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contract law

palgrave law masters

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Company Law Janet Dine and Marios KoutsiasConstitutional and Administrative Law John AlderContract Law Ewan McKendrickCriminal Law Jonathan HerringEmployment Law Deborah J LocktonEvidence Raymond EmsonFamily Law Kate Standley and Paula DaviesIntellectual Property Law Tina Hart, Simon Clark and Linda FazzaniLand Law Mark DavysLandlord and Tenant Law Margaret Wilkie, Peter Luxton, Jill Morgan and Godfrey Cole Legal Method Ian McLeodLegal Theory Ian McLeodMedical Law Jo Samanta and Ash SamantaSports Law Mark JamesTorts Alastair Mullis and Ken OliphantTrusts Law Charlie Webb and Tim Akkouh

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contract law

ewan mckendrick QC (Hon)Registrar and Professor of English Private Law

in the University of OxfordFellow of Lady Margaret Hall

Eleventh edition



© Ewan McKendrick 1990, 1994, 1997, 2000, 2003, 2005, 2007, 2009, 2011, 2013 and 2015

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v

Contents

Preface xii

Table of cases xiii

Table of legislation xxix

1 Introduction 11.1 Introduction 11.2 The scope of the law of contract 11.3 The basis of the law of contract 21.4 Contract, tort and restitution 41.5 Contract and empirical work 51.6 A European contract law? 61.7 An international contract law? 81.8 The role of national contract law in a global economy 101.9 Contract law and human rights 11

The formation and scope of a contract

2 Agreement: clearing the ground 172.1 Who decides that an agreement has been reached? 172.2 A residual role for a subjective approach? 192.3 The objective test 212.4 Has agreement been reached? 22Summary 25Exercises 25

3 Offer and acceptance 263.1 Offer and invitation to treat 263.2 Display of goods for sale 283.3 Advertisements 303.4 Auction sales 303.5 Tenders 313.6 Time-tables and vending machines 333.7 Acceptance 343.8 Communication of the acceptance 343.9 Acceptance in ignorance of the offer 353.10 Prescribed method of acceptance 363.11 Acceptance by silence 363.12 Exceptions to the rule requiring communication of acceptance 373.13 Acceptance in unilateral contracts 403.14 Termination of the offer 413.15 The limits of offer and acceptance 42Summary 43Exercises 44

Part I


Contentsvi

4 Certainty and agreement mistakes 454.1 Certainty 454.2 Vagueness 494.3 Incompleteness 494.4 A general rule? 504.5 A restitutionary approach? 514.6 Mistake negativing consent 52Summary 59Exercises 60

5 Consideration and form 615.1 Requirements of form 615.2 Consideration defined 675.3 The many functions of consideration 685.4 Consideration and motive 695.5 The scope of the doctrine 695.6 Consideration must be sufficient but it need not be adequate 695.7 Trivial acts 705.8 Intangible returns 715.9 Compromise and forbearance to sue 725.10 Performance of a duty imposed by law 735.11 Performance of a contractual duty owed to the promisor 745.12 Practical benefit 775.13 Consideration and duress 785.14 Alternative analyses 805.15 Part payment of a debt 825.16 Performance of a duty imposed by contract with a third party 835.17 Conceptions of value 845.18 Past consideration 855.19 Consideration must move from the promisee 865.20 Reliance upon non-bargain promises 875.21 The role of consideration 885.22 Estoppel 895.23 Estoppel by representation 925.24 Waiver and variation 925.25 Promissory estoppel 935.26 Estoppel by convention 965.27 Proprietary estoppel 965.28 The relationship between estoppel and consideration 995.29 Conclusion: the future of consideration 102Summary 104Exercises 105

6 Intention to create legal relations 1066.1 Introduction 1066.2 Balfour v Balfour 1066.3 Rebutting the presumption 1076.4 Domestic and social agreements 1086.5 Commercial agreements 109Summary 110Exercises 111


Contents vii

7 Third party rights 1127.1 Introduction 1127.2 Privity in operation 1137.3 Privity and consideration 1157.4 Criticisms of the doctrine of privity 1177.5 The Contracts (Rights of Third Parties) Act 1999 1177.6 The intention test 1187.7 No consideration required 1227.8 The remedies available to the third party 1227.9 Variation and cancellation 1237.10 The defences available to the promisor 1247.11 Avoiding double liability 1257.12 Exceptions to the new third party right of action 1267.13 Preserving existing exceptions 1267.14 Rights of the promisee 1277.15 Collateral contracts 1317.16 Agency 1327.17 The trust concept 1337.18 The role of the law of tort 1357.19 Assignment 1367.20 Negotiable instruments 1377.21 Statutory exceptions 1377.22 A further common law exception? 1387.23 Interference with contractual rights 1387.24 Conclusion 140Summary 140Exercises 142

The content of a contract

8 What is a term? 1458.1 What is a term? 1458.2 Verification 1468.3 Importance 1468.4 Special knowledge 1468.5 The consequences of the distinction between a term and

a mere representation 1478.6 Can a representation be incorporated into a contract as

a term? 147Summary 148Exercises 148

9 The sources of contractual terms 1499.1 Introduction 1499.2 The parol evidence rule 1499.3 Bound by your signature? 1519.4 Incorporation of written terms 1549.5 Incorporation by a course of dealing 1579.6 Interpretation 1589.7 Rectification 165

Part II


Contentsviii

9.8 Implied terms 167Summary 172Exercises 173

10 The classification of contractual terms 17410.1 The classification of terms 17410.2 What is a ‘condition’? 17410.3 Distinguishing between a condition and a warranty 17510.4 The need for change? 17810.5 Innominate terms 180Summary 183Exercises 183

11 Exclusion clauses 18411.1 Exclusion clauses: defence or definition? 18411.2 The functions of exclusion clauses 18511.3 An outline of the law 18611.4 Incorporation 18611.5 Construction of exclusion clauses 18611.6 Negligence liability 18911.7 Fundamental breach 19211.8 Other common law controls upon exclusion clauses 19311.9 The Unfair Contract Terms Act 1977 19311.10 Negligence liability 19411.11 Liability for breach of contract 19811.12 Attempts at evasion 20211.13 The reasonableness test 20311.14 Excepted contracts 20611.15 Conclusion 207Summary 208Exercises 208

Policing the contract

12 A duty to disclose material facts? 21312.1 Introduction 21312.2 Snatching at a bargain 21412.3 Representation by conduct 21412.4 Representation falsified by later events 21512.5 Statement literally true but misleading 21512.6 Contracts uberrimae fidei 21612.7 Fiduciary relationships 21612.8 A duty of disclosure in tort? 21612.9 The role of the Sale of Goods Act 1979 and the

Consumer Rights Act 2015 21612.10 Conclusion 217Summary 222Exercises 222

13 Misrepresentation 22413.1 Introduction 224

Part III


Contents ix

13.2 What is a misrepresentation? 22513.3 A statement of existing fact or law 22513.4 Addressed to the party misled 22713.5 Inducement 22713.6 The types of misrepresentation 22913.7 Remedies 23513.8 Rescission 23513.9 Damages 23713.10 Excluding liability for misrepresentation 240Summary 242Exercises 243

14 Common mistake and frustration 24414.1 Introduction 24414.2 Common mistake 24514.3 Mistake as to the existence of the subject-matter of the contract 24714.4 Mistake as to identity of the subject-matter 24814.5 Mistake as to the possibility of performing the contract 24914.6 Mistake as to quality 24914.7 Mistake in equity 25214.8 Frustration 25414.9 Frustration, force majeure and hardship 25414.10 Frustration: a sterile doctrine? 25714.11 Impossibility 25714.12 Frustration of purpose 25814.13 Illegality 25914.14 Express provision 26014.15 Foreseen and foreseeable events 26014.16 Self-induced frustration 26114.17 The effects of frustration 26314.18 Conclusion 266Summary 267Exercises 268

15 Illegality 26915.1 Introduction 26915.2 Some difficulties of classification 27015.3 Illegality in performance 27015.4 Statutory illegality 27215.5 Gaming and wagering contracts 27215.6 Illegality at common law 27315.7 Contracts contrary to good morals 27415.8 Contracts prejudicial to family life 27415.9 Contracts to commit a crime 27515.10 Contracts prejudicial to the administration of justice 27515.11 Contracts prejudicial to public relations 27615.12 Contracts in restraint of trade 27615.13 Contracts of employment 27715.14 Contracts for the sale of a business 27815.15 Restrictive trading and analogous agreements 27815.16 The scope of public policy 279


Contentsx

15.17 The effects of illegality 28015.18 The recovery of money or property 28015.19 Severance 285Summary 285Exercises 286

16 Capacity 28716.1 Introduction 28716.2 Minors 28716.3 Mental incapacity and drunkenness 28916.4 Companies 291Summary 291Exercises 292

17 Duress, undue influence and inequality of bargaining power 29317.1 Introduction 29317.2 Common law duress 29317.3 Undue influence 29917.4 Inequality of bargaining power 30317.5 The role of Parliament 30517.6 A general doctrine of unconscionability? 306Summary 307Exercises 308

18 Unfair terms in consumer contracts 30918.1 The background to the Act 30918.2 What is a consumer contract? 31118.3 When is a contract term unfair? 31218.4 Exclusion from assessment of fairness 31518.5 Liabilities that cannot be excluded or restricted 32018.6 The consequence of a finding that a term is unfair 32118.7 Enforcement 321Summary 322Exercises 323

Performance, discharge and remedies for breach of contract

19 Performance and discharge of the contract 32719.1 Performance 32719.2 Discharge of the contract 32719.3 Discharge by performance 32819.4 Discharge by agreement 32819.5 Discharge by operation of law 328Summary 329Exercises 329

20 Breach of contract 33020.1 Introduction: breach defined 33020.2 When does breach occur? 33020.3 The consequences of breach 331

Part IV


Contents xi

20.4 Damages 33120.5 Enforcement by the party in breach 33120.6 The right to terminate performance of the contract 33220.7 The prospective nature of breach 33220.8 The right of election 33420.9 Anticipatory breach 336Summary 339Exercises 339

21 Damages for breach of contract 34121.1 Introduction 34121.2 Compensation and the different ‘interests’ 34121.3 The expectation interest 34321.4 The restitution interest 34721.5 Failure of consideration and enrichment by subtraction 34721.6 Enrichment by wrongdoing 34921.7 Reliance interest 35421.8 The date of assessment 35621.9 The commitment to the protection of the expectation interest 35621.10 Mitigation 35721.11 Remoteness 35821.12 Causation 36321.13 Damages for pain and suffering and the ‘consumer surplus’ 36421.14 Conclusion 367Summary 368Exercises 368

22 Obtaining an adequate remedy 37022.1 Introduction 37022.2 The entire obligations (or ‘entire contracts’) rule 37022.3 The creation of conditions 37222.4 A claim in debt 37222.5 Liquidated damages 37322.6 Evading the penalty clause rule 37722.7 Deposits and part payments 37922.8 Liquidated damages, penalty clauses and forfeitures: an assessment 38222.9 Specific performance 38422.10 Injunctions 38822.11 Damages in lieu of specific performance 38922.12 Conclusion 389Summary 390Exercises 390

Bibliography 392

Index 399


ChapHdMain

xii

My aim in writing the eleventh edition of this book has not changed from the stated aim of previous editions: namely, to provide a clear and straightforward account of the basic rules of English contract law. I have also sought to introduce the reader to some of the debates about the nature, the scope and the functions of the law of contract and to discuss some of the wider controversies which surround certain basic doctrines of English contract law, such as consideration. In discussing these issues I have attempted to build a bridge between this introductory work and some of the more advanced and detailed writings on the law of contract by making frequent reference throughout the book to both the periodical literature and the standard textbooks on the law of contract (full citations are contained in the Bibliography located at the end of the book). My hope is that these references will encourage the reader to pursue the issues raised in this book in greater detail in the writings to which I have made reference.

The text has been fully revised and updated to take account of the numerous devel-opments in the law which have taken place since the publication of the previous edition. The principal change which has occurred since the last edition is the revocation of the Unfair Terms in Consumer Contracts Regulations 1999 and their replacement by Part 2 of the Consumer Rights Act 2015. This has necessitated the introduction of a new Chapter 18 in order to deal with the new law. It has also had a significant impact on Chapter 11 given that the Unfair Contract Terms Act 1977 no longer applies to contracts between a business and a consumer. Other topics where there has been a significant element of re-writing include the discussion of good faith (at Section 12.10) and the principles applied by the courts when seeking to interpret commercial contracts (see Section 9.6).

