LEVEL 6 - UNIT 2 CONTRACT LAW SUGGESTED ANSWERS - JUNE 2013

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1 Note to Candidates and Tutors: LEVEL 6 - UNIT 2 CONTRACT LAW SUGGESTED ANSWERS - JUNE 2013 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 June 2013 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. 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. 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 Historically the courts took the view that all the terms of a contract should be expressly agreed between the parties. The impracticable nature of this position later led the courts to accept that it was possible for the courts to imply terms into the contract. Terms which are implied as fact are those which are imputed from the intentions of the parties. In order for a term to be implied it must be obvious and necessary to give business efficacy to the agreement. A term will only be implied if its absence would render the contract incomplete and not on the basis that the contract would be better for its inclusion: Liverpool City Council v Irwin (1976). The two classic tests used to decide whether a term falls within the criteria set out above are the Business Efficacy Test and the Officious Bystander Test. In the business efficacy test the court attempts to imply a term that renders the business contract effective. This test was first articulated in The Moorcock (1889) by Bowen LJ, who said that the implying of terms is founded upon the presumed intention of the parties and upon reason. It is the implication which the law draws from what must obviously have been the intention of the parties, an implication which the law draws with the object of giving efficacy to the transaction. In Luxor (Eastbourne) Ltd v Cooper (1941) Lord Wright described it as a term which "can be predicated that it 'goes without saying,' some term not expressed but necessary to give the transaction such business efficacy as the parties must have intended". Page 1 of 16

2 One definition of the Officious Bystander Test that has survived the test of time is that of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) where he stated: "Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that if, while the parties were making their bargain an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common Oh, of course." The test cannot be used where one of the parties is unaware of the term that it is sought to imply into the contract: Spring v National Amalgamated Stevedores and Dockers Society (1956). It cannot be applied if there is uncertainty as to whether both the parties would have agreed to the term which has been omitted from the contract. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) Lord Simon explained the conditions required to imply a term as a matter of fact into a contract as: "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract". In Attorney General of Belize v Belize Telecom Ltd (2009) Lord Hoffman considered that Lord Simon's conditions should not be regarded as a series of independent tests that each have to be met. He considered that they were simply different ways in which judges have previously "tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so". Lord Hoffman therefore considered that the "officious bystander" and "business efficacy" tests were simply means of implying terms by way of construing the contract. Lord Hoffman considered that these tests employed a subjective approach and that this gave rise to a distraction from the requirement for an objective construction of the contract based on what the contract was reasonably understood to mean. Thus he formulated a single test for implying a term as a matter of fact: "...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." Whilst it has been generally accepted that terms implied as a matter of fact are based on the idea that such a term emanates from the common implied intention of the parties, terms implied by law are obligations that arise within the contract irrespective of the intentions of the parties or the facts of a particular case. Once a term is implied by law and the courts find for its existence in the particular circumstances of a case, then that case becomes the authority for the inclusion of the term in all subsequent similar cases. In Liverpool City Council v Irwin (1976) the House of Lords implied a term as a matter of law, stating that there was a duty on a landlord to take reasonable care to keep in reasonable repair and usability the common areas of the Page 2 of 16

3 building. Lord Cross thought that the test to be applied in making a decision to imply a particular term as a matter of law into all contracts of a specific type was whether in the general run of such cases the term in question would be one which it would be reasonable to insert. The fact that many contracts contain similar or identical terms does not necessarily mean that it is appropriate to imply a term by operation of law. In Ashmore v Corporation of Lloyd's (No 2) (1992) it was held that to imply a term there had to be a broad category or relationship, such as employee/employer, principal/agent, landlord/tenant in which it is possible to say that certain obligations could be regarded as "typical" for a term to be implied. Whether a term is implied as a matter of fact or law, the role of the courts is subject to a number of limitations. An implied term must not be contrary to an express term of the contract. It must be by agreement of the parties albeit unexpressed and capable of being deduced from circumstance - unless it meets the criteria for implication by law. It must be reasonable/equitable to imply such a term. It must be necessary to imply such a term: see AG of Belize v Belize Telecom (2009), per Lord Hoffman and subsequent case law. Question 2 The common law rule in English law is that only the parties to the contract may enforce the contract against each other, even if the contract was entered into with the sole intention of benefiting or imposing liabilities on a third party: Tweddle v Atkinson (1861). Whilst there are clear and good reasons for the existence of such a rule, the common law position has been subject to severe criticism, most notably that it prevented a third party benefitting from the provisions of a contract even where that had been the intention of the parties to the contract. There have been numerous attempts by the judiciary and Parliament to limit or exclude the operation of the rule. The most significant common law exception is the law of tort, (e.g.) negligence provides a cause of action for those who suffered harm caused by products supplied under contracts to which they were not privy: see Donoghue v Stevenson (1932). Within the law of contract, common law rules were developed that permitted parties to claim on behalf of those who were not privy. The application of those rules by the senior judiciary lacked both clarity and consensus and thus led to uncertainty. For example, in Jackson v Horizon Holidays (1975) the plaintiff entered into a contract for the supply of a holiday for himself and his family. When the defendant breached the contract the plaintiff successfully claimed for disappointment suffered by members of his family (who were not parties to the contract). The Court of Appeal held that he acted not as trustee for his family but had entered the contract on their behalf. Lord Denning MR approved Lush LJ s statement in Lloyds v Harper (1880) that, where a contract was made for the benefit of a third party, the contract could be sued upon on behalf of the third party. He declared Lush LJ s statement to be a rule of general application. In Woodar Investment Development v Wimpey Construction (1980) the House of Lords decided that Lush LJ s statement in Lloyds v Harper did not amount to a rule of general application and that Jackson v Horizon Holidays, whilst not Page 3 of 16

