UNIT 2 Contract Law SUGGESTED ANSWERS JANUARY Note to Candidates and Tutors:

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1 UNIT 2 Contract Law SUGGESTED ANSWERS JANUARY 2012 Note to Candidates and Tutors: The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2012 examinations. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. ILEX is currently working with the Level 6 Chief Examiners to standardise the format and content of suggested answers and welcomes feedback from students and tutors with regard to the helpfulness of these Suggested Answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners reports which provide feedback on student performance in the examination. Section A Question 1 (a) To succeed in a claim for breach of contract it is necessary to establish that a valid contract was formed and that an express or an implied term was breached by the defendant. Breach may take the form of none performance or of defective performance. Performance in contract is judged against an exacting standard. Contractual obligations must be performed precisely: see (e.g.) Lord Atkin s comment in Arcos v Ronaasen [1933]. Performance must be complete: see (e.g.) Cutter v Powell (1795). Liability in the tort of misrepresentation is to be distinguished from liability in negligent misstatement (see Hedley Byrne v Heller [1964]). A misrepresentation is a false statement of fact (or possibly law) made by one party to the contract to the other party which induces the other party to enter into the contract. Claims in misrepresentation can therefore be compared with claims in breach of contract: a contractual relationship between the parties is an essential element of both actions. Misrepresentation may be contrasted with breach of contract. Misrepresentation is independent of the contract, but attaches to it, only becoming actionable once the contract has been entered into. Liability in tort is imposed by law; liability in contract arises as a matter of agreement. Page 1 of 18

2 In claims in breach of contract the claimant must establish that the agreement is valid but has not been complied with. In misrepresentation the claimant must establish is that the agreement is flawed because it was based upon the false statement of one of the parties. (b) Remoteness of damage in contract has long been governed by the rule in Hadley v Baxendale (1854). Per Alderson B, to be recoverable losses must be such as arise naturally, i.e., according to the usual course of things, from such breach of contract itself ; or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract Losses arising naturally seeks to identify what must have been in the minds of both the parties as the likely result of the breach in question. The test is objective. In the contemplation of both parties refers to the actual knowledge of the parties at the time of contract. Damages may be recovered for losses arising from special circumstances, provided they were known to the party in breach. The test is subjective. In Transfield Shipping Inc v Mercator Shipping Inc, The Achilleas [2008], the House of Lords considered further the test for remoteness of damage in contract. Two of their Lordships sought to extend the Hadley v Baxendale approach to include consideration of whether, at formation of the contract, it was intended that the party in breach should assume liability for the loss in question. Two adhered to the approach established by Alderson B. A fifth appears to have wavered between the two positions. This has given some concern as to the subsequent application of Hadley v Baxendale. The better view seems to be that the extended test (taking in consideration of whether there was an intended assumption of liability) was applicable only in very particular circumstances. For most situations, the test laid down by Alderson B continues to be the correct one: see (e.g.) Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd, The Sylvia [2010] per Hablen J. The position in misrepresentation is quite different. In fraudulent misrepresentation the claimant is entitled to all losses flowing directly from the misrepresentation: Doyle v Olby (Ironmongers) Ltd [1969]: it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen, per Lord Denning MR (ibid). See also Smith New Court Securities Ltd v Citibank [1997], per Lord Browne-Wilkinson. The wording of s2(1) Misrepresentation Act 1967 means that the rules of remoteness of damage in fraudulent misrepresentation also apply to claims in (statutory) negligent misrepresentation and innocent misrepresentation: see (e.g.) Watts v Spence [1975], Naughton v O Callaghan [1990] and to Royscott v Rogerson [1996] etc. (c) Breach of contract does not automatically discharge the contract. Breach of warranty only ever sounds in damages: see Bettini v Gye (1876). Breach of condition goes to the root of the contract. It amounts to a repudiation of the contract. It passes to the innocent party the right to elect to accept the Page 2 of 18

