The modern law of contract

THE MODERN LAW

OF CONTRACT

Fifth edition

Professor Richard Stone, LLB, LLM

Barrister, Gray’s Inn

Visiting Professor, University College, Northampton

Fifth edition first published in Great Britain 2002 by

Cavendish Publishing Limited, The Glass House,

Wharton Street, London WC1X 9PX, United Kingdom

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This title was originally published in the Cavendish Principles series

© Stone, Richard 2002

First edition 1994

Second edition 1996

Third edition 1997

Fourth edition 2000

Fifth edition 2002

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British Library Cataloguing in Publication Data

Stone, Richard, 1951 –

The modern law of contract

1 Contracts I Title

346'.02

Library of Congress Cataloguing in Publication Data

Data available

ISBN 1-85941-667-5

1 3 5 7 9 10 8 6 4 2

Printed and bound in Great Britain

My aim in writing this book has been to produce a comprehensive, but readable, account

of what I have termed ‘the modern law of contract’. By this I mean the law of contract as

applied by the English courts at the beginning of the 21st century. This I see as being still

rooted in the forms of the classical theory of contract (which is generally accepted as

dating from the late 19th century), but with those forms increasingly being stretched to

adapt to the modern world. The inadequacies of the classical model which are thus

exposed have been the subject of much commentary and analysis, together with

suggestions of better models which might be adopted. Understanding the modern law

requires an awareness of these critical analyses and this I have attempted to provide

throughout the text. What results is not, however, and is not intended to be, a radical re￾reading of this area of law. A quick look at the chapter headings will show an overall

structure that will be familiar to all contract lecturers. For the purposes of exposition

many familiar authorities have been used. Throughout, however, and in particular

through the footnotes, I have tried to indicate ways in which the classical model of

contract may be, or is being, challenged and developed, whether openly or

surreptitiously. I hope that the result is a treatment of the law which is easy to follow (to

the extent possible given the complexity of some areas) but which is also sufficiently rich

to provide a challenge to more discerning readers. At the very least I hope that such

readers will be encouraged to think about and explore new lines of thought on a variety

of topics.

The text has been developed from a much simpler primer on Contract which has

variously appeared as ‘Lecture Notes’ and ‘Principles’: hence the label ‘5th edition’. But

this is essentially a new book, albeit one that I hope retains the clarity that I am pleased

that students and lecturers have found in its previous incarnations. I am grateful to Jo

Reddy for encouraging me to undertake this enterprise in the first place, and to Ruth

Massey and Sonny Leong for seeing it through to publication on a very tight timescale. I

am also grateful to Professor David Campbell of Cardiff University for taking the time to

read and comment on early drafts of some of the chapters in the first half of the book.

Those who are familiar with David Campbell’s work will realise that this text shows more

respect for the classical theory of contract than he would ever countenance: but his

comments were very helpful to me, and I am sure that they have resulted in a better book.

It is customary in a preface to a new edition to alert readers to new material that is

covered. Given the expansion from the previous edition, a comprehensive list is

impossible. But the House of Lords’ decisions in Alfred McAlpine Construction Ltd v

Panatown Ltd (privity); Royal Bank of Scotland v Etridge (No 2) (undue influence); Farley v

Skinner (non-pecuniary damages); and Attorney General v Blake (restitutionary damages

for breach) are all covered at the appropriate points. As regards statutory material, the

impact of the Consumer Protection (Distance Selling) Regulations 2000 on the finality of

acceptance is dealt with in Chapter 2. One omission which has occurred as a result of the

changes in this edition is that there is no longer a separate chapter on sale of goods,

though the implied terms are now dealt with alongside other implied terms in Chapter 8.

One issue which caused me uncertainty in relation to the previous edition remains

unresolved in this one. That is the change in the Civil Procedure Rules, effective from

2000, from ‘plaintiff’ to ‘claimant’. My approach has again been the compromise of using

the label which will be found in the report of any particular case (which will depend on

when the action was brought). Where the word is used generically, rather than in relation

to a particular case, then ‘claimant’ is used. This results in some clumsiness of expression,

and potential for confusion: I hope to have found a better solution by the time of the next

edition.

