ABE Principles of Business Law 2008-1
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(a)Contracts for Sale of Goods
These often revolve around attempts to impose conditions on the resale of goods. If a manufacturer sells to a retailer with certain conditions attached, he may want those conditions to attach to the goods when they are resold to the public. However, on account of the doctrine of privity, he cannot enforce those conditions against a third party who buys from the retailer. All he can do is to insist that the retailer himself attaches the desired conditions on his contract with the public (or other third parties).
McGruther v. Pitcher (1904)
P manufactured "revolving heel pads" as licensee of the patent’s owner. Inside the lid of each box, a notice was stuck stating that it was a condition of sale that the pads would not be resold at less than a certain price, and that "acceptance of the goods by any purchaser will be deemed to be an acknowledgement that they are sold to him on those conditions and that he agrees with the vendors to be bound by the same". A purchaser then resold the goods to the public at less than the specified price. P tried to sue the retailer to prevent this.
HELD: P failed. There was no privity between him and the retailer. Further, he could not rely on the printed notice, even though the ultimate purchaser might be aware of it, because "you cannot in that way make conditions run with the goods".
Thus, the common law rule is clear – two parties to a contract cannot impose liabilities in the form of restrictions on third parties who subsequently acquire the goods. In respect of price only, this rule can be overridden by statute. Under the Resale Prices Act 1976, agreements on resale price maintenance may, provided they are not those which are void under the Act, be enforced against third parties who buy the goods with notice of the price restrictions.
(b)Contracts Affecting Land
There have always been substantial differences between the law relating to land and that relating to other forms of property. Land is called "real property"; other forms are "personal property".
In land law, restrictive covenants can always be made to "run with the land", irrespective of privity of contract between the original vendor and subsequent purchasers (Tulk v. Moxhay (1848)).
(c)Chartering of Ships
Attempts have been made to extend the principles of "real" property to contracts for the charter of ships. Ships are, of course, "personal property" or "chattels".
Lord Strathcona Steamship Co. Ltd v. Dominion Coal Co. Ltd (1926)
Dominion Coal had a time-charter of a ship. The original owners sold the ship to Strathcona, which was aware of the charter, and agreed to be bound by its terms. The company failed to honour the agreement, and claimed that it was not bound by the charter, as it was not a party to it.
HELD: An injunction would be granted to restrain Strathcona from breaching the charter.
Now, at first sight, the decision appears to be wrong. Under the rules of privity, Strathcona was not a party to the charter, so could not legally be bound by its terms (whatever the moral rights might be). It has been contended, however, that notwithstanding that a ship is a chattel, the equitable rule in Tulk v. Moxhay ensured that equity would not permit an act to be done which was inconsistent with a covenant with notice of which the chattel was acquired. This argument is not very convincing, if you refer back to the "revolving heel pads" case (McGruther v. Pitcher (1904)).
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A better explanation is that a contract can be implied between Strathcona and Dominion, transferring the obligations of the original charter to Strathcona. This is called a "novation".
However, whatever the true explanation of this case is, its limits were defined in 1958, in the Port Line case.
Port Line Ltd v. Ben Line Steamers Ltd (1958)
Silver Line Ltd chartered a ship to Port Line for 30 months from March 1955. In February 1956, Silver Line sold the ship to Ben Line – but on condition that she be immediately chartered back to Silver Line, to enable the company to carry out its contract with Port Line. This second charter agreement contained a provision that "if the ship be requisitioned, the charter would forthwith terminate". No such clause appeared in the original charter, and Ben Line was unaware of this anomaly.
In August 1956, the ship was requisitioned by the Crown – and, so, Port Line lost the use of her. Port Line brought an action against Ben Line to recover the compensation received by Ben Line from the Crown.
HELD: Port Line could not sue Ben Line, because there was no privity of contract between them, and Ben Line was unaware at the time it purchased the ship of Port Line's rights under the original charter. However, even if Ben Line had had notice, the company would not have been in breach of any duty to Port Line as it was by no act of theirs that Port Line was unable to use the ship during the period of requisition.
