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Munich Personal RePEc Archive

Practical concepts in Contract Law

zarrokh Ehsan
14. August 2008
Online at http://mpra.ub.uni-muenchen.de/10077/
MPRA Paper No. 10077, posted 1. January 2009 09:21 UTC
Practical concepts in Contract Law

LL.M at university of Tehran
E-mail: e.zarrokh@gmail.com
TEL: 00989183395983
URL: http://www.zarrokh2007.20m.com

A contract is a legally binding exchange of promises or agreement between
sunt servanda (literally, promises must be kept) [1]. Breach of a contract is
contracts everyday. Sometimes written contracts are required, e.g., when buying
a house [2]. However the vast majority of contracts can be and are made orally,
with tort, unjust enrichment or restitution).
Contractual formation
Keywords: contract, important concepts, legal analyse, comparative.
fulfill the terms it advertised
In common law jurisdictions there are three key elements to the creation of a
create legal relations. In civil law systems the concept of consideration is not
what is sometimes called a statute of frauds.
Ball Company, decided in nineteenth century England. A medical firm
if it did not, buyers would get 100. Lots of people sued for their 100 when it did
advertisement how you will, and twist it about as you will," said Lord Justice
Offer and acceptance
offer for a bargain that another accepts. This can be called a 'concurrence of
wills' or a 'meeting of the minds' of two or more parties. There must be evidence
that the parties had each from an objective perspective engaged in conduct
that somebody gives the impression of offering or accepting contractual terms in
the eyes of a reasonable person, not that they actually did want to contract.
'unilateral contract', where an offer is made to the whole world and acceptance
comes from particular people upon their fulfillment of the contractual terms or
the condition precedent. In the U.S., the general rule is that in "case of doubt, an
which the circumstances imply that parties have reached an agreement even
compensate the other. For example, say a plumber who accidentally installs a
proven, he would not be liable.
Consideration and estoppel
Consideration is a controversial requirement for contracts under common law. It
is not necessary in civil law systems, and for that reason has come under
increasing criticism. The idea is that both parties to a contract must bring
something to the bargain. This can be either conferring an advantage on the
other party, or incurring some kind of detriment or inconvenience. Three rules
govern consideration.
sufficient consideration. In such cases, the fact that the consideration is
exceedingly unequal can be evidence that there was no consideration at all. Such
unequal bargaining power, or contrary to public policy. In some situations, a
collateral contract may exist, whereby the existence of one contract provides
the requirement of any consideration meaningless.
Kenyon, the guardian of a young girl raised a loan to educate the girl and to
pay off the loan. It was held that the guardian could not enforce the promise as
taking out the loan to raise and educate the girl was past consideration, because
it was completed before the husband promised to repay it.
from one of the promisees.
increasingly used to create obligations during pre-contractual negotiations.
Estoppel is an equitable doctrine that provides for the creation of legal
contracts. However, legislation, rather than judicial development, has been
Justice Denning famously stated "The doctrine of consideration is too firmly
fixed to be overthrown by a side-wind."
Intention to be legally bound
There is a presumption for commercial agreements that parties intend to be
legally bound. On the other hand, many kinds of domestic and social agreements
and parents. One early example is found in Balfour v. Balfour. Using contract-
like terms, Mr Balfour had agreed to give his wife 30 a month as maintenance
Balfour stopped payments. Mrs Balfour brought an action to enforce the
to be legally bound by the promise.
distinguished the case from Balfour v. Balfour because Mr and Mrs Merritt,
Therefore any agreement between them was made with the intention to create
legal relations.
The abstraction principle
'abstraction principle' (Abstraktion sprinzip) means that the personal obligation
lacked legal capacity to contract; the contractual obligation to pay can be
Formalities and writing
called an "oral contract", but it is often erroneously called a "verbal contract."
Most jurisdictions have formal requirements for certain kinds of contracts to be
valid. Formalities are especially required for contracts involving large amounts
of money, like real estate. For example, in the U.S. a contract is unenforceable if
it violates the statute of frauds. An example of the above is an oral contract for
sale of goods over US$500 must be in writing to be enforceable). The point of the
unenforceable contract may be subject to restitution for unjust enrichment.
Statutes of Frauds are typically codified in state statutes covering specific types
land under s. 52, Law of Property Act 1925.
such things as tickets issued at parking stations.
Uncertainty, incompleteness and severance
construing a reasonable construction of the contract.
Courts may also look to external standards, which are either mentioned
which are unique.
whether a clause is severable is an objective test - whether a reasonable person
would see the contract standing even without the clauses.
Contractual terms
The terms and conditions of a contract are its content. Once the so called
essentialia negotii of a contract's formation are established, the question of what
the parties of a contract have agreed to.
Different types of statements
Statements can be split into the following types:
Representation: A representation is a statement of fact made to induce
other remedies are available.
statement include:
Knowledge and expertise: In Oscar Chess Ltd v. Williams, a person
have thought that an inexperienced person would have guaranteed the truth of
the statement.
to interpret a contract.
Terms implied in fact
1. Reasonableness and equitableness: The implied term must be reasonable
and equitable.
operate better, that does not fit this criterion.
New South Wales, a term regarding the inability of construction company to
would have taken.
specific technical knowledge should be required.
shall apply to informal contracts:
Necessity: The term must be necessary to ensure reasonable or effective
operation of a contract of the nature before the court.
as for formal contracts).
for formal contracts).
Terms implied in law
These are terms that have been implied into standardised relationships. The
necessity; a necessary term is one where the contract is rendered worthless or
nugatory if it is without it.
Terms implied by custom or trade
must be notorious, certain, legal and reasonable
Course of dealing
procured after formation.
Good faith
obligation to negotiate in good faith provided that certain conditions are satisfied
Negotiations were well-advanced and the large proportion of terms have
been worked out; and
There exists some mechanism to resolve disputes if the negotiations broke
suggest honesty, and possibly also reasonably.
"Subject to" contracts
1. the parties are immediately bound to the bargain, but they intend to
2. the parties have completely agreed to the terms, but have made the
formalised contract; or
3. It is merely an agreement to agree and the deal will not be concluded until
the formalised contract has been drawn up.
The purchaser must seek finance; and
whether the offers of finance are suitable.
Once again, there is an element of good faith involved.
condition precedent and condition subsequent. Conditions precedents are
Failure of a condition does not void the contract; it is just regarded as voidable.
Statutory implied terms
The rules by which many contracts are governed are provided in specialized
contracts between sellers and buyers.
Setting aside the contract
may declare a contract ineffective at their wish. Unenforceability implies that
neither party may have recourse to a court for a remedy. Recission is a term
which means to take a contract back.
constitute misrepresentation. A finding of misrepresentation allows for a remedy
of rescission and sometimes damages depending on the type of
constituting a misrepresentation. Generally, statements of opinion or intention
and common mistake.
Lewis v Avery where Lord Denning MR held that the contract can only be
avoided if the plaintiff can show that at the time of agreement, the plaintiff
can be found. Although a contract based on a mutual mistake in judgement does
Raffles v. Wichelhaus.
subject-matter was sufficiently fundamental to render its identity different from
what was contracted, making the performance of the contract impossible.
Duress and undue influence
Undue influence is an equitable doctrine that involves one person taking
that it should give rise to such a presumption. See Odorizzi v. Bloomfeild School
Sometimes the capacity of either natural or artificial persons to either enforce
very small children may not be held to bargains they have made, or errant
directors may be prevented from contracting for their company, because they
people who act as agents for others.
Illegal contracts
One example, from Canada is Royal Bank of Canada v. Newell. A woman forged
courts, because of its essential goal, which was to "stifle a criminal prosecution."
forced to return the payments made by the husband.
the government's secrets during his/her lawsuit).
Remedies for breach of contract
ordinary contractual claims through the courts as for any other person.
There are three different types of damages.
Compensatory damages which are given to the party which was
two kinds of branches, consequential damages and direct damages.
Nominal damages which include minimal dollar amounts (often sought to
obtain a legal record of who was at fault).
not usually given regarding contracts but possible in a fraudulent situation.
enriched ("restitution").
Specific performance
collector's damages would be equal to the sum paid.
that the property has a unique value.
Both an order for specific performance and an injunction are discretionary
exception. In most jurisdictions it is enforceable by specific performance.
person from performing the act specified in the contract.
contract issues presented.
Many contracts provide that all contract disputes must be arbitrated by the
including most securities brokerage contracts, must be arbitrated; other
judgements are generally enforced and appealed in the same manner as ordinary
court judgements; a majority of states have adopted the Uniform Arbitration
Act to facilitate the enforcement of arbitrated judgements.
Third Parties
Act 1999 was introduced.
Contractual theory
Contract theory is the body of legal theory that addresses normative and
question focuses on the economic benefits of enforcing bargains. Another
realists and critical legal studies theorists.
relationship to a the wider law of obligations. Obligations have traditionally been
and typically owed to a wider class of persons.
obligations, based on the unjust enrichment of the defendant at the plaintiffs
retaining the benefit of the plaintiffs money or work
Compare with the US context, the Uniform Commercial Code defining
"Contract" as "the total legal obligation which results from the parties'
agreement"[citation needed] and does not attempt to state what act is essential to
circumstances under which the law will recognise the existence of rights,
privilege or power arising out of a promise.
to whom it is addressed, the "offeree" [G.H. Treitel, The Law of Contract, 10th
edn, p.8].
basis on which the offeror is prepared to contract.
The "intention" referred to in the definition is objectively judged by the courts.
Carbolic Smoke Ball Company.
Unilateral contract
the doing of the act. The court distinguished between unilateral contracts from a
conditional gift. The case is generally seen to demonstrate the connection
between the requirements of offer and acceptance, consideration and intention to
create legal relations.
Invitations to treat
example, has been regarded as an invitation to treat (ITT). Similarly in Gibson v
notification of price and therefore not a distinct offer. The courts have tended to
is ordinarily treated as an invitation to treat (Fisher v. Bell) and not an offer. The
Revocation of offer
ancillary contract entered into that guaranteed that the main contract would not
Ltd v. Welcome International Pty Ltd (1998) 81 FCR 475..
Test of acceptance
[G.H. Treitel, the Law of Contract, 10th edn, p.16]. It is no defense to an action
do the act. The performance of the requested act indicates objectively the party's
assent to the terms of the offer.
The essential requirement is that there must be evidence that the parties had
each from an objective perspective engaged in conduct manifesting their assent.
This manifestation of assent theory of contract formation may be contrasted with
"meeting of the minds" theory of contract, a party could resist a claim of breach
unsatisfactory, as the other parties have no means of knowing their
counterparts' undisclosed intentions or understandings. They can only act upon
minds is not required.
offer by conduct.
Rules of acceptance
Communication of acceptance
There are several rules dealing with the communication of acceptance:
The acceptance must be communicated: Depending on the construction of
performance of the conditions in the offer as in Carlill's case, but nonetheless the
the offer is made.
An offeree is not bound if another person accepts the offer on his behalf
without his authorization: see agent (law).
has dispensed with the requirement of communication of acceptance.
142 ER 1037.
Correspondence with offer
such that it adds to the
Battle of the forms
resulting legal dispute of these circumstances, wherein both parties recognise
govern that contract.
standard form contracts prevailed in the transaction. Denning MR preferred the
understood as an implied acceptance. In US law, this principle is referred to as
the last-chance doctrine.
of acceptance or a written confirmation of an informal agreement may constitute
or informal agreement. The additional or different terms are treated as
merchants, such terms become part of the contract unless: a) the offer expressly
limits acceptance to the terms of the offer, b) material alteration of the contract
results, c) notification of objection to the additional/different terms are given in a
reasonable time after notice of them is received.
Postal acceptance rule
contracts involving land, letters incorrectly addressed and instantaneous modes
of communication.
Knowledge of the offer
or persuance of an offer: see R v. Clarke.
Death of offeror
The offer cannot be accepted if the offeree knows of his death. In cases where the
Death of offeree
Counter Offers
tried to accept it, the offer having been revoked by the counter offer.
916 is analogous to this situation.
parties' acceptance of the offer on the same terms.
Postal Acceptance Rule
The mailbox rule or the postal acceptance rule is a term of common law
contracts which determines the timing of acceptance of an offer when mail is
contemplated as the medium of acceptance. The general principle is that a
contract is formed when acceptance is actually communicated to the offeror. The
mailbox rule is an exception to the general principle. The mailbox rule provides
that the contract is formed when the letter of acceptance is placed in the mailbox.
