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

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1 LEVEL 6 - UNIT 2 CONTRACT LAW SUGGESTED ANSWERS - JANUARY 2013 Note to Candidates and Tutors: The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 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. Question 1 SECTION A a) Specific performance is an order of the court which compels a defendant to carry out their obligations under a contract in accordance with the terms and conditions set out in the contract. It is not necessary for an actual breach of contract to arise however the award is based on the existence of a contract. Thus it is possible for the award to be made prior to the completion of a contract, as in an anticipatory breach of contract: Hasham v Zenab (1960). The remedy is used to enforce positive obligations under the contract. Failure to comply with an order will render a defendant liable to a criminal charge for contempt of court. The remedy is awarded at the discretion of the court, though it is a remedy that is only awarded sparingly where it is considered just and equitable to do so and will not be awarded if it results in injustice to the other party: Johnson v Agnew (1980). Similarly it is therefore refused if it were to cause hardship or injustice either to the parties themselves or some interested third party: Patel v Ali (1984). The award of an order is not however based simply on just and equitable grounds as the courts are required to take into account certain other factors. Thus specific performance is not awarded unless it is available to both parties: Flight v Bolland (1828). There are exceptions to this rule, for example, in the Landlord and Tenant Act 1985, s 17, which provides that the court can make an order of specific performance in respect of a landlord s covenant to keep the premises in a good state of repair whether based on mutuality or otherwise. The question of mutuality is based on a judgement of the facts and circumstances as they exist at the hearing in the light of the whole contract and its subject-matter: Price v Strange (1978). Page 1 of 19

2 The award of an order is a discretionary one but this does not make the award an arbitrary one since it must be exercised in such a way as to promote justice between the parties. As a general rule defendants will always be held to their bargain, unless they can prove that this would lead to injustice: Webster v Cecil (1861). Apart from the above criteria the courts are unlikely to award specific performance in the following circumstances: a. The order will not be awarded if damages amount to an adequate remedy the reasoning being that such orders are awarded in equity where a claimant has found that the award of damages to be inadequate. Thus where there is a contract for sale of goods which are of a unique nature, such as the purchase of a valuable antique clock, an order may be made since it would not be possible for the buyer to purchase a similar item and damages would not be an adequate remedy. For the same reasons contracts to pay money are not usually enforced by specific performance, however an order may be justified to enforce a contract where money is to be paid to a third party: Beswick v Beswick (1968). b. The exercise of discretion is subject to broad equitable rules one of which is delay defeats equity. Unreasonable delay may defeat an application for specific performance but what is unreasonable depends largely on the nature of the contract. At one time it was considered that specific performance had to be applied for within 12 months, however in Lazard Bros & Co. Ltd v Fairfield Properties (Mayfair) Ltd (1977) it was held that a delay of over two years was not a bar to the award for an order. The principle applied by the courts is to ask if it would be unconscionable for the claimant to asset his rights because of the delay. c. The claimant must come with clean hands, that is he must show that he himself has performed his own obligations under the contract, or is willing to perform them. There is no question of balancing the misconduct of one party against another. d. A court will not make an order if the result would be contrary to public policy: Wroth v Tyler (1974). e. Equity will not assist a volunteer. The requirement of consideration is fundamental for the granting of an order for specific performance, whether or not the contract is a simple one or one that is made under seal by deed: Penn v Lord Baltimore (1750) b) A contract may be enforced by the use of an injunction which can Injunctions can be either prohibitory or mandatory in their application. A prohibitory injunction in the law of contract is used only to restrain a breach of a negative undertaking, for instance where the defendant has broken an agreement not to carry on a particular trade: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd (1894). The rule that damages must be inadequate does not apply to prohibitory injunctions, however the courts will not generally allow this difference to be used to enable a claimant to gain that which he would not ordinarily be entitled in an application for specific performance. The courts will therefore only grant an injunction where there is an express stipulation in the contract that the defendant should not perform a particular act: Lumley v Wagner (1852). The Page 2 of 19

