to disclose material facts, even
8.3.4
MISREPRESENTATION MUST INDUCE THE CONTRACT
It is not enough to give rise to a remedy for misrepresentation for the claimant to point to
40
(1766) 3 Burr 1905, Lord Mans
eld justi
ed this approach to insurance contracts on the
basis that they were based on ‘speculation’.
41
[1975] 2 Lloyd’s Rep 485.
42
on the basis that it was the standard applied to marine
insurance by s 18 of the Marine Insurance Act 1906, and that there was no reason why a different standard
43
44
[1978] 1 All ER 1253, p 1257. As Collins points out (2003, p 210), if the insurer was concerned about previous
c questions to this effect. The position was complicated by
Misrepresentation
made. It must also be shown that that statement formed some part of the reason why
the claimant entered into the agreement. In
,
49
which was concerned with this issue of reliance in the context of an action for negligent
misstatement at common law, it was established that the plaintiffs took over a business
having seen inaccurate accounts prepared by the defendants. Their reason for taking over
the business, however, was shown to have been the wish to secure the services of two
directors. The accounts had not induced their action in taking over the business. Similarly,
where the claimant has not relied on the statement, but has sought independent veri
tion, there will not be suf
cient reliance to found an action.
50

On the other hand, it is not necessary for the misrepresentation to be the sole
reason why the contract was entered into. In
,
51
the plaintiff was
uenced not only by the prospectus, but also by his own mistaken belief that he would
49
50
(1838) 6 Cl & F 232.
51
52
53
54
[2006] 2 Lloyd’s Rep 511.
For Thought

DoesnÕt this approach seem to encourage contracting parties not to make proper
inquiries before entering into a contract? In other words, is the law rewarding
carelessness?

will not be applied, however, where the true
The Modern Law of Contract
misrepresentation of the terms. He succeeded at 
rst instance, but on appeal, the Court of
did not correspond to the investment previously outlined by the representative, the defend-
ants had not misrepresented the documents themselves. Since the claimant had looked at
sign by an earlier misrepresentation.
It seems that if the statement is one on which a reasonable person would have relied,
then there is a rebuttable presumption that the claimant did in fact rely on it. This was the
Barton v County NatWest Ltd
.
55
Moreover, the presumption
will not disappear simply as a result of the fact that the claimant has given evidence; the
burden remains on the defendant to disprove it.
The contrary position – that is, where it is claimed that the claimant did in fact rely on
the statement, even though a reasonable person would not have done so – has also been
given some consideration. In other words, does the reliance on the statement have to be
‘reasonable’ in order for it to be a material inducement to contract? This issue was consid-
ered in
.
56
Property owned by the
defendant was sold by auction to the plaintiffs. There was an inaccurate statement in the
auction particulars, which was reaf
rmed by the auctioneer, to the effect that rent reviews
of three leases to which the properties were subject had not been 
nalised. The plaintiffs
sought to rescind the contract for misrepresentation. The defendants argued, as part of
their case, that the misrepresentation was not material because no reasonable bidder
uence his bid. Scott J held (approving a passage to this
effect in Goff and Jones, 1993)
57
that the materiality of the representation was not to be
8.3.5
IN FOCUS: HOW UNREASONABLE CAN A PURCHASER BE?
cult to be sure how far the principle that, apart from insurance contracts, the
reaonableness or otherwise of reliance on a misrepresentation is irrelevant can be taken.
Suppose, for example, I am selling my car and, prior to the contract, I tell the prospective
purchaser that the car is amphibious and will go across water. Can the purchaser later
claim against me because this ridiculous statement turns out to be untrue, as he has
discovered now that the car is at the bottom of the river? Clearly, there may be dif
of proving that there was reliance in fact, as noted above, but assuming that it is estab-
lished that the statement was believed by the purchaser (for example, by the fact that he
tried to drive across a river), the
approach would give a remedy in misrepresen-
tation. Would the courts go this far? Or would some degree of reasonable reliance be
55
[2002] 4 All ER 494 (note); [1999] Lloyd’s Rep Bank 408, placing some reliance on the Australian case of
[1974] 2 NSWLR 202.
56
() 57
58
Misrepresentation
introduced, where, for example, no reasonable person would ever have believed the
it would affect the value of what was being sold, is so far-
Figure 8.2
The Modern Law of Contract
cannot be said that it comes through clearly in the judgment in
RESCISSION
The principal remedy under English law for a misrepresentation was for a long time the
rescission of the ensuing contract. This view of the effect of misrepresentation makes
Misrepresentation
obligations, however,
59
would suggest that the remedy for misrepresentation should be
based on the extent to which reliance on the false statement has led to loss. This would
mean the provision of compensatory damages playing a much more important role in the
remedies available. That trend can be observed as having occurred during the latter half of
■
af
rmation;

■
lapse of time;

■
impossibility of restitution;
■
adverse effect on third parties.

rst at ‘af
rmation’, this arises where the party to whom the statement has been
made, knowing or having discovered that the statement was false, nevertheless continues
,
61
for example, a representation was made as to the fuel
consumption of a lorry by the seller (the defendant). After buying the lorry, the plaintiff
discovered that this statement was untrue, and that the lorry had various other defects.
The defendant offered to contribute towards the cost of repairs. The plaintiff accepted this
offer, and later sent the lorry on a long journey during which it broke down. He then tried to
rescind the contract for misrepresentation. It was held that he had af
rmed the contract
with full knowledge of the false statement, and had therefore lost the right to rescind. The
cation for this bar is presumably that if the claimant has continued with the contract,
having knowledge of the misrepresentation, the statement cannot have been as material a
59
60
The Modern Law of Contract
The second way in which the right to rescind may be lost is by lapse of time. In
International Galleries
,
62
the purchaser of a picture stated to be by John Constable discov-
ered, on trying to sell it some 
ve years later, that this statement was false. His attempt to
rescind for misrepresentation failed because of the lapse of time. This case was fairly clear.
In other situations, it will be a matter for the court to consider in all the circumstances
62
63
64
Bernstein v Pamsons Motors (Golders Green) Ltd
Truk (UK) Ltd v
Tokmakidis GmbH
[2000] 1 Lloyd’s Rep 543.
65
[2003] EWCA Civ 220.
66
For Thought

would have been different if the purchaser
had simply accepted the offer of contribution to the repairs, but had not sent it on
the journey during which it broke down? What if there had been no discussion of paying
for the repairs, but the purchaser had continued to use the lorry, knowing about the

Misrepresentation
misrepresentation have been sold on to an innocent third party. The courts will not, in
such a situation, require the third party to disgorge the goods.
74
problems for claimants where there has been a misrepresentation as to the identity of a
purchaser, which is relevant to creditworthiness. As a result, attempts have been made
(generally unsuccessfully) to argue that such contracts are void for mistake.
75

67
68
69
70
Armstrong v Jackson
Cheese v Thomas [1994] 1 All ER 35, discussed in Chapter 11 , 11.9.1. 71
[1917] 1 KB 813.
72
73
(1878) App Cas 1218, p 1279, per Lord Blackburn.
74
Lewis v Averay [1972] 2 All ER 229. The position is also affected by s 23 of the Sale of Goods Act 1979, which allows a buyer of goods who is in possession under
a voidable title (which is the position where there has been a misrepresentation) to pass a good title to a third
75
The Modern Law of Contract
8.4.2
OPERATION OF RESCISSION
A contract is not automatically rescinded as a result of a misrepresentation, even where
8.4.3
DAMAGES AT COMMON LAW
At common law, damages were traditionally only available in relation to fraudulent
misrepresentations, under the tort of deceit. There is now the possibility of damages being
recovered for negligent misstatements under the tort of negligence, as developed in
Hedley Byrne & Co Ltd v Heller & Partners Ltd

79
and subsequent cases. These are discussed
80

The leading case on deceit is
Derry v Peek
.
81

76
(1869) LR 4 HL 64.
77
78

Derry v Peek (1889)
Facts:
A prospectus for a tram company indicated that it had the right to use steam
power. The directors had assumed that the Board of Trade would give the necessary
permission for this. In fact, the Board of Trade refused permission, and the company
failed. The plaintiff had bought shares in reliance on the statement in the prospectus,
Held:
The House of Lords held that for an action for deceit, it was necessary to show
fraud. This meant, in the words of Lord Herschell, that a false representation must be
proved to have been made:
82
Misrepresentation
83
84
[2000] 1 Lloyd’s Rep 218.
85
The contractual measure would aim to put them in the position they would have been in had the statement
86
East v Maurer
[1991] 2 All ER 733, discussed below.
87
88
For further discussion of the rules of remoteness, see
89
See the comments of Lord Denning [1969] 2 QB 158, p 167; [1969] 2 All ER 119, p 122.
90

The Modern Law of Contract
suffering a loss of over £11m. The plaintiffs claimed this in damages from the defendants;
8.4.4
FALSE STATEMENTS AND THE TORT OF NEGLIGENCE
In certain situations, damages for the tort of negligence may be recoverable in relation to
misstatements. The law governing this area derives from the House of Lords’ decision in
Hedley Byrne & Co Ltd v Heller & Partners Ltd
.
94

92
93
94
95
The reasonableness of such a disclaimer would now have to be considered under s 2 of the UCTA 1977. See
Chapter 7
[1990] 1 AC 831; [1989] 2 All ER 514.

Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)
The plaintiffs had asked their bank to give an opinion on the 
nancial standing
rm. The bank gave a positive report, and the plaintiffs entered into contracts
rm. Shortly afterwards the 
rm went into liquidation, owing substantial sums
to the plaintiffs. They sued the bank, alleging that the statements as to the 
rm had been made negligently.
The House of Lords held that the bank was protected by a ‘without responsibility’
95
It held, however, that in the absence
of this the bank would have been liable. The bank owed a duty of care to the plaintiff,
This established the possibility, therefore, of taking action in the tort of negligence in rela-
tion to statements made without proper care that result in loss. For this to be available,
Misrepresentation
the person who has acted on it. Much of the extensive subsequent case law on this area
has been concerned with the question of when such a duty will arise, which, it has been
8.4.5
INDEMNITY AT COMMON LAW
As has been indicated above, the primary remedy for misrepresentation at common law
was rescission. There was also, however, in certain circumstances a right to claim an
indemnity for expenses incurred, in addition to rescission. As is shown by
,
104
however, such expenses must have been directly related to the obliga-
tions of the contract. The case concerned the lease of premises for poultry breeding which
the landlord had stated were in good sanitary condition. The lease included a covenant
96
[1978] AC 728; [1977] 2 All ER 492.
97
Spring v Guardian Assurance plc [1995] 2 AC 296; [1994] 3 All ER 129. 98
Chapter 5 , 5.10. 99
This basis for a duty was recognised in
Hedley Byrne
.
100
Chapter 6 , at 6.4.2. 101
102
103
See below, 8.4.6 to 8.5.
104
(1900) 82 LT 49. See also
(1886) 34 Ch D 582 – rescission of a partnership; indemnity
against liabilities incurred while a partner.
The Modern Law of Contract
under which the tenant was obliged to effect certain repairs (in line with local authority
requirements). In fact, the premises were not sanitary, and the plaintiffs decided to rescind
for misrepresentation. They also claimed, in addition to a refund of the rent, compensation
in relation to rates paid, repairs carried out, loss of stock, medical and removal expenses.
It was held that they could only recover the cost of the rates, and of repairs carried
out under the covenant. These were obligations which arose directly from the contract,
and were recoverable on an ‘indemnity’ basis. The other items came into the category of
8.4.6
DAMAGES UNDER S 2(1) OF THE MISREPRESENTATION ACT 1967
105

Howard Marine Dredging Co Ltd v A Ogden & Sons (Excavations) Ltd (1978)


Facts:
A representative of the owner of a barge told a potential charterer that the
gure was based on his memory of the relevant
LloydÕs Register
1,800 tonnes. In fact, as was made clear in the ship’s documents, the correct 
gure was
much less, at only 1,055 tonnes. The charterers subsequently sought to claim damages
under s 2(1) on the basis of this misrepresentation. The defendants claimed that the
representative had had reasonable grounds for believing his statement to be true, since
it came from
LloydÕs Registers
.
Misrepresentation
8.4.7
MEASURE OF DAMAGES UNDER S 2(1)
culty which has arisen with s 2(1) is the measure of damages – should it be
Watts v Spence

106
there was some suggestion that it should
be contractual. The Court of Appeal, however, in
Sharneyford v Edge

107
be tortious. The issue was considered further in
Royscot Trust Ltd v Rogerson
.
108

106
107
108
109
[1969] 2 QB 158; [1969] 2 All ER 119 – see above, 8.4.3.
Held:
The Court of Appeal held that the defendant had failed to prove that he had
reasonable grounds for belief in the truth of the statement. Reliance on the
LloydÕs
cient when the correct 
gure was in documentation in the owner’s
For Thought

Do you think the outcome of this case would have been any different if the representa-
tive had previously seen the correct Þ
gure, but no longer had the shipÕs documents
available to him at the time when he relied on the
Lloyd’s Register


Royscot Trust Ltd v Rogerson (1991)
Facts:
A car dealer misrepresented to the plaintiff 
nance company the amount of a
deposit paid by a customer in connection with a hire purchase agreement. The 
company would not have been prepared to lend as much as it did had it known of the
nance company suffered a loss when the customer
defaulted on his payments, after having sold the car to an innocent third party (who
obtained good title under the Hire Purchase Act 1964). In an action by the plaintiff
fraudulent misrepresentation, the only dispute was as to the
amount of damages payable. The measure used by the judge at 
rst instance was
supported by neither party in the appeal, so that the Court of Appeal effectively had to
.
rmed that in an action for misrepresentation under s 2(1)
of the Misrepresentation Act 1967, the correct measure of damages is tortious rather
than contractual. Moreover, since the wording of s 2(1) makes liability conditional on the
situation where ‘the person making the misrepresentation would be liable to damages in
respect thereof had the misrepresentation been made fraudulently’, damages should be
assessed in the same way as for fraudulent misrepresentation. This meant that
owing from the defendant’s misrepresentation,
and not simply for those losses which were
reasonably foreseeable.
Although the wording of the section itself gives rise to the so-
ction of fraud’ alluded
The Modern Law of Contract
textbooks, has been in favour of applying the negligence remoteness rules, because to
apply the deceit rule would operate too harshly in a situation where the defendant has
however, was not prepared to be swayed by these arguments of policy. It found that s 2(1)
aligned liability under it with liability for fraud. The wording of the section was clear and the
Court saw no reason to depart from its literal meaning.
The approach taken by the Court of Appeal in
appeared to be treated with
some scepticism by the House of Lords in
8.4.8
IN FOCUS: WHY SHOULD NEGLIGENT MISREPRESENTATION BE
TREATED IN THE SAME WAY AS FRAUD?
involved a very narrow view of statutory inter-
110
111
– 112
At the time that the Misrepresentation Act 1967 was enacted it was thought that
Hedley Byrne
Misrepresentation
8.4.9
DAMAGES UNDER S 2(2) OF THE MISREPRESENTATION ACT 1967
Section 2(2) of the Misrepresentation Act 1967 allows a court to award damages in lieu
114
115
116
117
118
Beale (1995a and 1995b) has argued that there
be a power to award damages for non-
misrepresentation even where rescission is lost, in order to prevent the possibility of the unjust enrichment
The Modern Law of Contract
8.5
EXCLUSION OF LIABILITY FOR MISREPRESENTATION
Section 3 of the Misrepresentation Act 1967, as amended by s 8 of the Unfair Contract
Terms Act (UCTA) 1977, restricts the possibility of exclusion of liability for misrepresenta-
If a contract contains a term which would exclude or restrict:
(a)
any liability to which a party to a contract may be subject by reason of any
misrepresentation made by him before the contract was made; or
(b)
any remedy available to another party to the contract by reason of such
misrepresentation,

that term shall be of no effect except in so far as it satis
es the requirement of
reasonableness as stated in s 11(1) of the Unfair Contract Terms Act 1977; and it is
es that requirement to show that it does.

Thus, as regards any contract term which attempts to restrict either liability for misrepre-
sentation or any remedy available in relation to it, this will only be effective if it satis
requirement of reasonableness under s 11 of the UCTA 1977.
122
common use will not prevent it from being found to be unreasonable. In
Walker v Boyle
,
123

the court considered a clause contained in a contract for the sale of property, which stated
that ‘no error, misstatement or omission in any preliminary answer concerning the property
the National Conditions of Sale, and commonly used by solicitors, this did not prevent the
court from holding that it was unreasonable. It was also con
rmed by the House of Lords

124
exclude liability for its own fraudulent misrepresentation (though it left open the possibility
of excluding such liability where the statement was made by an agent, provided suf
There have been a number of cases on s 3 of the Act, in both its pre- and post-UCTA
form, relating to the question of the type of clause that is caught by this provision. In
particular, what is its effect in relation to a clause which states that no representations have
been made, or that no reliance is to be placed on any that are made?
make or give any representation or warranty in relation to [the property].’ The auctioneers,
as agents for the vendors, told the prospective purchasers that there were no local authority
schemes for the area in which the property was situated. The purchasers later discovered
that it was likely to be included in a slum clearance scheme, and tried to withdraw from the
122
123
124
[2003] UKHL 6; [2003] 2 Lloyd’s Rep 61.
125
Misrepresentation
decision did not make it clear what the approach would have been had
the representation come directly from the vendors, rather than via their agents. In
Cremdean
,
126
however, the Court of Appeal took the view that the scope of the
earlier decision was limited to the situation of agency. The court was considering a clause
in a contract for the sale of two properties which stated that the accuracy of the particulars
supplied could not be guaranteed and that ‘Any intending purchaser . . . must satisfy
himself by inspection or otherwise as to the correctness of each of the statements
to an attempt to exclude liability, but rather brought about a situation in which it was as if
no representation had ever been made. The court 
rmly rejected this argument. Referring
decision, Bridge LJ commented that:

It is one thing to say that s 3 [of the Misrepresentation Act 1967] does not inhibit a
principal from publicly giving notice limiting the ostensible authority of his agents; it
is quite another thing to say that a principal can circumvent the plainly intended
effect of s 3 by a clause excluding his own liability for a representation which he has

misrepresentations within the meaning of the Misrepresentation Act 1967 were made, this
would still have been treated by the court as an attempt to exclude liability falling within
Inntrepreneur Estates (CPC) Ltd v Worth
,
127

where the clause stated that the lessee acknowledged that no reliance was placed on
pre-contractual statements. Although on the facts it was held that there were no pre-
contractual statements on which the lessee had relied, Laddie J stated that, if there had
been, the clause would have fallen within the scope of s 3 and would have been treated as
unreasonable.
Cremdean v Nash
126
127
128
129
The action in this case was not based on misrepresentation. The judge declined to express a view on the
second half of the clause in question, which did explicitly refer to ‘representations’.
130
131
This stated ‘the Purchaser acknowledges that it has not been induced to enter into this Agreement by any
representation or warranty other than statements contained or referred to in Schedule 6’: ibid, p 595.
The Modern Law of Contract
, that even if these provisions did attempt to exclude liability for misrep-
resentation, they would be unreasonable under s 3 because their scope would be too
wide, potentially extending to fraudulent misrepresentation.
132

132
be considered when assessing reasonableness, rather than its application to the facts of the case before
133
[2000] 2 Lloyd’s LR 611.
134
135
136
–BSkyB Ltd v Enterprise Services UK Ltd
EWHC 86. 137

Misrepresentation
reconsideration of the area. A full reconsideration by the Court of Appeal or Supreme Court
A misrepresentation is a false statement of fact or law made by one
contracting party to the other, which induces the contract. It can be made by
words or actions.
Statements of intention or opinion are not misrepresentations, unless they are
not genuinely held, in which case they are misrepresentations of the state of
Silence will not constitute a misrepresentation unless the contract is one of
dei
, or the maker of the statement fails to reveal the whole truth,
The misrepresentation need not be the only reason for making the contract,
and the reliance on it does not need to be reasonable.
Rescission is in principle available for all types of misrepresentation, but can
be lost through:
rmation
Impossibility of restitution.
Damages are available for fraudulent misrepresentation (deceit), if the claimant
proves that the statement was made with knowledge that it was untrue, or
with a reckless disregard for the truth.
within the scope of the principles developed from the decision in
Byrne v Heller
Damages are available for negligent misstatements under s 2(1) of the
Misrepresentation Act 1967. It is up to the person making the statement to
prove that there were reasonable grounds for believing it to be true.
Under s 2(2) of the Misrepresentation Act 1967 damages may be awarded in
lieu of rescission if the court feels that this is appropriate but only where the
remedy of rescission is still available.
Exclusions of liability for misrepresentation will only be effective if they satisfy
the requirement of reasonableness under the Unfair Contract Terms Act 1977.
The Modern Law of Contract
FURTHER READING
Misrepresentation
Damages in lieu of rescission for misrepresentation
Points on misrepresentation
Pre-
contractual misrepresentation and the limits of the principle in
Hooley
Damages and the Misrepresentation Act 1967
COMPANION WEBSITE
Revise and consolidate your knowledge of Misrepresentation by tackling a series
Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Misrepresentation further by accessing a series of web links
9
Mistake

Contents
9.1
9.2
Introduction
9.3
305
9.4
Mistakes nullifying agreement (‘common mistake’)
307
9.5
Mistakes negativing agreement
313
9.6
324
9.7
Forms of equitable relief
326
9.8
328
9.9
330
9.10
331
9.11
Further reading
332

9.1
OVERVIEW
This chapter deals with situations where a contract is affected by a mistake on the part of
one or both parties. The general approach of the English courts and the different categories
of mistake are dealt with 
rst. The main topics then discussed are:

Mistakes nullifying agreement. This deals with mistakes where the parties have
reached agreement, but on the basis of an important mistake – such as the existence
of the subject matter.
The Modern Law of Contract

Performance must be impossible or radically different from that which the
parties had agreed.

But mistakes as to quality will not generally render the contract void.

■
Mistakes negativing agreement. This type of mistake means that the parties were
never in agreement. This may be because:

they were at cross-

one party was aware of the other’s mistake (‘unilateral mistake’).


Mistake as to the identity of the other party. This is generally a type of unilateral
mistake. It will only render the contract void where the identity was of vital importance
to the other party. It is easier to establish an operative mistake of identity in contracts
■
Mistake is a common law concept. In some circumstances the application of

the refusal of speci
c performance;

recti
cation of a written contract.

■
. This is a plea that a person signed a document under a misappre-
hension as to its effect. It will only be effective where the mistake related to the
nature of the document, and the person signing it had not acted carelessly.

9.2
1

This chapter is concerned with the situations in which a contract may be regarded as never
having come into existence, or may be brought to an end, as a result of a mistake by either
situations which fall within this traditional categorisation are varied, and do not have any
necessary conceptual unity. Moreover, they may have a considerable overlap or interaction
with other areas of contract law – in particular, offer and acceptance, misrepresentation
2

The rules developed by the courts impose fairly heavy burdens on those arguing that a
contract could simply, by saying ‘I’m sorry, I made a mistake’, unstitch a complex agree-
ment without any thought for the consequences for the other party, or any third parties
who might be involved. To allow this to be done would be to strike at the purposes of the
law of contract, which has as one of its main functions the provision of a structure within
which people can organise their commercial relationships with a high degree of certainty.
possible, the courts should give effect to the intentions of the parties. If either, or both, of
the parties has genuinely made a mistake as to the nature of their contract, to enforce it
3
The courts do, therefore, recognise the possibility of
mistakes affecting, or even destroying, contractual obligations that would otherwise arise.
The power to intervene in this way is, however, used with considerable circumspection.
1
For a full history of the development of the concept of ‘mistake’ in English law, see Macmillan, 2010.
2
That is why in some texts one or more of the topics dealt with in this chapter are discussed in the context of
the other rules to which they most closely relate. Smith (1994) has argued that ‘there is no room for the
3
This general reluctance to allow mistakes to affect a contract does not, of course,
prevent the parties themselves from agreeing that a mistake will allow the party who has
made the mistake to rescind the contract. This is not unusual in relation to consumer
contracts made with large chain stores. These organisations often feel able (presumably
4
See, for example, the Consumer Protection (Distance Selling) Regulations 2000, SI 2000/2334; the Consumer
Credit Act 1974, s 67; the Timeshare Act 1992, ss 5 and 6; and the Cancellation of Contracts Made in a
The Modern Law of Contract
unequivocal but mistaken view of the law, and where there is a doubt as to the law. The
at the time the compromise agreement was made, rather than an unequivocal mistake.
Moreover, the compromise agreement remained possible to perform. As a result, the
appeal was allowed and the claimant was held to her compromise agreement.
8
9
It is also referred to by some writers as a ‘common mistake’ – see, for example, Cheshire, Fifoot and
10
Figure 9.1

is contracting on the basis of different assumptions as to the nature or terms of the agree-
ment. They are at cross-
purposes, but do not realise this until after the contract has appar-
ently been agreed.
12
This situation relates to the issues discussed in
mistake. The parties have reached agreement, but that agreement is nulli
ed by the fact
that the subject matter no longer existed at the time of the agreement. This type of common
12
The Modern Law of Contract
As regards contracts for the sale of goods, the common law rule is given statutory effect

Where there is a contract for the sale of speci
c goods, and the goods without the

The word ‘perished’ almost certainly encompasses more than simply physical destruction,
as is shown by the pre-SGA 1893 case of
.
22
was for the purchase of a cargo of corn. At the time of the contract, the cargo had, because
basis for the decision in this case; these are referred to in 9.4.2.
23

9.4.1
SUBJECT MATTER THAT NEVER EXISTED
The cases we have been considering deal with the situation where the subject matter

exist at one point, but has ceased to do so by the time of the contract. The position is more
cult where the subject matter has
existed. There seems no logical reason why
.
24

The Commission had invited tenders for a salvage operation in relation to an oil tanker,
said to be ‘lying on the Jourmand Reef’. The plaintiffs were awarded the contract, but on
arrival found that neither the tanker nor the reef existed. The Commission claimed that the
contract was void for mistake, and that they therefore had no liability. The court held,
however, that there was a contract, in that the Commission had to be taken to have
warranted the existence of the tanker. The plaintiffs were entitled to damages to compen-
9.4.2
IN FOCUS: THE TRUE BASIS FOR THE DECISION IN

In reaching its conclusion in
was truly based on ‘mistake’. It was simply that the plaintiff’s claim in that case,
that the price was payable on production of the shipping documents, could not be upheld
as being part of the contract. It is certainly true that the House of Lords in
end best regarded as an example of the kind of situation in which an operative mistake
could occur, and which would now fall within s 6 of the SGA 1979, rather than as a direct
22
intended to give statutory effect to the principles applied in
.
23
For Thought

would have been if there had been a ship in
ed location, but it had already been salvaged by the time the Commission

9.4.3
HAS THERE BEEN A PROMISE THAT THE SUBJECT MATTER EXISTS?

can be taken to indicate a more general principle to the effect that where one of the
cally promised that the subject matter exists, then mistake has no role
to play, and the other party can sue for breach of the promise. This could apply not only
where the subject matter has never existed, but also where it did once exist and has been
destroyed prior to the agreement. This makes particular sense where, as in
party can reasonably be taken to have superior knowledge about the existence of the
subject matter. The other party is then
relying
the contract, and it may well be appropriate that if that reliance turns out to be unjusti
9.4.4
IMPOSSIBILITY OF PERFORMANCE
An operative common mistake may also arise where, although the subject matter of the
contract has not been destroyed, performance is, and always was, impossible. This may
result from a physical impossibility, as in
,
27
where land was not
capable of growing the quantity of crop contracted for, or legal impossibility,
28
where the
25
At various points the Act states that the provisions of a section apply unless the parties agree otherwise:
there is no statement of this kind in s 6. Nevertheless, Atiyah has argued that the effect of the section should
be able to be overturned by a contrary intention of the parties: Atiyah, 1957, pp 348–49.
26
27
28
The Modern Law of Contract
contract is to buy property which the purchaser already owned.
29
mistake of law will also fall into this category.
30
There is also one case,
th v Brymer
,
31

where a contract was found void for what may be regarded as ‘commercial impossibility’.
32

The contract was to hire a room to view an event which, at the time of the contract, had
already been cancelled. Performance of the contract was physically and legally possible,
33

9.4.5
MISTAKE AS TO QUALITY
Can there be an operative common mistake where the parties are mistaken as to the quality
the impression that they are dealing with a valuable antique, whereas it subsequently turns
out to be a fake? Can B claim that the contract should be treated as void on the basis of a
The leading House of Lords authority is

29
See Lord Atkin’s statement to this effect in
[1932] AC 161, p 218.
30
Brennan v Bolt Burdon
[2004] EWCA Civ 1017; [2005] QB 303 – discussed above, 9.3.
31
32
See Treitel, 2011, p 318.
33
There are a number of cases arising out of the same events as
ths v Brymer
lation occurred
the contract had been made, were dealt with as cases of ‘frustration’ – see
34
This type of situation will in practice often be dealt with by the provisions of the SGA 1979 and, in particular,
Nicholson and Venn v Smith-
(1947) 177 LT 189. For discussion of s 13, see
the nature of the table, there may also be the possibility of rescission or damages for misrepresentation.
35
[1932] AC 161. For a full discussion of the background to the case and the way in which it moved from being
36
37

Bell v Lever Bros (1932)
Facts:
The plaintiffs (Lever Bros) had reached an agreement for compensation with the
agreement was itself a contract, providing for the payment of £50,000. The plaintiffs
then discovered that the defendant had previously behaved in a way (entering into
defendant would not have given the guarantee if it had known the truth. But was the guar-
antee rendered void by this mistake? Steyn J refused to accept that
precluded an
argument based on common mistake as to quality. His view was that, on the facts, such a
Bros would have acted any differently even if they had known the truth. It was open, there-

has been described as possibly being ‘the most unsatisfactory decision
handed down by the House of Lords in modern times’: Harris, Campbell and Halson, 2002, p 244. The criticism
relates in part to the very limited scope for common mistake that was recognised by the House in this case.
39

A buys a picture from B: both A and B believe it to be the work of an old master,
and high price is paid. It turns out to be a modern copy. A has no remedy in the
absence of representation or warranty.