The leading case in the mailbox rule is Henthorn v. Fraser [1892] 2 Ch 77 which
was based in part on the earlier case of Adams v. Lindsell (1818) B & Ald 681.
The mailbox rule applies only to acceptance; other letters do not take effect until
the letter is delivered, as in Stevenson v McLean (1880) 5 QBD 346. The
acceptance will be complete at the time that the letter of acceptance was posted.
For example, suppose A makes an offer to B on January 1; A then decides to
revoke the offer on January 2 and puts a letter in the mail to B revoking the
offer; however, B puts a letter accepting the offer in the mail on January 3, and
does not receive A's revocation letter until January 4. The letter of revocation
can be effective only when received, that is January 4. However, the contract was
formed on January 3 when the letter of acceptance was posted. It is too late to
revoke the offer.
Suppose that A makes an offer to B on January 1, and initially B intends to
reject the offer on January 2 by putting a letter in the mail to A rejecting the
offer. However, the next day B changes his mind and sends a fax to A accepting
the offer. In this situation, whichever communication A receives first will govern.
Under the mailbox rule, performance is a means of acceptance. If A orders 1000
blue coathangers and B ships them out, that shipment is considered to be a
conveyance of acceptance of A's offer to buy the coathangers. Defective
performance is also an acceptance, unless accompanied by an explanation. For
example, if an orders 1000 blue coathangers and B mistakenly ships 1000 red
coathangers, this is still an acceptance of the contract. However, if B ships the
red coathangers with a note that they sent these because they had run out of blue
coathangers, this is not an acceptance, but rather an accommodation, which is a
form of counter-offer.
An interesting implication of the operation of the mailbox rule is that as
acceptance is complete once the letter of acceptance is posted, it makes no
difference whether the offeror actually receives the letter. This was
demonstrated in Byrne v Van Tienhoven (1880) 5 CPD 344. If a letter of
acceptance were to be lost, acceptance has still taken place. An exception to this
would be if the offeree knows or has reason to know that the letter of acceptance
never reached the offeror. For example, if A brings a letter of acceptance to the
local post office and a sees the post office burn down, there is no acceptance.
The mailbox rule does not apply to instantaneous forms of communications. For
example in Entores Ltd v Miles Far East Corporation [1955] 2 QB 327, the
Court held that the mailbox rule did not apply to an acceptance by telex as the
Court regarded it as an instantaneous form of communication. The general
principle that acceptance takes place when communicated applies to
instantaneous forms of communication. Courts have similarly held that the
mailbox rule does not apply to acceptances by telephone or fax.
The courts are yet to decide whether e-mail should be regarded as an
instantaneous form of communication. If the offeree were to convey acceptance
by commercially unreasonable means - by cross-country pony express, for
example - the acceptance would not be effective until it had actually been
A letter is regarded as "posted" only when it is in the possession of the Post
Office; this was established in the case of Re London & Northern Bank [1900] 1
Ch 220. A letter of acceptance is not considered "posted" if it is handed to an
agent to deliver, such as a courier.
The mailbox rule does not apply to option contracts or irrevocable offers where
acceptance is still effective only upon receipt. This is because the offeree no
longer needs protection against subsequently mailed revocations of the offer.
UNCITRAL Model Law of Electronic Commerce
Many Nations have enacted legislation based on the UNCITRAL Model Law of
Electronic Commerce. Such legislation is often entitled the Electronic
Transactions Act. Among other issues, this legislation deals a default rule for the
time that email (electronic communications) is sent and when it is received.
However it is mistaken to suggest that it deals with an electronic clarification of
the postal acceptance rule for electronic communications. There are two schools
of thought.
(1) Ask if the postal acceptance rule applies to emails (electronic
communications). If your answer is yes, then the relevant Electronic Transaction
Act (ETA) can help. The postal acceptance rule states that there is a contract
when posted so we should apply the "sent" rule under the ETA. If the answer
is no; then either apply the "received" rule under the ETA or ignore it and use
the contract rule of communication.
(2) Instead, treat the Electronic Transactions Act as an intended substitute and
statutory replacement of the postal acceptance rule; in which case the "received"
rule should apply. The problem with this second school of thought is that there is
nothing in the Model Law of neither Electronic Commerce, nor the ETAs which
suggests that it was intended to replace the postal acceptance rule. We are still
waiting for a court to decide. The UNCITRAL rules on time of sending and
receiving are:
(1) Unless otherwise agreed between the originator and the addressee, the
dispatch of a data message occurs when it enters an information system outside
the control of the originator or of the person who sent the data message on behalf
of the originator.
(2) Unless otherwise agreed between the originator and the addressee, the time of
receipt of a data message is determined as follows:
receiving data messages, receipt occurs:
(I) at the time when the data message enters the designated information system;
retrieved by the addressee;
when the data message enters an information system of the addressee.
Invitation to treat
In contract law, an invitation to treat (invitation to bargain in the US) is an
actually inviting others to make an offer of their own. The distinction is
important because if a legitimate contractual offer is accepted by another, a
binding contract is immediately formed and the terms of the original offer
cannot be further negotiated without both parties' consent. An invitation to treat
may be seen as a request for expressions of interest.
The clearest example of an invitation to treat is a tender (or bidding in the US)
process. This was illustrated in the case of Spencer v Harding (1870) LR 5 CP
561, where the defendants offered to sell by tender their stock and the court held
that they had not undertaken to sell to the person who made the highest tender,
but were inviting offers which they could then accept or reject as they saw
appropriate. In certain circumstances though, an invitation for tenders may be
an offer. The clearest example of this was seen in Harvela Investments Ltd v
Royal Trust of Canada (CI) Ltd [1986] AC 207, where the defendants had made
it clear that they were going to accept the highest tender; the court held that this
was an offer which was accepted by the person who made the highest tender and
that the defendants were in breach of contract by not doing so.
QB 401). They are not obliged to sell the good to anyone who is willing to pay for
of the good. (But see bait and switch.) This distinction was legally relevant in
such a weapon. The distinction also means that if a shop mistakenly displays a
not compelled to sell to every customer. In Partridge v Crittenden [1968] 1 WLR
1204, it was held that where the appellant advertised to sell wild birds, was not
offering to sell them. Lord Parker CJ commented that it did not make "business
sense" for advertisements to be offers, as the person making the advertisement
may find himself in a situation where he would be contractually obliged to sell
more goods than he actually owned. In certain circumstances however, an
advertisement can be an offer, a well known example being the case of Carlill v
Carbolic Smoke Ball Company [1893] 1 QB 256, where it was held that the
defendants, who advertised that they would pay anyone who used their product
in the prescribed manner and caught the flu 100 and said that they had
deposited 1,000 in the bank to show their good faith, has made an offer to the
whole world and were contractually obliged to pay 100 to whoever accepted it
by performing the requested acts.
promise. For example, in a promise between A and B for the sale of A's car to B,
B's payment of the price of the car (or promise to do so) is the consideration for
A's promise. Consideration is a central concept in the common law of contracts.
Under classical contract theory, consideration is required for a contract to be
enforceable. Service contracts and, in the United States, other contracts not
governed by the Uniform Commercial Code, generally require consideration for
a contract modification to be binding on the parties, because of the preexisting
duty rule. Consideration is what must be given up by each party when making
promising to do or not do an act. Consideration can be definded as being a
benefit to one party while being a detriment to the other one at the same time.
Elements of consideration
In order to meet consideration's requirements, a contract must fulfill three
elements. First, there must be a bargain regarding terms of an exchange. Second,
there must be a mutual exchange. In other words, both parties must get
something out of the contract. Third, the exchange must be something of value.
An example of this is the renting of an apartment. The landlord and tenant come
together to discuss the terms of the exchange (most of the time, the leasing is
outlined in a contract). Thus, they have fulfilled the first requirement of
consideration. To meet the second element, there must be a mutual exchange. In
this case, the landlord provides housing, while the tenant provides rent payment.
Third, the bargain terms must be of value. The apartment is worth what the
tenant hands over each month. Therefore, this contract has met its consideration
requirement, because it fits all elements of consideration...
Modern contract theory has also permitted remedies on alternate theories such
as promissory estoppel.
Promissory estoppel or, doctrine of detrimental reliance, is only able to be
applied when: 1. the promisor's promise lacks consideration. 2. The promisor
expects the promisee will rely only on that promise. 3. The promisee does rely on
the promise and 4. Injustice can only be avoided by enforcing what was
Consideration theories
There are two common theories that attempt to explain consideration. The first
is the "benefit-detriment theory", in which a contract must be either to the
benefit of the promisor or to the detriment of the promisee to constitute
consideration. The second is the "bargain theory", in which the parties
subjectively view the contract to be the product of an exchange or bargain. The
bargain theory has largely replaced the benefit-detriment theory in modern
contract theory, but judges often cite both and unknowingly confuse the two
models in their decisions. These theories usually overlap; in standard contracts,
such as a contract to buy a car, there will be both an objective benefit and
detriment (the buyer experiences a benefit by acquiring the car; the seller
experienced a detriment by losing a car) and the subjective experience of
entering into a bargain. However, there are certain contracts which satisfy one
but not the other. For instance, a deal in which the promisee feels subjectively
relieved, but hasn't actually gained any legal rights, might satisfy the bargain
theory but not the benefit-detriment theory. Alternately, a deal in which an actor
takes detrimental actions possibly in reaction to an offer, without having viewed
the deal as a bargain, wouldn't be viewed as a contract under the law.
The main purpose of the shift from benefit-detriment to bargain theory is to
reconcile consideration theory with other aspects of contract theory. For
instance, courts will not inquire as to the adequacy of consideration. If someone
honestly dislikes their car and wants to sell it for fifty dollars, the law will not
consider this an invalid deal. In some jurisdictions, contracts calling for such
nominal or "peppercorn" consideration will be upheld unless a particular
contract is deemed unconscionable. However, in other jurisdictions, the court
will reject "consideration" that was not truly bargained for. Occasionally the
courts in these jurisdictions may refer to "adequate" or "valuable"
consideration, but in reality the court is not examining the adequacy of
consideration, but whether it was bargained for. The traditional notion that
courts won't look into the adequacy of consideration, an ancient notion in the
English common law, doesn't square with the benefit-detriment theory (in which
courts are implicitly analyzing if the parties are receiving a sufficient benefit) but
does square with the bargain theory (in which only the subjective intentions of
the parties are considered).
For example, in Fischer v. Union Trust Co., 101 N.W. 852, the court held that
$1.00 paid in exchange for the sale of real property within the city of Detroit in
1902 was not "bargained for" by the seller, and thus the transaction was void.
The point was NOT that the amount of money involved was too small to be
adequate consideration, but that the seller did not convey the property in
exchange for the buyer's promise to pay $1.00. There was no consideration, not
because $1.00 was too small an amount to "count", but because the $1.00 offered
to the seller by the buyer did not induce the seller to part with the property.
There are three main purposes cited for the consideration requirement. The first
is the cautionary requirement - parties are more likely to look before they leap
when making a bargain than when making an off-the-cuff promise of a gift. The
second is the evidentiary requirement - parties are more likely to commemorate,
or at least remember, a promise made due to a bargaining process. The third is
the channeling requirement - parties are more likely to coherently stipulate their
specific desires when they are forced to bargain for them. Each of these
rationales ensures that contracts are made by serious parties and are not made
in error.
Certain other stipulations regarding consideration include the following:
Past consideration is not valid. Something that is already done is done,
and it does not change the legal position of the promisor. Any goods or services
to be exchanged must be exchanged at or after the time of contract formation.
However, a promise to pay a pre-existing debt or obligation is indeed
Preexisting duty does not count as consideration.
unconditional. This doctrine rarely invalidates contracts; it is a fundamental
doctrine in contract law that courts should try to enforce contracts whenever
possible. Accordingly, courts will often read implied-in-fact or implied-in-law
terms into the contract, placing duties on the promisor. For instance, if a
promisor promises to give away a third of his earnings for the year, he has no
actual obligation to do anything; if he earns nothing.
Defenses against formation

Non EST factum

Latin for "it is not [my] deed" is a doctrine in contract law that allows a
signing party to escape performance of the agreement. A claim of non est. factum
would make the contract voidable.