4 incorrect, was of limited application and might be used in holiday cases. The rights of third parties were consequently not generally recognised in Woodar. In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994) the rule in Dunlop v Lambert (1839) was employed to allow parties to claim on behalf of third parties provided that it was recognised by them that a third party might suffer damage as a result of a breach: see also Alfred McAlpine Construction v Panatown (2000). A further example of conflict among the senior judiciary on this point is to be found In Beswick v Beswick (1966). In that case a widow, who was not party to a contract entered into by her husband received a benefit under it in the form of weekly payments. She sought to enforce the contract (a) on her own behalf and (b) as administratrix of her husband s estate. Her claim to personal entitlement under the contract failed: she was not privy. To avoid the doctrine the Court of Appeal attempted to interpret s56 (1) Law of Property Act 1925 as including personal as well real property. The House of Lords disapproved of this interpretation of the 1925 Act but did allow Mrs Beswick to enforce the contract as administratrix of her husband s estate. Other common law devices to avoid the doctrine of privity have included the use of collateral contracts (see Shanklin Pier Ltd v Detel Products Ltd (1951)) and the use of agency (see (eg) Watteau v Fenwick (1893). Equity has also been employed to protect third party rights. For example, where there is an express or implied declaration of trust that a third party may enjoy benefits passing under the contract the trust will be recognised: see (e.g.) Les Affreteurs Reuinis SA v Leopold Wellford (London) Ltd (1919). Via the rule in Tulk v Moxhay (1848), equity permits those who were not party to the original agreement to enforce restrictive covenants concerning land against subsequent purchasers who had notice of the covenant, providing the covenant runs with the land. Attempts to extend the principle in Tulk v Moxhay to personal property led to the same uncertainty as was to be found in the common law. The principle was recognised by the Privy Council in The Lord Strathcona (1926) but rejected by the High Court in Taddy v Sterious (1904) and Port Line v Ben Line Steamers (1958). The statutory exceptions to the doctrine of privity of contract developed in a piecemeal manner: see (eg) s 148(7) Road Traffic Act 1988, s 11 Married Women s Property Act 1882, (Bills of Exchange) Act 1882 and s 56(1) Law of Property Act Attempts to avoid the injustices arising from the doctrine were so numerous that the rule itself was made impracticable and unfair and the law artificial, uncertain and complex : see Law Commission Report 242 Privity of Contract: Contracts for the Benefit of Third Parties. The Contracts (Rights of Third Parties) Act 1999 represents the greatest and most coherent inroad into the doctrine of privity of contract. It resolves many of the complexities. Section (1)(1) provides that a third party may enforce a contract in his own right. This is subject to the provisos set out in s 1(1)(a) and (b) that either the contract expressly provides that he may enforce or purports to confer a benefit on him. S1 (3) provides further that the third party must be identified by name, as a member of a class, or by description. Page 4 of 16

