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Chapter 4- LLB Contract Law- worksheet 3 Breakdown

Contract law (University of London)

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NATIONS UNIVERSITY (LONDON LLB PROGRAMME)

CONTRACT LAW (SYLLABUS CONTENT) – WORKSHEET 3 A
Elements of contract law
INTENTION TO CREAT LEGAL RELATIONS TWO TYPES OF AGREEMENTS:
BUSINESS/COMMERCIAL AGREEMENTS - PRESUMPTION AND REBUTTAL
DOMESTIC/SOCIAL AGREEMENTS – PRESUMPTION AND REBUTTAL
Weeks v Tybald (1605) – “I’ll pay a 100 pounds to the man who marries my daughter’. These
words were held to be mere puffs and not intended to be binding in a court of law.
Weeks v Tybald (1605)
The defendant “affirmed and published that he would give £100 to him that
should marry his daughter with his consent.” The court held that “It is not
reasonable that the defendant should be bound by such general words
spoken to excite suitors.”
In Edmonds v Lawson: in ascertaining whether the parties intended to enter into legal relations,
the court will not examine the state of minds of the parties involved as this would be too much of
a subjective approach. The court will ask whether or not reasonable parties to such an agreement
would possess an intention to create legal relations. This objective approach is used regardless of
whether the agreement is a social or domestic one or a commercial one.
Edmonds vs Lawson 2000 – (Contract with no evident intention
losing)

Fact: Edmonds accepted a twelve months unfunded pupilage in Lawson’s

Chambers. The agreement was regulated by the consolidated regulations of
the Inns of Court and the Code of Conduct of the bar of England and Wales;
to provide her with a period of practical training hence she was only entitled
to be paid for work she did that “warranted payment”.

She sued alleging that there was a contract between her and the members
of the chambers entitling her to be paid the minimum wage under the
national minimum wage act 1998.

Lawson argued that she was not entitled because the parties had not
intended to create legal relations. It was a voluntary offer by the chambers
to provide Edmonds with education and training in the practical aspects of
legal practice.

Held: It had to be determined objectively whether the parties had intended

to enter into legal relations. The court decided that the parties had intended
to create legal relations which consequently ended up in a contract.

Consideration

A valuable consideration may consist either in some right, interest, profit or

benefit accruing to one party or some for bearance, loss of responsibility
given or undertaken by the other

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Domestic agreements
Presumption
They are not intended to be legally binding unless proven to the contrary:
Husband and wife – see Balfour v Balfour contrast Merrit v Merrit
Balfour v Balfour (1919)
The defendant who worked in Ceylon, came to England with his wife on
holiday. He later returned to Ceylon alone, the wife remaining in England for
health reasons. The defendant promised to pay the claimant £30 per month
as maintenance, but failed to keep up the payments when the marriage
broke up. The wife sued.
It was held that the wife could not succeed because: (1) she had provided no
consideration for the promise to pay £30; and (2) agreements between
husbands and wives are not contracts because the parties do not intend
them to be legally binding.
Merrit v Merrit (1970)
The husband left his wife. They met to make arrangements for the future.
The husband agreed to pay £40 per month maintenance, out of which the
wife would pay the mortgage. When the mortgage was paid off he would
transfer the house from joint names to the wife’s name. He wrote this down
and signed the paper, but later refused to transfer the house.
It was held that when the agreement was made, the husband and wife were
no longer living together, therefore they must have intended the agreement
to be binding, as they would base their future actions on it. This intention
was evidenced by the writing. The husband had to transfer the house to the
wife.
Relatives: see the court’s approach in Jones v Padavatton

Jones v Padavatton (1969)
In 1962, Mrs Jones offered a monthly allowance to her daughter if she would
give up her job in America and come to England and study to become a
barrister. Because of accommodation problems Mrs Jones bought a house in
London where the daughter lived and received rents from other tenants. In
1967 they fell out and Mrs. Jones claimed the house even though the
daughter had not even passed half of her exams.
It was held that the first agreement to study was a family arrangement and
not intended to be binding. Even if it was, it could only be deemed to be for a
reasonable time, in this case five years. The second agreement was only a
family agreement and there was no intention to create legal relations.
Therefore, the mother was not liable on the maintenance agreement and
could also claim the house.

Other agreements: see Simpkins v Pays

Simpkins v Pays (1955)

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The defendant, her granddaughter, and the claimant, a paying lodger shared
a house. They all contributed one-third of the stake in entering a competition
in the defendant’s name. One week a prize of £750 was won but on the
defendant’s refusal to share the prize, the claimant sued for a third.
It was held that the presence of the outsider rebutted the presumption that it
was a family agreement and not intended to be binding. The mutual
arrangement was a joint enterprise to which cash was contributed in the
expectation of sharing any prize.

Commercial agreements
Presumption
They are always intended to be legally binding

See Edwards v Skywards contrast Rose and Frank v Crompton

Edwards v Skyways (1964)
The claimant pilot was made redundant by the defendant. He had been
informed by his pilots association that he would be given an ex gratia
payment (ie, a gift). The defendant failed to pay and the pilot sued. The
defendant argued that the use of the words “ex gratia” showed that there
was no intention to create legal relations.
It was held that this agreement related to business matters and was
presumed to be binding. The defendants had failed to rebut this

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presumption. The court also stated that the words “ex gratia” or “without
admission of liability” are used simply to indicate that the party agreeing to
pay does not admit any pre-existing liability on his part; but he is certainly
not seeking to preclude the legal enforceability of the settlement itself by
describing the payment as “ex gratia”.
Rose v Crompton Bros (1925)
The defendants were paper manufacturers and entered into an agreement with the claimants
whereby the claimants were to act as sole agents for the sale of the defendant’s paper in the
US. The written agreement contained a clause that it was not entered into as a formal or legal
agreement and would not be subject to legal jurisdiction in the courts but was a record of the
purpose and intention of the parties to which they honourably pledged themselves, that it
would be carried through with mutual loyalty and friendly co-operation. The claimants placed
orders for paper which were accepted by the defendants. Before the orders were sent, the
defendants terminated the agency agreement and refused to send the paper.
It was held that the sole agency agreement was not binding owing to the inclusion of the
“honourable pledge clause”. Regarding the orders which had been placed and accepted,
however, contracts had been created and the defendants, in failing to execute them, were in
breach of contract.