Illusory promise
results from failure or lack of consideration (see also consideration under
English law).
purely illusory and will not be enforced as a contract.
enforcing contracts. Parties entering into the arrangement presumably had the
intention of forming an enforceable contract, and so the court should attempt to
follow this intention. Methods of doing so include:
Implied-in-law "good faith" terms
Implied-in-fact terms
Bargaining for a chance
Implied-in-law "good faith" terms
pay if he isn't subjectively satisfied with the promisee's performance. Strictly
that the promisor must act in good faith, and only reject the deal if he is
illusory, since the promisor doesn't have to do anything - any percent of zero is
zero. However, courts will imply that the promisor promised to use reasonable
absolutely nothing. The U.C.C. in contracts exclusive to both sides requires "best
efforts" in such contracts. This is either read to be the same as a good faith
Implied-in-fact terms
reasonable person would be satisfied by the promisee's performance, regardless
Bargaining for a chance
Many judges would consider the "bargaining for a percentage of the proceeds"
business relationship to itself be acceptable consideration. Put differently, the
bargain, even if he doesn't do anything. Of course, if the promisor entered into
could be cited for fraud or bad faith principles which apply to all contracts.
Statute of frauds
The statute of frauds refers to a statute (i.e., statutory law), or a provision in a
statute, in many common law jurisdictions that requires certain kinds of
contracts to be done in writing and to be signed by the party against whom
enforcement is sought. In a number of civil law jurisdictions, there are similar
requirements in their civil codes.
The term statute of frauds comes from an English statutory law (29 Car. II c. 3)
passed in 1677 and more properly called the Statute of Frauds and Perjuries.
The writing that the Statute requires is a precondition to maintaining a suit for
breach of contract (or other obligation). However, the Statute is used as a
defense, which defense is waived if the person against whom enforcement is
sought fails to rise in a timely manner. Thus, the burden of showing evidence
that such writing exists only comes into play when a Statute of Frauds defense is
A statute of frauds defense may also be defeated by a showing of part
performance. If the parties have taken action in reliance on the agreement, a
court may uphold the contract despite a violation of the statute of frauds because
the parties' subsequent actions verify that a contract existed. Courts are wary of
parties misusing the statute of frauds as a "get out of jail free card" in breach of
contract actions.
Under common law, the Statute of Frauds also applies to contract modification -
for example, suppose party A makes an oral agreement to lease a house from
party B for 9 months. Immediately after taking possession party A decides that
he really likes the place, and makes an oral offer to party B to extend the term of
the lease by 6 months. Although neither agreement alone comes under the
Statute of Frauds, the extension modifies the original contract to make it a 15-
month lease, thereby bringing it under the Statute. In practice, this works in
reverse as well - an agreement to reduce the lease from 15 months to 9 months
would not require a writing. However, almost all jurisdictions have enacted
statutes that require writing in such situations. The Uniform Commercial Code
abrogated this requirement for contract modification, discussed below.
whom enforcement is sought in the following circumstances:
Contracts in consideration of marriage.
Contracts which cannot be performed within one year.
Contracts for the sale of an interest in land.
Under the Uniform Commercial Code (article 2, section 201) in the United
States, contracts for the sale of goods where the price equals $500.00 or more
(with the exception of professional merchants performing their normal business
transactions, or any custom-made items designed for one specific buyer) [1]. The
most recent revision of UCC 2-201 increases the triggering point for the UCC
Statute of Frauds to $5,000, but as of 2006 no U.S. state has adopted revised
Section 201.
another party's debt or other obligation.
Uniform Commercial Code
In the United States, the application of the statute of frauds to dealings between
merchants has been modified by provisions of the Uniform Commercial Code,
which is a statute that has been enacted by every state (except Louisiana).
Uniform Commercial Code 1-206 [2] sets out a "catch-all" statute of frauds for
personal property not covered by any other specific law, stating that a contract
for the sale of such property where the purchase price exceeds $500.00 is not
enforceable unless memorialized by a signed writing. This section, however, is
rarely invoked in litigation.
Interestingly, with respect to securities transactions, the Uniform Commercial
Code (section 8-113) has abrogated the statute of frauds. The drafters of the most
recent revision commented that "with the increasing use of electronic means of
communication, the statute of frauds is unsuited to the realities of the securities
An agreement may be enforced even if it does not comply with the statute of
frauds in the following situations:
Merchant's Firm Offer, under the UCC. If one merchant sends a writing
sufficient to satisfy the statute of frauds to another merchant, the merchant has
reason to know of the contents of the sent confirmation and the receivor does not
object to the confirmation within 10 days, the confirmation is good to satisfy the
statute as to both parties.
Admission of the existence of a contract by the defendant under oath,
Part Performance of the contract. The agreement is enforceable up to the
amount already paid, delivered, etc.
The goods were specially manufactured for the buyer and the seller either
1) began manufacturing them, or 2) entered into a third party contract for their
manufacture, and the manufacturer cannot without undue burden sell the goods
to another person in the seller's ordinary course of business-- for example, t-
shirts with a baseball team logo or wall-to-wall carpeting for an odd-sized room.
Duress in the context of contract law is a common law defence, and if you are
successful in proving that the contract is vitiated by duress, you can rescind the
contract, since it is then voidable.
Duress in contract law falls into two broad categories:
Physical duress
Economic duress
Physical duress
Duress to the person
In Barton v. Armstrong [1976] AC 104, a decision of the Privy Council,
Armstrong threatened to kill Barton if he did not sign a contract, which was set
aside due to duress to the person. An innocent party wishing to set aside a
enter into the contract. Duress can also be made by social influence.
Duress to goods
Economic duress
Although hard bargaining occurs legitimately in commercial situations, there is a
point where it becomes economic duress. Putting aside issues of consideration,
this often involves one party threatening to breach an existing contract between
the two parties unless the innocent party agrees to enter into another contract.
The contract is voidable if the innocent party can prove that it had no other
Undue influence
Undue influence (as a term in jurisprudence) is an equitable doctrine that
It is where free will to bargain is not possible.
If undue influence is proved in a contract (at least in Australia), the contract is
voidable by the innocent party, and the remedy is rescission. There are two
categories to consider:
Presumed undue influence
Actual undue influence
Presumed undue influence
First subgroup
In the first subgroup, the relationship falls in a class of relationships that as a
matter of law will raise a presumption of undue influence. Such classes include:
Priest/member of parish
In such cases, the onus of proof lies on a doctor, say, to disprove undue influence
on a patient.
Second subgroup
The second subgroup covers relationships that do not fall into the first subgroup,
but on the facts of case, there was an antecedent relationship between the parties
that led to undue influence. The test is one of whether there was a relationship of
such trust and confidence that it should give rise to such a presumption (see
Johnson v. Buttress (1936) 56 CLR 113).
Actual undue influence
An innocent party may also seek to have a contract set aside for actual undue
influence, where there is no presumption of undue influence, but there is
evidence that the power was unbalanced at the time of the signing of the
Undue influence in probate law
"Undue Influence" is the most common ground for will contests and is often
accompanied by a capacity challenge. In probate law, it is generally defined as a
testator's loss of free agency regarding property disposition through
contemporaneous psychological domination by an advisor which results in an
excessive benefit to the advisor. It is important to note that "undue influence" is
only an issue when the advisor is benefiting, not when advisor is getting a benefit
for someone else; in that case it would be considered fraud. In litigation most
jurisdictions place the burden of proving undue influence on the party
challenging the will.
Lack of capacity to contract
The capacity of both natural and artificial persons determines whether they may
for natural persons, the law of domicile or lex domicilii in common law
states, and either the law of nationality or lex patriae, or of habitual residence in
civil law states;
for artificial persons, the law of the place of incorporation, the lex
incorporationis for companies while other forms of business entity derive their
capacity either from the law of the place in which they were formed or the laws
of the states in which they establish a presence for trading purposes depending
on the nature of the entity and the transactions entered into.
see Competence (law).
state has a direct social and economic interest in promoting trade so, it will
define the forms of business enterprise that may operate within its territory and
and commercial mobility increased. Now persons routinely trade and travel
permit such a marriage (see nullity).
Natural persons
Standardised classes of person have had their freedom restricted. These
limitations are justified exceptions to the general policy of freedom of contract
enjoy. Hence, for example, freedom of movement may be modified; the right to
rules was repealed by the Domicile and Matrimonial Proceedings Act 1973 which
removed the wifes domicile of dependency for those marrying after 1974, so that
a husband and wife could have different domiciles).
parties in a minor, are voidable by the minor. For a minor to undergo medical
capacity earlier than the prescribed time through a process of emancipation.
the local experience of emerging behavioural problems (see doli incapax). For
contracts of service are unenforceable against an infant. Only student loans and
other contracts made specifically enforceable by statute will be binding on
infants in that province.
estate are considered valid until ruled otherwise.
Insanity, mental illness, or mental/medical condition
Individuals may have an inherent physical condition which prevents them from
achieving the normal levels of performance expected from persons of
against their interests, those persons are vulnerable through dependency and
guardian (in the UK, this is a specific function of the Court of Protection).
afflicted with some form of medical/mental disability such as Huntington's
persons are often unable to consent to medical treatment and otherwise handle
guardian. The guardian periodically provides a financial accounting for court
that those accused were detained indefinitely or until the medical authorities
defences that will limit or reduce the liability of those accused of committing
offences if they were suffering from a mental illness at the relevant time (see the
insanity and mental disorder defences).
Drunkenness/drug abuse
Although individuals may have consumed a sufficient quantity of intoxicant or
any defence or excuse to be raised to any actions taken while incapacitated. The
most generous states do permit individuals to repudiate agreements as soon as
sober, but the conditions to exercising this right are strict.
debts, they lose their status as creditworthy and become bankrupt. States differ
on the means whereby their outstanding liabilities can be treated as discharged
States, some states have spendthrift laws under which an irresponsible spender
effect under public policy as imposing a potentially penal status on the
individuals affected.
Enemy aliens and/or terrorists
hostilities is agreed.
Business entities
incorporation and the enabling provisions included in the constitutive documents
the corporations are usually protected.
General and limited partnerships
There is a clear division between the approaches of states to the definition of
partnerships. One group of states treats general and limited partnerships as
partnerships to have a separate legal personality which changes the capacity of
more like corporations.
relates to union activities.
similar legal functionary may be appointed to determine whether the entity shall
existing creditors.
Contract interpretation
Parol evidence rule
presumes that a written contract embodies the complete agreement between the
parties involved. The rule therefore generally forbids the introduction of
terms of a later written contract.
In order for the rule to be effective, the contract in question must be an
between the parties (as opposed to a mere draft, for example). One way to ensure
that the contract will be found integration is through the inclusion of a merger
rebuttable presumption.
An integrated agreement is either a partial or complete integration. If it contains
which the parties agreed, then it would be a complete integration. The
importance of this distinction is relevant to what evidence is excluded under the
parol evidence rule. For both complete and partial integrations, any evidence
a partial integration, terms that do not contradict the writing but merely add to
it is not excluded.
can always be admitted for the following purposes:
To work out the subject matter of the contract.
To resolve an ambiguity in the contract. [1]
both parties.
introduce evidence that A had never actually conveyed the $1,000.
To imply or incorporate a term of the contract.
oral communication made contemporaneous with execution of the written
inadmissible for some other reason, such as the Statute of Frauds. Similarly,
included in a separate writing - will not be barred. For example, if a contracts
the house.
courts and commentators is that the parol evidence rule constitutes substantive
contract law.
Additional information on the parol evidence rule may be found in Restatement
2d of Contracts 213.
Contract of adhesion
A standard form contract (sometimes referred to as an adhesion contract or
boilerplate contract) is a contract between two parties that does not allow for
negotiation, i.e. take it or leave it. It is often a contract that is entered into
between unequal bargaining partners, such as when an individual is given a
contract by the salesperson of a multinational corporation. The consumer is in
no position to negotiate the standard terms of such contracts and the company's
representative often does not have the authority to do so.
Theoretical issues
There is some debate on a theoretical level whether, and to what extent, courts
should enforce standard form contracts. On the one hand they undeniably fulfill
an important efficiency role in society. Standard form contracting reduces
transaction costs substantially by precluding the need for buyers and sellers of
product is sold. On the other hand, there is the potential for inefficient, and even
unjust, terms to be accepted by those signing these contracts. Such terms might
modify terms or terminate the contract [1]. They might be inefficient if they
buyer who is not in the best position to take precautions. There are a number of
reasons why such terms might be excepted [2]:
Standard form contracts are rarely read. Lengthy boilerplate terms are
often in small print and written in complicated legal language which often seems
such terms is correspondingly low. Even if such information is discovered the
consumer is in no position to bargain as the contract is presented on a take it or
leave it basis. Coupled with the often large amount of time needed to read the
would be expected to read it. [Citation needed]
Access to the full terms may be difficult or impossible before acceptance.
the terms being read and in some situations, such as software end user license
purchasing the good.
