BUSINESS LAW CONTENTS. Introduction. The Legal Profession. Hints on Answering Law Questions. Core Subjects in the Syllabus

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1 Business Law 1

2 BUSINESS LAW CONTENTS Introduction The Legal Profession Hints on Answering Law Questions Core Subjects in the Syllabus The Law of Contract Offer Acceptance Consideration Vitiating Factors in a Contract Mistake Representations & Misrepresentations Duress and Undue Influence Suggestions on Answering Law Questions Illegal Contracts Contracts in Restraint of Trade Contracts of Employment Remedies for Breach of Contract Remoteness of Damage Suggestions for Answering Questions Summary of Selected Cases The Law of Agency The Sale of Goods The Law of Tort Negligence Nuisance Defamation Partnership Company Law Conclusion Business Law 2

3 INTRODUCTION This is not an alternative to a comprehensive text book. It is an account of the basic concepts that any candidate would need to pass the examination in Business Law. It is hoped that these notes will show the way to answer a question, what to avoid and what to put in. This is particularly important regarding the use of cases. It is very difficult to get a good grade in law without using decided cases as the basis for your account. The best way is to read the cases in detail, and then get a short summary of the point that came out of them. THE LEGAL PROFESSION The following account of the legal profession is for your information only. There will be no questions on this area of the law. Lawyers In England there are two different kinds of lawyers, as described below. 1. Solicitors These are the lawyers who usually work (practice!) from an office in a town. They are governed by a body of senior solicitors called the Law Society, with its headquarters in Chancery Lane in London. To become a solicitor you would normally require a law degree from an English university, and you would have to work as a clerk, usually for three years, for a firm of established solicitors. After this period, if you manage to pass the examinations, you would receive a practice certificate, and your name is written on the Roll of Solicitors in Chancery Lane. Usually you would then be offered a job in the firm that you worked in as a clerk. This would be as a salaried partner. At the end of a period of time, the other partners may offer you a full partnership in the firm. Solicitors offer a large range of services to the general public. They may also take some cases in the lower courts, particularly magistrates courts and county courts. 2. Barristers These are the lawyers who wear wigs and gowns in the higher courts in England and Wales. To become a barrister you would need a law degree (usually, though some have degrees in other subjects). You then have to join one of the four Inns of Court, all of which are in London. They are the Middle Temple, the Inner Temple, Grays Inn and Lincolns Inn. Which one of these is your decision, but you will have an interview and need to satisfy a group of the leading barristers who run that particular Inn, i.e. the benchers, that you should become a member. After a period of time and, having successfully taken examinations, you will go through an ancient ceremony involving an evening dinner in your particular Inn (a large hall, several hundred years old). At such an event the senior bencher, almost always a judge, will stand and call out your name, e.g. John Smith, I call you to the bar and pronounce you barrister. You go up and shake hands, and you are then a barrister for the rest of your life. Barristers work from chambers, i.e. an office which is part of the Inn of Court. They must employ a clerk who keeps a record of all the cases and negotiates with the public and/or a solicitor. Barristers must not interview members of the public except in the presence of the Business Law 3

4 solicitor that the member of the public has employed to help. They take cases in the higher courts, and are primarily, advocates. HINTS ON ANSWERING LAW QUESTIONS You must expect questions on any of the following Sources of Law This section deals with where law comes from. When you say This is the law and someone says Oh yes, who says so? you have to be able to justify what you have just said, i.e. you have to know the source of the particular law. In England there are really just two sources of law case law and statute law. The first is the law that comes out of decided cases in court, and the second is the law that Parliament has made in the form of an Act of Parliament. We will consider each of these in turn. Case Law There are a number of courts in England with different degrees of authority. At the bottom is the County Court, then the High Court (which is split into a number of divisions), and then at the top there is the Court of Appeal and the Supreme Court (formerly the House of Lords). New laws can be made in all of these except the County Court. How does this work? A civil case is between two contesting parties (people or companies). The person bringing the case, i.e. making the complaint is called the complainant (or in the old terms: the plaintiff). The other person is the defendant. There are two lawyers (barristers in the higher courts, and possibly solicitors in the County Court) and a judge. In the Court of Appeal there can be three or five judges as is also the case in the Supreme Court. The complainant s lawyer puts his side of the argument, i.e. his case and then the other lawyer puts his side. The judge listens to all the arguments and makes notes. When this is finished the judge leaves to consider. When the judge returns he gives his summing-up of the case together with his decision. This decision becomes a new law. It is written down by clerks in the court, published in the Law Reports and is binding on all future cases. It is however, a little more complicated than that. The summing-up of the judge consists of two different things: First, there is the logical reasoning which leads to his decision (the judges finding ). This logical reasoning and the decision which results from it is called the rationes decidendi, i.e. the reason for the decision and it is this that becomes the new law. Other things the judge might have said have no bearing on the case or on his final decision. These are called obiter dicta, i.e. things said by the way, and they do not have any binding effect. Second, there are Acts of Parliament. These take precedence over all other types of law making. So if a decision in the High Court is different to the ruling made by an Act of Parliament, the Act will always take precedence. Summary of points to remember: Case Law made in High Court judge s summing up reason for decision = new law other things said no effect. Business Law 4

