Common Professional Examination (CPE) Contract Law Syllabus

What is the effect of an 'honour clause' or expressly stating an agreement is 'binding in honour only'?

Such a clause rebuts the commercial presumption and shows no intention to create legal relations, making the agreement legally unenforceable (Rose & Frank Co v JR Crompton & Bros, 1925).

Define consideration and give the classic definition.

Consideration is the price for which the promise is bought. Classically: 'a valuable consideration may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other' (Currie v Misa, 1875).

State the rule that 'consideration must move from the promisee.'

A person can only enforce a promise if they themselves provided consideration for it (Tweddle v Atkinson, 1861). It need not move TO the promisor, but it must move FROM the party seeking to enforce.

Explain the rule 'consideration need not be adequate but must be sufficient.'

Courts do not assess whether the bargain is economically fair (adequacy), so even a nominal or trivial price counts (Chappell v Nestlé, chocolate wrappers). But consideration must be sufficient, meaning real, tangible and of recognised legal value.

State the rule against past consideration and its main exception.

A promise given AFTER an act, in respect of that already-completed act, is past consideration and not good consideration (Re McArdle). Exception (Pao On v Lau Yiu Long): the act was done at the promisor's request, with an understanding of payment, and the payment would have been legally enforceable if promised in advance.

What is the general rule on performance of an existing public duty as consideration?

Performing a duty already imposed by law (a public duty) is not good consideration (Collins v Godefroy). But exceeding that duty is good consideration (Glasbrook Bros v Glamorgan CC; Ward v Byham, the mother making the child 'happy').

State the traditional rule on performance of an existing contractual duty owed to the SAME promisor.

Performing a duty already owed under an existing contract to the same party is not good consideration for a fresh promise (Stilk v Myrick, 1809 — sailors continuing the voyage). Doing more than the existing duty is good consideration (Hartley v Ponsonby).

What 'practical benefit' exception did Williams v Roffey Bros (1991) create?

Where A promises extra payment to B for completing B's existing contractual duty, and A thereby obtains a practical benefit or avoids a disbenefit (e.g. avoiding a penalty/cost of finding a replacement), that benefit is good consideration, provided the promise was not given under duress.

Is performance of an existing duty owed to a THIRD party good consideration?

Yes. Performing, or promising to perform, a duty already owed to a third party is good consideration for a promise from a new party (Scotson v Pegg; Shadwell v Shadwell; The Eurymedon).

State the rule in Pinnel's Case (1602) on part payment of a debt.

Payment of a lesser sum on the due date cannot satisfy a debt for a greater sum; the creditor may still claim the balance because there is no consideration for giving up the rest. The debtor needs to provide something extra.

List the recognised exceptions to the rule in Pinnel's Case (Foakes v Beer).

Part payment discharges the debt where accompanied by (1) something new at the creditor's request (different place, earlier date, or a chattel); (2) payment by a third party (Hirachand Punamchand); (3) a composition agreement with creditors; or (4) promissory estoppel.

What did Foakes v Beer (1884) confirm?

The House of Lords confirmed Pinnel's Case: an agreement to accept part payment of a debt in full settlement is not binding for lack of consideration. The creditor (Mrs Beer) could still recover the interest she had purportedly waived.

State the elements of promissory estoppel as developed in High Trees (1947).

(1) A clear and unequivocal promise/representation (by words or conduct) that existing legal rights will not be fully enforced; (2) intended to be relied upon; (3) the promisee relies on it (acts differently); and (4) it would be inequitable for the promisor to go back on the promise.

Explain the maxims 'a shield not a sword' and 'suspensory effect' in promissory estoppel.

'Shield not a sword' (Combe v Combe): estoppel is a defence only and cannot found a cause of action. 'Suspensory': it generally suspends rather than extinguishes rights; the promisor may resume full rights on reasonable notice (Tool Metal Manufacturing v Tungsten).

Why does promissory estoppel require the party to come with 'clean hands'?

Because it is an equitable doctrine, relief is discretionary and denied to a party who has acted inequitably. In D & C Builders v Rees, a creditor who paid only under pressure could not rely on estoppel because she had exploited the builders' financial difficulty.

Distinguish a term of the contract from a mere representation.