Boilerplate terms are not salient. The most important terms to purchasers
are read.
There may be social pressure to sign. Standard form contracts are signed
unreasonable if they read or question the terms, saying that they are just
something the lawyers want us to do or that they are wasting their time reading
negotiation over price or particular details then concessions given by the
by being co-operative and concluding the transaction.
Standard form contracts may exploit unequal power relations. If the good
medical item) then the purchaser might have no choice but to accept the terms.
potentially offer different terms (see below).
consequently able to avoid injustice. As noted, however, many people do not read
larger number of people by affecting the firms reputation.
drafted by lawyers instructed to construct them so as to minimize the firms
liability and not by managers making competitive decisions. Sometimes the
industry, increasing homogeneity of the contracts and reducing consumer's
ability to shop around.
Common law status
As a general rule, the common law treats standard form contracts as any other
that many common law jurisdictions have developed special rules with respect to
them. In general, courts will interpret standard form contracts contra
proferentem (literally 'against the proffering person') but specific treatment
varies between jurisdictions.
United States
The Uniform Commercial Code which is followed in most American states has
specific provisions relating to standard form contracts. Furthermore, standard
of adhesion.
Contracts of adhesion
not enter American jurisprudence until the Harvard Law Review published an
Co., 58 Cal. 2d 862, 882 n.10 (1962) (reciting history of concept) [3].
standard form on a take it or leave it basis, and give the purchaser no ability to
negotiate because of their unequal bargaining position. The special scrutiny
the circumstances surrounding acceptance of the contract.
Section 211 of the American Law Institute's Restatement (Second) of
the term is not part of the agreement.
by only a few state courts.
The doctrine of unconscionability which is a fact-specific doctrine arising
from equitable principles. Unconscionability in standard form contracts usually
Shrink wrap contracts
enforceable (eg. Brower v Gateway [4]) and the other follows Klocek v. Gateway,
Inc which found them unenforceable (eg. Specht v. Netscape Communications
Corp. [5]). These decisions are split on the question of consent, with the former
holding that only objective manifestation of consent is required while the latter
require at least the possibility of subjective consent.
In Canada, exemption clauses in a standard form contract must be brought to
the attention of the purchaser for them to have effect (Tilden Rent-A-Car Co. v.
Standard form contracts have generally received little special treatment under
However the defendant successfully appealed to the High Court so currently
there is no special treatment of standard form contracts in Australia.
In recognition of the consumer protection issues which may arise, many
governments have passed specific laws relating to standard form contracts.
protection legislation and typically allow consumers to avoid clauses which are
clauses altogether (eg. Victorian Fair Trading Act 1999).
Integration clause
In the contract law, an integration clause (sometimes, particularly in the United
Kingdom, referred to an entire agreement clause) is a term in the language of the
contract that declares it to be the complete and final agreement between the
parties. The existence of such a term is conclusive proof that no varied or
additional conditions exist with respect to the performance of the contract
beyond those that are in the writing. A contract that has such a clause is deemed
contract had considered different terms will be deemed superseded by the final
writing. Sometimes is also known as "Entire Agreement" Clause, and, in its case,
it is usually drafted at the end of the contract.
Sample clause
"This Agreement (and any documents referred to in it) contains the whole
agreement between the Parties relating to the transactions contemplated by this
Agreement and supersedes all previous understandings and agreements between
the Parties relating to these transactions. Each Party acknowledges that, in
agreeing to enter into this Agreement, it has not relied on any representation,
Agreement and any documents referred to in it) made by or on behalf of any
other Party or any other person whatsoever before the execution of this
Agreement. Each Party waives all rights and remedies which, but for this Clause,
warranty, collateral contract or other assurance, provided that nothing in this
Clause shall limit or exclude any liability for willful misconduct or fraud."
Contra proferentem
Construction contra proferentem is the rule of contract interpretation that
where a provision's meaning is ambiguous, it should be read against the party
who wrote it. That is, the preferred interpretation will be the one that helps the
party who drafted it the least.
situations as he can.
Additionally, the rule reflects the court's inherent dislike of standard-form take-
it-or-leave-it contracts (e.g., standard form agreements all club members must
sign). The court perceives such contracts as displaying an unfair or uneven
bargaining position. To compensate for this, the court applies contra
proferentem to take a strict approach and at times, striking down the terms to
the favour of the other party.
Contra proferentem also places the cost of losses on the party who was in the
best position to avoid the harm. This is generally the person who drafted the
contract. An example of this is the insurance contract, a great example of the
contract of adhesion, above. There, the insurance company is the party that is
completely in control of the terms of the contract and is generally in a better
position to, for example, avoid contractual forfeiture. This is a principle of long
standing. See, for example, California Civil Code 1654 (In cases of uncertainty
. . . the language of a contract should be interpreted most strongly against the
party who caused the uncertainty to exist." California enacted this section in
1872. Numerous other states have codified the rule as well.
As of today, 2006, international legislation such as the European Principles of
Contract Law, have also codified this rule of law. Also, in arbitration procedure
of the ICC (International Chamber of Commerce) there are (few) cases in which
arbitrators recall the principle of contra proferentem in their legal reasoning.
Last but not least, this principle has also been used by teams of many different
universities of many different countries, when they met in Vienna in 2006 for the
Willem C Vis International Commercial Arbitration Moot (e.g. Chapter 1 of the
Claimant Memorandum of the RuG University, NL).
The term is frequently mis-spelled "contra proferentum". The derivation is the
Latin contra (against) proferentem (the one bringing forth).
Excuses for non-performance
In contract law a mistake is incorrect understanding by one or more parties to a
mutual mistake, and common mistake.
Unilateral mistake
take advantage of the mistake.
Leading cases on unilateral mistake are Smith v. Hughes [1871] and Hartog v.
Colin & Shields [1939] 3 All E.R. 566.
Mistake of identity
the contracting party. In the leading English case of Lewis v Avery [1971] 3 All
ER 907 Lord Denning held that the contract can be avoided only if the plaintiff
can show, that at the time of agreement, the plaintiff believed the other party's
the other party is not sufficient.
Mutual mistake
found. However Mistake as to Identity, Shogun Finance v Hudson (2004) is now
the leading case on mistake as to identity. In this case the House of Lords stated
there was a strong presumption the owner intends to contract with the person
physically present before him and only in extreme cases would the presumption
be rebutted.
The famous case of the Peerless ship is an example in the case of Raffles v.
Wichelhaus, (1864) 2 Hurl. & C. 906. The defendant had made an order for the
purchase of cotton for goods arriving on a certain boat Peerless from Bombay
leaving in October. However a different boat arrived called Peerless, also from
Bombay, but having left in December. The plaintiff merchant sought to enforce
the contract for the sale of cotton, but the defendant refused stating that it was
not the cotton that he had ordered. The court stated that reasonable meaning
must be found. However, on the facts, there was no single reasonable
interpretation of the terms, both parties were equally mistaken, thus the contract
was void.
Shogun Finance v Hudson (2004) is now the leading case on mistake as to
identity. In this case, the House of Lords stated there was a strong presumption
the owner intends to contract with the person physically present before him and
only in extreme cases would the presumption be rebutted.
Common mistake
The House of Lords case of Bell v. Lever Brothers Ltd. established that common
sufficiently fundamental to render its identity different from what was
contracted, making the performance of the contract impossible.
Later in Solle v. Butcher, Lord Denning added requirements for common
Great Peace.
In contract law, a misrepresentation is a false statement of fact made by one
may constitute misrepresentation. A finding of misrepresentation allows for a
remedy of rescission and sometimes damages depending on the type of
According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a
misrepresentation either by words or by conduct, although not everything said
opinion or intention are not statements of fact in the context of
misrepresentation. If one party claims specialist knowledge on the topic
that party as a statement of fact.
Representation is not a term
To seek a remedy under misrepresentation it must first be determined that the
representation is not a term of the contract (i.e. a warranty or condition). This is
determined objectively by the trier of fact by looking at the time that the
representation was made: the closer to the moment of contract formation, the
more likely it is a term. If there is any mention of the representation in writing,
then it could be construed as part of the contract.
As well, the Courts will often attempt to find a collateral contract by interpreting
the representation as a promise accompanied by some sort of consideration (see
Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 (H.L.)). The collateral
contract will have the effect of adding the representation as a term to the
If the representation is found to be a term then the normal remedies for breach
of contract apply.
Types of misrepresentation
There are three types of misrepresentation. Depending on the type, the remedies
available vary:
Fraudulent misrepresentation (Derry v Peek) is when the representation
is made with intent to deceive and with the knowledge that it is false. This is
generally a difficult type of misrepresentation to prove but allows for a remedy
of both damages and rescission. An action for fraudulent misrepresentation can
also be brought as a tort. Fraudulent misrepresentation is capable of being made
Negligent misrepresentation at common law is when the representation is
made carelessly while having no reasonable reasons for believing it to be true.
This class of misrepresentation is relatively new and was introduced in order to
allow for a remedy of damages in situations where neither a collateral contract
nor fraud could be found. It was first seen in the case of Hedley Byrne v. Heller
was relied upon can be actionable in tort. Lord Denning in Esso Petroleum Co.
Ltd. v. Mardon [1976] Q.B. 108 however, transported the tort into contract law,
stating the rule as:
representation by virtue thereof to anotherwith the intention of inducing him
reliable There is also negligent misrepresentation in Statute, with the
introduction of the Misrepresention Act 1967, when dealing with a negligent
misrep it is better for an action to be brought under statute law as the burden of
proof that is required passes to the person who made the statement. So it is for
the person who made the negligent statement to prove that the statement was
either not one of fact but opinion and that they truly believed the statement to be
true at the time of making it.
Innocent misrepresentation is when the representor had reasonable
grounds for believing that his or her false statement was true. Proir to the
Hedley Burn v Heller & Partners [1964] all misrepresentations that were not
fraudulent were considered to be innocent. This type of representation only
allows for a remedy of rescission. The purpose of which is put the parties back
into a position as if the contract had never taken place.
Generally, the effect of misrepresentation is that it makes the contract voidable
(the representee can choose whether to affirm the contract or have it rescinded).
Rescission can be done either by informing the representor or by requesting an
order from the court. There are certain circumstances where rescission is not
possible though. The idea behind rescission is that the parties are restored to the
positions they were before entering into the contract. Therefore, if this is not
possible, rescission is not an option.[4]
If the representee discovers the misrepresentation and fails to take steps to avoid
the contract, then he may not be able to rescind It. [5] the time limit for taking
such steps varies depending on the type of misrepresentation. In cases of
fraudulent misrepresentation, the time limit runs until when the
misrepresentation ought to have been discovered, whereas in innocent
misrepresentation, the right to rescission may lapse even before the representee
can reasonably be expected to know about it. [6]
In certain circumstances, third party rights may interfere with rescission and
render it impossible. For example, if B contracts with A to sell a house with a
misrepresentation and then a sells the house to C, the courts are not likely to
permit rescission as that would require C to give up the house.
In England and Wales, under s. 2(2) of the Misrepresentation Act 1967, the court
has the discretion to award damages instead of rescission.
In cases of fraudulent misrepresentation, a claim for damages is under the tort of
deceit, making the damages tortuous, in other words, only actual losses are
recoverable. If the losses are calculated under the Misrepresentation Act 1967,
damages for misrepresentation are calculated as if the defendant had been
fraudulent, even if he has been only negligent. This is a wider scope than usual
tortious liability, as it protects the claimant's loss even if it was not reasonably
foreseeable. Inclusion of the representation into the contract as a condition will
leave the remedy for breach in damages as a common law right. The difference is
that damages for misrepresentation usually reflect C's reliance interest, whereas
damages for breach of contract protect C's expectation interest, although the
rules on mitigation will apply in this case. In certain cases though, the courts
have awarded damages for loss of profit, basing it on loss of opportunity.[7] In
cases of negligent misrepresentation, a claim for damages may be made either in
the tort of negligence or under s. 2(1) of the Misrepresentation Act 1967
(England and Wales).
In cases of innocent misrepresentation, the court has discretion to award
damages instead of rescission. Such damages are intended to accomplish the
same thing as rescission: restoration of the parties to their original positions,
rather than compensate any losses. The result of this is that damages for any
losses other than what was agreed to be transferred are not recoverable.
Frustration of purpose
Frustration of purpose is a term used in the law of contract to describe a defense
to an action for non-performance based on the occurrence of an unforeseen event
which makes performance impossible, illegal or radically different from what
was originally intended. A common situation is that the subject matter of the
contract - a house or a car for example - is unintentionally destroyed.