Finally, I must acknowledge the debts which I have incurred in writing this edition. I am grateful to my daughter Rachel for her assistance with the proofs. I must also acknowledge the assistance which I have derived from colleagues and students who have helped to clarify my thoughts and offered a number of constructive criticisms and suggestions. But my greatest debt continues to be to my wife, Rose, and our chil-dren, Jenny, Sarah, Rachel and Katie, who are now joined by AJ, Richard and Sam, and grandchildren Emma and Alfie. I am grateful to them for their encouragement and support.

The book is dedicated to the memory of my grandparents.I have endeavoured to state the law on the basis of the materials available to me on

31 March 2015.

Ewan McKendrickUniversity Offices,

Oxford,31 March 2015

Preface


1

Chapter 1Introduction

IntroductionIf the ‘law of contract’ were not already entrenched in the traditions of legal education, would anyone organise a course around it, let alone produce books expounding it? (Wightman (1989) ‘Reviving Contract’, Modern Law Review, 52, 116)

The fact that a lawyer can ask such a question would, no doubt, confound laymen. Yet, it is true that the scope, the basis, the function and even the very existence of the law of contract are the subject of debate and controversy among academic lawyers.

But such questioning seems absurd. After all, we enter into contracts as a regular part of life, and generally we experience no difficulty in so doing. Simple cases include the purchase of a morning newspaper or the purchase of a bus ticket when travelling to work. What doubt can there possibly be about the existence of such contracts or their basis? However, behind the apparent simplicity of these transactions, there lurks a fierce controversy. In an introductory work of this nature, we cannot give full consid-eration to these great issues of debate. The function of this chapter is simply to identify some of these issues so that the reader can bear them in mind when reading the ensu-ing chapters and to enable the reader to explore them further in the readings to which I shall make reference.

The scope of the law of contractA good starting point is the scope of the law of contract. Contracts come in different shapes and sizes. Some involve large sums of money, others trivial sums. Some are of long duration, while others are of short duration. The content of contracts varies enormously and may include contracts of sale, hire-purchase, employment and mar-riage. Nevertheless, we shall not be concerned with all such contracts in this book. Contracts of employment, marriage contracts, hire-purchase contracts, consumer credit contracts, contracts for the sale of goods, contracts for the sale of land, mort-gages and leasehold agreements all lie largely outside the scope of this book. Such contracts have all been the subject of distinct regulation and are dealt with in books on employment law, family law, consumer law, commercial law, land law and land-lord and tenant law, respectively. At this stage, you might be forgiven if you were to ask the question: if this book is not about these contracts, what is it about, and what is its value?

The answer to the first part of such a question is that this book is concerned with what are called the ‘general principles’ of the law of contract, and these general prin-ciples are usually derived from the common law (or judge-made law). Treatises on the general principles of the law of contract are of respectable antiquity in England, and can be traced back to Pollock (1875) and Anson (1879). This tradition has been main-tained today in works such as Treitel (2011), Anson (2010) and Cheshire, Fifoot and Furmston (2012). One might have expected that these treatises would gradually disap-pear in the light of the publication of books on, for example, the contract of employ-ment or the contract of hire-purchase, which subject the rules relating to such contracts

1.1

1.2


Contract law2

to close examination. Yet, textbooks on the ‘general principles’ of the law of contract have survived and might even be said to have flourished.

The existence of such general principles has, however, been challenged by Professor Atiyah (1986b), who maintains that these ‘general’ principles ‘remain general only by default, only because they are being superseded by detailed ad hoc rules lacking any principle, or by new principles of narrow scope and application’. Atiyah argues that ‘there is no such thing as a typical contract at all’. He maintains (1986a) that it is ‘incor-rect today to think of contract law as having one central core with clusters of differences around the edges’. He identifies the classical model of contract as being a discrete, two-party, commercial, executory exchange but notes that contracts can be found which depart from each feature of this classical model. Thus, some contracts are not discrete but continuing (landlord and tenant relationships), some are not two-party but multi-party (the contract of membership in a club), some are not commercial but domestic (marriage), some are not executory (unperformed) but executed (fully performed) and finally some do not depend upon exchange, as in the case of an enforceable unilateral gratuitous promise. Atiyah concludes by asserting that we must ‘extricate ourselves from the tendency to see contract as a monolithic phenomenon’.

Atiyah uses this argument in support of a wider proposition that contract law is ‘increasingly merging with tort law into a general law of obligations’. But one does not have to agree with Atiyah’s wider proposition to accept the point that the resemblance between different types of contract may be very remote indeed. A contract of employ-ment is, in many respects, radically different from a contract to purchase a chocolate bar. The considerations applicable to a contract between commercial parties of equal bargaining power may be very different from those applicable to a contract between a consumer and a multinational supplier (see Chapters 17 and 18).

This fragmentation of the legal regulation of contracts has reached a critical stage in the development of English contract law. The crucial question which remains to be answered is: do we have a law of contract or a law of contracts? My own view is that we are moving slowly in the direction of a law of contracts as the ‘general principles’ decline in importance.

Given this fragmentation, what is the value of another book on the general princi-ples of contract law? The principal value is that many of the detailed rules relating to specific contracts have been built upon the foundation of the common law principles. So it remains important to have an understanding of the general principles before pro-gressing to study the detailed rules which have been applied to particular contracts. The general principles of formation, content, misrepresentation, mistake, illegality, capacity, duress and discharge apply to all contracts, subject to statutory qualification. These principles therefore remain ‘general’, but only ‘by default’.

The basis of the law of contractThe basis of the law of contract is also a matter of considerable controversy. Atiyah has written (1986e) that ‘modern contract law probably works well enough in the great mass of circumstances but its theory is in a mess’. There are many competing theories which seek to explain the basis of the law of contract (on which see generally Smith, 2004).

The classical theory is the will theory. Closely associated with laissez-faire philoso-phy, this theory attributes contractual obligations to the will of the parties. The law of contract is perceived as a set of power-conferring rules which enable individuals

1.3


Introduction 3

to enter into agreements of their own choice on their own terms. Freedom of contract and sanctity of contract are the dominant ideologies. Parties should be as free as pos-sible to make agreements on their own terms without the interference of the courts or Parliament, and their agreements should be respected, upheld and enforced by the courts. As Lord Toulson observed in Prime Sight Ltd v Lavarello [2013] UKPC 22; [2014] AC 436, [47], ‘parties are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce them’. However, the will theory cannot explain all of the rules that make up the law of contract. Thus it is not possible to attribute many of the doctrines of contract law to the will of the parties. Doctrines such as consideration, illegality, frus-tration and duress cannot be ascribed to the will of the parties, nor can statutes such as the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015.

The will theory has, however, been revived and subjected to elegant refinement by Professor Fried (1981). Fried maintains that the law of contract is based upon the ‘prom-ise-principle’, by which ‘persons may impose on themselves obligations where none existed before’. The source of the contractual obligation is the promise itself. But, at the same time, Fried concedes that doctrines such as mistake and frustration (Chapter 14) cannot be explained on the basis of his promise-principle. Other non-promissory prin-ciples must be invoked, such as the ‘consideration of fairness’ or ‘the encouragement of due care’.

But Fried’s theory remains closely linked to laissez-faire ideology. Fried maintains that contract law respects individual autonomy and that the will theory is ‘a fair impli-cation of liberal individualism’. He rejects the proposition that the law of contract is an appropriate vehicle for engaging in the redistribution of wealth. But his theory is open to attack on two principal grounds.

The first is that it is difficult to explain many modern contractual doctrines in terms of liberal individualism or laissez-faire philosophy. The growth of standard form contracts and the aggregation of capital within fewer hands has enabled powerful con-tracting parties to impose contractual terms upon consumers and other weaker parties. The response of the courts and Parliament has been to place greater limits upon the exercise of contractual power. Legislation has been introduced to regulate employment contracts and consumer credit contracts in an effort to provide a measure of protection for employees and consumers. Such legislation cannot be explained in terms of laissez-faire ideology, nor can the expansion of the doctrines of duress and undue influence, or the extensive regulation of exclusion clauses which Parliament has introduced (see Chapter 11 and, more generally, see Chapter 18, which examines the law relating to unfair terms in consumer contracts). Conceptions of fairness seem to underpin many of the rules of contract law (see Chapter 17). Such departures from the principles of liberal individualism have led some commentators to argue that altruism should be recognised as the basis of contract law (Kennedy, 1976), while others have argued that the law of contract should have as an aim the redistribution of wealth (Kronman, 1980). We shall return to this issue in Chapters 17 and 18.

A second attack on the promise-principle has been launched on the ground that, in many cases, the courts do not uphold the promise-principle because they do not actu-ally order the promisor to carry out his promise. The promisee must generally content himself with an action for damages. But, as we shall see (in Chapter 21), the expecta-tions engendered by a promise are not fully protected in a damages action. One of the principal reasons for this is the existence of the doctrine of mitigation (see Section 21.10). Suppose I enter into a contract to sell you ten apples for £2. I then refuse to perform my


Contract law4

side of the bargain. I am in breach of contract. But you must mitigate your loss. So you buy ten apples for £2 at a nearby market. If you sue me for damages, what is your loss? You have not suffered any, and you cannot enforce my promise. So how can it be said that my promise is binding if you cannot enforce it? Your expectation of profit may be protected but, where that profit can be obtained elsewhere at no loss to you, then you have no effective contractual claim against me. Your expectations have been fulfilled, albeit from another source.

Although you cannot enforce my promise, it is very important to note that in our example you suffered no loss, and I gained no benefit. Let us vary the example slightly. Suppose that you had paid me in advance. The additional ingredients here are that you have acted to your detriment in reliance upon my promise, and I have gained a ben-efit. Greater justification now appears for judicial intervention on your behalf. Can it therefore be argued that the source of my obligation to you is not my promise, but your detrimental reliance upon my promise or your conferment of a benefit upon me in reli-ance upon my promise? Atiyah has written (1986b) that ‘wherever benefits are obtained, wherever acts of reasonable reliance take place, obligations may arise, both morally and in law’. This argument is one of enormous significance. It is used by Atiyah (1979) in an effort to establish a law of obligations based upon the ‘three basic pillars of the law of obligations, the idea of recompense for benefit, of protection of reasonable reliance, and of the voluntary creation and extinction of rights and liabilities’. The adoption of such an approach would lead to the creation of a law of obligations and, in consequence, con-tract law would cease to have a distinct identity based upon the promise-principle or the will theory (see further Section 1.4). This is why this school of thought has been called ‘the death of contract’ school (see Gilmore, 1974). We shall return to these arguments at various points in this book, especially in Chapters 21 and 22.

My own view is that Fried correctly identifies a strong current of individualism which runs through the law of contract. A promise does engender an expectation in the promisee and, unless a good reason to the contrary appears, the courts will call upon a defaulting promisor to fulfil the expectation so created. But the critics of Fried are also correct in their argument that the commitment to individual autonomy is tempered in its application by considerations of fairness, consumerism and altruism. These con-flicting ideologies run through the entire law of contract. (For a fuller examination of these ideologies under the titles of ‘Market-Individualism’ and ‘Consumer-Welfarism’, see Adams and Brownsword, 1987.) The law of contract is not based upon one ideol-ogy; both ideologies are present in the case law and the legislation. Indeed, the tension between the two is a feature of the law of contract. Sometimes ‘market-individualism’ prevails over ‘consumer-welfarism’; at other times ‘consumer-welfarism’ triumphs over ‘market-individualism’. At various points in this book, we shall have occasion to note these conflicting ideologies and the tensions which they produce within the law.

Contract, tort and restitutionA further difficulty lies in locating the law of contract within the spectrum of the law of civil obligations. Burrows (1983) has helpfully pointed out that the law of obliga-tions largely rests upon three cardinal principles. The first principle is that expectations engendered by a binding promise should be fulfilled. Upon this principle is founded the law of contract. The second principle is that compensation must be granted for the wrongful infliction of harm. This principle is reflected in the law of tort. A tort is a

1.4


Introduction 5

civil wrong, such as negligence or defamation. Let us take an example to illustrate the operation of the law of tort. You drive your car negligently and knock me down. You have committed the tort of negligence. Harm has wrongfully been inflicted upon me, and you must compensate me. The aim of the award of compensation is not to fulfil my expectations. The aim is to restore me to the position which I was in before the accident occurred, to restore the ‘status quo’ or to protect my ‘reliance interest’.

The third principle is that unjust enrichments must be reversed. This principle is implemented by the law of restitution or, to use the terminology which is gradually gaining acceptance, the law of unjust enrichment. There are three stages to a restitu-tionary claim. First, the defendant must be enriched by the receipt of a benefit; second, that enrichment must be at the expense of the claimant; and, finally, it must be unjust for the defendant to retain the benefit without recompensing the claimant. The last stage does not depend upon the unfettered discretion of the judge; there are principles to guide a court in deciding whether, in a particular case, it is unjust that the defendant retain the benefit without recompensing the claimant (see Burrows, 2010). The classic restitutionary claim arises where I pay you money under a mistake of fact. I have no contractual claim against you because there is no contract between us. Nor have you committed a tort. But I do have a restitutionary claim against you. You are enriched by the receipt of the money, that enrichment is at my expense, and the ground on which I assert that it is unjust that you retain the money is that the money was paid under a mistake of fact.

