BASIC PRINCIPLES OF CONTRACT LAW

Evi Platsidaki
Solicitor
Norton Rose Fulbright Greece
27 November 2014
OVERVIEW
 What’s the difference between a contract and an
agreement?
 What are the elements of a contract?
 Which are the terms of the contract?
 How can a contract be discharged? When are
remedies available to the injured party?
 Can you exclude liability for breach of contract?
 How can a contract become void or voidable?

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Key terms

Voidable
Discharge contract
of contract Warranty
Force Frustration
Majeure of contract
Innominate
term

Damages

Right to
Void terminate
contracts
Condition
Implied
Promissory terms
estoppel

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Agreement v Contract
 What’s the difference?
 Elements of a contract:
 OFFER:
 unequivocal offer
 not just an invitation to treat ie invitation for others to indicate interest
 ACCEPTANCE of terms of offer [acceptance must be on the SAME terms as
those of the OFFER]
 must be communicated to the offeror;
 if orally / fax / email must be actually received by the offeror;
 if by post, English law provides that acceptance is deemed to have occurred on the
date of posting;
 acceptance must not be a counter offer ie must be on same terms as the offer.
(Note: different in the US where you can have an agreement once the main
terms (not ALL terms) have been agreed.)

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Agreement v Contract cont’
 CONSIDERATION:
 The agreement must be a “bargain” ie the offeror must be getting something in
return.
 Consideration must be of value but need not be adequate eg $1.
 Courts have become more flexible in finding consideration.
 Stilk v Myrick (1808): some of the crew left the ship and the captain offered to give
the rest of the crew their salary to return the ship to London. The court found that the
crew had assumed such responsibility anyway under the terms of their contract so
there was no consideration for the extra money offered to them.
(Note: there were also public policy considerations “if such a promise could be
enforced, sailors would in many cases suffer a ship to sink unless the captain
would accede to any extravagant demand they might think proper to make”.)
 William v Roffrey (1990): carpenter quoted too low for work; owner offered extra
money to him; when work was completed the owner did not pay; Qu was whether the
was consideration for the extra money since the scope of work did not increase; court
decide there was consideration but were influenced by the fact that there was no sign
of duress by the carpenter, initial quite was very low, defendant intended to be bound
etc.

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Agreement v Contract cont’
Exception to the rule of consideration: promissory estoppel. The court might
enforce a contract where there is no consideration if the offeree made an offer on
which the counterparty relied on and acted on. If it is considered unfair on such
counterparty to not enforce the contract, the court will oblige the offeree to do as he
promised.
The Vistafjord [1988] 2 LLR 343: One offers to not accept payment; counterparty
makes arrangements and on longer has funds to pay. Even though such an
agreement is not legally enforceable (lack of consideration), the courts will not
allow the offeree to use the lack of consideration to his advantage because the
counterparty had relied on it and would suffer a detriment.
 INTENTION TO CREATE LEGAL RELATIONS e.g. if your grandma
asks you to bring her the paper [offer] and gives you $2 for ice cream
for yourself [consideration], and you accept [acceptance] do you have
a contract?
 FOR LEGAL PURPOSE
 FORMALITIES (if required) e.g. in writing / as a deed.

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Terms of Contract

EXPRESS & IMPLIED TERMS

 Express terms: those expressly stated by the parties; they
may be:

 ORAL; and/or
 WRITTEN.

Note: not all statements made will constitute terms; some will constitute
representations made to induce the other into contract. Depends on parties’
intention. (Different consequences if statement proves to be incorrect/not
complied with.)
 Have any terms been excluded? E.g. is there an entire agreement
clause in the contract?
 Are the terms effective? A clause which HAS been expressly
included may be ineffective. E.g. exclusion clauses (later)

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Terms of Contract cont’

 Implied terms: those implied into the contract by court by

reason of:
 Usage/customary for particular trade
 Previous course of dealings i.e. terms consistently used between the
same parties in previous dealings.
 Completing a gap in the documentation in order to reflect parties’
intention. E.g. no clause re: termination of contract  imply right to
terminate on reasonable notice.
(Note: no implication of good faith requirement in English law contracts.)
 Statute e.g. SGA 1979 eg will imply that the seller has the right to sell the
goods / that goods conform to description.
Note: can parties agree to exclude terms implied by statute?  Statute
may not allow such exclusion or may be silent, in which case not
necessarily clear. Mostly treated as mandatory.

