RECENT
DEVELOPMENT IN CONTRACT LAW
Text of a Lecture to the London Solicitors Litigation
Association
By Jonathan
Nash
of 3 Verulam Buildings, Gray's Inn,
London WC1R 5NT
10 February 1998
1. I am taking the title of this talk to indicate
an overview of developments in Contract Law in the last five
years i.e. from the 1st January 1993, although I will refer
from time to time to earlier developments where they are relevant.
Obviously this covers a good deal of ground and I can only
give a sketch in the hour which has been allotted to me. I
shall follow as far as possible the traditional divisions
of the subject because we are all used to them, and I shall
focus on those cases which seem to me to be important to litigators
in that they raise the kind of questions which litigation
solicitors and barristers have to consider, often at short
notice.
Formation
2. Nowadays this topic seems to be driven by developments
in technology which allow people to make contracts ever more
instantaneously and impersonally. The old "Postal Rule" as
to the communication of acceptance of an offer is beginning
to look rather quaint. As far as I'm aware, however, there
is no reported English case involving commerce on the Internet
although I think we can anticipate disputes as to what offer
was made and when and if it was accepted. There is no reason
to think that these issues will not be resolved in a manner
analogous to that which has been applied in the telex cases.
The rule here of course is that the contract is made when
and where the acceptance is received: Brinkibon Ltd
v Stahlag Stahl [1983] 2 AC 34.
3. The use of instantaneous and machine-generated means of
communication gives rise to problems about authenticity, particularly
in cases involving international trade and finance. An important
decision has resolved for the purposes of English Law what
the effect of the use of tested telexes is in communications
between banks. In Standard Bank Ltd. v. Bank of Tokyo
[1995] 2 Lloyds Rep 169, Waller J. had to consider whether
three letters of credit issued by tested telex at the instigation
of a fraudster who had somehow got access to the issuing bank's
tested telex department, were binding upon the issuer. He
concluded that by using the tested telex system the issuer
of the letter of credit represented that the telex was authorised,
and that its recipient would only be disentitled from relying
upon that representation and enforcing the contract if he
was on notice that the document was in fact fraudulent. He
added that at least in a commercial context one would not
be put on notice by negligence alone: actual knowledge of
fraud or wilful blindness was the only basis on which notice
would be imputed to the third party. In this sense his analysis
of the common law rules of agency and authority is very much
in line with the analysis of the equitable rules of constructive
trust in "knowing assistance" cases as they have now been
explained by Lord Nicholls in Royal Brunei Airlines
v. Tan [1995] 2 AC 378.
4. While dealing with the question of agency in a contractual
context I should draw attention to the important decision
of the Court of Appeal in First Energy (UK) Ltd v. Hungarian
International Bank Ltd [1993] 2 Lloyds Rep 194. In
that case the manager of the local office of a London-based
Bank committed his employers to a contract by signing a letter
indicating that the Bank had agreed to lend funds even though
it was established that the borrowers knew that the local
manager did not have authority himself to make the contract.
The Court of Appeal held that in circumstances where it is
known that an agent does not have authority to contract, his
principal may nevertheless be bound if he has placed him in
a position where he has apparent authority to communicate
to a third party that a contract has been made by those higher
up the chain. One can see of course that fine distinctions
will flow from this decision: litigators will no doubt plead
in future that agents who are known to lack actual authority
to conclude contracts nevertheless have ostensible authority
to announce that the contract has been concluded.
5. There have been some recent developments in the field of
what contracts can be made under English Law, in particular
on the question of the effect of "agreements to agree". In
Walford v. Miles [1992] 2 A C 128, the House
of Lords had held that an agreement for consideration to deal
exclusively with one potential contractor and to terminate
any other negotiations then current lacked certainty and was
unenforceable as being in effect a bare agreement to negotiate.
However, the possibility of such an agreement, if framed in
the correct way, was left open, and shortly afterwards the
Court of Appeal, in Pitt v. PHH Asset Management Ltd
[1994] 1 WLR 327 upheld an agreement to negotiate exclusively
with another person for a fixed period of time, in effect
a "lock-out" agreement. This decision was of course in the
context of a house purchase but there seems to be no reason
in principle why it should not apply to any contractual negotiation.
