Law of Contract Last updated 14-May-2015

Introduction

An agreement is the consent of two or more persons to form some engagement, or to rescind or modify and engagement already made. Dusrum vel plurium in idem placitum consensus. That kind of agreement, the object of which is the formation of an engagement, is called a contract.
A treatise on the law of obligations or contracts, M. Pothier, vol.1, 1806.

English law has no formal definition of the contract. In the absence of a Code it has not needed one, moreover any such definition is not a part of the law itself. Very generally it can be said that by the contract is usually understood a commercial agreement, which gives rise to obligations enforced and recognised by law. Social and domestic agreements generally are not capable to produce binding contract:

Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangements which are made between husband and wife.
Per Atkin LJ in Balfour v Balfour [1919] 2 KB 571 at p.578

Historically therefore, the English lawyers adopted the term Contract when they wish to convey an idea of a legal responsibility resulting from the voluntary engagement of one individual to another, as distinguished from a liability originating in a tort or wrong unconnected with agreement.

Understandably, that there are also a number of different definitions of the law of contract, all of which are of general and qualified character. Sometimes the law of contract described as a branch of the law which determines when a promise shall be legally binding on the person making it, and sometimes as a part of the law which deals with self-imposed obligations.

English law requires presence of three key elements for the creation of a contract. They are:

agreement,

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.
Per Blackburn J in Smith v Hughes [1871] 6 QB 597

consideration,

[A] valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given suffered, or undertaken by the other.
Per Lush J in Currie v Misa (1875) LR 10 Ex 153.

an intention to create legal relations, i.e. agreement becomes legally enforceable only if the parties were intended so.As mentioned above in case of social and domestic agreements there is a presumption in law that the parties have no intention to create legal relations.

The first thing we observe is that it takes not less than two persons to make it. In this, and in most cases, there are, in fact, not more; but others readily occur, such as partnership, where the number is not limited. The next thing is that these persons have a distinct intention, and the intention of both or all of them is the same. Without this, one obviously can not say there is an agreement. Next, they must be aware that their intentions agree: in other words, they must communicate them to one another, for it is again obvious that uncommunicated intentions, however exactly they correspond, do not make an agreement. Moreover the scope of the intention is material. If people make arrangements to go for walk or to read a book together, there is no agreement in a legal sense. Why not? Because their intention is not directed to legal consequences, but merely to extra-legal ones; no rights or duties are to be created.
F.Pollock, Principles of Contract, 2nd edn,1876.

To these key requirements, others can be added. For instance, in contracts for land formal requirements (i.e. writing the contract down and having it witnessed) are necessary to effect a sale. The Common Law does not, as a general rule, require any particular form in contracts, provided that there is a bargain intended to be binding, though in certain cases evidence in writing is required for special reasons of precaution, or by mercantile custom embodied in the law, and in some cases formalities are imposed for the protection of the revenue.

Also, parties to a contract must have capacity to contract and must be freely exercising their informed consent to the agreement.

Contract transactions can be void and voidable. An agreement or other act which is void has from the beginning no legal effect at all, i.e. void ab initio. On the other hand a voidable contract is fully effective until party entitled to set it aside does it, in other words such party avoid contract, as Dixon J stated in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477:

When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. … When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made.

Formation

So long as they are only in negotiation either party may retreat; and though the parties may have agreed on all the cardinal points of the intended contract, yet, if some particulars essential to the agreement still remain to be settled afterwards, there is no contract. The parties in such a case are still only in negotiation but the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared embodying the terms which shall be signed by the parties, does not, by itself show that they continue in negotiation.
W J Rossiter v Miller (1870) 3 App Cas 1124 per Lord Blackburn at p 1151.

Leaving social and domestic agreements aside, it is considered that parties have created legal relationships when they achieved consensus ad idem, or, in other words, a meeting of the minds, through the process of tendering and accepting an offer. It is essential to the creation of a contract that both parties should agree to the same thing in the same sense. Such meeting of minds achieved by way of communicating promises between parties and final coincidence of intentions.

