Note to Candidates and Tutors: LEVEL 4 - UNIT 1 CONTRACT LAW SUGGESTED ANSWERS JANUARY 2015 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 2015 examinations. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners reports which provide feedback on student performance in the examination. SECTION A 1. An offer may be terminated by acceptance, lapse of time, rejection, counter-offer, revocation. 2. The presumption that a contract is not intended to be legally binding when formed in a social or domestic context may be rebutted where there is evidence of intention, such as a degree of certainty, which may be recorded in writing; where there is mutuality in the arrangement; or where hardship is caused. This was demonstrated in cases such as Merritt v Merritt (1970) and Parker v Clark (1960). 3. The doctrine of privity of contract provides that a person who is not a party to a contract cannot acquire any rights under the contract or be subject to any of its burdens. The Contracts (Rights of Third Parties) Act 1999 has modified the doctrine of privity to the extent that a person who is not a party to the contract may enforce rights under the contract if he or she is either expressly identified by name, or as a member of a class, or as answering to a particular description; and the contract expressly provides that the third party may enforce the contract or it purports to confer a benefit on the third party. If both conditions do not apply, the common law doctrine of privity remains. 4. In circumstances where there has been no formal offer and acceptance a court may still find evidence of agreement by taking an objective approach. The court will look to external evidence as indicated by the words and/or conduct of the parties concerned. This approach was taken in the case of Butler Machine Tools v Ex-Cell-O Corporation (1979). Page 1 of 7
5. Terms can be implied into a contract by custom which would involve considering local or trade usage. The courts will look at relevant factors, e.g. the length of time in use, evidence of use in practice, whether there is contradiction of an express term, etc. This approach was taken in the case of Hutton v Warren (1836). 6. Non-disclosure will not normally amount to a misrepresentation. However, there are certain situations where silence will amount to a misrepresentation. These include: contracts requiring utmost good faith; a change of circumstances whereby a statement was true when it was made but has become incorrect by the time it is acted upon; and half-truths whereby that which has been omitted misrepresents the true situation. A contract may be found to have been entered into under duress where pressure has been exerted on one party, this pressure was illegitimate, the pressure induced the claimant to enter into the contract and the claimant had no real choice but to enter into the contract. 7. An anticipatory breach of contract will occur when one party indicates in advance that it will not perform as agreed. A contract is frustrated in situations where, after the contract is made, something happens which makes the contract impossible to perform or there is a radical change of circumstances. 8. A claimant is required to keep his losses to a minimum and may not claim for any losses that could reasonably have been avoided. 9. A claimant may claim for sums spent in reliance on the other party fulfilling his obligations under the contract and are usually awarded when the usual measure of damages, expectation loss, cannot be calculated. This was demonstrated in the case of Anglia Television v Reed (1972). Page 2 of 7
Scenario 1 Questions SECTION B 1. (a) Only if it is a term of the contract is the breach actionable. The Sale of Goods Act 1979, as amended by the Sale and Supply of Goods Act 1994, implies certain terms into all contracts for the sale of goods. Section 13 of the Sale of Goods Act implies a term that states when goods are sold by description they will correspond with any description by which they have been sold. This was demonstrated in the case of Beale v Taylor (1967) which concerned a car which was sold under a false description. Breach of s.13 is a breach of contract which may give rise to a claim in damages. Keiran has described the rug as 19 th century American. As it is neither American nor 19 th century it will be a breach of s.13 of the Sale of Goods Act 1979 and Lou may claim damages. (b) Misrepresentation is an untrue statement of fact made by one party to the contract to the other party to the contract, which is intended to induce, and which has induced, the other party to enter into the contract. A misrepresentation may take one of three forms. It may be fraudulent which means that the maker of the statement has made a false statement knowingly without belief in its truth or recklessly, i.e. careless as to whether it is true or false. A misrepresentation may also be made negligently. This means that the maker of the statement made a false statement and was careless as to whether it was true or false. Finally, a misrepresentation may be made innocently. This will occur when the maker of a false statement had reasonable grounds for believing that the statement was true when he made it. It is important to distinguish between the differing types of misrepresentation as the available remedies will