Generally, the non-performance is not excused. If the seller retained the risk of
loss from damage or destruction, then the non-performance will likely be
excused. However, if it is the buyer who carries the risk of loss, performance will
not be excused. A seller will not be excused for nonperformance of an agreement
to deliver a commodity. For example, if A agrees to sell B 100 bushels of corn,
and A's own crops are destroyed in an accident, A is still contractually obliged to
sell B 100 bushels of corn because A can still obtain the corn elsewhere for the
Frustration of purpose also arises as a defense where one party to the contract
dies, if that party was uniquely necessary to the performance of the contract.
Passage of a subsequent law that makes performance illegal will also excuse
nonperformance under this doctrine.
The leading case in English law on the subject is the famous 1903 case of Krell v.
Henry, which concerned a party who had rented a room for the purpose of
watching the coronation procession of Edward VII.
Frustration of purpose is distinguishable from the doctrine of
impossibility/impracticability in that frustration of purpose is typically used by
the buyer and Impossibility is used by the seller.
"Doctrine of Impossibility" is an excuse for non-performance of duties under a
contract, based on a change in circumstances (or the discovery of preexisting
circumstances), the nonoccurrence of which was an underlying assumption of the
contract that makes performance of the contract literally impossible. For such a
defense to be raised performance must not merely be difficult or unexpectedly
costly for one party; there must be no way for it to actually be accomplished.
For example, if Rachel contracts to pay Joey 500 to paint her house on October
1, but the house burns to the ground before the end of September, Rachel is
excused from her duty to pay Joey the 500, and he is excused from the duty to
paint her house. However, Joey still may be able to sue for restitution for the
benefit conferred to Rachel prior to the burning down of the house.
The English case which established this doctrine at common law is Taylor v.
Unclean hands
Unclean hands, sometimes clean hands doctrine, is an equitable defense in which
remedy on account of the fact that the plaintiff is acting unethically or has acted
in bad faith with respect to the subject of the complaintthat is with 'unclean
hands'. The defendant has the burden of proof to show the plaintiff is not acting
in good faith. The doctrine is often stated as "those seeking equity must do
Equitable remedies are generally remedies other than the payment of damages.
This would include such remedies as obtaining an injunction, or requiring
specific performance of a contract. Before the development of the courts of
equity in England, such remedies were unavailable in the common law courts.
Such remedies were developed in the equity courts as the payment of damages
was often not a sufficient remedy for a plaintiff in certain circumstances. For
example, if a landowner polluted the land of the neighbour, the common law tort
of nuisance would only allow the innocent party to recover damages. Common
law had no remedy that would force the defendant to stop the pollution. Equity
courts developed such a remedy, the injunction that provided an ongoing bar to
the activity that caused the damage.
Equity courts realized that such extraordinary remedies were only justified in
extraordinary cases, and would generally not grant such a remedy where
damages were sufficient to make the plaintiff whole. For example, if a car
dealership broke a contract of sale and refused to deliver a particular car, which
now could only be obtained for $10,000 more than what the plaintiff was willing
to pay, the courts would merely award the plaintiff $10,000 (in addition to the
original amount paid, if it had already been paid). It would not force the dealer
to obtain the exact same car and sell it to the plaintiff. However, if the subject
matter of the sale were a particular work of art, the court would order specific
performance and require the sale of the art work.
However, equity courts also realized that these extraordinary remedies were
subject to abuse. For example, if a doctor had signed a non-compete agreement
with a clinic, the non-compete clause might prevent the doctor from earning a
living if he left the clinic's employment. As such, the court will generally only
grant these remedies on the strictest terms. If there is any indication that the
plaintiff seeking the remedy had acted in bad faith, either prior to the
commencement of the litigation or afterwards, the court will generally not grant
the remedy. For example, if the doctor left the clinic because it was involved in
insurance fraud, a court would most likely refuse to enforce the noncompete
agreement by issuing an injunction, although it might allow the clinic to recover
damages if they did lose business to the doctor.
A defendant's unclean hands can also be claimed and proven by the plaintiff to
prevent that defendant from asserting equitable affirmative defenses and
claiming other equitable remedies. In other words, 'unclean hands' can be used
offensively by the plaintiff as well as defensively by the defendant. Historically,
the doctrine of unclean hands can be traced as far back as the Fourth Lateran
Unconscionability (also known as Unconscientious Dealings) is a term used in
the presence of terms unfair to one party. Typically, such a contract is held to be
unenforceable because the consideration offered is lacking or is so obviously
escape the contract.
In and of itself, inadequate consideration is likely not enough to make a contract
unenforceable. However, a court of law will consider evidence that one party to
the contract took advantage of its superior bargaining power to insert provisions
that make the agreement overwhelmingly favor the interests of that party.
Usually for a court to find a contract unconscionable the party claiming
unconscionability will have to prove both that there was a problem with the
substance of the contract and the process through which that contract was
formed. The substantive problem will usually be the consideration, but could
also be the terms, interest payments, or other obligations the court finds unfair.
Procedural issues that a court could consider include a party's lack of choice,
superior bargaining position or knowledge, and other circumstances
surrounding the bargaining process.
remedies the situation. It may refuse to enforce the contract, refuse to enforce
outcome. Damages are usually not awarded.
Typical scenarios
There are several typical scenarios in which unconscionability is most frequently
1. Where a party that typically engages in sophisticated business
transactions inserts boilerplate language into a contract containing terms
unlikely to be understood or appreciated by the average person. Such terms
might include a disclaimer of warranties, or a provision extending liability for a
newly purchased item to goods previously purchased from the same seller.
2. Where a seller offers a contract of adhesion for the purchase of necessary
goods (e.g. food, shelter, means of transportation).
3. Where a seller is vastly inflating the price of goods, particularly where
which the buyer will be liable.
unconscionable at the time that it was made - later circumstances that have the
effect of making the contract extremely one-sided are irrelevant. An interesting
aspect of unconscionability is that the determination is made by the judge, not by
a jury, despite the fact that such a determination is very fact-intensive.
Unconscionability is only prevalent in terms of special disadvatage to the
Case law
English case law
The leading case on this point is considered to be the English case of Lloyd's
Bank v. Bundy. In that case, Bundy had agreed to increase the mortgage on his
house in order to maintain the credit line being extended to his son's business.
The English Court of Appeal ruled that as Bundy received no direct benefit from
the agreement to increase the mortgage amount, and that the bank had
threatened to call in the son's loan if Bundy had not agreed to the extension, and
that the amount of the loan was already higher than the existing mortgage, that
the transaction was unconscionable and Bundy only had to honor the lower
mortgage. Essentially, the court ruled that only the bank benefited from the
agreement to raise the amount of the mortgage.
Canadian case law
In the case of Harry v. Kreutziger, a member of the First Nations was allowed to
rescind a contract for the sale of his boat and fishing license for a nominal
amount. The boat was worthless but, unknown to the native, his fishing license
was worth a great deal of money, and could have been mortgaged to finance a
new boat. The court ruled that the buyer was merely trying to take advantage of
the seller's lack of knowledge of the value of the license and refused to allow the
contract to be enforced.
However, sorely inadequate consideration in and of itself is not a determination
more than nominal sums. The court enforced the contract in favor of the option
negotiated and that the seller had adequate opportunity to investigate the market
and simply did not do so.
Australian case law
(1983) 151 CLR 447. In this case, an elderly Italian couple with little command of
English secured their son's debts arising from his failing business. Their son
misled them as to the extent of the guarantee, and the bank did nothing to
explain it to the parents. When the son's business failed, the Amadios had the
contract set aside due to unconscionable dealing by the bank. Key elements that
were relied upon were:
1. the parties must meet on unequal terms, such that one party has a
disability Vis a Vis the other party, through such things as infirmity, age and
2. the stronger party knows of the special disability, or should have been
aware of the special disability, and takes advantage of it.
3. The stronger party obtains a bargain which would be unconscionable to
Illegal agreement
An illegal agreement, under the common law of contract, is one that the courts
The illegal end must result from performance of the contract itself, however. A
contract that requires only legal performance, such as the sale of packs of cards
to a known gambler, where gambling is illegal, will nonetheless be enforceable. A
contract to pay a gambling debt, however, will not.
A famous example in the United States is Bovard v. American Horse Enterprises
247 Cal. Rptr. 340 (1988), in which the California Supreme Court refused to
enforce a contract for payment of promisory notes used for the purchase of a
company that manufactured drug paraphernalia.
Bank of Canada v. Newell, 147 D.L.R (4th) 268 (N.C.S.A.), in which a woman
forced to return the payments made by the husband.
parties and the public.
Accord and satisfaction
Accord and satisfaction is the purchase of the release from a debt obligation. The
parties to the agreement.
If a person is sued over an alleged debt they bear the burden of proving the
affirmative defense of accord and satisfaction.
Foakes v. Beer - an old leading case on the exception of accord and
Part performance - related legal concept
completion. At completion, the homeowner complained about inferior work
agreement, the builder accepted $4,000 as full payment. Thereby, new contract
inferior performance. When accord and settlement has occurred, the homeowner
Rights of third parties
The doctrine of privity in contract law provides that a contract cannot confer
parties to it.
This seems to make adequate sense, in that only parties to contracts should be
able to sue to enforce their rights or claim damages as such. However the
doctrine has proven problematic due to its implications upon contracts made for
contracting parties.
held by one party - the assignor - to another party - the assignee. The legal
nature of the assignment determines some additional rights and liabilities that
accompany the act.
Continuing Liability of Assignor
Assignor remains liable unless there is an agreement to the contrary.
Liability of Assignee: generally not liable
Consumer Protection, Defenses and Setoffs
Warranties of Assignor
Assignment of contract rights
if party contracts with Party B to sell his car to him for $10, party a can later
assign the benefits of the contract - the right to be paid $10 - to party C. In this
was not made for the purpose of benefitting party C. However an Assignment
the previous owner. Compare Novation.
When assignment will be permitted
generally be permitted unless there is an express prohibition against assignment
the other party receiving full performance of the same quality. Certain kinds of
performance, therefore, cannot be assigned, because they create a unique
relationship between the parties to the contract. For example, if party A
contracts to hire an attorney to represent her in a civil case for a fee of $1000, she
cannot then assign her contractual right to legal representation to another party.
Note however, that party A can assign her right to sue under the same claim she
contracted with the attorney to pursue.
Requirements for an effective assignment
A promise to assign in the future has no legal effect. Although this prevents a
court of equity may enforce such an assignment where an established economic
relationship between the assignor and the assignee raised an expectation that the
assignee would indeed form the appropriate contract in the future.
does not necessarily destroy the power of either party to make an assignement.
such an assignment is made. However, an assignment of a contract containing
clause, or if the non-assignment clause specifies that "all assignments are void".
Two other techniques to prevent the assignment of contracts are recission clauses
the latter would rescind the contract automatically in such circumstances.
Requirement of writing
1. Assignment of wages
2. Assignment of any interest in real property
3. Assignment of choses of action worth over $5,000
4. Assignment as collateral for a loan or debt
For more information about contractual writing requirements see Statute of
Assignments made for consideration are irrevocable, meaning that the assignor
made. Donative assignments, on the other hand, are generally revokable, either
There are some exceptions to the revocability of a donative assignment:
chose (chose being derived from the French word for "thing", as in a chose of
action) - a physical object that signifies a right to collect, such as a stock
certificate or the passbook to a savings account.
the assignment of a simple chose - a contract right not embodied in any for of
asignee changed their position in reliance on the assignment.
Finally, the death or declaration of bankruptcy by the assignor will
automatically revoke the assignment by operation of law.
Breach and defenses
perform or defective performance. At this stage, because the assignee "stands in
the shoes" of the assignor, the obligor can raise any defense to the contract that
the obligor could have raised against the assignor. Furthermore, the obligor can
rise against the assignee counterclaims and setoffs that the obligor had against
the assignor. For example, suppose that A makes a contract to paint B's house in
has to pay another painter $400 to correct A's work. If C sues B to collect the
provision that made the assignment ineffective, the assignee could sue the
sue under this theory if the assignor wrongfully revoked the assignment.
Successive assignments
Occasionally, an unscrupulous assignor will assign the exact same rights to
assignments relative to certain other actions.
In a quirk left over from the common law, if the assigment was donative, the last
have other remedies. In some countries, the rights of the respective assignees are
determined by the old common law rule in Dearle v Hall.
1. Earlier donative assignees for which the assignment was revocable
no cause of action whatsoever.
2. Earlier donative assignees for which the assignment was made irrevocable
technically their property when it was given to a later assignee.
the implied warranty discussed above.