PREFACE

Finally, my thanks to my wife, Maggie, and my youngest daughter, Anna, for their

support during the writing process.

The law is stated, as far as possible, as it stood on 1 July 2002.

Richard Stone

Oadby

July 2002

vi The Modern Law of Contract

Preface v

Table of Cases xxiii

Table of Statutes xxxix

Table of Statutory Instruments xliii

1 INTRODUCTION 1

1.1 The classical law of contract 1

1.2 The subject matter of contract law 3

1.2.1 Voluntary transactions 7

1.3 Discrete and relational transactions 8

1.4 Contract, tort and restitution 10

1.5 A law of contract or law of contracts? 11

1.6 Different approaches to analysing contract 14

1.6.1 Economic analysis 14

1.6.2 Socio-political analysis 15

1.6.3 Empirical research 16

1.6.4 Which approach? 16

1.7 International influences 17

2 FORMING THE AGREEMENT 21

2.1 Introduction 21

2.2 Deeds and other formalities 22

2.3 General lack of formal requirement 23

2.3.1 Promisor, promisee and detached objectivity 24

2.3.2 State of mind 24

2.4 The external signs of agreement 24

2.5 Historical background 25

2.6 Offer 25

2.6.1 Distinction from ‘invitation to treat’ 26

2.6.2 Self-service displays 28

2.6.3 Shop window displays 29

2.6.4 Issues of principle 30

2.6.5 Advertisements 31

2.6.6 Carlill v Carbolic Smoke Ball Co (1893) 32

2.7 Unilateral and bilateral contracts 34

CONTENTS

2.8 Tenders 34

2.9 Auctions 36

2.10 Acceptance 38

2.10.1 Distinction from counter-offer 39

2.10.2 Request for information 40

2.10.3 Battle of the forms 40

2.10.4 The traditional view 42

2.10.5 An alternative approach 43

2.11 Methods of acceptance 44

2.11.1 Acceptance by conduct 44

2.11.2 Acceptance by silence 45

2.11.3 Bilateral contracts 46

2.11.4 Inertia selling 46

2.11.5 Conclusions on ‘silence’ 47

2.11.6 Acceptance by post 48

2.11.7 Limitations on the postal rule 49

2.11.8 Acceptance by private courier 50

2.11.9 Acceptance by electronic communication 51

2.11.10 The Entores approach 51

2.11.11 Time of acceptance 53

2.11.12 Acceptance in internet transactions 54

2.11.13 Acceptance in unilateral contracts 56

2.11.14 Position in ‘reward’ contracts 59

2.11.15 Acceptance in ignorance of an offer 59

2.11.16 Unilateral contracts and ‘agreement’ 60

2.11.17 Cross-offers 61

2.12 Acceptance and the termination of an offer 61

2.12.1 Need for communication 62

2.12.2 Effect of lapse of time 62

2.12.3 Revocation and tenders 63

2.13 Retraction of acceptance 63

2.13.1 Formalist approach 65

2.13.2 Purposive approach 65

2.13.3 Unfairness to offeror 66

2.13.4 Guidance from authority 66

2.14 Certainty in offer and acceptance 67

viii The Modern Law of Contract

2.14.1 Meaningless phrases 67

2.14.2 Incomplete agreements 68

2.14.3 Obligations distinguished from ‘machinery’ 69

3 TESTS OF ENFORCEABILITY 73

3.1 Deeds 73

3.2 Consideration or reliance 74

3.3 Benefit and detriment 76

3.4 Mutual promises 76

3.5 Consideration need not be ‘adequate’ but must be ‘sufficient’ 77

3.5.1 Economic value 78

3.6 Past consideration is no consideration 81

3.6.1 The common law exceptions 81

3.6.2 Exceptions under statute 82

3.7 Performance of existing duties 83

3.7.1 Existing duty imposed by law: public policy 83

3.7.2 Public duty: exceeding the duty 85

3.7.3 Existing contractual duty owed to third party 86

3.7.4 Duty to third party: commercial application 87

3.7.5 Performance or promise? 87

3.7.6 Existing duty to the same promisor 88