It, thus, appears from this case that the exception to a privity rule permitting a liability to be imposed on a third party will only apply:
If the third party has actual notice of the liability, and
If the third party's conduct has been either inequitable or in breach of a separate agreement with the other party to the contract. (In Midland Silicones v. Scruttons (1962), Midland Silicones did not know that United States Lines stevedoring had been sub-contracted to Scruttons.)
Exceptions to and Avoidance of the Privity Rule
(a)Collateral Contracts
In an effort to avoid the privity rule causing either an absurdity or injustice, the courts will, sometimes, imply a "collateral" contract between a third party and one of the parties to the main contract. A collateral contract is one that is separate from, but substantially in respect of the same subject-matter as, the main contract.
Shanklin Pier v. Detel Products Ltd (1951)
P employed contractors to paint a pier. Detel approached P and represented to him that the company's paint would last for seven years. On the strength of this representation, P instructed the contractors to buy Detel's paint for the job. In practice, it lasted only three months.
HELD: Although the contract for the supply of paint was between the contractor and Detel, a collateral contract would be implied between Detel and P, that the paint would last for seven years.
As will be apparent to you, had the privity rule been strictly applied, P would have no right of action against Detel. Also, as the contract for painting the pier did not contain a warranty that it would last any particular time, P would have no rights against the contractor. Even if P did have such a right, Detel's misrepresentation was made to P. So, the contractor would have no rights against Detel in respect of it.
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The device of implied collateral contract ensured that justice was done. A problem can, however, arise over consideration in such collateral contracts. In the Detel case, the consideration for Detel's promise that the paint would last seven years was P's instruction to the contractor to buy Detel's paint.
However, in Channock v. Liverpool Corporation (1968), the facts were that P's car was damaged and repaired by a garage in pursuance of a contract between it and an insurance company. Repairs were inordinately delayed.
HELD: There was a collateral contract between P and the garage that it would do the repairs in a reasonable time. The consideration for this was the leaving of the car with the garage for repair. Although not necessarily a detriment to P, it was a benefit to the garage, in the sense that it enabled it to contract with the insurance company to do the repairs.
(b)Statute
As we have already seen, statute can override the privity rule. The best example is that of the Resale Prices Act 1976. Other instances are given below.
Law of Property Act 1925, Section 56(1) – a person may take an immediate interest in land or other property or rights, although he/she may not be named as a party to the conveyance or other instrument.
Married Women's Property Act 1882 – people may insure their lives for the benefit of their spouses or children, and these then can enforce the contract on the death of that person, although they are not parties to the contract.
Road Traffic Act 1972 – a person driving a car with the consent of the owner can enforce any provision of the owner's insurance policy that is in his/her favour.
(c)Trusts
A beneficiary of a trust may enforce the terms of a contract made for his benefit between his trustee and a third party.
The trust does not have to be a formal one. The rule applies to any situation where the law will deem a person to be in the position of a trustee, or where he constitutes himself a trustee for another. In such a case, if the "constructive" trustee makes a contract for the benefit of his "cestui que trust" (i.e. beneficiary), that person can enforce the contract. However, it is necessary that the trustee be joined as a party to any such action to avoid the danger of the third party, or promisor, being sued a second time in respect of the same action by the trustee.
In Midland Silicones v. Scruttons (1962), the arguments of agency and trust were both unsuccessfully employed in the Court of Appeal and the House of Lords.
Note: The rule in privity of contract ensures that a person not a party to the contract cannot be sued in contract. This does not preclude such a person being sued on any other pretext for a breach of their obligations such as in Negligence, which we deal with later.
Recent Developments
The law relating to privity of contract has undergone important reforms by the passing of the
Contracts (Rights of Third Parties) Act 1999 (in force on 11 May 2000). Section 1(1) states that a third party may enforce a term in a contract if:
the contract expressly provides that he/she may do so, or
the contract attempts to confer a benefit upon him/her.
Section 1(2) states that the third party will be denied such rights if the parties make it clear that a third party should have no such rights.
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The third party must be expressly identified in the contract:
by name – e.g. John Jones;
as a member of a class of persons – e.g. “all employees”;
as answering to a particular description – e.g. “subsequent purchasers”.