The key to such agreements is firstly that they should be
framed in negative terms i.e. restricting the right of the
negotiating parties to deal with other persons rather than
to seeking to impose a vague general obligation to negotiate
in good faith; and secondly that they should be expressed
to last for a fixed period of time.
6. Finally in this section dealing with the position where
the contract has not or may not have been made, note the decision
of Rattee J. in Regalian Properties Plc v. London Dockland
Development Corporation [1995] 1 WLR 212, where he was
faced with a claim for costs incurred in preparation for an
intended development contract where it was clear that the
contract itself was never concluded because parties were unable
to agree a contract price. He dismissed the claim, holding
that where parties entered into negotiations with the intention
of concluding a contract but on express terms that each party
was free to withdraw from negotiations at any time, it was
clear that, pending the conclusion of a binding contract,
any costs incurred by one of the parties in preparation for
the intended contract would be incurred at his own risk in
the sense that he would have no recompense for those costs
if no contract resulted. The use of the words "subject to
contract" meant that each party had accepted that if no contract
was concluded the losses incurred by the negotiating parties
would lie where they fell.
Consideration
7. Whether or not you think that the English law doctrine
of Consideration serves any useful purpose, it does not generally
seem to give rise to problems: if the English Court is minded
otherwise to enforce a contract, it will be creative in the
finding consideration. Thus in Bowerman v ABTA
[1996] CLC 451, which I will return to in a minute in more
detail, parties who read ABTA's poster before contracting
with travel agents were held to have given consideration for
a contract with ABTA by choosing to deal with their members.
There is always consideration if you look hard enough.
8. One area in which there has been some debate about the
doctrine, however, arises where the parties are all ready
subject to pre-existing contractual obligations of some kind
between themselves and the question is whether due performance
of those obligations can constitute consideration for the
performance of a further contract of some kind. In Williams
v Roffey Brothers & Nicholls (Contractors) Ltd.
[1991] 1 QB 1, the Court of Appeal decided that due performance
of existing obligations could provide consideration for a
further contract since there might be "practical benefit"
in obtaining the proper performance of the original obligations.
This decision was made in a building context. In Re
Selectmove Ltd [1995] 1 WLR 474, however, the Court
of Appeal had to decide whether this principle applied to
obligations to pay money. The company, Selectmove Ltd, alleged
that it had made an agreement with the Inland Revenue for
the payment of arrears of P.A.Y.E. and N.I.C. by instalments.
The Court of Appeal decided that this was not good consideration
for a promise by the Inland Revenue not to seek immediate
payment of the arrears, applying the old case of Foakes
v. Beer (1884) 9 App. Cas. 605, and deciding that
at least in cases of debtors and creditors the more modern
principle contained in Williams had no application.
9. Finally, it has been interesting to see that there is still
some life in the Carlill v Carbolic Smokeball Company
[1893] 1 QB 256. In the Bowerman case, the Court
of Appeal had to consider the effect of a notice prepared
and displayed by ABTA in the premises of its members apparently
promising to protect the customers of its members from financial
loss in the event of the insolvency of the travel agent. By
a majority the Court of Appeal held that the document, properly
construed, constituted a enforceable promise by ABTA to reimburse
customers of failed travel agents. Hobhouse LJ's decision
follows closely the rejection of the counter-arguments on
contactual intention and consideration a hundred years earlier
in the Smokeball case. All of the members of the Court of
Appeal emphasised that in dealing with questions of this sort
it was important to have in mind what impact the notice would
have on the ordinary member of the public: in other words
an objective test is applied. Evidence as to the particular
impact it had on the gym teacher concerned was irrelevant.