Contract, tort and restitution therefore divide up most of the law based upon these three principles, and they provide a satisfactory division for the exposition of the law of obligations. This analysis separates contract from tort and restitution on the ground that contractual obligations are voluntarily assumed, whereas obligations created by the law of tort and the law of restitution are imposed upon the parties by the operation of rules of law. Occasionally, however, these three principles overlap, especially in the context of remedies (Chapter 22). Overlaps will also be discussed in the context of misrepresentation (Chapter 13) and third-party rights (Chapter 7).

Finally, it must be noted that these divisions are not accepted by writers such as Professor Atiyah. His recognition of reliance-based and benefit-based liabilities cuts right across the three divisions. The writings of Atiyah deserve careful consideration, but they do not represent the current state of English law. Although we shall make frequent reference to the writings of Atiyah, we shall not adopt his analysis of the law of obligations. Instead, it will be argued that the foundation of the law of contract lies in the mutual promises of the parties and, being founded upon such voluntary agree-ment, the law of contract can, in the vast majority of cases, be separated from the law of tort and the law of restitution.

Contract and empirical workRelatively little empirical work has been done on the relationship between the rules that make up the law of contract and the practices of the community which these rules seek to serve. The work that has been done (see, for example, Beale and Dugdale, 1975; Lewis, 1982) suggests that the law of contract may be relied upon in at least two ways. The first is at the planning stage. The rules which we shall discuss in this book may be very important when drawing up the contract and in planning for the future. For example, care must be taken when drafting an exclusion clause to ensure, as far as

1.5


Contract law6

possible, that it is not invalidated by the courts (see Chapter 11). Secondly, the law of contract may be used by the parties when their relationship has broken down. Here the rules of contract law generally have a less significant role to play than at the planning stage. The rules of contract law are often but one factor to be taken into account in the resolution of contractual disputes. Parties may value their good relationship and refuse to soil it by resort to the law. Litigation is also time-consuming and extremely expen-sive, and so the parties will frequently resort to cheaper and more informal methods of dispute resolution. In the remainder of this book, we shall discuss the rules that make up the law of contract, but it must not be forgotten that in the ‘real world’ the rules of contract law may be only one of many factors taken into account by the parties on the breakdown of a contractual relationship. This is not to suggest that there is no connec-tion between the formal rules of the law of contract and the ‘real world’ of the parties’ relationship. In many cases, the relationship between the parties is governed both by informal understandings (or ‘relational norms’) and by the formal contract document and the rules of contract law, with the influence of these different factors depending upon the circumstances of the individual case (Mitchell, 2009).

A European contract law?The subject-matter of this book is the English law of contract, and so the focus is upon the rules that make up the English law of contract. But it should not be forgotten that we live in a world which is becoming more interdependent and where markets are no longer local or even national but are, increasingly, international. The creation of global markets may, in turn, encourage the development of an international contract and commercial law. There are two dimensions here.

The first relates to our membership of the European Union; the second is the wider move towards the creation of a truly international contract law. The first issue relates to the impact which membership of the European Union is likely to have on our con-tract law. As yet, membership has had relatively little direct impact, but this is unlikely to remain the case. An example of its potential impact is provided by the European Directive on Unfair Terms in Consumer Contracts (93/13/EEC) which was first enacted into UK law in the form of the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994/3159). These were then revoked and re-enacted in the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) which in turn were revoked and re-enacted in Part 2 of the Consumer Rights Act 2015. These rules give to the courts greater pow-ers to strike down unfair terms in consumer contracts which have not been individually negotiated. The purpose which lay behind the Directive, as stated in Article 1, was ‘to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in consumer contracts’. The Directive and the Regulations will be discussed in more detail in Chapter 18, but the issue which concerns us at this point is the potential which European Union law has to intrude into domestic contract law. Some clue as to the likely reach of EU law can be found in what is now Article 114 of the Treaty on the Functioning of the European Union, which gives the European Parliament and the Council of the European Union the power to adopt measures which have as their object ‘the establishment and functioning of the internal market’. This Article formed the legal basis for the Unfair Terms Directive, as can be seen from its preamble where it is stated:

whereas in order to facilitate the establishment of a single market and to safeguard the citizen in his role as consumer when buying goods and services by contracts which are governed

1.6


Introduction 7

by the laws of other Member States than his own, it is essential to remove unfair terms from those contracts.

It can be argued that differences between the substantive laws of Member States do act as a restriction on intra-Community trade because contracting parties are generally unsure of the legal rules which prevail in the different Member States and are there-fore more hesitant about contracting with people or companies in other Member States. For example, an English supplier selling goods to an Italian customer will generally want to ensure that the contract is governed by English law because he is ignorant of the legal position in Italy. Conversely, the Italian customer will wish to ensure that the contract is governed by Italian law for the reason that he does not know the law in England. This gives rise to what lawyers call the ‘conflict of laws’. If the law was to be the same in each Member State, these problems would not arise, and a further barrier to intra-Community trade would be removed.

The Unfair Terms Directive remains the principal example of the intervention of European law into domestic contract law. But there are other examples and we are beginning to seek the makings of a European law of consumer contracts. Recent examples include the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277), the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 (SI 2013/3134) and the Consumer Protection (Amendment) Regulations 2014 (SI 2014/870).

There have also been attempts to develop a much more expansive role for European law and its institutions in the regulation of contract law. On 1 July 2010, the European Commission issued a Green Paper on ‘policy options for progress towards a European Contract Law for consumers and businesses’ (COM (2010) 348 final). This is the latest stage in a process which has been ongoing for more than a decade.

A range of options is currently on the table. At one end of the spectrum is a ‘non-binding instrument, aiming at improving the consistency and quality of EU legisla-tion’. A non-binding instrument is one which does not have the force of law. A possible model is provided by the Principles of European Contract Law. The Principles were drawn up by the Commission on European Contract Law (a non-governmental body of lawyers drawn from the Member States). The Principles were divided into 17 chapters: general provisions, formation, authority of agents, validity, interpretation, contents and effects, performance, non-performance and remedies in general, particular rem-edies for non-performance, plurality of parties, assignment of claims, substitution of new debtor: transfer of contract, set-off, prescription, illegality, conditions and capitalisation of interest. Reference will be made to the Principles at various points in this book. Another version of a non-binding instrument is the so-called ‘toolbox’ which could be used by the Commission ‘when drafting proposals for new legisla-tion or when reviewing existing measures’. A ‘toolbox’ of this nature has the poten-tial to improve the coherence of European contract law and to improve the quality of European legislation.

At the other end of the spectrum is ‘a binding instrument which would set out an alternative to the existing plurality of national contract law regimes, by providing a single set of contract law rules’. The most radical option is a regulation establishing a European Civil Code, the scope of which would extend beyond contract law. Only slightly less radical is a regulation establishing a European Contract Law which ‘could replace the diversity of national laws with a uniform European set of rules, including mandatory rules affording a high level of protection for the weaker party’. While this


Contract law8

displacement of national rules of contract law would promote the cause of the har-monisation of contract law, it is unlikely that many European States will be willing to take this step in the short to medium term. A further alternative would be to establish a Directive on European Contract Law which ‘could harmonise national contract law on the basis of minimum common standards’. Such a Directive might be of particular benefit to consumers, but it is probably an awkward half-way house that will not find general acceptance. For some, it would be too limited because it does ‘not necessar-ily lead to uniform implementation and interpretation of the rules’, while for others the setting of minimum common standards would represent an unwarranted intrusion into national contract law.

The final option canvassed in the Green Paper is a regulation setting up an optional instrument of European Contract Law. An optional instrument would exist alongside the national law of Member States and would give to contracting parties the choice between domestic (or national) law and the optional instrument. Thus, it would ‘insert into the national laws of the 27 Member States a comprehensive and, as much as pos-sible, self-standing set of contract law rules which could be chosen by the parties as the law regulating their contracts’. The setting up of such a parallel system would not be without difficulty. It would add another level of complexity (given that the optional instrument would exist alongside the various domestic laws of Europe), and it would only have effect if selected by the parties. Contracting parties are probably more likely to select national law in preference to a new, optional instrument. But, if progress is to be made towards the creation of a European contract law, the optional instrument is probably an essential first step on that road.

That first step was taken in the form of a Common European Sales Law (‘CESL’) which was proposed by the European Commission (COM (2011) 635 final). But the pro-posal has encountered numerous objections and such is the strength of these objections that it seems unlikely that it will be implemented. The proposal originally encompassed cross-border contracts for the sale of goods, the supply of digital content and related services but its scope has been significantly narrowed as the proposal has undergone consideration. It is now confined to distance contracts and will focus on contracts con-cluded online. While the proposal has secured the support of the European Parliament, the opposition to it remains substantial, including opposition from the UK government. Even in the unlikely event that such a limited optional instrument secures approval, it will not displace national contract law and so the future of English contract law is safe at least for the medium term.

An international contract law?A broader vision of the future is concerned with the internationalisation of contract law. There are, essentially, two different ways of proceeding. The first is the production of non-binding statements of principle or model contracts; the second is the attempt to impose mandatory uniform rules on the international community.

The first category consists of non-binding statements of principle and model con-tracts or standard contract terms. We shall give one example from each category. The most important example of a non-binding statement of principles is to be found in the UNIDROIT Principles of International Commercial Contracts. The Principles were first published in 1994 and are now in their third edition. The third edition, agreed in 2010, consists of 211 Articles, and each Article is accompanied by a brief commentary setting

1.7


Introduction 9

out the reasons for its adoption and its likely practical application. These Articles are not intended to be imposed upon the commercial community in the form of mandatory rules of law. They are non-binding principles which, it is hoped, parties to international commercial contracts will incorporate into their contracts either as a set of contract terms or as the law applicable to the contract. While national courts are presently either unwilling or unable to recognise the Principles as a valid choice of law and thus the law applicable to the contract, the same cannot be said of arbitrators. The UNIDROIT Principles now have a significant role to play in international commercial arbitration. They are particularly useful where parties from different parts of the world are unable to agree on the law applicable to the contract: the UNIDROIT Principles offer a neutral set of Principles which may be acceptable to both parties to the contract.

Standard contract terms also have an important role to play in international com-merce. Two prominent examples are the INCOTERMS (a set of standard trade terms sponsored by the International Chamber of Commerce) and the FIDIC (Fédération Internationale des Ingénieurs-Conseils) Conditions of Contract for Works of Civil Engineers, which have achieved widespread acceptance in international sales and international construction contracts respectively. There can be little to object to in such developments because they seek to bring about harmonisation through persuasion rather than imposition. Their alleged weakness is, however, the fact that they are not mandatory. They can therefore be ignored or amended by contracting parties and thus are a rather uncertain method of seeking to achieve uniformity.

In an effort to ensure a greater degree of uniformity, it has been argued that there is greater scope for mandatory rules of law. But the attempt to impose uniform terms on the commercial community has given rise to considerable controversy. The most nota-ble example of an international convention in this category is provided by the United Nations Convention on Contracts for the International Sale of Goods, commonly known as the Vienna Convention or CISG. Unlike earlier conventions, the Vienna Convention does not enable states to ratify the Convention on terms that it is only to be applicable if the parties choose to incorporate it into their contract. It provides that, once it has been ratified by a state, the Convention is applicable to all contracts which fall within its scope (broadly speaking, it covers contracts for the international sale of goods) unless the contracting parties choose to contract out of the Convention or of parts thereof. The Convention has been in force since 1988 and, although the United Kingdom has not yet ratified it, it has been ratified by many major trading nations, such as the United States, France, Germany and China. Supporters of such Conventions argue that they promote the development of international trade by ensuring common standards in different nations. Contracting parties can then have greater confidence when dealing with a party from a different nation, and such uniformity should result in lower costs because there will be no need to spend time arguing about which law should govern the transaction, nor will there be any necessity to spend time and money seeking to discover the relevant rules which prevail in another jurisdiction.

But such Conventions have also been the subject of considerable criticism. It is argued that they do not achieve uniformity because national courts are likely to adopt divergent approaches to their interpretation (some courts adopting a literal approach, others a purposive approach). In this way, the aim of achieving uniformity will be undermined. The Vienna Convention took many years to negotiate and, even now, over 30 years after agreement was reached, it has not been adopted by all the major trading nations of the world. Furthermore, it is not at all clear how the Convention will be


Contract law10

amended. The commercial world is constantly on the move, and the law must adapt to the changing needs of the market if it is to facilitate trade. An international code which is difficult to amend is unlikely to meet the demands of traders. It is also argued that such Conventions tend to lack clarity because they are drafted in the form of multicul-tural compromises in an effort to secure agreement and thus lack the certainty which the commercial community requires. Lord Hobhouse (1990), writing extra-judicially, summed up these arguments when he wrote that:

international commerce is best served not by imposing deficient legal schemes upon it but by encouraging the development of the best schemes in a climate of free competition and choice … What should no longer be tolerated is the unthinking acceptance of a goal of uniformity and its doctrinaire imposition on the commercial community.