It does not matter that the third party does not exist when the contract is made – e.g. a subsidiary company yet to be formed; a child not yet born.
B. JOINT OBLIGATIONS
Definitions
"Several" liability is present where two or more people make separate promises to another person. These separate promises can be made by the same instrument or by different instruments. The promises are, thus, different – and, if one is discharged or breached, this has no effect on the others.
"Joint" liability arises where two or more people together promise to do the same thing. In this event, there is only one obligation, and the discharge of it discharges all the joint promisors. The rules regarding joint obligations are outlined below.
"Joint and several" liability occurs where two or more persons in the same instrument make a joint promise to do a certain thing and, at the same time, each of them makes a separate promise with the promisee to do the same thing. So, one joint obligation arises, and also as many several obligations as to the same thing as there are promisors.
How Joint Liability Arises
If two (or in each case more) people make the same promise to a third, it is presumed by the law that the intention was that their liability should be joint. Express words are necessary to make the one obligation a joint and several liability.
Examples of joint liability being presumed are outlined below.
Partnerships
The liability of partners for the debts of the partnership is joint.
In Respect of Bills of Exchange and Cheques
If two people draw, accept, or endorse a bill of exchange or a cheque, their liability in respect of it is joint. In the case of a promissory note, the liability may be either joint or joint and several, depending on the words used.
Effects of Joint Liability
(a)Joining all Parties
As we have mentioned, if the obligation which is the subject of joint liability is discharged, then all the joint promisors are discharged. However, if the promisee wishes to take action in respect of the obligation, he/she should "join" all the promisors who are still alive in the one action. If this is not done, any of the defendants (i.e. promisors) can apply to have the action stayed until all of them have been properly joined.
There are certain exceptions to this rule, and there is no requirement to join a joint promisor who is:
A discharged bankrupt
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Outside the jurisdiction of the court
Protected by the Limitation Act 1980
A member of a firm of "common carriers"
An undisclosed "sleeping partner"
(b)Death
The death of one joint promisor serves to transfer the obligation to the other joint promisors. His/her estate is not, thereafter, liable. An exception to this is in the case of partnerships. As we have seen, the liability of partners is joint but the estate of a deceased partner is liable for partnership debts to the extent only that the remaining partners cannot satisfy them. However, when the last surviving joint promisor dies, the obligation does then pass to his/her personal representative.
(c)Judgment against One Joint Debtor
If judgment is obtained against one of the promisors to a joint obligation, this serves to bar any further action against the others, even if it is not satisfied. The reason is that the debt is deemed to merge in the judgment. Hence, the practical as well as legal advisability of suing all the joint debtors.
In the event of joint and several liability, a judgment against one of them does not bar action against the others. The creditor can sue them all together, or one at a time, as he/she pleases. As you will appreciate, the fact that not only have the promisors jointly agreed to be liable but that each has also made a separate promise ensures that this flexibility is allowed to the creditor.
(d)Contribution between Themselves
If one joint or joint and several promisor pays the debt, or pays more than his/her share, he/she can recover the excess from the others in equal shares – subject, however, to any agreement between themselves to the contrary (Deering v. Earl of Winchelsea (1787)).
C. ASSIGNMENT
Background and Definition
Assignment is the act of transferring obligations or rights under a contract to another person, not a party to the original contract.
Now, it is not only the law but also common sense that a person cannot transfer his/her liabilities under a contract unless the other party agrees to accept performance by the transferee. Nor can a person be compelled to accept liability for the contract from anybody other than the person with whom he/she contracted. This principle was established in the old case of Robson and Sharpe.
Robson and Sharpe v. Drummond (1831)
Sharpe undertook to paint annually, and keep repaired, a carriage which he hired to Drummond for five years. After three years, Sharpe retired, and he informed Drummond that, henceforward, his partner Robson would be responsible for the painting and repair. Robson was not a party to the original contract.
Drummond, therefore, refused to accept this, and he returned the carriage.
HELD: He was entitled to do so.
The reasoning here is that a person is entitled to insist that the work is carried out by the person whom he, obviously, trusts to do it properly and in accordance with his wishes. That
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person has been selected on the basis of skill, competence, or other characteristics – so, it is right and proper that no one else should do the job.