3.7.7 Going beyond the existing duty 89

3.7.8 A re-consideration: Williams v Roffey 90

3.7.9 Williams v Roffey: effect on Stilk v Myrick 91

3.7.10 Limitation on Williams v Roffey 92

3.8 Consideration and the variation of contracts 93

3.8.1 Need for accord and satisfaction 93

3.8.2 The concept of ‘waiver’ 94

3.9 The doctrine of promissory estoppel 96

3.10 Promissory estoppel and consideration 97

3.10.1 There must be an existing legal relationship 98

3.10.2 There must have been (detrimental) reliance 99

3.10.3 The doctrine can only be used as a

‘shield not a sword’ 100

3.10.4 It must be inequitable for the promisor

to go back on the promise 101

3.10.5 The doctrine is only suspensory in its effect 101

Contents ix

3.11 Promissory estoppel and the part payment of debts 103

3.11.1 The decision in Foakes v Beer 103

3.12 Other types of estoppel 105

3.13 Alternative tests of enforceability 106

3.13.1 What does ‘consideration’ really mean? 106

3.13.2 ‘Reliance’ as a test of enforceability 108

3.13.3 ‘Promise’ as a test of enforceability 111

4 INTENTION TO CREATE LEGAL RELATIONS 115

4.1 Domestic agreements 117

4.2 Commercial agreements 120

4.3 Collective agreements 122

4.4 Is a requirement of intention necessary? 123

5 PRIVITY 127

5.1 The rationale for the doctrine 127

5.2 Development of the doctrine 130

5.2.1 Affirmation by the House of Lords 131

5.2.2 A special case: multi-party contracts 132

5.3 Evading the doctrine 133

5.4 The Contracts (Rights of Third Parties) Act 1999 134

5.4.1 The main effect 134

5.4.2 Changing the agreement 135

5.4.3 Defences 136

5.4.4 Protection from double liability 137

5.4.5 Exceptions 137

5.4.6 Effect of the Act 138

5.5 Principles of European Contract Law 138

5.6 Damages on behalf of another 139

5.7 The trust of a promise 143

5.7.1 Intention to create a trust 143

5.7.2 Need for a clear intention to benefit the third party

rather than the promisee 144

5.7.3 Intention to benefit must be irrevocable 144

5.7.4 Effects of a trust 145

5.7.5 Conclusion on trust device 145

5.8 Collateral contracts 145

x The Modern Law of Contract

5.9 The tort of negligence 146

5.10 Statutory exceptions 149

5.11 Privity and exclusion clauses 149

5.11.1 Vicarious immunity 150

5.11.2 Modification of the duty of care 152

5.12 Imposing burdens: restrictive covenants 153

5.12.1 Application outside land law 153

5.12.2 The current position 154

5.13 The role of the law of tort 155

6 AGENCY AND ASSIGNMENT 157

6.1 Agency 157

6.1.1 Relevance of labels 157

6.1.2 Relationship to doctrine of privity 158

6.1.3 Commercial agents 158

6.1.4 Creation of agency 159

6.1.5 The powers of an agent 160

6.1.6 Ratification 163

6.1.7 Duties of the agent 164

6.1.8 Duties of the principal 167

6.1.9 Position of third party vis à vis the principal 168

6.1.10 Liability of principal 169

6.1.11 Position of third party vis à vis the agent 169

6.1.12 Termination of agency 171

6.2 Assignment 173

6.2.1 Section 136 of the Law of Property Act 1925 174

6.2.2 Equitable assignment 175

6.2.3 Protection of the debtor 176

6.2.4 Unassignable rights 176

6.2.5 Assignment of contractual liabilities 177

7 CAPACITY 179

7.1 Reasons for limitations on capacity 179

7.2 Minors’ contracts 179

7.2.1 Contracts for necessaries 180

7.2.2 The definition of ‘necessaries’ 181

7.2.3 Beneficial contracts of service 181

Contents xi

7.2.4 Other contracts related to work 182

