CILEX Professional Qualification (CPQ) Foundation Stage: Contract Law Syllabus

By what sources can terms be implied into a contract?

(1) By statute (e.g. Consumer Rights Act 2015, Sale of Goods Act 1979); (2) by custom or trade usage; (3) by the courts in fact (to give business efficacy / 'officious bystander' test) or in law (necessary incidents of a type of contract).

Explain the 'business efficacy' and 'officious bystander' tests for implying terms in fact.

Business efficacy (The Moorcock): a term is implied if necessary to make the contract work. Officious bystander (Shirlaw v Southern Foundries): a term is implied if it is so obvious that, had a bystander suggested it, both parties would have replied 'oh, of course'.

How are terms distinguished from mere representations?

By the parties' intention, judged on: timing (the closer to contracting, the more likely a term), importance attached to the statement, whether it was reduced to writing, and the relative skill/knowledge of the maker (Oscar Chess v Williams; Dick Bentley v Harold Smith).

Define a 'condition' as a type of contract term and the remedy for its breach.

A condition is a major/important term going to the root of the contract. Breach allows the innocent party to repudiate (treat the contract as ended) AND claim damages.

Define a 'warranty' as a type of contract term and the remedy for its breach.

A warranty is a minor term, ancillary to the main purpose. Breach entitles the innocent party only to claim damages; it does NOT allow termination of the contract.

What is an 'innominate' (or intermediate) term and how is the remedy determined?

A term not classified in advance as condition or warranty. The remedy depends on the consequences of the breach: if the breach deprives the innocent party of substantially the whole benefit of the contract, they may terminate; otherwise only damages (Hong Kong Fir Shipping v Kawasaki).

Contrast the condition/warranty approach with the innominate term approach.

Condition/warranty: classification is fixed at the outset, giving certainty but potentially harsh results. Innominate term: classification is made after breach by reference to its effects, giving flexibility/fairness but less certainty (Hong Kong Fir; The Mihalis Angelos).

Define an 'exclusion clause' and a 'limitation clause'.

An exclusion clause is a term seeking to exclude/exempt a party entirely from liability for breach. A limitation clause seeks to cap or limit the amount or type of liability rather than exclude it completely.

State the three-stage common law test for the validity of an exclusion clause.

(1) Incorporation — the clause must be part of the contract (by signature, notice, or course of dealing); (2) Construction — it must, on its proper interpretation, cover the breach and loss; (3) It must satisfy any statutory controls (UCTA 1977 / CRA 2015).

What is required for incorporation of an exclusion clause by notice?

Reasonable notice must be given before or at the time of contracting (Olley v Marlborough Court); the more unusual/onerous the clause, the greater the notice required (Interfoto; Thornton v Shoe Lane Parking).

What is the effect of signature on incorporation of an exclusion clause (L'Estrange v Graucob)?

A party is bound by terms in a signed document whether or not they have read it, absent fraud, misrepresentation (Curtis v Chemical Cleaning) or non est factum.

How does the contra proferentem rule apply to exclusion clauses?

Any ambiguity in an exclusion clause is construed strictly against the party seeking to rely on it (the proferens), narrowing its protective effect.

How does the Unfair Contract Terms Act 1977 control exclusion of liability for negligence?

Liability for death or personal injury caused by negligence cannot be excluded or restricted at all (s.2(1)); liability for other negligence loss can only be excluded so far as reasonable (s.2(2)).

Under the Consumer Rights Act 2015, what is the test for fairness of a term, and which terms cannot be excluded?

A term is unfair if, contrary to good faith, it causes a significant imbalance in the parties' rights to the consumer's detriment (s.62). Liability for breach of the statutory rights (e.g. satisfactory quality, fitness, service with reasonable care) cannot be excluded against a consumer.

Define 'misrepresentation'.

An unambiguous false statement of existing or past fact (or law) made by one party to the other before/at the time of contracting, which induces the other to enter the contract.

List the three types of misrepresentation.

(1) Fraudulent — made knowingly, without belief in its truth, or recklessly (Derry v Peek); (2) Negligent — made without reasonable grounds for believing it true (s.2(1) Misrepresentation Act 1967 / Hedley Byrne); (3) Innocent — made with reasonable grounds to believe it true.