Applying this approach to the case before the House, the conclusion was that there was
no operative mistake. The plaintiffs had obtained exactly what they had bargained for,
that is, the release of the contract with the defendant. The fact that the plaintiffs could
have achieved the same result without paying compensation by relying on the defend-
ant’s earlier conduct was immaterial.
The Modern Law of Contract
The contract of guarantee was therefore void for common mistake at common law.
41
position would therefore seem to be that some mistakes as to the quality, or value, of the
subject matter of the contract can give rise to an operative mistake provided that
ciently serious effect in relation to matters which are fundamental
to the contract. There are
Nicholson and Venn v Smith-Marriott
,
42

where the mistake was as to the provenance of antique table linen, which would also
support such a view, though equally, in
Leaf v International Galleries
,
43
where the mistake
41
Treitel (1988, p 507) has suggested that
es the application of the policy of respect
for the sanctity of contract, whereas
is based on the policy of giving effect to the reasonable
42
(1947) 177 LT 189.
43
Chapter 8 at 8.4.1. 44
45
46

Great Peace Shipping Ltd v Tsavliris (‘The Great Peace’) (2002)
The contract concerned the charter of a ship,
The Great Peace
, to provide urgent
that the ship was about 35 miles from the salvage site. In fact it was about 410 miles
away. When the charterer discovered this, it found another ship that was much closer
The Great Peace
Held:
ciently serious to render
The Great Peace

to render assistance at the salvage, even though at a later time than anticipated. The
47
48
– 49
For the effect of this decision on the remedies available in equity to deal with mistake, see 9.6 below.
arose in
.
47
The reference to ‘impossibility’
in point (iv) must be read in the light of the analogies which the court was drawing with the
doctrine of frustration. Under that doctrine, a contract may be discharged if performance
has become impossible or ‘radically different’ from that which the parties intended. It
would seem that such an approach should also apply in relation to mistake. That this is the
The Great Peace
rmed by its treatment of mistakes
as to quality. As will be seen, in point (v) it refers to a ‘vital attribute’ which may not have
existence of the subject matter. Moreover, the court approved the analysis of Steyn J in the
open the possibility of a mistake as to quality rendering a contract void where the mistake
renders ‘the subject matter of the contract essentially and radically different from the
48
The Court of Appeal’s speci
approval of this passage, and of the conclusions reached by Steyn J on the facts of the
rm that mistakes as to quality may render a contract
void, albeit very rarely.
On the facts which arose in
The Great Peace
, the Court of Appeal agreed with the trial
ciently serious to render
the contract void. In particular, when the true position of the vessel was discovered, the
charterers did not cancel the contract until they had located another vessel that was
nearer. The implication was that if no other such vessel had been located, they would have
continued with the charter concerning
The Great Peace
be argued that the contract for
The Great Peace
different’ from that which the parties had intended.
9.4.6
EFFECT OF AN OPERATIVE COMMON MISTAKE
The effect of an operative common mistake at common law is to render the contract void
(from the beginning). It is as if the contract had never existed, and therefore, as far
The Modern Law of Contract
9.5.1
ÔMUTUAL MISTAKEÕ
‘Mutual mistake’ refers to the situation where the parties are at cross-
side is aware of this when they purport to make a contract. The mistake may relate to the
subject matter of the contract, or the identity of the other contracting party. If the mistake
50

Raf
es v Wichelhaus (1864)
Facts:
The alleged contract was for the purchase of a cargo of cotton due to arrive in
, from Bombay. There were two ships of this name carrying
cotton from Bombay, one of which left in October, the other in December.
The plaintiff offered the December cargo for delivery, but the defendant refused
to accept this, claiming that he intended to buy the October cargo. The plaintiff tried to
argue that the contract was simply for a certain quantity of cotton, and that the ship
from which it was to be supplied was immaterial. The defendant, however, put his case
51

There is nothing on the face of the contract to shew that any particular ship called
were about to sail from Bombay there is a latent ambiguity, and parol
, and the plaintiff another. That being so, there was no
, and therefore no binding contract.

The court stopped argument at this point, and held for the defendant.
There is, however, no report of any judgment in
cant, however, that a few
as authority for the proposi-
52

. . . if two persons enter into an apparent contract concerning a particular person or
ship, and it turns out that each of them, misled by a similarity of name, had a different
mutual mistake. This will, of course, only apply where there is a fundamental ambiguity in
the contract, and no objective means of resolving it.
do the courts decide what the parties intended? Clearly the intentions can only be inferred
from the words and actions of the parties, rather than their actual states of mind. The
approach is therefore primarily objective – what would a reasonable person viewing
the objective view, there was agreement, then the contract will not be avoided for mutual
53
however, the objective valuation may be made from
54
or from the point of view of an independent third
party.
55
9.5.2
53
54
Promisor or promisee objectivity.
55
[2005] EWHC 734 Comm; [2005] 2 Lloyd’s
60
Spencer, 1973. His criticism of
‘feveroles’. It is by no means clear, however, that that is an accurate view of the facts, since it seems that at
the time of the contract neither party understood how feveroles differed from horsebeans.
The Modern Law of Contract
fact been in agreement about which ship was meant, then the contract would have been
9.5.3
THE LIMITS TO MUTUAL MISTAKE
,
63
which again concerned an alleged mutual mistake in relation to the
subject matter of the contract, a more restrictive view was taken as to what mistakes
nding that there was no agreement.
61
62
The case might now be categorised as one of ‘unilateral mistake’, since there was some evidence that the
auctioneer realised that the bid was made on the basis of a mistake. At the time, however, it was not dealt
nding that there was no contract simply on the basis that the parties were not
.
63

Smith v Hughes (1871)
Facts:
The plaintiff had offered to sell oats to the defendant, who trained horses. The
defendant was shown a sample of oats, and agreed to buy the whole quantity. When
delivered, they turned out to be ‘new’ oats, which were of no use to the defendant. He
sought to escape from the contract on the basis that he thought he was buying ‘old’
oats. There was a con
For Thought

had, during pre-

9.5.4
ÔUNILATERAL MISTAKEÕ
‘Unilateral mistake’ refers to the situation where the agreement is ‘negatived’ (that is,
prevented from coming into existence), because one party is aware that the other is
there will have been a misrepresentation which will provide the other party with a remedy.
If there was no such misrepresentation, however, or the remedies available for misrepre-
sentation are inadequate, there may be a remedy on the basis of a mistake. For this to be
available, however, the mistake must be suf
ciently important that, viewed objectively, it
prevents there being an agreement. As we have seen, the court in

thought that the result would have been different if the plaintiff had been aware that the
as to a term of the contract
, relates to some quality of whatever constitutes
the subject matter of the contract, it is not enough that A is aware that B has made
some mistake about this quality; A must also realise that B regards A as having undertaken
a contractual obligation that the subject matter has the quality concerned. As has
been noted in the discussion of misrepresentation, the law of contract does not generally
intervene simply because one party is more knowledgeable than the other.
64
Taking
advantage of superior knowledge or information is seen as tending towards wealth
creation in a capitalist economic context. The approach taken by English law is
ed by the following quotation from Rimer J in
.
65
In considering the scope for the courts to intervene where one party is
aware of another’s mistake, he took the example of negotiations for a compromise of a
legal action (though the approach suggested is clearly intended to be of wider
66

The compromise of litigation is a contractual exercise in which it is the commonest
thing for each side to be aware of facts and matters of which it knows or at least
knew then either no or only a very different compromise would be reached. In the
negotiation of such compromises
67
the parties must be careful not to make
any misrepresentations. But there is in my view no general duty imposed on them in
the nature of a duty of disclosure. The negotiations are in the nature of an
arm’s length commercial bargain. Each party has to look after its own interests and
neither owes a duty of care to the other. It would in my view be astonishing if, in
64
65
66
Ibid, p 281. He is commenting on issues raised by Young J in the Australian case of
(1987) 11 NSWLR 98, p 106.
67
That is, in effect, ‘contracts’.
The Modern Law of Contract
It is, therefore, only where the party with the superior knowledge is seen as acting unfairly
towards the other (for example, by inducing the other’s misunderstanding through false
is part of the European Draft Common Frame of Reference: Contract Law.
68

An example of a situation where one party was not allowed to take advantage of a
.
69
for the sale of hare skins. The price quoted by the seller was stated to be ‘per pound’. This
skins appeared to be being offered at a price about two-
thirds lower than intended by the
seller. The normal practice in the trade is for skins to be sold by the piece. The buyers
accepted the seller’s offer in the terms stated, but the seller refused to supply on this basis,
claiming that the buyers were trying to take unfair advantage of a genuine mistake. The
court was of the view that the buyers were aware that a mistake had been made.
70
basis there was no contract, and the sellers did not have to supply at the price stated. This
9.5.5
MISTAKEN IDENTITY
Unilateral mistake may arise in relation to any aspect of the contract. The majority of
reported cases, however, concern mistakes as to the identity of the other contracting
party. The general rule is that the mistake, to be operative, must relate to the
person with whom you are contracting, not his or her
may be easier to state than to apply. Indeed, Lord Denning suggested in

that it was a ‘distinction without a difference’:
71

A man’s name is one of his attributes. It is also a key to his identity. If, then, he gives
ne distinctions do no good to the law.

lm star, and this is advertised widely. I will not be satis
ed if the agency with
star, but with no other similar qualities, or (b) another 
lm star, but not the one whose pres-
tions, the identity of the party with whom one is contracting is not important. The concern
68
See Article II.–7:201 for the use of good faith in relation to mistake cases.
69
Centrovincial Estates plc v Merchant Investors Insurance Co Ltd [1983] Com LR 158. 70
particular, there is generally no reason to allow a person to back out of a contract simply
for thinking mistakenly that the other party was wealthy, and therefore creditworthy.
The courts have been more willing to treat mistakes of identity as operative where the
contract has been made through the post, or via an agent, rather than in person. In
,
72
for example, the defendant had sent an order to one ‘Brocklehurst’ with whom
he had dealt regularly. Brocklehurst had, however, just transferred the business to his
foreman, who ful
lled the order. The defendant resisted a claim for payment by the foreman
72
73
74
75
[2003] UKHL 62; [2004] 1 All ER 215. Though it should be noted that two members of the House (Lord

Cundy v Lindsay (1878)
Facts:
A fraudulent individual named Blenkarn placed large orders for handkerchiefs
The Modern Law of Contract
who it was that was the intended contracting party. Thus, in
9.5.6
CONTRACTS MADE ÔFACE TO FACEÕ
It becomes much harder to argue for mistake where the contract is made face to face or,
. The courts are reluctant to accept that you
did not intend to contract with the person who is standing in front of you, even though you
may have been under a misapprehension as to that person’s attributes or qualities. The
importance of this distinction was demonstrated and reaf
rmed in
.
77
on hire purchase terms. Although the negotiations relating to the transaction were with the
car dealer, the written contract, in which the false name was given, was with the 
company. The majority of the House of Lords held that this was not a contract
78
They were clearly in
uenced in this conclusion by the fact that the 
creditworthy – and this was the person named in the written contract, not the ‘rogue’
76
77
78
This had the effect of preventing an innocent third party, who had bought the car from the ‘rogue’, from
nance company was able to avoid the protection normally given to
private purchasers of cars which are sold in breach of a hire purchase agreement provided by the Hire
Purchase Act 1964, s 27.
79
80
81
82
83
This was the view taken by Viscount Haldane in
[1927] AC 487, p 501, but does not really
t with the reported facts – see the comments of Treitel, 2007, pp 334–35.

Lewis v Averay (1972)
Facts:
The plaintiff was a student, who had advertised his car for sale. The fraudulent
The Modern Law of Contract
reality is that in all three cases the plaintiff was tricked into parting with property by the
fraud of the other contracting party. They could not use the remedy of misrepresentation
because the fraudulent party had already disposed of the property to an innocent third
party by the time the fraud was discovered. The question was simply which of two ‘inno-
The general view seems to be that the approach taken in
be preferred. The original owner is marginally less ‘innocent’ than the third party, because
84
There is no reason why such an argument should not equally apply to mistaken identity cases which involve
Figure 9.2

Ingram v Little

85
It was considered by the Law Reform Committee in 1966, but rejected as impractical: Twelfth Report,
Transfer of Title to Chattels
, Cmnd 2958.
86
87
88
89
90
For Thought

person defrauded been a young man rather than three elderly women? (2) What steps
cult then to suggest that you really wanted to contract with one
person in particular. If, however, you have gone to that person’s place of business, specif-
ically to enter into a contract, then the argument that the identity of the other party was
important is likely to be much more convincing. This may be illustrated by
.
89
The plaintiffs had approached a 
rm, Thomas Gandell & Sons. They dealt with
Edward Gandell, a member of the family who they thought was acting for the 
rm, though
in fact he was acting on his own account. He intercepted goods sent by the plaintiffs and
sold them to the defendant. It was held that the plaintiffs never intended to deal with
Edward, but only with the 
rm, and the contract was therefore void for mistake.
It may also be possible to rebut the presumption where the fraudulent party is deemed
rather than contracting in his or her own right. This situation was considered in
.
90
A woman went to a jeweller’s shop and represented that she was the wife of
The Modern Law of Contract
purchase one for her, and he wished to see them on approval. She was allowed by the
plaintiff to take the necklaces. In fact, she was not VB’s wife, though she was living
with him. Having received the necklaces, she absconded. The issue in the case was
issue a draft on a genuine account. The draft was collected by the rogue, or his associate,
from Bank B and presented to Bank A. Bank A rang Bank B to check that the draft was
genuine, and having been assured that it was, delivered the foreign currency to the rogue.
It was held that in this case the identity of the rogue was irrelevant to the transactions as
91
92
A mistake which is simply as to creditworthiness would not, however, generally be suf
cient to void the
.
93
94
95
96

97
Magee v Pennine Insurance [1969] 2 QB 507; Nutt v Read [2000] 32 HLR 761; West Sussex Properties Ltd v Chichester DC
[2000] NPC 74.
98
99
100
101
The Modern Law of Contract
ciently fundamental, may avoid a contract. If that is so, then what type of
ciently fundamental to allow for relief in equity, but not suf
ciently funda-
however, been signi
cantly reduced by the decision of the Court of Appeal in
Great Peace
Shipping Ltd v Tsavliris, The Great Peace
.
102
103
the Court of Appeal reviewed the whole line of cases 
owing from
was incorrectly decided. There is no
102
103
104
105
9.7.1
REFUSAL OF SPECIFIC PERFORMANCE
, the order of speci
9.7.2
RECTIFICATION
Where an agreement is contained in a document that contains an inaccuracy, in the form of
either an error or an omission, the equitable remedy of recti
cation may be granted. It is
clearly available where both parties miss the error (a common mistake), or if one party
knows of the other’s mistake (a unilateral mistake). Thus, in
Roberts v Leicestershire County
106
107
108
109
110
[1975] Ch 133; [1974] 2 All ER 656.
111
112

Rose (Frederick E) (London) Ltd v William H Pim Jnr & Co Ltd (1953)
111

The plaintiff had been asked by a third party to supply ‘horsebeans described as
feveroles’. The plaintiffs entered into a contract with the defendants under which the
defendants agreed to sell the plaintiffs 500 tons of ‘horsebeans’. Both plaintiffs and
defendants thought that ‘horsebeans’ was just another name for ‘feveroles’. In fact, feve-
roles are a higher quality horsebean. The defendants supplied ordinary horsebeans, but
these were unacceptable to the third party, who wanted feveroles. The plaintiffs sought
to have their written contract with the defendants recti
ed to refer to feveroles. They
would then be able to succeed in an action for supply of goods of the wrong description.
Held:
The Court of Appeal held, however, that recti
cation was not possible:
112
The Modern Law of Contract
Daventry District Council v Daventry & District Housing Ltd

113
emphasised the need for an objective approach in these situations. The question was what
the parties objectively appeared to have agreed, not their subjective intentions. In this case
there was a mistake about which of the parties was to pay for a de
for employees whose employment was being transferred from the claimant to the
cit, and allowed a contract to be
signed which stated the opposite, the contract should be recti
ed in line with the claim-
ant’s understanding, even though all those involved with the defendant, apart from the
chief negotiator, had no awareness of the claimant’s view.
9.7.3
BARS TO RECTIFICATION
Because this remedy is equitable, it may be lost by virtue of lapse of time or the interven-
tion of third party rights. If this is the case, the claimant will have to argue for common law
mistake in order to obtain any remedy.

9.8
CONTRACTS SIGNED UNDER A MISTAKE
9.8.1
AVAILABILITY OF THE PLEA
The result of these principles, and in particular the second one, is that the doctrine will
rarely be available to literate adults of full capacity. The courts will, however, make the
remedy available to those who are tricked into signing the contract, and it may also operate
113
[2011] EWCA Civ 1153; [2012] 1 WLR 1333.
114
LÕEstrange v Graucob
[1934] 2 KB 394, discussed above,
115
[1971] AC 1004. The facts are given below at 9.8.2. The case also appears in some reports under the name
.

Their agreement as expressed both orally and in writing, was for ‘horsebeans’.
That is all the sellers committed themselves to supply, and all they should be

Although there was a misapprehension underlying the contract (a ‘common mistake’, in
other words), it was not a mistake about what the parties thought that they were
agreeing. Objectively, it appeared to be a contract for horsebeans, and there was there-
fore no basis for providing the remedy of recti
to protect those who from ‘defective education, illness, or innate incapacity’
116
understand what they are signing.
A relatively recent (and fairly rare) example of the successful use of the plea is to be
Lloyds Bank plc v Waterhouse
.
117
Here, the defendant, who was illiterate, signed
a guarantee regarding his son’s future liabilities to the plaintiff bank. The father thought that
this guarantee related solely to the son’s purchase of a farm, whereas in fact it covered all
the son’s liabilities. The trial judge found that this did not amount to a fundamental differ-
ence, and that the defendant had been careless in not having the document read to him.
He gave judgment for the plaintiff. The defendant appealed.
The majority of the Court of Appeal regarded the mistake as to the extent of the
cient to support the plea of
that the father would not have signed it if he had known its true nature, even though he was
aware of the 
nancial value of the guarantee. As to carelessness, although the bank was
9.8.2
NATURE OF THE MISTAKE
At one time, the difference in the extent of the guarantee in the above case would not have
been regarded as suf
cient, as it was thought that the document had to be of a different
‘character’ for the defence to be available. That test was rejected, however, in
116
As Lord Reid put it in

The Modern Law of Contract
If the plea is successful, the transaction is void and unenforceable.
9.9
IN FOCUS: CONCLUSIONS ON ÔMISTAKEÕ
The lack of coherence in English contract law in dealing with the issue of ‘mistake’ will be
118
For Thought

Do you think the outcome of this case would have been different if the woman had
thought that she was signing a mortgage on the house, enabling her to raise money,
rather than making a gift to her nephew? Would the document then have been Ôradically
differentÕ?

and those created without such interaction,
losses, perhaps on a similar basis to that adopted in relation to frustrated contracts.

It will be seen that the above suggestions are pragmatic rather than formalistic. They
are based on the approach that where an agreement has failed as the result of a mistake
(of whatever kind), the precise analysis of the nature of that agreement is in general of less
importance than the practical consequences of its failure. Unless it is clear that one of the
exible approach based on
voidability is likely to lead to the most satisfactory results for all concerned.

9.10
SUMMARY OF KEY POINTS
■
An operative mistake will have the effect of rendering a contract void or
existent, and can override third party rights. It is therefore a very powerful
concept that the courts use with care.

Mistakes can be divided into those that nullify an agreement (‘common
mistake’) and those that negative agreement (‘mutual’ and ‘unilateral mistakes’).

Common mistakes that will be treated as nullifying the agreement are mistakes:

res extincta
);

that make performance impossible – physically, legally or commercially.

■
Mistakes as to quality will not generally be operative mistakes.

■
Mutual mistakes arise where the parties are at cross-
purposes. There is no
agreement, and so no contract.
■
Unilateral mistakes arise where one party is aware of the other’s mistake as to
■
Unilateral mistakes as to identity will be operative where identity is of
).
■
Equity provides only limited additional protection in relation to mistakes that
are not operative at common law. Such mistakes may lead to:

the refusal of speci
c performance;

recti
cation of a document.

■
Contracts signed under a mistake are dealt with by the plea of
.
Parties relying on this plea will need to show that the document was ‘radically
different’ from what they thought they were signing, and that they had not
been careless.

123
The availability of more 
exible powers would hopefully prevent arguments based on ‘mistake’ from leading
to the circumvention of statutory provisions designed for the protection of consumers – as apparently
. This is surely unacceptable.
124
The Modern Law of Contract
FURTHER READING
,
PS



existent goods
(
1957
) 73 LQR
340

Hare
Law, Fact and Narrative Coherence
,
C

How temptation led to mistake: an explanation of
Bell v Lever Bros
Ltd

2003
) 119 LQR 625

ed?
Oxford
AWB
AWB
) 11 Cardozo L Rev 287
,
JC

Contracts mistake, frustration and implied terms
(
1994
) 110 LQR 400

Spencer
Signature, consent and the rule in
LEstrange v Graucob
Treitel
COMPANION WEBSITE

Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Mistake further by accessing a series of web links
10
Duress

Contents
10.1
10.2
Introduction
10.3
Duress by threats of violence or other coercion
335
10.4
Economic duress
339
10.5
Remedies for duress
345
10.6
346
10.7
Further reading
346

10.1
OVERVIEW
This chapter deals with the position where one party alleges that he or she only entered
into the contract as a result of threats made by the other party. The questions that need to
be considered are:
■
What type of threats will allow a party to escape from a contract? To what extent can
threats other than of physical violence have this effect? The relevant question now
■
In what situations may ‘economic duress’ be suf
cient to affect the contract? It is
important here, as in relation to other types of duress, that the party alleging duress
had no real alternative to compliance.
The Modern Law of Contract
■
Can there be duress where there is a threat to perform an act which involves no
breach of the criminal law or civil obligation (such as breach of contract)? The answer
seems to be that there can be, but only where the threat is being used for an improper
■
What are the remedies for duress? It renders a contract voidable, but does not allow
the recovery of damages.

10.2
This chapter is concerned with situations in which an agreement that appears to be valid
on its face is challenged because it is alleged that it is the product of improper pressure of
some kind. This may take the form of threats of physical coercion or ‘economic’ threats
(such as to break a contract), which place pressure on the other party. It seems that explicit
threats are needed. Suppose, for example, that a woman has been beaten by her husband
in the past, and is then asked by him to sell him her share in the matrimonial home at a
gross undervalue. She agrees through fear of what he might do to her, even though he has
made no threat to her on this occasion. It seems that this situation cannot be treated as
duress, because the threat is implied, rather than explicit.
1
such a situation under the closely related, but conceptually distinct,
2
1
Compare, however, the Australian case of
FarmersÕ Co-
operative Executors and Trustees Ltd v Perks
52 SASR 399, discussed in Birks and Chin, 1995, p 66, where it seems that the judge was prepared to 
duress in circumstances similar to those given in the text. There is no comparable English authority.
2
The distinction might be denied by those who argue that duress and undue in
uence can both be encom-
passed within a general doctrine of ‘good faith’ – see, for example, Adams and Brownsword, 1995,
Figure 10.1

Duress
3
There are statements by Lord Cross in
Barton v Armstrong
[1976] AC 104, suggesting that duress renders a
contract void, but the general view is that its effect is to make it voidable.
4
5
(1840) 11 A & E 983.
6
(1731) 2 Stra 915.
7
One of the problems with economic duress lies in establishing the boundaries of accept-
able behaviour of this kind, since economic pressure clearly has a legitimate place within
business dealings, and this issue is explored below. If, however, the contract has been
entered into as a result of illegitimate threats, it is rendered voidable.
3

Attorney General v R (2003)
Facts:
account of his involvement with the SAS in the Gulf War of 1991. This came to the
attention of the British Government, and the Attorney General brought an action for
breach of contract against the soldier, based on a ‘con
dentiality agreement’ that the
signed the agreement, restricting his ability to publish information about his experi-
ences in the SAS, because if he had not he was threatened with being removed from
the SAS (though remaining in the army). Such removal would normally only have taken
place as a result of disciplinary action. The case originated in New Zealand, where the
trial judge held in the soldier’s favour. The New Zealand Court of Appeal reversed this
decision. There was a further appeal to the Privy Council.
The Modern Law of Contract
8
[1983] 1 AC 366; [1982] 2 All ER 67 – discussed below, 10.4.1.
9
10
11
For Thought

Does this mean that a person who signs a contract because the other party threatened
duress?

ed the essential
requirement of duress as being illegitimate pressure amounting to compulsion of the will
of the victim. There was no doubt that the soldier was pressured into signing the agree-
Duress
it rendered this lawful threat illegitimate? The trial judge had thought that it was, in that it
was effectively a military order which purported to control R’s conduct after he had left the
service. The Court of Appeal and the Privy Council disagreed. R had not been issued with
a command which created an obligation under military law; rather, he was faced with a
choice which may have constituted ‘overwhelming pressure’, but was not an exercise by
the Ministry of Defence of its legal powers over him. Since the objective of restricting unau-
thorised disclosures concerning military operations was in itself a legitimate objective, the
plea of duress failed.
This broad approach to de
ning the limits of duress must be assumed to be the one
which will be adopted by English courts in future (though, of course, as a decision of the
Attorney General v R
is only of persuasive authority – and since duress was
not found, the more general statements could be treated as
resolve all issues as to the nature of duress, however, and some of these are worth further
For example, the cases on duress are full of references to the claimant’s will being
‘overborne’ (and this is echoed in the Privy Council’s references to ‘compulsion’). In most
been forced to act as an automaton. The decision to make the contract has been taken as
a matter of choice. It is simply that the threat which has led to that choice is regarded by
es allowing the party threatened to escape from the
12
The fact that this is the basis of the modern doctrine is illustrated
Barton v Armstrong
that the threats which
were made were the sole reason for the managing director’s decision. The approach of the
majority of the Privy Council appears in the opinion of Lord Cross. He noted that, in relation
to misrepresentation, there is no need to prove that the false statement was the sole
reason for entering into the contract.
13
He then commented that:
14

Their Lordships think that the same rule should apply in cases of duress and that if
Armstrong’s threats were ‘a’ reason for Barton’s executing the deed he is entitled to
relief even though he might well have entered into the contract if Armstrong had
uttered no threats to in
uence him to do so . . .

If this is the case, then it clearly is inappropriate to talk of the will of the person subject to
the threats being ‘overborne’. The duress simply becomes a wrongful act of a similar kind
to a misrepresentation, which, if it has in
uenced the other party’s decision to make a
contract, provides a basis for that contract being voidable.
15

This analysis suggests that the concept of duress focuses on the wrongfulness of the
behaviour of the defendant rather than its effect on the claimant.
16
would accept that this necessarily follows from the rejection of the ‘overborne will’
12
As Atiyah (1995, p 267) and others have pointed out, the House of Lords has speci
cally rejected the ‘over-
borne will’ in relation to the criminal law defence of duress: see
Lynch v DPP for Northern Ireland
653, but the courts have been more reluctant to reject this language in the context of the law of contract. See
13
14
15
It seems also to be implicit in Lord Cross’ opinion that there is not even any need for it to be proved that the
threats were the major element in the decision. He certainly regards this as the case in relation to fraudulent
misrepresentation, ‘for in this 
eld the court does not allow an examination into the relative importance of
contributory causes’ (ibid, p 118), and the whole tenor of his opinion is to align duress with fraud.