3 repudiation, thus terminating the contract: Poussard v Spiers & Pond (1876). Alternatively, the innocent party may elect to affirm the contract. Whatever the election by the innocent party, there is a right to damages. Where it is not possible, by reference to the contract itself, to determine whether a term is a condition or a warranty, then the term is described as an innominate term. The court will then look to the consequences of the breach. Where the breach effectively deprives the innocent party of substantially the whole intended benefit of the contract, the innocent party may treat the contract as repudiated: see Hong Kong Fir v Kawasaki Kisen Kaisha [1962] per Diplock LJ. Similarly, misrepresentation does not render the contract void: it makes it voidable at the instance of the innocent party. That is, misrepresentation gives rise to a claim for rescission of the contract, which the innocent party may elect to pursue. Repudiation, in this context, exists as a common law right. It may therefore be exercised irrespective of the conduct of the claimant or the implications for third parties. The right to repudiate is lost if the innocent party chooses to affirm the contract. Rescission is an equitable remedy and so is discretionary. It may be rendered unavailable where the contract has been affirmed, where it is not possible to put the parties back to their original positions (i.e. restitutio in integram is not possible or is not substantially possible) or where third party rights are prejudiced. Rescission may also be refused under the equitable doctrine of laches : see Leaf v International Galleries [1950]. The approach taken to damages in the two actions differs considerably. The primary purpose of damages in contract is to place the claimant in the position s/he would have been had the contract not been breached: Robinson v Harman (1848). Because misrepresentation is a tort, the purpose of damages is to place the claimant in the position s/he would have been had the tort not been committed: see Doyle v Olby (Ironmongers) Ltd [1969]. Damages in contract carry the claimant forward ; tortious damages carry the claimant backwards : one readily admits of claims for lost profit, the other does not. In contract the primary remedy for breach is damages, which are available as of right. However, in order to claim substantial damages (i.e. more than nominal damages) the claimant must demonstrate that the breach caused the loss, the loss was not too remote in law, and that the claimant attempted to mitigate his loss. Misrepresentation falls into three categories: fraudulent, negligent and innocent. The availability of remedies varies subtly in respect of each category: (e.g.) in fraudulent misrepresentation both damages and rescission are available, whilst in innocent misrepresentation the primary remedy is rescission, with damages available in lieu of rescission. Section 2 (1) s2(1) Misrepresentation Act 1967 makes remedies usually available in fraudulent misrepresentation available in negligent misrepresentation. Page 3 of 18

4 Question 2 Because specific performance is an equitable remedy it is available at the court s discretion. The court has imposed restrictions upon the granting of the order. These reflect the order s equitable origins and status. The first of these restrictions is that the conduct of the person seeking the order must not be such as to preclude the aid of equity: he who comes to equity must come with clean hands. His actions must not be unconscionable. Mere trickery or sharp dealing is sufficient for the court to refuse equity s aid: see (e.g.) Webster v Cecil (1861), Walters v Morgan (1861). He who seeks equity must do equity: a person seeking specific performance must have performed his side of the bargain or be ready and willing to do so. The court will not grant specific performance where damages are an adequate remedy. Where goods or services are faulty the appropriate remedy is usually compensation for the diminution in value. Where goods or services are not delivered the usual remedy is monetary compensation for loss of bargain and inconvenience where appropriate. Specific performance is not available in contracts for the sale of goods where it is possible to obtain substitute goods in the market. The appropriate remedy is again damages. Damages enable the injured party to purchase substitute performance from a third party. It remains open to the party seeking specific performance to demonstrate that damages are not an adequate remedy. This may be done by establishing that the subject matter is in some way unique; alternatively it may be done by demonstrating that damages will not reflect the true expectation loss of the claimant: see Beswick v Beswick [1968]. As a matter of law, land is unique. Damages are therefore not an adequate remedy for a breach of a contract to sell land. In Phillips v Lamdin [1949] an Adam style door was removed after the defendant had contracted to sell his house to the plaintiff. The door was held sufficiently unique for it to be made the subject of an order for specific performance. Where the contract is for the sale of goods specific performance will be available if it can be shown that the goods possessed some unique quality, so substitute performance is not available. Damages may not then be an adequate remedy. Valuable antiques and works of art have been held to be unique: see (e.g.) Falcke v Gray (1859). However, in Cohen v Roche (1927), antique Heppelwhite chairs were regarded as ordinary commercial items readily available on the open market and so specific performance was refused. An order will not be granted where it would cause undue hardship. In Patel v Ali [1984] the court refused to grant specific performance for the sale of the defendant s family home because it would have had the effect of causing undue hardship to the defendant (who had a history of ill-health, spoke little English and was at home with small children) by isolating her from friends and family. Equity does nothing in vain. Performance of the contract must be possible if an order is to issue: see Wroth v Tyler [1974]. Performance must not be futile. An order for specific performance will not be made where the contract is vague or uncertain. Page 4 of 18