3 negative nature of the injunction should be noted in the case since, whilst since the court could not compel the defendant to work solely for the plaintiff, it could nevertheless restrain her from working for someone else. This case was followed in Warner Bros Inc. v Nelson (1937). Both cases have been criticised as being tantamount to forcing the defendants to work for the respective claimants, an effect which in personal contracts has always been ruled against in the granting of equitable remedies. In Page One Records Ltd v Britton (1968) the courts refused to grant an injunction since it would have compelled the defendant, The Troggs pop group, to engage the claimants as their agents and managers or wind up the group. This followed in Nichols Advanced Vehicle Systems Inc. v De Angelis (1979). There are no restrictions on a court granting a prohibitory injunction to prevent an employee from breaking particular terms in his contract of employment: Lansing Linde Ltd v Kerr (1991) and Lawrence David Ltd v Ashton (1991). A mandatory injunction on the other hand is an order to the defendant to do some positive act and is generally restorative in nature. This type of injunction is quite uncommon in the law of contract since usually an award of specific performance is made and as such is subject to very similar limitations to those imposed on applications for awards of specific performance. Question 2 The essence of an agreement and a legally binding contract is based on the parties giving their free consent to be bound by the terms of the agreement. It therefore follows that if a person is coerced into a contract by threats or undue pressure that person should not be bound by that contract. Both the common law and equity concurred in this principle; the common law via the doctrine of duress and equity through the doctrine of undue influence. At common law it was always considered that duress had to be directed against the person and that threats to goods could not amount to duress: Skeate v Beale (1840). Whilst the law did not formally recognise the concept of economic duress de jure, it did develop a de facto process for recognising the concept. The notion that common law duress does not include duress to goods has been the subject of a great deal of criticism, particularly as a wider recognition of economic duress began to gain ground: D & C Builders Ltd v Rees (1966). In that case Lord Denning considered that the actions of the defendant, knowing that the claimant was in dire financial straits, used this knowledge to compel the claimants to accept a lesser sum amounted to undue pressure. The case thus heralded a crucial step towards the development of a doctrine of economic duress. A more formal doctrine began to emerge in the case of Occidental Worldwide Investment Corporation v Skibs A/S Avanti, The Sibeon and The Sibotre (1976) where Kerr J rejected the notion of duress being based simply on a threat of physical violence and unlocked the door to the development of a notion of economic duress, albeit that he did fully develop the concept. Mere commercial pressure was inadequate to set up the defence. There had to be a coercion of will that deprived the other party of free consent. How could this test be satisfied? Two questions had to be asked to satisfy the test: did the victim protest at the time of the demand and did the victim regard the transaction as closed or did they intend to repudiate the new agreement? Page 3 of 19

4 Kerr J considered that a court had to be satisfied that consent was overborne by compulsion thus depriving the other of intention to enter into the contract. This depends on the facts of each case. One relevant factor would be whether the party relying on the duress made any protest at the time of the contract or shortly thereafter. Another would be to consider whether or not he treated the settlement as closing the transaction in question and as binding upon him, or whether he made it clear that he regarded the position as still open. The tests propounded by Kerr J were considered more fully in North Ocean Shipping Co. Ltd v Hyundai Construction Co. Ltd, The Atlantic Baron (1979) by Mocatta J. There was clear evidence of economic duress on the basis of the above tests; however the plaintiffs delayed for eight months in seeking to recover the extra moneys they had paid under the threat presented to them by the defendants. Mocatta J held that this delay amounted to affirmation of the contract, even if they had no intention of doing so. This reservation produced a serious deficiency in the concept of economic duress since it placed the victim on the horns of a dilemma: if he protested too much at the demands of the other party there was a risk that the other party would simply walk away leaving the victim damaged. On the other a weak protest could be seen as an affirmation of the contract leaving the victim bound by the contract. Similarly if the victim delayed in refuting the contract this again would be regarded as affirmation of the contract leaving the victim bound. The decision of Kerr J was again affirmed in the case of Pao On v Lau Yiu Long (1979) by Scarman LJ who recognised economic duress as a factor that could render a contract voidable provided always that there must be a coercion of will that vitiates consent. It had to be shown that any payment made under the contract was not a voluntary act. In assessing whether or not a coercion of will had taken place it was material to inquire as to whether the victim had protested or not, whether another course of action open to him; whether he received independent advice; and, finally, whether he took steps to avoid the contract. The judgement did little to reconcile the dilemma identified above since Scarman LJ talked of the victim entering into the contract by way of an involuntary act in order to set up the defence. Clearly if the victim entered into the contract this must per se be a voluntary action. Scarman LJ would have been better to talk in terms of the victim entering into the contract by way of a voluntary submission compelled by the fact of no other available course of action was available to the victim. In the case of Universe Tankships Inc. of Monrovia v International Transport Workers Federation (The Universe Sentinel) (1983) it was concluded that economic duress could arise if there is an intentional submission to the inevitable and that the pressure used to secure such submission was illegitimate in that there was a suppression of the will of the victim. But how are the differences between legitimate and illegitimate pressure to be tested? The court did not reconcile these differences, though it did establish that the pressure that compelled the victim to submit to the demands could be legitimate pressure and that duress can be found even if the threat is one of lawful action. In Alec Lobb (Garages) Ltd v Total Oil Great Britain Ltd (1983) the Court of Appeal considered that duress could not arise where legitimate pressure or lawful rights were threatened. These were confirmed in CTN Cash and Carry Ltd v Gallaher Ltd (1994) where the Court of Appeal stated that a lawful act coupled with a demand for payment may amount to economic duress. This approach Page 4 of 19