5 The Act neither abolishes nor replaces the doctrine of privity. It reforms it. It retains the common law rule that a contract cannot impose a burden on a third party. The problem of complexity is not resolved for those who fall outside the provisions of the Act: the pre-existing exceptions and means of avoidance are preserved: see s7 (1). Question 3 Contracts in restraint of trade are prima facie void as being contrary to public policy. This policy intervenes on two grounds: first the common law seeks to protect an individual from negotiating away his livelihood and, second, it is not in the public interest for the state to be deprived of a valuable benefit by allowing a person to be restricted in carrying out his lawful trade or business. The modern doctrine of restraint of trade is to be found in the case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. (1894). The decision in the case stated that the public has an interest in persons carrying on their trade freely and that as a consequence interference in individual freedom to trade and, indeed, all restraints, are contrary to public policy and therefore void. The case did however consider that a restraint may be justified if a restriction is reasonable both with regards to the individual and the public good. The result of this and later decisions is that the doctrine can be reduced to a number of principles. First, all contracts in restraint of trade are prima facie void. Second, it is a matter of law for the court to decide whether any special factors exist which may or may not justify the restraint. If the view is taken that such special factors do not justify the restraint then the covenant (and possible the contract) will be void as being contrary to public policy. Third, if the special circumstances do point to the restraint being valid, then it must be reasonable not only as regards the parties to the contract, but also as regards the interests of the public. Lastly, the burden of proving that the restraint is reasonable lies on the party alleging it to be so. If that burden is satisfied then it is always open for the party attempting to avoid the restraint to prove that the restraint is, in any event, contrary to the public interest and therefore void. A covenant in restraint of trade can only be regarded as reasonable if it is designed to protect only the legitimate interests of the covenantee. In Herbert Morris Ltd v Saxelby (1916) two types of contracts which are capable of being protected were identified. First, in contracts for the sale of a business, together with its goodwill, it is proper for a purchaser to restrain the vendor from acting in competition with the business just sold to the purchaser. The reason for this is that goodwill is a proprietary interest legitimately capable of protection. Second in contracts of employment an employer, while not legitimately able to prevent a former employee from acting in competition with the employer, is able to prevent the former employee from making use of trade secrets acquired during a period of employment. Similarly, the employer can prevent a former employee from soliciting former employer s customers. In these two examples one can clearly see that the law is attempting to balance the rights of the individual and the requirements of the state in respect of trade. Once it has been established that there is a legitimate interest capable of being protected the courts will allow the covenantor to impose only such restraint that will do no more than protect that interest. If the covenant exceeds this it will be void. Page 5 of 16

6 In assessing the reasonableness of the restraint the court will have regard to its nature, area and duration. The covenantee has to show that the restraint must be reasonable as regards both parties at the time of contracting. The effect is that the question of reasonableness is one which is directed towards the contract as a whole. Contracts that are held void as being unreasonable with regards to the public interest are extremely rare. One example is Wyatt v Kreglinger and Fernau (1933) where the defendants promised the plaintiff a pension provided that he did not compete against them in the wool trade. The Court of Appeal held (inter alia) that the restraint was contrary to the public interest. A restraint of trade covenant will be struck down if it is found to be unreasonably extensive as to its duration. The question of duration is largely one of fact, depending on the nature of the business. Thus in the Nordenfelt case 25 years was held to be reasonable. The covenant must not be excessive in respect of the area to which the restraint applies. Again, in the Nordenfelt case a worldwide ban was appropriate given the reputation of the covenantor and the nature of the business in question. In Forster & Sons Ltd v Suggett (1918) a covenant by a works manager, who had acquired knowledge of a secret glass-making process, not to engage in glass making anywhere within the United Kingdom was held to be reasonable. On the other hand, in Mason v Provident Clothing and Supply Co. (1913) a covenant by a canvasser not to work in a similar trade or business within 25 miles of London was held to be unreasonable given the covenantor s limited sphere of influence in his employment. In order to arrive at the conclusion as to whether or not a covenant or contract is void as being contrary to public policy, the court must construe the contract to determine the nature and the extent of the restraint contemplated by the parties in the circumstances of the situation at the time. In doing so the court has used both literal and purposive approaches to the interpretation of contracts. For example, in Home Counties Dairies Ltd v Skilton (1970) the Court of Appeal held that, whilst the parties had not contemplated a restraint, this was the effect of the literal interpretation of the clause and it was held that the restraint was valid. An example of the purposive approach is to be found in Littlewoods Organisation Ltd v Harris (1977) the Court of Appeal took a more flexible approach and stated that whilst on a literal basis the restraint could apply to prevent an employee from working for a multinational competitor anywhere, the business of the covenantee was limited to the UK and thus the restraint was also confined to that geographical area as well. Question 4 (a) Simple contracts frequently take the form of mutual promises of some future performance. Not all such exchanges of promises amount to enforceable agreements: there must have been an intention by the parties that the agreement should be legally binding. The absence of such an intention is fatal to the existence of the contract. The agreement then exists in fact but goes unrecognised by the law. One of the parties may have a subsequent change of mind because for one reason or another the contract has become unattractive or inconvenient. In order Page 6 of 16