5 Equity will not assist a volunteer: specific performance will not be granted where consideration is lacking. Specific performance will not be ordered where there is a want of mutuality of obligation: see (e.g.) Flight v Boland (1828), Price v Strange [1978], Sutton v Sutton [1984]. Specific performance will not issue where the contract is one involving personal services; equity may not be used to force one person to work for another: see (e.g.) De Francesco v Barnum [1890]. Specific performance will not issue where the contract requires constant supervision by the court. In Ryan v Mutual Tontine Westminster Chambers Association [1892] a tenancy agreement provided that the landlord was obliged to provide a hall porter. This was not done properly. The court refused specific performance on the ground that to do so would require the court to supervise the work. However, in Posner v Scott-Lewis [1987], in which the agreement required the landlord to employ a resident hall porter, the court was prepared to grant specific performance. If the landlord failed to comply with the order the tenant could simply return to the court. The restrictions the court places upon the granting of specific performance may be said to have three sources. They are: the nature of the remedy and its impact upon personal freedom; the origins of the remedy in the courts of equity; and the practicality and appropriateness of the remedy. Equity acts in personam. When compared with the requirement to pay compensation for not carrying out ones obligations, an order to carry them out may be seen as having a considerable impact upon personal freedom. A failure to comply with such an order is a contempt of court and may be met with punitive measures against the person, such as fines, sequestration of property, or imprisonment. The equitable nature of the remedy brings with it under underlying attitudes and requirements of equity that relate to fairness, proportionality and the desire to do justice between the parties. Equity may be refused to those who do not behave properly. Equity leans against causing undue hardship even where a party is in breach of contract. Finally, the court will refuse an order upon practical grounds, for example where the court thinks itself unfit to supervise an order and that its time is being wasted on contracts that are futile or impossible to perform. Question 3 (a) The business efficacy test was established in The Moorcock (1889), where, per Bowen LJ the test for implying a term into a contract is: the presumed intention of the parties with the object of giving the transaction such efficacy as it should have. That is, the court will imply a term which the parties must have intended to include because without it the contract would not work or the consideration of one party will fail. Page 5 of 18

6 The business efficacy test has been employed frequently since: see (e.g.) Wettern Electric v Welsh Development Agency [1983], Associated Japanese Bank (International v Credit du Nord [1988]. The officious bystander test is also used to imply terms where, even though unexpressed, they were intended by the parties to form part of the agreement. Mackinnon LJ propounded it in Shirlaw v Southern Foundries [1926]: that which is left to be implied and need not be expressed is something so obvious that it goes without saying; so that if, while one of the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with, Oh, of course. That is, the provision is so obvious that it was not worth saying. The test has been used subsequently on numerous occasions. It suffers from important flaws: one of the parties may be ignorant of the term in question or is unlikely to have agreed to it. It thus operates in some notable cases to refuse the insertion of a clause: see (e.g.) Spring v National Amalgamated Stevedores & Dockers Society [1956]and Shell (UK) v Lostock Garages Ltd [1977]. The underpinning principle of both tests has been expressed as being that of giving effect to intended but unexpressed agreement between the parties. This was attacked as a mere fiction by Lord Denning in Liverpool CC v Irwin [1976]. He took the view that the court should imply a term where it was reasonable in all the circumstances of the case to do so. This view was subsequently rejected by the House of Lords in Irwin, which took the view that any further common law reason for implying a term should be based upon necessity. The officious bystander test is often described as a development upon, or variant of, the business efficacy test. Both academics and members of the judiciary have argued that there is no real difference between them. In practice, it is clear there is considerable overlap between the two tests. Often they will produce the same result. The court might choose to use either the business efficacy test or the officious bystander test when considering whether to imply a term. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) the Privy Council took the view that the tests were cumulative and on occasion the English courts have used both: see Ultraframe (UK) Ltd v Tailored Roofing Systems Ltd [2004]. Criticism of these tests was continued by the Privy Council in Attorney General of Belize v Belize Telecom [2009]. Lord Hoffman, after pointing out the practical shortcomings of these formulations, then said that they were mere variants of the same test. Like other judicial devices for implying terms as matter of fact they addressed a single issue: What did the instrument (agreement) mean? The Privy Council response was to condense the different formulations of the test for the implication of a contract term into one question: What, read as a whole against the relevant background, would the instrument reasonably be understood to mean? Privy Council decisions are not binding on English courts. However, Belize Telecom has been much cited in English cases, notably by the Court of Page 6 of 18

7 Appeal in Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc, The Reborn [2009], which whilst adopting the Belize Telecom test, nevertheless emphasised the requirement of necessity and stated that reasonableness was not sufficient: see per Lord Clarke MR. (b) The doctrine of freedom of contract means that the parties should be left to decide the terms of their own agreements. Historically, the expectation was that the terms of a contract were express. Such an approach is impracticable. The problems associated with it were recognised and addressed, most clearly by way of the doctrine of implied terms. Implied terms are terms of the contract that are not expressly agreed by the parties. A term may be implied by way of custom provided that it is not contrary to the common law; it must also be of long standing and reasonable. A term may, similarly, be implied by trade usage, even though it lacks the long-standing quality normally associated with rights established by custom: see (e.g.) Hutton v Warren (1836) and Pelly v Royal Exchange Assurance (1757) The court may imply a term upon the ground that, as a matter of fact, it was the common intention of the parties. The best known examples of these are the business efficacy and officious bystander tests. They are explained and analysed in part (a) of this answer. Both are based upon the idea that the court will imply such a term because it is what must have been intended by the parties but went unexpressed. The attack upon this approach mounted by the Court of Appeal Liverpool CC v Irwin [1976], and the recognition by House of Lords that terms may be implied where it is essential to do so is arguably a move away from what was intended by the parties. In Equitable Life Assurance Society v Hyman [2002] Lord Steyn took the view that a term should be implied on the ground of necessity. However, elsewhere in his speech he said that the term should be implied because it was essential to give effect to the reasonable expectations of the parties. In Paragon Finance plc v Nash [2002] Dyson LJ also based his preparedness to imply a term upon the reasonable expectation of the parties. These decisions raise two questions: (1) is the test truly necessity or is it reasonableness? (2) Is the touchstone of reasonableness a move from subjective to objective intention, and so a move away from what the actual parties intended? The Privy Council s emphasis upon the search for the meaning of the agreement and the Court of Appeal s insistence upon necessity and its rejection of reasonableness as grounds for implying terms (see (a) above) go some way towards addressing these questions. If Lord Denning s comment in Liverpool CC v Irwin on the fictional nature of the search for unexpressed intention is correct then this approach may simply represent greater transparency rather than substantive change. Page 7 of 18