A term is a promise forming part of the contract, breach of which gives a contractual remedy. A representation is a pre-contractual statement inducing the contract; its untruth gives only a misrepresentation remedy. Factors: timing, importance, special knowledge, and whether reduced to writing.

State the three methods of incorporating express terms.

(1) By signature — bound by a signed document whether read or not (L'Estrange v Graucob); (2) By reasonable notice given before/at the time of contracting (Olley v Marlborough Court; Thornton v Shoe Lane Parking); and (3) By a consistent previous course of dealing (Hollier v Rambler Motors).

What is the 'red hand rule' for incorporating onerous terms (Spurling v Bradshaw; Thornton)?

The more unusual or onerous a clause, the greater the notice required; a particularly onerous term must be specifically drawn to the other party's attention — 'printed in red ink with a red hand pointing to it' (per Denning LJ) — to be incorporated.

How are terms implied by statute, and give an example under the Consumer Rights Act 2015.

Statute implies terms into certain contracts automatically. Under the Consumer Rights Act 2015, goods must be of satisfactory quality (s.9), fit for purpose (s.10), and as described (s.11); services must be performed with reasonable care and skill (s.49).

State the tests for implying a term in fact (The Moorcock / officious bystander / business efficacy).

A term may be implied in fact if necessary to give business efficacy to the contract (The Moorcock) or if it is so obvious that an officious bystander suggesting it would be met with 'oh, of course' (Shirlaw v Southern Foundries). Necessity, not mere reasonableness, is required (Marks & Spencer v BNP Paribas).

What are terms implied by custom and terms implied in law?

Terms implied by custom arise from established trade/market usage (Hutton v Warren), provided not inconsistent with express terms. Terms implied in law are implied into all contracts of a defined type as a matter of policy (Liverpool City Council v Irwin).

Classify contractual terms into conditions, warranties and innominate terms, with their remedies.

Condition: a major term going to the root of the contract; breach allows termination AND damages. Warranty: a minor term; breach allows damages ONLY. Innominate term: remedy depends on the seriousness of the actual consequences of the breach.

Contrast Poussard v Spiers with Bettini v Gye on conditions vs warranties.

In Poussard v Spiers, missing the opening performances breached a condition (root of the contract), permitting termination. In Bettini v Gye, missing only rehearsals breached a mere warranty, so the employer could claim damages but not terminate.

What is the innominate term approach in Hong Kong Fir Shipping (1962)?

Rather than pre-classifying a term, the court asks whether the breach deprived the innocent party of substantially the whole benefit of the contract. If so, they may terminate; if not, damages only. This focuses on the effect of the breach.

State the three-stage test for the validity of an exclusion/limitation clause.

(1) Incorporation — is the clause part of the contract? (2) Construction — does it, on its proper interpretation, cover the breach (contra proferentem rule, ambiguity construed against the party relying on it)? (3) Statutory control — UCTA 1977 / Consumer Rights Act 2015.

Summarise the key controls under the Unfair Contract Terms Act 1977.

Liability for negligently caused death or personal injury cannot be excluded (s.2(1)). Other negligence loss and liability for breach via standard terms can be excluded only so far as reasonable (s.2(2), s.3). The reasonableness test is judged at the time of contracting (s.11; Schedule 2 guidelines).

How does the Consumer Rights Act 2015 control unfair terms in consumer contracts?

A consumer is not bound by an unfair term (s.62) — one which, contrary to good faith, causes a significant imbalance in the parties' rights to the consumer's detriment. Terms cannot exclude the statutory rights in goods/services/digital content (s.31, s.57). A grey list (Schedule 2) gives examples.

Define an actionable misrepresentation.

A false statement of existing or past fact (or law), made by one party to the other before or at the time of contracting, which induces that other party to enter the contract. Statements of opinion, future intention, or mere sales puffs are generally excluded.

When can a statement of opinion or silence amount to a misrepresentation?

An opinion can be actionable if the maker did not honestly hold it or had special knowledge making it effectively one of fact (Smith v Land & House Property). Silence is generally not misrepresentation, except in contracts uberrimae fidei, half-truths, or where circumstances change (With v O'Flanagan).

State the three types of misrepresentation and the test for each.