5 One final tip: it is a good idea whenever you quote a case in your answer to underline it. Statute Law The making of an Act of Parliament can be quite long and sometimes very complicated. However, all that you need to know are the general rules. First of all, a member of the government (usually) decides after consulting his colleagues and, of course, the Prime Minister, that there is a need for a law in a particular area. He writes down his ideas and then gives it to a Parliamentary draughtsman. These people are barristers who specialise in writing out what will eventually become a new law. This preliminary draft is called a Bill. Most Bills originate in the House of Commons. On the day appointed for the introduction of these new laws, copies of the Bill are put on the seats of the members of the House and at the appointed time they read it. The first reading is for information only and can be followed by the second reading where the members of the House debate the different parts. Then there is the third reading which is followed by a vote. The members of the House (MP s) file out of the chamber into one of two corridors, they are the Yes and the No corridors. At the end of each corridor there is a table where an official counts each member as he goes past. The number of Yes votes and the number of No votes is recorded and the officials (known as Tellers) go to the Speaker of the House of Commons and give him the results. The Speaker then reads out the numbers both for and against, and then declares the result by saying either The Noes have it or The Ayes have it. ( Aye is an old fashioned word for yes ). It is then sent to the House of Lords for a similar procedure, and if it is passed, the original Bill is taken to the Queen for Her signature. Once this is done it then becomes an Act of Parliament and the original document is stored in St. Stephens Tower which is part of the Houses of Parliament building. Summary of points to remember: New law starts as Bill 1 st reading, 2 nd reading, 3 rd reading, votes, goes to other chamber, Queens s signature. Following these stages this becomes new statute law. CORE SUBJECTS IN THE SYLLABUS 1. There are certain parts of the Business Law syllabus which are essential, i.e. they are the core subjects. You must make sure that you understand and can remember these. 2. The basic subjects of any Business Law syllabus are as follows: Contract: You should make sure that you are familiar with the following aspects of this particular subject. 1. Offer and acceptance, i.e. the main headings and some cases to illustrate, such as the familiar Carlill case. 2. Consideration: You need a definition and the best one is probably the Currie v Misa definition given by the judge. Simply memorise it. 3. The effect of mistake, undue influence and, duress on a contract. 4. The meaning of an exclusion clause and how it affects a contract. You should know the case law and the statute law attitude towards putting an exclusion clause into a contract. 5. You should know what kind of contract is permitted for minors. Business Law 5

6 6. Finally, you should know how a contract may be discharged, and separately, the remedies for breach of contract. You should know the difference between common law and equitable remedies and be able to illustrate them. Tort: This is the next basic subject in Business Law. This means: o negligence, o nuisance, and o defamation By far the most important from this point of view is negligence. It would be wise to make an effort to really understand it the requirements of duty of care, breach and resulting damage. Agency: This is a small area of business law but you need to understand the: o types of agent, o how an agency is formed and o the duties, rights and responsibilities of both agent and principal Sale of Goods Act: Certain aspects of this Act should be learned thoroughly. In particular, sections 12, 13, 14, and 18. Company Law: This is a very large subject. The basic requirements that you should understand would be: o the formation of a company o its dissolution o the major characteristics of a limited company, and o the powers, responsibilities and duties of the directors Partnerships and Defamation: Finally, although these are relatively small subjects, try to read the relevant chapters. Remember that the above are suggestions to help you focus on the more important aspects of the Business Law syllabus. You must not assume that all the questions on the examination paper will be confined to the above. You can assume though, that in every paper you will have questions on some of them. THE LAW OF CONTRACT The fundamental area of business law is the law of contract. If you do not know this you cannot pass the exam. A contract is an agreement between two people which is legally enforceable. There is, however, more to it than that. An agreement can be rejected, changed, denied or forgotten about. So it is necessary to know what the legal position is in some of these eventualities. Most of the law regarding contracts is based on cases which have come up in the High Court and which form precedent, i.e. the decisions that will bind later cases which have the same set of facts and problems. To be able to answer a question properly you will need to know a number of these cases as well as the facts and results. In an examination answer you will simply not have the time to write out all the facts of these cases. What is needed is a summary which you could use in the answer. So as mentioned above, whenever a case is set out in the text as part of the explanation of a point made, a separate summary of the case will be made which you should memorise for a possible examination answer. The first requirement for a valid contract is to make an offer and to get back an acceptance. Let us deal with each of these aspects in turn. Business Law 6