7 to address this practical, evidential problem the court makes use of the device of rebuttable presumption. A presumption is a supposition that the law allows or requires to be made. Rebuttable in this context means that the supposition will give way to evidence to the contrary. In social and domestic situations the presumption is that there is no intention to create legal relations. The reasons behind such a presumption include its appropriateness to most social situations: there is no intention to bind in a legally enforceable agreement. There is also a need to avoid the courts becoming clogged with trivial disputes, thus bringing the law into disrepute. In the leading case of Balfour v Balfour (1919) a husband who was about to go abroad promised to pay his wife a certain sum per month; the wife s consideration for this promise was that she would not seek further maintenance from her husband. When the husband failed to pay, the wife contended that her husband was legally bound by his promise. The Court of Appeal held that the husband was not bound in contract: in domestic situations there is no intention to create legal relations. This principle includes parent and child relationships (see Jones v Padavatton (1969) and extends to other social relationships (see (e.g.) Buckpitt v Oates (1968)). A party seeking to rebut the presumption of lack of intention must carry the burden of proof and bring forward evidence of intention. What may constitute adequate proof of an intention is essentially a question of fact and is decided upon the circumstances of each case. Factors that have proven influential with the court have included: dealing at arm s length (Merritt v Merritt (1970)), putting financial security at risk (Parker v Clarke [1960]), and mutuality (Simpkins v Pays (1955)). It is thought likely that in situations analogous to Simpkins v Pays some form of formal agreement would be required in order to rebut the presumption: see Wilson v Burnett (2007). Question 4(b) In commercial agreements there is a strong presumption that there is an intention to create a legal relationship and, whilst it can be overturned, strong evidence is required to do so. As stated in (a) above the burden of proof is on the party seeking to rebut the presumption. One way in which the presumption can be overturned is an express statement to the contrary. In Appleson v Littlewoods Ltd (1939) and Jones v Vernon Pools (1938) the football pool coupons bore the words "binding in honour only" and this was held to be sufficient to rebut the presumption of an intention to create a legal relationship. In Rose and Frank Co. v J R Crompton and Bros (1925) it was held that an "honourable pledge" clause in the contract was sufficient to rebut the presumption of an intention to create a legal relationship as regards future orders for goods, however as regards orders already received there was a binding obligation on the defendants to execute the order. However, in Edwards v Skyways Ltd (1964) it was stated that "ex gratia" did not indicate that there was no intention to create legal relations but merely that there was no admission to any pre-existing legal liability. Page 7 of 16

8 In Bowerman v Association of British Travel Agents Ltd (1996) the court went so far as to say that one would need to expressly exclude the presumption of intention to create legal relations for this to be effective. Attempts have been made to use letters of comfort in argument when attempting to show a valid contract existed. Such arguments are sometimes based upon agreement and sometimes upon intention. Such attempts for the most part do not appear to have been successful: see (e.g.) Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd (1989). SECTION B Question 1 (a) It is clear from the facts of the question that Rodney s delay amounts to a breach of contract. In order for Muriel to recover substantial damages in respect of that breach it is necessary for Muriel to demonstrate that the loss was caused by Rodney s breach and that her loss was not too remote. For much of her claim there is a clear causal connection between the breach and Muriel s loss: i.e. she is able to show that the breach is the factual cause of her loss and not the contract with Rodney or some other outside factor: see (e.g.) see C&P Haulage v Middleton (1983); Smith Hogg & Co v Black Sea Insurance (1939) etc. The exception to this is the cost of employing a child minder. As a sales director it is likely that she would have to employ a child minder. If that is the case the expense would not be caused by the breach and so is not recoverable. If, however, the child care costs were increased by Muriel s staying in hotels in London (e.g. full-time care might not be needed if she and her children lived in the same city) the increase is recoverable. In order to demonstrate that the loss is not too remote Muriel must show that the loss is recoverable within the rule in Hadley v Baxendale (1854). It is clear law that Alderson B s statement in Hadley v Baxendale (1854) amounts to a single rule with two limbs or parts: see (e.g.) The Heron II (1967) per Lord Reid and Jackson v Royal Bank of Scotland (2005), per Lord Hope. There is, then, a single rule that governs remoteness of damage. It may be divided into two parts or limbs. The first limb refers to losses arising naturally, i.e. according to the usual course of things, for such breach of contract itself. This rule seeks to identify what loss must have been in the minds of both the parties as the likely result of the breach in question. The answer is arrived at by looking at the nature of the contract and asking: what loss will almost inevitably follow if there is a breach? The test is objective. The second limb deals with losses in the contemplation of both parties; the test is based on the actual knowledge of the parties at the time of contract and is subjective. Under this limb damages may be recovered from losses arising from special circumstances, provided they were known to the party in breach. The travel fares between Manchester and London are unlikely to be regarded as losses arising in the natural course of things. The loss would not, then, be recoverable under the first limb in Hadley v Baxendale. If, however, Rodney had knowledge of Muriel s personal circumstances (that she was based and had children living in Manchester), fares between the two cities might be recoverable under the second limb in Hadley v Baxendale. Page 8 of 16