Statutory provisions
Procedural agreements between employers and trade unions for the settlement of disputes are not
intended to give rise to legal relations inspite of their elaborate and very legal contents: section
179 of the trade Union and Labour Relations Act 1992.
Section 179 of the trade Union and Labour Relations Act 1992
Whether agreement intended to be a legally enforceable contract
(1) A collective agreement shall be conclusively presumed not to have been intended by the
parties to be a legally enforceable contract unless the agreement-
(a) Is in writing, and
(b) Contains a provision which (however expressed) states that the parties intended that
the agreement shall be a legally enforceable contract.
(2) A collective agreement which does satisfy those conditions shall be conclusively
presumed to have been included by the parties to be a legally enforceable contract.
(3) If a collective agreement is in writing and contains a provision which (however
expressed) states that the parties intend that one or more parts of the agreement specified
in that provision, but not the whole agreement, shall be a legally enforceable contract,
then-
(a) The specified part or parts shall be conclusively presumed to have been intended by
the parties to be legally enforceable contract, and
(b) The remainder of the agreement shall be conclusively presumed not to have been
intended by the parties to be such contract.
(4) A part of a collective agreement which by virtue of the subsection (3) (b) is not a legally
enforceable contract may be referred to for the purpose of interpreting a part of the
agreement which is such a contract.

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Letters of comfort
For many years, holding companies have given letters of comfort to creditors of subsidiaries.
Such letters have always been presumed to be statements of present intentions, rather than
legally binding.

See Kleinwort Benson Ltd v Malaysia Mining Co.

Kleinwort Benson v Malaysia Mining Corp (1989)
The claimant bank agreed with the defendants to lend money to a subsidiary of the defendants.
As part of the arrangement, the defendants gave the claimants a letter of comfort which stated
that it was the company’s policy to ensure that the business of its subsidiary is at all times in a
position to meet its liabilities. The subsidiary went into liquidation and the claimants claimed
payment from the defendants.
It was held that the letters of comfort were statements of the company’s present policy, and
not contractual promises as to future conduct. They were not intended to create legal relations,
and gave rise to no more than a moral responsibility on the part of the defendants to meet the
subsidiary’s debt.
Transactions Binding in honour only
If the parties state that an agreement is binding in honour only, this amounts to an express denial
of intention to create legal relations.
Jones v Vernon Pools Walford v Miles
Jones v Vernon Pools (1938)

The claimant claimed to have won the football pools. The coupon stated that the transaction
was “binding in honour only”.

It was held that the claimant was not entitled to recover because the agreement was based on
the honour of the parties (and thus not legally binding).

Walford v Miles: HL 1992

Agreement to Negotiate is Unworkable as a Contract
The buyers and sellers of a company agreed orally for the sellers to deal with the buyers
exclusively and to terminate any negotiations between them and any other competing buyer.
The sellers later decided not to proceed with their negotiations with the buyers and went on to
sell the company to another party. The buyers sued for breach of the oral agreement. The
sellers’ defence was that the parties were still in negotiations and the oral agreement was an
agreement to negotiate in good faith.

Held: The oral agreement was unenforceable. An agreement to negotiate in good faith was
unworkable in practice because while negotiations were in existence, either party was entitled
to withdraw from those negotiations at any time and for any reason. Such an agreement was
uncertain and had no legal content.

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Lord Ackner said: ‘The reason why an agreement to negotiate, like an agreement to agree, is
unenforceable is simply because it lacks the necessary certainty. The same does not apply to an
agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the
provision which it is said has to be implied in the agreement for the determination of the
negotiations.

How can a court be expected to decide whether, subjectively, a proper reason existed for the
termination of negotiations? The answer suggested depends upon whether the negotiations have
been determined ‘in good faith’. However, the concept of a duty to carry on negotiations in good
faith is inherently repugnant to the adversarial position of the parties when involved in
negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long
as he avoids making misrepresentations.

WORKSHEET 3 B – certainty of terms

Scammell Vs Ouston (1941)

Contract law – Contract terms – Sale of goods
Facts
Ouston agreed to purchase a new motor van from Scammell but stipulated that the purchase
price should be set up on a hire-purchase basis over a period of two years, with some of the
figure being part-paid by a van that Ouston already owned. Before the hire purchase terms had
been agreed, Scammell refused to proceed with the sale and as a result of this, Ouston brought
a claim for breaching the contract for the supply of the vehicle. Scammell claimed that the hire-
purchase agreement had not been implemented and therefore neither party was bound and
the agreement was void on the basis of uncertainty. The trial judge awarded Ouston damages
as it was believed that the contract had been wrongly repudiated. Scammell appealed to the
Court of Appeal who dismissed his action. Scammell re-appealed the decision of the trial judge
to the House of Lords.

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Issue
The court was required to establish whether the parties had agreed and constructed a contract.
Specifically the court was required to consider the phrase ‘on hire purchase terms’ and whether
this could satisfy the law and bind the parties. Scammell argued that the term was too vague to
be binding. Ouston argued that there was clearly contractual intention and this was enough to
constitute the agreement between the parties.
Held
The court found that the clause regarding the hire-purchase terms was so vague that there
could not be a precise meaning derived from it. As a result of this finding, there was no
enforceable contract between the parties and the appeal was dismissed.

Hillas and Co v Arcos Ltd (1932) 147 LT 503

Interpretation of Terms – Agreement to Negotiate – Enforceability
Facts
Hillas bought some timber from the timer merchants Arcos Ltd. They purchased 22,000 units of
timber, and the agreement also contained an option that they would be able to buy up to
100,000 units the next year at a discounted rate of 5%. The next year, Arcos refused to sell
them the timber at this rate and Hillas sued for breach of contract. Arcos claimed that the
agreement could not be valid because it required further agreement in the future.
Issues
Whether or not the agreement to enter into another agreement was an enforceable term of
the first agreement. Whether or not the contract to enter into a future contract was valid.
Held
There was a valid and enforceable agreement that allowed Hillas to purchase 100,000 staves of
wood for at a reduced rate. This was more than a mere ‘agreement to agree’ because the only
thing necessary for the agreement to be brought into existence was for the buyers to decide to
exercise their option to purchase the wood. Whilst the price had yet to be agreed, this was only
because it naturally fluctuated as a commodity depending on market conditions. Where the
issue was in the balance, as here, it was held that the court should try to interpret the words of
the agreement in such a way as to preserve the subject matter of the agreement rather than
destroying it, and contracts made between merchants in this way should be upheld where the
court can interpret the terms in order to do so.
In other words, The court held that the term ‘of fair specification’ did provide certainty as it
clearly meant something to the parties as they had contracted with each other for a long time.
Thus, in some circumstances even vague terms can amount to certainty/enforceability

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Nicolene Ltd Vs Simmonds (1953)

Facts: There was a phrase in the contract that said “we are in agreement that the usual
conditions of the acceptance apply”. Is this phrase too uncertain?

