Acing the SQE/Contract Law

In English contract law, formation refers to the creation of a legally binding agreement between two or more parties. For a contract to be valid and enforceable, it must satisfy several key elements. These elements are:

An offer is a clear, unequivocal proposal made by one party (the offeror) to another (the offeree) with the intention of being bound by it once the offeree accepts. • The offer must be specific and capable of acceptance. • Offers can be terminated through rejection, revocation, lapse of time, or counteroffer. Acceptance

• Acceptance is an unqualified agreement to the terms of the offer. • It must be communicated clearly, either explicitly (e.g., verbally or in writing) or implicitly (e.g., through conduct). • Acceptance must mirror the terms of the offer (the “mirror image rule”). Any variation might constitute a counteroffer rather than acceptance.

Some leading cases are: • Carlill v Carbolic Smoke Ball Co (1893): Demonstrates offer and acceptance in a unilateral contract. Hyde v Wrench (1840): Establishes the mirror image rule and the effect of a counteroffer. • Currie v Misa (1875): Defines consideration as a detriment to the promisee or a benefit to the promisor.

Consideration refers to the “price” paid for the promise made in the contract. It involves an exchange of value, such as money, services, goods, or promises. • It must be sufficient but need not be adequate. For example, a small or nominal consideration can suffice, but it must have some value in law. • Past consideration (an act performed before the promise is made) is generally not valid, except in specific exceptions.

• The parties must intend for their agreement to have legal consequences. • In commercial agreements, there is a presumption of intent to create legal relations, unless expressly stated otherwise. • In social or domestic arrangements, there is usually no such presumption unless evidence shows otherwise.

• The terms of the agreement must be clear and complete enough for the court to enforce. • Ambiguities or omissions in key terms may render the contract void.

The parties entering the contract must have the legal capacity to do so (e.g., they must be of sound mind and not minors, with some exceptions for necessities).

Definition: The doctrine of privity of contract means that only the parties to a contract can enforce or be bound by its terms.

Key Principles:

1. Third parties (those not party to the contract) cannot sue or be sued on the contract.

2. A contract cannot impose obligations on a third party, nor can a third party claim benefits from it – even if the contract was made for their benefit.

Key Case Law: • Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 ➤ Confirmed that only a party who provides consideration can enforce the contract.

Exceptions / Statutory Reform:

1. Contracts (Rights of Third Parties) Act 1999

This Act creates exceptions to the common law rule. A third party may enforce a term of a contract if: • Section 1(1)(a): The contract expressly provides that the third party may enforce it; or • Section 1(1)(b): The term purports to confer a benefit on the third party (unless it appears the parties did not intend it to be enforceable).

Requirements: • Third party must be expressly identified by name, class, or description (s1(3)).

Rights of the third party: • Same as if they were a party to the contract (s1(5)), but can be limited by the contract itself.

2. Agency

An agent can enter into contracts on behalf of a principal – though the agent isn’t a party, the principal (a third party) may enforce or be bound.

3. Trust of a promise

If A contracts with B for B to pay C, and A intends to create a trust of the contractual promise in favour of C, C (a third party) may enforce the contract as a beneficiary.

4. Collateral contracts

Separate, additional contracts may exist alongside the main one – often seen in consumer and commercial contexts.

5. Tort law / Negligence

A third party may claim outside of contract under tort if damage arises, even though privity doesn’t apply.

Express terms are specific provisions and clauses explicitly stated in a contract, outlining the parties’ rights and obligations.

These terms are clear, unambiguous, and agreed upon by the parties, either in writing or verbally.

Express terms form a crucial part of contract law by providing clarity and certainty regarding the parties’ responsibilities.

Distinction from Implied Terms • Express terms are those specifically agreed upon by the parties, while implied terms are not expressly stated but are incorporated by law, custom, or the courts. • The distinction is important for determining what can be enforced and how ambiguities are resolved.

Classification of Express Terms • Express terms may be further classified as: • Conditions: Fundamental terms, breach of which allows termination and damages • Warranties: Less important terms, breach only allows for damages • Innominate terms: Terms that may be treated as conditions or warranties depending on the effect of the breach Interpretation of Express Terms • Courts interpret express terms using the ordinary meaning of words, the context of the agreement, and the intentions of the parties. • Ambiguities may be resolved against the party who drafted the contract (contra proferentem rule).