7 Offer This is defined as a willingness to be bound to a contract. However: 1. It is necessary to distinguish an offer from what is really an invitation to someone else to make an offer. This is called an invitation to treat. The best examples of this are goods in shop windows and on the shelves. It is the customer who makes the offer, i.e. he or she offers to buy the goods on display. This is quite important because if, say, a customer says he will have one of the goods on a shelf in a shop and the assistant says he cannot because those goods are going to be withdrawn, the customer cannot sue for breach of contract. This was decided in the case of Fisher v Bell Although it is difficult you should try to remember the name of the case, what happened, the decision of the judge (do not use the word verdict this is used only in criminal cases) and most importantly the point of law that came out of the case. This point of law becomes what is known as case law and can be used to decide other cases or problems in the exam which have the same facts.(note: When referring to a case the v is short for versus which means against. However, in civil cases such as contract, the v is always referred to as and. So Fisher v Bell is spoken as Fisher and Bell. When you give the result of the case it is best simply to use the expression the court decided. Do not use the expression the court of law, it is unnecessary.) In this case a shopkeeper had put a flick knife on the shelf of his shop in the window. He was prosecuted for offering a flick knife for sale in his shop. He was found not guilty since the knife was not an offer but an invitation to treat. Other types of invitation to treat are auction sales, advertisements, and invitations for tenders. (A tender is a written estimate of the cost of doing a particular job, e.g. painting a door). Auctions are a type of sale where the auctioneer has possession of other peoples goods and tries to sell them. The goods are displayed in the auction house and on the day of the sale the auctioneer invites the public to make offers to buy. He accepts the highest offer by hitting the desk with a small hammer called a gavel. This then means there is a binding contract. 2. The offer, whether it is made by you or someone else must be certain. If it is vague then you cannot really know what you are accepting. In the case of Guthing v Lynn (it is a good idea to underline the name of the case you are quoting) the two parties to the contract were discussing the sale of a horse. The offer or, who was thinking of buying the horse, offered a sum of money for it and then said he would pay a larger sum if the horse was lucky. A dispute occurred later and the judge decided that there had been no contract since the word lucky was so vague that it had no meaning. 3. The next point about offers is to decide for whom the offer is meant. You can make an offer to a particular person or to everybody. The distinction is quite important. This was shown in the well-known case of Carlill v Carbolic Smoke Ball Co Here, the company had produced an inhaler which you had to use three times a day. It was supposed to guard against infections especially influenza. They published an advert offering 100 reward to anyone who contracted influenza after having used their product three times a day for two weeks. The advert also stated that to show our sincerity in the matter we have deposited 1,000 in the Alliance Bank in Regent Street, London. Mrs Carlill saw the advert and bought the product, used it according to the directions but still caught influenza. She then sued the company. They argued that the offer could not be accepted since it was too vague and was not directed at anyone in particular. Anyway, they did not know that Mrs Carlill had bought one since she had not written and told them. The court rejected these arguments and held that it was an offer to the whole world and anyone could accept the offer by simply buying the product and using it according to the Business Law 7

8 directions. This has now become a precedent. An offer may be made to the whole world and accepted by following the directions in the offer. 4. You must make a distinction between what is an offer and what really is just a request for some information. If you said to someone How much do you want for your car? and he replied Oh about 3,000 you could not then say OK Agreed and assume that you have bought it. All he has said is that to tell you the amount of money about which he would maybe sell the car if you made an offer. This was shown clearly in Harvey v Facey Here all the dealing was done in the form of telegrams. The claimant (i.e. the plaintiff as he was formerly known) telegraphed Will you sell us Bumper Hall Pen? (the name of a farm) Telegraph lowest cash price. He got a reply by telegram lowest price for Bumper Hall Pen 900. The claimant then replied to the effect that he accepted 900 and would buy the farm. When the defendant refused, he sued for breach of contract. In court it was held that the original telegram was simply a request for information and not an offer. Therefore there was no contract. 5. You should understand the difference between a cross offer and a counter offer. a) A cross-offer occurs when one person makes an offer to sell something and the other person makes an offer to buy the same thing. The offers are often sent by letter and cross in the post. Here there are two offers but no acceptance, so there is no contract. b) A counter-offer occurs where one person offers, e.g. to sell something for 30 and the other persons offers to buy it for 25. What has really happened is that the second person has rejected the offer of 30 and then made his own offer to buy at 25. So at this point there is no contract unless the first person accepts the new offer and agrees to sell for 25. Acceptance An offer must be accepted to become a valid contract. There must be an unqualified agreement to the actual offer. This can clearly be done by word of mouth, by writing, or by some action which counts as an acceptance as was shown above in the Carlill case. Here Mrs Carlill did what the advert required, i.e. she bought a smoke ball and used it according to the directions. It really cannot be inferred if the other party simply keeps silent. It could however be inferred from the other party s conduct. In this case, Mrs Carlill buying one of the products. However, you cannot accept an offer if you did not know about it. So if you found a lost dog and returned it to its owner, you cannot claim the reward if you read about it later in the newspaper. At the time you returned the dog you did not know about the offer. In Brogden v Metropolitan Railway Co the claimant had supplied coal to the defendant for many years even though there was no written contract. There was a draft contract but it had never been signed. The court took the view that having been supplied with coal for such a long time the defendants had, by implication, accepted the terms of the draft agreement. There was therefore a contract. You sometimes hear of a contract having been accepted subject to contract. This means that the other party suggests that there should be a negotiation about the terms before he really accepts it. So subject to contract does not mean acceptance. Since the acceptance must be unqualified, as mentioned above, any attempt to put extra terms into the so-called acceptance means there is actually no contract. If a counter offer is made, then the other party may accept it if he wishes. In which case there will be a valid contract. But if he says no, then there is no contract at all. The usual case here is Hyde v Wrench Business Law 8