However, in cases where the contract is such that it is quite immaterial who actually does the work, provided it is done adequately, it may be performed vicariously by someone else: that is to say, the performance is transferred to a third person without the necessary consent of the employer. Normally, however, the liability – as opposed to the actual performance – is not transferred.
British Waggon Co. v. Lea & Co. (1880)
The Parkgate Company hired a number of railway wagons to Lea, and agreed to keep them in repair. Parkgate then went into liquidation and assigned both the repair work and the benefit of the contract to British Waggon. Lea refused to accept this, and rescinded the contract.
HELD: He could not do so.
Robson and Sharpe v. Drummond was distinguished on the grounds that, here, any ordinary workman could carry out the necessary work, and it was of no importance who actually did it.
Of course, with the agreement of both parties, either the benefit of, or the liabilities under, a contract can be assigned to a third party. What one is, in reality, doing in such a case is cancelling the old contract, and substituting a new one, with the third party. This, as we have seen, is called a "novation".
Originally, the common law forbade the assignment of rights or obligations under contracts, whereas equity would permit them. So, statute stepped in to regulate the apparent absurdity. Now, therefore, there are two types of assignment.
Statutory Assignments
By the Law of Property Act 1925, Section 136, "any absolute assignment by writing under the hand of the assignor of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, is effectual in law to pass and transfer from the date of such notice:
(a)the legal right to such debt or thing in action;
(b)all legal and other remedies for the same; and
(c)the power to give a good discharge for the same without the concurrence of the assignor".
Section 136, therefore, permits any rights arising under a contract to be legally assigned to a third party, without the consent of the other party, provided that the assignor gives prior written notice to the other party. However, note that it is only rights under the contract that may be so assigned – the right to receive payment of a debt, the right to receive payments due on the contract, and so on. A person still cannot assign the liabilities – that is, the duties he/she has to perform, or the obligation to make payment, etc., by virtue of this statutory provision.
Equitable Assignments
Equity does not insist on the formality of written notice before the assignment of a debt or other "thing in action" is valid. Plainly, it is sensible to do so – but not essential. In equity, an assignor can assign a right arising under the contract in two ways:
By transferring the right to receive something, be it payment or the performance of the contract, to his/her assignee;
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By instructing the other party to the contract (the debtor) to discharge his/her debt to, or give performance to, the assignee.
Provisions Applicable to both Statutory and Equitable Assignments
(a)The assigning of rights under a contract is not necessarily a separate or collateral contract between assignor and assignee, although it can be. It is a right, and consideration for it is not necessary (Holt v. Heathfield Trust Ltd (1942)).
(b)A contract can specifically declare that rights under it shall be incapable of assignment
– in which event, any purported assignment will be invalid.
(c)The assignment of certain rights is prohibited by statute, or made void by reason of "public policy" – e.g. benefits under Social Security legislation; the salary of a public officer; the right of a wife to receive maintenance.
(d)Rights arising under commercial contracts are, normally, readily assignable. However, it may appear from the contract that the requirements of one party are a material consideration in ascertaining the obligations of the other. In such event, the benefit of the contract may not be able to be assigned. Two examples may serve to illustrate the difference.
Tolhurst v. Associated Portland Cement Manufacturers Ltd (1902)
Tolhurst contracted to supply a small company with "750 tons of chalk per week for 50 years, and so much more as the company shall require for the manufacture of portland cement upon their piece of land ". The small company sold its business to Portland Cement, which was a large concern.
HELD: Portland Cement could maintain an action against Tolhurst in its own name. Portland Cement was entitled to the benefits of the contract, and the assignment of them was valid.
The reasons given were:
That the assignment did not increase the burden of the contract on Tolhurst, as the small company might have increased its capital and worked "its piece of land" more intensively, and
With a contract of such long duration, the possibility of assignment must have been contemplated.
On the other hand, consider Kemp v. Baerselman.
Kemp v. Baerselman (1906)
D contracted to supply a cake manufacturer with all the eggs that he would require for one year, and the manufacturer agreed not to purchase eggs from elsewhere. The cake manufacturer transferred his business to another company.