Thus if A (the offeror) makes a communication to B (the offeree), whether in writing, orally or by conduct, which, in the circumstances at the time the communication was received, (1) B, if he were a reasonable man, would understand as stating A’s intention to act or refrain from acting in some specified manner if B will promise on his part to act or refrain from acting in some manner also specified in the offer, and (2) B does in fact understand A’s communication to mean this, and in his turn makes to A a communication conveying his willingness so to act or to refrain from acting which mutatis mutandis satisfies the same two conditions as respects A, the 'consensus ad idem' essential to the formation of a contract in English law is complete.
Per Lord Diplock in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal(The Hannah Blumenthal), [1983] 1 All ER 34 at pp.48-49

Both assent and communication of assent are necessary and there can be no communication of assent until there be assent.

A bilateral contact is formed through an exchange of promises under which both parties undertake obligations. A unilateral contact is formed through the promise of a party to perform if the other party does (or forbears from doing) a particular act.

Question whether agreement has been concluded must be decided objectively, but depends on the state of mind of the alleged offeree. To be binding a contract shall satisfy the test that promise, or an assurance given by one party was given with intention that another party should act upon it by entering into a contract, and it does actually act on it by entering into the contract.

An offer must be communicated and may be terminated by revocation, rejection or lapse. Revocation may take place at any time before acceptance because as Erle C.J. put it in Offord v Davies (1862) 12 CBNS 748 at p.757:

This promise by itself creates no obligation. It is in effect conditioned to be binding if the plaintiff acts upon it, either to the benefit of the defendants, or to the detriment of himself. But, until the condition has been at least in part fulfilled, the defendant has a power of revoking it.

However when revocation sent by post or cable it is considered to be communicated and effective only when the post or cable was received by the offeree. Once accepted an offer cannot be revoked, see GNR v Witham (1873) LR 9 CP 16.

Offer may lapse either after certain specified period for acceptance or after passing of a reasonable time.

English Law considers a counter-offer as rejection of the offer. Lord Langdale said in Hyde v Wrench (1840) 3 Beav 334:

… I think there exists no valid binding contract between the parties for the purchase of the property. The Defendant offered to sell it for £1000, and if that had been at once unconditionally accepted, there would undoubtedly have been a perfect binding contract; instead of that, the Plaintiff made an offer of his own, to purchase the property for £950, and he thereby rejected the offer previously made by the Defendant. I think that it was not afterwards competent for him to revive the proposal of the Defendant, by tendering an acceptance of it; and that, therefore, there exists no obligation of any sort between the parties …

Therefore if an offer is rejected, there may be a counter-offer, but the counter-offer kills the original offer and the offeree cannot revert to the original offer anymore purporting to accept it again. If or when counter-offer was accepted it becomes final and binding on both parties.

The general principle of law applicable to the formation of a contract by offer and acceptance is that the acceptance of the offer by the offeree must be notified to the offeror before a contract can be regarded as concluded.

When and where contract is deemed to be concluded? If the acceptance had been sent by post, or by telegram, then, on existing authorities, it would have been complete when put into the hands of the Post Office. If on the other hand it had been telephoned or telexed/faxed/emailed, it would have been complete when heard or received by the offeror, in country and place where his office located. Therefore if it is necessary to determine where a contract is formed, it appears logical that this should be at the place where acceptance is communicated to the offeror, in case of instantaneous communication, the contract is made where and when the telex of acceptance is received by the offeror.


Contract Terms

[T]he general principle … is quite true, that if there has been a parol agreement, which is afterwards reduced by the parties into writing, that writing alone must be, looked to to ascertain the terms of the contract …
Per Lord Abigner C.B. in Allen v Pink (1838) 4 M&W 140 at p.144

During negotiating stage parties agree on terms of future contract. Those terms can be formulated by way of exchange of oral promises between promisor and promisee in case of simple contract or be presented by each party in form of multipage sets of standard clauses with additions and amendments made in the course of negotiations. In our daily life we deal with contract terms each time we buy food in the supermarket and clothes in shopping center, when we pay for bus ticket or withdraw cash from cash machine. Our signature on the receipt or pin-code confirmation of electronic transaction symbolise our agreement with terms of contract, though we not always realise it.

When person having put his or her signature to the contract without reading it and, at the same time, not having been induced to do so by any fraud or misrepresentation, he or she cannot say that he or she is not bound by the terms of the contract because he or she has not read them. Considering the contract as an exchange of binding promises it can be said that any breach of such promise by the party in fault gives to the innocent party the right to seek for appropriate remedies, unless liability for breach in question expressly excluded (See Exclusion clauses).