Compare: Delegation
clause also bars delegation.
Real property rights can be assigned just as any other contractual right.
However, special duties and liabilities attach to transfers of the right to possess
property. With an assignment, the assignor transfers the complete remainder of
the interest to the assignee. The assignor must not retain any sort of reversionary
interest in the right to possess. The assignee's interest must abut the interest of
the next person to have the right to possession. If any time or interest is reserved
The liability of the assignee depends upon the contract formed when the
assignment takes place. However, in general, the assignee has privity of estate
with a lessor. With privity of estate comes the duty on the part of the assignee to
perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor
retains the obligations to perform on covenants to maintain or repair the land.
If the assignor agrees to continue paying rent to the lessor and subsequently
defaults, the lessor can sue both the assignor under the original contract signed
with the lessor as well as the assignee because by taking possession of the
property interest, the assignee has obliged himself to perform duties under
covenant such as the payment of rent.
Assignment of partnership rights
A person can also assign their rights to receive the benefits owed to a partner in a
partnership. However, the assignee can not thereby gain any of the assignor's
rights with respect to the operation of the partnership. The assignee may not vote
on partnership matters, inspect the partnership books, or take possession of
partnership property; rather, the assignee can only be given the right to collect
distributions of income. If the partnership is dissolved, the assignee can also
claim the assignor's share of any distribution accompanying the dissolution.
Assignment of patent ownership
statute also permits recording an assignment with the United States Patent and
Trademark Office, but recording is not required. See also transfer (patent)
Delegation is a term used in the law of contracts to describe the act of giving
Delegable contracts
delegated. If George W. Bush were hired to make a speech, he could not delegate
word for word.
held to be valid. In such a case, the obligee will under an affirmative duty to
delegator's obligations under the contract.
Breach of a delegated contract
If the delegation is without consideration, the delegator remains liable for
task contracted to someone else.
Compare: assignment
Under the common law, a contract clause prohibiting assignment also prohibits
delegate performance that involves special skills or reputation (although it is
possible to have a novation under such circumstances).poop
party to an agreement with a new party. A novation need not be agreed upon by
all the parties to the original agreement. The obligee, the person receiving the
benefit of the bargain, must only is given notice. The obligor, the party making
the novation, must only make the new obligor aware and receive consent from
the new obligor. A contract transferred by the novation process transfers all
duties and obligations from the original obligor to the new obligor.
A typical example of a novation is where a person has the rights to receive loans
from a Bank (Bank A). Bank A can make a novation by asking Bank B if they
will accept the duties and liabilities of providing loan payments to the person. If
Bank B accepts this novation, (which they would typically do if they owed Bank a
something) then the person receiving the loans does NOT have to consent. As a
practical matter though, it would be wise to make them aware of this change.
corporation assumes the pre-incorporation liabilities incurred by its founders.
Third party beneficiary
A third party beneficiary, in the law of contracts, is a person who may have the
contract. This right arises where the third party is the intended beneficiary of the
contract, as opposed to an incidental beneficiary. It vests when the third party
relies on or assents to the relationship, and gives the third party the right to sue
either the promisor or the promisee of the contract, depending on the
circumstances under which the relationship was created.
In English law, the doctrine was not recognised at common law, but a similar
concept was introduced with the Contracts (Rights of Third Parties) Act 1999.
Intended vs. incidental beneficiary
must be an intended beneficiary, as opposed to an incidental beneficiary. The
Incidental beneficiary
the contract, although that was not the intent of either contracting party. For
example, if party A hires party B to renovate party A's house, and insists that
party B use a particular house painterparty Cbecause that house painter
Neither party A nor party B is entering into the contract with the particular
intent to benefit party C. Party A simply wants his house properly renovated;
party B simply wants to be paid to do the renovation. If the contract is breached
by either party in a way that results in party C never being hired for the job,
party C nonetheless has no rights to recover anything under the contract.
Similarly, if party A were to promise to buy party B a Cadillac, and were to later
go back on that promise, General Motors would have no grounds upon which to
recover for the lost sale.
Intended beneficiary
The distinction that creates an intended beneficiary is that one party - called the
promisee - makes an agreement to provide some consideration to a second party
- called the promisor - in exchange for the promisor's agreement to provide some
product, service, or support to the third party beneficiary named in the contract.
The promisee must have an intention to benefit the third party - but this
requirement has an unusual meaning under the law. Although there is a
presumption that the promisor intends to promote the interests of the third
party in this way, if party A contracts with party B to have a thousand killer bees
delivered to the home of Party A's worst enemy, party C, then C is still
considered to be the intended beneficiary of that contract.
There are two common situations in which the intended beneficiary relationship
is created. One is the creditor beneficiary, which is created where party A owes
some debt to party C, and party A agrees to provide some consideration to party
B in exchange for party B's promise to pay party C some part of the amount
The other is the donee beneficiary, which is created where party A wishes to
make a gift to party C, and party A agrees to provide some consideration to
party B in exchange for party B's promise to pay party C the amount of the gift.
Under old common law principles, the donee beneficiary actually had a greater
claim to the benefits this created; however, such distinctions have since been
Vesting of rights
both bound to perform the contract. Any effort by the promisor or the promisee
to rescind or modify the contract at that point is void. Indeed, if the promisee
changed his mind and offered to pay the promisor money not to perform, the
third party could sue the promisee for tortious interference with the third party's
contract rights.
There are three tests used to determine whether the third party beneficiary's
rights have vested:
1. if the beneficiary knows of and has detrimentally relied on the rights
2. if the beneficiary has expressly assented to the contract at the request of
one of the parties
3. if the beneficiary files a lawsuit to enforce the contract
Breach and defenses
Where a contract for the benefit of a third party is breached by the non-
performance of the promisor, the beneficiary can sue the promisor for the
breach just as any party to a contract can sue the other. Because the rights of the
third party are defined by the contract created between the promisor and the
promisee, the promisor may assert against the beneficiary any defenses to the
contract that could be asserted against the promisee. These include all of the
traditional basis by which the formation of a contract may be challenged: lack of
capacity, lack of consideration, the Statute of Frauds, etc.; and all of the
traditional bases by which non-performance on the contract may be excused:
failure of consideration, impossibility, illegality, frustration of purpose, etc.
Because the promisor can assert any defenses that could be asserted against the
promisee, the beneficiary also becomes liable for counterclaims on the contract
that the promisor could establish against the promisee. This liability can never
exceed the amount that the promisor owes under the contract. In other words, if
the promisor is owed money by the promisee, any award to the third party for
the promisor's failure to perform can be reduced by the amount thus owed. If
the promisor is owed more than the value of the contract, the beneficiary's
recovery will be reduced to nothing (but the third party can never be made to
assume an actual debt).
beneficiary cannot recover against both. If the suit is successful against one party
to the contract, the other party will be dismissed. Because the creditor
beneficiary is receiving the performance of the promisor in order to fulfill the
promisee's debt, the failure of the promisor to perform means that the
beneficiary can still sue the promisee to recover the preexisting debt. The failure
of performance simply means that the debt has never been paid.
A donee beneficiary can not sue the promisee, because the promisee's act is
gratuitous. Courts simply will not allow a party who has been promised a gift to
sue to compel delivery of the gift. However, if the beneficiary has relied to his
detriment on the promisee's assertion that the promisor would perform, the
beneficiary may sue the promisee under a promissory estoppel theory.
Rights that accrue to the promisee
since determined that the promisee can sue for specific performance of the
contract, provided that the beneficiary has not already sued the promisor.
Furthermore, if the promisee was in debt to a creditor beneficiary, and the
failure of the promisor to perform caused the promisee to be held liable for that
debt, the promisee can sue to recover the amount of the debt.
Breach of contract
Anticipatory repudiation (anticipatory breach)
Anticipatory repudiation (or anticipatory breach) is a term in the law of
contracts that describes a declaration by one party (the promising party) to a
contract that they do not intend to live up to their obligations under the contract.
Where such an event occurs, the other party (the performing party) to the
contract is excused from having to fulfill their obligations. However, the
repudiation can be retracted by the promising party so long as there has been no
material change in the position of the performing party in the interim. A
retraction of the repudiation restores the performer's obligation to perform on
the contract.
If the repudiation occurs by the promising party making it impossible to fulfill
their promise, then no act by the promising party can restore the performer's
obligation to perform on the contract. For example, if a promises to give B a
unique sculpture in exchange for B painting A's house, but a then sells the
sculpture to C before B begins the job, this act by A constitutes an anticipatory
repudiation which excuses B from performing. Once the sculpture has left A's
possession, there is no way that A can fulfill the promise to give the sculpture to
The question arises as to why any party would want to provide notice of
anticipatory breach. The reason is that once the performing party is informed of
the anticipatory breach, a duty is then created for the performing party to
mitigate damages as a result of the breach.
Cover is a term used in the law of contracts to describe a remedy available to a
merchant buyer who has received an anticipatory repudiation of a contract for
the receipt of goods. Under the Uniform Commercial Code, the buyer is
permitted (but not required) to find another source of the same type of goods.
The buyer may then file a lawsuit against the breaching seller to recover the
difference, if any, between the cost of the goods offered and the cost of the goods
actually purchased.
The possibility of cover will prevent a party from being able to sue for specific
performance, which is an equitable remedy that requires the buyer have no
adequate remedy at law. If the buyer is able to buy elsewhere and sue for the
difference, that provides an adequate remedy. This prohibition does not apply,
however, to the sale of unique goods such as original works of art, collectibles,
real estate, and exclusive rights.
Judge Richard Posner has suggested that that the availability of cover allows for
efficient breach - that is, that it encourages the most efficient allocation of
resources by allowing a seller to breach a contract to sell goods to one buyer
when another, more lucrative opportunity comes along. The seller may thus be
able to realize a sufficiently increased profit to make more money even after
repaying the difference to the original buyer. Therefore, no value is lost in the
transaction because the original buyer is in the same position he would have been
but for the breach, and the seller is in a better position.
Exclusion clause
An exclusion clause is a term in a contract that seeks to restrict the rights of the
parties to the contract. Exclusion clauses generally fall into one of these
True exclusion clause: The clause recognises a potential breach of the
contract, and then excuses liability for the breach. Alternatively, the clause is
constructed in such a way it only includes reasonable care to perform duties on
one of the parties.
Limitation clause: The clause places a limit on the amount that can be
claimed for a breach of contract, regardless of the actual loss.
Time limitation: The clause states that an action for a claim must be
Traditionally, the courts have sought to limit the operation of exclusion clauses.
In addition to numerous common law rules limiting their operation, in England
and Wales, the main statutory interventions are the Unfair Contract Terms Act
1977 and the Unfair Terms in Consumer Contracts Regulations 1999. The
Unfair Contract Terms Act 1977 applies to all contracts, but the Unfair Terms in
Consumer Contracts Regulations 1999, unlike the common law rules, do
differentiate between contracts between businesses and contracts between
business and consumer, so the law seems to explicitly recognize the greater
possibility of exploitation of the consumer by businesses.
The courts have traditionally held that exclusion clauses only operate if they are
actually part of the contract. There seem to be three methods of incorporation:
Incorporation by signature: according to L'Estrange v Graucob [1934] 2
KB 394, if the clause is written on a document which has been signed by all
parties, then it is part of the contract.
Incorporation by notice: the general rule is that an exclusion clause will
have been incorporated into the contract if the person relying on it took
reasonable steps to draw it to the other parties' attention. Thornton v Shoe Lane
Parking [1971] 2 WLR 585, seems to indicate that the wider the clause, the more
Incorporation by previous course of dealings: according to McCutcheon v
David MacBrayne Ltd [1964] 1 WLR 125, terms (including exclusion clauses)
may be incorporated into a contract if course of dealings between the parties
were "regular and consistent". What this means usually depends on the facts;
however, the courts have indicated that equality of bargaining power between
the parties may be taken into account.
For an exclusion clause to operate, it must cover the breach (assuming there
actually is a breach of contract). If there is, then the type of liability arising is
also important. Generally, there are two varieties of liability: strict liability
(liability arising due to a state of affairs without the party at breach necessarily
being at fault) and liability for negligence (liability arising due to fault).
The courts have a tendency of requiring the party relying on the clause to have
drafted it properly so that it exempts them from the liability arising, and if any
ambiguity is present, the courts usually interpret it strictly against the party
relying on the clause.
As espoused in Darlington Future Ltd v. Delcon Australia Pty Ltd (1986) 161
CLR 500, the meaning of an exclusion clause is construed in its ordinary and
natural meaning in the context. Although we construe the meaning much like
any other ordinary clause in the contract, we need to examine the clause in light
of the contract as a whole.