8 This mechanism for the implying of terms may nevertheless represent a threat to the parties freedom to decide upon the contents of a contract. The parties may not have intended what is subsequently decided by the court as necessary to the functioning of the contract or what a reasonable person would have intended/expected. Against this is to be weighed the argument that implied terms generally are defeated by express terms: see Les Affreteurs Reunis Societe Anonyme v Leopold Walford Ltd [1919]). In addition, the parties may be taken to have intended to enter into a valid contract and giving force to this represents a greater good and a more reasonable attempt to give force to what they intended than allowing the agreement to fail by a refusal to imply such a term. There are numerous examples of terms implied by statute. The Sale of Goods Act 1979 (e.g.) implies into contracts for the sale of goods terms as to title (S12), description (S13) and quality and fitness for purpose (S14 (2) and S14 (3)). The Supply of Goods And Services Act 1982 implies terms into contracts for the supply of services on skill and care (S13), time (S14), and consideration (S15). The implying of such terms depends upon (i) the nature of the contract, (ii) the status of the parties, and (iii) the intention of the parties. They operate only in relation to the relevant class of contract. Some clauses operate only where one of the parties is acting in the course of business: see (e.g.) s14 of the Sale of Goods Act Some clauses operate only where there is an absence of express provision in the contract: see (e.g.) ss 14 and 15 of the Supply of Goods And Services Act Others may be excluded only insofar as it is reasonable to do so: see s6 (3) Unfair Contract Terms Act 1977; where the contract is between a party acting in the course of business and a consumer s 6(1) and 6 (2) of the 1977 Act render void attempts to exclude ss 12, 13, 14 and 15 of the 1979 Act. Here there is clearly no attempt to carry out the wishes of the party, whether express or implied. The implying of terms covers numerous relationships and kinds of activity, from expert traders, who rely on the custom of their trade and the context of statute, to consumer contracts where the buyer has little idea of the concept of implied term or the legal environment in which it operates. Whilst implied terms may be regarded as part of the search for the meaning of the agreement, as an attempt to find what the parties must have intended or ought to have intended and did not say or write. That is not the case in contexts covered by some statutes where one party would clearly not have intended to include it and the other would not have given his mind to the matter and to this extent challenges concepts of freedom of contract. Question 4 Consideration is one of the requirements of a simple contract (i.e. a contract not made under seal). It is required to support both formation and variation of agreements. To obtain a remedy in contract it is therefore generally necessary to provide consideration. There have been various attempts to define consideration. Early attempts were based upon the notions of benefit and/ or detriment. In Bunn v Guy (1803) consideration was described as some loss or inconvenience suffered by one party at the request of the other. In Currie v Misa (1875) Lush J said: A Page 8 of 18

9 valuable consideration may consist either in some right, interest, profit or benefit accruing to the one party, or some act or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Under these definitions one party s detriment may amount to a benefit to the other party but that is not necessarily the case. Sir Frederick Pollock, in Principles of Contract, defined consideration as: An act or forbearance or the promise thereof is the price for which the other is bought, and the promise thus given for value is enforceable. This definition was approved by Lord Dunedin in Dunlop v Selfridges [1915]; it therefore has the highest judicial authority. This definition retains the ideas of benefit and detriment but emphasises the idea of exchange or bargain. It is this analysis which has been most influential in the modern English law of contract. To be valid consideration must be sufficient. As a general rule it must comply with the definition found in Dunlop v Selfridges. It is the price by which the promise of the other is bought. To be recognised as sufficient consideration the act or forbearance or promise of one of these must have some monetary value or at least be capable of being valued in money. Where a person has promised or acted from emotion, sentiment or moral obligation the court will not recognise that there has been an exchange of valuable consideration: see (e.g.) White v Bluett (1853) and Eastwood v Kenyon (1840). The issue of performance of an existing contractual duty most commonly arises in relation to agreements to vary a contract: typically they will be agreements to pay more or to accept less than was originally agreed. Traditionally promises to pay more than was originally agreed must be supported by consideration by the promisee. In Stilk v Myrick (1809) two sailors deserted a ship and the captain promised the remaining crew that he would divide the deserters wages between them if they sailed the ship home safely. When the ship reached its home port the captain refused to pay as promised. Members of the crew then sued for the extra money promised. It was held that they should fail because they acted under an existing duty and so provided no consideration. In Hartley v Ponsonby (1857) the facts were substantially similar to those of Stilk v Myrick, with the exception that sufficient crew members had deserted the ship to make the return journey hazardous. It was held that the remaining crew had provided sufficient consideration for them to be able to enforce the promise: the original contract did not require them to undertake the additional dangers of sailing an undermanned ship home. At common law promises to accept less than is owed under the original contract are also not binding. The general rule is that part-payment of debt will not discharge the whole debt: Pinnel s Case (1602). At common law the creditor may promise to accept a lesser sum and, upon payment of the lesser sum, sue for the balance: see D&C Builders v Rees [1965]. Where, however, the promisee provides consideration for the promise to accept less than is owed, the creditor may be bound and the lesser sum will discharge the contractual obligation: Pinnel s Case. Page 9 of 18