Note that in the following discussion, for ease of treatment, ‘defendant’ is used to indicate the party issuing the
threat, and ‘claimant’ the party potentially affected by it, notwithstanding the fact that cases may involve the
defendant seeking to prevent an action to enforce a contract on the basis that the claimant has used duress.
The Modern Law of Contract
approach to duress. Birks and Chin have pointed out that there are authorities which make
10.3.1
IN FOCUS: CAN THERE BE DURESS IF THE CONTRACT WOULD HAVE
BEEN MADE ANYWAY?
Lord Cross suggests, in the quotation above, that duress is available even if the contract
would have been made without the threats. This surely goes too far. Lord Cross accepts
17
(1824) 2 B & C 729 (money paid in order to pay a licence);
Maskell v Horner
[1915] 3 KB 106 (payment of tolls under threat of seizure of goods). Birks and Chin are
mainly concerned with undue in
uence, rather than duress, but this does not affect the validity of the point
Universe Tankships Inc of Monrovia v International Transport WorkersÕ Federation
ER 67, for example, the threat was to take industrial action which the union concerned thought was lawful:
Duress
threats of the defendant.’ Lord Scarman, on the other hand, has on more than one occa-
10.3.2
DIFFICULTIES OF LANGUAGE
The language used in talking of duress does not assist in clarifying these issues. First, the
use of the word ‘threat’ carries pejorative overtones, and suggests deliberate bad behav-
iour on the part of the defendant. The usage is understandable given the origins of duress
in putting someone in fear of physical violence. What is, however, meant in the modern
context is simply an indication from the defendant to the claimant that if the claimant does
not enter into the contract, then the defendant will act in a particular way. The shorthand
use of the word ‘threat’ must not be allowed to carry with it any necessary connotation of
deliberate wrongdoing.
Second, ‘improper’ or ‘illegitimate’ are the adjectives most commonly used to qualify
the defendant’s behaviour. Once again these may carry the implication of wrongdoing by
24
derived from the origins of duress. It would perhaps be more accurate to
refer to behaviour which is ‘inappropriate’. This allows account to be taken of the context
in which the behaviour takes place – does it go beyond what a reasonable person would
regard as acceptable in all the circumstances?
A reformulation of the test of duress using this language would be as follows. Did the
claimant enter into the contract at least partly as a result of an indication of future behav-
iour by the defendant, which put pressure on the claimant and was inappropriate in all the
circumstances? No doubt, however, the more manageable formulation of ‘Did the claimant
enter into the contract at least partly as a result of illegitimate threats from the defendant?’
will more likely, in practice, be used.

10.4
ECONOMIC DURESS
The broadening of the approach to what behaviour can constitute duress, as re
ected in
Attorney General v R
,
25
duress’ as a separate category. However, it was in this area that the courts 
rst recognised
22
Pao On v Lau Yiu Long
Universe Tankships Inc of Monrovia v International
Transport WorkersÕ Federation, The Universe Sentinel
[1983] 1 AC 366, p 400; [1982] 2 All ER 67, p 88.
23
The Modern Law of Contract
renegotiation of charters of two vessels, under the threat that otherwise the charterers
would go out of business. In other words it was a threat that the contractual obligations
under the charters would be broken. It was recognised that this could in some circum-
stances have amounted to duress suf
cient to render the agreement voidable. On the
facts, however, the other party had not agreed to the renegotiation under duress, but
simply as a result of ordinary commercial pressures. In
,
27
increase in the price payable under a contract for the construction of a tanker. Mocatta J
held that this did amount to duress:
28

The Yard were adamant in insisting on the increased price without having any legal
cation for so doing and the owners realised that the Yard would not accept
ed agreement to the increase. The owners might
have claimed damages in arbitration against the Yard with all the inherent uncertain-
ties of litigation, but in view of the position of the Yard vis à vis [the owners] relations
29
it would be unreasonable to hold that this is the course they should have
(1731) 2 Str 915. The owners made a very reasonable
offer of arbitration coupled with security for any award in the Yard’s favour that might
be made, but this was refused. They then made their agreement, which can truly I

There was duress, because the defendants’ threat to break their contract had no legal
cation, and the plaintiffs had no realistic alternative but to submit if they wished to
preserve the chance of the charter to Shell. The plaintiffs had, however, delayed for eight
27
28
29
With whom the owners were negotiating for a lucrative contract for the charter of the tanker, once constructed.
30
31
32
Duress
that in its view, threats can be ‘illegitimate’ as a result of their context, even if they are
10.4.1
INDUSTRIAL ACTION
duress have often been concerned with industrial action. A trade union threatens to
encourage its members to break their contracts with a particular employer (for example, by
going on strike or refusing to do certain work) unless the employer agrees to act in a
certain way. To carry out the threatened action would (subject to the applicability of any
protective trade union legislation) amount to the tort of inducement of breach of contract.
This may well be regarded as going beyond legitimate pressure and thus amount to duress.
Universe Tankships Inc of Monrovia v International Transport WorkersÕ
,
33
the union ‘blacked’ a ship owned by the plaintiffs, by
instructing its members not to deal with it, and therefore preventing it from leaving port. In
order to escape from this, the owners,
, made a payment to the union’s welfare
fund. They later brought an action to recover this as a payment made under duress. It was
held that the threatened industrial action was unlawful under English law, and the payment
was recoverable.
Subsequent changes in English employment law, extending the scope of unlawful
industrial action, have had the effect of extending the scope of economic duress. This is
Dimskal Shipping Co SA v International Transport WorkersÕ Federation, The Evia
,
34
33
34


Dimskal Shipping Co SA v International Transport Workers’ Federation, The
Facts:
The International Transport Workers Federation (a trade union) had, through
industrial action, persuaded the respondent shipping company to agree to contracts
involving the payment of large sums of money in respect of back pay to its crew. This
was to bring the respondent’s terms of employment in line with those approved by the
ITF. The respondents sought to have these contracts, which were expressed to be
governed by English law, avoided for duress. The judge at 
rst instance refused, since
the actions of the ITF were legal where they took place (in Sweden). The Court of Appeal
overturned this judgment, and the ITF appealed to the House of Lords.
10.4.2
BREACH OF CONTRACT
Where the unlawful action threatened is simply a breach of contract, rather than a tort
(which may well be the case outside the industrial context), it may be more dif
cult to
identify the boundaries of legitimate pressure. Some assistance is provided by the opinion
The Modern Law of Contract
of Lord Scarman in the Privy Council case of
Pao On v Lau Yiu Long
.
35
plaintiff had threatened not to proceed with a contract for the sale of shares, unless the
other side agreed to a renegotiation of certain subsidiary arrangements. The defendant
agreed, but when the plaintiff later tried to enforce these arrangements, claimed that they
had been extracted by duress and were therefore voidable. Lord Scarman identi
ed the
35
36
37
38
For Thought

Duress
39
40
41
42
– Chapter 3 , 3.9.9. 43
Atiyah (1995, p 273) has suggested, however, that in a situation where the courts 
nd that there were good
commercial reasons for accepting a variation (and thus that there was consideration) it may be dif
cult to
argue that the acceptance was forced by ‘duress’.
A similar situation arose in the earlier case of
B & S Contracts and Design Ltd v Victor
Green Publications Ltd
.
39
There was a contract for the erection of exhibition stands. An
may amount to good consideration for a new promise means that in ‘duress’ situations
consideration is likely to be found. The claimant will probably have agreed to make
the additional payment (or whatever else is required) in order to avoid unfavourable
ow from the defendant’s threatened actions. Avoiding those
consequences will be likely to be regarded as a ‘practical bene
t’ and therefore good
consideration. The result is that duress becomes of increased importance in dealing with
43

10.4.3
MUST THE THREAT BE OF AN UNLAWFUL ACT?
The examples of duress so far considered have all involved an act which is in
some respects a breach of law. It involves a crime, or a tort, or a breach of contract. Is
The Modern Law of Contract
44
45
It has been noted earlier that ‘bad faith’ is not generally a necessary requirement for duress – above, 10.3.
Where, however, there is no other ‘unlawfulness’, it may well be that it becomes a much more relevant factor.
46
47
48

CTN Cash and Carry v Gallaher (1994)
44

Facts:
The threat in this case was to withdraw credit from the other party, and to insist
on cash for goods supplied. The circumstances in which this occurred were that the
Duress
49
50
[1978] 3 All ER 1170; above, 10.4. 51
52


Halpern v Halpern (2007)
51

Facts:
The Modern Law of Contract
dominance, however, there is little reason why damages resulting from the duress
should not be recoverable, on a ‘reliance’ basis, as they are now for most categories of
misrepresentation.
10.6
SUMMARY OF KEY POINTS
■
Duress involves a threat towards another person, which induces that
person to enter into a contract. Traditionally the threats needed to be of
physical violence, but the modern law recognises any threat involving
illegitimate pressure (including economic pressure) as potentially
involving ‘duress’.
■
A contract made under duress is voidable (not void).
■
■

was there any real alternative to compliance?

was there independent legal advice?


■
The remedy for duress is rescission of the contract. This may be granted even
if the victim of the duress cannot make precise restitution.
■
Damages are not available for duress.

10.7
FURTHER READING
■
Atiyah
, ‘
Economic duress and the overborne will
■
Birks
and
Chin Nyuk
Yin
, ‘
On the nature of undue in
Beatson
and
Friedmann
(eds),
,
Oxford
Clarendon Press

■
Halson
, ‘
Opportunism, economic duress and contractual modi
107
■
Smith
, ‘
Contracting under pressure: a theory of duress
■
Smith
,
AtiyahÕs Introduction to the Law of Contract
,
Oxford
Clarendon Press

Duress
COMPANION WEBSITE
Revise and consolidate your knowledge of Duress by tackling a series of Multiple-
Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Duress further by accessing a series of web links
Undue Inß uence

Contents
11.1
11.2
Introduction
11.3
353
11.4
Presumed in
uence: recognised relationships
354
11.5
Presumed in
uence: other relationships
356
11.6
Relevance of the disadvantageous nature of
358
11.7
Summary of current position on presumed
360
11.8
uence and third parties
362
11.9
371
11.10
bargaining power
373
11.11
376
11.12
Further reading
376

11
The Modern Law of Contract
11.1
OVERVIEW
uence is the equitable concept which supplements the common law vitiating
factor of duress. It operates largely through the application of presumptions. The following
aspects are discussed in this chapter:
■
uence become ‘undue’? Imbalance of
■
uence. If there is direct evidence that a party agreed to a contract
uence of improper pressure at that time, this will constitute actual
uence. Such evidence is, however, rare.
■
Presumptions. A relationship of in
uence will be presumed where:

the parties are in one of a number of recognised relationships (for example,
solicitor–client); the presumption is in these circumstances irrebuttable;

■
■
Effects. A contract entered into on the basis of actual or presumed in
uence is void-
able. The usual bars to rescission apply (for example, lapse of time, third party
rights). No damages are available.
■

the creditor will be affected by any undue in
uence used by the debtor; the

■
Unconscionability. English law recognises no general concept of unconscionability.

11.2
Duress, as discussed in the previous chapter, is essentially a common law concept.
uence’. This operates to
release parties from contracts that they have entered into,
not as a result of improper
threats, but as a result of being ‘in
1
uence
uence’ in itself is perfectly acceptable: it is only when it becomes ‘undue’ that the
law will intervene. Clarity in deciding when that has occurred is not assisted by the fact that
11.2.1
IN FOCUS SCOPE OF UNDUE INFLUENCE
The precise scope of the concept of undue in
uence may be due for reconsideration. At
present, there are authorities which are treated as being concerned with undue in
3
(1983) 151 CLR 447, p 474.
4
(1887) 36 Ch D 145, where the defendant was the lady superior of a religious
order. See also Birks and Chin, 1995, where the argument for the adoption of the approach taken in
is strongly made.
5
The ‘claimant’ here being the person in
uenced and the ‘defendant’ the alleged ‘in
uencer’ – see the corre-
sponding discussion in relation to duress, in
6
7
See, in particular, the speech of Lord Hobhouse. See also the Court of Appeal decision in
Services Ltd v Williams
[2002] EWCA Civ 555; [2002] 3 FCR 448.
The Modern Law of Contract
largely because of the limited scope given to duress at the time they were decided. In
,
8
for example, the plaintiff had agreed to give a mortgage over his colliery
as security for debts incurred by his son, who had forged his father’s signature on promis-
sory notes. The creditors had threatened that the son would be prosecuted if the mortgage
9
Similarly, in
11.2.2
THE MODERN LAW OF UNDUE INFLUENCE
The whole area of undue in
uence has twice in the last 20 years been given a thorough
examination by the House of Lords – in 1993, in
,
14
8
9
uence
uence should be presumed (‘Class 2B’). These divisions have
subsequently been used in many cases. The House of Lords took the view, however, in
17
18
‘It is not a useful forensic tool’: ibid, para 107; p 483, per Lord Hobhouse.
19
20
21
22
[2002] EWCA Civ 555; [2002] 3 FCR 448, not following statements apparently to the contrary by the Court of
, since these were regarded as inconsistent with the House of Lords’ view of
, as expressed in
, paras 85–91.
The Modern Law of Contract
is analogous to that applying to misrepresentation or duress: as long as the in
uence was
23

11.4
PRESUMED INFLUENCE: RECOGNISED RELATIONSHIPS
analysis there were certain relationships which were presumed to give

Allcard v Skinner (1887)
33

The plaintiff had entered a religious order of St Mary at the Cross, and had taken
vows of poverty, chastity and obedience. The defendant was the lady superior of the
order. Over a period of eight years during which she was a member of the order, the
plaintiff gave property to the value of £7,000 to the defendant, most of which was spent
on the purposes of the order. The plaintiff left the order, and some six years later sought
to recover her property, on the basis that it was given to the order under undue in
The property was prima facie recoverable as having been given under the undue
uence of membership of the order, which required obedience to the defendant. This
was so even though no direct pressure had been placed on the plaintiff. The in
was presumed from the relationship itself. The plaintiff’s action to recover her property
23
For a consideration of some of the problems with this position in the context of duress which may apply
uence, see
24
25
26
(1881) 18 Ch D 188.
27
(1754) 2 Ves Sen 547.
28
(1871) 7 Ch App 104.
29
(1902) 18 TLR 466.
30
Wright v Carter
[1903] 1 Ch 27.
31
(1887) 36 Ch D 145.
32
National Westminster Bank plc v Morgan
[1985] AC 686; [1985] 1 All ER 821.
33
uence
Once there is a relationship from which in
uence is presumed, in what circumstances can
uence was ‘undue’, under the approach in
For Thought

Assuming the time lapse had not occurred in this case, was there anything that the
religious order could have done to prevent any gift being recoverable on the basis of
uence? DoesnÕt this make the situation very difÞ
cult for religious groups which
34
Other than by proving actual undue in
uence, which would defeat the point of having a presumption of in
35
36
[2001] UKHL 44, para 24; [2001] 4 All ER 449, p 461. See the similar comments of Lord Hobhouse, para 104;
p 482 and Lord Scott at para 156; p 501.
37
38
The Modern Law of Contract
easiest way to do this is likely to be to show that the claimant received independent legal
advice before entering into the transaction, though the Privy Council in
Attorney General v
The adequacy of the advice to protect
uenced party may need to be considered.
cient for the alleged
uencer simply to show that there had been no ‘wrongdoing’ on his or her part.

11.5
PRESUMED INFLUENCE: OTHER RELATIONSHIPS
Even where a relationship does not fall into one of the categories listed in the previous
‘dominant’ position over the other. The dominated person will be likely in such a situation
to act on the advice, recommendation or orders of the other, without seeking any inde-
pendent advice, and without properly considering the consequences of his or her actions.
dence in the defendant in relation to the
management of the claimant’s 
nancial affairs will have to be proved by evidence.
42
is done, then any disadvantageous transaction entered into at the instigation of the domi-
dence of the claimant
has been abused. The burden of proof will shift to the defendant to produce evidence to
counter this inference. If no such evidence is produced, the court will be entitled to
conclude that the transaction was in fact brought about by the exercise of undue in
43
In other words, the issue is the inferences which the court is entitled to draw from
the evidence before it, and where the burden of proof lies in relation to that evidence.
Probably the majority of the reported cases that have been regarded as falling under
uence based on an established relationship of trust and con
dence concern a dominant husband and a subservient wife. Similarly, it was held by the

44
39
40
43
See ibid, Lord Nicholls, para 14; p 459; Lord Hobhouse, paras 106–107; p 483; Lord Scott, para 161; p 503.
All three suggest that an analogy with the tortious concept of
res ipsa loquitur
may be helpful.
44
45
46
uence
Although the period of time over which a relationship has developed is clearly relevant to
11.5.1
IN FOCUS: CAN THE NATURE OF TRANSACTION ESTABLISH

Lloyds Bank Ltd v Bundy (1975)
Mr Bundy was an elderly farmer. He had provided a guarantee and a charge over
his house to support the debts of his son’s business. He was visited by his son and the
could not continue to support the son’s business without further security. Mr Bundy
then, without seeking any other advice, increased the guarantee and charge to £11,000.
When the bank, in enforcing the charge, subsequently sought possession of the house,
47
Contrast the House of Lords’ view in
National Westminster Bank plc v Morgan
[1985] 1 All ER 821, where it
was held that there was no relationship of trust and con
signature, the relationship did not go beyond the normal business relationship of banker and customer.
48
The judgments in this case make reference to ‘presumptions’ of abuse of in
uence which would need recon-
The Modern Law of Contract
inference will be readily drawn’.
52
element in establishing a presumption of in
uence was unusual. The other pre-
had arisen from her husband’s business. She had been visited at home by the bank
manager and had thereupon signed the charge. Lord Scarman, with whom the rest of the
52
53
For an enthusiastic response to
as a welcome development in the law controlling substantively unfair
transactions, as opposed to simply procedural unfairness, see Chen-Wishart, 1997. For a more sceptical
reception see Tjio, 1997.
54
55
[1985] AC 686; [1985] 1 All ER 821. Lord Scarman was adopting and adapting an approach taken by Lindley
(1887) 36 Ch D 145, p 185.
uence
presumption to arise, the transaction had to be to the ‘manifest disadvantage’ of Mrs
Morgan. This was not the case here. The charge ‘meant for her the rescue of her home on
the terms sought by her: a short term loan at a commercial rate of interest’.
56
any transaction which puts a person’s home at risk must in one sense be regarded as
cient on its own to render a contract voidable. If
it were, every mortgage agreement would have to be so regarded. In looking for disadvan-
clear, as it seemed to be in
, that the risks involved were, as far as the claimant was
concerned, worth running in order to obtain the potential bene
ts of the transaction, and
there was no other indication of unfairness, then the courts should be quite prepared to
enforce it. As has been noted above, some of Lord Scarman’s comments in
were
56
57
58
59
ict with the approach taken in ‘abuse of con
dence’ cases such as
[1923] AC 673, where, on grounds of public policy (that is, the need to
protect those to whom 
duciaries owe duties as a class from exploitation), the burden is on the 
duciary to
prove that a transaction was advantageous to the claimant: ibid, p 209; pp 439–40.
60
The Modern Law of Contract
not the case that the claimant has to prove such disadvantage to establish that there
uence in such a case. The relevance of the nature of the transaction is
66
ts the defendant without providing any comparable bene
t for the claimant), then
this will impose a burden on the defendant to show that it was not in fact obtained by
uence, that is, an abuse of the relationship of trust and con
Lord Nicholls and Lord Scott both indicated that they did not regard the fact that a wife
cient to give rise to
an inference that in
uence has been abused. As Lord Nicholls put it:
67

in the ordinary course
mentioned [that is, the guarantee by a wife of her husband’s business debts] is to be
regarded as a transaction which, failing proof to the contrary, is explicable only on
the basis that it has been procured by the exercise of undue in
uence by the
husband. Wives frequently enter into such transactions. There are good and suf
cient reasons why they are willing to do so,
68
from saying that such transactions as a class are to be regarded as

evidence of the exercise of undue in
uence by husbands.
I have emphasised the phrase ‘in the ordinary course’. There will be cases where
a wife’s signature of a guarantee or a charge of her share in the matrimonial home
69
Nothing I have said is directed at such a case.

the husband – for example, that he has taken account of her interests, dealt fairly with her,
and made sure that she entered into the obligation freely and with knowledge of the true
70
It is likely, however, that the approach taken by Lord Nicholls and Lord Scott, with
whom Lord Bingham concurred, will be the one that is followed.
relating to undue in
uence; the nature of the transaction may, however, in cases where
uence is presumed, provide evidence which will put the burden on the defendant to
uence was not abused.
11.7
SUMMARY OF CURRENT POSITION ON PRESUMED
The current law is based on the House of Lords’ decision in
66
As Lord Scott comments, ‘the nature of the transaction, its inexplicability by reference to the normal motives
by which people act, may, and usually will, constitute important evidential material’: [2001] UKHL 44, para
67
Ibid, para 30; p 462 (emphasis in original); cf Lord Scott’s comments at para 159; p 502.
68
For example, because the husband’s business is the source of the family income: ibid, para 28; p 462.
69
It may be that the kind of situation in mind here is that referred to by Lord Hobhouse when, in the context of
the actions to be taken by a creditor, he commented that ‘A loan application backed by a viable business
uence
Figure 11.1
The Modern Law of Contract
The case also dealt with the implications for banks where undue in
uence by a third party
was alleged. This is dealt with below, at 11.8.
11.8
UNDUE INFLUENCE AND THIRD PARTIES
The majority of reported cases on undue in
uence over the past 20 years have been
concerned with the effect on a transaction of undue in
uence by a third party. Speci
cally,
where one party to a transaction is giving to the other a guarantee of a third party’s debts,
what is the effect of undue in
uence by the debtor on the guarantor? The typical situation of
this kind, as will have been discerned from the earlier discussion, is where a wife is guaran-
teeing a husband’s business debts and using her property, most commonly her share in the
matrimonial home, as security. In such a situation, if the husband’s actions amount to undue
uence, does this affect the wife’s transaction with the creditor? The husband is not a party
to that transaction, and so the standard answer under the doctrine of privity would be ‘no’.
Nevertheless, in some situations of this kind (not necessarily involving husband and wife),
the courts have been prepared to 

uence by the husband for which the bank should be held responsible. The House of
71
uence
uenced the guarantor to enter into the transaction with the creditor. Two main
possibilities were canvassed, namely, agency
and a ‘special equity’ protecting wives.

The House of Lords was not inclined to adopt either of theses analyses.

Barclays Bank v O’Brien (1994)
Facts:
Mr O’Brien persuaded his wife to sign a guarantee in relation to an overdraft
facility provided by a bank, using the jointly owned matrimonial home as security. He
had told her that the security was limited to £60,000, whereas in fact it was for £130,000.
The employee of the bank who presented the documents for the wife’s signature failed
to follow a superior’s instructions to explain the transaction, and to suggest that the
wife took independent legal advice if she had any doubts about it. The papers were
presented to the wife, open at the place for signature, and she did not read them before
signing. When the bank tried to enforce the security, Mrs O’Brien claimed that she was
the liability.
It was found by the Court of Appeal, and not disputed in the House of Lords, that
uenced by her husband. The case, therefore, turned on her husband’s
72
73
109; [1992] 4 All ER 983. 74
Subsequent cases have followed this treatment of undue in
uence and misrepresentation as distinct but
analogous concepts for these purposes. There are, however, some points in the speech of Lord Hobhouse
in the most recent House of Lords decision (
The Modern Law of Contract
11.8.1
THE DOCTRINE OF NOTICE
The basis on which he felt able to do this was by a proper application of the doctrine of
‘notice’, which he felt lies at the heart of equity. Where, for example, it is necessary to
For Thought

Barclay’s Bank v O’Brien
if the BankÕs employee

11.8.2
RELATIONSHIPS COVERED
Turning to the broader application of these principles, Lord Browne-Wilkinson saw no
reason to con
ne them to wives. The special position of wives is not based on that status
as such, but because of the emotional and sexual ties that arise from the marriage relation-
77
ment of this area in
11.8.3
APPLICATION OF THE DOCTRINE OF NOTICE
Where the creditor is put on notice of the risk of undue in
uence, Lord Browne-Wilkinson
outlined the following factors that will lead to the obligation being unenforceable:
79
(a)
there must be undue in
uence, misrepresentation or some other legal wrong by the
76
77
[1985] 2 All ER 581 – son and elderly parents.
78
79
uence
(b)
11.8.4
APPLICATION OF THE DOCTRINE OF NOTICE TO ACTUAL

but of misrepresentation. On the same day as it gave its opinion on this case, the House
of Lords also ruled on another husband and wife case, which was agreed to have involved
uence:
.
80
80
81
As has been noted above, the phrase ‘manifest disadvantage’ has now in any case been rejected as
uence:
The Modern Law of Contract
t. It is the combination of these two factors that puts the creditor on inquiry.

The emphasis in these cases is now on actual, or constructive, notice.
11.8.5
CONSEQUENCES FOR CREDITORS
The House of Lords’ decision in
placed a burden on creditors to
83
Figure 11.2

uence
11.8.6
ment arises. The law must afford both parties a measure of protection. It cannot
prescribe a code which will be proof against error, misunderstanding or mishap. But
culty is to decide
which other relationships, assuming the bank is aware of them, will have the same effect.
Should it only apply to sexual or family relationships, or those falling within the category
where the law presumes in
uence? The Court of Appeal had already stepped outside
case (employer/employee). Lord Nicholls considers the
85
His conclusion is that ‘there is no rational cut-
off point with certain types of relationship being susceptible to the
86
Therefore, ‘the only practical way forward is to regard banks as “put on
84
85
– 86
87
Lord Hobhouse acknowledges this, but notes that it has the practical advantage ‘that it assists banks to put
in place procedures which do not require an exercise of judgment by their of
cials’: ibid, para 108; p 484.
88
Ibid, para 87; p 476 (Lord Nicholls).
The Modern Law of Contract
had, as noted above, suggested that representatives of the bank should see the
guarantor separately, and explain the transaction and its risks. Lord Nicholls recognises the
understandable reluctance of banks to do this.
It runs the risk that there will later be allega-
tions that oral assurances were given by the bank’s representative to the effect, for example,
that the bank would continue to support the business, or would not call in its loan. Lengthy
litigation may well follow as to what exactly was said and when. Banks much prefer, there-
fore, that the transaction should be explained by an independent adviser, generally a solicitor.
take? Lord Nicholls identi
es four stages in the process.
91
cate directly with the wife to check who she wishes to use as a solicitor.
92
tion should indicate the reasons why the bank is encouraging her to take legal advice – that
husband in the transaction. The bank must not proceed with the transaction until the wife
has responded to this communication. Second, once a solicitor has been nominated, the
bank must provide that solicitor with the 
nancial information necessary to enable the
solicitor to advise the wife properly. To the extent that this involves information supplied to
dence by the husband, his permission will be required in order to disclose
it. If that permission is not forthcoming, the bank should not proceed with the transaction.
Third, if the bank has suspicions that the wife has been misled, or is not acting freely, these
must be communicated to the wife’s solicitor. Fourth, the bank will require from the wife’s
rmation that the nature of the documents she is being asked to sign
and the practical implications of them have been fully explained to her.
Three other issues need to be considered. First, why is it satisfactory for the solicitor to
should the content of the solicitor’s advice be? Third, if the solicitor does not carry out the
responsibilities properly, what are the wife’s remedies?
As to the common situation where the solicitor acts for both the husband and wife, Lord
Nicholls considered the obvious arguments against this, such as the fact that the wife may
wife’s interests may, even unconsciously, rank lower in the solicitor’s priorities than those
93
He also considered the arguments in favour of just
one solicitor being used, such as the reduction in costs, the fact that the wife may already
know and be more comfortable with the ‘family’ solicitor as opposed to a stranger, and
89
Ibid, para 89; p 476. Auchmuty (2005, pp 70–71) has argued that this approach tends to veil the signi
uence
96
The solicitor should also withdraw if, having agreed to act for the wife, it subsequently becomes clear that
there is a real risk of any advice being inhibited by a con
ict of interest or duty: ibid.
97
98
99
100
The Modern Law of Contract
are nevertheless vulnerable and liable to have their will unduly in
uenced. It is their
weakness that is being protected, not their inability to comprehend.

Lord Hobhouse was satis
ed that Lord Nicholls’ guidelines are suf
cient to provide the
necessary protection. He disagreed, however, with what he saw as being the view of Lord
Scott, that belief on the part of a lender that the wife has understood the nature and effect
cient to exonerate the lender.
101

nal issue considered by Lord Nicholls is the position where the solicitor has failed
to act in accordance with guidelines, and the wife is thereby prejudiced. Counsel for some
105
The approach of the courts, despite
being seen as a victory for wives, is heavily balanced in favour of the creditor, as
101
102
103
104
uence
11.9
REMEDIES FOR UNDUE INFLUENCE
The primary remedy for undue in
uence in cases such as those discussed in the previous
section is the refusal of the courts to enforce the agreement against the person in
In other words, that person will often be in the position of defendant, and will use the
uence to escape from obligations.
In some cases, however, rescission may be sought,
107
remedy (such as lapse of time, involvement of third party rights, and impossibility of resti-
tution) will apply.
108

or’s misrepresentation of the extent of the transaction to his wife, the wife had been
prepared to undertake some risk. In this case, she had been willing to go ahead with a
transaction which put the matrimonial home at risk to the extent of £15,000, whereas in
fact liability was unlimited. The bank argued that she should still be liable for £15,000. The
Court of Appeal rejected this. The test was what would the wife have done, had she known
the truth? The answer was clearly that she would not have entered into the transaction at
all. Therefore, the right result was for the whole transaction to be rescinded.
A slightly different situation arose in
Here, the wife had
not previously had any legal interest in the matrimonial home, which was held by her
husband on a long lease. As part of a loan transaction, using the home as security, however,
she acquired a bene
cial interest in half of the property. When the husband defaulted on
the loan repayments, the bank sought to enforce its charge over the property. The wife
For Thought

cult, and will inevitably impose
severe strains on the relationship. It is hard to see the decision as ever being ÔfreeÕ: on

107
(1887) 36 Ch D 145.
108
As with misrepresentation – see
109
The position may be different where there are two distinct parts to the transaction in relation to only one of
which there is a 
nding of undue in
uence:
[1998] FLR 532. Here C had been
properly advised in relation to an original charge and guarantee, but not in relation to a subsequent side
The Modern Law of Contract
advantage of her. But, if there had been undue in
uence, it was suggested (though of
) that the correct approach would have been for the wife to give up
her interest in the property (which would then have reverted to her husband). She would be
released from any personal liability on the loans made to her husband, but would not have
acquired any unfair bene
t. Of course, this would mean that she would still not have been
able to resist the bank’s claim for possession of the property, which was her main objective.
11.9.1
CHANGE IN VALUE OF PROPERTY
Where restitution is ordered, however, but the value of property has changed, it may be dif
11.9.2
SUBSEQUENT TRANSACTIONS
Where a contract is found to be voidable for undue in
uence, then a substitute transaction,
particularly if entered into as a condition of discharging the 
rst transaction, will be
Yorkshire Bank plc v Tinsley
.
113
to secure a husband’s business debts was held to be voidable by the wife because of her
husband’s undue in
uence, of which the bank had constructive notice. When the husband
and wife divorced, a substitute mortgage was entered into by the wife in relation to a
smaller property, but the bank required the security for the business debts to continue to
apply to this property. When the bank sought to enforce the security, it was held that the
uence. This decision was
rmed by the Court of Appeal.