However, if after construing the contract in its ordinary and natural meaning,
there is still ambiguity in the exclusion clause, the contra proferentem rule shall
apply; that is to say, the clause is construed against the person trying to take
advantage of the rule.
In terms of negligence, the courts have taken the approach that it is unlikely that
someone would enter into a contract that allows the other party to evade fault
based liability. As a result, if a party wishes exempt his liability for negligence, he
must make sure that the other parties understand that. The decision in Canada
SS Lines Ltd v. The King [1952] AC 192 held that:
If the exclusion clauses mention "negligence" explicitly, then liability for
negligence is excluded.
If "negligence" is not mentioned, then liability for negligence is excluded
only if the words used in the exclusion clause are wide enough to exclude liability
for negligence. If there is any ambiguity, then the contra proferentem rule
If a claim on another basis can be made, then liability for negligence is not
covered by the exclusion clause.
In Australia, the four corners rule has been adopted in preference over the idea
of a fundamental breach (The Council of the City of Sydney v. West (1965) 114
CLR 481). The court will presume that parties to a contract will not exclude
liability for losses arising from acts not authorized under the contract. However,
if acts of negligence occur during authorized acts, then the exclusion clauses shall
still apply.
If the contract is for the carriage of goods, if the path is deviated from what was
agreed, any exclusion clauses no longer apply.
Efficient breach
Efficient breach refers to a breach of contract that the breaching party considers
desirable even when the legal and economic ramifications of such a breach are
The first statement of the theory of efficient breach appears to have been made
in a law review article by Robert Birmingham, Breach of Contract, Damage
Measures, and Economic Efficiency, 24 Rutgers L.Rev. 273, 284 (1970)
(Repudiation of obligations should be encouraged where the promisor is able to
would have occupied had performance been rendered). The theory was named
by Charles Goetz and Robert Scott, Liquidated Damages, Penalties, and the Just
Compensation Principle: A Theory of Efficient Breach, 77 Colum.L.Rev. 554
Efficient Breach Theory is associated with Richard Posner and the Law and
Economics school of thought. It has been used to defend the traditional common
law rule that a non-tortious breach of contract cannot be remedied by punitive
damages and penal damages (unreasonably excessive liquidated damages that
are seen as a punishment for breach rather than a remedy). Such penalties
would discourage efficient breach (therefore discouraging efficient behavior) and
possibly put companies at increased risk of bankruptcy, which would be very
bad for society. Posner explains his views in his majority opinion in Lake River
The theory of efficient breach is that such an action can result in an outcome that
benefits the breaching party and society as a whole. To illustrate, suppose I
contract to sell you a ton of bricks for $1,000. We sign the contract, and then a
third party comes along and offers me $1,500 for that same ton (maybe he needs
them more urgently). One might say that morally, I am obligated to sell you the
bricks because I am bound by my promise. See, for example, Charles Fried's
"Contract as Promise." Posner would say no -- I could choose to sell the other
person the bricks. If you already paid me, I would have to refund you the $1,000.
If it costs you $1,100 to get replacement bricks, and $100 because of the delay in
getting the replacement (e.g., your workers don't have bricks to use but you still
have to pay their salaries), you would also be entitled to collect $200 from me.
This is known as the expectation interest because it puts you in as good a position
as if I had performed the contract (if I had delivered the bricks when I said I
would). Society is better off on net by at least $300, because I am better off by
$300, whomever I sold the bricks to be better off, and no one is worse off.
Efficient breach is not a legal defense to a suit for breach of contract. If there is
no defense, the breaching party must pay damages to the non-breaching party,
such as the expectation interest described above.
Fundamental breach
Fundamental breach, sometimes known as a repudiatory breach, is a breach so
fundamental that it permits the aggrieved party to terminate performance of the
United Kingdom
In English law, fundamental breach was first examined by the House of Lords in
the Suisse Atlantique case [1966] 2 All E.R. 61, wherein they decided that a
contract can be voided if a breach of a fundamental term can be found. That is, a
breach of a condition that "goes to the root of the contract". This approach is
known as the Rule of Law doctrine.
At the Court of Appeal level in Photo Productions Ltd. v. Securicor Transport
Ltd. [1978] 1 W.L.R. 856 Lord Denning championed the Rule of Law doctrine
and extended the rule in Suisse Atlantique case to apply to all exemption clauses.
However on appeal to the House of Lords Lord Wilberforce effectively
overturned the Rule of Law doctrine and instead maintained a strict Rule of
Construction approach whereby a fundamental breach is found only through
examining the reasonable intentions of the parties at the time of the contract.
The leading case on fundamental breach in Canada is the case of Hunter
Engineering Co. v. Integrated Metal Systems Ltd. [1989] 3 W.W.R. 385. In it
they adopt similar reasoning as the House of Lords in Photo Productions, ruling
that a fundamental breach is found through rule of construction only.
The court should not disturb the bargain the parties have struck, and I am
inclined to replace the doctrine of fundamental breach with a rule that holds the
parties to the terms of their agreement, provided the agreement is not
unconscionable ... Only where the contract is unconscionable, as might arise
from situations of unequal bargaining power between the parties, should the
courts interfere with agreements the parties have freely concluded.'
Specific performance
previously established transaction, thus being the most effective remedy in
protecting the expectation interest of the innocent party to a contract. It is the
opposite of an injunction.
equity developed the remedy of specific performance as damages often could not
property, land being regarded as unique. Specific performance is often
proceedings for contempt of court.
Orders of specific performance are granted when damages are not an adequate
There are certain circumstances where an order of specific performance would
not be granted. Such circumstances include:
1. specific performance would cause severe hardship to the defendant
2. the contract was unconscionable
3. the claimant has misbehaved (no clean hands)
4. specific performance is impossible
5. performance consists of a personal service
6. the contract is too vague
Additionally, in England and Wales, under s. 50 of the Supreme Court Act 1981,
the High Court has a discretion to award a claimant damages in lieu of specific
performance (or an injunction). Such damages will normally be assessed on the
same basis as damages for breach of contract, namely to place the claimant in
the position he would have been had the contract been carried out.
In practice, specific performance is most often used as a remedy in transactions
regarding land, such as in the sale of land where the vendor refuses to convey
However, the limits of specific performance in other contexts are narrow.
Moreover, performance that is based on the personal judgment or abilities of the
party on which the demand is made is rarely ordered by the court. The reason
behind it is that the forced party will often perform below the party's regular
standard when it is in the party's ability to do so. Monetary damages are usually
given instead.
Traditionally, equity would only grant specific performance with respect to
contracts involving chattels where the goods were unique in character, such as
art, heirlooms, and the like. The rationale behind this was that with goods being
fungible, the aggrieved party had an adequate remedy in damages for the other
party's non-performance.
In the United States, Article 2 of the Uniform Commercial Code displaces the
traditional rule in an attempt to adjust the law of sales of goods to the realities of
the modern commercial marketplace. If the goods are identified to the contract
for sale and in the possession of the seller, a court may order that the goods be
delivered over to the buyer upon payment of the price. This is termed replevin.
In addition, the Code allows a court to order specific performance where "the
goods are unique or in other proper circumstances", leaving the question of what
circumstances are proper to be developed by case law.
In the civil law (the law of continental Europe and much of the non English
speaking world) specific performance is considered to be the basic right. Money
damages are a kind of "substitute specific performance." Indeed, it has been
proposed that substitute specific performance better explains the common law
rules of contract as well, see (Steven Smith, Contract Law, Clarenden Law ).
Liquidated damages
Liquidated damages - damages are said to be liquidated (also referred to as
liquidated and ascertained damages) when the amount of damages recoverable
in the event of a specified breach (eg late performance) is agreed at the date of
the contract. In such circumstances a liquidated damages provision will be
included in the contract. When damages are not predetermined/assessed in
advance then the amount recoverable is said to be 'at large' (to be agreed or
determined by a court or tribunal in the event of breach).
At common law, a liquidated damages clause will not be enforced if its purpose is
to punish the wrongdoer/party in breach rather than to compensate the injured
party (in which case it is referred to as a penal or penalty clause). One reason for
this, it could be said, is that the enforcement of the term would, in effect, require
an equitable order of specific performance. However, courts sitting in equity will
seek to achieve a fair result and will not enforce a term that will lead to the
unjust enrichment of the enforcing party.
In order for a liquidated damages clause to be upheld, two conditions must be
met. First, the amount of the damages identified must roughly approximate the
damages likely to fall upon the party seeking the benefit of the term. Second, the
Damages that are sufficiently uncertain may be referred to as unliquidated
damages, and may be so categorized because they are not mathematically
calculable or are subject to a contingency which makes the amount of damages
For example, suppose Joey agrees to lease a storefront to Monica, from which
Monica intends to sell jewelry. If Joey breaches the contract by refusing to lease
the storefront at the appointed time, it will be difficult to determine what profits
Monica will have lost, because the success of newly created small businesses is
highly uncertain. This, therefore, would be an appropriate circumstance for
Monica to insist upon a liquidated damages clause in case Joey does indeed fail
to perform.
The law applied to bank and credit card charges
This law has recently been of great interest to bank and credit card customers
who have been charged as much as 38 for a single transaction that took them
over their credit limit. Consumers argued these charges were well beyond the
cost of sending a computerised letter.
In 2006 the Office of Fair Trading investigated the excessively high charges
being imposed on customers of Credit card companies. In its report, the OFT
confirmed these charges were unlawful under UK Law as they amounted to a
penalty. It said it would be prepared to investigate any charge over 12, though
this was not intended to indicate that 12 is a fair and acceptable charge. The
OFT said it would be up to a court to determine such an amount based on the
established legal precedent that the only recoverable cost would be actual costs
The credit card companies did not produce evidence of their actual costs to the
OFT, instead insisting their charges are in line with clear policy and information
provided to customers.
Following the ruling, many bank customers have made County Court claims
against their banks and credit card companies for return of penalty charges for
returned cheques, direct debits and unauthorised overdraft charges. To date no
bank or credit card company, save NatWest on one occasion, has attended at
Court for a Trial.
Penal damages
Penal damages are best seen as quantitatively excessive liquidated damages and
are invalid under the common law. While liquidated damages are a priori
calculations of expectation loss under the contract, penal damages go further and
seek to penalise a party in some way for breach of a clause above and beyond the
loss suffered by the innocent party as a result of this breach. Many clauses which
are found to be penal are expressed as liquidated damages clauses but are seen
by courts as excessive and thus invalid.
The judicial approach to penal damages is conceptually important as it is one of
the few examples of judicial paternalism in contract law. Even if two parties
genuinely and without coercion wish to consent to a contract which includes a
penal clause, they are unable to. So, for example, a person wishing to give up
smoking cannot contract with a third party to be fined $100 each time they
smoke as this figure does not represent the expectation loss of the contract.
In contract law, rescission (to rescind or set aside a contract) refers to the
cancellation of the contract between the parties. This is done to bring the parties
as far as possible to the position they were before they entered into a contract
(the "status quo ante"). This equitable remedy and is discretionary. The court
action (see Long v Lloyd [1958] 1 WLR 753) or a third party has acquired some
rights or there has been substantial performance in implementing the contract.
In insurance, rescission is the termination of a contract from the beginning (as if
it never existed). The insurer has the right to rescind a policy due to
concealment, material misrepresentation, or material breach of warranty.
In American government, rescission authority rests with the President. This
authority was granted in the Congressional Budget and Impoundment Control
Act of 1974. The President can force Congress to vote on rescinding (or
permanently withholding) already appropriated funds. The average amount
Presidents have requested since 1974 has been approximately $15 billion.
Quasi-contractual obligations
Estoppel is a doctrine in common law jurisdictions recognised both at law and in
equity in various forms. In general it protects a party who would suffer
detriment if:
The defendant has done or said something to induce an expectation
The plaintiff relied (reasonably) on the expectation...
...and would suffer detriment if that expectation were false.
Unconscionability by the defendant has been recognised as another element by
courts, in an attempt to unify the many individual rules of estoppel. In most
cases, it is only a defense that prevents a plaintiff from enforcing legal rights, or
the scope of the remedy is often limited.
For an example of estoppel, think about the case of a debtor and a creditor. The
creditor might unofficially inform the debtor that the debt has been forgiven.