differ. The remedy for the victim of fraudulent misrepresentation is damages and rescission which means that the parties are returned to the positions that they were in before the contract was made. The remedy for negligent misrepresentation is also damages and rescission but a claim for this type of misrepresentation can be made under s.2(1) of the Misrepresentation Act 1967 which reverses the burden of proof. The consequence of this is that rather than the claimant having to prove that the defendant was negligent, the defendant must prove that in fact he had reasonable grounds for believing that the statement was true when he made it. Keiran's business specialises in rugs. In the circumstances, the statement is likely to have been made fraudulently or negligently. However, Lou would be better advised to bring a claim for negligent misrepresentation under s.2(1) of the Misrepresentation Act 1967 than fraudulent misrepresentation as the burden of proof will pass to Keiran to prove that in fact he had not been negligent. Page 3 of 7
2. The contract between Keiran and MFL may be said to be frustrated. This occurs when something happens which is the fault of neither party, after a contract is made, which makes the contract impossible to perform or radically alters the circumstances. In the case of Taylor v Caldwell (1863) a contract for the hire of a concert hall was frustrated when the hall burnt down, making it impossible for the concerts to go ahead. In this scenario, the subject matter of the contract, i.e. the Georgian furniture, has been destroyed and the contract is consequently frustrated. Once a court holds that a contract is frustrated, it is automatically terminated from the point at which the frustrating event occurs. At common law, any loss resulting from the frustration lay where it fell. Therefore, any advance payments made under a contract which had become frustrated would not be recoverable. The position has been altered to some extent by the Law Reform (Frustrated Contracts) Act 1943. Under s.1(2) of the Act a party who has paid money prior to a frustrating event may recover it. Therefore, Keiran is obliged to re-pay MFL their 100 deposit. 3. A contract is an agreement between two or more people that is legally binding. This may be evidenced by an offer made by one party which is met with corresponding acceptance by the other party. An item on display in a shop is not an offer, it is an invitation to treat. This means that it is open to potential customers to make an offer, which the retailer may accept or reject. This was established in the case of Fisher v Bell (1961) in which flick knives on display in a shop window were held to be an invitation to treat rather than on offer to sell. Keiran's display of the silver dish in his shop is an invitation to treat. Nilesh has made an offer to which Keiran has made a counter offer. The effect of a counter offer is to extinguish the original offer and thereby establish a fresh offer. Nilesh has rejected this fresh offer by making a further counter offer which Keiran has accepted. Keiran and Nilesh now have a binding contract. 4. Keiran is in breach of contract by refusing to deliver the dish to Nilesh as agreed. At common law a breach of contract will entitle the injured party to damages. The purpose of damages is to put the innocent party in the position that he would have been in had the contract been performed as agreed, as stated in the case of Robinson v Harman (1848). In some circumstances an award of damages may not be appropriate and equity provides other remedies which may be available at the discretion of the court. One such remedy is that of specific performance, which is an order that commands the contract to be completed as agreed. It may be awarded where the goods which are the subject of the contract are unique. Specific performance will not, however, be awarded where damages would be a sufficient remedy or where a third party has acquired rights under the contract. Nilesh is entitled as of right to an award of damages for Keiran's breach of contract. He may prefer to apply for an order of specific performance as the silver dish is antique and possibly unique. However, Oli has now Page 4 of 7
acquired third party rights. Nilesh's application for an order of specific performance will be unsuccessful. Scenario 2 Questions 1. (a) Not all statements which are made when a contract is being negotiated will become terms of the contract. The basic principle is that of the importance attached to the statement. If the person to whom the statement is made has made it known that he attaches particular importance to a certain fact and the other party states that fact is true, it is likely that the statement will be treated as a contractual term. This was shown in the case of Bannerman v White (1861) in which a prospective buyer made it clear that he would not be interested in buying hops if they had been treated with sulphur. In this scenario, from Gisela's statement that she was particularly keen on 18-carat gold and Ferdinand's reply that he never used anything else in his jewellery, it may be taken as a term of the contract that 18-carat gold will be used for the jewellery that Gisela has commissioned. (b) Not all terms of a contract will be of equal importance. Those terms that are more