9 With regard to the cost of Muriel s hotel bills, it is possible that the first limb of Hadley v Baxendale would apply. It is arguable (depending on the facts of the case) that in the normal course of things Muriel would have to find alternative accommodation if she was unable to move into her new house because of delays in renovation work. An argument under the second limb of Hadley v Baxendale is likely to prove stronger. Again this would rest on Rodney s knowledge of Muriel s personal circumstances. Muriel s ability to claim for four star hotel accommodation is limited by her duty to mitigate her loss: see (e.g.) British Westinghouse Electric v Underground Rly Co of London (1910); Payzu v Saunders (1919). Rodney might argue that Muriel should have sought cheaper accommodation. Muriel could respond that (a) as a sales director such accommodation was suitable to her in that it was no better than the accommodation she had to forego because of the breach and (b) no other suitable accommodation was available. Question 1(b) Damages in contract for emotional distress were originally held to be irrecoverable: see Addis v Gramophone Co. Ltd (1909). The exceptions to this rule is where the main aim of the contract was the provision of pleasure, peace of mind etc: see (e.g.) Jarvis v Swan Tours Ltd, Jackson v Horizon Holidays Ltd (1975), Heywood v Wellers [1976], Haynes v Charles & James Dodd (1990) etc. Damages may also be awarded for inconvenience and disappointment: see (e.g.) Bailey v Bullock (1950). It was thought that damages for such distress were available only if the sole object of the contract was the provision of peace of mind, prevention of distress, pleasure etc.: see Watts v Morrow (1991) per Bingham LJ. Thus in Knott v Bolton (1995) the client s claim for damages for disappointment and distress was disallowed on the ground that the central object of the contract was to design a house, not to provide pleasure to the occupiers of the house In Ruxley Electronics v Forsyth (1995) the House of Lords awarded Forsyth 2,500 because the failure to build a swimming pool to the correct depth resulted (per Lord Lloyd) in disappointed expectations. The "very object" of the contract requirement was relaxed by the House of Lords in Farley v Skinner (2001), where it was stated that it did not matter if the object of the contract was not "to provide pleasure, relaxation, peace of mind or freedom from molestation" provided this was an important part of the contract. Their Lordships also disapproved of the position taken on emotional distress by the Court of Appeal in Watts v Morrow. They further observed that Knott v Bolton had been wrongly decided on the issue of disappointment. In both Ruxley Electronics and Farley v Skinner the House of Lords recognised the Claimant s performance interest and were prepared to award damages for disappointment to consumers. Muriel may therefore argue that she is entitled to damages for emotional distress on four grounds: (1) the distress resulting from the physical inconvenience of having to live in hotel accommodation rather than in her home; (2) the distress of being forced to live away from her children during the week; (3) the distress caused by the need for such extensive travel each week; and (4) the distress caused by her disappointed expectations of when the work would be finished Page 9 of 16

10 and she could move into her home. Arguments (1) to (3) are of course dependant on the court s findings with regard to the rule in Hadley v Baxendale. Question 2 Consideration is one of the essential ingredients of an enforceable simple contract in English law. Consideration is the price for which the promise of another is bought: Dunlop Pneumatic Tyre v Selfridge (1915) per Lord Dunedin. It must be something of value. In Currie v Misa (1875) per Lush J "some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given suffered or undertaken by the other". 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. This is a formal test and is to be distinguished from adequate consideration : the court will not look into whether or not the bargain represents good value. Promises to pay more than was originally agreed must be supported by consideration by the promisee. The classic cases governing this point are Stilk v Myrick (1809) and Hartley v Ponsonby (1857). In Stilk 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 the facts were substantially similar 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. The facts of the present problem have a close resemblance to those of Williams v Roffey Bros & Nicholls [1991], In Williams v Roffey, Roffey & Nicholls, the defendant building contractors, entered into a contract with a third party for the renovation of a number of flats. The defendants engaged Williams, a carpentry contractor, to perform work on the flats that the defendants had contracted to renovate. The defendants were subject to pay a penalty if the contract was not performed on time. Williams ran into difficulties which were partly attributable to the fact that the agreed price for the work was too low and partly to Williams poor management of his own work force. The defendants offered to pay Williams further sums to complete the work that he was already bound in contract to carry out. Williams completed a few more flats. He then abandoned the contract. When no payment was forthcoming from the defendants Williams brought a quantum meruit claim for the work he had done. The question arose as to whether Williams had provided sufficient consideration to enforce the defendants promise. Page 10 of 16