112
113
uence
11.10
UNCONSCIONABILITY AND INEQUALITY OF BARGAINING POWER
114

Does the approach of the courts to the issues of duress and undue in
uence simply re
a general reluctance to enforce transactions that are so unfair as to be regarded as ‘uncon-
,
115
Lord Denning based his decision in favour of Mr Bundy
on a broader principle than that adopted by the other members of the Court of Appeal. He
ed this as ‘inequality of bargaining power’. By virtue of this, he claimed:

English law gives relief to one who, without independent advice, enters into a
contract on terms which are very unfair or transfers property for a consideration
which is grossly inadequate, when his bargaining power is grievously impaired by his
own needs or desires, or by his own ignorance or in
rmity, coupled with undue in
ences or pressure brought to bear on him by or for the bene
t of the other.

es, alongside the unequal bargaining power, the nature of the
114
For a compact and useful survey of the English approach to this area, see Brownsword, 2000,
115
116
117
Pao On v Lau Yiu Long
All ER 65. 118
[1997] 1 All ER 144, discussed above at 11.5. See, in particular, the judgment of Nourse LJ.
119
Note, however, that Atiyah disputes that a distinction of this kind can be drawn with any degree of clarity:
The Modern Law of Contract
120
Cresswell v Potter
.
121
For Thought

Cresswell v Potter
approach is to be used, what level of education will be relevant?
Will it only apply, for example, to those who have left school at the earliest opportunity
cations? Or is it a subjective test of the level of understanding of
the particular transaction in question which is relevant?

11.10.1
IN FOCUS: POSITION ON ÔUNCONSCIONABILITYÕ IN OTHER
Other jurisdictions have adopted a broader approach. In Australia, for example, the decision

formulated a principle
of unconscionability on very similar lines to those suggested by Lord Denning in
Lloyds
A similar approach has been
As Harland has pointed out, however, the
approach is at least
as much concerned with procedural as substantive unconscionability.
By contrast, s 2–302
of the United States Uniform Commercial Code states:
120
Though it might be suggested that the comments of Lord Hobhouse in
uence

nds the contract or any clause of the contract to have
been unconscionable at the time it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract without the unconscionable
any unconscionable result.

This very broadly worded provision has been used to deal with situations of both procedural
and substantive unfairness.
The only provisions in any way comparable in English law,
11.10.2
RISK OF UNCERTAINTY
130
but the Second Restatement, s 208, provides a model provision in similar terms for application to any
131
132
Sections 140A–140C, as added to the Consumer Credit Act 2006.
133
See reg 6(2), and the discussion in
134
This was one of the reasons for Lord Scarman’s rejection of a general doctrine of inequality of bargaining
Pao On v Lau Yiu Long
[1980] AC 614, p 634.
135
See the comments of Collins to this effect: Collins, 1999, p 258 onwards – ‘The Illusion of Unfairness’. See
136
Collins (1999, p 286) on the other hand, concludes his consideration of this area by expressing the view that
‘The open textured rules devised by private law appear to be the most adept at handling the complex
issues which [regulating substantive unfairness in contracts] raises, though there is certainly room for
The Modern Law of Contract
11.11
SUMMARY OF KEY POINTS
■
uence is an equitable concept, which if proved, makes a contract
■
The concept involves a person’s decision to make a contract being unduly
uenced by the actions of the other party, or by that party’s relationship of
uence over the other.
■
uence may be proved to have occurred in relation to a particular
uence), or presumed from the parties’
relationship and the nature of the transaction.
■
Certain relationships will be irrebuttably presumed to involve in
uence – e.g.
■
Other relationships may be found as a matter of fact to involve one party
dence in the other, and thus being in
■
Where a relationship of in
uence exists, and the transaction calls for
explanation (e.g. a sale of property at an undervalue),
in
uence will be
presumed. The alleged in
uencer can rebut the presumption (e.g. by proving
that the other party received independent legal advice).

Banks and other creditors will in some circumstances be unable to enforce
transactions which have been made as a result of the undue in
uence of a third
party (e.g. a wife using her house as security for her husband’s business debts).
■
■
To protect itself in such a situation, the bank will need to ensure that the
■
The primary remedy for undue in
uence is that the transaction is not
enforceable. Rescission may be awarded in some cases.
■
English contract law does not recognise any general principle of

11.12
FURTHER READING
■
Auchmuty
, ‘
■
Birks
and
Chin Nyuk
Yin
, ‘
On the nature of undue in
Beatson
and
Friedmann
(eds),
,
Oxford
Clarendon Press

uence
■
Brownsword
Contract Law: Themes for the Twenty-First Century

Butterworths
■
Chen-Wishart
,
,
Wellington



principle and substantive unfairness
CLJ 60
■
Cope
,
Duress, Undue Inß
uence and Unconscientious Bargains
,
Ryde, NSW

■
■
Enman
, ‘
■
Harland
, ‘
Brownsword
,
Hird
and
Howells
(eds),
,

■
McLaughlin
, ‘
Unconscionability and impracticality: re
ections on two UCC
■
O’Sullivan
, ‘
’ (
■
Tijo
, ‘
and unconscionability

COMPANION WEBSITE

:
■
uence by tackling a series of
■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
Explore Undue In
uence further by accessing a series of web links

12
Illegality and

Contents
12.1
12.2
Introduction
12.3
Rationale for the unenforceability of illegal contracts
381
12.4
382
12.5
389
12.6
Effects of illegality: enforcement
391
12.7
Effects of illegality: recovery of money or property
393
12.8
395
12.9
12.10
Proposals for reform
398
12.11
Agreements contrary to public policy
399
12.12
Contracts concerning marriage
399
12.13
Contracts promoting sexual immorality
401
12.14
402
12.15
404
12.16
Contracts in restraint of trade
405
12.17
Effect of contracts void at common law
406
12.18
Wagering contracts
406
12.19
407
12.20
Further reading
407

The Modern Law of Contract
OVERVIEW
This chapter deals with situations where otherwise valid contracts are unenforceable
because they are deemed to involve illegality, or are otherwise contrary to public policy.
The following issues are discussed:
The reasons why illegal contracts are unenforceable. Public policy is the central
Contracts to commit crimes or torts. These are always illegal.
Contracts contrary to professional regulations (for example, Solicitors Practice
Rules). These will not be enforceable, but a party may be able to claim for work
Contracts where performance involves the breach of a statute. This is the
cult area the act itself is legal, but the manner of performance is not.
The purpose of the statute and the knowledge of the parties will be relevant to
the issue of enforceability.
Contracts to indemnify a person for breaking the law. This is not allowed in
relation to criminal liability or intentional torts, but is permitted in relation to
Effects of illegality. Two aspects need consideration:
Enforcement. Speci
c performance will not be available, but a legal right
related to an illegal transaction may be enforceable if the party does not need
to rely on the illegal act to found the claim.
Recovery of money or property. Generally no recovery is possible, but it may
be allowed where:
a change of mind in relation to the illegal transaction;
the contract results from oppression;
there is no reliance on the illegal transaction;
the claimant is a member of the class which the statute concerned is
intended to protect.
Agreements contrary to public policy (but not illegal). In this category fall:
Contracts related to marriage for example:
for future separation (pre-
nuptial agreements are currently caught by this);

receiving payment for arranging a marriage.
Contracts promoting sexual immorality. There are old cases supporting this
Contracts to oust the jurisdiction of the courts. The parties may agree that
Effects of agreements contrary to public policy:
c performance;
property transferred can probably be recovered.
Wagering contracts. These have been unenforceable as a result of statutory controls,
but the controls have been removed by the Gambling Act 2005. Wagers will now be
enforceable.
12.2
This chapter, like the previous two, is concerned with two situations where the courts will
intervene to prevent the enforcement of an agreement which, on its face, has all the
characteristics of a binding contract. Both are often put under the general heading of
1
they might also be grouped as ‘contracts contrary to public policy’.
2
There are,
12.3
IN FOCUS: RATIONALE FOR THE UNENFORCEABILITY OF
The reasons why the courts interfere to render contracts which are ‘illegal’ unenforceable,
as opposed to simply leaving those who have committed a crime or a tort to the relevant
procedures under those areas of law, are not often explicitly stated, other than to say that
it is a matter of ‘public policy’. It follows, however, from the fact that ‘public policy’ is the
without it needing to be pleaded by either party.
3
The law is not primarily concerned here
with the protection of one party, as it is in the areas of duress or undue in
uence, for
example, but with more general concerns of the proper scope of the law of contract and
its associated remedies.
Two commentators, Atiyah and Enonchong, have attempted to explore the more
c policies which underlie the law in this area.
4
Both suggest that there are two main
reasons for the law’s intervention. The 
1
See, for example, Treitel, 2011,
2
cult concept to pin down – as recognised by Burroughs J’s famous refer-
(1824) 2 Bing 229, p 252. It is possible to argue that
the whole of the law of contract is simply a re
ection of ‘public policy’ concerns about the regulation of
The Modern Law of Contract
contracts unenforceable. This policy does not fully explain, however, why illegal contracts
are in some circumstances unenforceable even by innocent parties. A person who does
not realise that he or she is infringing the law by the making or performance of a contract
12.4.1
CONTRACTS WHICH CONSTITUTE A CRIMINAL OFFENCE
In some circumstances, the making of the contract itself will be a criminal act. The most
obvious example is an agreement to commit a crime, such as murder or theft. If A asks B
to kill C for a payment of £5,000, and B agrees, then their agreement has all the character-
istics of a binding contract in the form of offer, acceptance and consideration. It also
amounts to the criminal offence of conspiracy to murder (under the Criminal Law Act
7
8
es a third possible policy, i.e. ‘the desirability of bringing an illegal or
undesirable state of affairs to an end’. His example (a landlord wishing to evict a prostitute), however, seems
more closely linked to the contracts dealt with in the second part of this chapter (12.11 onwards) and this
policy will therefore be left for consideration at that point.
9
10
t from their own wrongdoing; and (2) punishment of the wrongdoer: Consultation Paper No 154,
1999, Part VI. Neither of these, however, explains why an innocent party is not allowed to enforce an illegal
1977), and so will be unenforceable. Any agreement to commit any crime will also be a
criminal conspiracy, and treated in the same way. In addition, the Criminal Law Act 1977
preserves the common law offence of ‘conspiracy to defraud’.
11
behaviour which is agreed need not amount to a criminal offence.
Certain contracts are made illegal by statute. Under the Obscene Publications Act
1959, for example, it is illegal to sell an ‘obscene article’. Here (unlike conspiracy), the
offence is only committed by one party (that is, the seller), but nevertheless the contract is
illegal and will be unenforceable by either party.
12.4.2
CONTRACTS FORBIDDEN THOUGH NOT CRIMINAL
rmed in two reported cases that a contract which is forbidden by dele-
gated legislation, in the form of the rules of a professional body, should be treated as an
illegal contract, even though the behaviour amounts at most to a disciplinary offence under
the rules of that body, rather than being criminal.
11
Criminal Law Act 1977, s 5, which also purports to preserve the common law offences of conspiracy to
corrupt public morals or outrage public decency. Subsequent case law has, however, con
rmed that
‘corrupting public morals’ and ‘outraging public decency’ are themselves substantive offences: agreements
to commit them therefore amount to statutory conspiracies under s 1 of the 1977 Act, without the need for
the common law offence preserved by s 5. See
[1991] 1 All ER 441.
12
13
14
The claimant was allowed, however, to recover for the translating work which had been done on a
basis: this is discussed further at 12.6, below.
Figure 12.1

The Modern Law of Contract
.
15
In this case the agreement was one
whereby the solicitor agreed to act on a ‘conditional fee’ basis. This meant that the solicitor
12.4.3
CONTRACT TO COMMIT A TORT
18
19
there is a contract for the sale of property which belongs to a third party, but which both
the buyer and seller believe to belong to the seller, this will involve the tort of conversion,
20
Where only one party is innocent, it is possible
that that party will be allowed to enforce the contract, though the position is uncertain.
21

There are
Clay v Yates

22
that can be read to suggest that this is the case, but the
point was not directly in issue and was not speci
cally addressed.
23

the Equality Act 2010, in that it would involve unlawful discrimination on grounds of, for
24
It is clear that a requirement to discriminate is itself
unenforceable. Thus in
,
25
a provision in an agreement that arbitrators
15
16
The position as regards conditional fees has now been altered as a consequence of the Access to Justice
Act 1999, so that they are now lawful in certain circumstances.
17
rmed the view taken in
felt that the court in that case had not been referred to all relevant authorities: see the comments of
18
Such contracts may well also involve an agreement to commit a criminal offence.
19
nd any authority on the issue, but assumes that the position is as
20
This example is given by Treitel, 2011, p 477, noting that it is implicit in s 12 of the Sale of Goods Act 1979
21
See Law Commission, Consultation Paper No 154, 1999, para 2.23; Treitel, 2003, p 433.
22
23
The case concerned the publication of a book containing a libel. The printer, on discovering the defamatory
nature of the passage in question, refused to print it, but was able to recover the cost of printing the rest of
the book. Martin B suggests that the printer was entitled to recover for the work ‘performed’ and Treitel
(2007, p 477) reads this as implying that he would have recovered if the libellous statement had been
published unwittingly.
24
25
[2010] EWCA Civ 712; [2010] 2 Lloyd’s Rep 534.
26
cant that the courts appeared to contemplate the possibility of intervention even before
Edwards v SOGAT
[1971] Ch 354, p 382.
where the parties are aware of the effect of the discriminatory nature of their agreement, it
should be unenforceable. Even if the discrimination is unintentional,
27
the policy of not allowing the legal process to be used in a way that undermines its integ-
28
would lead a court to refuse to enforce such an agreement. The situation would prob-
ably now be treated as falling within the principles dealing with performance contrary to
12.4.4
PERFORMANCE IS CONTRARY TO STATUTE
Performance which contravenes a statute involves contracts which are prima facie legal,
and which are concerned with the achievement of an objective which is legal, but which
contravene a statute by the way in which they are performed. Thus, in relation to hire
purchase agreements, the Consumer Credit Act 1974 provides that unless various formal-
ities are complied with, the agreement will be unenforceable against the creditor. The aim
of the law here is to provide protection for the debtor, and the penalty of unenforceability
is used to encourage creditors to make sure that they follow the procedures that Parliament
29

An example of the application of this approach is to be found in
.
30
The contract was to sell linseed oil. It was a statutory requirement that both
31
buyer nevertheless told the seller that he was licensed. When the buyer refused to take
delivery, the seller sued. It was held that the seller could not enforce the contract because
of its illegality, despite its reasonable belief that the defendant was licensed.
32
27
This would be unlikely in the example as given, but might arise if the employer imposed a requirement which
indirectly
able – for example, that all candidates should have been educated
ve years.
28
29
It was argued in
Wilson v First County Trust Ltd
these strict rules as to enforceability were incompatible with the creditor’s right to a fair trial under Art 6 of
the European Convention on Human Rights, as incorporated into English law by the Human Rights Act 1998.
This argument was successful in the Court of Appeal, but was rejected by the House of Lords.
30
31
This requirement was contained in the Defence of the Realm Regulations.
32
Could the seller in such a situation sue for misrepresentation? The court in
refused
further, 12.6, below.
33
The Modern Law of Contract
The principles that should govern this area were considered by Devlin J in
.
34

34
35
The Times
, 25 March.
For Thought

forceable contract? (2) What are the practical implications of these two decisions? Is it
satisfactory that parties contemplating making a contract need to consider the policy
behind any legislation which may govern their transaction?


St John Shipping Corp v Joseph Rank Ltd (1957)
principle that illegality which has the object of protecting the revenue is less likely to render
a contract unenforceable than where the object is the protection of the public.
12.4.5
RELEVANCE OF KNOWLEDGE
parties know that the contract can only be performed in a way that will involve the breach
36
37
38
39

For Thought

Does this mean that if both parties are aware that a time limit stated as part of a contract
eight months. He was then dismissed. He brought a claim for racial discrimination and
Hall v Woolston Hall
Leisure Ltd
,
39
in which the Court of Appeal suggested that the proper approach in this sort
The Modern Law of Contract

40
41
42
This is probably best explained on the basis that the illegal part of the transaction, the premium, was sever-
43
44
–Little v Pool (1829) 9 B & C 192.
45
[1915] 1 KB 652. Note, however, that this case involved ille-
gality arising from the
of the defendant; the law now seems to be prepared to allow an indemnity
[1970] 1 Lloyd’s Rep 313, the court preferred the earlier decision
[1913] 2 KB 220 to
on this particular point.
46
[1970] 1 Lloyd’s Rep 313.
47
[1970] 1 Lloyd’s Rep 313, p 316.
,
43
both the issue of the protection of the public and the knowl-
edge of the parties were considered relevant. The contract was for the sale of arti
manure, made up of sweepings of various fertilisers from the holds of ships. Regulations
required that the seller should specify the contents of the fertiliser and the proportions of
each chemical it contained. This was impractical as far as sweepings were concerned. The
Court of Appeal held the contract for sale to be unenforceable by the seller, because the
statute was intended to protect purchasers. As Scrutton LJ put it:
44

When the policy of the Act in question is to protect the general public or a class of
persons by requiring that a contract shall be accompanied by certain formalities or

This seems to suggest that the answer might have been different if the purchaser had
sued, rather than the seller.
The overriding questions are, therefore, 
rst, does the statute prohibit contracts? In
12.5.1
CRIMINAL LIABILITY
It will generally be illegal to attempt to insure against criminal liability.
45
There appears to
be an exception, however, as regards strict liability offences (that is, where the prosecution
does not need to prove any ‘guilty mind’ on the part of the defendant in order to obtain a
conviction). Provided the court is satis
ed that the defendant is morally innocent, then it
,
46
the plaintiff was suing
his insurance brokers who had negligently failed to keep him informed that his car insur-
ance was no longer valid (because of the collapse of the insurance company). As a result,
the plaintiff had been 
ned £25 for driving without insurance (an offence of strict, or abso-
lute, liability). The Court of Appeal held that he could recover the amount of the 
ne from
47
The Modern Law of Contract

Having examined the authorities as to cases where the person 
ned was under an abso-
lute liability, it appears that such 
ne can be recovered in circumstances such as the
present as damages unless it is shown that there was on the part of the person 
ned a
degree of
mens rea

in the matter which resulted in the 
ne.

The burden of proof was on the defendants to prove circumstances which rendered the
ne irrecoverable.
12.5.2
CIVIL LIABILITY
A contract to indemnify will be illegal as regards torts which are committed deliberately,
50
It is regarded as perfectly acceptable, however, to
have such an arrangement as regards the tort of negligence, or where a tort is committed
51

Where civil liability arises out of a crime, a contract which would provide compensation
may be unenforceable. Thus, in
,
52
Barr, who had been cleared of manslaughter
by the criminal courts, was sued in tort by the widow of his victim. He admitted liability, but
claimed that he was covered by his Prudential ‘Hearth and Home’ insurance policy, which
covered sums he became liable to pay as damages in respect of injury caused by acci-
dents. The Court of Appeal held (in effect ignoring the verdict in the criminal court) that
Barr’s actions did amount to the criminal offence of manslaughter, and that he therefore
could not recover under the insurance policy.
A similar refusal to allow reliance on an insurance contract was shown in
Geismar v Sun
where the plaintiff was seeking compensation for the loss of goods which had been
brought into the country without the required import duty having been paid. There was nothing
illegal about the insurance contract itself, which provided standard protection against loss by,
among other things, theft. The court held, however, that to allow the plaintiff to recover under
the policy in relation to the smuggled goods would be assisting him to derive a pro
t from a
deliberate breach of the law. In arriving at this decision, it was relevant that the failure to pay
import duty rendered the goods liable to forfeiture at any time by Customs and Excise, and
that the breach was deliberate. It was not suggested that the same approach would be taken
in relation to unintentional importation or innocent possession of uncustomed goods.
Different considerations apparently apply, however, where the crime is one of strict liability,
or where it arises from negligence. Thus, in
Tinline v White Cross Insurance Association Ltd


the plaintiff, who had knocked down three people while driving ‘at excessive speed,’ was
able to recover from the defendants, his insurers, the compensation he was required to pay
to the victims. The exception will not apply, however, if the offence was deliberate.
The rules
in the motoring area are, however, affected by the need to uphold the effectiveness of the
48
That is, intention or recklessness.
49
–(involving the sale of liquor not  t for public consumption) there had been ‘gross negligence’.
50
(1909) 99 LT 840. The action was by the printers of a magazine to recover on an
indemnity given by the publishers in relation to libel. There was evidence that the printers were aware of the
risk of libel, because the passage which eventually resulted in action being taken against both printers and
51
(1937) 81 SJ 924, where the plaintiffs recovered
damages in breach of contract to cover the cost of libel damages resulting from the publication of a photo-
52
53
54
[1921] 3 KB 327. The degree of injury caused by the negligence is irrelevant; in this case one of the victims
55
Gardner v Moore
[1984] AC 548; [1984] 1 All ER 1100.
system of compulsory insurance, so that the victims, and families of victims, of road acci-
dents receive proper compensation. Thus, in
Gardner v Moore
, the House of Lords held that
even though a car had been driven deliberately so as to cause injury,
and that therefore the
driver would not be able to claim an indemnity under an insurance policy, the statutory provi-
sions contained in the Road Traf
c Acts, designed to ensure compensation for the victims of
road accidents, allowed the victim to recover compensation directly from the driver’s insurer.


12.6
EFFECTS OF ILLEGALITY: ENFORCEMENT
If a contract is found to be void for illegality, then this will, in general, mean that speci
performance will be refused. This is so even if neither party has pleaded illegality.
The
reason is that if there is no contract, the court cannot order it to be performed. It may,
however, in some circumstances, be prepared to award damages. This may be done by
where the
plaintiff who had been party to an illegal overvaluation of furniture (for the purpose of avoiding
at was nevertheless allowed to sue for deceit on
the basis of the defendant’s fraudulent misrepresentation that the 
at included a roof garden.
The court took account of the ‘relative moral culpability’ of the two parties, and this question
of ‘guilt’ or ‘innocence’ has always been relevant. During the 1980s, it was transformed by a
56
Amounting to ‘grievous bodily harm’ under the Offences Against the Person Act 1861, s 18.
57
In fact, in this case, the driver was uninsured, so the claim was against the Motor Insurers’ Bureau.
58

Tinsley v Milligan (1994)
In this case, T and M had both supplied the money for the purchase of a house.
It was, however, put into the name of T alone in order to facilitate the making by M of
false claims to social security payments. When the parties fell out, M claimed a share of
the property on the basis of a resulting trust. It was argued for T that M could not
succeed because the original arrangement had been entered into in order to further an
The House of Lords also held by a majority of 3:2, that M should succeed. In
doing so, the majority rejected the approach taken by the Court of Appeal that the issue
The Modern Law of Contract
A similar approach was taken by the High Court in
21st Century Logistic Solutions Ltd v
,
63
where the defendant resisted a claim for payment for goods delivered on
63
[2004] EWHC 231; [2004] 2 Lloyd’s Rep 92.
64
[2000] 4 All ER 787, approving
[1996] ICR 1091 (EAT).
65
nal possibility is that the court will allow the claimant to assert a ‘collateral contract’
which will allow for recovery without the need to rely on the illegal agreement. This
approach was adopted in
.
71
In this case, an architect had
failed to obtain the necessary licences for building work that the plaintiffs were carrying out
for him. When the builders sued to recover the price of the work which had been done,
73
that the plaintiffs could recover damages under this. It was regarded as very signi
that the defendants were not to blame for the fact that the work had been carried out
without a licence; nor had they been negligent in leaving it to the architect to obtain the
74

71
72
It was accepted by all involved in the appeal proceedings, including counsel for the defendant, that the
defendant had ‘no merit’ in raising this defence – ‘justice’ was clearly on the side of the plaintiffs: see
75
See Grodecki, 1955.
For Thought

Would this approach provide a solution for the seller in
(above, 12.4.4)? That is, could he have said to the buyer, if you guarantee that you have
a licence then I will sell to you? Could this then be treated as an enforceable collateral

did not make it clear what it regarded as the considera-
tion provided by the builders for the architect’s promise under this collateral contract.
Presumably, it was the carrying out of the building work. The objection that the builders
were already obliged to do this, so that the rule in
The Modern Law of Contract
12.7.1
GENERAL RULE: NO RECOVERY
An example of the application of the rule of no recovery is to be found in the following case.
76
77
(Shanshal v Al-Kishtaini ).
78
The possibility of the common law rules in this area being susceptible to such a challenge had previously
regard the risk as very high.
79
80
81
–()–() 82
That is, the Control of Gold, Securities, Payments and Credits (Republic of Iraq) Directions 1990, SI

Parkinson v College of Ambulance Ltd (1925)
76

Facts:
but no knighthood was forthcoming. He brought an action to recover his money.
Held:
The contract was illegal, as being contrary to public policy. Parkinson could not
sustain his action without disclosing this, and his own complicity. The donation was on
its face a gift, and therefore irrecoverable. It could only be explained as being part of a
promise of the knighthood. The plaintiff’s action could only have any force as being for
breach of this contract, but since the contract was illegal, the action had to fail.
,
77
the rules prohibiting the recovery of property on the basis of
‘illegality’ were challenged as being contrary to Art 1 of the First Protocol to the European
78

Article 1 of the Protocol states that:

deprived of his possessions except in the public interest and subject to conditions
provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State
to enforce such laws as it deems necessary to control the use of property in accord-
ance with the general interest or to secure the payment of taxes or other contribu-

The courts, as public authorities under the Human Rights Act 1998, are obliged to apply
sanctions imposed in the aftermath of Iraq’s 1990 invasion of Kuwait. Mummery LJ noted
that there was a very ‘high degree’ of public interest involved, given the background to the
regulations; and that, in any case, they were not absolute, in that it was possible to obtain
This decision was only concerned to deal with the Human Rights Act point as it applied
12.8.1
If the contract is still executory, the claimant should have the chance to have a change of
83
84
85
– 86
The Modern Law of Contract
and tried to recover his money. The Court of Appeal refused to allow him to do so, because
there had been ‘a partial carrying into effect of an illegal purpose in a substantial manner’.
87

the refusal of the other party to play his or her part, this exception will not apply.
88

12.8.2
In the case of oppression, if the claimant was in a weak bargaining position, so that there
was virtually no choice about entering into the agreement, recovery may be possible. Thus,
,
89
a creditor refused to accept a composition agreement unless he
was paid £50, so gaining an advantage over the other creditors. The debtor paid, but later
brought an action to recover the money. It was held that the debtor could recover. Although
the agreement was an illegal contract, the element of oppression meant that an exception
are not in fact
in pari
(that is, they are not
at fault). As Cockburn CJ put it in


It is true that both are
, because the act is a fraud upon the other creditors,
alternative but to submit.