10 There are exceptions to this rule. Promises to accept less than that owed may be binding where part-payment is made by a third party and payment is accepted on the basis that the whole debt will be discharged: see (e.g.) Hirachand Punamchand v Temple [1911] and Welby v Drake (1825). The promise in this situation is binding because to find otherwise would permit a fraud on the third party. Another exception is where the creditor is estopped from claiming the full amount owed under the contract: see Central London Property Trust Ltd v High Trees House Ltd [1957]. Neither of these exceptions turn on the common law doctrine of consideration: they are governed by other principles. Thus the rule of existing contractual duties itself would seem to indicate at least an implicit understanding that consideration in these contexts includes a requirement of exchange. This is so even though cases pre-date the exchange or price definition of consideration espoused in Dunlop v Selfridges. In Williams v Roffey Bros & Nicholls [1991], however, the Court of Appeal took the view that where there was a promise of additional payment in the context of an existing contractual duty that promise could be binding providing the promisor obtained some practical benefit, or avoided some disbenefit, from the performance of the existing duty. This would seem to rely on a benefit/detriment analysis of consideration, with an emphasis upon practical benefit to the promisor. It does not rely upon the need to give more by way of consideration if the promise to pay more is to be relied upon. The case has caused some academic and judicial disquiet: see (e.g.) Coleman J s comments in South Caribbean Trading v Trafigura Beheer [2005], where his criticisms of the case included that it was inconsistent with Stilk v Myrick and so contrary to established authority. Williams v Roffey has, however, generally been followed in contracts for the supply of services: see (e.g.) Anangel Atlas Compania Naviera v Ishikawaja- Harima Heavy Industries (No 2) [1990] and Simon Container Machinery v Emba Machinery [1998]. Williams v Roffey is inconsistent with the rule in Pinnel s Case (1602). It has not, however, been allowed to weaken the principle governing promises to accept less: rather the ambit of Williams v Roffey has been limited so that it does not apply to part-payment of debt: see re Selectmove [1995]. Williams v Roffey represents an important change in this aspect of the law. Whilst some commentators regard it as embracing commercial realty, others see it as a weakening of the doctrine of consideration and an unfortunate source of complexity and inconsistency. Section B Question 1 (a) The express undertakings indicated by the facts of the question are simple: DM agreed that Don the Mantle would perform at The Brixham Bash ; AP agreed to pay DM a fixed fee in respect of the performance, together with percentage of the money earned from ticket sales. Page 10 of 18

11 In the absence of an express term that AP should actually hold The Brixham Bash, the court is likely to imply a term that neither party shall act in such a way as to prevent performance of the contract by the other. AP appears to have breached its express undertaking to pay DM the fixed fee. It is in breach of the implied term not to prevent performance. There is nothing in the facts of the problem to suggest a valid defence to DM s claim. AP might attempt to reduce its potential losses to DM by arguing frustration of contract. It is, however, clear law that mere inconvenience or financial loss is insufficient to frustrate a contract: see (e.g.) Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962]. Consequently DM has a strong case against AP in breach of contract. (b) If DM succeeds in its claim in breach of contract against AP, compensation will take the form of common law damages. The purpose of damages in contract is to place the claimant in the position s/he would have been had the contract not been breached: Robinson v Harman (1848), per Parke B. This means that the innocent party may claim for its loss of expectation under the contract, including loss of profit. Loss of opportunity may also be recovered for: see Chapman v Hicks [1911]. Where the expectation loss is too speculative the claimant may elect to claim reliance loss instead: see Anglia Television v Reed [1972]. Reliance loss is based upon the claimant s wasted expenditure in preparation for, or in performance of the contract in question. In order to claim substantial damages in contract it is necessary to show that the breach caused the loss, the loss suffered was not too remote in law, and that the claimant has attempted to mitigate the loss. The losses caused by AP s breach may have four possibly significant aspects. They are: (1) the non-payment to DM of 20,000 fixed fee; (2) the depriving of DM of the chance to earn a percentage of the ticket sales; (3) negating DM s opportunity to promote Don the Mantle with the The Brixham Bash audience and possibly a wider public; and (4) depriving DM of other income, such as music and other product sales. (1) The Non-payment to DM of 20,000 Fixed Fee This is a claim for an agreed sum. Payment fell due either at the date of the repudiatory breach by AP, if DM elected to accept the repudiation. If, however, the contract was affirmed by DM, payment became due at the agreed date for performance. The amount claimable is the sum agreed together with interest at the appropriate rate. (2) The Depriving of DM of the Chance to Earn a Percentage of the Ticket Sales Page 11 of 18