While these arguments have a great deal of force, they are not universally shared (for a reply, see Steyn, 1994) and it should be noted that they do not deny the value of internationally agreed standards. But it is suggested that they do show that we should proceed by way of persuasion rather than imposition. Attempts to draft international standard form contracts and non-binding statements of the general principles of con-tract law should be encouraged as they are most likely to produce uniform standards which will meet the needs of contracting parties and, in so doing, lower the cost of concluding international contracts.

The role of national contract law in a global economyWhat is the likely role of national contract law in a global economy? This is not an easy question to answer. Much is likely to depend on the various projects currently in exist-ence which aim to produce either a European or an international law of contract. If they are successful, the role for national contract law is likely to diminish considerably. On the other hand, if they are unsuccessful, the national laws of contract will continue to regulate the vast majority of contracts that are made. But it should not be thought that trade across national boundaries is a new thing. It is not. While the volume of such trade has increased significantly in recent years, international trade is not a new phenomenon. Indeed, many of the cases to be discussed in this book were litigated between parties who had no connection with England other than the fact that their contract was governed by English law (usually by virtue of a ‘choice of law clause’ in their contract). The explanation for the choice of English law as the governing law is undoubtedly to be found in England’s great trading history, which has been of great profit to the City of London and English law, if not to other parts of the United Kingdom. The commodities markets have had their centres in England for many years, and many contracts for the sale of commodities are governed by English law. London has also been an important arbitration centre, and a number of our great contract cases started life as arbitration cases which were then appealed to the courts via the stated case procedure, before the latter procedure fell into disrepute and was abolished in the Arbitration Act 1979. The fact that English contract law has had this ‘global’ influ-ence in the past may make English lawyers reluctant to accede to attempts to create a European or an international law of contract: they may have too much to lose if English law diminishes in importance. Of course, much depends on the reasons why contract-ing parties choose English law as the governing law or choose to arbitrate in London. If the reason is to be found in the way in which English lawyers handle disputes or in procedural factors, then there is little for English lawyers to fear from the creation of a

1.8


Introduction 11

European or an international law of contract. But if parties choose English law because of the quality of the substantive law, then the City may well lose out if English contract law is to be abandoned at some future time in favour of some uniform law. The threat to national contract law in the short to medium term is relatively low, but in the longer term it is much harder to quantify, and the arguments for and against the adoption of a uniform law may be governed as much by economics and practical politics as the quality of the uniform law which is ultimately produced.

Contract law and human rightsOne of the most significant events in recent legal history is the enactment of the Human Rights Act 1998, which incorporates the European Convention on Human Rights into English law by creating ‘Convention rights’ which are enforceable in domestic law (Human Rights Act 1998, s 1). The impact which the rights contained in the Convention will have on the law of contract remains somewhat uncertain.

In this introductory chapter, there are two issues which are worthy of brief note. The first is that the Act makes it ‘unlawful for a public authority to act in a way which is incompatible with a Convention right’ (Human Rights Act 1998, s 6(1)). It therefore clearly applies as between a public authority and a natural or a legal person. But does the Act also have ‘horizontal effect’, that is to ask, does it apply between two private citizens or between an individual and a business?

The answer to this question is currently the subject of an extensive debate. It seems clear that the Act has some horizontal effect, in the sense that Convention rights can be invoked in litigation between private parties when seeking to interpret domestic legislation. It is more difficult to discern whether the Act has greater horizontal effect. Support for the proposition that it does may be found in the fact that section 6 includes ‘a court or tribunal’ within the definition of public authority. Given that it is unlaw-ful for the courts, as a public authority, to act in a way which is incompatible with a Convention right, the courts may conclude that they must give effect to the Act even in litigation between two private individuals (where the issue between the parties is not one that relates to the interpretation of domestic legislation). On the other hand, it can be argued that, while the court must not act in a way which is incompatible with a Convention right, given that the Convention does not apply against a private individ-ual, a court cannot act incompatibly with a Convention right if it refuses to apply the Convention in a claim against a private individual. While there remains considerable uncertainty in relation to the extent to which the Act is applicable in litigation between private individuals, there can be no doubt that, at the very least, the Act will apply to contracts entered into by public authorities.

The second question relates to the scope of the ‘Convention rights’ and the extent to which they may be violated by contracts or by the rules of contract law. Some examples are obvious. A contract of slavery would be a violation of Article 4 of the Convention, but English law already refuses to recognise the validity of such a contract. The dif-ficult cases are going to be those rules of contract law which are currently valid but, in fact, can amount to a violation of a Convention right. At the moment, it is only possible to speculate as to which Convention rights may suddenly surface in contract litigation. The most obvious are perhaps Article 6 (which states that ‘in the determination of his civil rights and obligations … everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law’),

1.9


Contract law12

Article 14 (which states that ‘the enjoyment of the rights and freedoms set forth in this Convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, associa-tion with a national minority, property, birth or other status’) and Article 1 of the First Protocol (which states that ‘every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law’). So, attempts to expropriate contract rights or to deny to claimants the right to have their disputes resolved by a court of law may involve a violation of a Convention right.

Here it will suffice to give two examples of the potential impact of Convention rights on the law of contract. The first is the decision of the House of Lords in Wilson v First County Trust Ltd (No 2) [2001] EWCA Civ 633; [2002] QB 74, [2003] UKHL 40; [2004] 1 AC 816, 12 1 in which their Lordships allowed an appeal from the decision of the Court of Appeal ([2001] EWCA Civ 633; [2002] QB 74). The Court of Appeal had made a declaration that section 127(3) of the Consumer Credit Act 1974 was incompatible with the rights guaranteed by Article 6(1) of the Convention and by Article 1 of the First Protocol. Section 127(3) renders an improperly executed consumer credit agree-ment unenforceable by the creditor where the debtor does not sign a document which contains all the prescribed terms of the agreement. The Court of Appeal held that this absolute ban on the enforceability of the agreement was incompatible with the defend-ant pawnbroker’s human rights. The problem identified by the Court of Appeal was that section 127(3) imposes an absolute ban on enforcement, and this was held to be a disproportionate response to the problems created by consumer credit agreements which are not in the prescribed form. In this respect, section 127(3) was contrasted with sections 127(1) and (2) of the 1974 Act, which give to the court a discretion to enforce a consumer credit agreement notwithstanding the failure to comply with formal require-ments. The Court of Appeal stated that the contrast between sections 127(1) and 127(3) was ‘striking’, and they concluded that no reason had been advanced which could justify an ‘inflexible prohibition’ on the enforcement of such agreements when it was possible to regulate the issue by giving the court the power ‘to do what is just in the circumstances of the particular case’.

The House of Lords held that the Court of Appeal had erred in concluding that sec-tion 127(3) was incompatible with Article 6(1) of the Convention. In so deciding, their Lordships emphasised that Article 6(1) cannot be used in order to create a substantive civil right of action which otherwise has no basis in national law. The target of Article 6(1) is procedural bars on bringing claims to court. As Lord Nicholls recognised (at [35]): ‘the distinction between the substantive content of a right and an unacceptable procedural bar to its enforcement by a court can give rise to difficulty in distinguishing the one from the other in a particular case’. But on the present facts, no such difficulty arose. Section 127(3) was a restriction on the scope of the right which the creditor acquired, and it did not bar access to the court in order to decide whether the case was caught by the restriction.

In relation to the claim that there had been a violation of Article 1 of the First Protocol, their Lordships concluded that Article 1 was applicable on the facts of the case but that it had not been breached. Importantly, the House of Lords concluded that the word ‘possessions’ includes contractual rights so that the deprivation of a contractual right may raise human rights issues in an appropriate case (see, for example, Pennycook v Shaws (EAL) Ltd [2004] EWCA Civ 100; [2004] Ch 296 and Breyer Group plc v Department


Introduction 13

of Energy and Climate Change [2014] EWHC 2257 (QB)). On the facts, the majority con-cluded that section 127(3) did operate to deprive the creditor of his contractual rights in such a way as to trigger the operation of Article 1 but that on the facts there had been no breach. Section 127(3) was held to be a ‘legitimate exercise in consumer protec-tion’. Borrowers who fall within the scope of the Consumer Credit Act are often ‘vul-nerable’ and do not bargain on an ‘equal footing’ with lenders. Parliament was entitled to conclude that the protection of such borrowers required the automatic invalidation of contracts which did not satisfy the requirements of the subsection in order to give lenders the strongest incentive to comply with its clear and transparent requirements. The fact that the aim could possibly have been achieved by conferring a discretion on the court to invalidate the contract could not be dispositive. The response of Parliament could not be said to be disproportionate to the policy which underpinned the legislation, and it did not amount to a breach of the Article.

The second example of the potential role of human rights law in the law of contract is provided by the law relating to the regulation of illegal contracts. The law currently refuses to enforce a contract which is illegal or which is contrary to public policy, and it also generally refuses to allow a party who has conferred a benefit on another party to an illegal contract to recover the value of the benefit so conferred. The reason for this is generally that the courts wish to deter parties from entering into illegal contracts (see further Sections 15.17 and 15.18). The law in this area is widely considered to be unsatisfactory, and the Law Commission have begun work on reforming it. But does the Human Rights Act add an extra dimension to the problem? Can a party who has entered into a contract which is illegal or which is contrary to public policy argue that his Convention rights have been violated if a court refuses to enforce the contract or refuses to allow him to recover the value of the benefit which he has conferred on the other party to the contract? Take the example of a contract under which one party promises in return for a fee to procure the marriage of another. There is authority in England which concludes that such a contract is unenforceable (Hermann v Charlesworth [1905] 2 KB 123) but, if a court held that it was bound by authority not to enforce such a contract or to allow the recovery of any benefit conferred under it, could the claim-ant, assuming for now that the Act has horizontal effect, allege that there has been a breach of Article 6 of the Convention? The answer is not entirely clear. The potential significance of Article 6 also surfaced in the Law Commission’s initial Consultation Paper (1999) on reform of the law relating to the effect of illegality on contracts and trusts (on which see Section 15.18). At that time the Law Commission provisionally recommended that the courts should be given a discretion to decide whether or not to enforce an illegal contract or to reverse an unjust enrichment which has occurred under an illegal contract (it was later decided not to take forward this proposal: see Section 15.18). Is a proposal of this nature compatible with the European Convention on Human Rights? In the past, it would not have been necessary to ask this question: if Parliament passed a law which was generally thought to be desirable, it was the task of the courts simply to give effect to it. But today, proposed legislation must be tested for compatibility with Convention rights. The Law Commission identified three provisions of the Convention which could potentially apply to their proposals, namely Article 6, Article 7 (‘no punishment without law’) and Article 1 of the First Protocol. However, they declared that they were ‘confident’ that their proposals are compatible with the Convention. In the case of Article 1 of the First Protocol, the Law Commission stated that, to the extent that the Article was applicable, the public interest provision would


Contract law14

apply and, in the case of Articles 6 and 7, they maintain that no part of their proposals would deny a claimant access to the courts or to a fair and public hearing. The conclu-sion of the Law Commission in this respect was affirmed by the Court of Appeal in Shanshal v Al-Kishtaini [2001] EWCA Civ 264; [2001] 2 All ER (Comm) 601 where it was held, on the facts of that case, that the public interest exception did justify the ‘avail-ability of the common law defence of illegality to a contractual or restitutionary claim based on the commission of a prohibited act’. However, the public interest invoked in Shanshal was stated to be ‘very strong’. In other cases, where the illegality is of a technical nature, and the public interest in refusing to enforce the agreement is conse-quently much lower, the refusal to give effect to the contract may possibly be held to be a disproportionate response. The existence of some uncertainty can be demonstrated by the fact that the Law Commission conclude their consideration of the point by stat-ing that: ‘we would be very grateful if consultees with the relevant expertise could let us know whether they agree with our view that our provisional recommendations do not infringe the European Convention on Human Rights and Fundamental Freedoms, and, if they do not agree, to explain their reasoning’. This demonstrates the uncertainty which currently surrounds the impact which Convention rights may have on private law. Convention rights may yet turn out to be a time bomb ticking away under the law of contract and private law generally.