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How can a contract be discharged?
 By performance  parties fully perform their obligations.
 By breach  must be a breach which allows a party to
terminate. (see below – the injured party won’t always be allowed
to terminate because of breach; may only have a right to
damages).
 By frustration  automatic discharge of contract without
remedies for injured party.

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Breach of contract
Breach = failure by a party to the contract to perform an obligation
under the contract.
What are the consequences of a breach under common law*?
 Damages; and [in certain circumstances]
 Right to terminate the contract.
Note that this is a right of the injured party; it’s not triggered
automatically. Instead of terminating the contract such party
may choose to affirm the contract i.e. allow it to continue.
* These rights are available under common law. There may be
additional rights under the terms of the contract.

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Breach of contract cont’
When is an injured party entitled to (i) damages and/or (ii)
terminate the contract?

 Must determine what TYPE of term has been breached by the

other party. The term may be a:
o Condition; or
o Innominate term; or
o Warranty,

and depending on the type of term the remedies will differ.

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Breach of contract cont’
Conditions, Warranties and Innominate terms
A. Conditions
A term which goes to the root of the contract.
A fundamental term.
 A term which if breached will give the injured party the right to
terminate the contract AND claim damages.
E.g. ship fully classed, no deviation, no dangerous goods.
B. Warranties
A term which does not affect the overall performance of the
contract.
 Will not entitle the injured party to terminate the contract. Can
only claim damages.

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Breach of contract cont’
C. Innominate terms
A term which may be either a warranty or a condition depending on
the circumstances.
E.g. seaworthiness, carrying capacity, consumption/speed, type of
cargo to be loaded.

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Breach of contract cont’
Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26 Court of Appeal

C/P for 2 years.

One of the terms of the contract was that the vessel would be seaworthy throughout the period of hire (“in
every way fitted for ordinary cargo service / maintained in a thoroughly efficient state in hull and machinery
during service.
Delivered to the charterer undermanned and engine room staff was incompetent.
Vessel was off hire for 5 weeks for repairs.
On arrival at Osaka (15 May 1957), engines found to be in bad state requiring further 15 weeks to repair.
By 15 September 1957 vessel was made seaworthy.
On 6 June and 11 September, the charterers sought to repudiate the charter and the owners commenced
action for wrongful termination.

Held: The defendants were liable for wrongful repudiation i.e. did not have a right to
terminate the C/P. The judge held that one should look to the effect of the breach and ask if
the breach has substantially deprived the innocent party of the whole benefit of the
contract. If it had, then it would be a breach of condition. The court held that 20 weeks off
hire out of a 2 year contract period did not substantially deprive the defendants of whole
benefit and therefore they were not entitled to repudiate the contract.

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Breach of contract cont’
So how can one know how to classify an innominate term?
 Must look at the effect of the breach on the contract and the
loss incurred by the injured party:
 Does it deprive the other party of substantially the whole
benefit of the contract?  condition
 Can the breach be remedied by way of damages? 
warranty.
 A term may be classified by statute e.g. under SGA 1979, the
time of payment is deemed to be a warranty but implied terms
relating to the seller’s title to the goods, compliance with
description etc. are deemed to be conditions.

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Breach of contract cont’
 A term designated as a condition or warranty under the contract
will be deemed to be as designated unless:
 it’s not in line with relevant statute or case law;
 there is express provision for the consequences of the breach
which are contradictory to such designation. E.g. deemed to be
a warranty but also provide that breach will allow the other
party to terminate; and
 courts find that the intention of the parties, based on the facts
was otherwise.