Held: There is a principle that if there is an uncertainty or meaningless phrase in the contract, if
it can be deleted without it having an effect on the working of the contract then it will be
ignored by the court. Thus, the court ignored the phrase here because there had been no
“usual conditions”

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TERMS
The importance of the distinction between terms and representations
Terms: are statements, which form the express terms in a contract. If a term is breached, then the
claimant can sue for breach of contract
Representations: these are statements made prior to the existence of a written contract but
which however, may form the basis or foundation of the written contract. If the statement is
false, then the claimant can sue for misrepresentation. Representation therefore, can become
terms.
Whether a statement made prior to a contract becomes a term of the contract depends upon the
intention of the parties. In trying to ascertain this intention, the court may take into account the
following:
1. The importance of the statement to the parties: Bannerman v White, Schawel v Reade,
Couchman v Hill
2. The respective knowledge of the parties: Oscar chess v Williams, Dick Bentley
Productions v Harold Smith
3. Whether a contract has been reduced in writing: Evans & Sons v Andrea Merzario
4. Reliance on the statement: Schawel v Reade
5. Where one party clearly relied upon the statement of the other indicating that it is a term-
Esso Petroleum v Mardon

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1. Bannerman v White (1861) 10 CBNS 844

The claimant agreed by contract to purchase some hops to be used for making beer. He
asked the seller if the hops had been treated with sulphur and told him if they had he
wouldn't buy them as he would not be able to use them for making beer if they had. The
seller assured him that the hops had not been treated with sulphur. In fact they had
been treated with sulphur.

Held:

The statement that the hops had not been treated with sulphur was a term of the
contract rather than a representation as the claimant had communicated the
importance of the term and relied on the statement. His action for breach of contract
was successful.

Schawel v Reade [1913] 2 IR 81

The claimant purchased a horse from the defendant. The claimant went to see the horse and
had told the defendant that he wished to use the horse for stud purposes. Whilst he was
examining the horse, the defendant told him that the horse was sound. He stated that if there
was anything wrong with the horse he would tell him and told him there was no need to get a
vet to check him out. In reliance of these statements the claimant purchased the horse which
turned out to have a hereditary eye disease and was therefore not able to be used as a stud.

Issue:

Whether the assurance as to the health of the stallion could be considered an effective term of
the contract.

Held:

The statement was a contractual term. The defendant had assured him he could rely on his
word and the claimant had communicated the purpose for which the horse was to be used. The
defendant was thus in breach of contract.

Generally, where the parties have put the contract in writing that will be presumed to reflect
the intention of the parties and the courts will not consider anything outside of these, the
parole evidence rule as in the case of Couchman Vs Hill (1947)

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Generally where the parties

have put the contract in
writing that will be
presumed to reflect
the intention of
the parties and
the courts will not consider
anything outside of these,
the parole evidence
rule.
Generally where the parties
have put the contract in
writing that will be
presumed to reflect
the intention of

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the parties and

the courts will not consider
anything outside of these,
the parole evidence
rule.
Classification of terms in a contract
1. Expressed
2. Implied
3. Conditions, warranties and innominate terms
Expressed terms
Are stated in black and white in the contract and are therefore easily identifiable. List the
expressed and implied terms in a contract of employment.

Implied terms
When looking at implied terms it is important to bear in mind that the courts are generally
reluctant to imply terms into a contract. The courts generally consider their role to be the
interpreters of the contract than the makers of it.

The more frequently the court attempts to imply terms into a contract the more likely the court
has created the contract than interpret it. See the case of Crossley v Faithful and Gould
Holdings Limited (2004).
Terms are implied into a contract by: statute, custom, court and the nature of the relationship
Terms implied by the court – The Moorcock case, Spencer & another v Secretary of state for
defence (2012), Attorney General of Belize v Belize Telecom Ltd

Attorney General of Belize v Belize Telecom Ltd

Whether term regarding director’s vacating office could be implied
into company articles

(Belize) A company had been formed to manage telecommunications in Belize. The parties
disputed the interpretation of its articles. Shares had been sold, but the company was structured
so as to leave a degree of control with the government. It was argued that a term was to be
implied requiring resignation of a director when the class of shareholdings he represented ceased
to exist.

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It was Held: The implication of a term is an exercise in the construction of the contract as a
whole. The background facts should have been admitted as evidence to interpret the articles in
this particular situation: ‘The implication as to the composition of the board was not based upon
extrinsic evidence of which only a limited number of people would have known but upon the
scheme of the articles themselves and, to a very limited extent, such background as was apparent
from the memorandum of association and everyone in Belize would have known, namely that
telecommunications had been a state monopoly and that the company was part of a scheme of
privatisation.’

Lord Hoffmann said that the court ‘cannot introduce terms to make [a contract, statute or articles
of association] fairer or more reasonable. It is concerned only to discover what the instrument
means.’and ‘It follows that in every case in which it is said that some provision ought to be
implied in an instrument, the question for the court is whether such a provision would spell out in
express words what the instrument, read against the relevant background, would reasonably be
understood to mean.
‘An unexpressed term can be implied if and only if the court finds that the parties must have
intended that term to form part of their contract: it is not enough for the court to find that such a
term would have been adopted by the parties as reasonable men if it had been suggested to them:
it must have been a term that went without saying, a term necessary to give business efficacy to
the contract, a term which, though tacit, formed part of the contract which the parties made for
themselves.’