12 There are few issues of concern in relation to this element of loss. It is clear that AP s breach caused the loss in fact. With regard to causation in law (remoteness of damage) the loss in question would appear to fall squarely within the first limb of the rule in Hadley v Baxendale (1854): it falls within the category of losses arising naturally, i.e. according to the usual course of things, for such breach of contract itself. That is, the loss was inevitably in the minds of both the parties as the likely result of the breach in question. The agreement was that DM should be paid a percentage of revenue derived from the sale of tickets. The cancellation of the event inevitably caused the loss of such income. The question then arises as to how that loss is to be measured. The projected income, based upon sales in previous years, would have amounted to 3% of 2,000,000, which is 60,000. However, AP did not guarantee the amount of income to be derived from this aspect of the agreement. To award 600,000 would be to place DM in a better position than if the contract had been performed without breach. The court is therefore very unlikely to award this level of compensation. It is unclear from the facts of the question whether DM accepted AP s repudiation in May or affirmed the contract. If AP s repudiation was accepted by DM in May then the claim is likely to be confined to a sum based upon actual tickets originally sold. The appropriate measure for this expectation loss in this instance should be based upon the number of actual tickets sold: that is 3% of ticket sales of 1,000,000, which is 30,000. If DM affirmed the contract then it is possible to argue that allowance should be made for tickets that may have been sold up to the actual breach by AP in June. All that DM is required to do is to demonstrate that there was a real and substantial chance that such a profit would have been made, not that, upon the balance of probabilities, such a profit would have been made. In any event, DM s claim for this particular aspect of the loss is not likely to exceed 40,000. (3) Depriving DM of other income, such as music and other product sales. If DM is to be able to succeed in claim for such a loss it must show that the alleged loss was more than merely speculative. There must have been a substantial chance of gaining the profit or benefit claimed: see Allied Maples Ltd v Simmons & Simmons [1995]. Evidence of sales in similar situations, together with (e.g.) contracts with third parties for the production of merchandise to be sold at The Brixham Bash might be used to persuade the court of the substantial chance lost. (4) Negating DM s Opportunity to Promote Don the Mantle with the The Brixham Bash Audience and Possibly a Wider Public The same issues arise as in (3) above. The word promote is ambiguous in this context. If it means profit generated from the sale of recordings and other merchandise directly connected with, and resulting from performing at the The Brixham Bash then DM may be successful. Promote used in the sense of increasing the fame of the band in some less tangible and long term way may be regarded as too speculative. Page 12 of 18

13 DM s claim in damages is likely to exceed 50,000. If claims under (3) and (4) above are accepted by the court the award is likely to be considerably greater. There are insufficient facts in the question to speculate on how much greater. Question 2 Covenants in restraint of trade are contrary to public policy and prima facie void. That is, there is a presumption that they are unenforceable. This presumption may be rebutted if it can be shown that the restriction is reasonable in reference to the parties concerned and reasonable in reference to the interests of the public per Lord MacNaghten, Nordenfelt v Maxim Nordenfelt Guns & Ammunition Company Ltd [1894]. The burden of proof lies on the person seeking to rely on the covenant. That means that, in this context, Shirley must prove that the covenants in question are reasonable. Reasonable in the context of the public interest means that the covenant does not harm the general interest. Contracts in gross (anti-competition agreements) are thought to harm the public interest and so are not reasonable: see Vancouver Malt & Sake Brewing Co v Vancouver Breweries (1934). Covenants that damage a trade or business by diminishing, without proper justification, those who may engage in it are also contrary to the public interest: see (e.g.) Wyatt v Kreglinger & Fernau [1933] and Kores Manufacturing v Kolok Manufacturing [1959]. Newton s had no existing interest in the antique jewellery trade to protect at the time the contract was entered into. Clause (ii) is therefore likely to be regarded as a contract in gross and so void as being contrary to the public interest: Vancouver Malt & Sake Brewing Co v Vancouver Breweries. Reasonable between the parties means that the covenant acts to protect a legitimate trade interest. Legitimate interests potentially include the goodwill of the business, trade connections, and trade secrets. Given the context of the trade in question it is unlikely that there will be trade secrets worthy of protection. Shirley does, however, have a legitimate interest in the customer base and trade connections of Newton s. Roland s setting up a business, contrary to the covenant in his contract of employment, may represent a threat to those interests. When assessing reasonableness between the parties the courts traditionally have regard to the area, duration and scope of the prohibition. Where it goes beyond what is needed to protect the legitimate interest in question it is unreasonable and it will not be possible to rebut the presumption that the covenant is contrary to public policy and so void. The geographical area of the prohibition must not be greater than is necessary to protect the interest. If it is, the covenant may be unreasonable. In Mason v Provident Clothing & Supply [1913] a covenant prohibited a canvasser and money collector from obtaining similar employment for a period of three years within a radius of 25 miles of London. It was held that the covenant was Page 13 of 18