Implied Terms
10. There have been several interesting cases on the implication
of terms into contracts. In Spring v. Guardian Assurance
Plc [1994] 2 AER 129, the House of Lords considered
whether there was an implied term in a contract of employment
that any reference given should be prepared with reasonable
care. The context was the Life Assurance Industry. A Sales
Director was dismissed following the takeover of his employers
by another company and he attempted to set up a business in
the same locality selling the assurance policies of a rival
company. His new employers had to obtain a reference from
his previous employers under the LAUTRO Rules. The reference
supplied stated that the Plaintiff kept the best business
for himself, that he was a man of little or no integrity and
could not be regarded as honest and that he had mis-sold a
policy with the aim of generating a very substantial commission
for himself at the clients' expense. This was not regarded
as a satisfactory reference. The Plaintiff succeeded at first
instance in establishing the existence of a tortious duty
of care although the argument that an implied contractual
term required his former employer to use reasonable care in
preparing the reference was dismissed. In the Court of Appeal
it was held in effect that his only remedy lay in deformation
and that there was no contractual term and no duty of care
to take care in preparing a reference. In the House of Lords
it was decided that there was both a duty of care and an implied
term of the contract of employment that the reference prepared
by the employer would be prepared with skill and care. From
the contractual point of view the interest of the case lies
with the consideration by their Lordships of the circumstances
in which a term should be implied into the contract. Emphasis
was placed, particularly by Lord Woolf on the importance of
identifying specific aspects of the express contract which
made it necessary (and not merely reasonable) that the implied
term should exist. In this particular case the fact that LAUTRO
required references to be obtained made it a necessary incident
of the contract of employment that a former employer should
use reasonable care in providing his reference.
11. In Wong Mee Wang v. Quan Kin Travel [1996]
1 WLR 38 a holiday maker was drowned when travelling in a
speed boat driven by an employee of a local Chinese company:
the holiday had been booked with a Hong Kong package tour
operator. The case raised the question of whether the package
tour operator had undertaken only to arrange for services
to be provided by others as their agents (where the law would
imply a term into a contract only that they would use reasonable
care and skill in selecting those other persons), or whether
they themselves undertook to supply the services, in which
case there would be implied into the contract a term that
they would as suppliers carry out the services with reasonable
care and skill. The Privy Council held that the package tour
operator had undertaken that it would itself provide services
to the holiday maker even though in some instances those services
were to be performed by local personnel who were not employees
of the operator and accordingly a term was to be implied that
those services would be performed with reasonable skill and
care. The result was hardly surprising given the merits of
the claim and the tragedy which had occurred but the case
does highlight the difficulty in deciding in any particular
case whether the contract is for the supply of services or
for the arrangement of services to be supplied by others.
Lord Slynn emphasised that the fact that it is known that
another person will or may perform the services or part of
them does not mean that the contract is one of agency. In
each case it has to be asked as a matter of construction into
which category the contract falls.
Construction
12. The whole question of the correct approach to construing
the express terms of a contract and what evidence is admissible
as an aid to the construction exercise has been debated in
some detail recently at appellate level. One of the principal
problems has been the use of Lord Wilberforce's remarks in
Reardon Smith v Hansen-Tangen [1976] 1 WLR 989
as to the importance of having regard to the "factual matrix"
in which a contract is made as an excuse for bringing in all
kinds of irrelevant material, including expert evidence, which
could not conceivably have been known to the parties at the
time the contract was made. Naturally in litigation when one
side adduces what purports to be evidence of how a market
works but which often in fact is thinly disguised material
showing what the expert himself believes the contract should
mean, the other side feel bound to respond. This approach
was deprecated by Staughton LJ in an interlocutory appeal
in New Hampshire Insurance Company v. MGN Ltd
(unreported) in an ex tempore judgement delivered on 15th
June 1995. When the substantive appeal in that case came before
the Court of Appeal the Court took the opportunity to repeat
what were described as the four principles relevant to the
interpretation of the written contract (at [1996] CLC on 692
at 1730):
(a) Nothing is relevant unless it was known to or reasonably
capable of being known to both parties at the time when the
contract was made. In particular, an undisclosed intention
held in pectore by one of the parties is not admissible
for the purpose of interpretation.
(b) The court looks first at the written document alone and
determines what it means from the ordinary meaning of the
language used, unless some customary meaning is pleaded and
proved.
(c) However, the court may also have regard to the surrounding
circumstances, now commonly referred to as the matrix, the
genesis or aim, the market in which the parties were operating.
But this evidence must qualify under principal (1) if it is
to be admitted.
(d) Evidence of negotiations is not admissible. This is subject
to some exceptions, such as a case of rectification, or if
it is said that agreement was reached in negotiations as to
the meaning of a particular term, or that the contract was
made by a continuous process of agreeing some terms and then
turning to consider others.