5 however was tempered by the view that it would be extremely difficult to maintain such a claim in the context of two parties dealing at arm s length in a commercial transaction, particularly if the party making the threat was acting in the bona fide belief that the demand was legitimate. The court considered that the development of lawful act duress in pursuing a bona fide claim would create an undesirable level of uncertainty in commercial bargaining. The current law regarding economic duress is uncertain and the boundaries of are still being formed. It has received further judicial recognition in Atlas Express Ltd v Kafco (Importers and Distributors) Ltd (1989) and in Vantage Navigation Corporation v Suhail and Saud Bahawn Building Materials LLC (The Alev) (1989). Both cases indicate a relaxation in the criteria to establish economic duress. It is now only necessary to prove a suppression of will and voluntary consent to the transaction. The concept is vague and in an unsatisfactory state. The truth is that the concept is some way off being formulated into a hard set of principles. Economic duress renders a contract voidable and thus the remedy is rescission. This remedy may be lost by lapse of time, the intervention of third-party rights and by affirmation. In order for rescission to be available restitutio in integrum must be available: Halpern v Halpern (2007). Question 3 Terms, whether implied by statute or the courts or expressly agreed between the parties are commonly divided into two types - warranties and conditions, which have differing degrees of importance. A condition is regarded as a major term of the contract. If a party to a contract breaks a condition it entitles the other party not only to sue for damages but also to terminate the contract. The injured party, however, does have the option of affirming the contract and simply claiming damages if s/he so wishes. A warranty is regarded as a minor term that is merely ancillary to the main thrust of the contract. A breach of warranty gives the injured party the right to sue for damages only. The difference between conditions and warranties can be seen in two contrasting cases: Poussard v Spiers and Pond (1876) and Bettini v Gye (1876). In Poussard v Spiers and Pond an actress was employed to play the leading role in an operetta. She was unable to take up her role until a week after the season had begun, with the result that the producers had to engage a substitute. When she eventually appeared they refused her services and purported to terminate the contract. The actress sued for breach of contract. It was held that since the opening night of the operetta was regarded as of the utmost importance, her absence amounted to a breach of condition which entitled the producers to terminate the contract. In the case of Bettini v Gye the facts were very similar however the contract required him to appear six days before the start of the season for rehearsals, but in fact he arrived only three days in advance. The producers sought to treat the singer s absence as breach of a condition and terminated the contract. The singer sued for breach of contract. The court held that the terms regarding the rehearsals were merely ancillary to the main part of the contract and thus amounted to a warranty only. The producers, whilst being entitled to sue for damages, were not entitled to terminate the contract. The distinction between conditions and warranties arises out of the relative importance attached to the terms when considered against the total background of the contract. The parties to a contract may expressly agree to designate a term as a condition or warranty as an indication of the emphasis they wish to Page 5 of 19

6 place on the importance of the term within the contract. Similarly, the law itself may give an indication of the importance of a term either by means of a statute, as in the case of the implied terms contained in the Sale of Goods Act 1979 for instance, or by means of a judicial decision as to the status of a particular term. Where no expression of the status of a term arises out of the agreement, the courts have classified such terms as innominate terms or intermediate terms. The effects of a breach of an innominate term do not depend on the status of the term in the contract but on the effects of a breach of the term on the contract. The concept of the innominate term first arose in the case of Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd (1962). Lord Diplock considered that it was not appropriate to analyse the contract in terms of conditions and warranties. He considered that many terms could not be categorised in this manner. He stated that some breaches may deprive the party not in default of "substantially the whole benefit which it was intended that he should obtain from the contract". He stated that the legal consequences of a breach, unless expressly provided for, depended on the nature of the event giving rise to the breach and did not follow automatically from a prior classification of a term as a condition or a warranty. Where a term is found to be an innominate term the rights of an innocent party in the event of a breach are found by applying the test as to whether they have been substantially deprived of the whole of the benefit which it was intended they should obtain from the contract. If they have been so deprived then they will be entitled to terminate the contract and sue for damages; if not, they can claim damages only. The decision in the Hong Kong Fir case creates a certain level of uncertainty since the parties will not know what their rights are in relation to a breach of contract until an action is brought before the court. Of course the parties can avoid such uncertainty by expressly stating in the contract itself what the consequences of breaking a particular term would be and it would be in their interests to do so. The absence of such express intentions nevertheless creates significant problems to the extent that there have been attempts to limit the scope of the concept of the innominate term by the courts. This can be seen in the case of The Mihalis Angelos (1970) where the court declined to adopt the Hong Kong Fir approach. The court considered that the classic approach of labelling a term as a condition or warranty was still valid and indeed desirable to establish a level of certainty in some contracts. The court considered that it was undesirable on a matter of commercial exigency to expect a charterer of a ship to have to delay the transportation of a cargo because the owners have failed to comply with the date of expected readiness to load, particularly when the owners knew that the date could not realistically be met. The court also considered that it was unfair to prevent a charterer from terminating the contract and chartering another ship on the basis that there was a possibility that the decision to terminate might be challenged by an action for breach of contract by the owners. The approach taken in The Mihalis Angelos was approved of and adopted by both the Court of Appeal and the House of Lords in Bunge Corporation v Tradax Export SA (1981) where the status of an expected readiness to load clause was again questioned. Both courts had no hesitation in stating that this was a condition and rejected attempts to persuade them to apply the Hong Kong Fir test. Lord Wilberforce stated that to find otherwise would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts. Page 6 of 19