12.8.3
If one party entered into the contract as a result of the other’s fraudulent misrepresentation
that it was lawful, recovery will be allowed.
91
Again, the parties are not regarded as being
12.8.4
NO RELIANCE ON THE ILLEGAL TRANSACTION
If the plaintiff can establish a right to possession of the property without relying on the
illegal contract, then recovery will be allowed.
87
88
[1951] 1 All ER 92 – the contract was in breach of exchange control regulations. In
Tribe v
Tribe

a licence from the Ministry of Supply. There were three agreements. The defendants
sold the machines which were the subject of two of the agreements, but kept the others.
94
See, for example, Treitel, 2011, pp 548–89, arguing that, while there was clearly a repudiatory breach in
relation to the machines which had been sold, the same is not so obviously the case in relation to those
The decision in this case is not uncontroversial,
94
and is arguably inconsistent with
Taylor
,
95
where a person who had pledged a £50 bank note as security for a debauch
in a brothel (an illegal contract) was held unable to recover it. The adoption, however, by
the majority of the House of Lords of a similar line of argument in
Tinsley v Milligan
,
96

12.8.5
CLASS-PROTECTING STATUTES
In some situations, the purpose for which a statute makes an agreement illegal is to protect
a particular class. For example, the provisions forbidding the taking of illegal premiums
under the Rent Acts are designed to protect tenants. A member of that class may be able
to recover property transferred under the agreement, notwithstanding the illegality. Many
c provisions for recovery.
97
Where they do not,
however, the courts will apply the common law rule and allow recovery, as in
.
98
This was a Privy Council decision concerning the payment of a premium
by a tenant, which was illegal under Ugandan law. The tenant was allowed to recover the
premium. As Lord Denning put it:
99

The Modern Law of Contract
more than 20 hours a week and so the whole contract was unenforceable for illegality. The
Employment Appeal Tribunal (EAT) held that the contract could be severed, so that the
student could recover in relation to vacations (in which there was no restriction on hours)
and in relation to any term-
time weeks when he worked for not more than 20 hours.
103

12.10
IN FOCUS: PROPOSALS FOR REFORM

The Law Commission has been considering the need for reform of the law relating to the
illegality defence in respect of contract, tort and restitution for some time, and in 1999 put
out a Consultation Paper suggesting some possible improvements.
105
these proposals was that the present ‘technical and complex rules’
106
should be replaced
103
Further discussion of the issue of severance can be found in the chapter on Restraint of Trade, which is on
http://www.routledge.com/textbooks/stone.

104
The European Draft Common Frame of Reference deals with illegality in Articles II.-7:301–7:304.
105
Law Commission, Consultation Paper No 154, 1999. For a broadly favourable welcome to the proposals,
see Buckley, 2000.
106
107
108
Law Com No 320, HC 412, 16 March 2010.
109
Ibid, Summary, para 1.3.
110
Ibid, Summary, para 1.4.
12.11
AGREEMENTS CONTRARY TO PUBLIC POLICY
The second part of this chapter, like the 
rst, is concerned with contracts which the courts
refuse to enforce. In this case, however, the reason for this refusal is not that the agree-
ments concerned amount to, or are linked to, the commission of a crime or a tort, or are
forbidden by statute. Rather, they have been held to be more generally ‘contrary to public
policy’ and, for that reason, void and unenforceable. Most of the areas dealt with here are
the creation of the judges. The categories of common law public policy have been stated
111
so that the courts will not apply this approach to a type of contract to
which it has not been applied previously. Such an approach has the advantage of promoting
111
Fender v St John Mildmay [1938] AC 1, p 23; Geismar v Sun Alliance and London Assurance Ltd [1978] QB 383, p 389; [1977] 3 All ER 570, p 575.
112
Lancashire County Council v Municipal Mutual Insurance Ltd
based on ‘public policy’ was rejected, but only after careful consideration: if there were really no possibility
of expanding the public policy categories, the argument would surely have been rejected out of hand. See
Multiservice Bookbinding Ltd v Marden
Staffordshire AHA v
South Staffordshire Waterworks Co
[1978] 3 All ER 769.
The Modern Law of Contract
12.12.1
FUTURE SEPARATION
113
(1848) 1 HL Cas 538.
114
The same exception used to apply to a promise by a married man to marry another woman: if a decree nisi
had been issued in relation to the 
rst marriage, the promise was enforceable:

 cance, since the action for breach
of promise of marriage was abolished by the Law Reform (Miscellaneous Provisions) Act 1970.
115
But agreements arrived at as part of a divorce or judicial separation are subject to the supervision of the
116
[1910] 1 KB 35.
117
118
119
120
12.12.2
RESTRAINT OF MARRIAGE
A contract which imposes liability on a person if he or she marries is void. Thus, a promise
by A that if he marries, he will pay a sum of money to C is unenforceable.
121
Similarly,
a promise by A to make a payment if he marries anyone else other than B will also be
unenforceable.
122

12.12.3
MARRIAGE BROKERAGE
Marriage brokerage concerns a contract whereby A promises to procure a marriage for B.
The professional ‘matchmaker’ cannot make an enforceable contract for his or her
services. The rule is not limited to contracts to procure marriage with a particular person.
Hermann v Charlesworth
(discussed further below, 12.17), Miss H entered into an
agreement under which, if the defendant introduced her to someone whom she married,
cessful introductions, she sought to recover. The Court of Appeal held that the contract
was illegal as being contrary to public policy. It is dif
cult to see, however, why such
121
(1690) 2 Vern 615; 23 ER 740.
122
(1768) 4 Burr 2225.
123

Pearce v Brooks (1866)
124

There was a contract under which the plaintiffs supplied the defendant with an
ornamental brougham (a type of carriage), which was to be paid for by instalments.
The Modern Law of Contract
The knowledge of the plaintiffs was relevant here, but not every contract with a known
prostitute will be illegal. In
125
126
127
The Times
, 7 August.
For Thought

If the law is to strike down ÔimmoralÕ contracts, why should this be limited to the area of
sexual immorality? Are there other types of immoral behaviour (such as discriminating
on inappropriate, though not illegal, grounds Ð for example, charging more to people
with red hair) which should render unenforceable any contract made?

12.14
CONTRACTS TO OUST THE JURISDICTION OF THE COURTS
The courts are very jealous of any attempt in a contract or other agreement to try to take
128
Lee v ShowmenÕs Guild of Great Britain
[1952] 2 QB 329.
129
Figure 12.2


Baker v Jones (1954)
128

The rules of the British Amateur Weightlifters’ Association provided that the
The Modern Law of Contract
130
The statutory position is that a party may have recourse to
the court on a point of law, but only with the agreement of the other side, or the leave of
131

(d)
that, despite the agreement of the parties to resolve the matter by arbitration,
130
Czarnikow v Roth Schmidt & Co
[1922] 2 KB 478.
131
132
133
134
therefore in developing the common law must have regard to the requirements of the HRA.
Thus, in relation to the common law concept of ‘breach of con
dence’, it is clear that the
12.5.1
IN FOCUS: POSSIBLE AREAS FOR APPLICATION OF THE HUMAN
Suppose, for example, that a contract provides that W has written a biography of B, which
book) then makes an agreement with X Ltd that the book will only receive a very small print
run (perhaps a few hundred copies) and no publicity, in exchange for a substantial payment
from B to X Ltd.
136
W feels that this is a restriction on her right of freedom of expression (as
guaranteed by Art 10 of the European Convention), and persuades X Ltd to break its
agreement with B. If B sues X Ltd, can X argue that its contract with B was void as being
137

Another possibility is a contract which has the effect of discriminating against a person
on grounds of religion – perhaps by making it dif
cult for that person to worship as his or
her faith requires. This might be subject to challenge on the basis of an infringement of
Art 9 of the Convention, which guarantees the right to ‘freedom of thought, conscience
and religion’. Religious discrimination is unlawful in relation to employment contracts and
in connection with the provision of goods and services to the public,
138
but such a provi-
sion in another type of contract might be held to be void on public policy grounds.
139

135
[2004] UKHL 22; [2004] 2 All ER 995.
136
It is assumed for the purposes of this illustration that this does not constitute a breach of the contract
The Modern Law of Contract
140
.
141
142
12.19
SUMMARY OF KEY POINTS
■
Contracts that constitute a criminal offence (e.g. conspiracy to commit a
crime) will be illegal and unenforceable.
■
In cases where the way in which a contract is performed involves a breach of

the knowledge of the parties as regards the illegality.

■
offences and deliberate torts will be illegal; contracts to indemnify for
damages payable as a result of negligence will generally be enforceable.
■
Illegal contracts will be unenforceable, unless the party seeking to enforce:

does not need to rely on the illegality to establish their claim;

can show that the illegality is ancillary to the rights being enforced (e.g.
unfair dismissal under an employment contract where the employer has

can rely on a collateral contract.

■
Money paid or property transferred under an illegal contract cannot be
recovered unless the claimant can show that:


the parties were not
(i.e. equally at fault), as a result of, for
example, the fraud or oppression of the other party;

he or she does not need to rely on the contract to make the claim;

the statute was designed to protect a class to which the claimant

12.20
FURTHER READING
■
Buckley
, ‘
■
Conway
, ‘
Prenuptial contracts
■
Coote
, ‘
,

■
Enonchong
,
Illegal Transactions
,
Lloyd’s of London Press

■
Grodecki
, ‘
’ (
■
Law Commission, Consultation Paper No 189
,

■
Law Commission
, Law Com No 320, HC412, 2010

The Modern Law of Contract
COMPANION WEBSITE

Test your understanding of the chapters key terms by using the Flashcard glossary
Explore Illegality further by accessing a series of web links
Frustration

Contents
13.1
13.2
Introduction
13.3
413
13.4
418
13.5
Effects of frustration: common law
421
13.6
Effects of frustration: the Law Reform
423
13.7
430
13.8
Further reading
431

13.1
OVERVIEW
1

The doctrine of frustration deals with the situation where circumstances change after a
cantly different from what was intended. The following aspects need discussion:
■
The nature of the doctrine. Is the doctrine based on an implied term in the contract,
13
1
See, generally, Treitel, 1994; McKendrick, 1995a.
The Modern Law of Contract
■
What sort of events will lead to the frustration of a contract? Examples include:

destruction of the subject matter – this is the clearest example of frustration;

where personal performance is important, the illness of one party may
frustrate the agreement;

where the contract presumes the occurrence of an event, its cancellation may
be treated as frustration;

if the contract becomes illegal, or a government intervenes to prohibit it.

■
Limitations on the doctrine. It will not apply where:

the contract simply becomes more dif
cult or expensive to perform;

the ‘frustration’ is attributable to the actions of one of the parties;


the parties have provided for the circumstances in the contract itself.

■
Effects of the doctrine under the common law:

the contract is terminated automatically; but


all rights and liabilities which have already arisen remain in force; except that

if there is a total failure of consideration, money paid may be recovered.

■
The Law Reform (Frustrated Contracts) Act 1943. This Act amends the common law,

money paid prior to frustration can generally be recovered;

ts conferred, which survive the frustrating event, can be compensated for.

13.2
This chapter is concerned with the situation where, following the formation of a valid
contract, an event occurs which is not the fault of either party, but which has a signi
13.2.1
ORIGINAL RULE
,
3
the court took the line that obligations were not discharged by a ‘frus-
trating’ event, and that a party who failed to perform as a result of such an event would still
be in breach of contract. The justi
cation for this harsh approach was that the parties
2
could, if they wished, have provided for the eventuality within the contract itself.
4
commercial contracts this is in fact often done, and
force majeure
clauses are included so
as to make clear where losses will fall on the occurrence of events which affect some
5
13.2.2
SUBSEQUENT MITIGATION
approach, however, proved to be too strict and potentially unjust,
4
Trebilcock (1993, p 136) has suggested that, in fact, the courts are unlikely to be very effective in achieving
an appropriate allocation of risks in the business context, and that therefore there is an argument that ‘a
clear, albeit austere, rule of literal contract enforcement in most cases provides the clearest signal to parties
to future contractual relationships as to when they might 
nd it mutually advantageous to contract away from

Taylor v Caldwell (1863)
Facts:
The Modern Law of Contract
10
In reality, of course, this is some-
11
Some judges in more recent cases have recognised this. In particular,
Lord Radcliffe in
Davis Contractors Ltd v Fareham UDC
,
12
quoted subsequently, stated that, in relation to the implied term theory:

10
Or, more accurately, what two reasonable people in the position of the parties would be taken to have
11
tions, to be based on the myth of ‘presentiation’, exposed in particular by Macneil, which suggests that the
uncertainty, and the third theory, based on ‘construction’, seems to be the one that is
currently favoured.
19
The most frequently cited statement of this theory is that of Lord
Radcliffe in
Davis Contractors Ltd v Fareham UDC
.
20
ciality of the
implied term approach, he commented:

gories can never be closed, it is possible to identify certain occurrences that have been
recognised by the courts as amounting to frustration of the contract.
13.3.1
DESTRUCTION OF THE SUBJECT MATTER
contract will render it void for common mistake,
23
Taylor v Caldwell
.
24
19
out that it may be inaccurate to describe the various approaches as con
icting theories, since they are in fact
just answers to different questions about the doctrine of frustration: the ‘just solution’ is the goal or objective
of the doctrine; the implied term approach is a ‘technique’; and what is called here the ‘construction’ theory
approach will be applied.
20
– 21
The Modern Law of Contract
but it was only the hall which was destroyed.
25
sible as regards a major element (use of the hall), and was therefore frustrated. In other
words, if what is destroyed is fundamental to the performance of the obligations under the
26

Figure 13.1

25
Indeed, it seems that the defendant continued to be able to use the gardens and to charge for admission to
re: see Treitel, 1994, p 808, n 31.
26
See Sale of Goods Act 1979, s 7: see 13.6 below.
27
28
13.3.2
PERSONAL SERVICES Ð SUPERVENING INCAPACITY
portrait, and no substitute is likely to be satisfactory, then the contract will generally be
frustrated by the incapacity of the person concerned.

Condor v Barron Knights (1966)
29

The drummer with a pop group was taken ill. Medical opinion was that he would
t to work three or four nights a week, whereas the group had engagements for
Held:
His contract of employment was discharged by frustration. He was incapable of
cant. Suppose, for example, a garage agrees to service a car on a particular day,
but on that day, as a result of illness, it is short-
staffed and cannot carry out the service.
This will be treated as a breach of contract, rather than frustration. The contract is simply
to carry out the service, and the car owner is unlikely to be concerned about the identity of
For Thought

Do you think the position would be the same if there were a ß
u epidemic, and the garage

13.3.3
NON-OCCURRENCE OF AN EVENT
If the parties reach an agreement which is dependent on a particular event taking place,
arose in relation to a number of contracts surrounding the coronation of Edward VII, which
was postponed owing to the king’s illness.
29
30
31

Krell v Henry (1903)
31

Facts:
The defendant had made a contract for the use of certain rooms in Pall Mall
owned by the plaintiff for the purpose of watching the coronation procession. He paid
a deposit of £25 and was to pay the balance of £50 on the day before the coronation.
Before this day arrived, the king was taken ill, and the procession postponed. The
plaintiff sued for the payment of the £50, and the defendant counter-
The Modern Law of Contract
By contrast in another ‘coronation case’,
Herne Bay Steamboat Co v Hutton
,
32
was not frustrated. Here, the contract was that the plaintiff’s boat should be ‘at the disposal
of’ the defendant on 25 June to take passengers from Herne Bay for the purpose of
watching the naval review, which the king was to conduct, and for a day’s cruise round the
13.3.4
Brownsword has taken a different view of the
Herne Bay
case. He has argued that the
13.3.5
GOVERNMENT INTERVENTION
If a contract is made, and there is then a declaration of war which turns one of the parties
35
Similarly, the requisitioning of
property for use by the government can have a similar effect, as in
32
33
Brownsword, 1993, pp 246–47.
34
– 35
Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd
[1943] AC 32.
36
Bank Line v Arthur Capel Ltd [1919] AC 435 – requisition of a ship which was the
subject of a 12-month time charter. When the ship was released some six months after the expected start
delivery (brought on the basis that the charter could have run for 12 months from that
37
38
This was a majority view, with two of the members of the House dissenting.
The government intervention need not relate to war or international relations. In
SA v ICM/Fair Warning Agency
,
40
13.3.6
SUPERVENING ILLEGALITY
If, after a contract has been made, its purpose becomes illegal, this will be regarded as a
Denny, Mott and Dickson v James Fraser
,
43
there was an agreement for

Tsakiroglou & Co v Noblee and Thorl (1962)
39

The appellants agreed to sell groundnuts to the respondents to be shipped from
Port Sudan to Hamburg. Both parties expected that the shipment would be made via
ed in the contract. The Suez Canal was closed
by the Egyptian government, and this meant that the goods would have had to be
weeks. The appellants failed to ship the goods and the respondents sued for non-
performance. The appellants argued that the contract had been frustrated.
The House of Lords held that this was not frustration. The route for shipment had
ed in the contract, nor was any precise delivery date agreed. The fact
that the rerouting would cost more was regarded as irrelevant. The appellants were in
breach of contract and the respondents entitled to succeed in their action.
39
40
41
42
43
The Modern Law of Contract
13.3.7
OTHER FRUSTRATING EVENTS
particularly if in the form of a strike, and the effects of war. For example, in
Ltd v BTP Tioxide Ltd
,
44
the House of Lords upheld an arbitrator’s view that a time charter
would be able to be made. As regards the effects of war, in
13.4.1
SELF-INDUCED FRUSTRATION
breach of contract, has brought about the circumstances which are alleged to frustrate the
contract, this will be regarded as ‘self-
discharged. For example, if the 
re which caused the destruction of the music hall in
Taylor

46
had been the result of negligence by one of the parties, the contract would not
44
45
46
47
48
Treitel (2011, pp 965–66) has argued that this element should be treated as an important part of the decision
Maritime National Fish v Ocean Trawlers
.
a person is put in a position where there is no choice but to break one of two contracts.
Nevertheless, when this situation arose in
Lauritzen (J) AS v Wijsmuller BV, The Super
Servant Two
,
49
induced frustration strictly.

Lauritzen (J) AS v Wijsmuller BV, The Super Servant Two (1990)
Facts:
they both knew, could only be carried out by one of two vessels owned by the defend-
ants, namely,
Super Servant One
Super Servant Two
. The contract referred to both
Super Servant Two
Super Servant One
Super Servant Two

then sank. The defendants claimed that the contract was frustrated, but the plaintiffs
alleged that the impossibility of performance arose from the defendants’ own acts,
50

and that they should not therefore be discharged from performance.
The Court of Appeal held that, even though the defendants were neither negligent
nor in breach of contract in the way in which they had allocated the vessels, the
doctrine of frustration did not operate to remove their liability under the contract with
the plaintiffs.

. . . inconsistent with the doctrine of frustration as previously understood on high
authority that its application should depend on any decision, however reasonable
and commercial, of the party seeking to rely on it.

It seems then that any exercise of choice by one of the parties which contributes to a situ-
ation where the contract becomes impossible, or radically different, will prevent the
doctrine of frustration from applying.
Super Servant Two
decision has been strongly criticised by Treitel. In his view, the
situation was distinguishable from that in the
case, because there
49
[1990] 1 Lloyd’s Rep 1.
50
Super Servant Two
Super Servant One
for this contract.
51
The court did hold, however, that the defendants could rely on a
force majeure
contract, provided that the sinking of the
Super Servant Two
did not result from their negligence (or that of
52
Treitel, 1994, pp 490–93; Treitel, 2011, p 967. McKendrick (1995b, pp 323–27) considers, but rejects, an
alternative argument that allowing greater scope to frustration than was the case in
Super Servant Two
decrease transaction costs, in that it would reduce the need for the negotiation of complex
force majeure

clauses: such a move would increase uncertainty, and a wider legal rule enforced by the courts would not
provide the 
exible outcomes which parties can devise for themselves by specially constructed clauses.
The Modern Law of Contract
13.4.2
EVENTS FORESEEN AND PROVIDED FOR
One way in which the parties can avoid the situation discussed in the previous section, and
its perceived unfairness, is by including speci
c provision in the contract to deal with that
Super Servant Two
c
force majeure
clause, provided that the sinking of the vessel was not due
was concerned. As was noted at the start of this chapter, a
force majeure
which the parties have inserted to cover various eventualities outside their control, which
may affect the contract. It will provide the way in which risks and consequential losses are
to be distributed in such circumstances. The existence of such a clause, covering the facts
that have arisen, will often prevent the contract from being frustrated. It will not inevitably
do so, however, as is shown by
chartered in November 1871 to proceed with all possible dispatch ‘damages and accidents
of navigation excepted’ from Liverpool to Newport and there to load a cargo for carriage to
San Francisco. She sailed on 2 January but, before reaching Newport, ran aground off the
Welsh coast. On 15 February, the charterers abandoned the charter and found another
ship. On 18 February, the ship got off, but repairs were not 
nished until August. The ship-
owner brought an action against the charterers for failure to load. It was held by the
Exchequer Chamber that the exception in the contract absolved the shipowner from liability
in the event of delay, but did not give him the right to sue if the delay was bad enough to
frustrate the contract. This was the situation here, and so the shipowner’s action failed.
53
54
– 55
56
There is, however, an argument that
force majeure
clauses are in effect exclusion clauses falling within the
scope of the UCTA 1977 (see Wheeler and Shaw, 1994, p 760): to the extent that they are contained in
For Thought

ready to load on 18 February?

A similar conclusion was reached in
13.4.3
A contract for the sale of land can apparently be frustrated. This must have been assumed
Amalgamated Investment and Property Co Ltd v John Walker &
,
57
57
– 58
59
– 60
61
The Modern Law of Contract
arisen from an unpredictable event which was not the fault of either party?
62
rst view, while the statutory intervention may be
seen as a move towards the second. A further possibility, not so far adopted by English law
but suggested by the proposed European Draft Common Frame of Reference,
63
frustrating event should lead to renegotiation of the contract, to take account of the
changed circumstances.
13.5.1
AUTOMATIC TERMINATION
rst point to note is that the common law regards the frustrating event as automatically
bringing the contract to an end. It is not a situation such as that which arises in relation to
mistake, misrepresentation or breach of contract, where one party can decide, notwith-
Hirji Mulji v Cheong Yue Steamship
.
64
By a charterparty entered into in
November 1916, shipowners agreed that their ship, the
Singaporean
the charterers’ disposal on 17 March 1917 for 10 months. Shortly before this date, the ship
was requisitioned by the government. The shipowners thought the ship would soon be
released, and asked the charterers if they would still be willing to take up the charter when
this happened. The charterers said that they would. In fact, the ship was not released until
February 1919, at which point the charterers refused to accept it. The shipowners argued
that the charterers had af
rmed the contract after the frustrating event, and were therefore
still bound. The House of Lords held that af
rmation was not possible. The frustrating
event automatically brought the contract to an end, and discharged both the shipowners
and the charterers from their obligations.
13.5.2
FUTURE OBLIGATIONS ONLY DISCHARGED
render a contract void
. Its effect is to bring the contract to an end prematurely, but
all existing obligations at the time of the contract remain unaffected, as far as the common
law is concerned. If money has been paid or property transferred, it cannot generally be
recovered, and if valuable services have been provided, compensation cannot be claimed.
Krell v Henry
,
65
the hirer of the room had paid a deposit, which was irrecover-
contract, arise until after the date on which the coronation procession was cancelled. This,
therefore, was also irrecoverable by the owner of the room. By contrast, in
Webster

66
(another case on the hiring of a room to view the coronation), under the terms of
the contract, the obligation to pay arose before the frustrating event occurred. In this case,
it was held that not only could money paid not be recovered, but the obligation to pay
money due (but not in fact paid) before the event was cancelled remained. Because frus-
tration only discharged the contract from the point when the event occurred, the court
refused to regard this as a case where there was a total failure of consideration, which
ed recovery on a restitutionary basis.
67

Chandler v Webster
was, however, overruled by the House of Lords in
Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd
.
68

62
Or, to put it in other words, to decide upon the appropriate allocation of risks in relation to such an event.
63
64
65
– 66
67
The area of restitution is considered in
68
This decision, that in cases of total failure of consideration money can be recovered, is
probably an improvement on
Chandler v Webster
, but it still leaves two areas of dif
and potential injustice. First, it can only apply where the failure of consideration is total. If

Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd (1942)
Facts:
An English company (the respondents) had made a contract to supply machinery
to a Polish company (the appellants). The appellants had paid £1,000 towards this
lants sought to recover the £1,000.
The House of Lords held that since they had received nothing at all under the
contract, there had been a total failure of consideration and recovery was therefore
69
See below, 13.6.
70
71
Other than possibly that of ‘freedom of contract’: but if this is to be the governing principle, then why not
The Modern Law of Contract
(a)
to any charterparty, except a time charterparty or a charterparty by way of
73
74
or
(b)
75
save as is provided by sub-
foregoing section;
76
or
(c)
to any contract to which [section 7 of the Sale of Goods Act 1979] . . . applies,
or to any other contract for the sale, or the sale and delivery, of speci
c goods,
where the contract is frustrated by reason of the fact that the goods have

Section 7 of the Sale of Goods Act (SGA) 1979 provides that:

. . . where there is an agreement to sell speci
c goods, and subsequently the goods,
without any fault on the part of the seller or buyer, perish before the risk passes to
the buyer, the agreement is thereby avoided.

73
The effect of this is basically that the Act does not apply to charterparties for a particular voyage (voyage
74
This exclusion is apparently based on the fact that established rules in shipping law dealing with the loss or
misdelivery of freight should be allowed to stand: see Treitel, 2011, p 978.
75
This obviously complies with the normal view of an insurance contract as representing in itself the parties’
decision as to the allocation of risk. Its effect is that if, for example, goods are destroyed in a way not covered
Figure 13.2

make a different agreement if they so wish. ‘Speci
c goods’ are those which are identi
at the time of the agreement, as opposed to generic goods, which are sold by description.
Thus, a contract to buy ‘all the grain currently in X warehouse’ would be a contract for
c goods; a contract to buy ‘
ve tonnes of grain’ would be a contract for generic
therefore not be subject to the 1943 Act if X warehouse burnt down, destroying all the grain
before the risk had passed to the buyer. The contract would be ‘avoided’ by s 7, and the
common law rules on the effects of frustration would apply.
78
generally be capable of being frustrated, since the buyer is not concerned with where the
ed a particular source for the grain (for
ve tonnes of the 100 tonnes currently held in X warehouse’), then the contract
could be frustrated by the total destruction of the source.
79
would apply to the contract rather than the common law rules. There seems to be no good
reason for these distinctions, which seem to serve no sensible policy. It would surely be
preferable for all sale of goods contracts to be treated in the same way.
Section 2(3) of the LR(FC)A 1943 states that:

Where any contract to which this Act applies contains any provision which, upon
the true construction of the contract, is intended to have effect in the event of
circumstances arising which operate, or would but for the said provision operate, to
13.6.1
SECTION 1(2): MONEY PAID OR
PAYABLE PRIOR TO FRUSTRATION
Chandler v Webster
situation – that is, where money has been paid or is owed under the contract before the

All sums paid or payable to any party in pursuance of the contract before the time
when the parties were so discharged [that is, by frustration] . . . shall, in the case of
sums so paid, be recoverable from him as money received by him for the use of the
party by whom the sums were paid, and, in the case of sums so payable, cease to

In other words, in such a situation, money paid is recoverable, and money owed ceases to
be payable. To that extent the section adopts and extends the
rule now applies even where there is not a total failure of consideration. Subject to the
provisions of s 1(3),
80
concerning the conferring of valuable bene
ts, there can be recovery
of sums paid even where there has been partial performance by the other side.
78
Thus, if the buyer had made a payment, this would be recoverable on the basis of a total failure of consid-
principle.
79
(1876) 1 QBD 258 – contract for 200 tons of potatoes to be grown on a speci
piece of land. Failure of the crop led to the frustration of the contract.
80
See below, 13.6.2.
The Modern Law of Contract
There is, however, a proviso to s 1(2) which is designed to limit the injustice in the
81
that is, even where there is a total failure of consideration, the other

Gamerco SA v ICM/Fair Warning Agency (1995)
85

Facts:
The plaintiffs were claiming the repayment of $412,500 paid in connection with
81
82
Goff J, however, stated in
of the 1943 Act was not to apportion losses, but to prevent unjust enrichment.
83
Below, 13.6.2.
84
Campbell has argued that the effect of the proviso contained in s 1(2) is to confuse the restitution and
The decision emphasises the very broad power that the court has in relation to the proviso
13.6.2
SECTION 1(3): COMPENSATION FOR A ÔVALUABLE BENEFITÕ
Section 1(3) of the LR(FC)A 1943 provides that where a party to a contract has obtained a
t’ (other than money) before the time of discharge, the other party can
obtain compensation for having provided this. Suppose, then, that D has contracted to hire
C’s hall for a series of 10 concerts, with the entire fee to be payable at the end of the
contract. If after one concert the hall is destroyed by 
re, under the common law, C would
not be able to recover anything from D. By virtue of s 1(3), however, C would be entitled to
seek compensation from D in relation to the use of the hall for the one concert that took
place. D would have received a ‘valuable bene
t’ in the use of the hall for one concert. As
s 1(3)(a), any expenses incurred by the party obtaining the bene
t, and also, by virtue of
s 1(3)(b), the effect, in relation to the bene
t, of the circumstances which frustrated the
This provision would seem at 
rst sight to provide a more satisfactory outcome to the
,
86
in that it might allow the supplier of the machinery to recover
For Thought

Is this the best approach, or does it leave matters too vague and uncertain? Would it be
86
87
[1982] 1 All ER 925. The Court of Appeal and the House of Lords dismissed appeals against the 
rst instance
The Modern Law of Contract

re which destroys
the building and which, therefore, also destroys a substantial amount of work already
done by the plaintiff. Although it might be thought just to award the plaintiff a sum
basis . . . in respect of the work he has done, the
effect of s 1(3)(b) will be to reduce the award to nil, because of the effect, in relation
to the defendant’s bene
t, of the circumstances giving rise to the frustration of the

In other words, he adopted the second of the approaches outlined in the previous para-
graph as regards the assessment of the bene
13.6.3
IN FOCUS: CRITICISM OF GOFF JÕS ANALYSIS
Goff J’s analysis is not accepted as correct by all commentators. Treitel, for example,
argues that although the Act makes reference to the relevance of the effect of the frus-
13.6.4
CALCULATING THE ÔJUST SUMÕ
The second element in the process under s 1(3), once the valuable bene
89
Treitel, 2011, p 975.
90
were seeking compensation for the work done in exploiting the concessions. Applying the
approach outlined above, Goff J found that the eventual bene
t to Hunt, following the
frustration, consisted of the value of the oil which he had received, plus the compensation
from the Libyan government.
95
This produced a ‘bene
t’ of £85m. The ‘just sum’ was, on
the other hand, based on the value of the services which BP had provided to Hunt, less the
value of the oil which BP had itself received under the contract. This produced a 
gure of
t’, was awarded in full.
13.6.5
CONCLUSIONS ON THE LAW REFORM (FRUSTRATED CONTRACTS)
The 1943 Act has been the subject of strong criticism. McKendrick has noted that it ‘suffers
from a number of de
ciencies’ and agrees with the view of the British Columbia Law
96
Campbell comments that:
97

As there are but a handful of Acts of Parliament which affect the basic structure of
remedies for breach of contract, it is rather dismal to note that this one is so poorly
95
The enhanced value of the concession resulting from BP’s work could not be included as part of the bene
because this had been lost as a result of the frustrating event.
96
McKendrick, 1995a, p 243. See also Stewart and Carter, 1992.
97
98
99
100
The Modern Law of Contract
There has been very little case law on the 1943 Act, and this might be thought to indi-
cate that it is in practice a successful piece of legislation. Campbell, however, suggests
■
A contract is frustrated when an event beyond the control of either party
makes continued performance impossible or radically different from what was
agreed. It is not enough that the contract is made more dif
cult or expensive.
■
Types of frustrating event include:



government action;

occurrence of event;

effects of war.


will be regarded as ‘self-
induced’, and the doctrine of frustration will not apply.
■
The parties may have provided for the circumstances that have occurred by
contractual terms. If so, the doctrine of frustration will not apply.
■
At common law the effect of frustration is to terminate the contract and
absolve the parties from all future obligations, but:

that if there is a total failure of consideration money paid can be
recovered;

there can be no compensation for work done prior to the frustrating

■
The Law Reform (Frustrated Contracts) Act 1943 provides that:

money paid prior to a frustrating event can be recovered, subject to the
deduction of expenses (as approved by the court);

compensation (to the extent considered just by the court) can be
provided for bene
ts from the contractual performance which survive

■

102
use of contract by business people provided by the work of Macaulay and others – see Macaulay,

13.8
FURTHER READING
■
Harris
,
Campbell
and
Halson
,
Remedies in Contract and Tort
,
2002
■
Haycroft
and
Waksman
, ‘
Frustration and restitution
■
Hedley
, ‘
force majeure
’ (
■
McKendrick
(ed),
Force Majeure
,
Lloyd’s of London
Press

■
McKendrick
, ‘
The regulation of long-
Beatson
and
Friedmann
(eds),
,
Oxford
Clarendon Press

■
Stewart
and
Carter
JW
, ‘
case for a reappraisal
■
Treitel
,
Frustration and Force Majeure
,
■
Revise and consolidate your knowledge of Frustration by tackling a series of
Choice Questions on this chapter

■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
Explore Frustration further by accessing a series of web links

Discharge by
Breach

Contents
14.1
14.2
Introduction
14.3
Discharge by performance
435
14.4
Tender of performance
441
14.5
441
14.6
Discharge by breach
443
14.7
Some special types of breach
451
14.8
Anticipatory breach
454
14.9
Effect of breach: right of election
454
14.10
457
14.11
Further reading
458

14.1
OVERVIEW
■
Discharge by performance. The normal rule is that performance must be precise and
exact to discharge the party’s obligations. This has the following consequences:

In an ‘entire’ contract payment only has to be made when performance is fully
14
The Modern Law of Contract


the partial performance has been accepted; or


the court deems there to have been ‘substantial performance’.