For a term to be enforceable as an express term, it must be properly incorporated into the contract: • By signature: Terms in a signed document are generally binding. • By notice: Reasonable steps must be taken to bring terms to the other party’s attention before or at the time of contracting. • By course of dealing: Regular dealings on certain terms may incorporate those terms into future contracts

• Implied terms are provisions not expressly stated in a contract but are incorporated by law to fill gaps, ensure fairness, or make the contract workable. • They can arise from common law (by the courts), by statute, by custom, or by previous dealings

Section 3 of the Unfair Contract Terms Act (UCTA) will apply and the exemption clause will be valid if reasonable (reasonableness test).

English courts interpret contracts objectively, seeking the meaning a reasonable person with all relevant background knowledge would attribute to the contract’s language.

The process considers both the literal wording and the commercial context, with greater emphasis on context in less formal or less detailed agreements.

The primary aim is to ascertain the parties’ intentions as expressed in the contract

Contract variation refers to any change or modification to the terms of an existing contract, allowing the original agreement to continue but with amended terms

Variations can address changes in scope, price, deadlines, obligations, or other contractual elements.

Variation Clauses - Many contracts include a *variation clause* specifying the permitted method(s) for making changes (e.g., “in writing and signed by both parties”)

Such clauses may restrict or prohibit oral or informal variations. Courts generally uphold these requirements, as confirmed in *Rock Advertising Ltd v MWB Business Exchange Centres Ltd (2018).

Clauses allowing unilateral variation (by one party only) are subject to fairness and may be unenforceable if they create significant imbalance or uncertainty[2].

Requirements for a Valid Variation

Mutual Agreement: All parties must agree to the variation.

Consideration: Required for most variations unless the change is executed as a deed[9].

Compliance with Formalities: Any specific requirements in the contract (e.g., written notice, signatures) must be followed.

Clarity and Certainty:** The changes must be clearly documented, specifying which terms are altered and the new wording.

Vitiating factors are elements that undermine the validity of a contract, making it void, voidable, or unenforceable.

They protect parties from unfair, coerced, or unlawful agreements and uphold the integrity of contractual relationships

Definition: An untrue statement of fact made by one party, inducing another to enter the contract.

Types:

• Fraudulent: Made knowingly, without belief in its truth, or recklessly.

• Negligent: Made carelessly or without reasonable grounds for belief.

• Innocent: Made with reasonable belief in its truth.

Remedies:

• Rescission (contract set aside).

• Damages (especially for fraudulent and negligent misrepresentation).

Definition: A fundamental error by one or both parties regarding a key aspect of the contract.

Types:

• Common mistake: Both parties share the same incorrect belief.

• Mutual mistake: Parties misunderstand each other.

• Unilateral mistake: One party is mistaken, and the other knows or ought to know.

• Effect: May render a contract void if the mistake goes to the root of the agreement.

Definition: Terms that create a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer or weaker party.

Statutory controls:

• Unfair Contract Terms Act 1977 (UCTA)

• Consumer Rights Act 2015
• Effect: Unfair terms may be deemed unenforceable or struck out by the courts.

Duress:

• Involves threats, violence, or illegitimate pressure to force a party into a contract.
• Renders the contract voidable at the option of the victim.

Undue Influence:

• Arises when one party uses a position of power or trust to improperly influence another’s decision to contract.

• Can be actual (proven influence) or presumed (special relationship).
• Also renders the contract voidable.

Definition: A contract is illegal if its object or performance is contrary to law or public policy.

Types:

• Statutory illegality: Prohibited by statute (e.g., contracts for illegal activities).

• Common law illegality: Contrary to public policy (e.g., contracts to commit a crime).

• Effect: Courts will not enforce illegal contracts; they are void and parties may not recover losses.

Contracts may terminate automatically upon the occurrence of a specified event or the expiry of a fixed term.

Common examples:

• Expiry of a set period (e.g., a 12-month contract ends after 12 months unless renewed).

• Occurrence of a particular event (e.g., completion of a project, insolvency, or a force majeure event as defined in the contract).

• Termination procedures and notice requirements are governed by the contract’s express terms and must be strictly followed

A contract may be terminated for breach, but not every breach justifies termination.

Only a repudiatory breach (a breach so serious it goes to the root of the contract or deprives the innocent party of substantially the whole benefit) gives rise to a right to terminate at common law.

Breaches of conditions (fundamental terms) or sufficiently serious breaches of innominate terms qualify; breaches of warranties do not.

The innocent party must communicate its decision to terminate to the defaulting party.

Contractual termination clauses may provide additional or alternative grounds for termination, such as termination for “material” or “serious” breach, and may require notice and opportunity to remedy

The doctrine of frustration applies when an unforeseen event, not due to either party’s fault, renders contractual performance impossible or radically different from what was contemplated at the time of contracting.

Frustration automatically discharges the contract, releasing both parties from future obligations.