11 Glidewell LJ s leading judgment in the Court of Appeal (Purchase LJ dissenting) set out the following criteria for the finding of sufficient consideration in such situations:- (i) if A has entered into a contract with B to do work for, or to supply goods (ii) or services to B, in return for payment by B; and at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and (iii) B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time; and (iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and (v) B's promise is not given as a result of economic duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding. 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. Providing that the court finds no evidence of either fraud or duress in Dave s conduct (and there is nothing in the facts of the case to suggest it), Dave s claim for the extra 5,000 promised by Will is likely to succeed. Question 3 In order to decide if there is a legally binding agreement which Gerald can enforce it is necessary to analyse the various communications between the parties with a view to finding evidence of agreement. The preferred method of the courts for establishing agreement is to seek objective evidence of this phenomenon by finding the existence of offer and acceptance. An offer is defined as an expression of a willingness to contract on certain terms made with the intention that a binding agreement will exist once the offer is accepted. An offer however must be distinguished from an invitation to treat, which is merely a statement of a willingness to initiate negotiations and does not amount to an offer. In analysing the dealings between Sean and Gerald the first significant factor that needs consideration is whether the advertisement placed in the Antiques Gazette ( the advertisement ) is capable of comprising an offer: see Carlill v Carbolic Smoke Ball Co (1893). Most advertisements are regarded as invitations to treat and not offers capable of being accepted: see Partridge v Crittenden (1968), per Parker CJ. There is nothing in the facts of the case to suggest that the advertisement is anything more than an invitation to treat. Gerald's telephone call on Friday is then an offer to Sean to buy the chest of drawers. Acceptance is defined as "a final unqualified assent to all the terms of an offer". Even if the advertisement could be interpreted as an offer, Gerald's telephone communication with Sean did not amount to an acceptance. Gerald s words were not an unqualified acceptance: he offered to pay not 2,500 but 2,000. This constitutes a counter offer, which destroys the original offer: Hyde v Wrench (1840). Page 11 of 16

12 Whilst it is then open to Sean to accept the counter offer, he does not do so. His insistence upon 2,500 is clearly not an unqualified acceptance. The exact status of Sean s words is debatable. They could amount to a counter offer, a simple rejection, or a statement of the minimum price upon which he is prepared to contract: see Harvey v Facey (1893). Sean s promise not to sell the chest to anyone else is unsupported by consideration from the promisee, Gerald. Gerald then has no right in law to enforce this promise: see Routledge v Grant (1828). With regard to Gerald s purported acceptance by telephone on Monday morning (by leaving a message on Sean's answering machine), a number of factors require consideration:- (a) Is there an offer for Gerald to accept? If the above analysis is correct there is no offer by Sean that Gerald can accept. (b) If there is an offer by Sean has Gerald communicated his acceptance? The basic rule for acceptance is that it must be communicated to be effective. The communication is effective when the offeror is notified (i.e. received by the offeror): see Carlill v Carbolic Smoke Ball Co (1893), per Lindley LJ. There are exceptions: see (e.g.) the postal rules and the law on waiver of acceptance by the offeror. Communication by telephone is regarded as an instantaneous form of communication, in which case communication is complete when it is received by the offeror: Entores v Miles Far East Corporation (1955). In the present problem Gerald left his purported acceptance on Sean s answer machine. The message was later erased by a third party. This communication would fail under the rule in Entores v Miles Far East Corporation. Communication by making use of an answer machine may be classified as noninstantaneous communications using an instantaneous method. This class of communication was recognised in Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft Gmbh (1983). In that case Lord Wilberforce stated that there was no precise rule governing when communication was complete. A principle does, however, emerge from his Lordship s statement: provided the offeree has done all that is reasonable to communicate, communication will take place when the offeree might reasonably expect, guided by sound business practice. There seems to be no authority on the exact position of messages left on answer machines. There is some academic debate on the matter. It can be argued from the principles laid down in Brinkibon that the situation is governed by what the offeree could reasonable expect: the machine was working and the message would not be heard until later. Under this analysis Gerald s acceptance is not communicated when left on the machine. Some commentators argue by analogy with the postal rules that communication is complete when the message is left. This argument fails to deal with the courts reluctance to extend the ambit of the postal rules: see Mondial Shipping and Chartering BV v Astarte Shipping Ltd (1995) Page 12 of 16