Terms implied by statute – Sale of Good Act 1979 – sections 12-15- title, sample, description,
quality and suitability- Slater v Finning, Wilson v Best Travel

Slater v Finning
Facts
Buyers bought a camshaft for their motor fishing vehicle- this was very unsatisfactory in
that there was noise from the engine and considerable wear to parts of the camshaft.
However, the reason the camshaft didn't work was because of the particular nature of
the vessel.
Held
Where a buyer purchased goods from a seller who dealt in goods of that description
there was no breach of the implied condition for fitness contained in s14(3) SoGA where
the failure of the goods to meet the intended purpose arose from an idiosyncrasy, not
made known to the seller by the buyer, in the buyer or in the circumstances of the use
of the goods by the buyer, and that the principle applied whether or not the buyer was
himself aware of the idiosyncrasy.

Wilson v Best Travel [1993] 1 All ER 353

The claimant was injured when he fell through some glass patio doors whilst
on holiday in Greece. The glass conformed to Greek safety standards but did
not conform to British safety standards. The claimant brought an action

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against the travel agent asking for a term to be implied as a matter of law,
that all accommodation offered by the defendant should conform to British
safety standards.

Held:

The courts did not imply a term. Whilst this was a contract of a defined
type, it was reasonable for the travel agency to ensure that all
accommodation offered, no matter where in the world, conformed with
British safety standards.
 

Terms implied by custom/ trade usage – Hutton v Warren

Hutton v Warren [1836] EWHC Exch J61

Whether custom could become an implied term of a lease where the lease is
silent

The claimant was a farmer who had a tenancy on the defendant's fields. The
claimant had planted corn and Barley on the fields and worked the fields to
ensure the crops would grow. Before the field was due to be harvested the
tenancy was terminated. The claimant then submitted a bill to the
defendant for the work and cost of seed spent on the field as was customary
in farming tenancies. The defendant refused to pay stating there was
nothing in the tenancy agreement stating that such compensation was
payable.

Held:

The court implied a term into the tenancy providing for compensation for
the work and expenses undertaken in growing the crops. The term was
implied as it was common practice for farming tenancies to contain such a
clause.
 

Terms implied by the nature of the relationship – Malik v BCCI, Liverpool City Council v Irvin,
Equitable Life Assurance Society v Hyman

Malik v BCCI
In Malik v BCCI former employees of BCCI brought claims in the High Court seeking
damages for breach of their employment contracts, on the basis that BCCI's business
had been conducted so corruptly that future potential employers in the financial sector -
in which the standing of an employee as an honest and trustworthy person is essential -

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would not now wish to employ them since they had been tainted by their association
with a corrupt employer.

The requirement to find a contractual term that had been breached by BCCI was
satisfied in the unanimous opinion of the House of Lords, by founding the claim on
breach of the duty of trust and confidence, which is implicit in every contract of
employment.

It was held that one aspect of that duty was the employer's obligation not to run its
business corruptly and dishonestly.

Liverpool City Council v Irwin [1977] AC 239 House of Lords

Implying a term including an obligation on the part of a council where
tenancy agreement did not expressly stipulate any obligation

Liverpool city council owned a block of flats in which the defendant 
was a tenant. The common parts of the flats, the lifts, stair cases, 
rubbish chutes etc, had fallen into disrepair. A rent strike was 
implemented by many of the tenants including the defendant. The 
council sought to evict the defendant for non payment of rent and 
she counter claimed for breach of an obligation to repair. However, 
the tenancy agreement did not mention any obligation to repair. In 
fact the tenancy agreement only imposed obligations on the tenant 
with no mention of the obligations of the landlord. The defendant 
asked the court to imply a term that the council had an obligation to
repair the common parts of the block of flats.

Held:

The courts did imply a term. The implied term arose as a legal 
incident in contracts of a defined type between landlord and tenant 
that the landlord was to take reasonable care to maintain the 
common parts. However, there was no breach of this duty.
 
Equitable Life Assurance Society v Hyman
The directors of the Society had calculated the final bonuses to be allocated to policyholders in a
manner which was found to be contrary to the terms of the policy. The language of the article
conferring the power to declare such bonuses contained no relevant express restriction on the
power to do so. The critical question was whether a relevant restriction was to be implied.

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Held: Where a life assurance company had issued retirement policies which guaranteed certain
returns, the policy holders had a proper and reasonable expectation that those promises would be
met. The discretion given to the directors to set the levels of returns must be read to be subject to
the prior expectation created, and must be exercised accordingly subject to those expectations.

The parole evidence rule: this rule states that if there is a contract in writing, the courts will
interpret the terms of the contract by reference to the written contract.

Hawrish v Bank of Montreal (1969) Collateral and written

must not contradict

Facts: Hawrish guaranteed the debts of company (signed a

guarantee).He says that before he signed the contract of
guarantee, the bank manager told him that the guarantee would
cover the guaranteed companies existing debt only itwouldn’t
cover their future debt (oral statement).This pre-contractual
utterance, which induced him to enter into the contract, turned
out to be in flat contradiction with what the contract of
guarantee actually said
Held: The Court decided for the Bank. The oral evidence
contradicts the written agreement and is inadmissible.

Ratio: There must be clear intent that the parties are creating a
separate agreement (collateral agreement).
A collateral agreement cannot be established where it is
inconsistent with or contradicts the written agreement
Parole evidence of a distinct collateral agreement or
supplementary agreement that does not contradict or is not
inconsistent with a written instrument is admissible
The collateral contract becomes a way for the courts to
circumvent the parol evidence rule when it does not contradict
the written agreement
Think of it as: you wont buy the property unless they fix the
heating. The completion of the fixing of the heating brings rise
to the next contract. They cannot enforce the second contract
without the collateral one (the one about fixing the heating)

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Exceptions:
1. Oral evidence may be given of trade practice or custom : Hutton v Warren
2. Evidence may be given to show that the parties agreed orally that their written consent
should not take effect until a condition precedent has been satisfied
3. Oral evidence may be given as an addition to a written contract if it can be shown that the
document was not intended to comprise all the agreed terms. SS Ardennes (Cargo
Owners) v SS Ardennes (Owners)
Classification of terms into major and minor undertakings
Conditions and Warranties
Conditions – Poussard v Spiers
Warranties – Bettini v Gye
Innominate terms: The Hansa Ford Case, Hong Kong Fir v Kawasaki, The Mihalis
Angelos, The Naxos, Bunge v Tradax, Barber v NWS Bank

