Contract Law

Ewan McKendrick

• Publisher: Red Globe Press
• Year: 2019
• ISBN:
  9781352005264
• Edition: 13
• Topic: Derecho
• Subtopic: Derecho contractual

A comprehensive and bestselling textbook on Contract Law that covers core areas such as the formation of a contract, what goes into a contract, how to enforce a contract and much more.

The book takes a very practical approach to teaching Contract Law including real-world examples and 'Hot Topic' discussion points, illustrating how Contract Law can interact with other aspects of the core curriculum such as Tort Law. This edition has been updated with important new developments in the field, such as on interpretation, and negotiating damages and an account of profits.

New material includes:

• Rewritten section on interpretation in the light of decisions of the Supreme Court including Wood v Capita Insurance Services Ltd (2018)
  
• New section dealing with negotiating damages and an account of profits in the light of the decision of the Supreme Court in Morris-Garner v One Step (Support) Ltd (2018)
  
• Updated section on the rule in Foakes v Beer in light of the decision of the Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd (2018), albeit the Supreme Court found it unnecessary to resolve the point
  
• Otherimportant new cases: include Swynson Ltd v Lowick Rose LLP (damages andthird party losses) Goodlife Foods Ltd v Hall Fire Protection Ltd (exclusion clauses) First Tower Trustees Ltd v CDS (Superstores International) Ltd (the scope of section 3 of the Misrepresentation Act 167) and Ali v Petroleum Company of Trinidad and Tobago (implied terms).
  

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Written by one of the leading authorities on the topic, this book retains a critical edge and a student-friendly focus. It is essential readingfor all students taking undergraduate and GDL/CPE courses incontract law.

Chapter 1

Introduction

1.1 Introduction

If 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)

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 consideration 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 ensuing chapters and to enable the reader to explore them further in the readings to which I shall make reference.

1.2 The scope of the law of contract

A 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 marriage. 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, mortgages 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 landlord 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 principles 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 maintained today in works such as Treitel (2015), Anson (2016) and Cheshire, Fifoot and Furmston (2017). One might have expected that these treatises would gradually

disappear in the light of the publication of books on, for example, the contract of employment or the contract of hire-purchase, which subject the rules relating to such contracts 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 ‘incorrect 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 multiparty (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 employment 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 principles 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 progressing 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’.

1.3 The basis of the law of contract

The 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 philosophy, 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 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 possible 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, frustration 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 (2015). Fried maintains that the law of contract is based upon the ‘promise-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 principles 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 implication 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 contracting 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 actually 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 expectations 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 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 benefit. 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 reliance 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, contract 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 conflicting 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 ideology; 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.

1.4 Contract, tort and unjust enrichment

A 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 obligations 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 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 four principal stages to an unjust enrichment claim. First, the defendant must be enriched by the receipt of a benefit; second, that enrichment must be at the expense of the claimant; third, it must be unjust for the defendant to retain the benefit without recompensing the claimant and, finally, the defendant does not have a defence to the claim to the reversal of the enrichment. The third 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 unjust enrichment 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 an unjust enrichment 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 unjust enrichment 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 unjust enrichment on the ground that contractual obligations are voluntarily assumed, whereas obligations created by the law of tort and the law of unjust enrichment 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 agreement, the law of contract can, in the vast majority of cases, be separated from the law of tort and the law of unjust enrichment.

1.5 Contract and empirical work

Relatively 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 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 expensive, 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 connection 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).

1.6 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, enco...