13 (c) If the court finds that there is an offer by Sean is it capable of revocation? An offer may be revoked at any time up until acceptance: Payne v Cave (1789). If Gerald has successfully communicated his acceptance the offer cannot be revoked and Sean will be liable in damages under the contract if he cannot supply the chest in question. If Gerald has failed to accept the offer then Sean is free to revoke his offer. Revocation must be communicated to the offeree (i.e. received by the offeree) to be effective: Byrne & Co v Leon Van Tienhoven (1880). Revocation may be revoked via a reliable third party: Dickinson v Dodds (1876). Revocation may also be effected, by implication, from the promisor s conduct: see Dickinson v Dodds (1876) Cartwright v Hoostoel (1911). Depending on the facts, communication of revocation may therefore be effective. If it was not the offer remained open to be accepted. However, if the exchange between the parties, were both received timeously, Sean s revocation before Gerald s purported acceptance would terminate the offer, rendering it incapable of acceptance. Consequently Sean has a strong arguable defence against any claim that Gerald might bring. Question 4 (a) Only terms of a contract may form the basis for an action in breach of contract. Such terms may be either express or implied. Express terms may derive from the written terms of a contract or from oral statements. The present contract seems to be part oral and part written. Apart from the wording of an exclusion clause, no information is given in the question on the written terms of the contract. This answer must therefore concentrate mainly on the possible oral terms of the contract. A distinction must be made between statements which are representations and those that are terms. When deciding what oral statement may constitute a term the court may employ a number of tests which indicate the parties intention that the statement should constitute a term. One of these is the lapse of time between the making of the statement and entering into the contract: Routledge v McKay (1954). A second is the degree of importance attached to the term by the innocent party. If it is clear that the innocent party would not have entered into the contract but for the statement made it is likely to amount to a term of the contract: see Bannerman v White (1861) in which clear indication by a purchaser that he would not buy certain hops if they had been treated with sulphur. This was sufficient to render assurances by the seller that the hops were untreated - a term of the contract. Page 13 of 16

14 Where a contract is reduced into writing and the representation is not reproduced in the writing that is likely to be taken as an indication that parties did not intend it to be a term of the contract: see Routledge v McKay (1954). Even where the evidence falls short of that in Bannerman v White, and the agreement is reduced into writing that is either silent on the representee s requirement or even excludes it, such a requirement may become a term of the contract providing it is clear that one of the parties entered into the contract in reliance on the statement: see (e.g.) Birch v Paramount Estates (1956) and Couchman v Hill (1947). Where the representor has some special knowledge or skill that places him in a stronger position with regards to the veracity of the statements made to the representee the court is more likely to regard the representation as a term: see (e.g.) Oscar Chess Ltd v Williams (1957); Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965). Rupert may argue that two of Donald s statements constitute express terms of the contract. They are: (a) the representation as to Cowboy Blues pedigree and (b) the representation as to his winning races in the previous year. Rupert s argument should be based upon the central importance of those factors as predictors of the dog s future performance and consequent earnings. There is nothing in the facts of the question to suggest that Rupert made known the importance of those factors, nor that the representations were made part of written terms and conditions. However, he could, with good reason, argue that he relied on those representations when entering into the contract: Birch v Paramount Estates. His relative inexperience in purchasing and owning greyhounds supports his case further: Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd. A greyhound is a good like any other. Sale of it falls to be considered under the Sale of Goods Act 1979, section 13 of which implies into all contracts for the sale of goods a term to the effect that goods shall comply with their description. Details of Cowboy Blue s parentage are very likely to be considered as part of the description of the animal. Failure to perform a contract completely and precisely is a breach of contract. Cowboy Blue s pedigree and his lack of past success in races are both likely to amount to breaches of express or alternatively implied terms of the contract. The contract has already been discharged: property in the dog has passed to Rupert and Rupert has paid the purchase price for the dog. Rupert s remedy therefore lies in common law damages, which are available as of right. The written terms and conditions of sale contain an exclusion clause which purports to exclude liability for breach of contract and so falls within the ambit of s3 of the Unfair Contract Terms Act This provides that in a contract where one deals as a consumer or on the other's standard terms of business the other party cannot exclude or restrict liability for breach of contract except insofar as the term satisfies the requirement of reasonableness. Section 6(2) of the 1977 Act provides that liability under s13 Sale of Goods Act 1979 cannot be excluded as against those dealing as a consumer. Where the transaction does not involve a consumer the ability to exclude s13 is subject to the criterion of reasonableness. The criteria for assessing reasonableness are set out in s.11 and Schedule 2 of the 1977 Act. Factors suggesting that the clause is unreasonable are set out in Page 14 of 16