Barber v NWS Bank

Facts
The claimant entered into a hire-purchase agreement for a car with K Ltd; he paid off
the installments and exercised his option to have the car transferred to him.
However, it later transpired that the car was subject to a prior registered finance
agreement, having been let on hire purchase by another finance company to C Ltd, who
had sold it to K Ltd before the property had passed to C Ltd.
The claimant sought to rescind the contract; this was despite the fact that in actual fact
no claims could be made against him because s27(3) of the Hire Purchase Act 1964
vests title in a hire-purchaser once they have paid off the purchase price.
Held
It was an express condition of the agreement (analogous to s12 SoGA) that the
defendant was at the date of the agreement the owner of the car and would so remain
until payment of the balance of the price.
The defendant was in breach of that condition since it did not have title at the date of the
agreement or at any time prior to the plaintiff's letter of rescission.
The condition was breached even though the plaintiff obtained good title to the car
because of s27(3) of the Hire Purchase Act 1964 (though NB: Sir Roger Parker relied
on ss6 which expressly stated that 'nothing in this section shall exonerate the trade or
finance purchaser.'
Key points
The case highlights the difference between a right to sell and a power to pass good title-
the defendant was liable for having no right to sell even though he had a power pass
good title under the Hire Purchase Act.

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Conditions- Poussard v Spiers (1876) 1 QBD 410

Breach of condition of a contract

Madame Poussard entered a contract to perform as an opera singer for three
months. She became ill five days before the opening night and was not able
to perform the first four nights. Spiers then replaced her with another opera
singer.

Held:

Madame Poussard was in breach of condition and Spiers were entitled to end
the contract. She missed the opening night which was the most important
performance as all the critics and publicity would be based on this night.

Warranties- Bettini v Gye (1875) LR 1 QBD

Breach of a condition of a contract
Facts
The claimant, Alessandro Bettini (a tenor) entered into an agreement with
the defendant, Frederick Gye. The terms of that agreement were that Bettini
would not perform within 50 miles of London in any venue, apart from the
Royal Italian Opera Covent Garden within the time period of 1 January 1875
to 1 December 1875. Further, between 30 March 1875 and 13 July 1875,
Bettini would perform for Gye in return for £150 per month. The agreement
also stipulated that Bettini must be in London 6 days before rehearsals
“without fail”. Bettini however arrived two days before his performance
period was to begin. Gye however declined to have him perform at his opera.
Issues
The issue in the case was whether the requirement to be in London “without
fail” 6 days before the start of rehearsals was a condition of the contract and
therefore, whether Gye could rescind the contract on the basis of the breach
of that term.
Held
Blackburn J held that this requirement did not amount to a condition, but was
instead a warranty which meant that Gye could not terminate the contract
on that basis. A breach of this warranty is not a repudiation of the contract,
and Gye would only have an action in damages.
In order for to determine whether the contract was repudiated, the court
needed to ask whether what was breached was a term.

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“going to the root of the matter, so that a failure to perform it would render
the performance of the rest of the contract by the plaintiff a thing different
from what the defendant has stipulated for.” (Blackburn J)

Innominate terms-
The Hansa Nord [1976] QB 44
Construction of contractual terms as ‘conditions’ and the right to terminate a
contract.

Facts

Pursuant to a contract of sale, a German company agreed to sell a Dutch

company 12,000 tons of citrus pulp pellets for use in cattle feed. A clause in
the contract stipulated that the shipment is “to be made in good condition.”
The buyer sought to reject the goods on the ground that “not all of the
goods” were shipped in good condition. However, all of the goods were
usable for the same intended purpose.

Issue

The question arose as to whether the buyer was entitled to reject the goods
on the grounds that (1) the term “good condition” is construed as a
contractual condition’; or, (2) the breach was substantial.

Held

As a general rule, whether a contractual breach entitles the other party to

repudiate the contract depends on whether the breached stipulation, on the
contract’s construction, constitutes a ‘condition.’ In the case law following
the Sales of Good Act 1893, the right to repudiate is the breach of a
condition or if it is so substantial as to go to the root of the contract. On the
facts, firstly, in assessing the term “shipped in good condition,” the Court
viewed that the buyer should not have a right to reject an entire cargo
shipment due to ‘some’ goods being in bad condition. Thus, the term must
be construed as an intermediate stipulation and not a condition, the breach
of which does not give the buyer the right to reject the goods but solely a
right to claim for damages. Secondly, as all of the goods are usable for the
same intended purposes, there is no substantial breach of the term that goes
to the root of the contract. Accordingly, the buyer did not have the right to
reject the goods but solely to claim for damages for the breach of an
intermediate term.

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*If the court had granted damages for all goods on this consignment, it
would have opened a floodgate in similar cases and would have allowed him
as a buyer to rescind the entire contract.

Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 

QB 26 Court of Appeal
Construction of contractual terms as ‘conditions’ and repudiatory
breach of contract.

A ship was chartered to the defendants for a 2 year period. The 
agreement included a term that the ship would be seaworthy 
throughout the period of hire. The problems developed with the 
engine of the ship and the engine crew were incompetent. 
Consequently, the ship was out of service for a 5 week period and 
then a further 15 week period. The defendants treated this as a 
breach of condition and ended the contract. The claimants brought 
an action for wrongful repudiation arguing the term relating to 
seaworthiness was not a condition of the contract.

Held:

The defendants were liable for wrongful repudiation. The court 
introduced the innominate term approach. Rather than seeking to 
classify the term itself as a condition or warranty, the court should 
look to the effect of the breach and ask if the breach has 
substantially deprived the innocent party of the whole benefit of the 
contract. Only where this is answered affirmatively is it to be a 
breach of condition. 20 weeks out of a 2 year contract period did 
not substantially deprive the defendants of whole benefit and 
therefore they were not entitled to repudiate the contract.

The Mihalis Angelos [1970] 3 WLR 601

The owners of the ship, The Mihalis Angelos, chartered the ship to the
defendant to use for the carriage of some cargo. A clause in the agreement

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stated the ship was expected ready to load on 1st July. In fact the owners
had no grounds for believing the ship would be ready to load on that date as
it was in Hong Kong at the time and would not be ready until at least the
14th of July and in fact it was not ready at that date. The defendant
cancelled the contract on 17th of July. The cargo that they expected to be
carrying had not arrived due to the bombing of a railway in Vietnam. The
ship owners brought an action against the defendants for anticipatory
breach. The defendants argued that the claimant was in breach of condition
of the contract by not be ready to load on the specified date.