The threshold for frustration is high and does not apply if the contract has allocated the risk of the event or if performance is merely more difficult or expensive.

Examples: destruction of subject matter, supervening illegality, or death/incapacity in contracts for personal service

Upon termination, especially by frustration, the law seeks to prevent unjust enrichment.

At common law, recovery was limited to cases of total failure of consideration (i.e., where a party received no part of the bargained-for performance).

The Law Reform (Frustrated Contracts) Act 1943 allows for:

• Recovery of monies paid before frustration, subject to the court’s discretion to allow the payee to retain or recover reasonable expenses.
• Restitution of benefits conferred, to prevent unjust enrichment.

After termination for breach, secondary obligations (such as confidentiality or payment of damages) may survive, and damages may be awarded to compensate the innocent party.

The principle of unjust enrichment ensures that neither party retains an unfair benefit following termination, particularly where the contract ends without full performance

Remedies are legal solutions available to a party when a contract is breached. They aim to compensate for loss, enforce obligations, or prevent further harm.

Purpose: To compensate the injured party and place them in the position they would have been in had the contract been performed.

Types: • Expectation Damages: Compensate for loss of bargain (the expected benefit of the contract). • Reliance Damages: Compensate for expenses incurred in reliance on the contract, used where expectation loss is difficult to prove or the contract would not have been profitable. • Restitutionary Damages: Aim to strip gains made by the breaching party.

Limitations: Damages are not recoverable for remote losses (remoteness) and must be mitigated by the claimant (see duty to mitigate below).

Liquidated Damages: • Pre-agreed sums payable on breach, enforceable if they are a genuine pre-estimate of likely loss. • Provide certainty and avoid the need to prove actual loss.

Penalty Clauses: • Sums intended to punish or deter breach, rather than compensate for loss, are unenforceable. • The distinction is determined by the substance, not the label, and is assessed at the time of contract formation. • Key case: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.

Nature: An equitable remedy ordering the breaching party to perform their contractual obligations as agreed.

When Available: Typically granted where damages are inadequate, such as contracts for unique goods or land.

Discretionary: Not available if performance would cause hardship or requires constant supervision.

Nature: Court orders either restraining a party from doing something (prohibitory) or compelling them to act (mandatory).

Use in Contract Law: Common for preventing breaches of negative covenants (e.g., non-compete clauses) or protecting confidential information.

Types: • Interim/Temporary Injunctions: Granted pending trial. • Permanent Injunctions: Granted as a final remedy after trial.

Principle: The injured party must take reasonable steps to minimize their loss following a breach.

Effect: Damages may be reduced if the claimant fails to mitigate their loss.

Definition: A contractual promise by one party to compensate the other for specified losses or liabilities.

Scope: Covers losses arising from the contract or from third-party claims.

Rights of Indemnity Holder: Recover damages, costs, and sums paid under compromise, provided actions are prudent and within authority.

Definition: A promise by a third party (guarantor) to answer for the debt or default of another (principal debtor).

Nature: Secondary obligation—enforceable only if the principal debtor defaults.

Requirements: Must generally be in writing to be enforceable.

Causation

• Definition: Causation in contract law is the requirement that a breach of contract must be the factual and legal cause of the loss claimed by the non-breaching party

Factual Causation ("But For" Test): - The claimant must prove that, but for the breach, the loss would not have occurred.

- The breach must be a necessary condition for the loss; if the loss would have happened anyway, causation fails.

- The breach need not be the sole cause, but it must be an effective or dominant cause.

- Legal Causation (Proximate Cause):

- The breach must be sufficiently connected to the loss; intervening acts may break the chain of causation if they are not reasonably foreseeable.

- The court examines whether the breach was more than just the occasion for the loss, but the actual cause.

Remoteness

Purpose: Remoteness limits the types of losses for which the breaching party is liable, ensuring only foreseeable losses are recoverable.

Core Test (Hadley v Baxendale):

Losses are recoverable if they:

1. Arise naturally from the breach (ordinary course of things) (*imputed knowledge*), or

2. Are within the parties’ contemplation as a probable result of the breach at the time of contracting (actual knowledge).

Modern Approach:

- The loss must be of a type or kind that was reasonably foreseeable as not unlikely to result from the breach at the time of contract formation.

- The courts may also consider whether the parties assumed responsibility for that type of loss (as highlighted in The Achilleas case).

Application:

- Losses that are too remote—i.e., not reasonably foreseeable or outside the scope of assumed responsibility—are not recoverable[6][8]. - The test focuses on foreseeability at the time of contracting, not at the time of breach[8].