■
Time of performance. If performance is offered late, is the other party obliged to

time for payment is not ‘of the essence’ and so late payment is not a ground
for rejection; but

in relation to all other obligations, the House of Lords has suggested that in
contracts time is always of the essence.

■
Where time is of the essence, even a very short delay will entitle the other party to
■
Discharge by breach. Breach, however serious, does not automatically terminate a

Conditions. Breach of a condition entitles the other party to terminate the

Warranties. Breach of warranty only entitles the other party to claim damages,

Innominate terms. The consequences of breach of an innominate term depend
on the seriousness of the breach. If it deprives the other party of the main
t of the contract, it will allow that party to terminate.

■
Problem areas.

cult in a long-

Instalment contracts. Similarly, there may be dif
■
Anticipatory breach. If a party indicates in advance that it is not going to perform, the
other party may elect to terminate immediately, rather than waiting for the date for

14.2
This chapter is concerned with ways in which a contract may be discharged, so that the
parties no longer have any obligations under it. We have already discussed one way in
which this can happen in the previous chapter, under the doctrine of frustration. Contracts
may also be discharged by express agreement. If both parties decide that neither of them
wishes to carry on with a contract which contains continuing obligations, or in relation to
which some parts are still executory, they may agree to bring it to an end early. The only
problems which arise here are where the executory obligations are all on one side, so that
1
Discharge by Performance or Breach
discharge by performance or by breach: discharge in this context meaning that all further
obligations of either or both of the parties are at an end.
14.3
DISCHARGE BY PERFORMANCE
Once the parties have done all that they are bound to do under a contract, all ‘primary’
2
There may, of course, be some continuing ‘secondary’ obligations,
such as the obligation to pay compensation if goods turn out to be defective at some point
after sale and delivery.
The problem that concerns us here is what constitutes satisfactory performance. If
there is some minor defect, does this negative discharge by performance? The practical
importance of this relates primarily to the situation where performance by one side gives rise
to the right to demand performance from the other. Most typically, this will occur where
payment for goods or services is only to be made once the goods have been supplied or the
14.3.1
PERFORMANCE MUST BE PRECISE AND EXACT
The general rule under the classical law of contract is that performance must be precise
and exact, and the courts have at times applied this very strictly. Consider, for example,
Re Moore & Co and Landauer & Co
,
3
defendants agreed to buy from the plaintiffs 3,000 tins of canned fruit. The fruit was to be
packed in cases of 30 tins. When the goods were delivered, a substantial part of the
factory performance, and the defendants were entitled to reject the whole consignment.
Similarly, in
,
4
the buyer had ordered timber staves for the
purpose of making barrels. The contract description said that they should be 1/2 inch
thick. Most of the consignment consisted of staves which were in fact 9/16 inch thick.
They were still perfectly usable for making barrels. Nevertheless, it was held that this did
not constitute satisfactory performance, and the buyer was entitled to reject all the staves.
In other words, in both these cases, the seller had not performed satisfactorily, and so had
not discharged his obligations under the contract.
5

2
The Modern Law of Contract
14.3.2
PARTIAL PROVISION OF SERVICES
8
Ibid, p 576. He made particular reference to
Re Moore & Co and Landauer & Co
in this context.
9
10
As Collins (2003, p 293) points out in relation to the courts’ general refusal to grant relief for change of
circumstances making a contract more onerous (for which see
), a strict liability rule ‘provides an
11
(1785) 6 Term Rep 320; [1775–1802] All ER Rep 159. For the full background to the case, and the somewhat
fortuitous route by which it has become a ‘leading case’, see Dockray, 2001.

Cutter v Powell (1785)
11

Facts:
The defendant agreed to pay Cutter 30 guineas provided that he served as
second mate on a voyage from Jamaica to Liverpool. The voyage began on 2 August.
Cutter died on 20 September, when the ship was 19 days short of Liverpool. Cutter’s
widow brought an action to recover a proportion of the 30 guineas.
Held:
Discharge by Performance or Breach
14.3.3
DIVISIBLE CONTRACTS OR OBLIGATIONS

One way to mitigate this rule, which has the potential to operate very harshly, is to 
nd that
14.3.4
NON-PERFORMANCE DUE TO OTHER PARTY
14.3.5
ACCEPTANCE OF PARTIAL PERFORMANCE
cient in certain circumstances to
discharge the other party’s further obligations under the contract, and moreover allow that
for the work already done. For example, suppose that
12
Dockray (2001, p 673) suggests that the court may have misunderstood the factual background on this
issue, in that Cutter’s skill as a carpenter would be likely to have been of special value to Powell, making the
rate of pay less extraordinary than it appeared.
13
It is common to refer to entire or divisible
: as Treitel (2007, pp 825–26) has pointed out, it would be
more accurate to refer to entire or divisible
. See further below, 14.3.6.
14
Taylor v Laird
(1856) 25 LJ Ex 329: a plaintiff was employed to command a steamer at £50 per month for
a particular voyage but subsequently abandoned the command. It was held that he could recover for the
15
See also the Apportionment Act 1870, ss 2 and 5, which state that salaries shall be treated as ‘accruing from
16
17
For further discussion of this case, see below, 14.3.6.
18
(1831) 8 Bing 14; [1824–34] All ER Rep 94. This case is discussed further in the context of ‘restitution’ in
The Modern Law of Contract
goods are to be transported from London to Hull, and the van breaks down en route. If
the recipient of the goods agrees to take delivery at Doncaster, the carrier will be able
to sue for a proportion of the carriage. In
,
19
on a fresh agreement involving an implied promise to pay for the bene
t received. In this
case, there was a contract of carriage in relation to seven keels of coal, to be taken from
Shields to Hamburg. Seven keels were delivered at Gluckstadt by arrangement with the
consignee. It was held that the carrier was entitled to recover freight at the contract rate of
This exception will not apply, however, if the party effectively has no option but to

Sumpter v Hedges (1898)
20

Facts:
The plaintiff, a builder, contracted to build two houses and stables on the
defendant’s land for £565. The plaintiff did work to the value of £333, and then aban-
doned the contract, because he had no money. The defendant 
nished the buildings
himself, using building materials left by the plaintiff. The plaintiff brought an action to
recover the value of the work he had done on the buildings.
Held:
The Court of Appeal held that the plaintiff could not recover. Collins LJ pointed
out, although in some circumstances an agreement to pay might be inferred from the
t, nevertheless:
21

. . . in order that that may be done, the circumstances must be such as to give an
t of the work done.

It would not be reasonable to expect the defendant to keep on his land a building which
14.3.6
SUBSTANTIAL PERFORMANCE
The principle of ‘substantial performance’ has the potential to constitute a more general
22
It is based on the idea that where there is only a minor variation from the terms
of the contract, the other party cannot claim to be discharged, but must rely on an action
for damages for breach. The origins of it can be traced to
Boone v Eyre
,
23
a case concerning
19
(1808) 1 Taunt 300.
20
21

It is argued by Treitel and Campbell that the doctrine of substantial performance can only apply to a severable
obligation, since the claim that there can be substantial performance of an entire obligation is contradictory:
see Treitel, 2011, p 822–23; Harris, Campbell and Halson, 2002, p 46.
23
24
25
Discharge by Performance or Breach
A similar approach was taken in
, where there were found to be defects
(which would cost £55 to repair) in work done in redecorating a 
at. The total contract price
was £750. It was held that there was substantial performance, and that the plaintiff could
recover the contract price, less the cost of repairs.
27


Dakin v Lee (1916)
Facts:
The contract was for the repair of a house. The work was not done in accord-
For Thought

If the repairs in
have made a difference to the decision? If so, where would the Ôtipping pointÕ be
26
; see 14.3.5 above.
27
Treitel (2011, p 821) explains
of work to be done were severable from the obligations as to the
The obligation as to quantity was entire; the obligation as to quality was not. There was no substantial failure
of this obligation, so the plaintiff was entitled to recover. This analysis has some force, but it should be noted
Pickford LJ speci
cally included the situation where the contractor is in breach by ‘omit-
ting some small portion of’ the work as amounting to possible ‘substantial performance’, in addition to
breach through ‘doing his work badly’: [1916] 1 KB 566, p 580. Similarly Lord Cozens-Hardy’s example of a
ed three could be argued to go to ‘quantity’ rather
28
29
The Modern Law of Contract
that these defects made little practical difference to the quality of the car park, and that the
cost of remedying them (which would have involved taking up and relaying the whole area)
would have been disproportionate. He held that the plaintiff was entitled to the contract
price, less the amount which he had saved through the various failures to comply with the
cations. The Court of Appeal con
rmed that the doctrine of substantial performance
, and that, in particular, there was a difference
Figure 14.1

30
31
[1991] 1 QB 1; [1990] 1 All ER 512. The facts of this case are dealt with in
Discharge by Performance or Breach
14.4.1
DEFINITION OF TENDER
14.4.2
TENDER OF MONEY
to pay. The debtor, however, is not obliged to attempt to pay again, but can wait until the
creditor calls for payment.
The exact amount must be tendered. There is no legal obligation to give change, though
of course in the majority of situations the creditor will be quite happy to do so.
There are particular statutory rules as to the maximum amounts of particular types of
33

14.5
TIME FOR PERFORMANCE
common law said that it was, unless the parties had expressed a contrary intention. Equity
took the opposite view, so that time was not of the essence unless the parties had specif-
ically made it so. The equitable rule was given precedence in s 21 of the Law of Property
Act 1925, so that where under equity time is not of the essence, contractual provisions
32
33
The Modern Law of Contract

Unless a different intention appears from the terms of the contract, stipulations as to
time of payment are not of the essence of a contract of sale.
34

The reference to the intention of the parties which appears in this section is of general
rmed by the House of Lords in
c Holdings Ltd v
Burnley Borough Council
.
35
Refusing to be bound by the position as regards the common
law and equitable rules prior to 1873, the House preferred to look at the nature of the
contract itself. The dispute concerned the operation of a rent review clause within a
the review machinery was concerned, so that the landlord was able to put it in motion even
ed in the lease itself. In coming to
this conclusion, the House expressed approval for the following statement in
HalsburyÕs
:
36

Time will not be considered to be of the essence unless: (1) the parties expressly
stipulate that conditions as to time must be strictly complied with; or (2) the nature
of the subject matter of the contract or the surrounding circumstances show that
time should be considered to be of the essence.

rst element of this paragraph is unproblematic. As regards the second category,
34
cally deals with time of payment: it says nothing about any other obligation which
may arise under the contract, such as the time for delivery.
35
36
Volume 9, para 481. See Viscount Dilhorne, p 937; p 78; Lord Simon, p 944; p 83. Lord Fraser also approved
the third limb of the paragraph from
Halsbury
, which reads ‘(3) a party who has been subjected to unreason-
37
38
Ibid, p 535, per Megaw LJ; p 542, per Lord Wilberforce.
39
40
See Treitel’s comments to this effect: Treitel, 2011, p 916.
41
42
See 3.10.2. See also the passage from
Halsbury
approved by Lord Fraser in
c Holdings v
Burnley
, above, note 36.
43
Discharge by Performance or Breach
and the party not in breach was entitled to serve a notice immediately making time of the
essence. As Purchas LJ put it:
44

I see no reason for the imposition of any further period of delay after the breach of
performance in accordance with its terms
before it is open to a party to serve such a notice. The important matter is that the
notice must in all the circumstances of the case give a reasonable opportunity for the

Only after that period had expired would the party who has issued the notice be entitled to
treat the contract as repudiated by the other side’s failure to perform. In coming to this
conclusion, the court disapproved
Quadrex Holdings Inc
,
45
which suggested that there must be an unreasonable delay before
the right to give notice making time of the essence arises. Since both these cases are
Behzadi v Shaftesbury Hotels Ltd
taken to prevail, pending a ruling by the House of Lords.
14.6
DISCHARGE BY BREACH
A breach of contract will have a range of consequences. It may entitle the innocent party
to seek an order for performance of the contract, to claim damages, or to terminate the
contract, or some combination of these. It is termination that we are concerned with in this
chapter,
46
since this will also entail the discharge of future obligations. Where the innocent
party terminates a contract as a result of a breach by the other side, it is in fact likely to be
indicating three things: (1) that it will not perform any of its outstanding obligations under
obligations, and will reject performance if it is tendered; and (3) that it may seek 
compensation (damages) for losses resulting from the other party’s breach.
47

14.6.1
EFFECT OF BREACH
There have at various times been suggestions that a breach of contract, if suf
serious, amounting to what is often called a ‘repudiatory’ breach, might bring a contract to
an end automatically, irrespective of the wishes of the parties.
48
The current view, however,
44
45
46
The other two are dealt with in
47
In some cases damages will not be sought if, for example, defective goods are supplied under a sale of
The Modern Law of Contract
the possibility of electing to either treat the contract as repudiated and therefore to
rm it (and possibly claim damages).
Termination for repudiatory breach is not the same thing as ‘rescission’, though the
14.6.2
NATURE OF REPUDIATORY BREACH
What types of breach of contract will give rise to the right to treat the agreement as repudi-
ated and therefore to terminate it? There are a number of ways of approaching this issue.
14.6.3
THE SALE OF GOODS ACT 1979: IMPLIED CONDITIONS
AND WARRANTIES
The implied terms under the SGA 1979 are labelled as being either ‘conditions’ or ‘warran-
ties’. The consequences of this are spelt out in s 11(3), which indicates that a ‘condition’ is
a stipulation the breach of which may give rise to a right to treat the contract as repudiated,
whereas a breach of ‘warranty’ may give rise to a claim for damages, but not to a right to
reject the goods.
51
52
53
Discharge by Performance or Breach
14.6.4
IN FOCUS: POSSIBLE AMBIGUITY IN TERMINOLOGY
Before considering the constuction of the contract it is important to note that both ‘condi-
tion’ and ‘warranty’ are at times used in other senses than the ones under consideration
here. ‘Condition’ is used, for example, in relation to a ‘condition precedent’ or ‘condition
subsequent’, or generally to mean the provisions of a contract, as in ‘terms and condi-
tions’. ‘Warranty’ on the other hand can mean simply a ‘promise’ or a ‘guarantee’. Care is
needed, therefore, in looking at discussions of contractual terms, particularly by judges, in
order to be sure that the meaning which is being attached to a particular word is clear.

14.6.5
CATEGORISATION OF TERMS: THE COURTSÕ APPROACH
54
55

Poussard v Spiers (1876)
Facts:

The Modern Law of Contract
The court treated the failure to appear for the rehearsals as a breach which was
not repudiatory. As Blackburn J said, the classi
cation of terms ‘depends on the true
56
and here the breach did not go to the root of
For Thought

14.6.6
CATEGORISATION OF TERMS: LABELLING BY THE PARTIES
56
57
58
59
This meaning that the right to repudiate would depend on the seriousness of the breach – see below, 14.6.8.
60
61
Discharge by Performance or Breach
through the contract and referred to certain terms as conditions, and the rest as warran-
ties, then it may be presumed that this was intended to have the same signi
cance as the
labels used in the SGA 1979. The use of labels will not be conclusive, however, as is shown
Schuler AG v Wickman Tools Sales Ltd
.
62
The defendants were under an obligation to
rms, over a period of four and a half years, in connection
with a contract under which they were given the sole selling rights of the plaintiffs’ panel
presses. This obligation was referred to as a ‘condition’, and none of the other 19 clauses
in the contract was described in this way. This would seem to suggest that the parties
intended that any breach of it would be repudiatory. The majority of the House of Lords
62
63
64
That is, the approach should be that adopted in
discussed below, 14.6.8.
The Modern Law of Contract
65
Corporate Trustees Ltd v Dominion Trust Ltd
.
66
The words:

If . . . either party shall in any respect fail or neglect to observe or perform any of the
provisions of this Agreement . . . then either party may by notice to the defaulting
party any time after such occurrence terminate this Agreement

were taken to mean:
67

if either party shall in any respect fail or neglect to observe or perform any provision
of the Agreement in a way that amounts to a repudiatory breach, or if an insolvency

Taking into account the context of the contract, and the many ways in which it would have
been possible to breach it, this is what ‘A reasonable commercial person would under-
be ignored, simply that it is not conclusive of the issue. In other cases the courts have
shown themselves to be willing to give effect to clearly stated provisions as to the conse-
quences of a breach. In
,
68
example, in discussing a clause giving a right to withdraw a ship for late payment of hire,
Lord Bridge said that where parties bargaining at arm’s length use ‘common form’ clauses,
it is very important that their meaning and legal effect should be certain:
69

The ideal at which the courts should aim, in construing such clauses, is to produce
a result such that in any given situation both parties seeking legal advice as to their
dent answer from their

Similarly, in
,
70
parties’ own express provisions as to the consequences of breach of terms as to payment
in a contract of hire, even though they were not happy about the justice of the overall
result.
14.6.7
IN FOCUS: CONSEQUENCES OF CATEGORISATION
consequence of a particular breach is not a relevant factor. Once a term is a ‘condition’,
any breach of it will be repudiatory, no matter that it can be easily remedied, or has on this
occasion caused no substantial loss to the other party. Similarly, whatever the conse-
quences of a breach of warranty, and however great the losses it causes, it will never give
rise to the right to terminate the contract. This approach is therefore rigid, and may appear
65
Which presumably means what the court thinks reasonable parties would be taken to have intended by the
term (or ‘relational’) contract are capable of ‘presentiation’ – see Macneil, 1978, and
66
67
68
69
70
Discharge by Performance or Breach
to cause injustice in some cases, but it has the merit of certainty, in that the parties can be
aware in advance what the legal consequences of any particular breach will be.
71

14.6.8
INTERMEDIATE TERMS
There are times when the categorisation of terms in the way outlined in the previous
sections does not work and, at least since 1962, the courts have recognised that it is
necessary to have an intermediate category. The leading case is
,
72
though some would argue that earlier decisions were,
71
See the comments of Lord Bridge in
(see above, 14.6.6).
72

Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd (1962)
The contract concerned a 24-month time charter of a ship. One of the terms
effectively required the ship to be ‘seaworthy’. It was not in such a condition on delivery,
on account of the state of the engines. Repairs were required, and delays resulted.
Four months into the contract the charterers purported to terminate the charter.
The owners sued for wrongful repudiation. The trial judge held in favour of the owners.
The charterers appealed.
Held:
The Court of Appeal agreed with the trial judge that the breach did not go to the
root of the contract. The charterers had not been deprived of substantially the whole
t of the contract, and did not have the right to terminate it for breach.
Figure 14.2

The Modern Law of Contract
able as conditions or warranties, but
felt that there are many contractual undertakings of a more complex nature which cannot
ed in that way. The obligation as to seaworthiness, for example, could be broken

but on the effect of the actual breach which has occurred: that is, the second of the
approaches outlined at the start of this section.
74
If the breach is so serious as to strike
fundamentally at the purpose of the contract, then it will be treated as repudiatory, in the
same way as if it was a breach of condition; if it is less serious it will give rise only to a
remedy in damages, like a warranty.
14.6.9
EFFECTS OF

, that there are three
75

An approach based on the consequences of breach has even been adopted, perhaps
somewhat surprisingly, in relation to sale of goods contracts, in
Cehave NV v Bremer
.
76
Lord Denning, in this case, was concerned
nition of ‘merchantable quality’
77
73
74
75
Reynolds (1981, pp 548–49), following the argument of Upjohn LJ in
, has argued that in effect
there are only two types of t\erm: those where any breach will give rise to the right to terminate, and those
where the right to terminate will depend on the consequences of the breach (that is, con
ating ‘warranties’
with ‘innominate terms’). But this analysis has not found favour in subsequent cases. See also Treitel, 2011,
76
77
78
Discharge by Performance or Breach
into the area of the statutorily labelled implied terms was not adopted by the other members
14.7.1
LONG-TERM CONTRACTS
This issue was considered by the Court of Appeal in
Rice v Great Yarmouth BC
.
83
contract was for the provision of leisure management and grounds maintenance services
to the council for a four-year period. After seven months the council purported to terminate
the agreement for breach of contract. The Court of Appeal, as noted above,
84
clause in the contract on which the council relied did not give a right to terminate for
every breach. This meant that it then had to consider the question of what, in this type of
79
80
81
82
–BS & N Ltd v Micado Shipping Ltd (Malta) (No 2) [2001] 1 All ER Comm 240.
83
84
The Modern Law of Contract
running contract for the provision of public services, would amount to a repudiatory
breach. The Court of Appeal could 
nd no direct authority on the issue, though there were
some parallels with charterparties or building contracts. It was accepted that it was rele-
85
For Thought

Would it be more satisfactory in this type of situation if the courts laid down a general
rule that the breach must affect 30 per cent of the contract, for example, in order for it
to be considered repudiatory? What difÞ
culties might that give rise to?

14.7.2
INSTALMENT CONTRACTS
A similar problem to that just considered arises here. In a contract which is to be performed
by instalments, will the breach of one of them ever amount to a repudiatory breach? If
so, then the contract can be brought to an end as soon as that one breach has occurred,
and there will be no further obligations as regards the rest of the instalments. On the
rmation of the contract, so that the breach could not subsequently be relied on as being
repudiatory.
Discharge by Performance or Breach
Goods Act 1979, which states that in cases of defective delivery, or a refusal to accept

. . . it is a question in each case depending on the terms of the contract and the
14.7.3
COMMERCIAL DESTRUCTION
In most cases of repudiatory breach, there is some act or omission which means that the
lled. Goods do not match their
description, or are supplied in insuf
88
89
90
91
The Modern Law of Contract
Batchelors Peas’. Unfortunately, the date was 11 November, and the crowd had assem-
bled to keep the traditional two minutes’ silence on Remembrance Day. The actions of the
pilot led to much criticism of Batchelors. The judge held that it was ‘commercially wholly
unreasonable to carry on with the contract’ and that, in the circumstances, the conse-
quences of the breach (that is, the failure to clear the 
ight plan) meant that Batchelors
were entitled to treat the contract as repudiated.

14.8
ANTICIPATORY BREACH
While there are obligations still to be performed, one party may indicate in advance that he
or she intends to break the contract. This is known as an ‘anticipatory breach’, and will
generally give the other party the right to treat the contract as repudiated, and to sue at
Hochster v De La Tour
,
92
plaintiff on 12 April to enter his service as a courier, and accompany him on a foreign tour.
This employment was to start on 1 June. On 11 May, the defendant wrote to the plaintiff to
inform him that his services would no longer be required. It was held that the plaintiff was
entitled to bring an action for damages immediately, without waiting for 1 June.
The reason for allowing this type of action, rather than making the plaintiff wait until
performance is due, was given by Cockburn CJ in
.
93
a breach of a right to have the contract kept open as a subsisting and effective contract.
t of enabling the innocent party to obtain compen-
sation for any damage speedily.
As will be seen in the next section, however, the innocent party does not have to accept
the anticipatory breach as repudiating the contract. He or she may wait until performance
in one case that the innocent party can legitimately incur expenses towards his or her own
performance even after a clear indication of an intention to break the contract has been
94

14.9
EFFECT OF BREACH: RIGHT OF ELECTION
In relation to all repudiatory breaches, the innocent party has the right to elect to treat the
contract as discharged and claim for damages, or to af
rm the contract, notwithstanding
the breach. The latter course will prevent the contract from being discharged, but damages
may still be recovered.
14.9.1
NEED FOR COMMUNICATION
Where the innocent party elects to treat the breach as repudiatory, this decision will
normally only be effective if communicated to the other party.
95
That this is not, however,
universally necessary is shown by the House of Lords’ decision in
Vitol SA v Norelf Ltd,
.
96

92
– 93
94
White and Carter (Councils) Ltd v McGregor
[1962] AC 413; [1961] 3 All ER 1178.
95
See the European Draft Common Frame of Reference, which suggests that notice of termination should be
given ‘within a reasonable time’: Art III.–3:508(1).
96
Discharge by Performance or Breach
97
98

Vitol SA v Norelf Ltd, The Santa Clara (1996)
Facts:
V and N had entered into a contract on 11 February 1991 for the purchase of a
cargo of propane. On 8 March, V sent a telex to N repudiating the contract. This was
subsequently agreed to amount to an anticipatory breach which, if accepted by N,
would bring the contract to an end immediately. N did not communicate with V but, on
12 March, started to try to 
nd an alternative buyer and, on 15 March, sold the cargo to
X. V challenged the arbitrator’s decision that these actions by N amounted to an accept-
ance of the anticipatory breach. Phillips J upheld the decision of the arbitrator. The
Court of Appeal, however, reversed this decision. There was a further appeal to the
House of Lords:
Held:
The House of Lords restored the decision of the arbitrator and the trial judge, and
held that N’s actions constituted acceptance of V’s anticipatory breach.
The Modern Law of Contract
14.9.2
RISKS OF ACCEPTANCE
There are, of course, dangers in treating an action by the other party as repudiatory, if it turns
out to be viewed otherwise by the court. The party purporting to accept a repudiatory breach
Vitol v Norelf
) which itself involves a breach of obli-
gations under the contract. If this turns out not to be justi
ed by what the other party has
done, then the party who thought it was acting in response to a repudiatory breach may 
nd
the tables turned, and that that party itself is now liable to damages for its own breach of the


which concerned the operation of three time charterparties, the charterers deducted various
amounts from the hire which they paid to the owners. The owners objected and issued
instructions to the masters of the vessels concerned to,
, withdraw all authority to
the charterers or their agents to sign bills of lading. This action was held to amount to a
repudiatory breach which entitled the charterers to terminate the charterparties.
Woodar Investment Development Ltd v Wimpey Construction UK Ltd
of the House of Lords seemed to take the view that this consequence would not necessarily
follow if the party purporting to accept the repudiation was acting as a result of a mistake
made in good faith as to his or her rights. Most commentators regard this aspect of the
Woodar v Wimpey
decision as dubious, and prefer to follow the bulk of authorities which
14.9.3
RISKS OF AFFIRMATION
An election to af
rm the contract carries risks as well, as is shown by the following case.
99
100
101
102

Avery v Bowden (1855)
102

The plaintiff chartered his ship to the defendant. The ship was to sail to Odessa,
and there to take a cargo from the defendant’s agent, which was to be loaded within a
certain number of days. The vessel reached Odessa, but the agent was unable to
supply a cargo. The ship remained at Odessa, with the master continuing to demand a
Discharge by Performance or Breach
Similarly, in
■
Performance must generally be precise and exact, though the modern
■
If an obligation (or contract) is ‘entire’, no payment can be claimed for
■
In relation to divisible obligations (or contracts) payment may be recoverable
■
mercantile contracts some cases suggest that obligations as to time, other
than in regard to payment, are always of the essence.
■
The effect of a breach will depend on the nature of the breach:

if it is a breach of condition, the claimant will be able to repudiate the

if it is a breach of warranty, the claimant will only be able to claim

if it is a breach of an intermediate (‘innominate’) term, the right to
repudiate the contract will depend on the effect of the breach.