Extent of available remedial actions depends on:
- the nature of the term or terms has been breached,
- on consequences of breach,
- and effect of breach,
- whether there any limiting or excluding provisions.
Contractual terms are distinguished from mere representations which are not intended to be promises.

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Frustraction of Contract

Vergil, Aeneid. IV.338/9: nec coniugis umquam praetendi taedas aut haec in foedera veni.

It is ironic that Aeneas’s shabby excuse to Dido has become the watchword of the modern doctrine of frustration. Aeneas’s desertion of Dido has not played well down the ages. However, there is another view (‘At pius Aeneas quamquam lenire dolentem solando cupit et dictis auertere curas, multa gemens magnoque animum labefactus amore iussa tamen diuum exsequitur classemque reuisit. - But pious Aeneas, although he desired by consolation to lessen her grief and deflect her worries with his words, with much groaning, his heart weakened by a great love, he followed the orders of the gods and returned to his fleet’ Aeneis.IV.393).

The English Common law historically holds the parties to their bargain, thus leaving them to make their own provisions for events outside of their control, for circumstances which may make their obligations more burdensome and for instances which may render further performance of contract impossible. This principle has been conferred into a long standing rule of law insisting on literal performance of absolute promises with the roots coming back to the medieval times. Rule has been expressed in Paradine v Jane (1647) Aleyn 26, in the following words:

… when the party by his own contract creates a duty or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.

It has been recognised and applied in a number of cases, the most prominent of which was Atkinson v Ritchie (1809) 10 East 530, in which Lord Ellenborough at p.533 denied availability to the shipowner of the way to escape from his contractual obligations on the pretext of threatening embargo, his Lordship said:

Their relative claim upon, and duties in respect of, each other are conclusively fixed and detined [spelling used in the original] by the terms of their own written contract. No exception (of a private nature at least) which is not contained in the contract itself, can be engrafted upon it by implication, as an excuse for its non-performance.

The words ‘if he may’, in Paradine case, were not given any consideration, although they seem to be able to limit the promisor’s duty to perform to the circumstances when such performance is still within bounds of his possibilities. Lord Wright in Joseph Constantine Steamship Line, Limited v. Imperial Smelting Corporation, Limited [1942] A.C. 154 at p. 184 has confessed himself quite unable to find a clear meaning to these words:

I am not clear what "if he may" means. It may mean "legally may," but the reference to inevitable accident seems inconsistent with reading "if he may" as reserving impossibility.

Anyhow, this rigorous rule served as a good law until about the middle of the nineteenth century, with some exceptions, however, when, for example, in a contract of apprenticeship the death of a party was held to have the effect to dissolve the contract without any liability being imposed for the consequences of a failure to perform the contract in accordance with its terms. Footing on such type of contracts, i.e. when a person binds himself to do something which requires to be performed by him in person, Blackburn J in Taylor v Caldwell (1863) 3 B.&S. 826, applied same principle to commercial contracts, stating that if the parties, when entering into the contract, contemplated continuing existence of some particular specified thing, then such a contract is subject to an implied condition, that the parties shall be excused in case, when performance becomes impossible from the perishing of said particular thing without default from either side.

Henceforth the doctrine of frustration began its existence as "a device by which the rule as to absolute contracts are reconciled with a special exception which justice demands".

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Breach of Contract

We think that, from the nature of the engagement to take a leading, and, indeed, the principal female part (for the prima donna sang her part in male costume as the Prince de Conti) in a new opera which (as appears from the terms of the engagement) it was known might run for a longer or shorter time, and so be a profitable or losing concern to the defendants, we can, without the aid of the jury, see that it must have been of great importance to the defendants that the piece should start well, and consequently that the failure of the plaintiff’s wife to be able to perform on the opening and early performances was a very serious detriment to them. This inability having been occasioned by sickness was not any breach of contract by the plaintiff, and no action can lie against him for the failure thus occasioned.
Per Blackburn J in Poussard v Spiers and Pond (1876) 1 QBD 410 at p.414

Under a breach of contract is usually understood such state of affairs between the contracting parties when one of them without lawful excuse refuses or fails to perform his contractual obligations. A breach is also deemed to be committed when performance rendered by a party to contract is defective, or a party disables himself from performing.

If a party either renounce the contract or incapacitate himself before the date when performance is due, it is said that he commits an anticipatory breach of contract.