Held:

The expected ready to load clause was a condition despite the fact it had
caused no loss to the defendant. The classification as a condition was said to
be because of the need for commercial certainty in shipping contracts.
 

Bunge Corporation v Tradax [1981] 1 WLR 711 House of Lords

A contract for the sale 5,000 tons of soya beans required the buyers to give
the sellers 15 days notice of readiness of loading. This term was stated as a
condition. The buyers gave a shorter notice period and the sellers treated
this as terminating the contract and claimed damages. The price of soya
beans had dropped by over $60 per ton. The initial hearing was decide by
arbitration where it was held that the sellers were entitled to end the
contract and awarded $317.500 representing the decrease in value of the
soya beans. The buyers appealed to the High court who reversed this
decision applying the innominate term approach from Hong Kong Fir. The
Court of Appeal reversed the decision and the buyers appealed to the House
of Lords.

Held: the term was stated as a condition and should be treated as such. The
Court held that, in a written contract, where a stipulated term has to be 
performed by one party as a prerequisite to the other party’s ability to 
perform their obligations, the term ought to be constructed as a condition. 

Barber v NWS Bank

Facts
The claimant entered into a hire-purchase agreement for a car with K Ltd; he paid off
the installments and exercised his option to have the car transferred to him.

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However, it later transpired that the car was subject to a prior registered finance
agreement, having been let on hire purchase by another finance company to C Ltd, who
had sold it to K Ltd before the property had passed to C Ltd.
The claimant sought to rescind the contract; this was despite the fact that in actual fact
no claims could be made against him because s27(3) of the Hire Purchase Act 1964
vests title in a hire-purchaser once they have paid off the purchase price.
Held
It was an express condition of the agreement (analogous to s12 SoGA) that the
defendant was at the date of the agreement the owner of the car and would so remain
until payment of the balance of the price.
The defendant was in breach of that condition since it did not have title at the date of the
agreement or at any time prior to the plaintiff's letter of rescission.
The condition was breached even though the plaintiff obtained good title to the car
because of s27(3) of the Hire Purchase Act 1964 (though NB: Sir Roger Parker relied
on ss6 which expressly stated that 'nothing in this section shall exonerate the trade or
finance purchaser.'
Key points
The case highlights the difference between a right to sell and a power to pass good title-
the defendant was liable for having no right to sell even though he had a power pass
good title under the Hire Purchase Act.

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Contrast: 1.

Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989;

[1976] 3 All ER 570
Facts
In order to help finance the building of a ship, an agreement was reached with some
charterers to use the ship upon its completion. This agreement was reached before the
ship had even been built and referred to the ship as 'Osaka 354' based on where it
would be built
However, because of the size of the ship it was actually built at Oshima 004, though the
physical attributes corresponded with those required under the respective charterer.
By the time the ship was completed the market had collapsed and the charterers sought
to escape their obligation by rejecting the vessel on the ground that the vessel tendered
did not correspond with the contractual description in that it was Oshima 004 and Osaka
354.

Held
The authorities on 'description' in sale of goods were not to be extended, or applied to
contracts of the present nature.
Even if a strict and technical view had to be taken as regards the description of
unascertained future goods, as to which each detail of the description must be assumed
to be vital, it was right to treat other contracts generally so as to ask whether a particular
item in a description constituted a substantial ingredient of the 'identity' of the thing sold,
and, only if it did, to treat it as a condition.
In the present case it was plain that the hull or yard number of the vessel had no special
significance for the parties so as to raise it to a matter of fundamental obligation.

Schuler v Wickman Tools [1974] AC 235 House of Lords

Schuler were manufacturers of certain tools and Wickman were a sales

company granted the sole right to sell certain tools manufactured by
Schuler. A term of the contract between the parties was described in the
contract as being a condition and provided that Wickman would send a sales

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person to each named company once a week to solicit sales. This imposed
an obligation to make 1,400 visits in total. Wickman failed to make some of
the visits and Schuler terminated the contract for breach of condition.

Held:

Despite the fact the contract had expressly stated the term was a condition,
the House of Lords held that it was only a warranty.

Contrast the following traditional approaches to the distinction in the following cases:
 Lombard North Central Vs Butterworth (1987)
 Union Eagle Vs Golden Achievement (1997)

Lombard North Central Vs Butterworth (1987)

The defendant entered into a hire-purchase contract for a computer, time being stipulated to be
‘of the essence’ in relation to the payment obligations. He defendant defaulted, and the plaintiff
took possession of the goods, and and sought payment of the balance due.

Held: Time is of the essence where the parties have expressly stipulated in their contract that
time is to be of the essence. The same result will follow if the contract contains a clause to the
effect that any breach of such a clause will entitle the innocent party to terminate (or cancel) the
agreement. The injured party is relieved of any obligation that remains unperformed on his part.
In addition the injured party may claim for damages on the basis that upon termination of the
contract the obligations of both parties remaining unperformed are brought to an end.

Union Eagle Vs Golden Achievement (1997)

(Hong Kong) The parties had contracted with each other for the sale of land. Completion was to
take place on the appointed day at 5:00pm. A ten per cent deposit had been paid, and time had
been made of the essence. The seller sought to rescind the contract when the buyer was 10

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minutes late in tendering the completion money.

Held: Equity will not prevent the rescission of a land contract for delay in completion. If time
was of the essence, strict compliance must have been what was intended.

Ashme Singh LLB, ACCA PG (Dip) Laws

Lecturer
Nations school of Law

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Answers to the above Questions
Question 1 

Alban is a surveyor. He bought a car from Brenda four months ago.
The   car   is   a   9   months   old   Landmaster   car.   Alban   uses   it   for   his
practice. He paid GBP 12 500 for the Landmaster and was given a
written   guarantee   in   the   following   terms   ”Brenda’s   Garage   Ltd
guarantees that for three months from the date of purchase it will
put right free of charge any defects in the vehicle which cannot be
discovered   on   proper   examination   at   the   time   or   purchase.
Thereafter all work and materials will be charged to the customer.”

the sales manager recommended to Alban that he should take out a
special extended warranty under which for the payment of GBP 350
the car would have been guaranteed in respect of all defects for a
further two years, but Alban declined.

Last week the engine and gearbox seized up. The repairs will cost
GBP £2000.