7 The decision of a court to adopt the traditional or the Hong Kong Fir approach is driven by several considerations. The most important of these by far is the need for certainty and this takes on even more importance where a term is a standard one found in particular types of contract. The expected readiness to load clause in the above cases is a good example since it applies to all charterparties and commonly broken. It is desirable to have certainty with regard to such a clause. The same considerations do not arise where the contract is non-standard contract. Here the prime consideration may be one justice between the parties, and the innominate term concept usually achieves a greater level of fairness since the parties may attempt to terminate the contract for breach of condition when they have no real justification other than purely economic or commercial motives. The choice open to the courts then is usually governed by a judicial impression of a need to achieve either certainty or fair play. The concept of innominate terms is well established and the application of the concept can also be seen in the case of Cehave NV v Bremer Handelsgesellschaft GmbH, The Hansa Nord (1975) and subsequently confirmed in Reardon Smith Line Ltd v Yngvar Hansen-Tangen (1976) by the House of Lords. Question 4 Whilst there are clear advantages in parties deciding on the levels of compensation to be payable in the event of a breach of contract the courts are not prepared to completely abrogate their jurisdiction as regards awards of damages. The courts never considered that equality of bargaining power and freedom of contract represent the same thing and have continued to regulate awards of damages where an agreement attempted to impose a penalty on a party as opposed to a claim for liquidated damages. When entering a contract the parties may decide to make a genuine pre-estimate of the losses they may encounter, should the other party be in breach of contract, and then agree that certain sums will be payable if such an event occurs. Where the sums payable are a genuine pre-estimate of loss then the courts will usually support claims for such sums, despite the fact that the actual losses may be more or less than the actual loss sustained by the breach. The sums agreed to be payable are termed liquidated damages. Where the sums agreed by the parties to be payable are not based on a genuine pre-estimate of the losses these sums may be excessive in relation to the maximum possible losses the parties may sustain. Such sums, rather than being liquidated damages, are placed in the contract as a punitive measure to dissuade a party from breaching the terms of the contract. The courts will not award sums which are considered to be penalties and will substitute a sum representing the actual losses sustained by the breach. In Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd (1915) the basis on which the courts decide whether a pre-estimated sum is a liquidated damages clause or a penalty was laid down by Lord Dunedin as follows: A sum will be a penalty if it is extravagant having regard to the maximum possible loss that may be sustained by the breach. If the contract imposes a liability on a party to pay a sum of money and failure to do so results in that party incurring liability to pay a larger sum, then the latter will be regarded as a penalty. Page 7 of 19

8 If a single sum is payable upon the occurrence of one or several breaches of the contract, some being serious, some being minor, then that sum will raise the presumption of its being a penalty. These presumptions are weakened if it is impossible to prove the actual losses that may result from a breach, although the fact that an accurate pre-estimation of loss is not possible will not prevent a sum from being a penalty. A rather more straightforward approach can be seen in Lordsvale Finance plc v Bank of Zambia (1996) where it was stated that whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function was to deter a party from breaking the contract or to compensate the innocent party for breach. Whether a contractual term is a deterrent rather than compensatory in function can be deduced by comparing the amount that would be payable on breach with the loss that would be sustained if the breach had actually occurred. This approach was approved of in Cine Bes Film Cilik ve Yapimcilik v United International Pictures (2003). The courts are not confined to the terms of the agreement in determining whether a term is a penalty or not. The court may look at the inherent circumstances of the contract to be judged at the time the contract was entered into such as the bargaining power of the parties: Murray v Leisureplay plc (2005). The burden of proving whether a sum is a penalty lies on the party from whom the sum is being recovered: Robophone Facilities Ltd v Blank (1966) The fact that a clause is described as a liquidated damages clause or a penalty clause is not regarded as conclusive: Cellulose Acetate Silk Co. Ltd v Widnes Foundry (1925) Ltd (1933). In Duffen v FRA BO SpA (1998) it was held that it is not possible for the parties simply to avoid the interpretation by the courts as to the status of a term merely by agreeing to a term in the contract that states that the amount payable on termination of a contract is a reasonable pre-estimate. The court followed Elphinstone v Monkland Iron & Coal Co. (1886), in that whilst it was agreed that the 100,000 was a genuine pre-estimate this was not conclusive, albeit that it might be persuasive. The Court of Appeal considered other factors had to be taken into account for instance, the sum did not take into account the length of time the contract had to run. The amount payable under such a clause had no regard to the possible losses the agent might sustain and thus could be described as extravagant. This position was further reinforced by the fact that the Court of Appeal on examining the contract found that it set out reasons which allowed the agent to terminate the agreement. Several of these reasons were regarded as trivial. The court considered that a sum of 100,000 was a penalty as the contract could be concluded on such trivial grounds. In assessing whether a term is a penalty or not the case of Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) appears to advocate a rather more flexible approach than that laid down in Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. In the Dunlop case Lord Dunedin stated that the question as to whether a sum is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, to be judged at the time of the contract not the time of the breach, an objective view. In Philips it was suggested that a court can examine what actually happened in the case to decide whether or not the clause Page 8 of 19

