Contract Law Notes
Scope of contract law
Contracts are formed every day in the form of exchanges and they needn’t be written. Professor Ian McNeil has come up with a relational contract theory, on the one hand there are ‘discrete’ exchanges where an exchange
is set to be completed in a very short timescale and the parties aren’t bound to each other in any longer term relationship or anybody else. I.e. a casual purchase of fruit from a road-side stall. ‘Relational’ exchanges sit on the
other side of the spectrum, and are more complex, binding the parties for a long term but having to be flexible as at the outset neither party knows exactly what will come. They may be based on previous dealings between
the parties or more general custom and habit in the sector concerned. Other third-parties may also be involved.
Some see general rules to contract law, the unitary approach, however in more specific cases and areas many rules will not apply and require their own special rules, this has led to some saying that there is only a law of
contracts and that the idea that there is a unitary law of contract as an artificial construct of law teachers – Gilmore, The Death of Contract.
The function of contract law
Contract law supports the institution of private exchange by creating power in the parties to commit themselves to legally enforceable agreements. Contract law has many functions however the primary one is to support
and control millions of agreements which make up the market economy. Without contract law trading would be much more difficult and thus surviving would be too as one would have to become much more self-sufficient.
In order to have a stable capitalist or mixed economy the law must guarantee the freedom of individuals and the protection of property: real, personal and intellectual. Contract law obviously plays a part in dispute
resolution, however it can also help in preventing disputes in the first place by empowering parties. The difficulty of simultaneous exchange can be overcome, it can give confidence to parties making exchanges (although in
long term business, parties may be unwilling to use if goes wrong as would damage relationship and may damage reputation.) and as the lingua franca and a longstanding law the English law is often preferred. Contract law
also though can be said to have a social or moral function, it often operates in a regulatory capacity especially in areas such as consumer protection. These are the two conflicting ideologies throughout contract law, ‘Market
Individualism’ and ‘Consumer-Welfarism’, a feature of contract law is the tension between them, sometimes one prevails over the other, another time the other prevails. There are also two other policies within contract
law, Formalism – i.e. sticking to what the law books say, irrespective of result and Realism which is about looking at the real-world, handing out acceptable decisions and is result orientated. A thesis, Hugh Collin’s
Transformation thesis, about what the law of contract should be doing is promoting a social market: preventing domination, ensuring the fairness of exchange (equal bargaining power) and promoting co-operation.
What is contractual liability is based on?
A promise is one of the essential requirements in contract law, it can be express or inferred however by itself it is generally not enough. In Taylor v Brewer a committee in charge of selling lottery tickets promised after the
third lottery to take into account the work a gentleman had done selling tickets. Paying ‘such remuneration be made as should be deemed right’. The court deemed this not to be enough, he wasn’t actually promised
anything.
Normally some sort of agreement is required and an intention to create legal relations. This will normally be bilateral however it can also be unilateral. In the case of Carlill v Carbolic Smoke Ball Co on an advert promoting
the product it was stated that a £100 reward would be given to anyone who contracts flu after having used the smoke ball 3x daily for 2 weeks. £1000 was deposited in the bank to demonstrate the company’s sincerity.
However when a person came to collect the reward the company refused. The court however insisted saying that one can still make an offer to the world without it being too vague and that the company had shown by their
wording that they didn’t require notice, it could be a unilateral contract.
Generally consideration is also required. In Re Hudson the deceased hadn’t completed promised payments to the Congressional Union, however as they weren’t giving back anything in return, it was completely voluntary i.e.
there was no consideration. Had it been included in a deed then it would have been enforced.
Contract, Tort and Restitution
A difficulty lies in locating the law of contract within the spectrum of the law of civil obligations. Burrows (1983) helpfully pointed out that the law of civil obligations rests on 3 principles: expectations engendered by a
binding promise should be fulfilled (contract), compensation must be granted for the wrongful infliction of harm (tort) and that unjust enrichments must be reversed (restitution or unjust enrichment). In contract obligations
arise voluntarily whereas in tort and restitution they are imposed upon the parties. A tort is committed when harm is wrongfully inflicted, and thus compensation is due to try to return the party to the position they were in
prior to the accident. i.e. Donoghue v Stevenson. In restitution there are several elements: D must have benefitted (enriched), at P’s expense, unjustly and without any defences. i.e. British Steel Corp v Cleveland Bridge
Engineering – negotiating for supply of steel nodes still pending, CB issued letter of intent asking for supply. BSC made all the nodes suppling all but one which it withheld as it hadn’t been paid. Delivery of the last one then
delayed by steel strike, BSC sued for damages of price of nodes, CB counter-claimed for late delivery. Court held no contract as negotiations were still ongoing, so instead said it was a restitution claim and awarded a
quantum meruit award - reasonable sum representing work done.
What is required to form a contract?
- Agreement (offer and acceptance, certainty) - Consideration - Intent to create legal relations (sometimes must be in particular form) - Capacity
, Agreement – Contracts are voluntarily assumed legal obligations. Yet do the rules which govern whether an agreement is reached respect the intention of the parties?
General Theoretical level: An objective approach (rather than a subjective one) is taken in deciding if an agreement has been reached. Smith v Hughes (Old Oats case)
Blackburn J: “If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon
that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”.
More recently, same point made in RTS Flexible Systems v Molkerei Alois Müller GmbH by Lord Clarke. The Objective approach avoids practical problems of subjective intention e.g.
what about stuff that not given thought to? Also what of parties who give outward signs of assent but whose inner subjective thoughts are quite different, how are such inner thoughts to be proved?