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Damages
What amount of damages can one claim?
AIM is to compensate for loss incurred and put the innocent party in the
position he would be had the contract been performed.
So the question is which losses resulted from the breach?
 Was the loss caused by the breach? There must not be a “break in the
chain of causation”. Corr v IBC Vehicles Ltd [2008]
 Duty to mitigate.
 Remoteness of damage – was the type of loss incurred foreseeable by
the parties at the date of the contract? (Note: information exchanged
between parties will be taken into account).
Note: may be able to recover even if breach is not the only cause e.g.
Unseaworthiness / perils of the sea (Smith, Hogg & Co Ltd v Black Sea and Baltic
General Insurance Co Ltd [1940]

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Exclusion clauses
A clause aiming at excluding one’s liability for breach of contract.
To be effective they must:
o Be properly incorporated in the contract. E.g. Thornton v Show
Lane Parking (1971): exclusion of liability set out on the ticket
was ineffective as the contract had already been formed.
o Not misrepresented.
o Unambiguous.
o Not repugnant to the main purpose of the contract.
One can exclude liability for fundamental breach Photo Productions v Securicor
(1980) contract between plaintiff and defendant whereby the defendant would
install fire precautions. The defendant employed an arsonist who burnt down the
plaintiff's property. HofL held that liability for breach of contract had been
successfully excluded (clear / unambiguous/equal footing).

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Exclusion clauses cont’
Unfair Contract Terms Act 1977 (UCTA)
Relates to consumer contracts. If an exclusion clause does not
comply with UCTA rules it will be void (rest of the contract is not).
Rules:
o Must not cause imbalance in the parties’ rights and obligations
under the contract;
o Will be void if not reasonably necessary to protect one’s
legitimate interests;
o Would cause detriment to the party relying on it.

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Frustration Of Contract
General rule is that the party who fails to perform its obligations
under contract is liable in damages (Paradine v Kane (1647)).
 Frustration is an exception to the rule as it allows the contract
to be discharged i.e. parties are no longer bound to perform their
obligations and no remedy is available to the innocent party
(“loss lies where it fell”).
What constitutes a frustrating event? An event that:
 Occurs after the contract has been formed; and
 Is so fundamental that it strikes at the root of the contract; and
 Not contemplated by parties when entering into the contract; and
 Is not due to fault by either party; and
 Performance becomes impossible, illegal or radically different.

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Frustration Of Contract
Examples of frustrating events:
 Subject matter of the contract is no longer available;
Taylor v Caldwell [1863]: plaintiff and defendant entered into a contract
whereby the plaintiff would rent the defendant’s music hall for concerts.
The music hall was burned down and the plaintiff claimed that the
defendant was in breach of contract for failing to rent out the music hall.
“When the existence of a particular thing is essential to a contract, and the
thing is destroyed by no fault of the party selling it, the parties are freed
from the obligation to deliver such thing.”
 Personal incapacity of a person who has entered into a contract for
personal services.
The contract will NOT be frustrated if:
 The parties have made provision for such event;
 Party is at fault;
 More expensive to perform the contract;
 Contract can be performed in a different way.

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Frustration Of Contract
Force majeure
What is force majeure and how does it relate to frustration of
contract?
A clause which provides that if certain events occur, the parties will
no longer be liable to perform their obligations under contract.
But note that “force majeure” is not recognised under English law so
to have the effect of such a clause under an English contract,
parties must describe it in full (not just refer to a force majeure
clause being deemed incorporated).

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Void & voidable contracts
When a contract is VOID, it has no legal effect. It is deemed void from the
beginning. (e.g. if A sells to B and B to C and contract between A to B is
void, C did not acquire title to goods because B had to title to transfer to
C*).
The parties have no rights or obligations, as if the contract had never been
made.
A contract may be void by reason of:
o Statute
o Illegality (i.e. one must act illegally to perform it)
o Ultra vires (lack of capacity)
o Mistake (but Great Peace Shipping Ltd v Tsavliris Salvage contract not
void due to common mistake re: location of ship; TS had to pay
cancellation fee)
o Uncertainty impossible to be resolved

23 * http://uk.practicallaw.com/8-503-1691?q=voidable+contract#a186498
Void & voidable contracts cont’
When a contract is VOIDABLE, it has been formed (so not deemed
void from the beginning as a contract that is void) but the innocent
party has the RIGHT to have it set aside (ie not automatically set
aside).
A contract may be voidable by reason of the counterparty being
induced into the contract by:
o Duress
o Fraud
o Undue influence
o Undue influence
o Misrepresentation
o Fraud

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