7.2.5 Voidable contracts 182

7.3 Effects of entering into a contract with a minor 183

7.3.1 Void contracts 183

7.3.2 Voidable contracts 184

7.3.3 Enforceable contracts 184

7.4 Minors’ liability in tort 185

7.5 Mental disability 186

7.6 Intoxication 187

8 THE CONTENTS OF THE CONTRACT 189

8.1 Introduction 189

8.2 Distinction between representations and terms 189

8.2.1 Was the contract put into written form? 191

8.2.2 Was the claimant relying on the skill and knowledge

of the defendant? 192

8.2.3 Was there a significant lapse of time between

the statement and the contract? 193

8.2.4 Pre-contractual statements under the

Principles of European Contract Law 194

8.3 Remedies for pre-contractual statements 194

8.3.1 Misrepresentation 194

8.3.2 Collateral contract 195

8.3.3 Limitations of the ‘collateral contract’ 196

8.3.4 Negligent misstatement 196

8.3.5 Conclusion on pre-contractual statements 197

8.4 Express terms 198

8.4.1 Incorporation 198

8.4.2 Construction 199

8.4.3 ‘Purposive’ or ‘commercial’ interpretation 201

8.4.4 Interpretation under the Principles of European Contract Law 204

8.4.5 Conditions, warranties and innominate terms 205

8.5 Implied terms 205

8.5.1 Terms implied by the courts 206

8.5.2 Terms implied by custom 206

8.5.3 Terms implied in fact 207

8.5.4 The Moorcock test 207

xii The Modern Law of Contract

8.5.5 The ‘officious bystander’ test 208

8.5.6 Terms implied by law 210

8.5.7 Liverpool City Council v Irwin (1976) 211

8.5.8 Terms implied by statute 212

8.5.9 Implied terms under the Sale of Goods Act 213

8.5.10 Title 213

8.5.11 Description 214

8.5.12 Satisfactory quality 215

8.5.13 Fitness for a particular purpose 216

8.5.14 Sale by sample 217

8.5.15 Implied terms under the Principles of European Contract Law 217

8.6 Statutory controls 217

9 CLAUSES EXCLUDING OR LIMITING LIABILITY 219

9.1 Introduction 219

9.2 Common law rules 220

9.3 Incorporation 221

9.3.1 Relevance of time 222

9.3.2 Requirement of ‘reasonable notice’ 223

9.3.3 Incorporation and unusual exclusions 224

9.3.4 Need for a ‘contractual’ document 225

9.4 Construction 226

9.4.1 Contra proferentem rule 226

9.4.2 Relaxation of the rule of construction 229

9.4.3 Fundamental breach 230

9.4.4 The current position 233

9.5 Statutory controls 234

9.6 Unfair Contract Terms Act 1977 235

9.6.1 Scope of the UCTA 1977 235

9.6.2 ‘Business’ liability 235

9.6.3 Meaning of business 236

9.6.4 Disclaimers 237

9.6.5 Exclusion of negligence under the UCTA 1977 238

9.6.6 Standard terms and consumer contracts 238

9.6.7 Meaning of ‘in the course of a business’ 239

9.6.8 Standard terms of business 240

Contents xiii

9.6.9 Effect of s 3 240

9.6.10 The requirement of reasonableness 241

9.6.11 Interpretation of reasonableness 241

9.6.12 Guidelines in Sched 2 242

9.6.13 Judicial approach to ‘reasonableness’ – pre-UCTA 1977 243

9.6.14 The UCTA 1977 in the House of Lords 244

9.6.15 ‘Reasonableness’ in the Court of Appeal 245

9.6.16 Indemnities 247

9.6.17 Guarantees of consumer goods 248

9.6.18 Exclusions in contracts for the supply of goods 248

9.6.19 Exclusion of liability for misrepresentation 249

9.7 Unfair Terms in Consumer Contracts Regulations 1999 250

9.7.1 Application of the Regulations 250

9.7.2 Terms attacked 250

9.7.3 The requirement of ‘plain, intelligible language’ 253

9.7.4 General supervision 254

9.8 Principles of European Contract Law 254

10 MISREPRESENTATION 257