9 Here one party offered to sell some property to the other for 1,000. The other party, Hyde, offered 950 which Wrench rejected. Hyde then wrote and said he accepted 1,000, and sued Wrench when the latter refused to complete. The court took the view that Hyde s offer of 950 was a counter offer which had the effect of terminating the offer from Wrench. The case therefore failed. Communication of the Acceptance There are different aspects to the need for the acceptance to be communicated after all, if the other party does not communicate his acceptance to you, then you have no way of knowing whether or not there is a contract! These different aspects may be dealt with as follows: 1. You can actually waive the need for communication. ( Waive means to do without.) This was done in the Carlill case mentioned above. Here, according to the advert, all that was required for a contract to be established was for someone, in this case Mrs Carlill, to buy the product and use it according to instructions. 2. You can decide, in your offer, which kind of acceptance you require, e.g. by post, by , by telephone etc. If the other person accepts by using another kind of method from the one you wanted, then there is not necessarily a contract. You can accept it if you want but you don t have to. 3. If you make it clear, expressly or by implication, that you want the acceptance to be made by post, then the postal rules apply. These are: a) The acceptance is complete, i.e. there is a valid contract, when the letter is posted. This is the case if you use words such as I require acceptance to be done by post, or in course of post then the postal rules apply b) However, if you use words such as I require acceptance by notice in writing and you don t get the acceptance letter if, e.g. it has been lost in the post, then there is no contract because you never got the notice! It all depends on the way it was written. 4. Silence however is not an acceptance How may an offer come to an end? The issue here is how an offer may end if it has not been accepted to form a contract. There are a number of ways, all of which are fairly obvious. 1. If either one or the other of the parties to the transaction dies then that ends the offer. 2. If the person to whom the offer has been made simply says no, i.e. it has been rejected. 3. If the offer was stated to be for a specific time and that time has lapsed then the offer is at an end. It is also the case that even if there is no specified time limit in the offer, it will come to an end at the expiry of a reasonable time. This was shown in the case of Ramsgate Victoria Hotel Co. v Montefiore The defendant had applied for some shares in the claimant company in June. They replied at the end of November and sent him a letter of allotment of the shares. When he refused to pay for them they sued for breach of contract. The court decided that the offer (to buy the shares) was for a reasonable time and a wait of nearly six months was unreasonable. Therefore, the offer had lapsed and there was no contract. Business Law 9