Even if the original contract was not terminated, the creditor may be estopped
from collecting the debt if he changes his mind later. It would be unfair to allow
the creditor to change his mind in light of the unofficial agreement he made with
the debtor beforehand. In the same way, a landlord might inform a tenant that
rent has been reduced, for example, if there is construction or a lapse in utility
services. If the tenant relies on this advice, the landlord could be estopped from
collecting rent retroactively.
the realm of administrative law and judicial review is estoppel's counterpart in
public law, albeit subtle but important differences exist.
This term appears to come from the French estoupail or a variation, which
situation. Ultimately, it comes from the Latin stopare, "to stop".
Major types
Estoppel by record This frequently arises as issue/cause of action
previous legal proceedings prevent the parties from relitigating the same issues
or causes of action,
done, and
Reliance-based estoppels these are the most important forms. Under
English law, this class includes estoppel by representation of fact; promissory
o Estoppel by representation of fact is known as equitable estoppel in
American law.
O Equitable estoppel as understood in English law includes:
promissory estoppel,
proprietary estoppel,
Although some authorities regard reliance-based estoppels as mere rules of
evidence, they are in reality rules of substantive law.
Laches is estoppel by delay. Laches has been considered both a reliance-
based estoppel, and a sui generis type of estoppel.
Reliance-based estoppels
Under English law, estoppel may be:
facts to another;
there is no enforceable contract; and
Proprietary estoppel, where the parties are litigating the title to land.
three estoppels collectively as estoppels by representation. More simply, one
done to change behavior. So, suppose that:
D has the money to repay a debt,
but the creditor tells D that the debt is forgiven,
have been able to afford,
And the creditor is aware of this reaction.
a cause of action.
both inducement and detrimental reliance, i.e.:
there must be evidence to show that the representor actually intended the
victim to act on the represention or promise, or
act on the relevant representation or promise, and
what the victim did must either have been reasonable, or
the victim did what the representor intended, and
to deny what was said or done detriment is measured at the time when the
the time when either was made, and
In all the circumstances, the behavior of the representor is such that it
Estoppel by representation of fact and promissory estoppel are mutually
fact and law); while the latter is based on a promise not to enforce some pre-
existing right (i.e. it expresses an intention as to the future). A proprietary
representation of fact.
The test for unconscionability in the English and Australian courts takes many
Spence, Protecting Reliance: The Emergent Doctrine of Equitable Estoppel,
Oxford: 1999, pp60-66):
how the promise/representation and reliance upon it were induced;
the content of the promise/representation;
the relative knowledge of the parties;
the parties' relative interest in the relevant activities in reliance;
the nature and context of the parties' relationship;
the parties' relative strength of position;
the history of the parties' relationship; and
The steps, if any, taken by the promisor/representor to ensure he has not
caused preventable harm.
Estoppel by representation of fact
Where one person (the representor) has made a representation of fact to
another person (the representee) in words or by acts or conduct, or (being
attempting to establish by evidence, any averment substantially at variance with
manner, objects thereto.
defence to the estoppel can be raised by A.
that English courts need to take into account when considering estoppel by
Deane J.)
Equitable estoppel
Butterworth: 2002, Chapter 17 and Pakinson, the Principles of Equity, 2nd
has jurisdiction to adjudicate on the issue.
by representation of fact:
The most comprehensive definition of equitable estoppel or estoppel in pais is
Estoppel and Waiver 28
Proprietary estoppel
The traditional version of proprietary estoppel arises in negotiations affecting
title to land. So if:
another, but what is done has no legal effect, or
in land to another, and
detriment in reliance on the supposed or promised transfer,
to be established before proprietary estoppel could operate:
the plaintiff must have done some act of reliance;
the defendant must know of the plaintiff's mistaken belief; and
The defendant must have encouraged the plaintiff in his act of reliance.
Although proprietary estoppel was only traditionally available in disputes
constructive trust.
is part and parcel of the general doctrine of promissory estoppel.
Promissory estoppel
The doctrine of promissory estoppel prevents one party from withdrawing a
promise and acted upon it.
English law
In English law, a promise made without consideration is generally not
not an exception to this rule.
The doctrine of promissory estoppel was first developed in Hughes v.
resurrected by Lord Denning in the controversial case of Central London
rent of 2500 - but, because the defendants were unable to find enough tenants
reduction in rent to 1250. There was no consideration for this promise to accept
Promissory estoppel requires:
(I) an unequivocal promise by words or conduct,
(iii) Inequity if the promisor was to go back on the promise.
Estoppel is "a shield not a sword" it cannot be used as the basis of an action
enforce full rights.

courts refused to recognise a promise to accept a part payment of 300 on a debt
Co Rep 117a, and affirmed in Foakes v. Beer (1884) 9 App CAS 605.
Australian law
The doctrine of promissory estoppel was adopted into Australian law in Legione
case because the reliance was unreasonable and the promise not unequivocal.
existing legal relationship between the two parties, and promissory estoppel can
that lead to reliance.
without a consideration under the following conditions: 1. promise 2. Dishonest
behavior of the promittant 3. Special relationship between the promittant and
the beneficior (eg: duty of information) 4. Irreversible changement of the
situation of the beneficior of the promise
American law
sometimes referred to as detrimental reliance.
The American Law Institute in 1932 included the principle of estoppel into 90
of the Restatement of Contracts, stating:
A promise which the promisor should reasonably expect to induce action or
requirement that the detriment be "substantial".
The distinction between promissory estoppel and equitable estoppel should be
Equitable estoppel is distinct from promissory estoppel. Promissory estoppel
involves a clear and definite promise, while equitable estoppel involves only
representations and inducements. The representations at issue in promissory
promissory estoppel lies in contract. The major distinction between equitable
damages. 28 Am Jur 2d Estoppel and Waiver 35
shopkeeper's actual words and knowledge are critical to deciding whether either
a contract or an estoppel arises.
B Ltd consolidates estimates from a number of subcontractors and quotes a
construction begins. But one of the subcontractors then claims reimbursements
contract prices to reflect additional expenditure, the subcontractor's conscience
One contentious point during the drafting of the Restatement was how to
deliberations, the following example was considered: a young man's uncle
breach may be limited as justice requires." A formula which leaves
quantification to the discretion of the court.
Other estoppels
Estoppel in pais
Estoppel in pais (literally by act of notoriety", or "solemn formal act) is the
historical root of common law estoppel by representation and equitable estoppel.
The terms Estoppel in pais and equitable estoppel are used interchangeably in
American law.
Estoppel by convention
assumption or understanding if:
(I) they both knew the other had the same belief, and
(ii) They both based their subsequent dealings on those beliefs.
Estoppel by acquiescence
acquiescence may prevent any court from invalidating Jack's actions of
Estoppel by deed
under seal such agreements, called deeds, are more strictly enforced than
conclusive evidence against the parties who are estopped from asserting
Issue Estoppel
have the villain exploits the rule. In the world of real crime, some cases have
applied. Lord Diplock said:
justice into disrepute among right-thinking people.
Quantum meruit
Quantum meruit is a Latin phrase meaning "as much as he has deserved". In the
of services".
The concept of quantum meruit applies to the following situations:
I. When a person employs (impliedly or expressly) another to do work for him,
may deserve or merit.
II. When there is an express contract for a stipulated amount and mode of
compensation for services, the plaintiff cannot abandon the contract and resort
to an action for a quantum meruit on an implied assumpsit.
I. The famous example used in United States law schools is usually as follows:
A Man (plaintiff in this hypothetical) talks to a neighbor (defendant) and tells
him he's going to build a wall on their property that will give a benefit to both
the man and his neighbor. The neighbor neither agrees nor disagrees with what
the man wants to build. The man builds the wall, and then asks the neighbor to
compensate him for the benefit of the wall that he conferred on the neighbor
(usually half the value of the wall). The neighbor refuses. The man is entitled to
some compensation based on quantum meruit. This is because there was an
implied promise between the man and the neighbor, which is derived from
contract law, because the man was acting under the assumption that the
neighbor would pay for part of his services. The plaintiff files suit in court on the
basis of quantum meruit. The plaintiff makes an estimation of value conferred
on the defendant, which the defendant has not paid. Plaintiff will likely win
because of quantum meruit. The winning of the case will be directed as an
assumpsit on a quantum meruit.
II. This is not the only factual scenario where this will work. Quantum meruit
will also work where there is a breached contract.
A contractor is contracted to work on a school. The contractor does some work
but messes up part of the work (breach of contract). The school suspends the
construction work because of the problem. The contractor is entitled to be paid
for the services he has already done for the school on the basis of quantum
III. If a plaintiff is prohibited from completing work based on a long term
service contract where other contacts have been negotiated, the plaintiff may ask
a court to determine a judgment based on the amounts that the defendant
benefited. Third parties may also bring actions against the plaintiff.
A Promoter enters into a long term service contract with a Theatre to exclusively
present events for a specified period. The promoter books events and contracts
with others to perform during the entire period but alleges that the theatre is
unsafe. The Promoter withholds payments until the theatre is made safe. The
Theatre performs no repairs. Instead the Theatre terminates the entire service
contract before the benefit of the events occurs to the plaintiff and refuses to
repair the theatre. After the contract is terminated, the theatre operates the
events negotiated by the promoter and gains a significant benefit but does not
pay the promoter anything. The theatre also cancels some events without cause.
A court determines that the promoter is entitled to an assumpsit on a quantum

1. ^ Hans Wehberg, Pacta Sunt Servanda, The American Journal of
International Law, Vol. 53, No. 4 (Oct., 1959), p.775; access here at JSTOR
2. ^ e.g. In England, s. 52, Law of Property Act 1900
3. ^ Carlill v. Carbolic Smoke Ball Company [1893] 2 QB 256
4. ^ e.g. Lord Steyn, Contract Law: Fulfilling the Reasonable Expectations
of Honest Men (1997) 113 LQR 433; c.f. 133 BGB in Germany, where "the
5. ^ Restatement (Second) of Contracts 32 (1981) (emphasis added)
6. ^ e.g. In Germany, 313 BGB
7. ^ Chappell & Co Ltd v Nestle Co Ltd [1959] 2 All ER 701.
8. ^ Eastwood v. Kenyon (1840) 11 Ad&E 438
9. ^ Austotel v. Franklins (1989) 16 NSWLR 582
(1986) p.195, Oxford University Press
KB 130
12. ^ Balfour v. Balfour [1919] 2 KB 571
14. ^ 105, II BGB
15. ^ L'Estrange v. F Graucob Ltd [1934] 2 KB 394
16. ^ Curtis v. Chemical Cleaning and Dyeing Co [1951] 1 KB 805
17. ^ Balmain New Ferry Company Ltd v. Robertson (1906) 4 CLR 379
18. ^ Hillas v. Arcos Ltd (1932) 147 LT 503
19. ^ Whitlock v. Brew (1968) 118 CLR 445
(1967) 111 Sol. J. 831
21. ^ Oscar Chess Ltd v. Williams [1957] 1 WLR 370
22. ^ Codelfa Construction Pty Ltd v. State Rail Authority of New South
Wales (1982) 149 CLR 337
23. ^ Byrne and Frew v. Australian Airlines Ltd (1995) 185 CLR 410
24. ^ Liverpool City Council v. Irwin [1976] 2 WLR 562)
25. ^ Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur
Insurance (Australia) Ltd (1986) 160 CLR 226
"chicken") and U.C.C. 1-205.
28. ^ Masters v. Cameron (1954) 91 CLR 353
29. ^ Meehan v. Jones (1982) 149 CLR 571
30. ^ Gordon v. Selico (1986) 18 HLR 219
31. ^ Bisset v Wilkinson and others [1927] AC 177
32. ^ Esso Petroleum Co Ltd v Mardon [1976] 2 Lloyd's Rep. 305
33. ^ Smith v. Hughes [1871]
34. ^ Lewis v Avery [1971] 3 All ER 907
36. ^ Bell v Lever Brothers Ltd. [1931] ALL E.R. Rep. 1, [1932] A.C. 161
37. ^ Black's Law Dictionary (8th ed. 2004)
38. ^ Barton v. Armstrong [1976] AC 104
39. ^ Johnson v. Buttress (1936) 56 CLR 113
40. ^ see in the U.K. e.g. s.3(2) Sale of Goods Act 1979
42. ^ Beatson (1998)" Anson's Law of Contract", 27th ed. (Oxford: OUP),
43. ^ Beatson, Ansons Law of Contract (1998) 27th ed. OUP, p.21
44. Ewan McKendrick, Contract Law - Text, Cases and Materials (2005)
Oxford University Press ISBN 0-19-927480-0
45. P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979) Clarendon
Press ISBN 0198253427
46. Randy E. Barnett, Contracts (2003) Aspen Publishers ISBN 0-7355-6535-