309

Chapter 18Unfair terms in consumer contracts

Having examined the extent to which English contract law recognises a general doc-trine of unconscionability (see Section 17.6) and noted some examples of legislative provisions which have a role to play in regulating contracts in an effort to protect the most likely victims of inequality of bargaining power (see Section 17.5), it is now time to examine Part 2 of the Consumer Rights Act 2015 which is entitled ‘Unfair Terms’ and, as its title suggests, it regulates unfair terms in consumer contracts concluded between a consumer and a trader. Thus section 62(1) of the Act provides that ‘an unfair term of a consumer contract is not binding on the consumer’. This apparently straight-forward statement contains within it a number of difficult issues. What, for this pur-pose, is a ‘consumer contract’? When is a term in such a contract ‘unfair’? What does it mean to say that a term is not ‘binding’ on the consumer? In seeking to answer these questions it is important to set Part 2 of the Act in its context and to examine its origins and its predecessors.

The background to the ActThe origins of Part 2 of the Consumer Rights Act 2015 are to be found in a European Directive on Unfair Terms in Consumer Contracts (93/13 EEC). The transposition of the Directive into domestic law has proved to be somewhat problematic. Part 2 of the Consumer Rights Act represents the third attempt by the UK to implement the Directive into domestic law. The first attempt is to be found in the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994/3159) which came into force on 1 July 1995 (although the Directive itself came into force on 1 January 1995). The 1994 Regulations were subsequently revoked by the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) which in turn came into force on 1 October 1999. The 1999 Regulations have now been revoked by Part 2 of the Consumer Rights Act.

The European origin of the legislation is important for a number of reasons. The first is that the drafting of the original Directive is not a model of clarity and has been the subject of a number of criticisms (see Hartley, 1996). Unfortunately, Parliament has not always been willing to grapple with these difficulties. Indeed, the 1999 Regulations adopted a technique known as the ‘copy-out’ technique so that the Regulations largely copied out the text of the Directive without attempting to remove the ambiguities or deal with difficulties of interpretation. This approach has advantages in so far as it minimises the potential liability of the State for failure to implement the Directive properly and, in not departing from the text of the Directive, it appears to promote the cause of uniformity in Europe. But this approach also had its disadvantages in so far as it has at times left the law in an unsatisfactory state and triggered litigation the outcome of which was difficult to predict.

The second point of significance which flows from the fact that the legislation has been enacted in implementation of a European Directive relates to the approach which should be adopted when seeking to interpret the legislation. Domestic legisla-tion has traditionally been interpreted literally, with close attention being paid to the precise words which Parliament has chosen to use, and rather less emphasis is placed

18.1


Contract law310

on the purpose or spirit behind the legislation. In contrast, the Court of Justice of the European Union (CJEU) adopts a much more purposive or teleological approach to interpretation which, at times, seems to do some violence to the words which have actually been used in the texts that are being interpreted. An English lawyer must therefore learn to approach the interpretation of the legislation with a less finely tuned linguistic fork and pay greater attention to the purposes which lie behind the Directive and to the other language versions of the Directive. An illustration of this point is provided by a question which arose initially under the 1994 Regulations, namely whether they applied to contracts for the sale of land. At first sight the answer seemed to be ‘no’ because the Regulations referred only to sellers and suppliers of ‘goods’ or ‘services’, and land, as far as English lawyers are generally concerned, is neither a good nor a service. The reference to ‘goods’ and ‘services’ was then deleted in the 1999 Regulations but their deletion did not have the necessary consequence that land thereafter fell within the scope of the Regulations. The Regulations were simply silent on the point. But the French text of the Directive uses the words ‘vendeur de biens’, words which can encompass a seller of both movable and immovable prop-erty. The French text therefore includes land and it would have undermined the goal of uniformity if the Directive were to apply to contracts for the sale of land in France but not to contracts for the sale of land in the United Kingdom. The Court of Appeal in London Borough of Newham v Khatun [2004] EWCA Civ 55; [2005] QB 37, after refer-ring to the background to the Directive and to the use of the word ‘biens’ in the French text, concluded that the Directive and the Regulations do apply to contracts relating to land and the same conclusion now follows under Part 2 of the Consumer Rights Act. In other cases the UK courts have been criticised for their unwillingness to adopt a purposive approach and instead have placed greater emphasis on a careful construc-tion of the wording of the text (see, in particular, the decision of the Supreme Court in Office of Fair Trading v Abbey National plc [2009] EWCA Civ 116; [2009] 2 WLR 1286; [2009] UKSC 6; [2010] 1 AC 696, 310, 314–15, 317, 383, discussed below, which has been criticised on the ground that it took a rather literal approach to the interpretation of the provision in dispute and gave insufficient attention to the purpose of the Directive).

The third point relates to the role of the CJEU in the interpretation of the Directive. There are two issues here. The first relates to the obligation of national courts to make a reference to the CJEU under Article 267 of the Treaty on the Functioning of the European Union if a decision on the correct interpretation of the Directive is necessary to enable the court to give judgment and the matter is not acte clair. Both the House of Lords and the Supreme Court have declined to make a reference in cases concerned with the interpretation of the Regulations/Directive, and their failure to do so has been the subject of some criticism (see Dean, 2002). The second concerns the extent to which the CJEU will see fit to conclude that certain words or phrases in the Directive have an ‘autonomous’ or ‘independent’ meaning to be established by the Court. In VB Pénzügyi Lizing Zrt v Ferenc Schneider (Case C-137/08); [2011] 2 CMLR 1 the CJEU affirmed that its jurisdiction extended to the interpretation of ‘unfair term’ in Article 3(1) of the Directive and that it could also determine the criteria which a national court may or must apply when assessing the fairness of a contractual term. It is then for the national court to apply these criteria to the facts of the case and to decide whether a particular contract term is or is not ‘unfair’ (see also Kásler v OTP Jelzálogbank Zrt Case C-26/13; [2014] 2 All ER (Comm) 443). The interpretation of the Directive and the Regulations is therefore a partnership between the CJEU and national courts.


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A significant criticism of the means chosen to implement the Directive into English law was that no attempt was made initially to integrate either the 1994 or the 1999 Regulations with existing legislation (in particular, the Unfair Contract Terms Act 1977 (UCTA), on which see Sections 11.9–11.15). The decision not to attempt integra-tion created some confusion because there were important differences between UCTA, on the one hand, and the 1994 and the 1999 Regulations on the other hand. The most important one for present purposes is that UCTA is confined in its application to par-ticular types of clause (essentially exclusion and limitation clauses, see Section 11.15), while the Regulations were not confined to any particular type of term in a consumer contract. Thus, the jurisdictional problems which we noted under UCTA (see, for example, Section 11.10) did not arise under the Regulations. But the co-existence of UCTA and the Regulations did create some difficulties and apparent inconsistencies. For example, paragraph 1(a) of Schedule 2 to the 1999 Regulations gave as an exam-ple of a term which was indicatively unfair, a term which had the object or effect of ‘excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier’ notwithstanding the fact that section 2(1) of UCTA provides that any attempt to exclude or restrict business liability for death or personal injury caused by negligence is of no effect (see Section 11.10). Thus such a term was void by virtue of section 2(1) of UCTA but was only indicatively unfair as far as the Regulations (a subse-quent statutory instrument) were concerned. While it was highly unlikely that a court would have taken the view that the Regulations had impliedly repealed section 2(1) of UCTA (see Reynolds, 1994), the procedure adopted by Parliament has little to com-mend it.

It was the desire to produce a more coherent set of rules that led the Law Commission and the Scottish Law Commission (2005) to recommend that the Regulations and UCTA be replaced by a single, unified regime. This recommendation has not been enacted in the form originally envisaged by the Law Commissions but there is little doubt that the work of the Law Commissions has been extremely influential in relation to the enactment of Part 2 of the Consumer Rights Act. Rather than produce a single, unified regime, the approach which has been adopted is to take consumer contracts out of UCTA, leaving the latter to deal principally with contracts concluded between par-ties both of whom are acting in the course of a business. The regulation of unfair terms in consumer contracts will henceforth be governed by Part 2 of the Consumer Rights Act and not by UCTA. Having set out the background to Part 2, we shall now turn to consider its principal provisions.

What is a consumer contract?Part 2 of the Act applies to a contract between a ‘trader’ and a ‘consumer’ (s 61(1)). A trader is defined in section 2(1) of the Act as a ‘person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf’ (which definition is applicable to Part 2 of the Act by virtue of s 76(2)). A ‘business’ for this purpose includes the activities of any government department or local or public authority (s 2(7)). The definition of trader is therefore wide enough to encompass charities and other not-for-profit organisations where they are acting for the purpose of their business in, for example, selling goods to the general public.

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A ‘consumer’ is defined in section 2(3) as ‘an individual acting for purposes that are wholly or mainly outside the individual’s trade, business, craft or profession’ (which definition is applicable to Part 2 of the Act by virtue of s 76(2)). There are a number of points to note here. The first is that a consumer must be an ‘individual’. A company can-not, for this purpose, claim to be a consumer (in this respect differing from the approach which had been taken in the now repealed section 12 of UCTA). Second, the definition of a consumer is broad. An individual will be a consumer provided that he or she was act-ing for purposes ‘wholly or mainly’ outside his or her trade, business, craft or profession. The words ‘wholly or mainly’ have been added into the Act and were not to be found in the previous Regulations, nor are they contained in the Directive itself. The princi-pal effect of the extension will be, for example, to permit an individual who purchases a computer which is used occasionally for business purposes to claim the protection of Part 2 of the Act. Third, it is for a trader to prove that an individual was not acting for purposes wholly or mainly outside the individual’s trade, business, craft or profession (s 2(4)). Fourth, the Act excludes certain contracts entered into by consumers from its scope. Thus section 61(2) provides that contracts of employment or apprenticeship do not fall within the scope of Part 2. However, the Act does include within its scope a ‘consumer notice’ which is defined as a notice which relates to rights or obligations as between a trader and a consumer or purports to exclude or restrict a trader’s liability to a consumer (s 61(4)).

Both the Regulations and the Directive contained a further requirement which had to be satisfied before a term could be challenged on the ground that it was unfair. That requirement was that the term in the contract must not have been ‘individually negoti-ated’. A term was not individually negotiated where it had been drafted in advance and the consumer had therefore not been able to influence the substance of the term (see regulation 5(2) of the 1999 Regulations and Article 3(2) of the Directive). This requirement has now been removed so that the consumer is entitled to claim the pro-tection of Part 2 even when the term has been individually negotiated with the trader. It is difficult to assess the significance of this extension. While consumers may well seek to negotiate the price that is payable, it is less likely that they will seek to negotiate the type of term likely to fall within the scope of Part 2. But, where they do, the term will still fall within the scope of Part 2 and the fact that the term has been negotiated will only be of relevance in so far as it is a factor which may be relied upon by the trader for the purpose of demonstrating that the term was fair.

When is a contract term unfair?The core of the legislation is to be found in the definition of ‘unfair term’ which is con-tained in section 62(4) in the following terms:

A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer.

A virtually identical test is applied to a consumer notice (see s 62(6)). It can be seen that there are two key components to the definition of an ‘unfair term’. The first is that the term must cause a ‘significant imbalance’ in the rights and obligations of the parties to the detriment of the consumer and the second is that a term is unfair if it is ‘contrary to the requirement of good faith’. What is the relationship between these two components? Earlier drafts of the Directive distinguished clearly between significant

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imbalance and incompatibility with the requirement of good faith: they were alterna-tive rather than cumulative grounds of unfairness. Thus, a draft of the Directive stated that a contract term was unfair if:

it causes to the detriment of the consumer a significant imbalance in the parties’ rights and obligations arising under the contract, or

it causes the performance of the contract to be unduly detrimental to the consumer, orit causes the performance of the contract to be significantly different from what the consumer

could legitimately expect, orit is incompatible with the requirements of good faith.

But in the final version of the Directive and the Act, the test appears to be cumulative. In Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481 the House of Lords emphasised both elements in the equation so that a consumer will have to show both an absence of good faith and significant imbalance before a court will conclude that a term is ‘unfair’, albeit that, as Lord Steyn observed, there is a ‘large area of overlap between the concepts of good faith and significant imbalance’ (see also UK Housing Alliance (North West) Ltd v Francis [2010] EWCA Civ 117; [2010] 3 All ER 519, [21]).