10 4. The person making the offer may withdraw his offer at any time before acceptance. This is known as revocation. In the case of Routledge v Grant 1828, the defendant offered to buy the house belonging to the claimant and asked for the acceptance to be within the next six weeks. Before the end of the six weeks he withdrew his offer. After this, but before the end of the six weeks the claimant accepted the offer and sued Grant for breach when he refused to continue. The court decided that the defendant was entitled to withdraw his offer any time before acceptance, even though it was within the six weeks stated. There was therefore no contract. However, there is more to it than this. For example: a) If the person who is making the revocation decides to use the post, then the rule of the post does not apply and his letter is effective only when actually received. b) The revocation information may be communicated to the other party by anyone who is sufficiently reliable, e.g. another person who is working with him, or perhaps a member of his own family. Consideration This is one of the most important areas in the law of contract. Basically it means there must be something in return for something to make a legal contract, usually the exchange of money for goods. So if I say I will come round to your house tomorrow at 10 o clock and if I do not arrive, you cannot sue me for breach of contract because you have not given anything in return for the promise. There is a definition of consideration which is accepted as the standard definition. It is from the case of Currie v Misa It is a good idea to try to learn it by heart. Consideration is: some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. If this is too difficult to remember, then you could state that consideration is the element of exchange in a contract, i.e. something for something, usually goods for money. There are some aspects of consideration which should be understood. 1. Executory consideration is where a person makes a promise in return for another promise, e.g. if you go into a shop and ask the shopkeeper to order some goods for you, then he promises to get the goods and you promise to pay when they arrive. 2. Executed consideration is a promise given in return for an act already having been made, e.g. in the above case when the shopkeeper has got the goods that he ordered for you and you promise to pay for them. If you later refuse to, then this amounts to a breach of contract. 3. Implied consideration. There is an exception to the general rule. If you ask someone to do something for you and afterwards offer to pay them something, this is binding. 4. Adequate or Sufficient Consideration? This often causes confusion. It is not too difficult to remember. Consideration does not have to be adequate. This means that whatever is exchanged for the goods you are buying does not have to be equal in value. 50 for a one year old car is not adequate, but if both parties are satisfied then it is legal and therefore sufficient and can result in a contract. Business Law 10

11 Consideration does, however, need to be something more than you are already bound to do. This is what is meant by sufficient. The difference can be explained by reference to two cases. In the case of Collins v Godefroy 1831 the claimant had been given a summons to appear in court on behalf of the defendant. He claimed that the defendant had promised him six guineas for doing so. The case here obviously failed since when you are given a summons you are obliged by law to appear in court and so he was not promising to do something that he was not already bound to do. It was not sufficient. However, in Thomas v Thomas 1842 in his will, the claimant s husband stated that his widow should be allowed to live in the house for the rest of her life. The defendants allowed her to do so provided she paid 1 a year rent. They later tried to evict her on the grounds that 1 a year was nowhere near enough rent. She won her case and was allowed to stay, since although the money was obviously not adequate it was something and therefore was sufficient. 5. Past consideration. This is a promise in return for an act that has already been done it is already in the past. One of the standard cases to illustrate this is Re.McArdle ( Re just means in the case of ) This concerns a house which was the property of the mother of a family. They were all going to benefit when she died under the terms of her will. However, while she was still alive the wife of one of her sons, who was living in her house with her, did some decorating and improvements to the building. After it was finished the other children wrote to her agreeing to pay her 488 in consideration for her having carried out certain improvements to the building. When the mother later died, they refused to pay. The court decided that they were not liable since when they wrote the letter the decorating had already been completed, i.e. it was past. There is however an exception to this idea. It was first set out in the old case of Lampleigh v Braithwaite 1615 This case took place in the 17 th century and so may seem odd today. These two were friends and in a quarrel Braithwaite had killed a man and had been arrested and was likely to face the death penalty. He asked his friend Lampleigh to obtain a Kings Pardon. This involved Lampleigh travelling long distances (on horseback) until he eventually managed to get an audience with the King who granted a pardon for Braithwaite. When he got back and told Braithwaite, he was so pleased that he promised to pay him 100. Later on he changed his mind and refused to pay. So Lampleigh sued him for the money. Braithwaite argued in court that the consideration was past since he already had obtained a Kings Pardon when he promised to pay the money. He lost the case, however, and had to pay the money because the court took the view that when he asked Lampleigh to get the Pardon he implied that he would pay something for his trouble. The consideration was therefore not in the past. There are also some situations where you agree to a contract in which you have to do some work that you are already bound to do. This is against the law of consideration and you are not entitled to it. One of the best cases to remember regarding this point is the old case of Stilk v Myrick In this case, two of the crew members of a ship deserted at a port in a foreign country. The ship s captain could not find two replacements and so he said to the crew that if they would do the work of the two men who had deserted they could share their wages when they arrived back in England. The crew agreed. When they got back the captain refused to pay and the crew sued him. They lost the case however because the judge decided that they were already bound by their contract of service to do any extra work that may be needed. So they were agreeing to do work that they were already bound to do. Business Law 11