Advise Alban. Would your answer be different if he used the car to
take his wife shopping on Saturdays?

Steps to answering the above question

Question   1  You  should   begin   this

problem   by   considering   the   facts   given.
Note   that   at  the  end  of  the  problem,  a
variant  on  the  facts  is  provided.  The
variant  involves  the   personal  use  of  the
car  –  this  is  likely  to  give  rise  to  issues
about  the  legal  treatment  of   consumers
by statute law.
The  first   question to  establish   is  whether
or not there has been a breach of contract
when  the  engine  and  gearbox  seized  up.
To  establish  this,  it  is  necessary  to
determine what the terms of the contract
are.   An   express   term   is   that   Brenda’s
garage   will   put   right   any   problem   which

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occurs   within   three   months.   This   term   is

of   no   use   to   Alban   because  his  problem
has  occurred  outside  the  three  months.
The issue then becomes, in the absence of
any other express term, whether or not a
term can be implied into the contract. This
contract  is  for  the  sale of  a  good  and  you
must consider the Sale of Goods Act 1979.
Section 14(2) provides that where the seller
sells in the course of a business, ‘there is an
implied term that the goods supplied under
the contract are of satisfactory quality’. You
need to consider whether or not satisfactory
quality   is  established  here  (by  applying
ss.14(2A),  (2B)  and  (2C)  of  the  Act).  You
need  to  consider   whether   or   not   the
statutorily   implied   term   is   negatived   or
varied by the express agreement between
the parties. If this is a consumer sale (as
per   the   variant),   the   statutorily   implied
terms   are   compulsory   and   cannot   be
varied   or   excluded   by   the   parties   (s.6
Unfair Contract Terms Act 1977 – covered
in   Chapter   6).   If   this   is   not   a   consumer
contract,  the  statutorily  implied  term  can
be  excluded  to  the  extent  that  it   is
reasonable to do so.
If this is not a consumer sale and the term 
is implied (and not negated by the 
presence of the express terms) then the 
buyer, Alban, cannot reject the goods 
where the breach of a condition implied by 
s.14 is so slight that it would be 
unreasonable to reject them (by reason of 
s.15A of the Sale of Goods Act).
With regard to the variant to the 

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question, you need to consider whether 
or not the use of the car to take his wife 
to the market on Saturdays removes the 
contract from one made in the course of 
a business.

A valid contract is a written or expressed agreement between two parties to
provide a product or service. There are essentially six elements of a contract
that make it a legal  and binding  document.  In  order  for a  contract  to  be
enforceable, it must contain:

 An offer that specifically details exactly what will be provided
 Acceptance,   or   the   agreement   by   the   other   party   to   the   offer
presented
 Consideration, or the money or something of interest being exchanged
between the parties
 Capacity of the parties in terms of age and mental ability
 Intent of both parties to carry out their promise

In   other   words,   a   contract   is   enforceable   when   both   parties   agree   to

something, back the promise up with money or something of value, both are
in sound mind and intend to carry out their promise and what they promise
to do is within the law. Therefore, a valid contract was formed. Consideration
was exchanged. Alban used the vehicle for his practice as a surveyor rather
than for ordinary use. This means he might be seen as dealing as business
and not as a consumer. On the other hand his business is not about cars so
it might be ruled that he is dealing as a consumer.
The fact that Brenda gave the guarantee suggests that she is confident she
sold him a vehicle in roadworthy condition. Under the Sale of Goods Act the
item sold must be satisfactory. the car appears to be so as it ran for four
months. The car company offered him the warranty for the small sum of GBP
350 which again implies that Brenda’s Car Ltd are confident in what they
sell.

If there were serious defects then these should have been discovered when
Alban inspected the car as he was invited to do. Any defects that could have
been seen on a reasonable inspection of the car are permissible under the
Sale of Goods Act.

The three months guarantee period has run out. Therefore, Alban cannot use
that.

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In   the   Karsales   (Harrow)   v   Wallis   [1956]   case  Which   fell   under   the
Doctrine of Fundamental Breach, the Defendant (Mr. Wallis) agreed to buy a
used car if the vendor was able to find a company with which the Defendant
could   enter   into   a   hire-purchase   agreement.   The   vendor   found   such   a
company   (the   Claimant).   Once   the   agreement   was   entered   into,   the
Defendant inspected the vehicle he had agreed to purchase through the hire
purchase agreement and found that it had been substantially altered from
the version he had previously seen and agreed to buy. Namely, the radio
was missing, as were the chrome strips around the body, the new tires had
been replaced by old ones, the bumper was not held together with rope and
perhaps most importantly, the car could not start. The Defendant therefore
refused   to   pay   for   the   car.   The   hire   purchase   agreement   contained   an
exclusion clause which stated that ‘No condition or warranty that the vehicle
is roadworthy or as to its age, condition or fitness for any purpose is given
by   the   owner   or   implied   herein.’   The   issue   in   this   case   was   whether   the
exclusion   clause   was   valid   even   in   cases   where   there   was   a   fundamental
breach of the contract.

It was held that Karsales was under an obligation to provide a car which is in
substantially   the   same   condition   as   when   Mr.   Wallis   inspected   it.   This   is
particularly the case for hire purchase agreements where the purchaser had
previously inspected the vehicle. More broadly, where there is a fundamental
breach of a contract, a party cannot rely on an exemption clause. Not in the
least, the Sale of Goods Act 1979 would still imply a term into the contract
that the goods will be fit for purpose which cannot be excluded through such
a clause.

Therefore, this case says that if there is something crucial that is wrong (like
the   engine   is   missing)   then   the   vehicle   does   not   count   as   a   car.   The
problems   with   the   motor   vehicles   in   this   case   are   not   that   severe.   The
seizing up of the gearbox could be down to bad luck or to Alban mistreating
the car.

Alban cannot void the contract. He cannot rescind it. He might try but his
chances of succeeding are very slight.

if he only used it to drive his wife to shop on Saturdays then his case would
be only a little stronger. Then he definitely would be a consumer. He would
also be using the car less and thus the wear and tear on the car would be
less readily explained. This would suggest that there was something faulty
with the car at the time of purchase.