13. These principles are easily stated and clear enough. In
particular, principle (1) was applied in the MGN
case to the effect that even if the parties agree that
privately each had the same intention in relation to a contract,
if that intention cannot be derived from the words used and
there was no communication to the other party of the private
intention, then this fact is irrelevant and inadmissible for
the purposes of interpreting the contract.
14. Unfortunately, the whole area has now been reopened by
the important decision of the House of Lords in Investors
Compensation Scheme v. West Bromwich Building Society
[1997] CLC 1243, where Lord Hoffman continued his rather iconoclastic
career in the House of Lords by declaring that what he called
the "old intellectual baggage of legal interpretation" has
now been discarded. In particular, he stated that:
"The
meaning which a document (or any other utterance) would convey
to a reasonable man is not the same thing as the meaning of
its words. The meaning of words is a matter of dictionaries
and grammars; the meaning of the document is what the parties
using those words against the relevant background would reasonably
have been understood to mean. The background may not merely
enable the reasobnable man to choose between the possible
meanings of words which are ambiguous but even (as occasionally
happens in ordinary life) to conclude that the parties must,
for whatever reason, have used the wrong words or syntax."
15. In the ICS case, Leggatt LJ determined that
what was proposed as the commercially sensible meaning of
the words used in the ICS compensation form was not an "available
meaning" of the words. He relied on Alice Through the
Looking Glass. In the House of Lords Lord Hoffman
decided that Leggatt LJ had misunderstood that authority and
that it was perfectly open to the Court to depart from the
actual words and syntax used if it could conclude (from the
commercial background) that the wrong words had been used.
16. The matter is not closed however. The Court of Appeal
has indicated a distinct unease with the radicalism of Lord
Hoffman's approach in two recent cases, the National
Bank of Sharjah v. Delbourg (unreported) Court of
Appeal , 9th July 1997; and Scottish Power v. Britoil,
The Times, 5th December 1997.
Statutory Intervention
17. There has been a potentially very important statutory
intervention in contracts made by the Unfair Terms in
Consumer Contracts Regulations 1994, which came into
force on 1st July 1995. Their potential however does not appear
to have been appreciated by lawyers to date. The regulations
are complex and need to be studied in detail but note that
they apply to contracts concluded between a seller or supplier
and a consumer, and they permit the Court to strike out any
term which is held to be "unfair". This is defined in regulation
4 as being "any term which contrary to the requirement of
good faith causes a significant imbalance in the parties'
rights and obligations under the contract to the detriment
of the consumer". The regulations also enshrine a contra
proferentem rule in favour of the consumer (regulation
6); override any choice of law clause which purports to apply
the law of a non-member state provided the contract has a
close connection with the territory of a member state (regulation
7); and confer upon the Director-General of Fair Trading the
power to apply for an injunction against any person whom he
considers is persisting in using a contract containing an
unfair term. Schedule 2 to the Regulations specifies four
matters to which regard should be had in considering whether
a term has been negotiated in good faith. It is interesting
to note that the requirement of good faith here does not appear
to depend on any concept of conscionability but rather on
practical commercial considerations such as the strength of
the bargaining position of the parties and whether the consumer
had an inducement to agree to the relevant term. Schedule
3 provides an extensive list of illustrations of the sort
of terms which may be regarded as unfair.
18. On the application of the other major area of statutory
intervention in contract, the Unfair Contract Terms
Act 1977, it has now been decided that there is no
necessity for a party wishing to challenge exclusion terms
under the Act on the basis that they are not reasonable to
indicate this intention on the pleadings: see Sheffield
v. Pickfords Limited, The Times, 17th March 1997.
It seems that any person who is intending to rely, for example,
on an exclusion clause in the standard terms and conditions,
must be prepared at trial whether or not the point is raised
by the defence to prove the reasonableness of the terms relied
upon.
19. On the substantive issue of whether or not a particular
contractual term is reasonable, these decisions tend to turn
on their individual facts and there is little to be gained
from reciting all the various cases in which a particular
contractual term has been considered. Note however the remarks
of the Court of Appeal in Edmund Murray Ltd v BSP International
Foundations Ltd. (1992) 33 Construction Law Reports
1 in which emphasis was placed on the importance of attaching
great weight to the conclusions of the trial judge on the
issue of reasonableness.