12 6. Payment of part of a debt. This is concerned with what are called waivers. A waiver occurs where a person agrees (for no extra consideration) to take a sum of money which is smaller than the agreed amount that is owing to him. This is not a particularly easy part of contract. The general rule is that if you owe someone some money you cannot discharge the debt by paying a smaller sum than you owe him. So if you owe John 100 you cannot discharge the debt by paying him 80. You would still owe him 20 and he could sue you for it. However, there are some exceptions. a) If you paid John 80 and also gave him something else as well (provided he agreed) then he cannot later ask for the 20. b) If you owed him 100 and it was to be paid by the end of October, then if you paid 80 in September and he agreed, then you have discharged the debt. This is because you paid him the money before the date he was entitled to. c) If you owed John 100 to be paid at his office, and instead he came round to your house and paid the 80, and he agreed, then again you have discharged the debt. There is one final aspect of part payment which has developed in Equity. You must remember that Equity is concerned with morals and fairness rather than the strict application of the law. It was the idea of a famous judge in England called Lord Denning, who was for years the Master of the Rolls. This means he was the senior judge of the civil side of the courts in England. The idea, which came to be known as Promissory or Equitable Estoppel, arose from a well-known case. It is worth trying to remember the facts and result of this case: Central London Property Trust Ltd v High Trees House 1947 The facts were that in 1939 the claimants let a block of flats to the defendants for 2,500 a year rent was the beginning of the war and it became very difficult to let flats during the war, so in 1940 the owners of the flats agreed in writing to accept half the rent each year. So the defendants only paid 1,250 each year. By 1945 the war was ended and the flats were fully let. So the owners sued for the half rents both for the period after 1945 and also for all the war-time years. The court applied the rules of Equity and said that they could get the full rent for the period 1945 onwards, but not for the war-time years since they had agreed to the half rent and should keep to their word. The concept of Equitable Estoppel can only be used as a defence. It cannot be used to commence a case. There is always the possible situation of implied consideration as shown above. Vitiating factors in a contract Vitiating simply means anything that can make a contract void. These are circumstances which can have an effect on a contract so that it becomes void or voidable. Remember, void means does not exist and voidable means could become void, These factors are: contracts entered into by mistake, or as a result of a misrepresentation, or because one of the parties was subject to duress or undue influence, or lastly if for some reason the contract is illegal. They must be considered in turn. Business Law 12

13 Mistake Mistakes can be called either operative or non operative. An operative mistake has the effect of making the contract void, whereas a non operative mistake has no effect on the contract. Everyone is assumed to understand the law and so a mistake of law is non operative. There are three kinds of mistake which must be distinguished from each other. 1. Common mistake. This is where both the parties to the contract have made the same mistake, i.e. they have made it in common. There are two kinds of common mistake which should be remembered. They are given Latin names: a) Res extincta (Latin for the thing does not exist ). This is where both parties think that something in the contract exists whereas it actually does not. An easy case to remember is: Couturier v Hastie This was about a contract made in London for the sale of a cargo of corn on a ship at sea on the way to England. Unknown to either party the corn had started to ferment and the captain had sold it. The contract was therefore void for mistake b) Res Sua (Latin for his own thing ). This is the situation where a person makes a contract to buy something that, unknown to him, is already his. Obviously the contract is void. 2. Mutual mistake. This is easy to remember by calling it the mistake of cross purposes. Whether the resulting contract is considered to be void will depend on the view taken by the court. They take what could be described as the common sense view of the contract. There are a number of cases on mutual mistake, but the easiest to remember is Raffles v Wichelhaus This was a case where the parties made an agreement to buy a cargo of cotton. The cotton was on a ship called the SS Peerless and was sailing from Bombay. Unknown to either party there were two ships both called the Peerless, one sailed from Bombay in October and the other in December. Raffles thought he was buying the cotton from the October ship whereas Wichelhaus thought he was selling the cotton from the December ship. The court simply took the view that the contract was void for mistake. 3. Unilateral mistake. This occurs where only one party to the contract is mistaken. The other party knows that a mistake has been made. Here there are two situations which may make the contract void: a) where one party makes an offer and realises that the other party is mistaken about the offer. Here the contract is void for mistake, b) where one party is mistaken about the identity of the other party. Representations and misrepresentations This area of contract is very important and is common in commercial life. People do not often enter a contract without having some idea of what is involved. This is either by reading about the goods or by listening to what the other person is telling them. Of course they may not take any notice of what they have been told and simply just buy the goods. In this case there is no representation nor misrepresentation because the words did not have any influence on the person who bought them. This topic is very common in law so you should take some time to make sure that you actually do understand it. Representation A representation is a statement of FACT that induces the other person to enter the contract, e.g. This car is only one year old. Other statements are not representations, i.e. statements of Business Law 13