The reference to ‘the requirement of good faith’ had the potential to be prob-lematic for English lawyers because, as we have already noted (see Section 12.10), good faith is not a standard which is generally employed in English contract law, although it is more familiar to our civilian counterparts. Nevertheless, the House of Lords in Director General of Fair Trading v First National Bank (above) did not experience undue difficulty in giving a meaning to the words ‘good faith’ when called upon to interpret the 1994 Regulations. They emphasised its connec-tion to fair and open dealing and it is likely that the courts will use the good faith standard in order to promote fair and open dealing, to create an expectation that the trader will draw the existence of the term and its principal effects to the con-sumer and to prevent unfair surprise (see West v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316; [2014] BLR 324, [58]). To similar effect the CJEU in Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) (C-415-11); [2013] 3 CMLR 5 stated that, when seeking to decide whether the imbalance has arisen con-trary to the requirement of good faith, the court must consider whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably have assumed that the consumer would agree to the term had they been the subject of individual contract negotiations. The 1994 Regulations contained some further guid-ance as to the meaning of ‘good faith’. Schedule 2 to these Regulations stated that in making an assessment of good faith particular regard should be had to the strength of the bargaining positions of the parties, whether the consumer had an inducement to agree to the term, whether the goods or services were sold or supplied to the spe-cial order of the consumer, and the extent to which the seller or supplier had dealt fairly and equitably with the consumer. These factors bore a strong resemblance to the factors taken into account by the courts when assessing the reasonableness of an exclusion clause under UCTA and so had a familiar resonance for English lawyers. However Schedule 2 to the 1994 Regulations was deleted from the 1999 Regulations and has not been re-enacted in the Consumer Rights Act. This does not mean that these factors are no longer relevant. They are all mentioned in the preamble to the Directive and so a court may still make reference to them notwithstanding the fact that they no longer appear on the face of the Act.


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In relation to the meaning of ‘significant imbalance’, it should be noted that it is not sufficient to show that there is an imbalance. It is necessary to go further and show that the imbalance is ‘significant’ (Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch); [2011] ECC 31, [174]). This reference to imbalance is clearly directed towards substantive unfairness (that is, unfairness in the terms or the substance of the contract) rather than procedural unfairness (that is, unfairness in the procedure by which the contract was concluded). As Lord Bingham observed in Director General of Fair Trading v First National Bank, [17] the requirement of signifi-cant imbalance ‘is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour’.

However, the inquiry into the fairness of a term does not depend entirely on the meaning of the words ‘significant imbalance’ and ‘contrary to the requirement of good faith’. Further guidance can be derived from section 62(5) which states that the fairness of a contract term shall be assessed ‘taking into account the nature of the subject matter of the contract’ and ‘by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends’. It should be noted that the time at which the assessment is to be conducted is the time at which the term was agreed, not the time at which it is challenged. But these tests are set at a high level of abstraction and will not easily yield predictable results when applied to the facts of individual cases. Rather more concrete guidance may be gleaned from the following two sources.

The first is to be found in Part 1 of Schedule 2 to the Act which provides ‘an indica-tive and non-exhaustive list of terms of consumer contracts that may be regarded as unfair’ for the purposes of Part 2 of the Act (s 63(1)). It should be noted that inclu-sion in the list does not mean that the term is unfair. It only means that it may be unfair: in this sense it is a grey list rather than a black list. The grey list goes beyond attempts to exclude or limit liability for negligence or breach of contract and encom-passes, for example, terms which purport to make ‘disproportionately high’ sums payable by the consumer who fails to fulfil his obligations under the contract, terms which enable the trader to alter the terms of the contract unilaterally without a valid reason which is specified in the contract, and terms which have the effect of irrevoca-bly binding the consumer to terms with which he had no real opportunity of becom-ing acquainted before the conclusion of the contract. The legislation therefore has a broad reach and its reach was broadened with the enactment of the Consumer Rights Act 2015, where the opportunity was taken to add three more contract terms to the grey list.

The second source is to be found in a number of decided cases in which the courts have considered what constitutes an unfair term. Although these cases were decided under the 1994 or the 1999 Regulations, the approach adopted in these cases would appear to be applicable under the 2014 Act given the similarity in language between the provisions. When deciding whether a term is or is not unfair, the identity of the party putting forward the term would appear to be of considerable significance. Where the term is put forward by the consumer, or by the consumer’s professional advisers, the term is unlikely to be unfair (Bryen & Langley Ltd v Boston [2005] EWCA Civ 973; [2005] BLR 508), unless, perhaps, the adviser did not inform the consumer of the draw-backs of the clause. But where the term is put forward by the contractor, the term may be held to be unfair, although the inference is by no means inevitable. In such a case, a contractor must be prepared to assume the burden of proving the fairness of the term,



and in particular that the term has been brought to the attention of the consumer and that the consumer has understood its implications. A court may be more willing to find that a term is not unfair where the consumer has substantial business experience and so should be expected to understand the significance of the term which he or she is seeking to challenge (West v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316; [2014] BLR 324).

Section 71 of the Act provides that in relation to proceedings before a court which relate to a term of a consumer contract, the court must consider whether the term is fair even if none of the parties to the proceedings has raised the issue or indicated that it intends to do so provided that the court has before it sufficient legal and factual material to enable it to consider the fairness of the term. In this way a duty has been imposed upon the courts to consider the fairness of a term in a consumer contract. The intent here is to give effect to case law of the CJEU which has emphasised this proac-tive duty of the court so that the onus is not left entirely with the consumer, who may be unaware of his or her rights, to raise the point that the term which is in dispute between the parties may be unfair.

In order to reduce the possibility of evasion, section 72 of the Act provides for the application of Part 2 of the Act to ‘secondary contracts’ which comes into play where a term of a contract reduces the rights or remedies or increases the obligations of a per-son under another contract, which is defined as ‘the main contract’. Take, for example, the case in which the manufacturer of a product includes a term in a direct contract with the consumer which purports to restrict the consumer’s rights against the retailer who sells the goods to the consumer. In such a case the term of the secondary contract between the manufacturer and the consumer is subject to the controls to be found in Part 2 of the Act.

Exclusion from assessment of fairnessNot all terms in consumer contracts are subject to assessment for their fairness. Some terms are exempt from assessment. Thus Part 2 of the Consumer Rights Act is stated not to apply to a term of a contract, or to a notice, to the extent that it reflects manda-tory statutory or regulatory provisions or the provisions or principles of an interna-tional convention to which the United Kingdom or the EU is a party (s 73). The reason for this exclusion is that, in such cases, the trader has no option but to include the term in its contract and it is therefore exempt from review.

The most difficult exemption in practice has proved to be the exemption that relates to what have been called the ‘core terms’ of the contract. These ‘core terms’ may be described broadly as terms which define the main subject-matter of the contract and which determine the price payable. While it may seem odd at first sight to exclude such ‘core terms’ from assessment in this way, it has been suggested that the object of the exemption is ‘to exclude from assessment for fairness that part of the bargain that will be the focus of a customer’s attention when entering into a contract’ (Office of Fair Trading v Abbey National plc [2009] EWCA Civ 116; [2009] 2 WLR 1286; [2009] UKSC 6; [2010] 1 AC 696, 310, 314–15, 317, 383 [79]). In other words, the aim behind the Directive is to prevent the ‘unfair surprise’ of the consumer. While consumers tend to be aware of the price of the goods or services and the definition of the main subject-matter of the contract provided that they are set out in clear terms, they tend to be unfamiliar with, and hence surprised by, the myriad of terms found in the ‘small-print’ of consumer

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contracts. It is the latter clauses, generally to be found in the small-print of the contract, which are the subject of regulation. Although the general idea behind the exclusion can be readily understood, it has proved to be more difficult to translate it into a clear legal rule, as can be seen from the different ways in which the rule has been expressed and the litigation which the exemption has triggered in the courts. In seeking to explain the applicable rules we shall start with the Directive and then consider the evolution of its transposition into English law.

Article 4(2) of the Directive provides that:

assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.

Article 4(2) of the Directive was implemented into English law initially in Regulation 3(2) of the 1994 Regulations and then by Regulation 6(2) of the 1999 Regulations. The latter provided:

In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate –

(a) to the definition of the main subject matter of the contract, or(b) to the adequacy of the price or remuneration, as against the goods or services supplied in

exchange.

The equivalent provision in the Consumer Rights Act is section 64(1) which provides that:

A term of a consumer contract may not be assessed for fairness under section 62 to the extent that –

(a) it specifies the main subject matter of the contract, or(b) the assessment is of the appropriateness of the price payable under the contract by com-

parison with the goods, digital content or services supplied under it.

Section 64(2) continues by providing that s 64(1) excludes a term from an assessment under section 62 only if it is ‘transparent and prominent’. A term that is included in the grey list in Part 1 of Schedule 2 cannot fall within the scope of section 64.

Although expressed in slightly different language, the essence of these provisions is to exclude from review terms which define the main subject-matter of the contract or which determine the price as long as they are in plain intelligible language (or, to use the language of the Consumer Rights Act 2015, are transparent and prominent). Thus stated, there appear to be three issues to be resolved (although there is a degree of inter- relationship between them). The first relates to the identification of the term that is excluded from assessment (the term which defines the main subject-matter of the contract and the price term). The second relates to the nature of the exclusion from assessment: is it the case that the term is excluded from assessment entirely or is it only excluded from certain forms or types of assessment? The final issue relates to the require-ment that the term be expressed in ‘plain intelligible language’ or that it be ‘transparent and prominent’. We shall consider the first two issues in relation to the main subject-matter of the contract and the price term before turning to the requirement that these terms be expressed in plain intelligible language or are transparent and prominent.

The first exclusion relates to terms which define or specify the ‘main subject matter of the contract’. It can be seen that the language used in the Directive, the Regulations and the Consumer Rights Act in this context is virtually identical. In Kásler v OTP



Jelzálogbank Zrt (Case C-26/13); [2014] 2 All ER (Comm) 443 the CJEU held that this exclusion encompassed those terms that ‘lay down the essential obligations of the con-tract and, as such characterise it’ and not terms that are ‘ancillary to those that define the very essence of the contractual relationship’. The distinction between an ‘essen-tial’ and an ‘ancillary’ term is a question of interpretation which requires the court to examine the disputed term in its legal and factual context. But the fact that we are here concerned with a ‘derogation’ from the general fairness test requires the court to adopt a ‘strict’ construction of the exemption. A court can therefore be expected to examine a contract term with some care in order to ascertain whether or not it defines or specifies the main subject-matter of the contract. A term which is held to fall within this category would appear to be an exempt term so that it cannot be examined for unfairness at all (although contrast Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch); [2011] ECC 31, [153] where Kitchen j held that the term was not exempt from any assessment of its fairness and that the assessment which was pre-cluded was one that related to ‘the definition of the main subject matter of the contract, that is to say its meaning, description and clarity’).

The second exclusion relates to the ‘adequacy’ or ‘appropriateness’ of the price or remuneration ‘as against’ or ‘by comparison with’ the goods or services supplied in exchange. The change from ‘adequacy’ to ‘appropriateness’ made in the Consumer Rights Act is probably not a change of substance given that, as Lord Mance observed in Office of Fair Trading v Abbey National plc [2009] EWCA Civ 116; [2009] 2 WLR 1286; [2009] UKSC 6; [2010] 1 AC 696, 310, 314–15, 317, 383, [94], ‘adequacy’ here means ‘appropriateness or reasonableness (in amount)’. However, the nature of this exemp-tion and whether the term is excluded from assessment for fairness in its entirety or is only excluded from certain forms of assessment has proved to be an issue of some controversy. That controversy is best illustrated by reference to the leading cases con-cerned with the interpretation of this particular exemption.

The first such case is the decision of the House of Lords in Director General of Fair Trading v First National Bank plc [2001] UKHL 52; [2002] 1 AC 481, [34] where Lord Steyn stated that the definition of a ‘core term’ must be interpreted ‘restrictively’ so that the main purpose of the scheme is not ‘frustrated by endless formalistic arguments as to whether a provision is a definitional or an exclusionary provision’. On the facts of Director General of Fair Trading v First National Bank the defendant bank argued that a term in a loan agreement which provided that, should the customer default on repay-ments to the bank, the bank would be entitled to recover from the customer the whole of the balance on the customer’s loan account together with outstanding interest, and the costs of seeking judgment was part of the bank’s remuneration so that the court was not entitled to scrutinise the term in the name of fairness. The House of Lords rejected this submission. Lord Bingham stated that the term did not concern the adequacy of the interest earned by the bank as its remuneration but was designed to ensure that the bank’s entitlement to interest did not come to an end on the entry of judgment. It was not a term which expressed the substance of the bargain between the parties. Rather it was a default provision which was not directly related to the price charged for the loan or to its adequacy. It was therefore no more than an incidental (possibly an important incidental) term of the agreement between the parties.