Rectification
20. There has been no new law in this area but some useful
restatements of the principles which are to be applied. In
Grand Metropolitan plc v. The William Hill Group Limited
[1997] 1 BCLC 390, Arden J reaffirmed that it is not necessary
for the purposes of rectification to prove that the parties
to the agreement had reached some prior concluded agreement
in the terms in which rectification is sought. It is sufficient
that the parties had a common continuing intention
with respect to a particular matter which is not reflected
in the written agreement which is executed. It is however
necessary to show that there was an outward expression of
accord in relation to the matter. She also accepted that a
party seeking rectification must show by "convincing proof"
that there was a common continuing intention. This does not
detract from the normal burden of proof in civil cases but
emphasises that where what is impugned is a written instrument
particularly cogent evidence is required to convince the Court
that the written instrument is wrong.
21. There is an important decision in the Court of Appeal
in Commission for New Towns v. Cooper [1995]
2 All ER 929 where the Court was concerned to consider the
effect of an agreement made between a statutory body which
had succeeded to the rights of Milton Keynes District Council,
and a UK subsidiary of an American corporation. A representative
of the American corporation had procured a local official
to agree to grant to the UK subsidiary the right to surrender
a lease without penalty in circumstances where it was clear
that, although the terms of the agreement made did indeed
include the right conferred, it had never been intended so
to do. In effect the Americans had pulled the wool over the
eyes of the local official but it could not be said that there
was any ambiguity in the words used in the agreement; nor
could it be said that there had been any actual misrepresentation.
Nevertheless, the Court held that rectification could be granted
to exclude the conferment of the option. In the course of
doing so, Stewart-Smith LJ gave a remarkably wide statement
of the law:
"...
were it necessary to do so in this case, I would hold that
where A intends B to be mistaken as to the construction of
the agreement, so conducts himself that he diverts B's attention
from discovering the mistake by making false and misleading
statements, and B in fact makes the very mistake that A intends,
then notwithstanding that A does not actually know, but merely
suspects that B is mistaken, and it cannot be shown that the
mistake was induced by any misrepresentation, rectification
may be granted. A's conduct is unconscionable and he cannot
insist on performance in accordance to the strict letter of
the contract; that is sufficient for rescission. But it may
also not be unjust or inequitable to insist that the contract
be performed according to B's understanding, where that was
the meaning that A intended that B should put upon it."
Vitiating Factors
22. The old plea of non est factum has been considered by
the Court of Appeal in Norwich & Peterborough Building
Society v. Steed [1993] Ch 116. The owner of a property
left a power of attorney with his mother when he emigrated
to the United States. His mother was tricked into transferring
the property to the sister of the owner, who subsequently
charged it to a building society. The plea that the transfer
(and therefore the charge) were void ab initio was
rejected. The evidence did not establish that the mother was
mistaken as to the character of the document she was signing
when she transferred the property to the owner's sister: it
only showed that she had no opinion at all as to what the
document was. Furthermore, if it was the case that she was
incapable of understanding the powers conferred upon her by
the letter of attorney and the transfer of the property to
the sister, then the owner was careless in appointing her
as his attorney and for that reason also was unable to rely
on the non est factum plea.
23. In the field of common law duress note the decision of
the Court of Appeal in CTN Cash & Carry Limited
v. Gallaher [1994] 4 All ER 714. Here the Plaintiffs
ran a cash and carry business from warehouses in the north
of England from which they sold inter alia cigarettes which
they bought from the defendant distributors. The Plaintiffs
had credit facilities from the Defendants which the Defendants
were entitled in their absolute discretion to withdraw. A
dispute arose between the parties as to who was responsible
for some stolen goods. The Plaintiffs rejected the claim of
the Defendants that they were bound to pay for the goods but
later paid up when the Defendants made it clear that unless
they did so their credit facilities would be withdrawn. They
then issued proceedings to recover the money which they had
paid on the basis that it had been paid under duress, namely
the Defendants' threat to stop the Plaintiff's credit facilities
in future dealings. The claim was dismissed at first instance
and on appeal. The Court of Appeal held that although in certain
circumstances a threat to perform a lawful act coupled with
a demand for payment might amount to economic duress it would
be very difficult to maintain such a claim in the context
of arms length commercial dealings between two trading companies,
especially where the party making the threat bona fide
believed that its demand was valid.