14 law, statements of a person s intention, or his opinion, e.g. I have been told that this car is one year old, it probably is. So if the car was found later after you had bought it, to be three years old, you could sue for misrepresentation if you had bought it on the strength of the first statement, (the car is one year old) but not the other (it probably is one year old) It must not only be a statement of fact, but it must also have induced the other party to have entered the contract. If someone says something about an article he wants to sell but the other person takes no notice of it, then if it turns out to be false he cannot sue for misrepresentation. Silence, i.e., keeping quiet about the goods is not considered to be a representation. Misrepresentation This is a false statement of fact that has induced the other person to enter into a contract. These are three different kinds of misrepresentation; make sure you know the difference. 1. Fraudulent misrepresentation This is where someone gives a statement of fact to another person knowing it is untrue or not caring at all whether it is true or untrue. If the persons making the statement honestly believed that what he was saying was correct, then it is not fraudulent misrepresentation. The remedies for this are: you can rescind the contract, which in practice means tear the contract up and have no more to do with it, or simply refuse to perform your part of it, and also you can sue for damages. 2. Negligent misrepresentation Here the difference between this and fraudulent is that the person making the statement thought it was correct, but he could have found out with a little bit of effort. Here again you can rescind the contract and sue for damages, but you will have to prove that the other person, who made the statement, had a special relationship with you and that the wrong statement was in breach of that statement. There is a well-known case which will make this point fairly clear, in Esso Petroleum v Mardon 1976, Mr Mardon was interested in buying the tenancy of a petrol station. In the negotiations the representative of Esso had told Mardon that he could expect to sell at least 200,000 gallons of petrol a year. Mardon took the lease of the garage on the strength of this statement. He never sold anything like this amount because the local authority refused Esso s application for an exit from the garage onto the main road. Mardon successfully sued Esso for misrepresentation since there was clearly a special relationship between them. 3. Innocent misrepresentation. This is where a person says something about the goods to be sold which is wrong, but which he thought, quite honestly, was correct. In this case the only remedy is damages. 4. Silence It is possible for silence to amount to a misrepresentation. This was shown in With v O Flanagan. In this case a contract had been made for the sale of a doctor s practice, and a date had been agreed for its completion. The price had been agreed on the basis of the income from the doctor s practice and in between the original agreement and the date for completion the doctor became ill and the revenue fell considerably. The court decided that the silence had amounted to a misrepresentation and the contract was void. Business Law 14

15 Duress and undue influence Duress This arises when a person is forced into a contract by the threat of violence. This does not happen very frequently and so there is another side to duress called economic duress. This comes into force when there is a contract where one of the parties A, has been forced into it often by the other party B, refusing to complete one part of the contract until A agrees to something that A does not really want. This is best explained by reference to a real case. Probably the easiest case is D & C Builders v Rees Here Rees had some building work done by D & C Builders at an agreed cost of 482. He later refused to pay more than 300 and told them that if they did not agree he would not pay anything! They agreed to the 300 because they were in financial trouble and needed the money and so they signed an agreement form. Later they sued Rees for the 182 outstanding. Here Lord Denning decided that they had been forced into signing the agreement and ruled that the builders were entitled to the balance. Undue Influence This occurs where a contract is made by one person because of the influence of another person who is in a dominant position, i.e. he has a lot of influence over him. This can occur in relationships such as parent and child, bank manager and client, doctor and patient, and sometimes husband and wife. There are two situations where there may be undue influence: 1. Where there is a special relationship like those set out above. Here there is a presumption of undue influence. This just means that the court will assume that there has been some influence and so the person receiving the benefit must prove that he/she did not actually exert some kind of influence to get the benefit. 2. Where there is no special relationship. In this case the proof is the job of the person who was persuaded to make the contract. He has to convince the court that there was undue influence. The other party does not have to prove that there was not. A very old case, but one which explains the idea well is Allcard v Skinner In this case Miss Allcard joined a Protestant nunnery run by the defendant Miss Skinner, the Lady Superior. When Miss Allcard became a nun, in obedience to the rules, she made over all her money to the nunnery. This came to the (then) very large sum of 7,000. Eight years later she decided to leave the nunnery and become a Roman Catholic. At this time there was about 1,671 left of her original 7,000. She sued the nunnery for its return. The court decided that there had been so much pressure put on her to make over all her wealth if she wanted to become a nun that this amounted to undue influence and she was entitled to her money back. Exclusion clauses These are clauses commonly put into contracts in order to minimise or avoid liability for some part of the contract. The company will not be liable for any injury sustained in the use of this product is a type of exclusion, probably useless these days. There are some rules that apply to the use of exclusion clauses and these are important and the source of many examination questions. When dealing with an exclusion clause, there are two main approaches to enable you to decide whether or not the clause is valid. These are: 1. The common law approach, i.e. decisions from a number of cases where a principle of law has emerged. 2. The approach to the particular clause from statute Business Law 15