10.1 Introduction 257

10.1.1 Other remedies for pre-contractual statements 259

10.2 Misrepresentation 260

10.2.1 Statement by one party to the other 260

10.2.2 Statement of existing fact 261

10.2.3 Misrepresentation by silence 262

10.2.4 Misrepresentation must induce the contract 264

10.3 Remedies for misrepresentation 266

10.3.1 Rescission 266

10.3.2 Operation of rescission 269

10.3.3 Damages at common law 269

10.3.4 False statements and the tort of negligence 271

10.3.5 Indemnity at common law 272

10.3.6 Damages under s 2(1) of the Misrepresentation Act 1967 273

10.3.7 Measure of damages under s 2(1) 274

10.3.8 Damages under s 2(2) of the Misrepresentation Act 1967 275

10.4 Exclusion of liability for misrepresentation 276

xiv The Modern Law of Contract

11 MISTAKE 281

11.1 Introduction 281

11.2 Categories of mistake 282

11.3 Principles of European Contract Law 283

11.4 Mistake nullifying agreement (‘common mistake’) 284

11.4.1 Subject matter which never existed 285

11.4.2 Impossibility of performance 286

11.4.3 Mistake as to quality 287

11.4.4 Effect of an operative common mistake 289

11.5 Mistakes negativing agreement 289

11.5.1 ‘Mutual mistake’ 289

11.5.2 Unilateral mistake 292

11.5.3 Mistaken identity 293

11.5.4 Contracts made ‘face to face’ 294

11.6 Mistake in equity 298

11.7 Forms of equitable relief 300

11.7.1 Refusal of specific performance 300

11.7.2 Rescission on terms 301

11.7.3 Rectification 301

11.7.4 Bars to rescission or rectification 302

11.8 Contracts signed under a mistake 302

11.8.1 Availability of the plea 302

11.8.2 Nature of the mistake 303

11.9 Conclusions on ‘mistake’ 303

12 DURESS 305

12.1 Introduction 305

12.2 Duress by physical threats or coercion 305

12.3 Economic duress 308

12.3.1 Industrial action 309

12.3.2 Breach of contract 310

12.3.3 Must the threat be of an unlawful act? 312

12.4 Remedies for duress 313

12.5 Duress under the Principles of European Contract Law 313

Contents xv

13 UNDUE INFLUENCE 315

13.1 Undue influence: the concept 315

13.2 Actual undue influence 317

13.3 Presumed influence: recognised relationships 318

13.4 Presumed influence: other relationships 320

13.5 Requirement of ‘manifest disadvantage’ 322

13.6 Undue influence and third parties 325

13.6.1 Agency 325

13.6.2 Special equity 326

13.6.3 The O’Brien analysis 326

13.6.4 The doctrine of notice 327

13.6.5 Relationships covered 328

13.6.6 Application of doctrine of notice 328

13.6.7 Application of the doctrine of notice to actual undue influence 328

13.6.8 Relevance of disadvantage nature of transaction 329

13.6.9 Consequences for creditors 330

13.6.10 Practical consequences: Royal Bank of Scotland v Etridge (No 2) 332

13.7 Remedies for undue influence 336

13.7.1 Change in value of property 337

13.8 Unconscionability and inequality of bargaining power 338

13.9 Undue influence, unconscionability and the

Principles of European Contract Law 341

14 ILLEGALITY 343

14.1 Introduction 343

14.2 Policy arguments 343

14.3 Categories of illegality 344

14.3.1 Contracts which constitute a criminal offence 345

14.3.2 Contracts forbidden though not criminal 345

14.3.3 Contract to commit a tort 346

14.3.4 Performance is contrary to statute 347

14.3.5 Relevance of knowledge 348

14.4 Contract to indemnify 349

14.4.1 Criminal liability 349

14.4.2 Civil liability 350

14.5 Effects of illegality: enforcement 351

xvi The Modern Law of Contract