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CML - WS 4 - Exclusion of Liability
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CML - WS 4 - Exclusion of Liability
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WS 4 – Exclusion of LiabilityUK CONTRACT PRINCIPLES
Formation of the Contract – requires offer and acceptance. There must be consideration and intention to be
legally bound.
Negotiation Phase
In all but the simplest of commercial contracts, the entry into the contract will be preceded by a period of
negotiation, either oral or written.
Is this the first time the parties have dealt with each other?
The subject matter of the contract and whether or not the parties are using standard terms and conditions.
Offers
Throughout the negotiation process, it is important to ensure that any offer remains on the table. An offer can
be ended by rejection, counter-offer, lapse of time, death of the other party or by revocation before it has been
accepted. If any of these has occurred, then there will be no offer capable of acceptance.
Terms and representations
A pre-contractual statement which amounts to a term will form part of the contract, and breach will give the
injured party the usual contractual remedies, including the right to terminate the contract and sue for damages
as of right, depending on the status of the term
There are three types of misrepresentation: fraudulent, negligent and innocent. However, if the maker of the
statement can show that he honestly believed that the statement was true at the time that it was made, and
that he had reasonable grounds for that belief, then the innocent party may lose his right to damages.
Battle of the forms
Where both parties seek to impose their own terms on the other, it may not be clear whose standard terms
apply.
A battle of the forms may occur, for example where the seller provides the buyer with an invitation to treat,
containing the seller’s standard terms and conditions, and the buyer then makes an offer, introducing his own
terms. If the seller does not accept the buyer’s terms, and insists instead on reinstating its own terms, the seller
has made a counteroffer
Prevail clauses
A prevail clause provides in effect that if there is a battle of the forms then the seller’s terms will prevail. Legally, the
clause is ineffective, as any later set of terms which is introduced will act as a counter-offer and override an earlier
set. However, a prevail clause is often included for bluff value.
Entire or whole agreement clauses
The seller may include an ‘entire’ or ‘whole agreement’ clause. This is intended to prevent any statements made by
sales representatives, or statements included in sales literature, brochures and the like, forming terms of the
contract. The clause will state that the seller’s terms and conditions form the whole agreement between the seller
and the buyer and cannot be varied in any way.
A further danger of a whole agreement clause is that it might exclude other documents which the parties do wish to
have taken into account, for example a price list.
‘No authority’ clauses
These are attempts by the seller:
(a) to put a limit on the extent to which its sales representatives, or other employees, are permitted to
negotiate individual terms with the buyer; and
(b) To exclude any extravagant claims made by the sales representatives to induce the buyer to enter into the
contract.
Consideration
The consideration in a commercial contract will usually be money, goods or services, or the promise of these.
Certainty
, WS 4 – Exclusion of Liability
One of the key concepts in the law of contract is that there must be contractual certainty that is the parties must
be specific about the terms of the contract.
Agreements to agree
The courts will not enforce an ‘agreement to agree’. So an agreement to enter into a contract at a later date, or an
agreement that a certain provision will be agreed between the parties after the commencement of the contract
would be void for uncertainty.
Lock-out and lock-in agreements
A lock-out agreement is one in which one party, for example a manufacturer (A), agrees with another, a distributor
(B), not to negotiate with anyone other than B. It is essentially a negative promise. Such agreements are too
uncertain and therefore unenforceable.
Cancellation clauses
Both the buyer and the seller might want to have a let-out clause, allowing them to withdraw from the contract
without liability in certain circumstances. If the cancellation clause is too wide, it may invalidate the contract
altogether.
Mistake
A mistake may mean that the parties have failed to reach agreement, because, for example, unknown to the parties,
the subject matter of the contract does not exist or has perished. Where there is a mistake, it renders the contract
void.
PERFORMANCE OF THE CONTRACT
Post-contractual variation
Where one party agrees to do something over and above the terms of an existing contract, the other party must
provide consideration for that promise, either by providing something extra over and above his existing contractual
duty
The doctrine of waiver
An example would be where a delivery date has been agreed, but the seller finds that he is unable to deliver.