16 1. The common law approach simply means the rules that have come out of the results of some decided cases. The first approach is to decide whether or not the exclusion clause has been incorporated into the contract which has not been signed. This really means, did the other party see or have notice of the clause before he entered into the contract? If he did not, then the clause is ineffective. Of course, to be able to decide this it is first necessary to find the exact point in time when the contract was agreed upon, i.e. when it became legally binding. This is usually managed by both parties signing the contract. In Chapelton v Barry UDC 1940 (UDC means Urban District Council and signifies that it was a town) the claimant went down to the beach at Barry, a town in South Wales, with a friend and said he would get some deck chairs. There was a pile of deck chairs on the beach with a notice which said Barry UDC, hire of deckchairs 2d per session of three hours. The public is requested to pay at the ticket office. Mr Chapelton took two chairs from the pile and went over to the ticket office and paid his 4d (four pence) and got a ticket in return. On the back of the ticket was an exclusion clause to the effect that the council would not be liable for injury when using the chairs. Mr Chapelton s chair collapsed and he was injured. When he sued the council they relied on the clause on the back of the ticket. The question then was was the clause part of the contract? To answer that they had to decide when the contract was formed, i.e. when was there an offer and an acceptance? The court decided that the contract was formed when Mr Chapelton took the chairs off the pile. Therefore the clause on the ticket was not part of the contract and therefore the council was liable. This decision might not seem to you to be fair, but it does show the importance of deciding on the time of the contract. This question was answered in Thompson v LMS 1930 (LMS was the London Midland and Scottish Railway company in those days). Here a railway ticket containing an exclusion clause on the back was considered valid and part of the contract even though the person who bought the ticket could not read. This was sensible really because it must be the case that the contract is when you actually buy the railway ticket, and the fact that you cannot read is not the fault of the railway company What else could they do? The second approach concerns contracts which have been signed. If you sign a contract it is assumed that you have read it beforehand. Therefore, you are bound by the exclusion clause. However, this may not always be the case. If you are given a contract to sign, and before you sign it the other party tells you what the clause means, then, even if you have subsequently signed the contract, you are bound only by the verbal description of the clause made by the other party. The two most usual cases to illustrate this are: a) L Estrange v Graucob Here the claimant bought a slot machine from the defendant and signed the contract without first reading it. There was an exclusion clause in the contract which protected the defendant from the effects of a breach of some of the conditions of the Sale of Goods Act The machine was faulty and the claimant sued. The court decided that she had no remedy as the exclusion clause was valid. (Note: this would probably not be the case today and the law has changed regarding the Sale of Goods Act which is now 1979). b) In Curtis v Chemical Cleaning Co the claimant took her wedding dress to be cleaned. In the agreement there was a clause which excluded liability for any loss or damage to the dress. She asked the shop assistant what it meant and was told that the firm would not be Business Law 16

17 liable to damage to beads or sequins. She then signed the contract. The dress was returned stained and shrunk. She successfully sued the firm as the court ruled that the only exclusion was for beads and sequins as explained by the assistant. 2. The Statutory approach to the problem. This is contained mainly in the Unfair Contract Terms Act It is a very important part of legislation and you should try to remember the most appropriate parts of it. First of all it is restricted. That means it applies mainly to firms making use of exclusion clauses in contracts. Generally, private people can put whatever kind of exclusion they like into a contract. Secondly, it does not apply to contracts relating to transfer of land, to company formation or insurance contracts. What then does it do? a) It prohibits the use of an exclusion clause to avoid liability for death or personal injury which results from the other party s negligence. I will not be liable for any injury howsoever caused is meaningless. b) If you are trying to restrict your liability for some other kind of loss or damage, i.e. not death or personal injury, then the court will use the test of was it reasonable? for you to do so. This means that every case is tried on its merits. The Sale of Goods Act states (in clauses 12, 13, 14) certain requirements regarding the description of the goods, their fitness for purpose and whether they are of satisfactory quality. None of these requirements may be excluded in a contract Suggestions on answering law questions 1. Questions in law fall into two possible categories. There is the straightforward type which rely to a large extent on your memory, and there is the problem type. Quite often the two kinds are mixed together into one question having two parts a memory type question, followed by a problem which will always be based on the first part of the question. Marks are awarded for the whole question and you will not lose any marks if you spend more time on one half than the other. 2. Most people lose marks and sometimes fail simply because they do not know enough. One of the best things you can do is to make a list of some of the major cases and learn them by heart. You should remember the name of the case, the facts of the case and the result, and, quite as importantly, the principle that came out of the judge s decision. 3. You will always get at least one question on the law of contract and usually two. One of the most interesting topics in contract is the use of exemption or exclusion clauses. The following is what I would expect as a reasonably good answer to the question: Explain the meaning of incorporation and interpretation as applied to the use of exemption clauses in contracts. Suggested answer An exclusion clause is a clause in a contract which attempts to limit or exclude the liability of one of the parties in a contract. This is normally satisfactory as between equals, but not when it is imposed on the weaker party. The courts have for a long time attempted to curtail the unfair imposition of these clauses by decisions which result in a body of case law. This must necessarily be piecemeal since it is completely dependent upon the emergence of situations Business Law 17