15 s11 (1) and paragraph (a) Schedule 2 of the 1977 Act. The burden of proving that the disclaimer is reasonable is on Donald: S11(5). He is likely to have difficulty in doing so. The common law rules of construction of exclusion of exclusion clauses require that such clauses are read strictly and contra proferentem. If the contractual terms discussed above were not reduced into writing then the exclusion clause does not cover the breach: see Andrews v Singer (1934); Baldry v Marshall (1925) etc. For the reasons set out above the exclusion is unlikely to provide an effective defence. Rupert consequently has a good arguable claim. Question 4 (b) A misrepresentation is a false statement of fact (or possibly law), made by one party to the contract to another party to the contract, before the contract was made, with a view to inducing the other party to enter the contract, and that representation did actually induce the other party to enter into the contract. Statements of opinion are not actionable: see Bisset v Wilkinson (1927). Donald s statements as to the pedigree of Cowboy Blues may be regarded as statements of fact for the following reasons: (a) he appears from the facts of the problem to hold himself out as a dealer or breeder of racing greyhounds and so claims expertise and acts in the knowledge that his statement would be relied upon by a person with less expertise (see ESSO v Marden (1976)): (b) he arguably possesses knowledge of the true facts, which turns statements of opinion into fact (see Smith v Land & House Properties (1884)); (c) given his arguable knowledge of the facts, he has misrepresented the state of his own mind and this amounts to a misrepresentation of fact (see Edgington v Fitzmaurice (1885), per Bowen LJ). Donald s statements are therefore statements likely to be of fact. The representee must establish that the misrepresentation was material, that is that the representation induced him into entering into the contract. In Museprime Properties Ltd v Adhill Properties Ltd (1990) it was held that it was sufficient if the purchaser could show that he was actually affected by the misrepresentation. In Downs v Chappell (1996) the Court of Appeal confirmed that a misrepresentation is material when the natural and probable result is to induce the representee to act on it. Rupert should have little difficulty in demonstrating that the statements were material: pedigree and past performance of a racing dog are significant factors in predicting the future performance, and hence in the decision to purchase the animal. He must go further and show that he relied on the representations when making his decision to purchase the dog: see (e.g.) Horsfall v Thomas (1862), Smith v Chadwick (1884). The facts of the question would seem to support this. It does not matter if Rupert relied on other factors as well, provided that the representations have acted on his mind when making the decision to enter the contract: Edgington v Fitzmaurice (1885). If Rupert is aware of the untruth of Donald's statements at the time he entered into the contract then he will not be able to claim for misrepresentation. The onus of proving such knowledge lies with Donald, who is precluded from establishing this merely by showing that Rupert had the means of discovering the truth himself: Redgrave v Hurd (1881). Page 15 of 16

16 Claims in misrepresentation may be classified as being fraudulent, innocent, or falling under the Misrepresentation Act 1967 s.2(1). Tactics, burden and standard of proof, and the remedies open to the claimant are influenced by the type of misrepresentation claimed. Fraudulent and negligent misrepresentation would appear to be the most advantageous in the circumstances. To bring an action in fraudulent misrepresentation Rupert must show that there was a "false statement made knowingly or without belief in its truth or recklessly careless whether it be true of false": Derry v Peek (1889). Rupert has to prove that Donald acted dishonestly or with a disregard for the truth. This may be difficult to prove since Robert would have to establish the state of Donald's mind. If he could do this then his action would lie in the tort of deceit, where the potential remedies are rescission and damages. Damages are calculated on a tortious basis and reflect all losses flowing from and caused by the misrepresentation: Doyle v Olby (Ironmongers) Ltd (1969). A tactically more advantageous claim would be in negligent misrepresentation under s2(1) Misrepresentation Act 1967, the provisions of which would place the burden of proof on Donald to demonstrate that he had reasonable grounds to believe and did believe that the facts represented were true : see Howard Marine & Dredging Co Ltd v Ogden & Sons (Excavations) Ltd (1978). The wording of s2 means that the remedies and rules of remoteness of damage in negligent misrepresentation are the same as those for fraudulent misrepresentation: see Royscot Trust v Rogerson (1991). The facts of the question do not indicate any evidence of the facts upon which Donald based his representation. If he possesses evidence which might provide reasonable (though false) grounds for his belief in the representations, this will defeat a claim for fraudulent and s 2(1) negligent misrepresentation. It would not defeat a claim for innocent misrepresentation: see Oscar Chess v Williams (1957). Remedies for innocent misrepresentation are limited to rescission or damages in lieu of rescission: s 2(2) Misrepresentation Act On the facts of the problem Rupert has a strong arguable case in negligent misrepresentation under the 1967 Act. Page 16 of 16