The second case is the decision of the Supreme Court in Office of Fair Trading v Abbey National plc [2009] EWCA Civ 116; [2009] 2 WLR 1286; [2009] UKSC 6; [2010] 1 AC 696, 310, 314–15, 317, 383 where the issue before the court concerned a number of terms in


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contracts between banks and their customers. In broad terms, the litigation raised the question whether the fairness of bank charges levied on personal current account holders in respect of what may be termed ‘unauthorized overdrafts’ could be challenged under the 1999 Regulations. To the surprise of many, the Supreme Court held that they could not be so challenged. It held that Regulation 6(2)(b) excluded from assessment not only ‘essential’ price or remuneration terms but that it extended to ‘any monetary price or remuneration payable under the contract’. The width of this exclusion can be demon-strated by the outcome of the litigation itself. The Supreme Court held that the various bank charges constituted part of the price or remuneration for the banking services provided by the banks and, given that the terms were found to be in plain, intelligible language, any assessment of the fairness of those terms which related to their adequacy as against the services supplied was excluded by Regulation 6(2)(b). It was held that the words ‘related to their adequacy as against the services supplied’ are important because they emphasise the fact that it is not the term itself which is excluded from assessment. Instead, the term is excluded from certain forms of assessment (namely, on grounds of price/quality ratio) but can be subject to challenge on other grounds (for example, on the ground that it is unfair because of its other, discriminatory effects). The latter point is not unimportant given that it holds out the prospect that the terms could be open to challenge on grounds other than the price/quality ratio.

How can the decision in Director General of Fair Trading v First National Bank be rec-onciled with the decision of the Supreme Court in Office of Fair Trading v Abbey National plc? The answer given by the Supreme Court in Office of Fair Trading v Abbey National plc was that the term in question in Director General of Fair Trading v First National Bank was a ‘default provision’ ([43]) or concerned an ‘ancillary payment’ ([113]) which was not part of the price or remuneration for the goods or services to be supplied. However, notwithstanding these explanations, the line of distinction between the two cases is not at all clear. While in formal terms it may be possible to distinguish the two cases, it is more difficult to distinguish them in substantive terms. There was a fear that the spirit of Director General of Fair Trading v First National Bank had been undermined by the Supreme Court in Office of Fair Trading v Abbey National plc and that the decision in the latter case threatened to emasculate the legislation. The decision of the Supreme Court in Abbey National has been criticised on a number of grounds, principally: (i) it adopted a literal approach to the interpretation of the Regulations; (ii) it failed to pay sufficient attention to the purpose behind the Directive; (iii) it failed to protect consum-ers against unfair surprise; and (iv) the scope of the decision was not clear and it thus introduced considerable uncertainty into the law.

The third and final case is the decision of the CJEU in Kásler v OTP Jelzálogbank Zrt (Case C-26/13); [2014] 2 All ER (Comm) 443 where it was held that this exclusion was ‘limited in scope’ because it concerned ‘only the adequacy of the price or remunera-tion as against the services or goods supplied in exchange’. Thus the exclusion is not of the term itself (as it is in the case of a term which defines the main subject-matter of the contract) but only an exclusion from certain forms of assessment, namely in rela-tion to the ‘adequacy of the price and the remuneration on the one hand as against the services or goods supplied on the other’. On this basis, a contract term, whether essen-tial or ancillary, cannot be assessed for fairness by comparing the adequacy of the price against the services or goods supplied in exchange. If the term relates to aspects of the price other than the amount, such as the time at which payment is to be made, the term may be assessed for fairness provided that the amount of the price is not assessed as part of this process.



It is, however, important to remember that the term is only excluded from assess-ment if it is in ‘plain intelligible language’ (as required by the Directive) or is ‘trans-parent and prominent’ (as required by the Consumer Rights Act). The terminological change which was introduced in the Consumer Rights Act was heavily influenced by the work of the Law Commissions (2012 and 2013) who were asked to review the exclusion in Regulation 6(2) of the 1999 Regulations after the decision of the Supreme Court in Office of Fair Trading v Abbey National plc. Their conclusion was that the law should be simplified and that a price term should only be excluded from review if it is transparent and prominent. The essential idea was that if a term was transparent and prominent, it would be subject to competitive pressures (because consumers would be aware of the term and so better able to compare it with other terms on offer) and so should not be assessed for fairness. It was hoped that this explicit emphasis on ‘promi-nence’ would go some way to address the problem of the ‘hidden price term’ which qualified the headline price of the goods or services in a way that was detrimental to the consumer.

But it may be that this change is one of terminology rather than substance. The requirement that the term be transparent may be no more than another way of say-ing that the term must be in plain intelligible language. The requirement that the term be ‘prominent’ appears at first right to be more demanding but may do no more than make explicit a requirement that was previously implicit in the plain intelligible lan-guage test. Further consideration of the significance of the change requires us first to give consideration to the phrase ‘plain intelligible language’.

The requirement for the term be in plain intelligible language demands more than that the term be free from ambiguity. In this sense, it is not to be equated with the contra proferentem rule (on which see Sections 9.6 and 11.5). It requires that the term must be such as to enable the typical consumer to have a proper understanding of the term for sensible and practical purposes (Office of Fair Trading v Abbey National plc [2009] EWCA Civ 116; [2009] 2 WLR 1286). Not only must the actual wording be comprehen-sible to the consumer, but the typical consumer must be able to understand how the term affects the rights and obligations that he and the seller or supplier have under the contract. It is not, however, necessary that the consumer be put in a position to be able to make a fully informed choice about whether to enter into a contract on the standard terms of the seller or supplier. Further, the mere fact that there are inconsist-encies in the document does not necessarily preclude a finding that the language of the term is plain and intelligible provided that the average consumer who read the document carefully would have no doubt as to the meaning of the term (Office of Fair Trading v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch); [2011] ECC 31, [158]). In Kásler v OTP Jelzálogbank Zrt (Case C-26/13); [2014] 2 All ER (Comm) 443 the CJEU held that the ‘plain intelligible language’ test requires ‘not only that the relevant term should be grammatically clear and intelligible to the consumer, but also that the economic reasons for using that term and its relationship with other contractual terms should be clear and intelligible to him’ so that the consumer ‘is in a position to evalu-ate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it’.

Given the rather demanding nature of the ‘plain intelligible language’ test, the change in the Consumer Rights Act to ‘transparent and prominent’ may be more a change of nomenclature than a change of substance. A term is stated to be ‘transparent’ if it is expressed in plain and intelligible language and (in the case of a written term) is legible (section 64(3)). A term is ‘prominent’ if it is brought to the consumer’s attention


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in such a way that the average consumer would be aware of the term (section 64(4)). An ‘average consumer’ for this purpose is one who is reasonably well-informed, observant and circumspect (section 64(5)). It can be seen that there are similarities between these definitions and the requirements of the plain intelligible language requirement, at least as set out in Kásler. Although the change may be largely one of terminology, it may be that English lawyers will find the labels ‘transparent and prominent’ easier to use than the ‘plain intelligible language’ test. As the Law Commissions stated (2013 at 3.16):

the emphasis on prominence … offers a practical way of distinguishing between a headline price and what are commonly thought of as incidental or ancillary terms. It also emphasises that whether a term is exempt is within the control of the trader. A trader may ensure that a price is exempt from review by making it prominent.

The aim here would appear to be to give the trader a choice. It can set out the price of the goods or services in a transparent and prominent way and in return will obtain exemption from the fairness test, at least in its application to that price term. It is then for the consumer to decide whether or not he or she wishes to enter into the contract on the terms offered or to shop elsewhere. Alternatively, the trader can seek to hide aspects of the price term or obfuscate them in some way. Such a trader may succeed in confusing the customer as to the actual price that he or she will pay for the goods or services but the risk which the trader runs in taking such a step is that the price term may be more likely to be reviewed for fairness.

Liabilities that cannot be excluded or restrictedThe Consumer Rights Act also provides that there are certain liabilities that cannot be excluded either by a term of a consumer contract or by a consumer notice. One exam-ple, found in section 65, is that a trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence. This is the consumer equivalent to section 2(1) of the Unfair Contract Terms Act 1977 (see Section 11.10). In most respects section 65 resembles section 2(1) of UCTA. Thus ‘negligence’ is defined as a breach of an obligation to take reasonable care or exer-cise reasonable skill in the performance of a contract, the breach of a common law duty to take reasonable care or exercise reasonable skill or the breach of the common law duty of care imposed by the Occupiers’ Liability Act 1957 (s 65(4)). Personal injury is stated to include ‘any disease and any impairment of physical or mental condition’ (s 65(3)). An act is not prevented from being an act of negligence on the ground that the breach of duty was intentional rather than inadvertent, or because liability for it arose vicariously rather than directly (s 65(5)). However, the prohibition in section 65 does not apply to any contract of insurance or to a contract that relates to the creation or transfer of an interest in land (s 66(1)), nor does it affect the validity of any discharge or indemnity given by a person in consideration of the receipt by that person of compen-sation in settlement of any claim the person has (s 66(2)).

Other examples of liabilities that cannot be excluded or restricted are to be found in sections 31, 47 and 57 of the Consumer Rights Act. Taking section 31 as our example, it provides that a term of a contract to supply goods is not binding on the consumer to the extent that it would exclude or restrict the trader’s liability arising under sections 9–17, 28 or 29 of the Act. So, for example, a trader cannot exclude liability to a consumer in respect of the supply of goods that are not of satisfactory quality (s 9), the supply of goods that are not fit for their purpose (s 10) or do not match their description (s 11).

18.5



The consequence of a finding that a term is unfairWhere a term is held to be unfair, the consequence is that it is ‘not binding on the con-sumer’ but ‘the contract continues, so far as practicable, to have effect in every other respect’ (s 67). In Kásler v OTP Jelzálogbank Zrt (Case C-26/13); [2014] 2 All ER (Comm) 443 it was held that a court may delete an unfair term from the contract and replace it with a supplementary provision drawn from national law. A court might be expected to do this where the deletion of the unfair term would have unfortunate consequences for the consumer and these consequences could be alleviated by inserting a rule drawn from the applicable national law which did not contain the unfairness found to be pre-sent in the deleted unfair contract term. Section 68 further states that a trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is ‘transparent’ and transparency for this purpose means that the term is expressed in plain and intelligible language and is legible. If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is most favourable to the consumer is to prevail (s 69(1)). The requirement that any doubt be resolved in favour of the consumer is probably no more than what English contract lawyers would call the contra proferentem rule (see Sections 9.6 and 11.5).

EnforcementThe enforcement provisions are also of considerable importance. Consumers tend to be reluctant to resort to litigation to enforce their rights and so some additional enforcement is necessary in order to give the legislation some bite (see s 70). The 1994 Regulations gave the Director General of Fair Trading power to intervene to prevent the continued use of unfair terms in consumer contracts and considerable use was made by the Office of Fair Trading of these powers (see Bright, 2000). But no other body was at that time given enforcement powers. Consumer bodies argued that this restriction constituted a failure to implement the Directive properly, and the govern-ment eventually gave way and agreed to increase the number of bodies with enforce-ment powers in the 1999 Regulations. The organisations to which enforcement powers were given consisted of a number of statutory bodies together with the Consumers’ Association. These extensions have been retained in Schedule 3 to the Consumer Rights Act where these bodies are described as ‘regulators’. The list of regulators in paragraph 8 of Schedule 3 now includes the Information Commissioner, the Gas and Electricity Markets Authority, the Office of Communications, the Water Services Regulation Authority, the Office of Rail Regulation and the Financial Conduct Authority. The principal role as regulator is given to the Competition and Markets Authority (‘CMA’) which has assumed the role previously played by the Office of Fair Trading. Its lead-ing role is reflected in the fact that if another regulator wishes to consider a complaint about an unfair term it must first notify the CMA, and there is a similar notification obligation in the event that another regulator wishes to make an application for an injunction to restrain the continued use of an unfair term.

The principal obligations and powers of the regulators are to (i) consider complaints about unfair terms, (ii) investigate such complaints and make use of the investigatory powers that are given to them and (iii) apply to court for an injunction to restrain the use of unfair terms. Paragraph 2 to Schedule 3 of the Consumer Rights Act provides that a regulator ‘may’ consider a complaint about a term of a consumer contract, a term

18.6

18.7


Contract law322

proposed for use in a consumer contract, a term which a third party recommends for use in a consumer contract or a consumer notice. The regulator is therefore empowered but not obliged to consider such a complaint. The investigatory powers given to regu-lators are set out in Schedule 5 to the Act (where they are described as ‘an unfair con-tract terms enforcer’). The powers given to enforcers in Parts 3 and 4 of Schedule 5 are extensive, including, for example, the giving of a notice requiring a person to provide the enforcer with the information specified in the notice.