9 represents a penalty or liquidated damages. This allows an assessment to be made of what the parties expected the losses to be when the contract was made and for a court to disregard a liquidated damages clause where it allows a disproportionate sum in relation to the actual losses suffered, if the facts showed that the parties did not intend the clause to apply in those circumstances. This would therefore allow such clauses to stand, whereas previously, following the Dunlop case, they would have been entirely severed from the contract. It may be that this flexible approach is confined to commercial contracts, as in the Philips case, since the court considered that such contracts are entered into by businesspeople at arm s length who should normally be bound by what they have agreed. Such an approach would accord with the cases of Export Credits Guarantee Department v Universal Oil Products Co. (1983); Lordsvale Finance plc v Bank of Zambia (1996); McAlpine Capital Projects Ltd v Tilebox Ltd (2005) and Steria Ltd v Sigma Wireless Communications Ltd (2008). The logic is correct since the courts are always predisposed to uphold contractual terms which fix the level of damages for breach, particularly in commercial contracts. The rules regarding penalties and liquidated damages are only applicable where there has been a breach of contract. Where a sum becomes payable because of the occurrence of some other event the above rules have no application and here the stronger of the two parties would be in a position to enforce what would otherwise amount to a penalty. In Export Credits Guarantee Department v Universal Oil Products Co, it was stated that it is not and never has been a policy of the courts to relieve a party from the consequences of an onerous or imprudent commercial bargain. While the rule is easy to understand in such a context it has an inherent perversity in that it is possible that the defendant might find it cheaper to actually breach the contract rather than be subject to onerous conditions. In Jobson v Johnson [1989] 1 All ER 621 the principles set out in the Universe Oil Products case were not followed. Question 1 SECTION B According to the classical theory of the law of contract in order to create a legally binding agreement there must normally be an offer and an acceptance of that offer. 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 can be made orally or in writing or implied by the conduct of the person making the offer, the offeror. In addition an offer can be made to a specific person, group of persons or the world at large: Carlill v Carbolic Smoke Ball Co (1893). Most offers are bilateral in the sense that an agreement does not materialise until the offer is accepted, however it is possible to have a unilateral offer where one party, the offeror, promises to pay for the act of another. This is a conditional offer the acceptance taking place when the offeree performs the act in question. The offer is said to be unilateral because only one party is making a promise. Again, the Carlill case illustrates the point though a modern example can be seen in the case O Brien v MGN Ltd (2001). Page 9 of 19

10 In the question it would appear that the advert put out by the Daily Examiner may amount to an offer. However adverts are normally regarded not as offers but as invitations to treat. No doubt the Daily Examiner would attempt to raise this as a defence in that it was not their intention to implement the terms of its offer: Partridge v Crittenden (1968) affirming Harris v Nickerson (1873). In the case of a unilateral offer, however, as stated in the Carlill case an advertisement would amount to an offer not an invitation to treat since the advert is not an offer to negotiate but a statement of an intention to be bound if the condition is met, in this case completing the run. The advert therefore is a conditional promise. In the case of Paula it would appear that there is clearly an offer arising in relation to her that has been communicated via the Daily Examiner's advert. This is not the case with Dave since in order to accept an offer it must have been communicated to the offeree, which is Dave himself. The offeree cannot accept something of which he is not aware: Taylor v Laird (1856).On this basis there is no offer that Dave can accept and therefore he could not claim the prize money. In order for an agreement to arise the offer must be accepted by the offeree. Acceptance is defined as the final unqualified expression of assent to all the terms of an offer. The objective test, which was examined above in regard to offers, applies in the same manner to acceptance. In other words, evidence must be produced from which the courts can adduce an intention by the offeree to accept the offer communicated to him. Two principles evolve from the definition of acceptance and the requirement of its objective existence. First, the expression of intention to assent to the offer must: Taylor v Laird, be in response to the offer and match the terms of the offer precisely. The acceptance, therefore, must be unequivocal and unconditional. Second, mere acknowledgement of the offer is insufficient; there must be a communication of the acceptance to the offeror. Acceptance of an offer may be communicated either orally, in writing or by conduct. Acceptance by conduct is commonly found in unilateral contracts of the type already discussed: Carlill v Carbolic Smoke Ball Co. Usually there will be some sort of communication of the fact that acceptance has been performed in order to claim the reward, but this is only notification of the fact that acceptance has taken place. It does not amount to acceptance itself. The act of acceptance must be completely performed for it to be valid: Daulia v Four Millbank Nominees Ltd (1978). In Paula's case her acceptance of the offer takes place when she commences the run and completes it by reaching Nelson's Column. At this point she is deemed to have accepted the offer and could claim the prize money. She does not have to communicate her acceptance of the offer to the Daily Examiner prior to commencing the run since the Daily Examiner has impliedly waived the need for need for communication of the offeree's acceptance. Her position is therefore analogous to the Carlill case. On this basis it would seem that Paula can claim the prize money. Can the Daily Examiner revoke their offer prior to Paula reaching Nelson's Column by way of the notice? In bilateral contacts it is possible to revoke an offer at any time prior to it being accepted: Payne v Cave (1789). Furthermore there is no obligation on an offeror to keep his offer open for a specified time: Routledge v Grant (1828). In order for revocation to be effective the withdrawal of the offer must be communicated to the offeree: Byrne v Van Tienhoven Page 10 of 19