14 unreasonable because it went beyond what was necessary to protect the interest in question: see also Fellows v Fisher [1976]. Whether the extent of the geographical prohibition is unreasonable is a question of fact, based upon the nature of the trade and business in question. It is, however, extremely unlikely that a trader in antique silver could justify as reasonable a prohibition that extended to the whole of Greater London. Whether the duration of the prohibition is unreasonable is also a question of fact, dependent upon whether it goes beyond protecting Shirley s interest: are customers likely to be lured away from Newton s for up to two years because Roland is working close by? Militating quite strongly against the prohibitions being reasonable is that the scope of the prohibition extends beyond the scope of Roland s employment when working for Newton s. The quoted Clause (i) of the contract of employment prohibits Roland from engaging in the antique silver trade: the interest worthy of protection is arguably (at least) restricted to goodwill and trade connections in the very specialist area of 18 th century silver tableware. The prohibiting of all trade in the antique silver trade prevents Roland from engaging in trade both with professional silver dealers and with members of the general public. This goes beyond Roland s scope of activity when employed by Newton s: he dealt only with Newton s trade connections. The restraint is therefore likely to be considered unreasonable: see Austin Knight v Hinds [1994]. The quoted clause (ii) of the contract of employment prohibits Roland from engaging in the antique jewellery trade. Newton s have no legitimate interest in the antique jewellery trade. The clause is consequently unreasonable. Because the covenants are contained in a contract of employment the court is likely to take into account Roland s weaker bargaining position and consequently take a more robust position against the enforcement of the covenants in question. Where it is possible to sever unreasonable aspects of a covenant from that which is reasonable it is possible to preserve and enforce some aspect of the covenant in restraint of trade. This may only be done if severance damages neither the grammar, nor the sense, of the clause; and it does not undermining the whole contract: see (e.g.) Goldsoll v Goldman [1915] and Napier v National Business Agency [1951]. In the present problem severance is unlikely. For the reasons set out above the covenant is likely to be considered unreasonable and so void. Question 3 Undue influence is an equitable doctrine that applies where one party uses his/her influence over another to persuade the other to enter into a contract. Page 14 of 18

15 Where this occurs, the court may set aside the contract or modify its terms to mitigate the disadvantage. There are two traditional classifications of undue influence: actual undue influence and presumed undue influence. In actual undue influence the claimant must prove that s/he entered into the contract as a result of illegitimate pressure. In Allcard v Skinner (1887) this was described as some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating and generally, though not always, some personal advantage obtained by the guilty party In presumed undue influence the claimant must demonstrate that the contract was entered into within the context of a relationship that gives rise to a presumption of undue influence. Traditionally those relationships involved a fiduciary or some element of dominance. The House of Lords decision in Royal Bank of Scotland v Etridge (No 2) [2001] is the leading case on undue influence. It establishes that it is now necessary to demonstrate in all cases that there was actual undue influence. In Etridge it was held that the test(s) for deciding whether an agreement should be set aside in circumstances where one person provides surety for the obligations of another remain those set out in Barclays Bank v O Brien : (1) was the party to the agreement granting surety subject to undue influence by a third party; and (2) was the bank granting the loan put on notice. When dealing with Thomas s case the court should therefore ask: (1) was Thomas subject to undue influence by Stuart? and (2) was there sufficient in the transaction to fix the bank with constructive notice of the of that undue influence? Stuart s conduct is likely to be considered illegitimate pressure amounting to actual undue influence. In so far as Stuart s conduct is unfair and improper and contains elements of coercion and cheating it clearly falls within Lindley LJ s definition of actual undue influence in Allcard v Skinner (1887). The sole purpose of Stuart s conduct would appear to be his own profit. Where, as in Thomas s case, a person entered into an agreement to provide surety for a bank loan granted to a third party (Stuart), the agreement may be tainted by the undue influence of the third party. In such cases the person seeking to have the contract set aside needs to demonstrate not only undue influence by the third party but that the agreement with the bank was tainted by the undue influence. In Etridge it was held that where the relationship between the surety and debtor was non-commercial, the creditor is put on notice that there is a risk of undue influence. There is no commercial element to the relationship between Thomas and Stuart. The bank was aware of the actual nature of their relationship and consequently was put on notice. If that is correct, and SCDB were put on notice, it is then for SCDB to rebut the charge that the transaction was tainted by undue influence. SCDB may do so by demonstrating that it had taken reasonable steps to ensure that Thomas had been informed of the practical implications of what he was doing. The guidelines Page 15 of 18