important are said to go the root of the contract and are known as conditions. A breach of condition enables the injured party to treat the contract as repudiated and claim damages. Less important terms of a contract are known as warranties and will entitle the injured party to damages only. The difference between conditions and warranties was demonstrated in the cases of Poussard v Spiers (1875) and Bettini v Gye (1875). In the former case a singer failed to perform on the opening night of a concert. It was held that this was a breach of condition and the producers of the concert could treat the contract as ended. By contrast, in the case of Bettini v Gye (1875) the failure was to attend rehearsals. It was held that this failure was a breach of warranty which gave rise to a claim in damages only. If there is difficulty or uncertainty in assessing the importance of a term at the time that the contract was formed then the court may classify it as an innominate term and allocate it according to the seriousness of the breach. This approach was taken in the leading case of Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (1962). The use of 9-carat gold rather than 18-carat gold does not deprive Gisela of the whole benefit of the contract, as per Hong Kong Fir, and may therefore be viewed as a breach of warranty rather than a breach of condition. If this is the case, Gisela will not be entitled to repudiate the contract but she may have a claim in damages. 2. Ferdinand has a legally binding agreement with Goldmark Merchants Ltd under which it has provided him with gold which he is obliged to pay for. The term given for the price paid for the performance or promise of performance is consideration, as explained in the case of Dunlop v Selfridge (1915). Page 5 of 7
Consideration must have some economic value or be capable of being valued in money. In this scenario, the consideration given by Goldmark Merchants Ltd is the gold which it has supplied, and Ferdinand's consideration is the 1,500 which he has promised to pay for the gold. Part of Ferdinand's debt has been repaid. However, part-payment of a debt will not satisfy the requirement to pay the whole amount, as in Pinnel's Case (1602), and Ferdinand should still be obliged to pay the remaining 500. However, the part-payment has been made by a third party, Ivy. In these circumstances an exception to the rule against partpayment of debt will arise so that if part-payment is offered by a third party and is accepted by the creditor in full settlement this will afford a good defence in a later action. Any later claim by a creditor would be viewed as an act of fraud against the third party. In the case of Welby v Drake (1825) the claimant accepted part payment from the defendant's father in full satisfaction. The claimant's later action against the defendant failed because by suing the son he was committing a fraud on the father. By banking the cheque Goldmark Merchants Ltd appear to have accepted Ivy's payment in full satisfaction. Ferdinand will not be required to pay the remaining 500. 3. Undue influence may occur where one party uses their influence over another to persuade them to enter into a contract, which is usually to the disadvantage of the other. The courts will intervene where there is some relationship between the parties which has been exploited and abused to gain an unfair advantage. Where this occurs the court may set the contract aside. Where a third party, such as a bank is involved, the transaction may be put aside if there is constructive notice that it was procured by improper means. In the case of Barclays Bank v O'Brien (1994) a classification of types of undue influence was approved which distinguished between actual undue influence and presumed undue influence. This classification has been revised by the now leading case of Royal Bank of Scotland plc v Etridge (No. 2) (2001). In Etridge the House of Lords considered that the law on presumed undue influence was inaccurate in that the 'presumption' is no more than an evidential presumption that influence has been exercised, which did not extend to concluding that it was also undue. Whether the influence was undue is a separate matter which would rest on the facts, e.g., the nature of the transaction. Janet has been the subject of actual undue influence resulting from Ferdinand's behaviour which could render the agreement with the bank voidable. 4. In order for the bank to proceed with the repossession of Janet and Ferdinand's apartment, it will need to establish that it had written confirmation from a solicitor that appropriate advice had been given to Janet and that the solicitor met with Janet without Ferdinand being present. The solicitor's duty is only to provide reasoned advice. Therefore if such advice had been given, it would have been up to Janet whether she wanted to proceed with the transaction or not. The nature of the Page 6 of 7
documents should have been explained to Janet and her own financial means should have been discussed. The financial position and indebtedness of Ferdinand should also have been discussed. If the bank is unable to establish that these guidelines (which were laid down in RBS v Etridge (no 2) [2001]) have been followed correctly, it will not be able to proceed with the repossession of the apartment. Page 7 of 7