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Question 2

‘The   present   legal   rules   allowing   an   innocent   party   to   bring   a

contract   to   an   end   for   breach   are   unclear   and   in   need   of   reform.
Fortunately,   the   rules   concerning   measure   of   damages   for   breach
are clear.’ Discuss

There are two issues to be examined here. The rules concerning when an
innocent party is allowed to rescind a contract for breach are fairly clear. The
rules   governing   the   damages   that   are   awarded   to   an   innocent   party   are
rather unclear.  These shall be examined one by one.

An innocent party is allowed to terminate a contract if the other party has
breached a condition of the contract or a sufficiently important innominate
term.   This right   to   rescind   for   the   breach   of   an   innominate   term   was
established   in   the   case   of  Hong   Kong   Fir   Shipping   v   Kawasaki   1962.
How important an innominate term needs to be before its breach gives the
right to rescission is uncertain. Incidentally innominate terms are also known
as intermediate terms. If a warranty is breached then this is not enough to
allow   an   injured   party   to   rescind   the   contract   but   he   is   entitled   to   seek
damages.   By   the   way   if   there   is   the   breach   of   a   condition   or   indeed   an
important innominate term the injured party does not have to rescind the
contract. He may choose to affirm the contract and seek damages through
the courts.

In  Schuler   AG   v   Wickson  a   condition   of   the   contract   was   breached.

Wickson was supposed to visit car dealers to promote Schuler AG;s products
but Wickson did not carry out many of these weekly visits. Despite the word
condition being used in the contract in relation to this term the court held
that   this   did   not   count   as   a   condition.   Schuler   AG   was   therefore   not
permitted to rescind the contract. There was supposed to be a 60 day notice
period in the event of a breach of a condition in which the injured party told
the   wrongdoer   to   amend   his  conduct  or   face   breach.   Schuler   AG  has   not
kept to this warning period. This case somewhat muddies the waters around
breach.

The   Lombard   North   West   v   Butterworth  case   concerns   the   hire   of   a

computer.   Butterworth   failed   to   keep   up   prompt   payments   and   had   the
computer repossessed by Lombard North West who sold it and then sued for
damages. They had rescinded the contract because Butterworth  has fallen
behind on the rent. Lombard North West won the case because payment on
time was crucial to the contract and missing even one payment gave them
the right to rescind.

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Some   breaches   may   be   so   minor   even   if   it   is   a   condition   that   to   allow

rescission   for   them   would   be   unreasonable.   These   are   technical   and   not
material breaches. They are de minimis.

Some contracts are strict. Either it is performed or it is not. A contract for
barrel staves 8/16ths of an inch thick was breached because some staves
were 7/16 of an inch and some were 9/16ths of an inch. It need not be the
fault of the supplier of the staves that the staves are wrong. He assumed the
risk   that   this   might   happen.   The   wronged   party’s   right   to   rescind   the
contract was upheld in a court of law.

On the other hand the damages that are available are fairly clear. These are
not specific amounts. The courts have a degree of latitude to decide what
type   of   damages   to   award.   The   different   measures   of   damages   are   as
follows.   There   is   the   expectation   measure.   This   means   giving   the   injured
party   the   amount   of   money   he   would   have   had   if   the   contract   had   been
performed as originally envisaged. There is the reliance measure which gives
the injured party the amount that he spent in reliance on the contract. There
is also the restitution measure which is to give back to the party what he
had before – restoring to him his wealth.

This is the method for calculating the damages to which the innocent party is
entitled. It covers loss of bargain or expectation loss. The usual aim of the
court is to put the innocent party in the position he would have been in had
the contract been properly performed  (Robinson v Harman [1848] 18LJ
Ex 202). The two usual methods of assessing this are difference in value or
cost of cure. The court will generally use the more appropriate.
Sometimes reliance loss may be sought where loss of expectation is difficult
to   prove.   The   aim   of   reliance   loss   is   to   put   the   innocent   party   into   the
position he would have been in had the contract never been made, that is,
an   indemnity   for   his   out   of   pocket   expenses   incurred   in   reliance   on   the
contract(Anglia TV v Reed [1972] 1 QB 60).
There   are   many   other   types   of   loss   that   have   been   claimed   by   innocent
parties.   Damages   for   disappointment   or   mental   distress   are   not   generally
awarded  (Addis v Gramophone Co. Ltd [1909]AC 488)   unless   the
contract   is,   for   example,   a   holiday   contract  (Jarvis v Swans Tours Ltd
[1973] 1 QB 233).

For   breach   of   contract   the   expectation   measure   of   damages   is   usually

sought. It may be that the court finds that the parties are in  pari delicto
(equally guilty) and awards damages in a way that reflects this. It could be
that the court  awards pecuniary  damages  on  a quantum  meruit  basis (as
much as he deserves). The court will have regard to all the relevant facts of
the case.

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There may be a penalty clause in the contract saying what damages will be
paid in the event of breach. This penalty clause will be allowed to stand so
long as it is a genuine attempt to estimate the loss that would be occasioned
by breach especially if it distinguishes between different types of breach. If
damages   are   said   to   be   penal   (as   in   acting   as   though   a   punishment   for
breaking the criminal law) then the court will say that these damages are
unlawful.

The British government contracted to have aircraft carriers built before the
2010   election.   The   new   government   considered   cancelling   the   order   but
decided not to because of the penalty clause.

It   is   important   to   note   that   when   there   is   rescission   for   breach   this

discharges   the   injured   party   from   future   obligations   but   not   from   past
obligations. Rescission for misrepresentation makes the contract void from
the start and allows a party to get back into the position he was before the
contract was formed. Rescission for breach of contract tries to put the party
into   the   position   he   or   she   would   have   been   if   the   contract   had   been
performed as was at first anticipated.

Of course, in a commercial contract it is tricky trying to figure out how much
profit   a   party   would   have   made   had   the   contract   been   carried   out   as
planned. Sometimes a party would have made a loss. The courts will almost
always ensure that an injured party suffers no loss and that a wrongdoer
suffers   no   gain.   This   is   to   prevent   unjust   enrichment.   If   there   has   been
unjust enrichment the party in breach will be required to disgorge part or all
of his wrongfully acquired lucre. It would offend the court and principles of
justice   to   preside   over   a  situation   where   breach   was   effectively   rewarded
and those who honoured the contract were punished financially.

The  title   statement  is   wrong.   If  anything   it is  the   other  way  around.  The
rules on damages are clearer than on breach.

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