■
The Sale of Goods Act implied terms are labelled as ‘conditions’ or
‘warranties’. In relation to other contracts, the courts decide. Labelling by the
■
Advance notice of an intention to break a contract (‘anticipatory breach’) will
generally give the other party the right to terminate immediately.

Even a repudiatory breach does not terminate a contract automatically: the other
rm the contract, rather than accepting
the repudiation. This right exists even in relation to anticipatory breach.

cargo. Before the period speci
103

The Modern Law of Contract
14.11
FURTHER READING
■
Brownsword
, ‘
■
Dockray
, ‘
: a trip outside the text
■
Harris
,
Campbell
and
Halson
,
Remedies in Contract and Tort
,
2002

■
Reynolds
, ‘
Discharge of contract by breach
■
Treitel
, ‘
rmation after repudiatory breach
■
Treitel
, ‘
Types of contractual terms
■
Revise and consolidate your knowledge of Discharge by tackling a series of
■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
Explore Discharge further by accessing a series of web links

15
Remedies

Contents
15.1
15.2
Introduction
15.3
461
15.4
Damages: measure
464
15.5
476
15.6
Limitations on recovery
482
15.7
492
15.8
494
15.9
c performance
501
15.10
15.11
506
15.12
Further reading
507

15.1
OVERVIEW
The two main remedies for breach of contract in English law are damages and speci
performance, and these provide the focus for this chapter. The following issues are
The Modern Law of Contract
■
Purpose of damages. The general rule is that damages are compensatory, rather
than punitive, and are intended to put claimants in the position they would have
been in had the contract been performed properly.
■

Expectation interest. This is the usual measure. It allows the claimant to
recover lost bene
ts, such as lost pro
ts that would have been made. Problems
can arise where:

ts were not certain – the claimant may be compensated for the

the costs of providing the bene
t are out of proportion to the value of
t itself – the court may refuse to allow full recovery in these
circumstances.


Reliance interest. The claimant may choose to seek damages on this basis –
compensating for expenses incurred in relation to the contract – where the
expectation interest is dif
cult to calculate (though not where the claimant has
simply made a bad bargain).

■
pecuniary losses. The claimant can exceptionally recover for loss of enjoyment
or mental distress caused by a breach of contract. Either the contract must be one
which has the provision of non-
ts as an important objective, or the
breach must have caused physical discomfort which has led to the distress.
■
compensatory damages. In limited circumstances a claimant has been allowed
to recover the bene
t that the defendant has obtained through breaking a contract,
■
Limitations on recovery. The claimant’s right to damages is limited by:

the rule of remoteness – the claimant can recover only those losses which
were normally to be expected, or, if unusual, were in the reasonable contem-

mitigation – the claimant must take reasonable steps to prevent the losses
increasing.

■
Liquidated damages clauses are enforceable; penalty clauses, aiming to ‘terrorise’
the defendant into performance, are not.

Restitution. The principles of ‘restitution’ are designed to prevent ‘unjust enrichment’.
■
c performance. This equitable remedy will only be available where damages
would be inadequate. The order will not be made where:

it would need continuous supervision;


it relates to personal services;

it would cause undue hardship to the defendant;

the claimant has not acted equitably.

■
Injunctions. These can be used to prevent a breach of contract, but not as a means
of indirectly obtaining speci
c performance where this remedy would not be

15.2
1

At various points during the earlier chapters, remedies of one kind or another have been
considered. Rescission and damages for misrepresentation were discussed in
1
See, generally, Beale, 1980; Harris, Campbell and Halson, 2002; Burrows, 2004.
for example, and rescission for mistake in
help’ remedies of with-
holding performance and terminating on the basis of repudiatory breach were dealt with in
2
Here, we are considering more generally the award of damages for breach of
contract, and the order of ‘speci
c performance’, which will instruct a party to perform its
obligations under an agreement. Some discussion of injunctions will also be necessary.
3

they would have been in had the contract been performed by ordering one party to pay
money to the other. Where one of the parties has performed its side of the bargain and is
awaiting payment from the other party, this can be achieved by the ‘action for an agreed
4
In other words, the party who
has promised to pay for goods or services which have been transferred or performed
by the other party, can be required to make good that promise. This was, for example, the
5
and it is in practice probably the most frequently used action following a
breach of contract.
6
In other situations, the normal requirement will be for the payment of
compensatory damages. An order to perform part of the contract, other than paying
money that is owed, is much more unusual.
We start, therefore, by considering the remedy of ‘damages’, and will then look at
c performance and injunctions.
15.3
DAMAGES: PURPOSE
restitutio in integrum
, or full restitu-
Robinson v Harman
,
7

and recently restated by Lord Scott in
:
8

The basic principle of damages for breach of contract is that the injured party is
the contractual obligation had been properly performed. He is entitled, that is to say,
t of his bargain.

The main objective of contract damages is therefore compensation, not punishment.
9

Although, of course, in some situations, a party thinking about breaking an agreement may
2
Rescission for mistake or misrepresentation can also be regarded as ‘self-
help’, in that there is no necessity
for the court’s involvement.
3
c performance’ is a type of injunction, which requires a person to act in a particular way; injunctions
are also used to
a person from carrying out some action.
4
5
[1893] 1 QB 256 – discussed in
6
7
8
– 9
See, for example, Lord Lloyd in
[1995] 3 All ER 268, p 282: ‘It is  rst necessary to ascertain the loss the plaintiff has suffered by reason of the
The Modern Law of Contract
10
This is the effect of s 51(3) of the Sale of Goods Act 1979.
Figure 15.1

not in breach has suffered no quanti
able loss, only nominal damages will be awarded. If,
for example, there is a failure to deliver goods, and the buyer is able to obtain an alternative
supply without a problem, and at a price which is the same or lower than the contract
price, no substantial damages will be recoverable.
10

15.3.1
IN FOCUS: THE CONCEPT OF ÔEFFICIENT BREACHÕ
In relation to the fact that damages will generally only be awarded where the claimant has
suffered a quanti
able loss, it is important to note the concept of the ‘ef
cient breach’.
Looking at the law of contract from the economic point of view, as a means of wealth
11
it may make sense for a party to break a contract. The typical example
12

given is where a seller (S) has contracted to sell an item to a buyer (B1) for £100.
Before the transaction takes place a second potential buyer (B2) offers S £200 for the
item. If S sells to B2, S will receive £200, but may have to pay compensation to B1 for
lling the original contract. But as long as that compensation is below £100, S will
still have made a pro
t. All parties are in theory happy. S has sold the item at a higher
price, to B2, to whom the item is obviously more valuable than it would be to B1. B1
has not received the item, but has received damages which fully compensate for
cient breach’ is most commonly discussed in terms of the advan-
tage to the party breaking the contract in ‘maximising gain’. As Campbell has pointed out,
however, it should also be recognised as encompassing the situation where the party in
breach acts to ‘minimise loss’.
13
This may arise, for example, where circumstances change
in a way that increases the costs of performance to an extent that the increase exceeds
the damages which would be payable to the other party. Here again, the economic answer
cient result is not to enforce the contract, but to allow the party whose costs
have increased to escape from it by paying appropriate compensation.
cient breach goes some way to explaining why the law of contract
is generally more disposed to award damages than to insist on performance.
14
11
12
13
14
As Campbell comments, ‘In this sense, the function of the law of contract is to allow breach, but on the right
15
The Modern Law of Contract
cient breach is a useful tool to apply in the analysis of the law on
damages for breach of contract.
17

15.3.2
NON-COMPENSATORY DAMAGES?
accepted to be to compensate the claimant. It should be noted, however, that a possibly
cant exception to the solely compensatory nature of contract damages has been
opened up by the decision of the House of Lords in
Attorney General v Blake
.
18
there that a defendant could, in certain circumstances, be required to hand over to the
t acquired by breaking a contract, even where there is no corresponding
loss to the claimant. This decision and its implications are discussed fully below (see 15.5).

15.4
DAMAGES: MEASURE
15.4.1
EXPECTATION INTEREST
This is the approach which most clearly relates to putting the innocent party into the posi-
tion he or she would have been in had the contract been performed. It is concerned with
lling the expectations of that party as to the bene
ts that would have 
owed from the
17
Macneil, however, suggests that, outside of ‘futures’ contracts, the opportunities for gain through ‘ef
breach’ are in reality so rare as to be almost non-
existent, so that ‘general propositions about remedies
ciency in the real world’: Macneil, 1988, p 15. See also Macneil,
1980 and Macneil, 1982. These three articles are all extracted in Campbell, 2001,
Campbell and Halson, 2002, pp 19–20, for a response to some of Macneil’s criticisms.
18
19
In contrast to the standard measure of damages in tort, which aims to compensate for losses arising from
the wrongful action by putting the claimant back into the position he or she was in prior to the tort being
20
previous paragraph, the non-
less staff and therefore has a reduced wage bill, this must be taken into account in
assessing the pro
t which has been lost. It also follows that if A would not in fact have
made any pro
t from the transaction, only nominal damages will be recoverable.
There are two situations which may cause particular dif
culty for calculation of the
expectation interest, and which merit further consideration: 
rst, where the pro
t was not
certain and, second, where the cost of ful
lling the claimant’s full expectation may be
disproportionate to the eventual bene
In the situation where the pro
t was not certain to be made, there may be a partial
recovery on the basis that the claimant has lost the chance to make it. In
,
21

for example, the breach of contract prevented the plaintiff from taking part in an audition.
22

She was allowed to recover a proportion of what she might have earned had she been
successful in the audition. Similarly, in
Simpson v London and North Western Railway Co
,
23

ed date. The
plaintiff was allowed to recover compensation for the loss of sales he might have made
15.4.2
WHAT IF THE COST OF COMPENSATING THE CLAIMANT IS
DISPROPORTIONATE TO THE COST OF THE CONTRACT?
The second area of dif
culty in 
full consideration by the House of Lords in
.
26

The position under previous case law on this type of situation involving building
contracts was that the court would normally allow the recovery of the ‘cost of cure’ – that
21
22
The case is often referred to as involving a ‘beauty contest’ (see Treitel, 2011, p 1023; Harris, Campbell and
Halson, 2002, p 81; Halson, 2013, p 463), but this is clearly wrong.
23
(opportunity for hairdresser to earn tips);
(enhance reputation by publishing a book).
24
See, for example, the comment by Vaughan Williams LJ: ‘But the fact that damages cannot be assessed with
certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract’:
[1911] 2 KB 786, p 792. Bridge (1995, p 445) suggests that the award of damages in this area is simply a
result of the courts’ unwillingness to limit the claimant to nominal damages.
25
26
The Modern Law of Contract
is, putting the building into the condition it should have been in if the breach had not
occurred. This is subject to the limitation that if the cost of cure is signi
cantly greater than
the reduction in value of the property concerned, then the court may refuse to allow it.
27

This limitation did not, however, normally apply to the situation where the ‘cure’ relates to
27
Watts v Morrow
[1991] 4 All ER 937 – cost of repairing house £34,000, diminution in value £15,000.
28
29
30
31

Ruxley Electronics and Construction Ltd v Forsyth (1996)
Facts:
The defendant in this case entered into a contract for the construction of a
30

Damages are designed to compensate for an established loss and not to provide
t to the aggrieved party. . .

Given that the defendant had a perfectly serviceable swimming pool, ‘were he to receive
The precise nature of the award for loss of amenity is considered further, below.
For Thought

Ruxley Electronics v Forsyth
swimming pool had been too shallow to allow the claimant to carry out some activity,
such as diving? Would the claimant then have been able to claim the cost of having the
pool rebuilt?

15.4.3
IN FOCUS: HOW FAR DOES THE
DECISION GO?
The House of Lords’ decision in this case appears quite sensible on the facts. Nevertheless,
it leaves open the problem that an unscrupulous contractor can apparently now play fast
cations in a construction contract, provided that the
nal product is 
t for the purposes for which the other party wishes to use it. If it is so 
15.4.4
WHAT IS ÔLOSS OF AMENITYÕ?
As was noted above, the only award which the plaintiff received in
was for ‘loss of amenity’. What is the precise nature of this award? There are two
32
[1998] Ch 439; [1998] 1 All ER 833. See below, 15.5.
33
cant sum on the work.
34
The Modern Law of Contract
and inconvenience’ arising as a consequence of a breach of contract. This area is
discussed further below (see 15.4.5). The House of Lords’ decision in

35

has made it clear that the award in

category.
concerned a contract for the survey of a house, where the
cally asked by the prospective purchaser to check on aircraft
noise. The surveyor failed to do this properly, and the purchaser, having moved in, sought
compensation for the fact that his enjoyment of the property was reduced, though there
had been built for a developer who was going to sell the property once it was
15.4.5
RELIANCE INTEREST

In some situations, it may not be easy for the claimant to calculate the pro
ts that would
have been made. Here it may prove more sensible to abandon the attempt, and instead to
seek recovery of the expenditure which has been incurred in anticipation of the contract.
This is what is referred to as the ‘reliance’ interest. The result of this type of award is that
position if the contract had been performed properly.
40

An example of this type of situation is
Anglia Television Ltd v Reed
.
41

35
36
See O’Sullivan, 1997, pp 14–16. This would also seem to be implicit in Lord Scott’s comment in
to the effect that damages for discomfort (as opposed to loss of amenity) would not be recoverable
42
See below, 15.6.1.
43
(1951) 84 CLR 377 – loss of pro
ts rejected as too speculative. For other aspects of this case, see
44
[2010] EWHC 2026 (Comm).
45
46
Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm). See also the Australian case of The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] 174 CLR 64, discussed in this context by Bridge, 1995, p 468. 47

Anglia Television Ltd v Reed (1972)
Facts:
Reed was an actor who was under contract to play a leading role in a television
lm. At a late stage, Reed withdrew, and the project was unable to go ahead. In suing
Reed for breach of contract, Anglia did not seek their lost pro
ts. It would have been
cult to estimate exactly what these would have been, given the uncertainties of
the entertainment industry. Instead, they sought compensation for all the expenses
The Modern Law of Contract
,
48
15.4.6
CONSEQUENTIAL LOSSES
There are some losses which 
ow from the breach, but which cannot be put into the
category of ‘expenses’ (that is, reliance) or thwarted expectations. Provided the causal link
can be established, and they are not too remote,
51
then they will be recoverable. If there is
a contract for the purchase of a piece of machinery, for example, and it is defective, then
the expectation interest may allow the recovery of lost pro
ts that would have been gained
by using the machine. If, however, the defect causes the machine to explode, which results
in damage to the buyer’s premises, or personal injury to the buyer, compensation in
relation to these consequential losses can also be recovered.
15.4.7
SUPERVENING EVENTS
The issue of the measure of damages when supervening events have increased the claim-
ant’s loss was considered by the Court of Appeal in
.
52
defendants had installed a heat exchanger at the plaintiffs’ works. A leak was discovered,
and a repair attempted by the second defendants. The plaintiffs put the heat exchanger
back in use without carrying out proper tests. In fact, the defects in the exchanger were
more extensive than had been realised, and shortly afterwards it exploded. The plaintiffs
sought to recover from the 
rst defendants an amount relating to the loss of pro
ts they
would have suffered as a result of the need to further repair or replace the exchanger had
it not exploded. Their action was based on the defendants’ breach of contract in their
initially having supplied a defective exchanger. The Court of Appeal held that the measure
48
49
See, for example, Lord Denning in
Anglia Television Ltd v Reed
–690, p 692. 50
51
See below, 15.6.1.
52
53
Carslogie Steamship Co Ltd v Royal Norwegian Government
ER 20. 54
See below, 15.6.1.
A different approach to a particular type of supervening event was taken by the House
of Lords in
15.4.8
NON-PECUNIARY LOSSES
Contract damages are primarily concerned with economic losses of one kind or another,
which are more or less quanti
able in money terms. In some situations, however, non-
pecuniary losses will be caused. If, for example, a defective product results in personal
injury to the purchaser, there is no reason why damages should not be recovered in relation
to the pain and suffering so caused. Of course, third parties who are injured will have to
rely on tortious remedies at common law or under the Consumer Protection Act 1987.
A more dif
cult question arises in relation to mental distress, anguish or annoyance caused
by a breach of contract. The courts have tended to be wary of awarding compensation
55
56
The Modern Law of Contract
under this heading, but the whole area has recently been reconsidered in a number of
House of Lords decisions.
57
The traditional view is that expressed in
.
58
The House of Lords refused to uphold an award which had been made in relation
to the ‘harsh and humiliating’ way in which the plaintiff had been dismissed from his job in
breach of contract. This line was followed in a more recent dismissal case,
,
59
where a surgeon had sued the health authority by which he was
were raised by the decision of the House of
Lords in
,
61
took the view that where there was a breach of the implied term of trust and con
should not be regarded as precluding an award of damages
for loss of reputation or dif
culty in obtaining future employment. The House was not,
however, dealing with the manner of dismissal in this case, and was not concerned with
‘injury to feelings’. The House of Lords subsequently con
rmed in

62

should not be regarded as having been overruled in
distress and injury to feelings resulting from the manner of a dismissal are still unavailable
in an action for breach of contract.
63
The Supreme Court, in
eld Royal
Hospital NHS Foundation Trust
approach applies
to breach of an express term of a contract relating to dismissal procedures, as well as
64
Exceptionally, however, it may be possible to claim damages for
pecuniary loss in relation to a breach of contract which is constituted by treatment
leading up to a dismissal. This was the view of the House of Lords in its most recent
consideration of this area,
.
65

On the other hand, it has been held that where one of the purposes of the contract is to
provide pleasure and enjoyment, damages for distress and disappointment caused by a
breach may be recovered. Thus, in
Jarvis v SwanÕs Tours Ltd
,
66
such damages were
awarded in relation to breach of contract in the provision of a holiday which had promised
to provide ‘a great time’.
67
Where, however, the contract is a purely commercial one,
57
Johnson v Gore Wood & Co
Johnson v Unisys Ltd [2001] UKHL 13; [2001] 2 All ER 801; Farley v Skinner [2001] UKHL 49; [2001] 4 All ER 801.
58
59
60
61
62
63
Lord Hoffmann in
pecuniary losses could be recovered under the
statutory regime governing ‘unfair dismissal’, and used this as part of the argument for rejecting a common
law action. This suggestion was rejected by the House of Lords in
()do not extend to non- pecuniary loss. 64
65
66

A similar approach can be seen in
–Chapter 5, 5.7.
,
68
the plaintiffs were suing their solicitors for breach of contract. The
solicitors had given an assurance that a right of way existed in relation to access to a
property which the plaintiffs were purchasing for their business. This turned out to be
untrue, and the plaintiffs’ business failed as a result. The trial judge awarded damages
of £1,500 to each plaintiff for anguish and vexation. The Court of Appeal, however, applied
the same approach as in
69

. . . damages for mental distress in contract are, as a matter of policy, limited to
certain classes of case. I would broadly follow the classi
cation by Dillon LJ in
: ‘. . . where the contract which has been broken
was itself a contract to provide peace of mind or freedom from distress’. It may
include any case where the object of the contract was not comfort or pleasure,
or the relief of discomfort, but simply carrying on a commercial activity with a view
to pro

Watts v Morrow
exceptions were restated by Bingham LJ, in a passage which has subsequently been
approved by the House of Lords:
70

68
69
70
[1991] 4 All ER 937, pp 959–60 (emphasis added). Approved in
Johnson v Gore Wood & Co
481 and in Farley v Skinner [2001] UKHL 49; [2001] 4 All ER 801.
71
1971 SLT (Sh Ct) 49 (a Scottish case dealing with wedding photographs);
Wellers
[1976] QB 446; [1976] 1 All ER 300 (solicitor’s failure to take action to protect the plaintiff from ‘moles-
72
[1996] RTR 95.
73
The Modern Law of Contract
The four speeches delivered in the House of Lords differ in some respects in their
reasoning,
76
74
75
uenced by the fact that
Watts v Morrow
was itself a case of a negligent survey, and
pecuniary loss had been refused.
76
77
[2001] UKHL 49, para 24; [2001] 4 All ER 801, p 812 – disapproving the Court of Appeal’s decision in
pecuniary damages were refused for an architect’s failure to
provide a wide staircase for a gallery and impressive entrance hall.
78
79
80
Campbell, however, regards the treatment of Bingham’s 
rst category in

Farley v Skinner (2001)
Facts:
The claimant was seeking damages from a surveyor who had inspected and
reported on a house which the claimant had then bought. Speci
c instructions had
been given to the surveyor to check and report on any problems with aircraft noise.
74

The surveyor failed to mention in his report that the house was near an aircraft naviga-
tion beacon, around which aircraft were often ‘stacked’ waiting to land, so that the use
and enjoyment of the property was affected by aircraft noise (particularly at weekends).
The county court judge found that the defendant was in breach. He held that the value
of the house was not affected by the breach, but awarded the claimant £10,000 for non-
pecuniary damage. The Court of Appeal overturned the award on the basis that,
Watts v Morrow
tests, this was not a case where the ‘very object’ of the
contract was to provide pleasure,
75
nor could the annoyance caused by the aircraft
noise be considered to amount to ‘physical inconvenience’.
Held:
The House of Lords restored the judge’s award holding that this was a situation
where non-
pecuniary loss was recoverable, given that the speci
c obligation to check
for aircraft noise was designed to enhance the claimant’s enjoyment.
The statements of Lord Steyn and Lord Scott clearly apply where there is a positive
obligation to bring about a result – for example, to provide a holiday of the right quality, or
ed depth. In
kind. The surveyor did not undertake to guarantee that the property was unaffected by
81
See, also, the similar example given by Lord Clyde at [2001] UKHL 49, para 43; [2001] 4 All ER 801, p 818.
82
83
Ibid, para 85; p 829. See also Lord Hutton, paras 57–60; pp 824–25.
84
85
The Modern Law of Contract
damages for the consequent distress to the claimant were recoverable in an action for
breach of contract. A signi
cant purpose of the contract was to ensure that the claimant
86
87
See above, 15.4.2. See also the comments of Lord Steyn at [2001] UKHL 49, para 21; p 810.
88
89
90
91
92
bene ts obtained. This is in line with the general principles of contract damages as stated
Robinson v Harman
.
89
In other words, the purpose of contract damages
t from breaking the contract, this is irrelevant, as
long as all the claimant’s losses are fully compensated. The idea that there could be
recovery not only for the claimant’s loss, but also for the defendant’s gain, was speci
rejected by the Court of Appeal in
Surrey CC v Bredero Homes Ltd
.
90
Here a developer
deliberately built more houses on a piece of land than it was entitled to under its contract
with the local authority from which the land was acquired. The Court of Appeal held that
the damages would only be nominal because the local authority had suffered no loss. The
Attorney General v Blake
,
91
however, re

Attorney General v Blake (2001)
Facts:
The case concerned the notorious spy George Blake, who had been a member
ting from criminal activity (the disclosures
made by Blake in the book amounting to offences under the Of
The Modern Law of Contract

This is where the defendant fails to provide the full extent of the services which he
has contracted to provide and for which he has charged the plaintiff.

re service which did not provide the contracted number of
remen, horses, or length of hosepipe.
93
re service had saved expenses, but had not
res. Nevertheless, it was suggested by Lord Woolf that it would be
just to allow the other contracting party to recover damages based on the amount that the
re service had saved by this ‘skimped’ performance.
94

ant’s gain might be appropriate is where the defendant has obtained a pro
t ‘by doing the
95
This was exactly Blake’s situation. He had
promised not to disclose information about his work, but this was precisely what he had
done in writing and publishing the book. It is clear that, had the Attorney General pursued
this issue, the Court of Appeal would have been prepared to award damages for breach of
contract on this basis. It reconciled this approach with that taken in
Surrey CC v Bredero
on the basis that that decision should be regarded as allowing restitutionary
When the case reached the House of Lords, the contractual basis of the claim was fully
argued. The House reached the same effective result as the Court of Appeal by rejecting
the public law claim, but allowing the Attorney General to recover the money due to Blake
on the basis of breach of contract. Lord Nicholls, who delivered the main speech on behalf
of the majority,
96
found support for such an approach in a 
rst instance decision which
preceded
Surrey v Bredero Homes
, but was approved in it, namely
Wrotham Park Estate
.
97
In this case houses had been built on land in breach of a
restrictive covenant, and the plaintiff sought an injunction which would have led to their
demolition. The court was reluctant, ‘for social and economic reasons’,
98
to grant such an
injunction. Instead the judge awarded damages based on an estimate of what the
defendant would have had to pay to obtain a release from the restrictive covenant. This he
valued at 5 per cent of the pro
t which the defendants had made on the development. This
cult to reconcile with
Surrey v Bredero
power to award damages in lieu of an injunction.
99
the Court of Appeal, however, in
.
100
Moreover, the House of Lords in

101
has clearly held that the damages awarded in relation to a breach of
93
City of New Orleans v FiremenÕs Charitable Association
no recovery was, in fact, allowed in this case.
94
re service had not failed in its
res) in what sense could its performance be said to be ‘skimped’?:
Harris, Campbell and Halson, 2002, pp 277–78. Indeed, it would not appear that there was any breach of
contract at all. Atiyah (1995, p 451), however, clearly regards the situation as involving a breach, and one in
relation to which the law is ‘seriously de
cient’ in not providing a remedy.
95
96
Lord Hobhouse dissented, on the basis that he could see no grounds for the Crown recovering substantial
damages for Blake’s breach of contract.
97
98
Lord Nicholls in
Attorney General v Blake
[2001] 1 AC 268, p 282; [2000] 4 All ER 385, p 395.
99
As now provided by the Supreme Court Act 1981, s 50. The power was originally given by the Chancery
Amendment Act 1858, s 2, commonly known as Lord Cairns’ Act.
100
101
, Lord Nicholls did not attempt to achieve a reconciliation of these issues. His
Bredero Homes Ltd
with the approach adopted in the
Wrotham Park
case, the latter approach is to be
preferred’.
102
He went on to declare that
Wrotham Park
that contract damages are not always con
ned to the recovery of 
nancial losses. Damages
Wrotham Park
basis were not, however, what the Attorney General was seeking in
. He was not asking for a sum by which Blake could have bought his release from the
restrictive provision in his contract of employment; on the facts the Crown would not have
agreed to such a release on any terms. The Attorney General was, therefore, seeking a full
‘account of pro
ts’ made by Blake from the breach. Lord Nicholls, despite the assistance
nd any cases in which the courts have made such an order in
103
but noted that there is a ‘light sprinkling’ of cases in which an order to
the same effect as an account of pro
ts has been made, but not with that label.
104
From
here he jumped to the somewhat surprising general conclusion that ‘there seems to be no
reason, in principle, why the court must in all circumstances rule out an account of pro
as a remedy for breach of contract’.
105

Having opened this box, however, the dif
culty is to 
nd a way to keep the remedy
within bounds, and in particular to avoid it disrupting the normal expectations of commer-
106
Lord Nicholls’ response to this is to state that the remedy of an account
of pro
ts will only be available ‘in exceptional circumstances’.
107
exceptional circumstances? On this question Lord Nicholls’ speech is unhelpfully vague. It
seems that exceptional cases will arise where normal damages are ‘inadequate’, and that
all the circumstances must be taken into account. Beyond this, however, the only guidance
102
103
Though he notes that such an approach was rejected in
Tito v Waddell (No 2)
129 by Megarry J, and even more forcefully by Kerr J in
Occidental Worldwide Investment Corp v Skibs, The
Siboen and the Sibotre
[1976] 1 Lloyd’s Rep 293.
104
The cases cited are
Reid-Newfoundland Co v Anglo-American Telegraph
[1912] AC 555 and
British Motor Trade Association v Gilbert
[1951] 2 All ER 641.
105
[2001] 1 AC 268, p 284; [2000] 4 All ER 385, p 397. Lord Nicholls objects to the label ‘restitutionary
damages’; but since the point of an account of pro
ts must be the prevention of the unjust enrichment of
the defendant, which is the basis of restitutionary remedies, his objection seems to be without merit.
106
It causes particular problems for the concept of the ‘ef
cient breach’ which, it has been suggested above
(15.3), is an important element in the standard English law approach to contract damages.
107
108
109
110
The Modern Law of Contract
For Thought

is applied more generally, would it mean that a former employee who breaks a
restrictive covenant in relation to future employment could be made to hand over the
wages earned from doing so?