Normally the buyer can refuse to accept late delivery, but if the buyer agrees to it, the court will usually decide that
the buyer has waived its right to terminate the contract for late delivery.
Promissory estoppel
The doctrine of promissory estoppel applies to promises not to claim sums of money which would otherwise be due
under a contract.
Prevention
In the same way that the parties can attempt to draft the contract to solve ‘battle of the forms’ problems, they may
also attempt to prevent unauthorised variation of the terms of the contract, by extending the no-authority clause.
Economic duress
Even if a variation is supported by consideration, it may not be valid if it is brought about by economic duress, where
one party threatens to break its side of the contract unless the other side promises to pay more than originally
agreed.
INTERPRETATION (OR CONSTRUCTION) OF CONTRACTS AND IMPLIED TERMS
Interpretation – is deciding the meaning of the words of the contract.
o Only if the language is unclear or there are clear drafting problems should the court be prepared to
depart from the natural meaning of the words, or invoke business common sense
Brexit - Going forward, in order to future-proof their contracts, commercial parties should expressly state
whether a reference to the EU includes the UK after Brexit, or whether a reference to EU legislation includes
subsequent UK legislation.
, WS 4 – Exclusion of Liability
Implied terms - a term will only be implied into a contract if either it is necessary to give business efficacy to the
contract (the ‘business efficacy test’) or it is so obvious that it should be included that it goes without saying (the
‘officious bystander test’). Marks and Spencer v BNP Paribas.
DISCHARGE OF CONTRACTS
A contract comes to an end when it has been discharged by:
(a) performance of the contract (which will be the usual situation);
(b) agreement between the parties;
(c) frustration, if the contract can no longer be performed in the manner intended by the parties;
(d) Breach, if it is a repudiatory breach, i.e. breach of a condition not of a warranty, and that repudiation is
accepted by the innocent party.
FRUSTRATION – p.34
A contract is frustrated when, after the contract is made, and without the fault of either party, the contract
becomes impossible or radically different to perform, e.g. because the subject matter of the contract has
been destroyed
The result is that the contract automatically comes to an end and both parties are relieved of their
obligations under the contract.
Prima facie, the buyer can recover any payments it made before frustration (s 1(2)), and any sums which are
due before the frustration date will cease to be payable.
Remedies for breach of contract
Breach of a condition will give the innocent party the right to repudiate or terminate the contract.
Termination means that the innocent party is discharged from all future obligations under the contract, and
may recover any property transferred under the contract (including the price paid for any goods or services)
and claim damages.
Breach of warranty only gives the innocent party the right to claim damages (provided that it can show that
it has suffered a loss). The innocent party does not have the option to terminate the contract.
CONTRACTUAL DAMAGES
Damages are the ‘usual’ remedy for breach of contract and, provided that the claimant can show that it has
suffered a loss, are available as of right.
The purpose of contractual damages is compensatory, not punitive.
Most damages in contract are assessed on an expectation basis – the aim is to put the claimant into the
position that he would have been if the contract had been performed as intended.
Remoteness of damage – Hadley v Baxendale (1854)
The remoteness rule was set out in Hadley v Baxendale (1854) 9 Exch 341. Claims for damages are limited to:
(a) first-limb: losses that flow naturally from the breach e.g. ordinary loss of profit.
(b) second-limb: losses that may reasonably be supposed to have been in the contemplation of the parties at
the time they made the contract, as a result either of actual knowledge.
In commercial contracts, most sellers will want to exclude indirect or consequential loss, although in the UK this will
always be subject to UCTA 1977. However, it is not always clear whether loss of profit falls within the first or second
limb.
Mitigation
The claimant must have made a reasonable attempt to mitigate its loss. It cannot claim for loss which it failed to
mitigate. The burden of proof is on the defendant to show that the claimant did not make a reasonable attempt to
mitigate.
Restitution and restitutionary damages
The aim of restitution is to prevent unjust enrichment, eg where an advance payment has been made for a
service and there has been a total failure of consideration, in the sense that no benefit at all has been
provided under the contract
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