Fraudulent: a false statement made knowingly, without belief in its truth, or recklessly (Derry v Peek). Negligent: under s.2(1) Misrepresentation Act 1967, with a reversed burden on the representor to prove reasonable grounds. Innocent: made with reasonable grounds to believe it true.

What remedies are available for misrepresentation?

Rescission is available for all types (subject to bars). Damages: for fraudulent (tort of deceit, all direct losses), for negligent under s.2(1) MA 1967 (deceit measure, Royscot v Rogerson), and damages in lieu of rescission for innocent under s.2(2). Bars to rescission include affirmation, lapse of time, third-party rights, and impossibility of restitution.

Distinguish common, mutual and unilateral mistake.

Common mistake: both parties share the same mistaken belief (e.g. as to existence/quality of subject matter). Mutual mistake: parties are at cross-purposes, each mistaken about the other's intent. Unilateral mistake: only one party is mistaken and the other knows or ought to know of it.

When does a common mistake render a contract void (Bell v Lever Bros; Great Peace Shipping)?

Only where the mistake is sufficiently fundamental: res extincta (subject matter does not exist, Couturier v Hastie), res sua (buyer already owns it), or a mistake as to quality rendering the subject matter essentially and radically different from what was contracted for (a very high threshold; Great Peace confirmed no equitable jurisdiction to rescind for mistake).

How does unilateral mistake as to identity affect a contract, and what is the key distinction?

Where identity is material and the non-mistaken party knew of it, the contract is void for mistake. Key distinction: contracts made face-to-face carry a strong presumption of intent to deal with the person present, making them merely voidable for fraud (Phillips v Brooks; Lewis v Averay), whereas written/distance contracts can be void (Cundy v Lindsay; Shogun Finance v Hudson).

Define duress and the test for economic duress.

Duress is illegitimate pressure that vitiates consent, rendering a contract voidable. Economic duress requires: (1) illegitimate pressure (e.g. a threatened breach of contract), (2) which was a significant cause inducing the contract, and (3) the victim had no reasonable practical alternative but to submit (Universe Tankships; Atlas Express v Kafco).

Distinguish actual undue influence from presumed undue influence.

Actual undue influence (Class 1): the claimant proves overt pressure/coercion. Presumed undue influence (Class 2): arises from a relationship of trust and confidence plus a transaction calling for explanation; the presumption then shifts the burden to the dominant party to rebut it (Royal Bank of Scotland v Etridge).

What protective steps must a lender take where undue influence by a third party is possible (Etridge)?

Where a transaction (e.g. a wife guaranteeing a husband's debts) is not on its face to the surety's advantage, the lender is put on inquiry and must ensure the surety receives independent legal advice, or the transaction may be set aside for constructive notice of the undue influence.

How does illegality affect a contract, and what are the main categories?

A contract may be unenforceable if illegal as formed or as performed. Categories include contracts to commit a crime/tort/fraud, contracts contrary to public policy (e.g. ousting court jurisdiction, prejudicing marriage), and contracts in restraint of trade. Courts apply a flexible policy-based approach (Patel v Mirza).

State the rules governing the validity of a restraint of trade clause.

A restraint of trade is prima facie void but enforceable if (1) it protects a legitimate proprietary interest (trade secrets, customer connection, goodwill), and (2) it is reasonable between the parties and in the public interest as to scope, geographical area and duration (Nordenfelt; Esso v Harper's Garage).

Distinguish discharge by performance and the entire obligations rule.

Performance must be complete and precise to discharge obligations (Cutter v Powell; Re Moore & Landauer). Exceptions allowing partial recovery: substantial performance (Hoenig v Isaacs), severable/divisible obligations, acceptance of partial performance, wrongful prevention of completion (Planché v Colburn), and tender of performance.

Distinguish actual breach from anticipatory breach, and state the innocent party's options.

Actual breach is failure to perform when performance is due. Anticipatory breach is a clear refusal/disablement before performance is due (Hochster v De La Tour). On anticipatory breach the innocent party may sue immediately, or affirm and wait for the time of performance (White & Carter v McGregor).

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

Termination is justified for (1) breach of a condition, (2) a sufficiently serious breach of an innominate term depriving the party of substantially the whole benefit (Hong Kong Fir), or (3) a renunciation/repudiation showing intention no longer to be bound. Otherwise only damages are available.