24. In equity the ability of the Courts to intervene in cases
where undue influence has been established has been radically
stimulated by the decision of the House of Lords in Barclays
Bank v. O'Brien and Pitt. These
decisions have been the source of a major wave of new litigation
in the banking context - there seem to be half a dozen new
reported cases each year adding refinements to Lord Browne-Wilkinson's
formulae. Again it is necessary to read the House of Lords
decisions in full to understand the rulings but briefly:
(1) The traditional categories of actual and presumed undue
influence remain. The principal distinction between the two,
apart from the evidence which will be led to establish the
undue influence element, lies in the fact that it is no longer
necessary to prove in cases of actual undue influence that
the transaction which is impugned was "manifestly disadvantageous"
to the victim;
(2) In the case of third parties seeking to rely upon a transaction
which is attacked as having been procured by undue influence,
the third party will be affected if he has notice, actual
or constructive, of the possibility that undue influence has
been used to procure the victim's agreement.
(3) In the case of banking transactions, where this issue
has arisen very frequently, the usual way of rebutting the
contention that the bank had notice of the possibility of
undue influence is by the Bank advising the victim to take
independent legal advice and receiving from a solicitor, whether
acting for the bank, the influencer, or the victim, a certificate
that advice has been given. However, some doubt has been cast
even on this approach by the recent Court of Appeal decision
in Royal Bank of Scotland v. Ettridge [1997]
3 All ER 628, where a Bank was found to be fixed with constructive
notice of the undue influence notwithstanding the endorsement
it received from a solicitor stating that advice had been
given.
25. In addition to this late flowering of the doctrine of
undue influence the old equitable doctrine of unconscionable
bargains made with "poor and ignorant" persons may have been
given a new lease of life by the decision of the Court of
Appeal in Credit Lyonnais Bank Nederland NV v. Burch
[1997] 1 AER 144. Although there are clear parallels with
the doctrine of undue influence they do appear to be distinct
doctrines. Unconscionability will be found when there has
been procedural unfairness in entering into a transaction
with a poor and ignorant person which, in modern language,
means a person from the "lower income group" or someone who
is "less highly educated" (see Megarry J. in Cresswell
v Potter [1978] 1 WLR 255. No question of notice arises.
26. The law of penalty clauses has been looked at by the Privy
Council in Philips Hong Kong Limited v. The Attorney
General of Hong Kong (1993) 61 BLR 49, where it was
necessary to consider whether a liquidated damages clause
in a construction project for Hong Kong was penal. The Privy
Council held that the relevant clause was not penal and emphasised
that one did not prove that a clause was penal merely by postulating
circumstances where it was possible that the liquidated damages
claim would be greatly in excess of the actual damage suffered.
Lord Woolf said:
"Except
possibly in the case of situations where one of the parties
to the contract is able to dominate the other as to the choice
of the terms of a contract, it will normally be insufficient
to establish that a provision is objectionably penal to identify
situations where the application of the provision could result
in a larger sum being recovered by the injured party than
his actual loss. Even in such situations so long as the sum
payable in the event of non-compliance with the contract is
not extravagant, having regard to the range of losses that
it could reasonably be anticipated would have to cover at
the time the contract was made, it can still be a genuine
pre-estimate of the loss that would be suffered and so a perfectly
valid liquidated damage provision. The use in argument of
unlikely illustrations should therefore not assist a party
to defeat a provision as to liquidated damages."
27. The effect of provisions in a contract in restraint of
trade came before the Court of Appeal in Marshall v.
NM Financial Management Limited [1997] 1 WLR 1527.
A self-employed salesman sold life assurance under a contract
which provided for payment of commission in respect of premiums
paid after termination of his employment but only if for a
period of twelve months after termination he did not work
for a competitor. He terminated his service and successfully
struck down the clause resticting his rights to work for a
competitor, but claimed payment of his post-termination commission
on the ground that the restraint of trade was severable from
the remainde of his contract. The Court of Appeal accepted
his arguments, holding that contracts containing an objectionable
restraint would be enforced without the restraint unless it
could be said that the contract in its entirety was in substance,
and regardless of its form, an agreement for an invalid restraint
of trade. Here it was possible to eliminate the restraint
of trade without striking out the contract as a whole.