Paragraph 3 of Schedule 3 provides that a regulator may apply for an injunction against a person if the regulator thinks that the person is using, or proposing or recom-mending the use of, a term or notice which (i) purports to exclude or restrict a liability which cannot be excluded under sections 31, 47, 57 or 65(1) of the Act (on which see Section 18.5); (ii) ‘is unfair to any extent’ within the meaning of Part 2 of the Act; or (iii) breaches the requirement for transparency set out in section 68. A regulator may apply for an injunction even in the case where it has not received a complaint about the term or notice. To this extent, the regulator is entitled to act on its own initiative. On an application for an injunction the court may grant the injunction on such conditions, and against such of the respondents, as it thinks is appropriate (paragraph 5 of Schedule 3). The injunction may include provision about a term or notice to which the application relates or any term of a consumer contract, or any consumer notice, of a similar kind or with a similar effect. A regulator may accept an undertaking from a person against whom it has applied, or thinks it is entitled to apply for an injunction under paragraph 3. The undertaking may provide that the person will comply with the conditions that are agreed between that person and the regulator about the use of terms or notices, or terms or notices of a kind, specified in the undertaking (paragraph 6 of Schedule 3). This is a useful provision in so far as it removes the necessity for the regulator to apply to court for an injunction in the case where it can obtain a satisfactory undertaking from the per-son who was previously using or relying upon the unfair term or notice.

The CMA must arrange the publication of details of any application it makes for an injunction under paragraph 3 of Schedule 3 and any injunction or undertaking it has obtained under Schedule 3. In this way publicity will be given to enforcement of the leg-islation and this may help to achieve the aim of the legislation in substantially reducing, if not eliminating, the use of unfair terms in the small-print in consumer contracts.

Summary ◗ Part 2 of the Consumer Rights Act 2015 regulates unfair terms in contracts concluded between

a trader and a consumer and provides that an unfair term of a consumer contract is not binding on the consumer.

◗ A trader is a person acting for purposes relating to that person’s trade, business, craft or profession, and a consumer is an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession.

◗ A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer.

◗ Good faith demands fair and open dealing and requires the court to consider whether the trader, dealing fairly and equitably with the consumer, could reasonably have assumed that the consumer would agree to the term had they been the subject of individual contract negotiations.



Summary cont’d ◗ There exists a significant imbalance if a term is so weighted in favour of the trader as to tilt the

parties’ rights and obligations under the contract significantly in the trader’s favour.

◗ Part 1 of Schedule 2 to the Act contains an indicative and non-exhaustive list of terms of consumer contracts that may be regarded as unfair. The list is a ‘grey list’ so that inclusion on the list does not have the automatic consequence that the term is unfair. But inclusion in the list is likely to play an important role when considering whether a term is unfair.

◗ No assessment can be made of the fairness of any term which (i) specifies the main subject-matter of the contract or which (ii) concerns the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it provided that the term is transparent and prominent.

◗ A term is transparent if it is expressed in plain and intelligible language and (in the case of a written term) is legible. A term is prominent if it is brought to the consumer’s attention in such a way that an average consumer would be aware of it.

◗ Certain liabilities in consumer contracts cannot be excluded or restricted. For example, a trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence.

◗ Where a term is held to be unfair, the consequence is that it is not binding on the consumer but the contract continues, so far as practicable, to have effect in every other respect.

◗ A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent.

◗ If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is more favourable to the consumer is to prevail.

◗ Enforcement of Part 2 of the Consumer Rights Act is not left entirely to the consumer. A number of regulators are given power to respond to complaints, to investigate them and, in certain circumstances, seek an injunction to restrain the continued use of unfair terms in consumer contracts. The principal regulator is the Competition and Markets Authority.

18.1 Who is a consumer for the purposes of Part 2 of the Consumer Rights Act 2015? Who is a trader?

18.2 When is a term in a consumer contract unfair for the purposes of Part 2?

18.3 What is meant by ‘the requirement of good faith’ and ‘significant imbalance’ and what role do these elements play when seeking to decide whether a term is unfair?

18.4 Would Office of Fair Trading v Abbey National plc be decided the same way under section 64 of the Consumer Rights Act?

18.5 Why does the Act provide that a trader cannot by a term of a contract exclude or restrict certain liabilities while permitting it to exclude or restrict other liabilities provided that the term is not unfair?

18.6 What effect, if any, is given to an unfair term in a consumer contract and what is the impact of the unfair term on the contract as a whole?

18.7 Why might the enforcement provisions contained in Schedules 3 and 5 to the Act be important for the success of the legislation?

Exercises


399

acceptancecommunication of, 34–5conduct, by, 34mistake, effect of, in making, 52–9post, by, 37–9prescribed method of, 36revocation of, 39silence, by, 36–7unilateral contracts and, 40–1unqualified nature of, 34

adequacy of consideration, 70, 279, 293, 306advertisements, 30affirmation, 334–5agency, 132–3agreement

contract based on, 1–5objective nature, 17–19, 21–2subjective, 19–21

ambiguity, uncertainty due to, 45–9assignment, 136–7auction sales, 30–1

bargaining power, inequality of, 279–80, 293, 303–4

battle of the forms, 23–4, 34, 42–3bills of exchange, 61, 86, 137breach of contract

anticipatory, 336–9consequences of, 331, 334–9discharge by, 327–8, 330–9occurrence of, 330–1prospective nature of, 332–3remedies for, 341–89

capacitycompanies and, 291drunkenness and, 290mental patients and, 289–90minors and, 287–9

causation, 363–4certainty see uncertaintycollateral contracts, 131–2, 239, 280companies

capacity and, 291ultra vires and, 291

Competition and Markets Authority, 321, 322condition

breach of, 174, 331creation of, 174–8, 372precedent, 174–5promissory, 175subsequent, 174–5

considerationadequacy of, 70, 279, 293, 306benefit and detriment as, 67–8, 85compromises and, 72–3definition of, 67–8economic value of, 70–2, 83–4estoppel and, 89–91, 99–102existing duties and, 73–84forbearance from suing, as, 72–3motive and, 70past, 85–6promisee, must move from, 86–7, 116, 123reform of, 102–4sufficiency of, 69–70total failure of, 288, 347–9trivial acts and, 70–1valuable, 70–1variation of contract, and, 92–3

consumer contract, 311–12consumer surplus, 364–7contra proferentem rule, 165, 187–9contract

agreement, as, 2–4, 17, 389basis of, 2–4distributive justice and, 3, 306–7empirical research and, 5–6promise, as, 2–4scope of, 1–2

contributory negligence, 364core terms of contract, 315counter-offer, 22, 34

damagesaction for, 341–67date of assessment of, 356expectation, 343–7, 358liquidated, 373–7, 382–4mental distress, for, 364–7

Index


Index400

damages – continuedmisrepresentation and, 237–40punitive, 238, 341reliance, 354–6restitutionary, 347–9, 353

debtclaim in, 372–3part payment of, 82–3

deceit, tort of, 230, 237–8deed, 61deposits, forfeiture of, 380discharge of the contract

agreement, by, 328breach, by, 328, 331–2frustration, by, 244, 263, 328operation of law, by, 328performance, by, 328

disclosure, duty ofno general duty, 213–14particular contracts, 214in tort, 216

distributive justice and contract law, 3drunkenness and contractual capacity, 290duress, 293–9

economic duress, 293–9empirical research and contract law, 5–6enforcement of the contract by party in breach,

331–2entire obligations rule, 370–2estoppel

consideration and, 89, 99–102convention, by, 96defined, 89–91promissory, 93–6proprietary, 96–9representation, by, 92

European Contract Law, 6–8exclusion clauses

construction of, 186–9definition of, 184–5function of, 185fundamental breach and, 192–3incorporation of, 155–7, 186misrepresentation and, 193, 240–2negligence liability and, 189–92,

194–8reasonableness of, 203–6

exemption clauses see exclusion clausesexpectation interest

definition of, 343–7protection of, 356–7

force majeure, 254–7forfeiture clauses, 380–2formalities, 61–2freedom of contract, 3, 306frustration

basis of, 244–5, 266–7discharge of contract and, 254, 264, 327effects of, 263–6express provision for, 260foreseen and foreseeable events and, 260–1illegality and, 259impossibility and, 257–8leases, of, 257mistake, relation to, 244–5, 266–7purpose of, 258–9self-induced, 261–3

fundamental breach, 192–3fundamental terms, 193

gaming contracts, 272–3good faith, 217–22, 312–13

hardship clauses, 256human rights, 11–14

illegality in contractsclassification of, 270crime, agreement to commit, 275effects of, 280–5performance, illegality in, 270–2public policy, agreement contrary to, 273–9recovery of money or property, 280–5sexual immorality, agreements involving, 275statutory, 272

implied terms, 167–72incompleteness of agreement, 49–50inequality of bargaining power, 279–80, 293,

303–4injunction

damages in lieu of, 389no indirect specific performance, 388–9

innominate termsbreach of, 180–3creation of, 180–3

intention to create legal relations, 106–10international contract law, 8–10interpretation, 158–65, 186–93invitation to treat, distinguished

from offer, 26–36

jurisdiction of courts, agreement to oust, 275–6


Index 401

leases, frustration of, 257legal relations, intention to create, 106–10limitation clauses, 188liquidated damages, 373–7, 382–4

marriage brokage contracts, 13, 274mental patients, 289–90minors

capacity to enter into contracts, 287–9contracts by, 287–9executed contracts and, 287necessaries, for, 287passing of property and, 289ratification, of, 288tort, liability in, 289void contracts and, 288voidable contracts and, 288

misrepresentationdamages for, 237–40excluding liability for, 240–1fraudulent, 230, 238innocent, 235, 239, 240negligent, 230, 241promise, distinguished from, 228rescission for, 235–7term of contract, distinguished from, 145–8

mistakeacceptance, effect of, in making, 52–9agreement, 52–9common, 52, 245–54, 266–7equity, in, 252–4frustration and, 254–7, 266–7fundamental, 245–6non est factum, 152–4offer, effect of, in making, 52–9performance, as to possibility, 249person, as to, 53–9quality, as to, 249–52subject-matter, as to existence of, 247–8subject-matter, identity of, 248–9unilateral, 52–9

mitigation of damage, 357–8

necessaries see minorsnegotiable instruments, 101non est factum, 152–4

objectivity, 17–19, 21–2 offer

acceptance of see acceptancecounter, 22–3, 34duration of, 42

ignorance of, 35invitation to treat, distinguished from, 26–36mistake in making of, 52–9revocation of, 41–2

Parliament and contract law, 305–6parol evidence rule, 149–51partial failure of consideration, 264, 347–9past consideration, 85–6penalties

distinguished from liquidated damages, 374–7

evading the rules as to, 377–9justification for the rules as to, 382–4

performance, 327post, contract made by, 37–40privity of contract

collateral contracts and, 131–2consideration and, 86–7, 115–16, 122development of, 112–18exclusion clauses and, 113–15liability of third parties under, 138–40third party, enforcement by promisee for,

125–6tort, law of, and, 135–6

promissory estoppel see estoppelproprietary estoppel see estoppelpublic policy

agreements contrary to, 274–80new heads of, whether possible to create, 279

puffs, mere, 145, 226

rectification, 165–7reliance

consideration and, 87–8damages and, 354–6protection of, 354–6

remedies for breach of contract, 341–89remoteness of damage, 358–63representation

conduct, by, 214–15distinguished from promise, 224–5

rescissionfor breach, 236, 332for misrepresentation, 235–7

restitution, law of contract and, 4–5, 51–2, 264–7, 280–5, 347–54

restraint of tradecontracts for the sale of a business and, 278contracts in, 276–9contracts of employment and, 277–8scope of, 279–80


Index402

revocation of offers, 41–2rewards, offers of, 30, 35risk allocation

common mistake and, 244–5, 266–7frustration and, 244–5, 266–7

severance, of illegal contracts, 285significant imbalance, 314social and domestic arrangements, 108–9specific performance, 384–7

contracting for, 387damages in lieu of, 389when not available, 385

standard form contracts, 185subjectivity and agreement, 19–21

tender, contract by, 31–3termination of the contract, 332terms of the contract

ambiguity, 53classification of, 174condition, 174–8exclusion clauses, 184–208fundamental, 192–3implied, 167–72incorporation of, 154–7innominate, 180–3interpretation of, 158–65,

186–93representation, distinguished from, 145third party rights, 112–40

tortcontract and, 4–5duty of disclosure in, 216privity of contract and, 135–6

total failure of consideration, 263, 288, 347–9trader, definition of, 311trusts of contractual obligations, 133–5

uberrimae fidei, 216ultra vires, 291uncertainty

ambiguity, 45–9incompleteness, 49–50vagueness, 49

unconscionability, 306–7undue influence, 299–303unfair contracts, 279unfair terms in contracts, 309–22

vagueness, 49–50variation of contracts, 92–3void contracts

consequences of, 55, 154, 247, 248, 252, 270, 288, 291

illegality and, 271, 279voidable contracts, 54, 55, 154, 236, 252, 288

wagering contracts, 272–3waiver, 92–3, 335warranty, breach of, 174, 182written evidence see parol evidence rule


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