16 set out in Etridge indicate that proper and independent legal advice would be sufficient. Nothing in the facts of the problem suggests that such advice was received. The presumption is consequently not rebutted. Whilst Thomas is required to prove actual undue influence, his argument that this is the case may be given an evidential lift by the nature of his relationship with Stuart. In order to do so it is necessary to consider the traditional classifications of undue influence and their subsequent refinement in BCCI v Aboody [1991] and Barclay s Bank v O Brien [1993]. In BCCI v Aboody [1991] the Court of Appeal affirmed and refined these classifications to Class 1 (actual undue influence) and Class 2 (presumed undue influence). Class 2 was subdivided into 2A and 2B. 2A includes special relationships which give rise to a presumption of undue influence, such as trustee and beneficiary (Ellis v Barker (1871)), doctor and patient (Mitchell v Homfrey (1881)), solicitor and client (Wright v Carter (1903)), religious leader and follower (Allcard v Skinner (1887)). This category includs parent and child: see (e.g.) Bainbridge v Browne (1881) and Lancashire Loans v Black [1934]. It does not include child and parent, where the child is dominant. 2B deals with situations in which there is no special relationship but where the aggrieved party could prove as a matter of fact that trust and confidence had been placed in the wrongdoer. These classifications were approved and applied by the House of Lords in Barclay s Bank v O Brien [1993]. They were subsequently disapproved by the House of Lords in Royal Bank of Scotland v Etridge (No 2) [2001], as being confusing ; they nevertheless may be useful evidentially. The relationship between Thomas and Stuart falls under the old 2B classification. If established it provides evidence of influence. Thomas must now show that it was undue. He must demonstrate some feature that indicates that the transaction would not have been entered into without improper pressure. Placing at risk a significant capital asset to secure funding for a business in which he had no financial interest may be sufficient to do this. For the reasons set out above Thomas has a strong case for arguing that his agreement with SCDB should be set aside. Question 4 A contract is a legally binding agreement. The court will look to objective evidence of agreement between the parties. The usual way of establishing this is by demonstrating valid offer and acceptance. The first issue to address is whether Alfie made an offer. If he did so it took the form of the advertisement placed in local newspapers and on local commercial radio. An offer is an expression of willingness to contract upon specified terms. It is capable of being converted into a binding agreement by acceptance of those terms by the offeree. Page 16 of 18

17 Advertisements do not usually constitute offers. They constitute invitations to treat: that is they invite others to make an offer. Purported acceptance of an invitation to treat is not capable of constituting a contract. In Partridge v Crittenden [1968] Lord Parker CJ took the view that there was business sense in advertisements and circulars being construed by the court as invitations to treat and not offers. There are, however, circumstances, in which an advertisement is capable of constituting an offer. It is possible to make an offer to the world. To constitute such an offer, it must be clear from the advertisement that the person placing it is willing to be bound upon the terms specified. Those terms must be sufficiently specific. The leading case on such offers is Carlill v Carbolic Smoke Ball Company [1893], in which it was held that sufficient evidence of an intention to be bound, together with a sufficiently precise statement of terms amounted to an offer. Like Carlill, Alfie s advertisement amounts to a promise of reward upon the performance of certain conditions. Provided the intention to be bound is sufficiently clear and the mode of acceptance is sufficiently certain it is likely that it amounts to a unilateral offer. Liability to Viola Viola complied with the terms of Alfie s offer but she did so in ignorance of the offer. This gives rise to two questions of law: (1) is an offer effective if it is not communicated; (2) is it possible to accept an offer of which one is ignorant. With regard to the first question, it seems to be clear law that in order to be effective an offer must be communicated: see Taylor v Laird (1856). It would therefore appear that no valid offer has been made to Viola. There a number of cases that address the issue of the acceptance of unilateral offers by conduct. They generally pertain to rewards for information given. A number are unsatisfactory, inconsistent and are distorted by the facts of the case and the prejudices of the court: see (e.g.) Gibbons v Proctor (1891), R v Clarke (1927) (High Court of Australia), and Williams v Carwardine (1833). The better view is contained in Fitch v Snedakar (1868) (Court of Appeals, State of New York), in which the plaintiff gave information in ignorance of the offer of a reward of $200. It was held the plaintiff could not succeed in recovering the reward because there was no contract between the parties, the plaintiff could not accept an offer of which he was unaware. Fitch v Snedakar is closer in principle to the rules which generally govern this area of contract. It is undistorted by fact and the prejudices of earlier times. It provides persuasive authority. Viola is consequently unlikely to succeed in establishing agreement. Alfie is unlikely to be liable to her in contract. Liability to Willow Willow read Alfie s advertisement and, having decided to accept, did so by conduct: that is she started dancing at Moonbeams at pm and continued dancing until after 3.00 am. Page 17 of 18