Objectivity in this way protects the position of the other party who may reasonably have relied on the outward appearance of a willingness to contract.
Howarth describes 3 types of objectivity: ‘Detached objectivity’ (‘fly on the wall’), ‘Promisor objectivity’ and ‘Promisee objectivity’. He advocated using ‘detached objectivity’ apposition wholly independent of either party’s
perspective rather than what the courts do – choosing one parties perspective objectively (battle of forms). His distinction has been attacked by Vorster on basis that in a bilateral contract each party is both a promisor and
promisee. But as Mindy Chen-Wishart points out whilst the terminology Howarth employs is misleading, his point that there are two parties to a contract and a court can apply to use either perspective as their ‘objective
basis’ is important.
Example in action: Centrovincial Estates v Merchant Investors Assurance Landlord sent tenants new rent – £65,000 was offered and subsequently accepted by tenants. But upon receiving the written acceptance of the offer
landlord wrote back saying he had meant to put £126,000. Tenants refused to accept this insisting a contract had been concluded for £65,000. Court found for tenants. Stands for proposition that contracts are binding from the outset (even if
wholly executory). Some Like Atiyah think this is bad and suggested that the law does and should stick to what people do rather than bare intentions. Therefore, contract law should prioritise reliance interest over
expectation interest. On the other hand, promises are good as – allows transactions where actual money or good not possessed at time – efficient marketplace (Posner). Also allows parties to plan ahead! To keep this up, the
reliability of outward appearances generally is important to protect the whole institution of contracts. If we can easily escape promissory obligations by secretly crossing our fingers behind our backs people would soon stop
bothering to make contracts at all. the institution of promising would fall into disrepute, followed by disuse. Thus to prevent this the law provides powerful incentives to avoid careless manifestations of assent.
Lord Slate here though did say that there are situations where the objective test is either displaced or modified (so an acknowledgement of a slight subjectivism? NO – says Chen-Wishart, still an
objective assessment, reasonable person wouldn’t rely on an agreement if they knew the other person was suffering from a mistake as to the terms):
When the offeree knows that the offeror is suffering from a mistake as to the terms, there is held to be no contract. Hartog v Colin & Shields Hare skins offered at 10¼ a pound. S meant 10¼
apiece. H accepted S’s offer. Skins normally sold by piece. Held, H couldn’t reasonably have thought offer matched S’s true intention (slightly subjective, but no need to prove H’s actual knowledge).
However, if the mistake relates not to the terms, then the contract remains binding even if the offeree was aware of the mistake - The Harriette N Agreement to settle dispute over
amount of demurrage (compensation for delay on loading/unloading ship); B knew A had calculated amount in offer on mistaken assumption about date ship had completed discharging.
If a mutual misunderstanding of terms, generally also held to be no contract. Raffles v Wichelhaus “ex Peerless Bombay”. Two ships called Peerless were leaving Bombay 2 months apart.
The courts traditionally apply the ‘mirror image’ rule in deciding whether or not a contract has been concluded Butler v Ex-Cell-O Corp (replied on tear-off slip which said ‘agree to be bound
by terms’ although also had a letter saying they were dealing on the terms already negotiated.) There must be a clear and unequivocal offer which is ‘mirrored’ by an equally clear and unequivocal acceptance in the
documents passed between the parties. A purported acceptance which doesn’t accept all the terms of the original offer is not in fact a true acceptance at all but is a counter-offer which ‘kills off’ the original offer and
amounts to a new offer. (see later) Whilst this seems very strict and on a strict reading leads to the conclusion that there would normally be no contract, it is absurd to hold this when their conduct shows that they were in
agreement. In which case the law of contract would fail in its basic duty to recognise and enforce agreements. However, the courts do lean towards upholding contracts rather leaning towards the ‘last shot’ approach – the
last form sent prevails as this is deemed acceptable by conduct.
Lord Denning in Butler rejected the traditional approach instead proposing looking at all the documents passed between the parties to glean from them or their conduct whether an agreement was reached on material
points despite differences between the forms and conditions. If terms were mutually contradictory a court could ‘scrap’ them and replace them by ‘reasonable implication’. Here the court has considerable discretion in
filling in the gaps, making it much more flexible. However this suggestion was rejected by the HoL primarily because it would cause uncertainty in contract law. Thus English contract law remains welded to the traditional
mirror approach. Only in exceptional cases, where clear course of dealing between parties may a court avoid the traditional approach.
Advantages Criticisms
Certainty (business people know the principles and can plan their affairs accordingly) Excessively rigid, producing ‘all or nothing’ results (Collins): either there’s a contract or there’s not
Provides a standard which can be used in every type of contract. – so no remedies. Unfortunate results in ‘battle of the forms’ cases. ‘Last shot’.
Internationally though, most other countries, e.g. US, Germany, France, employ the ‘knock-out’ rule – similar to what Denning argued. The terms which match govern the contract and
differing terms ‘knock’ each other out and are replaced by default rules of law. Giesela Rühl has analysed both rules in economic terms.
Last shot rule – economically questionable. Doesn’t enforce mutual agreements and incurs high transaction costs. Whilst Baird & Weisberg argue that businesses don’t bother to send a last shot as by sending new terms
they lose the chance to do business, in reality almost all businesses still attach their standard terms. It also incentivises parties to draw up standard terms which are more favourable to themselves, not necessarily maximising
the joint profit of both parties. B & W believe this doesn’t happen though as businesses realise that parties are likely to go elsewhere rather than accept unfavourable terms. However, people rarely read standard terms, even