What are the remedies for each type of misrepresentation?

Fraudulent: rescission + damages in the tort of deceit. Negligent: rescission + damages under s.2(1) Misrepresentation Act 1967. Innocent: rescission, or damages in lieu of rescission under s.2(2). Rescission is available for all types.

What are the 'bars to rescission' for misrepresentation?

Affirmation of the contract, lapse of time, restitution being impossible (subject matter changed/consumed), and the intervention of third-party rights.

When can silence amount to a misrepresentation?

Generally silence is not a misrepresentation, but exceptions: half-truths/misleading partial statements (Dimmock v Hallett); a change of circumstances making an earlier true statement false (With v O'Flanagan); and contracts uberrimae fidei (utmost good faith, e.g. insurance) and fiduciary relationships.

Distinguish a 'common', 'mutual' and 'unilateral' mistake.

Common mistake: both parties make the same mistake (e.g. subject matter no longer exists). Mutual mistake: parties are at cross-purposes, each mistaken about the other's intention. Unilateral mistake: only one party is mistaken and the other knows (or ought to know) of the mistake.

Give two categories of operative common mistake that render a contract void.

(1) Res extincta — the subject matter does not exist at the time of contracting (Couturier v Hastie; s.6 Sale of Goods Act 1979); (2) Res sua — a party contracts to buy something they already own (Cooper v Phibbs). Also fundamental mistake as to quality (Bell v Lever Bros — very narrow).

What is the effect of a unilateral mistake as to the identity of the other party?

If identity (not merely attributes) is crucial and the mistaken party intended to deal with a specific different person, the contract may be void for mistake (Cundy v Lindsay). Where parties deal face-to-face there is a strong presumption of intent to deal with the person present, so the contract is voidable, not void (Phillips v Brooks; Lewis v Averay).

Define 'duress' in contract law and its modern forms.

Coercion or illegitimate pressure that vitiates true consent, making the contract voidable. Forms: duress to the person (threats of violence), duress to goods, and economic duress (illegitimate commercial pressure leaving no practical choice — Universe Tankships v ITWF; Atlas Express v Kafco).

What must be shown to establish economic duress?

(1) Illegitimate pressure (e.g. a threatened breach of contract); (2) which is a significant cause inducing the contract; and (3) the victim had no realistic practical alternative but to submit; coupled with prompt protest/avoidance after the pressure is lifted.

Distinguish actual undue influence from presumed undue influence.

Actual undue influence: the claimant proves overt pressure/improper influence was actually exerted. Presumed undue influence: arises from a relationship of trust and confidence plus a transaction calling for explanation; the burden shifts to the dominant party to rebut the presumption (Royal Bank of Scotland v Etridge).

What is the effect of illegality on a contract?

A contract may be void and unenforceable if it is illegal as formed (e.g. to commit a crime/tort) or contrary to public policy. Generally neither party can enforce it or recover money/property transferred (ex turpi causa non oritur actio), subject to limited exceptions.

Give examples of contracts void as contrary to public policy.

Contracts in unreasonable restraint of trade, contracts to oust the jurisdiction of the courts, contracts prejudicial to the administration of justice, contracts to commit a crime/tort/fraud, and contracts prejudicial to public safety or sexually immoral.

What is the test for the validity of a restraint of trade clause?

A restraint is prima facie void but enforceable if it (1) protects a legitimate proprietary interest (trade secrets, customer connection), (2) is reasonable between the parties in scope, area and duration, and (3) is not contrary to the public interest (Nordenfelt v Maxim).

What are the four main methods by which a contract may be discharged?

(1) Performance, (2) Agreement, (3) Frustration, and (4) Breach.

State the general rule on discharge by performance and its main exceptions.

General rule: performance must be complete and precise/entire (Cutter v Powell). Exceptions allowing partial payment: divisible/severable obligations, substantial performance (Hoenig v Isaacs), acceptance of partial performance, wrongful prevention of completion by the other party, and tender of performance properly rejected.

How may a contract be discharged by agreement, and what is the consideration issue?

By a new agreement to release the obligations. If both parties have outstanding obligations there is bilateral discharge (each provides consideration by giving up rights — accord). If only one party has performed, fresh consideration or a deed is needed (accord and satisfaction).