HELD: The contract for eggs was not assignable. The obligation to supply eggs was not limited to the capacity of a piece of land, or anything else. Its assignment would, therefore, increase the burden of the contract on D. In the second place, the agreement of the manufacturer not to purchase elsewhere was personal, and the obligation would not have been binding on the assignee company.
D. MISTAKE
The subject of "mistakes" in contracts, and how they affect the validity or otherwise of the bargain, is one of the most illogical areas of contract law. Many of the cases turn on fine distinctions. As a generalisation, if you make a mistake in entering into a contract, that is
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your bad luck – you must suffer the consequences. However, there are certain types of mistake which the law recognises as affecting the agreement. In some instances, common law will declare that a mistake has served to nullify the consent, and so made the contract void "ab initio", or as if it had never been made. In others, equity will step in to allow the contract to be rectified or rescinded, or to act as a defence to a request for an order of "specific performance" of the contract (you will remember that specific performance is a court order compelling the guilty party to execute the contract according to its terms).
At common law, there are two basic types of mistake which may serve to render the contract void – common mistake (where both parties have made the error), and unilateral mistake (where only one of them has).
Common Mistake
Where the mistake is shared by both parties, it may mean that there is no true agreement or "consensus ad idem". There is agreement of a sort but it is based on a false assumption, hence common law may declare the contract void on the grounds that the agreement is not a true consensus.
There are only a few circumstances where this will apply.
(a)Mistake as to some Fact which Lies at the Basis of the Contract
If both parties assume some fact to be true, and that fact is a root condition of the contract, and it is either false or non-existent, then the contract is nullified.
The leading example of this is Bell v. Lever Bros Ltd (1932).
Bell v. Lever Bros Ltd (1932)
Lever Bros had a subsidiary in Africa, called the Niger Company Ltd. Mr Bell and another man were directors of the Niger Company, and they had service agreements with the parent, Lever Bros. These agreements, as well as providing for large salaries, also contained a provision that the directors were prohibited from carrying on business on their own account. Unbeknown to Lever Bros, the two directors did carry on private business and made substantial profits from it.
For quite unconnected reasons, Lever Bros terminated the two service contracts before their expiry, and paid a substantial "golden handshake" to each of the two directors. They later learned about the private business profits. Had they discovered this beforehand, they would have been entitled to terminate the service agreements summarily without payment of any compensation. They sought to recover the payments they had made.
It was found as a fact by the jury (they had juries in civil actions in those days) that the two directors had not given a thought to their previous breaches of contract when entering into the contract for compensation with Lever Bros. It was, therefore, a case of common mistake – Lever Bros did not, at the time, know about their right summarily to dismiss, and it never occurred to Mr Bell. Hence, they both contracted for the compensation payment on the basis of ignorance of a vital fact.
Both the High Court and the Court of Appeal held that there had been a common mistake as to some fact at the root of the contract. Hence, as there was no true agreement, the contract was void ab initio, and Lever Bros were entitled to recover the payments. By a majority of three to two, the House of Lords overturned this decision, mainly on the grounds that the mistake was not sufficiently fundamental to avoid the contract.
(b)Mistake as to the Existence of the Subject-matter of the Contract
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This, usually, occurs in contracts for the sale of goods. If both parties think they are contracting for a certain thing, and unknown to both it does not actually exist, then the contract is void. There are a number of important cases to illustrate this principle.
Couturier v. Hastie (1856)
The parties contracted for a cargo of corn which was believed to be in a ship bound from Greece to England. In fact, before the date of the sale, the corn had rapidly deteriorated, and the ship had put in to Tunis and sold the cargo for what it would fetch.
HELD: The contract was void because of mistake as to the existence of the subjectmatter.
Barrow, Lane & Ballard Ltd v. Phillip Phillips & Co. (1929)
There was a contract to buy specific bags of nuts, stored in a warehouse. Unknown to both parties, at the time of the sale, those particular bags of nuts had been stolen.
HELD: The contract was void.