Define frustration and state the test.

Frustration discharges a contract automatically where, after formation and without fault of either party, an unforeseen event makes performance impossible, illegal, or radically different from what was undertaken — 'a thing radically different from that which was undertaken' (Davis Contractors v Fareham UDC).

Give examples of frustrating events and factors that PREVENT frustration.

Frustrating: destruction of subject matter (Taylor v Caldwell), supervening illegality, non-occurrence of the contract's foundation (Krell v Henry), unavailability/incapacity. NOT frustrating: mere increased difficulty or expense (Davis Contractors), self-induced frustration (Maritime National Fish v Ocean Trawlers), foreseen events, or an event provided for in a force majeure clause.

Summarise the effects of frustration under the Law Reform (Frustrated Contracts) Act 1943.

Money paid before frustration is recoverable and money payable ceases to be due (s.1(2)), subject to the court allowing the payee to retain/recover expenses incurred. Where one party gained a valuable non-money benefit before discharge, the court may award a just sum for it (s.1(3)).

State the compensatory aim of damages and the two measures of loss.

Damages aim to put the claimant in the position they would have been in had the contract been performed (Robinson v Harman). The two measures: expectation loss (loss of bargain/benefit expected) and reliance loss (wasted expenditure incurred in reliance on the contract).

State the two limbs of the remoteness rule in Hadley v Baxendale (1854).

Damages are recoverable for losses that are either (1) arising naturally, in the ordinary course of things, from the breach; or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time of contracting as the probable result of breach (special losses requiring communicated knowledge).

Explain the claimant's duty to mitigate and the principle on causation in damages.

The claimant cannot recover for losses they could reasonably have avoided; they must take reasonable steps to mitigate (British Westinghouse v Underground Electric) but need not take unreasonable risks. Damages are also limited to losses caused by the breach, breaking where a new intervening act supersedes it.

How are damages for non-pecuniary loss (distress) and loss of amenity treated?

Generally no damages for mental distress in commercial contracts, but exceptionally available where a major object of the contract was to provide pleasure, relaxation or peace of mind (Jarvis v Swans Tours; Farley v Skinner). Loss of amenity may be recoverable (Ruxley v Forsyth).

Distinguish a liquidated damages clause from a penalty clause, and state the modern test.

A liquidated damages clause is a genuine pre-estimate of loss and is enforceable; a penalty clause is designed to deter/punish breach and is unenforceable. Modern test (Cavendish Square v Makdessi): a clause is penal if it imposes a detriment out of all proportion to the innocent party's legitimate interest in performance.

State the nature and key bars to the equitable remedy of specific performance.

Specific performance is a discretionary equitable order compelling performance, granted only where damages are inadequate (e.g. sale of land or unique goods). It is refused where: damages are adequate, the contract is for personal services, constant supervision is needed, there is mutuality problem, delay (laches), or the claimant lacks clean hands.

Describe the equitable remedies of injunction, rectification and rescission.

Injunction: a discretionary order restraining a breach (prohibitory) — not used to indirectly compel personal service (Page One Records; Warner Bros v Nelson). Rectification: corrects a written document to reflect the true common intention. Rescission: unwinds the contract, restoring parties to their pre-contractual position (subject to bars).

State the doctrine of privity of contract at common law.

Only a party to a contract can sue or be sued upon it; a third party cannot enforce it even if made for their benefit (Tweddle v Atkinson; Dunlop Pneumatic Tyre v Selfridge), and a third party generally cannot have contractual burdens imposed on them.

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

A third party may enforce a contract term if either (a) the contract expressly provides that they may (s.1(1)(a)), or (b) the term purports to confer a benefit on them and the contract does not show the parties did not intend it to be enforceable (s.1(1)(b)). The third party must be identified by name, class or description (s.1(3)).

List the common law exceptions/devices that circumvent privity.

Agency, assignment of contractual rights, trusts of a promise, collateral contracts (Shanklin Pier v Detel), restrictive covenants running with land (Tulk v Moxhay), and a narrow recognition of damages recovered on behalf of a third party (Linden Gardens; the 'broad ground' in Panatown).