Define discharge by frustration and state the test.

Frustration occurs where, after formation and without fault of either party, an unforeseen event makes performance impossible, illegal, or radically different from what was undertaken (Davis Contractors v Fareham). It automatically discharges the contract from the date of the frustrating event.

Give examples of frustrating events.

Destruction of subject matter (Taylor v Caldwell), supervening illegality, death/incapacity in personal-service contracts, non-occurrence of the contract's foundation event (Krell v Henry), and government intervention/requisition. Note: increased difficulty or expense alone does NOT frustrate.

Identify three situations where frustration will NOT be available.

(1) Self-induced frustration (caused by a party's own choice/breach — Maritime National Fish v Ocean Trawlers); (2) the event was foreseen or expressly provided for (force majeure clause); (3) performance is merely more onerous or expensive, not radically different.

What does the Law Reform (Frustrated Contracts) Act 1943 provide?

s.1(2): money paid before frustration is recoverable and sums due cease to be payable, but the court may allow retention/recovery of expenses incurred. s.1(3): a party who received a valuable (non-money) benefit before frustration may have to pay a just sum for it.

What are the two main types of breach by which a contract may be discharged?

(1) Actual breach — failure to perform when performance is due; and (2) Anticipatory breach — a party indicates, before performance is due, that they will not perform (by words or conduct).

What options does the innocent party have on an anticipatory breach (Hochster v De La Tour)?

They may (1) accept the breach immediately, terminate, and sue for damages at once; or (2) affirm the contract, keep it alive, and wait until the time for performance, then sue (White & Carter v McGregor).

When does a breach entitle the innocent party to terminate (repudiate) the contract?

Where it is a breach of a condition, a sufficiently serious breach of an innominate term (depriving the innocent party of substantially the whole benefit), or a repudiatory/renunciatory breach showing an intention no longer to be bound.

What is the primary remedy for breach of contract and its aim?

Damages — a common law remedy available as of right. The aim is to put the innocent party, so far as money can, in the position they would have been in had the contract been properly performed (expectation/loss of bargain measure — Robinson v Harman).

State the rule on remoteness of damage in contract (Hadley v Baxendale).

Damages are recoverable for losses that (1) arise naturally, in the usual course of things, from the breach; or (2) were reasonably in the contemplation of both parties at the time of contracting as the probable result of breach (e.g. from special knowledge communicated).

What is the claimant's duty to mitigate, and its effect on damages?

The innocent party must take reasonable steps to minimise their loss and cannot recover for losses that could reasonably have been avoided (British Westinghouse v Underground Electric). They need not take unreasonable risks; reasonable costs of mitigation are recoverable.

Distinguish a liquidated damages clause from a penalty clause.

A liquidated damages clause is a genuine pre-estimate of loss agreed in advance and is enforceable. A penalty clause is designed to deter breach / is extravagant and unconscionable compared with the legitimate interest, and is unenforceable (Dunlop v New Garage; modern test in Cavendish v Makdessi).

Name the principal equitable remedies for breach of contract.

Specific performance (an order to perform), injunction (prohibitory/mandatory order), rescission, and rectification. Being equitable, they are discretionary and granted only where damages are inadequate.

When will specific performance NOT be granted?

Where damages are an adequate remedy; for contracts requiring constant supervision; for personal-service contracts; where there is lack of mutuality; where the claimant has acted inequitably ('clean hands') or delayed (laches); or where it would cause undue hardship.

State the doctrine of privity of contract.

Only the parties to a contract can sue or be sued on it; a person who is not a party (a third party) cannot acquire rights or have obligations imposed under it (Dunlop v Selfridge; Tweddle v Atkinson).

How does the Contracts (Rights of Third Parties) Act 1999 modify the privity rule?

A third party may enforce a contract term if (a) the contract expressly provides they may, or (b) the term purports to confer a benefit on them (unless on proper construction the parties did not intend it to be enforceable). The third party must be expressly identified by name, class, or description.

Name two common-law/equitable exceptions to the privity rule that pre-date the 1999 Act.

Examples: agency, assignment of contractual rights, trusts of contractual rights/promises, collateral contracts, and the rule in Dunlop v Lambert / contracts concerning land (covenants running with land).