There is an alternative argument as to the reason why a contract should be void if there has been a mistake as to the existence of the subject-matter. This is that:
"cases where goods have perished at the time of sale ... are really contracts which are not void for mistake, but are void by reason of an implied condition precedent because the contract proceeded on the basic assumption that it was possible of performance". (Lord Denning in Solle v. Butcher (1950)).
The result is, usually, the same: the contract is void. However, on occasions, the court will refuse to imply such a condition precedent.
McRae v. Commonwealth Disposals Commission (1951)
The Commission sold a salvage firm, McRae, an oil tanker lying stranded on a Jourmand reef, 100 miles off the coast of New Guinea. When the salvage firm arrived on the scene, it found that not only was there no oil tanker but also no reef anywhere in the vicinity!
HELD: McRae succeeded. The contract was not void for mistake, and no condition would be implied that the contract would be void if the tanker was not in existence.
This is, perhaps, an example of the court trying to ensure that justice was done. The Commission was reckless in asserting the existence of the vessel. Had the contract been declared void for mistake, the purchase price would have been repaid – but not the very substantial expense of fitting out the salvage expedition and searching the area.
(c)Mistake as to Title
This is an uncommon type of mistake but it does occur – not least in examination questions! The principle is that, if someone makes a contract in the belief that the subject-matter belongs to the other party whereas in reality it is his/her own property, the contract will be void (Cooper v. Phibbs).
Cooper v. Phibbs (1867)
A contracted to lease a fishery in Ireland from B. Unknown to both of them at the time, A was, in fact, "tenant in tail" (i.e. beneficial owner) of the fishery.
HELD: The lease would be set aside.
In a contract which involves sale of goods, the seller warrants his/her title to the goods. So, if there is a common mistake, the contract is not avoided, and the seller may be liable for damages for breach of warranty. It is only where there is no such warranty that the contract will be void if the buyer purchases his/her own property.
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(d)Mistake as to the Quality of the Subject-matter
This category of mistake probably raises the greatest number of problems for the courts. An ordinary error as to quality will not avoid the contract, although it may well give rise to an action for damages. In order to qualify as a mistake which will serve to avoid the contract:
It must be common to both parties, and
It must be such that the quality makes the thing contracted for an essentially different thing from that which it was thought to be.
Kennedy v. Panama, New Zealand and Australian Royal Mail Co. (1867)
The company issued a prospectus offering shares, and it stated that the extra capital was needed to fulfil a profitable mail contract with the Postmaster in New Zealand. It later transpired that the contract was beyond the Postmaster's authority to make. Mr Kennedy, who had purchased shares in reliance on the statement in the prospectus, attempted to repudiate the share purchase contract on the grounds that the shares issued were totally different in substance from those for which he had contracted.
HELD: He failed on these grounds. The shares purchased under an admitted mistake were not sufficiently different in substance or quality to avoid the contract.
A mistake as to quality which was not sufficient to make the thing contracted for a totally different thing occurred in Frederick E Rose (London) Ltd v. H Pim Junior & Co. Ltd (1953).
The parties contracted for the sale of "horse beans" which both believed to be the same as "féveroles". They were not the same thing.
HELD: The contract was valid. The difference was not sufficiently fundamental.
However, the common mistake was sufficiently fundamental to avoid the contract in
Scriven Brothers v. Hindley (1913).
Scriven Brothers & Co. v. Hindley & Co. (1913)
Hindley bid at auction for what he believed was hemp. The auctioneer thought he was offering tow.
HELD: Hemp and tow are totally different commodities, and the contract was, therefore, void.
(e)False and Fundamental Assumption
This is the last category of common mistake. As was said in Bell v. Lever Bros:
"Whenever it is to be inferred from the terms of the contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided ".
There are two important cases which illustrate how a false and fundamental assumption by both parties will serve to avoid a contract.
Magee v. Pennine Insurance Co. Ltd (1969)
Mr Magee claimed on his insurance company for damage to his car. The damage was caused by a risk which was covered under the policy. The insurance company agreed to pay. It later transpired that, unbeknown to both parties, at the time of the accident the policy was, in fact, voidable by the insurance company.
HELD: The contract was avoided by reason of the false and fundamental assumption of both parties that the policy was valid.
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