11 (1880). Any attempt to revoke an offer after acceptance must of necessity amount to a breach of contract. In the question the offer is a unilateral one and therefore the question must be asked if the Daily Examiner can revoke its offer prior to the contestants reaching Nelson's Column. Under classical theory as applied to bilateral contract the answer would be in the affirmative since an offer can be withdrawn at anytime up to acceptance as stated in the Daulia case above. In unilateral contracts however this poses a particular problem and could lead to abuse and injustice if the offer is revoked just prior to the completion of the race and acceptance of the offer. This position was recognised in Luxor (Eastbourne) Ltd v Cooper (1941) where on the face of things the case supported the proposition that an offer in a unilateral contract is freely revocable by the offeror until performance by the offeree. The House of Lords, however, was not so definite in its judgment, preferring to decide that in the circumstances of the case it would not be proper to infer an undertaking on the part of the offeror not to withdraw from the sale and thus revoke his offer. This position was also discussed in Errington v Errington and Woods (1952). The basis of the decisions in these cases is elusive. Denning tended to rely on promissory estoppel as a justification for the rule, though this requires an existing legal relationship for it to apply. This is not present where an offer in a unilateral contract is being revoked. Another justification for disallowing revocation of the offer once performance has commenced can be found in collateral contracts. Here two offers are presented in the offeror s statement. The first expressly presents itself to the offeree, and the offeror promises to pay once the offeree has performed the act in question. The second offer is implied in that offeror promises not withdraw his offer once the offeree has begun to perform the act in question. If the offeror attempts to revoke his first offer he will be in breach of the second collateral contract. Some authors favour the idea that acceptance takes place when the offeree begins to perform the act, thus rendering any attempt at revoking the offer impossible. The flaw here is that a binding contract will materialise and the offeree will be in breach of contract if they fail fully to perform the act. With regards to revocation having to be communicated to an offeree an exception arises where an offer has been made to the general public. In such a case it may be impossible to communicate the revocation to every person who has read the newspaper. In these circumstances revocation is effective if the offeror, the Daily Examiner, takes all reasonable steps to bring the notice of the revocation to all those who have potentially read the offer. In the case of the question the Daily Examiner could achieve this by placing a similar sized advert in the same newspaper on the same day so as to pass this test of reasonableness: Shuey v US (1875). In the question the Daily Examiner's advert was placed in a Sunday edition of the newspaper. It would seem reasonable to suggest that the Sunday readership is different from the daily readership and, in any event, it would be on a different day. It is likely that this attempt at revoking the offer would be ineffective and that Paula would still be able to claim the prize money if she completed the race within the prescribed time limit. Whatever view is taken of these different positions the law seems to be settled that a unilateral contract is irrevocable once the performance by the offeree i.e. Paula, has commenced and therefore Paula should be able to recover the prize money from the Daily Examiner. Page 11 of 19

12 Question 2 a) The basic rule in relation to performance of a contract is that it must be carried out strictly in accordance with the terms of the contract. Failure to do so will entitle the innocent party to allege that a breach has occurred and give them the right to claim damages or to repudiate the contract and treat it as discharged. This is unfair if a promisor becomes liable for breach of contract because he is prevented from performing his side of a bargain by of some unforeseeable event beyond his control. Here the law provides the promisor with the excuse that the contract has become frustrated which brings about the immediate and automatic end to the contract, releasing the parties from their obligations. Formerly supervening events that were beyond the control of either party had no effect on the obligations of the parties to perform their side of the contract: Paradine v Jane (1647). The courts limited frustration to actions for breach of contract where the event destroyed a fundamental assumption on which the contract was based, though the courts recognised that contracts could provide for such an event by force majeure clauses. There is no indication of such a clause has been included in Kevin's contract with Paintfast Ltd. Originally the doctrine was based on courts implying a term into the contract that a state of affairs would exist up until the time the contract is performed and that the impossibility of performance excused non-performance of the contract: Taylor v Caldwell (1863). The implied term approach was reviewed in Davis Contractors Ltd v Fareham UDC (1956) in which an objective test was formulated. This test is expressed as a "radical change in obligations" test. Here the court must construe the nature of the contract and the surrounding circumstances to determine the obligations of the parties. Once this is done the court then assesses whether the obligations of the parties have changed because of the supervening events. It should be noted that it is not a radical change in circumstances that triggers the operation of the doctrine but a radical change in the obligations of the parties under the terms of the contract as construed by the court. It is not hardship or inconvenience or material loss that calls the doctrine into play. Davis Contractors Ltd v Fareham UDC (1956); National Carriers Ltd v Panalpina (Northern) Ltd (1981). In the question the fact that there was a flood that destroyed the house would seem to point to this being a frustrating event since the house, is no longer available for the purpose of Paintfast Ltd completing its obligations as in Taylor v Caldwell. What are the effects of this frustrating event on the contract? The effect of frustration is to bring about the automatic termination of all obligations incurred under the contract: Hirji Mulji v Cheong Yue Steamship Co. (1926). At common law this effect had severe repercussions since the parties were released from their obligations and "the loss lay where it fell": Chandler v Webster (1904). This would mean that Kevin would not recover his 1250 and Paintfast Ltd could not its expenses, although it could recover any money owed that had fallen due under the contract prior to the supervening event. The position in Chandler v Webster (1904) was overruled in Fibros Spolka Akcyjna v Fairburn Lawson Combe Barbour Ltd (1943) where the House of Lords Page 12 of 19