15.5.1
CASE LAW POST-

111
See, for example, Hedley, 2000; Harris, Campbell and Halson, 2002, Chapter 17.
112
113
() 114
It is to be hoped that this case is not an example of a trend towards extensive use of the
‘exception’, which it seems unlikely that the House of Lords intended should apply
to straightforward commercial disputes.
115

.
116
115
For further criticism of this case, see Sandy, 2003.
116
117
118
– 119
The Modern Law of Contract
preclude a
Wrotham Park
claim. On the facts, however, the claimant had raised this basis
120

15.5.2
IN FOCUS: ACADEMIC VIEWS OF
ATTORNEY GENERAL V BLAKE
, there is further interesting and critical
argue that the implication of the
decision is that all breaches should be
penalised. This, they say, is misguided, because not all breaches are ‘wrongs’ that should
15.6.1
THE RULE OF REMOTENESS
At various points in this chapter, it has been mentioned that the award of damages under
a particular head will be subject to the rule of remoteness. This is a rule which basically
prevents consequential losses from extending too far, and placing unreasonable burdens
on the defendant. It should also be recalled that in
it was noted that, in relation
to the tort of deceit and the remedy for negligent misrepresentation under s 2(1) of the
120
rmed the exceptional nature of the
remedy, and refused to apply it. See, e.g.,
Vercoe v Rutland Fund Management Ltd
Luxe Holding Ltd v Midland Resources Holding Ltd [2010] EWHC 1908.
121
Jaffey, 2002, p 576.
Misrepresentation Act 1967, all consequential losses are recoverable without limitation.
122

This is exceptional, however, and in general, in both tort and contract, damages are only
recoverable in relation to losses which are not too remote.
The type of recovery this rule is designed to prevent is as follows. Suppose that a
contract for the hire of a car is broken in that the one supplied is un
t for its purpose and
breaks down. The hirer may as a result fail to arrive at a sale where he would have been
able to buy a valuable painting which he could have resold for a £100,000 pro
t. Should
the hire company be liable for the £100,000? English law will normally regard this loss as
too remote from the breach to be recoverable. To take a recent example from a decided
Wiseman v Virgin Atlantic Airways Ltd

123
ight as a result of the defendant’s breach of contract. While he was
waiting for a replacement 
ight he was attacked by robbers. It was held that this was too
remote from the breach of contract to give rise to any compensation from the airline
company. This approach ties in with the view of contract law as a mechanism by which the
parties to an exchange transaction allocate the risks of their enterprise. In order to be able
to do this properly, they must be aware of the risks at the time of contracting, so that they
can be properly catered for in the contract price, exclusion clauses, or other terms of the
contract. If unforeseen losses were recoverable, this would unbalance the contractual
relationship.
124

15.6.2
THE RULE IN
In contract, the starting point for the rule of remoteness is
.
125

122
123
124
therefore, that the contractual rules of remoteness also have a basis in ideas of ‘fairness’. For discussion of

Hadley v Baxendale (1854)
The plaintiff, the owner of a 
our mill, contracted with the defendant, a carrier,
for the transport of a broken mill-
shaft to an engineer who was to use it as a pattern for
shaft. There was a delay in the delivery to the engineer, which constituted a
breach of contract by the carrier. The plaintiff received the new shaft 
ve days late,
which resulted in considerable losses to his business because no spare shaft was avail-
able, and the mill was shut for longer than expected. The plaintiff sued for lost pro
Held:
The Exchequer Court held that the lost pro
ts could not be recovered because
they were too remote. In this case, there was delay in the transport of a broken mill-
shaft which resulted in considerable losses for the mill owner, because no spare shaft
126

. . . either arising naturally, that is, according to the usual course of things, from
such breach of contract itself, or such as may reasonably be supposed to have
the probable result of the breach of it.

The Modern Law of Contract
15.6.3
RELEVANCE OF KNOWLEDGE
There are two aspects of this test which should be noted. First, it is clear that the remote-
. The House of Lords in

127
rmed that this
15.6.4
ÔREASONABLE CONTEMPLATIONÕ TEST
relating to the natural consequences of breach, and the second to the contemplation of
127
128
[1987] BTLC 353 – mention of the plaintiff’s medical condition when booking a
cient to make the defendant liable for losses resulting from it. For discussion of the prac-
tical problems in communicating special circumstances to large, fragmented organisations, see Danzig,
129
130
131
Applying this to the facts of the case, the court held that in most cases of a breach of
losses followed naturally from the breach. Nor were the defendants aware, at the time
of the contract, of the circumstances which meant that the mill would not be able to
function at all without this particular shaft. Therefore, the losses were not recoverable.

lost pro
ts at a level reasonably to be anticipated from a business of this type. They could
not recover, however, in relation to some particularly lucrative dyeing contracts with the
Ministry of Defence, of which the defendants were unaware.
15.6.5
DEGREE OF RISK
The degree of risk that has to be contemplated before a loss is not too remote is dif
to pin down and there is no clear, single phrase that is used to express it. The issue was
considered in the following case.
132
133
134

The Heron II (1969)
Facts:
The plaintiff charterers lost money when the ship they had chartered to carry a
cargo of sugar deviated from its route and arrived late at the port of destination. The
The Modern Law of Contract
sense, rightly, saying that people would contemplate . . . the serious possibility of

Where a particular unusual aspect of the claimant’s activity has increased the loss caused
by the defendant’s breach, the defendant will only be liable if he had actual knowledge.
,
135
Lords held that a supplier of electricity who was in breach of contract because of an inter-
ruption in the supply was not liable for the full losses suffered by the plaintiff. The interrup-
tion had occurred while the plaintiff was in the middle of a construction project which
135
136
Lord Walker, with tentative support from Lady Hale, was that the loss went beyond what
would have been in the reasonable contemplation of the parties at the time of the original
contract, or its extension, because no one could have predicted the extreme volatility in
15.6.6
MITIGATION
Once a breach of contract has occurred, the claimant is not entitled to sit back and do
nothing while losses accumulate. There is an obligation to take reasonable steps to miti-
gate losses which was laid down by the House of Lords in
British Westinghouse Electric
137
138
139
140
141
The Modern Law of Contract
.
142
Viscount Haldane
143

. . . imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss
consequent on the breach, and debars him from claiming any part of the damage

Furthermore:

. . . this . . . principle does not impose on the plaintiff an obligation to take any step
which a reasonable and prudent man would not ordinarily take in the course of his
the transaction, which action has diminished his loss, the effect in actual diminution
of the loss he has suffered may be taken into account even though there was no duty

In other words, the court will look at what the claimant’s actual losses are, rather than what
Lord Nicholls put it:
147

[I]n measuring the loss suffered by an impecunious plaintiff [
own car the law will recognise that, because of his lack of 
nancial means, the timely
provision of a replacement vehicle for him costs more than it does for his af
neighbour.

142
143
144
145
146
[2003] UKHL 64; [2004] 1 All ER 277. This case concerned a negligence claim in tort, but the mitigation
principles are the same as for a contractual action.
147
[2003] UKHL 64, para 7. Note that two members of the House of Lords dissented from the conclusion.
The principle of mitigation raises particular problems in cases of anticipatory breach. If the
claimant accepts the breach, and the contract terminates immediately, then the normal
rules will apply. If, however, the claimant does not accept the breach, but elects to af
the contract and wait for the other party to perform, it seems that in some circumstances
there is not any duty at that stage to reduce losses. This is illustrated by the following case.
148
149
In other words, this was an action for an agreed sum, rather than for compensatory damages: see above,
150
See Furmston, 1962; Goodhart, 1962; Harris, Campbell and Halson, 2002, pp 161–65; Burrows, 2004.
151
Hounslow LBC v Twickenham Garden Developments Ltd
Ch 233 – work to be done on property owned by the other party. The need for ‘passive co-
cient to exclude the
approach.
152
153
Though this may surely have been because they did not realise that they needed to.
154
open, coupled with the right to claim the agreed sum, are not absolute but in fact subject to a requirement

White and Carter (Councils) Ltd v McGregor (1962)
148

the plaintiffs. This contract was wrongfully cancelled by the defendants before any work
had been done. The plaintiffs refused to accept this anticipatory breach, and went
ahead with the production and display of the advertisements over the full three years of
149

Held:
The House of Lords, by a majority of 3:2, held that there is no obligation on the
claimant in such a situation to mitigate the losses, and full recovery is possible. The
plaintiffs were entitled to recover the sum agreed as payment for the work done.
The decision has been regarded as harsh on the defendant, and involving an unnecessary
waste of resources. It has been widely criticised,
150
on this issue. Lord Reid, however, identi
ed two limitations, one practical and one legal,
which exist in relation to the situations where a
response to anticipatory
breach will be acceptable. The practical limitation is that the claimant will not be able to act
in this way where the performance of the contractual obligations requires the co-
151
As regards the legal limitation, Lord Reid
152

It may well be that, if it can be shown that a person has no legitimate interest,
nancial or otherwise, in performing the contract rather than claiming damages, he
ought not to be allowed to saddle the other party with an additional burden with no
t to himself.

Lord Reid clearly felt that the burden of proving the absence of any such ‘legitimate
interest’ rested on the defendants, and in this case they had not attempted to establish
153
Lord Reid does not specify what might constitute a ‘legitimate interest’, but clearly
this might arise where failing to continue with the contract might involve the party in breach
of other obligations owed to third parties.
154
This type of interest was found to exist by Kerr
The Modern Law of Contract
Gator Shipping Corp v Trans-Asiatic Oil Ltd SA,The Odenfeld
,
155
owners of a vessel were not obliged to accept the repudiatory breach of a time charter. In
other cases, however, the ‘no legitimate interest’ restriction has been used to distinguish
Attica Sea Carriers Corp v Ferrostaal Poseidon Bulk Reederei
,
156
the Court of Appeal considered a case where the char-
terers of a ship had a repair obligation. The repairs would have cost twice the value of the
15.6.7
CONTRIBUTORY NEGLIGENCE
In tort, it is well established that the damages recoverable may be reduced by the claim-
ant’s own, contributory negligence.
159
issue was considered by the Court of Appeal in
155
[1978] 2 Lloyd’s Rep 357.
156
[1976] 1 Lloyd’s Rep 250.
157
Lord Denning agreed, but more generally on the basis that
c performance’ where damages would be an adequate remedy.
158
159
See, in particular, the Law Reform (Contributory Negligence) Act 1945.
160
161
162
163
contrary approach carries in its wake. Assume a defendant, clearly liable under a
strict contractual duty. Is his position to be improved by demonstrating that besides
breaching that duty he was in addition negligent?

Where, however, the contractual liability is based on ‘negligence’, but there is no concur-
rent tortious duty, there is no clear authority. There is some suggestion from the case of

164
164
[1975] 1 Lloyd’s Rep 498.
165
Figure 15.2

The Modern Law of Contract
Law Commission has recommended that contributory negligence should always be
available to apportion losses where there has been breach of a contractual duty to take
reasonable care,
166
166
167
168

See Harris, Campbell and Halson, 2002, pp 139–42, and in particular the articles cited at p 142, nn 13 and 14.
The limitation which English law imposes on this approach is that the sum speci
ed in
the contract must be a ‘genuine pre-
estimate’ of the claimant’s loss, and not a ‘penalty’. If
it is the latter, then it will be unenforceable. This distinction was insisted upon by the House
of Lords in
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd
.
170

170
[1915] AC 79. It has more recently been approved by the Privy Council in
Philips Hong Kong Ltd v Attorney
(1993) 61 BLR 41.
171

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915)
This concerned a contract for the supply of car tyres to the respondents, who
relation to any breaches of this contract. The respondents sold tyres below the list
price, which constituted a breach of contract. The appellants brought an action for the
ed sum of £5 per breach. At trial they succeeded, but the Court of Appeal held
that the relevant clause was a penalty clause, and unenforceable. The appellants
Held:
The House of Lords held that the clause was enforceable. The losses against
which the appellants were trying to protect themselves were indirect, and dif
cult to
15.7.1
APPLICATION OF THE PRINCIPLES
The principles in this area are clear enough. The dif
culty comes in applying them to
particular provisions. The area was reconsidered by the Privy Council in
Ltd v Attorney General of Hong Kong
.
171
The case concerned a claim by Philips that they
were not liable to pay the Hong Kong government liquidated damages for delay in comple-
tion of contract works, because these amounted to a penalty. The Court of Appeal of Hong
Kong allowed an appeal from a 
rst instance decision upholding Philips’ claim. Philips
The Modern Law of Contract
was dismissed. In reaching its conclusions, the Privy Council accepted Lord Dunedin’s
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co
that:
172

172
– 173
[2000] 1 Lloyd’s Rep 180.
174
175
176
177
the plaintiff recovered all three. The contract involved the purchase of a machine which
proved to be defective on delivery and was rejected. The disappointed buyer had spent
money on installation costs, and had lost pro
ts from the use of the machine. He was
able to recover the price (restitution), the installation costs (reliance) and the lost pro
178

Restitution also has a more general role to play in relation to contracts which are void,
or rescinded (for example, for mistake or misrepresentation), or where no contract has ever
come into existence. In this context, ‘restitutionary’ damages are part of a more general
concept developed by the courts to prevent the defendant being ‘unjustly enriched’. As
Lord Wright put it in
Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd
:
179

It is clear that any civilised system of law is bound to provide remedies for what has
t, that is, to prevent a man from
15.8.1
RECOVERY OF MONEY
The transfer of money outside a contractual relationship raises particular problems. If I give
you possession of my car in connection with a contract which turns out to be void, I can
maintain an action for the recovery of it relying on my continuing rights of ownership, but
with the transfer of money the position is more complicated. There will not be any possi-
bility of identifying the particular notes or coins which have been transferred, or of
‘unmixing’ funds from a bank account into which they have been paid. In other words, the
money itself has become the property of the person to whom it has been transferred, and
the most that is left is the obligation to repay an equivalent sum. There are four situations
where the possibility of such recovery is clearly recognised: (1) where there is a total failure
of consideration; (2) where the money was transferred under a mistake of fact; (3) where
the money was transferred under a mistake of law; and (4) where money has been paid to
a third party for the bene
t of the defendant.
15.8.2
TOTAL FAILURE OF CONSIDERATION
One example of this situation has already been discussed in
, in relation to the
doctrine of frustration. As we saw there, the House of Lords, in
Fairbairn Lawson Combe Barbour Ltd
,
180
178
The Modern Law of Contract
,
183
184
it was used to allow the recovery of the
full purchase price from the sellers of cars who, unwittingly, did not have the right to sell
at the relevant time, even though the buyer had had some use of the car. The fact that
place meant that there was a ‘total failure of consideration’.
In a contract to design and construct an object, and then to transfer it to the buyer, as
opposed to simply a contract of sale, the failure to transfer ownership will not amount to a
total failure of consideration. This was con
rmed by the House of Lords in
,
185
.
186
15.8.3
MISTAKE OF FACT
Money paid under a mistake of fact will be recoverable, provided that the mistake is as to
a fact which, if true, would have legally,
188
or morally,
189
money or, at least, is suf
ciently serious to justify the requirement of repayment. Where a
contract is void as a result of being based on a common mistake of fact (such as a false
belief in the existence of the subject matter), then recovery will certainly be possible. Other
situations where recovery has been held to be possible include mistaken payments under
faith as a result of the payment.
191
As far as payment to discharge an existing debt is
concerned, it was con
rmed by the Court of Appeal in

192
claim for restitution based on a mistake of fact.
15.8.4
MISTAKE OF LAW
Until 1998, it was accepted that it was not possible to reclaim money paid under a mistake
of law. This was based on the maxim that ‘ignorance of the law is no excuse’, as applied
.
193
However, in
183
184
185
186
187
(1804) 5 East 449; 102 ER 1142.
188
(1856) 1 H & N 210; 156 ER 1180.
189
Larner v LCC
[1949] 2 KB 683.
190
191
Barclays Bank Ltd v Simms and Cooke (Southern) Ltd
[1980] QB 677; [1979] 3 All ER 522.
192
193
,
194
the House of Lords overturned this rule, and held that in certain circumstances
money paid under a mistake of law could be recovered. In coming to this conclusion,
world, and recommendations for change from the Law Commission.
195

194
195
196
197

Kleinwort Benson Ltd v Lincoln City Council (1999)
Facts:
The factual background to this decision was ‘interest rate swap’ agreements
entered into by various local authorities during the 1980s as a means of raising money.
The agreements involved the advance of a capital sum by the lending bank, coupled
with an agreement for mutual payment of interest on a notional sum, one side paying at
The Modern Law of Contract
nal payment was recoverable as having been made on
the basis of a mistake of law.
15.8.5
PAYMENT TO A THIRD PARTY
What is the position in respect of money which has been paid by the claimant to a third
party, but which bene
ts the defendant? Can the claimant recover this money from the
purely as a volunteer, but under some constraint. A mother who decides, out of the good-
This rule was applied in a commercial context in
eld Corp v Great Central
,
198
where the plaintiffs carried out repairs on a bridge which the defendants were
legally obliged (but had refused) to maintain. The plaintiffs were regarded as acting purely
as volunteers, and so could not recover from the defendants the money spent on the work.
An example of a situation where recovery was allowed is
.
199
The plaintiff
in this case paid off arrears of rent owed by the defendant. The reason for doing this was
to avoid the seizure by bailiffs of a carriage belonging to the plaintiff which had been left
on the defendant’s premises. The plaintiff was thus acting under a constraint, and not
simply as a volunteer, and could recover his money.
the money. In
rent. In
15.8.6
RECOVERY OF COMPENSATION FOR A BENEFIT
The claimant, rather than paying money to the defendant, may have done work or provided
t. Since, by de
nition, any compensation for such a bene
t is not de
198
199
200
there is no contract), the claimant will be seeking compensation on a

201
There are three situations to consider, namely: where a contract has been broken;
where it is void; and where agreement is never reached.
15.8.7
CONTRACT BROKEN
A broken contract will not usually give rise to consideration of a
remedy,
but an example of how it can be appropriate can be seen in the following case.
201
t conferred.
202
203
204
205
206
207

Planché v Colburn (1831)
202

Facts:
The plaintiff had been engaged to write a book on Costume and Ancient Armour.
He carried out research and did some of the writing. The defendants then abandoned
the project. There were some further negotiations to try to renew the contract, but these
failed, and the plaintiff then sued for breach of contract, and for a
action for breach of contract would have been unlikely to succeed, because it appears
that the original contract was ‘entire’,
203
15.8.8
CONTRACT VOID
We have seen that money paid under a void contract is recoverable. Equally, work
,
205
for example, the proper procedures were not followed in appointing
the plaintiff as managing director. As a result, his appointment was a nullity. Before this
was discovered, however, the plaintiff rendered services for the company in accordance
with the agreement which he thought had been entered into. Since the company had
ted from this work, he was allowed to recover on a
This enabled him to claim reasonable remuneration for the work which he had
done. Similarly, in
,
206
had provided translation services under an illegal, and therefore void, fee sharing
agreement with a 
rm of solicitors could claim on a
207

The Modern Law of Contract
15.8.9
AGREEMENT NEVER REACHED
It is not uncommon in relation to complex contracts, such as those entered into in the
building or engineering industries, for work to be done on a project prior to the formalisa-
tion of a contract. Although an ‘agreement to agree’ will not be enforced,
208
problem arises with this as long as a contract does materialise at some point. The Court of
Appeal’s decision in
Trentham Ltd v Archital Luxfer

209
rms that in such a situation the
t of it.

The plaintiffs were therefore allowed to recover a reasonable sum for the work done. This
208
Courtney and Fairbairn v Tolaini Bros (Hotels) Ltd
[1975] 1 WLR 297.
209
[1993] 1 Lloyd’s Rep 25 – discussed above,
210
The position as regards money paid will be governed by the rules discussed above, 15.4.
211
212
– 213
214

British Steel Corp v Cleveland Bridge and Engineering Co Ltd (1984)
214

This indicates that although the remedy of restitution does allow the courts to avoid unjust
ciently 
15.9.1
ADEQUACY OF DAMAGES
One of the reasons why the remedy of speci
c performance developed is that, in certain
situations, damages will be an inadequate remedy. If no pecuniary loss can be established,
or if it is impossible to quantify, this would mean that there would be no effective sanction
for a breach of contract, in the absence of the order for speci
c performance. In
215
216
That is, once the claimant has proved a breach of contract the court must award some damages, even if
they are only nominal.
217
218
Malins v Freeman
(1837) 2 Keen 25.
219
Held:
The plaintiffs were able to succeed in a restitutionary claim for the value of what
had been supplied. It should be noted, however, that the defendants’ counterclaim for
compensation for late delivery failed. Since there was no contract, there could be no
obligation concerning the date for delivery, and therefore there was no basis on which
The Modern Law of Contract

Unquestionably, the original foundation of these decrees was simply this, that
cial to him as if the agreement were
cally performed.

,
220
an injustice to stand, but intervened to order performance of the obligations. Now, of
course, the remedy is available in all courts, and the question to be asked is: when will
damages not be regarded as an adequate remedy?
220
(1859) 4 Drew 651; 62 ER 250.
221
On the facts, however, it was felt that the judge had been wrong to make such an order
relating to the plaintiffs’ option to purchase a vessel. A factor that had apparently weighed
heavily with the judge was that the ship concerned was a sister ship of other vessels oper-
ated by the plaintiffs. On the other hand, he had made the order subject to another charter
with a third party which was to operate for the next two years. The Court of Appeal found
these two elements in the judge’s decision to be inconsistent. As May LJ commented:
227

15.9.2
NEED FOR SUPERVISION
The court will be reluctant to order speci
c performance where it would have to supervise
the parties over a period of time to ensure compliance. In
Ryan v Mutual Tontine Westminster
,
229
for example, the court refused to grant speci
c performance of
a landlord’s obligation to have a resident porter ‘constantly in attendance’. It appears,
227
[1982] 2 Lloyd’s Rep 336, p 349.
228
[1968] AC 58; [1967] 2 All ER 1197. The facts of this case are given above,
229
230
231

Co-
The Modern Law of Contract
15.9.3
PERSONAL SERVICES
The courts will be reluctant to grant an order for speci
c performance in relation to employ-
15.9.4
NEED FOR MUTUALITY
A court will not order speci
c performance unless it would also be available against the
party seeking it. Thus, a minor trying to enforce a contract for non-
be likely to fail on the basis of this lack of mutuality. If, however, unenforceable obligations
have in fact already been performed, the court may order the other side to go through with
232
233
234

Price v Strange (1978)
234

Facts:
The defendant had granted the plaintiff the continuation of an underlease of a
at, at an increased rent, in consideration for his agreeing to carry out certain internal
and external repairs. The agreement started to operate, and the plaintiff carried out the
interior repairs. At that point, the defendant purported to terminate the agreement. She
15.9.5
If the granting of an order, which on other grounds would seem to be available, will cause
disproportionate hardship to the defendant, the court will refuse it. This is an aspect of the
general ‘equitable’ nature of the remedy, which requires the court always to have in mind
15.9.6
CLAIMANT MUST HAVE ACTED EQUITABLY
c performance is an equitable remedy, the courts will apply the general equi-
must come with clean hands’. In other words, the claimant will not be granted the remedy
unless he or she, in the eyes of the court, has also acted equitably. For example, the
remedy was refused in
Walters v Morgan
,
237
where the plaintiff had taken advantage of the
defendant’s ignorance as to the true value of property over which a mining lease had been
granted. Similarly, in
,
238
the Court of Appeal refused to
grant an injunction which would have in effect compelled the defendants to go through
with a contract. The plaintiff’s discriminatory pricing policy was regarded as unfair, and a
basis for refusing the order.

15.10
In some situations, the courts will be prepared to grant an injunction restraining a person
from acting in a way which will amount to a breach of contract. The injunction may be
‘interlocutory’, that is, temporary, pending a full trial, or permanent. One example of a
situation where this may be a valuable remedy is in relation to restrictive covenants relating
235
236
237
238
order for speci
c performance, but the trial judge rejected this. His reason was that, at
the time of the contract, the plaintiff’s obligations to carry out the repairs would not have
cally enforceable, so that there was a lack of mutuality. The plaintiff
The Court of Appeal disagreed with the trial judge. By the time of the trial, all the
The Modern Law of Contract
239
240
(1852) 1 De GM & G 604; 42 ER 687. See Waddams, 2001 for the background to this case.
241
(1853) 2 E & B 216; 118 ER 749 – discussed in
242

■
The main remedy for breach of contract is damages, though the courts will
■
The purpose of damages is compensatory; they are intended to put the
performed properly.
■
The alternative measures of damages are:

Expectation interest (including lost pro

Reliance interest (compensating for lost expenditure).

■
Consequential losses can generally be recovered.
■
pecuniary losses in the form of personal injury will be recoverable. Other
pecuniary loss, such as mental distress or disappointment, are
only recoverable in exceptional cases (such as where the purpose of the
contract was to provide pleasure).
■
t that the defendant has
gained through breaking a contract, are only available in exceptional
circumstances
■
Recovery of damages is limited by the rules of remoteness and mitigation.
FURTHER READING
Oxford
Clarendon Press
Expectation damages and uncertain future losses
Oxford
Clarendon Press
Burrows
Remedies for Torts and Breach of Contract
3rd
Oxford
Oxford University Press
Burrows
,
R

Should punitive damages be part of the judicial arsenal in contract
cases
? (
2006
) 26 LS 369

Good faith and remedies for breach of contract
Oxford
Clarendon Press
Fuller
Perdue
The reliance interest in contract damages
) 46 Yale
Goff
Remedies in Contract and Tort
Contract remedies and the consumer surplus
Hedley
Very much the wrong people: the House of Lords and publication of
2000 ] Web JCLI
Liquidated damages clauses are enforceable; penalties are not.
c performance is only available where damages would be an
inadequate remedy.
Injunctions can be used to prevent a breach of contract, but not as a means
c performance when that remedy would not normally be
The Modern Law of Contract
■
Law Commission
Ultra Vires
, Report No 227, 1994
■
McKendrick
and
Graham
, ‘
The sky’s the limit: contractual damages for
■
O’Sullivan
, ‘
Loss and gain at greater depth: the implications of the

Rose
(ed),
Failure of Contracts, Contractual Restitutionary
■
Reece
, ‘
■
Rose
(ed),
■
Sandy
, ‘
Spies, rock stars and restitutionary damages

COMPANION WEBSITE


■
Revise and consolidate your knowledge of Remedies by tackling a series of
Choice Questions on this chapter

■
Test your understanding of the chapter’s key terms by using the Flashcard glossary
■
tune your legal skills by reading our tips and suggestions for Remedies
problem questions
■
Explore Remedies further by accessing a series of web links

Bibliography

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Beyleveld
Brownsword
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Brownsword
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Bishop
Furmston

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contractual relations in business
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Essays on the nature of contract
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, ‘
cient breach: circles in the sky
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Macneil
Relational contract theory as sociology: a reply to Professors Lindenberg and
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,

O’Sullivan
, ‘
’ (
O’Sullivan
Loss and gain at greater depth: the implications of the
Rose
AWB
A History of the Common Law of Contract
Oxford
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AWB
Treitel
,
Frustration and Force Majeure
,
Index

icting forms
icting forms; counter offers
electronic
electronic communication;
; information requests
95
,
bene
enforceability
; promise as test
reliance as test
Entores
promissory
promissory estoppel;
reform proposals
tness for particular purpose
freedom of contract, distinction
; reasonable
; reasonableness,
; signature
; time relevance
information requests
Infoto Picture Library
innocent misrepresentation
intention to create legal relations: basic
; collective agreements
; commercial agreements
commercial agreements, intention to
create legal relations; domestic
agreements
domestic agreements,
and intention to create legal relations;
and formal requirements
objective approach
international in
22
misrepresentation/fraud, distinction
test for misrepresentation
; promissory estoppel
partial performance/provision
; discharge by
; partial provision
; precise and
pre-nuptial agreements
presentiation
private courier, and acceptance
privity: arguments against
arguments for
of debts; as shield not sword
suspensory effect
signature
solicitor/client relationship
specialist areas
c performance: adequacy of
hardship
; mutuality requirement
; refusal
; supervision requirement
standard terms, international
; promisee
revocation
termination of offers
revocation of offers
express terms
express terms;
representations
pre-contractual
statements; statutory controls
third parties: payment, restitution
rescission
362
Contracts (Rights of Third
third party duty, and consideration
commercial application
existing duty to same promissor (
; promise to perform
trust of a promise
ciary relationship
UCTA
Unfair Contract Terms Act
uence
353
value of property
modern law
; nature of
relationship
; presumed
uence
recognised relationships
remedies
; rescission
; third parties
Unfair Contract Terms Ac
misrepresentation, liability
reasonableness, cases
t, compensation
; accord and satisfaction
; enforceable
war, effects

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