It is not always easy to establish breach of contract, as for example in case of unilateral contract when promisor promises to pay promisee a sum of money if he, promisee, without any obligation, will do something or refrain from doing it. In such contracts promisee will not be in breach if he never attempts to perform, because he has not promise anything. But if he starts his performance then such act will bide promisor thereupon. Moreover, having begun his performance promisee might also be held to have impliedly promised to complete it, so the contract would become bilateral.

If I say to another, "If you will go to York, I will give you 100£," that is in a certain sense a unilateral contract. He has not promised to go to York. But if he goes, it cannot be doubted that he will be entitled to receive the 100£. His going to York at my request is a sufficient consideration for my promise. So, if one says to another, "If you will give me an order for iron, or other goods, I will supply it as a given price"; if the order is given, there is a complete contract which the seller is bound to perform. There is in such a case ample consideration for the promise. So, here, the company having given the defendant an order at his request, his acceptance of the order would bind them.
Per Brett J in Great Northern Ry. v Witham (1873) L.R. 9 C.P. 16, at p. 19.

Sometimes there are reciprocal claims that another party committed a breach and in some cases the existence of breach itself is a matter of dispute. Moreover, not every failure to perform amounts to a breach of contract. Liability for breach of contract is generally strict, but it may also be is based on some misconduct or fault, such as fraud, want of due care or due diligence.

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Damages

… it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed. That is a ruling principle. It is a just principle.
Per Lord Atkinson in Wertheim (Sally) v Chicoutimi Pulp Co. [1911] A.C. 301 at page 307.

Damages are pecuniary [monetary] recompense given by process of law to a person for the actionable wrong that another has done him. Damages may, on occasion, be awarded where the plaintiff has suffered no ascertainable damage: damage may be presumed. Every breach of contract gives rise to a claim for damages, even when the claimant has not suffered any loss as a result of the breach, he is still entitled to recover damages, such damages are nominal damages. The legal meaning of damages is to compensate the innocent party for the breach of the contract by the guilty party. The relevant criteria for damages is the actual suffered loss of the innocent party, i.e. the innocent party shall not be better off with the damages than it would have been off if the contract would have been fulfilled properly.

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.
Robinson v Harman (1848) 1 Exch 850 per Parke B at p.855

Accordingly, the damages are calculated on the basis of what price, for example in case of broken contract of sale of goods, the injured party can get for the goods on open market if they would have been delivered on contracted date. Any speculative component is of no relevance because the law is against unjust enrichment, as Lord Atkinson explained in Wertheim (Sally) v Chicoutimi Pulp Co. [1911] A.C. 301:

The rule which prescribes as a measure of damages the difference in market prices at the respective times above mentioned is merely designed to apply this principle and, … , it generally secures a complete indemnity to purchaser. But it is intended to secure only an indemnity. The market value is taken because it is presumed to be the true value of the goods to the purchaser. In the case of non-delivery where the purchaser does not get the goods he purchased, it is assumed that these would be worth to him, if he had them, what they would fetch in the open market; and that, if he wanted to get others in their stead, he could obtain them in that market at that price. In such a case, the price at which the purchaser might in anticipation of delivery have resold the goods is properly treated, where no question of loss of profit arises, as an entirely irrelevant matter: Rodocanachi v. Milburn (1886) 18 QBD 67.

The purchaser not having got his goods should receive by way of damages enough to enable him to buy similar goods in the open market. Similarly, when delivery of goods purchased is delayed, the goods are presumed to have been at the time they should have been delivered worth to the purchaser what he could then sell them for, or buy others like them for, in the open market, and when they are in fact delivered they are similarly presumed to be, for the same reason, worth to the purchaser what he could then sell them for in that market, but if in fact the purchaser, when he obtains possession of the goods, sells them at a price greatly in advance of the then market value, that presumption is rebutted and the real value of the goods to him is proved by the very fact of this sale to be more than market value, and the loss he sustains must be measured by that price, unless he is, against all justice, to be permitted to make a profit by the breach of contract, be compensated for a loss he never suffered, and be put, as far as money can do it, not in the same position in which he would have been if the contract had been performed, but in a much better position. The authorities cited, Wilson v Lancashire and Yorkshire Ry. Co. (1861) 9 C. B. (N.S.) 632 and Schulze & Co. v Great Eastern Ry. Co. (1887) 19 Q. B. D. 30, bear out this conclusion.

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