13 decided that there had been a total failure of consideration. If this was applied to Kevin's case then he may well be to recover the 1250 deposit since he had not received what he had bargained for. The unsatisfactory nature of the common law led to the passing of the Law Reform (Frustrated Contracts) Act This Act seeks to regulate the recovery of moneys paid under a contract (s.1(2)), the compensation available for expenses incurred in the performance of the contract (s.1((2)) and, finally, financial readjustments where a party has received a valuable benefit under the contract in the absence of any prepayment (s.1(3)). Under s.1(2) Kevin would be able to recover his 1250 since all sums paid or payable prior to the frustrating event are recoverable. The Act however allows Paintfast Ltd to retain any sums paid to it if it has incurred expenses before the time of the frustrating event where the court considers it just to do so having regard to all the circumstances of the case. Paintfast Ltd cannot retain anymore than the expenses so incurred. Paintfast Ltd could therefore recover expenses for materials and labour etc. but no more. It could not recover lost profits. Recovery of money for expenses is always at the discretion of the court. If Paintfast Ltd can prove that Kevin has obtained a valuable benefit under the contract before the frustrating event then by s.1(3) Paintfast Ltd could recover a sum not exceeding the value of the benefit as the court considers just having regard to all the circumstances of the case. In assessing this benefit the court is required to consider if Kevin has incurred expenditure to obtain his benefit and secondly, whether the frustrating event has reduced the value of the benefit. This latter point could prove damaging to Kevin since in BP Exploration Co. (Libya) Ltd v Hunt No 2 (1979)(confirmed by the House of Lords [1983]), Goff J stated that if the supervening event destroyed the valuable benefit then nothing could be recovered for this though this reasoning has been criticised. If this was the case then Paintfast Ltd could not recover anything in the circumstances of the question. b) This appears to be another frustrating event however under the "radical change in obligations" test the court must construe the contract in the light of its nature and the surrounding circumstances to determine the obligations of the parties. The court must then assess whether the obligations of the parties have changed because of the supervening events. There must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for: Davis Contractors Ltd v Fareham UDC (1956); National Carriers Ltd v Panalpina (Northern) Ltd (1981). Here Kevin's obligations have not changed by being posted abroad only his circumstances and by cancelling the contract he is now in breach. Where a parties indicates, either expressly or impliedly, by words or conduct, that they do not intend to honour their obligations under the contract then this becomes know as an anticipatory breach: Hochester v De La Tour (1853) Where an anticipatory breach occurs the innocent party, Paintfast Ltd may decide the treat the contract as at an end or to affirm the contract. There are dangers in affirming the contract since Paintfast Ltd will have to carry out its obligations under the contract or else it could find itself in breach. Furthermore if it is possible that a frustrating event could occur which would automatically bring the contract to an end and destroy Paintfast Ltd's rights under the contract: Avery v Bowden (1855) Once Paintfast makes its election to affirm or treat the contract Page 13 of 19

14 as discharged it cannot retract that election: Panchaud Freres SA v Establissement General Grain Co. (1970). If Paintfast Ltd decides to affirm the contract it can continue to complete its obligations under it, increase its losses and use these losses as a basis for a claim for damages: White and Carter (Councils) Ltd v McGregor (1962) AC 413. There is no obligation on Paintfast Ltd to mitigate their losses while they treat the contract as still subsisting. These principles were criticised in the White case where it was stated that the innocent party should only be allowed to continue with the contract if they had a legitimate interest financial or otherwise to do so. This approach was accepted in Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH (The Puerto Buitrago) (1976) 1 Lloyd s Rep 250 and Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader (No 2) (1984) 1 All ER 129. In Hounslow Borough Council v Twickenham Garden Developments Ltd (1971) the court stated that it was not just a question of the innocent party demonstrating that he had a legitimate interest in completing the contract but it had to be capable of being completed without the cooperation of the other party. It would seem that Paintfast Ltd would not be able to affirm the contract and continue with it since they require the co-operation of Kevin to complete the contract i.e. access to the premises. For anticipatory breach to amount to repudiation it needs to be established beyond doubt that the other party does not intend to perform their side of the contract. There must be an absolute refusal of one party to perform his part of the contract: Freeth v Barr (1874). Kevin is appearing to do this. If however there is a misinterpretation by Paintfast Ltd and they elect to treat the contract as discharged this may leave themselves open to an allegation of an anticipatory breach no matter that they make this decision in good faith: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd(1962); Federal Commerce and Navigation Co Ltd v Molena Alpha Inc (1979) but note Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd (1989). On the face of things it would seem that Paintfast Ltd would have legitimate claim for damages against Kevin for his anticipatory breach of contract which Paintfast Ltd would not be entitled to affirm. Question 3 In this scenario the Bellevue Hotel is seeking to rely on exemption clause in order to avoid liability to Gerald. A party who seeks to rely on the protection of an exemption clause has to be able to show that the clause has been incorporated into the contract. There are three ways in which a part may be able to do this: by signature, by notice and by a previous course of dealings. Should a person sign a contract then he is prima facie bound by the terms of that contract, even if they have to read the contract, unless they have been induced to sign the contract by some misrepresentation of fraudulent conduct: L'Estrange v Graucob (1934). There is nothing in the scenario to suggest that Gerald has signed a contract and therefore this would not seem to be applicable. A party may be bound by the terms of a contract if reasonable notice of the terms must have been given; despite the fact the contract has not been signed. What is reasonable here depends on a number of factors. Firstly, if there is a document containing the clause then this document must be a contractual document and not for instance a mere receipt: Chapelton v Barry UDC (1940). Page 14 of 19

15 Secondly, if an unsigned document is to be regarded as being a contractual document reasonable steps must be taken to bring notice of the exemption clause to the other party: Parker v South Eastern Railway Co (1877). If the clause is regarded as being particularly onerous or unusual then a higher degree of notice is required to satisfy the reasonableness test. In such a situation the other party's attention has to be specifically drawn to the terms incorporating the exemption clause - note here Denning's "red hand" principle in Spurling v Bradshaw (1956). Of particular note here is the case of In Thornton v Shoe Lane Parking Ltd (1971) where it was held that while a motorist could anticipate a clause purporting to exclude liability for loss or damage to his vehicle, this was not true of a clause which purported to exclude liability for personal injury caused by negligence. The consequence of this finding was that the owner of the car park, in order to exclude liability for personal injury, would have to take special precautions to draw the term to the attention of customers using the car park. On the facts of the question it would seem that following this case the Bellevue Hotel should take greater steps to bring notice of the exemption clause to Gerald's attention because of the gravity of the clause in order to escape liability for his broken arm and collarbone. Thirdly, reasonable notice of the exemption clause must have been given to the other party before or at the time of contracting as in Olley v Marlborough Court Ltd (1949) where a notice in a bedroom purporting to exclude liability was held to be ineffective because it was only brought to the claimant's attention after the contract had been concluded. On this basis it would seem that the Bellevue Hotel would not be able to rely on the exemption clause on the back of his bedroom door. The Bellevue Hotel may however be able to rely on the third method of incorporating an exemption into the contract, that is, by a previous course of dealings. In such a situation the courts will sometimes infer that notice has been given as in Spurling v Bradshaw. In order to show this there must have been a consistent course of dealings and also it is incumbent on the Bellevue Hotel to prove knowledge of the clause on the other party, Gerald: McCutcheon v David MacBrayne Ltd (1964). Whether a course of dealing exists in this case also depends on the frequency Gerald has used the hotel. In Hollier v Rambler Motors (AMC) Ltd (1972) it was held that three or four occasions in five years was insufficient. Prima facie it would seem that a previous course of dealings appears to exist in Gerald's case and therefore this clause will be incorporated into his contract. With regard to the issue of the booking of room 201this appears to be covered by Unfair Contract Terms Act 1977 ("UCTA") s.3 in that if the parties contract on one party's standard terms of business that party claims to be entitled to render contractual performance substantially different from that which was reasonable expected of him than that term is subject to the requirement of reasonableness under s.11 in that the Bellevue must satisfy the court that the term is a fair and reasonable one having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made. The requirement of reasonableness is not defined in the Act and the only specific guidance offered by the UCTA 1977 on the requirement of reasonableness is found in Schedule 2 of the Act but these guidelines do not relate to s.3. There is evidence however in a number of decisions that the courts are will to make use of the Schedule 2 guidelines in a wider context: Levison v Patent Steam Carpet Cleaning Co. Ltd (1977); Woodman v Photo Trade processing Ltd (1981); Flamar Interocean Ltd v Denmac Ltd (The Flamar Pride) (1990). Page 15 of 19