Contributory Negligence
28. The availability of a plea of contributory negligence
where the breach of contract relied upon is a breach to take
reasonable care has been looked at again in Barclays
Bank plc v. Fairclough Building Limited [1995] 1 All
ER 289. You will recall that it was already settled that in
principle a plea of contributory negligence was available
in a contractual claim where the complaint was of a breach
of a contractual duty of care co-extensive with the tortious
duty: see the decision of Hobhouse J in Forsikringsaktieselskapet
Vesta v. Butcher (No. 1) [1986] 2 All ER 488. In the
Fairclough case, the Court of Appeal emphasised
that this principle was confined to cases where the contractual
claim was co-extensive with the tortious claim. Where the
complaint was of a breach of a strict contractual duty then
arguments about contributory negligence simply did not apply.
Assignment/Third Party Contracts
29. On the question of the assignment of the benefit of contracts
we now have the important decision of the House of Lords in
Linden Gardens Limited v. Lenesta Sludge Disposals Limited
[1994] 1 AC 85. Two appeals came before the House: in the
first, there was a contract for the removal of blue asbestos
from certain premises which expressly provided that the employer
would not without the written consent of the contractor assign
the contract. The second case involved a JCT standard form
building contract which also contained a restriction on assignment
on the part of the employer. In both cases the employers assigned
the benefit of the contracts without the consent of the contractor
and the question arose whether and by whom the contracts were
enforceable. The House of Lords held in the first case that
there was no reason to strike down the prohibition on assignment
since a party might have a genuine commercial interest in
ensuring that his contractual relations with the party he
had selected were preserved, with the result that the purported
assignment of contractual rights was ineffectual to vest any
rights in the assignee. However, in the second case, since
the development was to the knowledge of the parties likely
to be occupied or purchased by third parties, damage to a
subsequent owner was foreseeable. Accordingly the parties
could properly be treated as having entered into the contract
on the basis that the Assignors would be entitled to enforce
against the Defendants contractual rights on behalf of the
third parties who would suffer from defective performance
of the contract but were unable to acquire rights under it,
with the result that the Assignors were entitled to substantial
damages for breach of contract by the Defendants.
30. The leading speech (by Lord Browne-Wilkinson) identified
the case as a new category of exception to the general rule
that a Plaintiff can only recover damages for his own loss.
Performance and Breach
31. Again in this area the cases tend to be very sensitive
to the facts and it is not usually useful to look at authorities
considering whether in a particular situation a breach of
contract has occurred. Note however the important House of
Lords decision in Vitol SA v. Norelf Ltd [1996]
AC 800. This involved a dispute between the parties to a contract
for the sale of a cargo of propane. While the propane was
being loaded the buyers sent a telex rejecting the cargo and
repudiating the contract on the basis that loading would not
be completed in time. The loading was completed, the vessel
sailed and the sellers brought a claim in arbitration for
the difference between the contract price and the sale price.
There was no notice of acceptance of the repudiation sent
by the sellers to the buyers but the arbitrator found that
the non-performance by the sellers of the contract after the
repudiatory telex was sufficient notification to the buyers
of their election to treat the contract as being at an end.
Damages
32. This is undoubtedly one of the most difficult areas of
the law and unfortunately the recent decisions of the Court
of Appeal and House of Lords in this area have not brought
any clarity. We appear to be passing through a period of transition
in which the rules governing the quantum of contractual damages,
tortious damages and compensation for breaches of an equitable
duty are gradually merging and the emphasis is much more on
a remedies-based analysis rather than a cause of action analysis.
In other words, one should begin by specifying precisely what
loss the victim of the wrong has suffered as a matter of facts
and figures, and then considers whether or not his loss can
be recovered either by way of common law damages or equitable
compensation.
33. In the contractual field the principles underlying the
award of damages were considered by the Court of Appeal in
Galoo v. Bright Grahame Murray [1995] 1 All
ER 16, where the Court of Appeal approached the problem on
the basis that, so far as causation was concerned, there was
no distinction between the test in contract and the test in
tort. The issue in the Galoo case was whether
a firm of accountants and auditors were liable for the trading
losses incurred by a company which had continued to trade
relying upon the negligent audit work done by the firm. No
doubt it could be proved that if the firm had done its work
properly the company would have stopped trading and therefore
would have avoided the subsequent trading losses The question
was whether this was enough to establish the causal link between
the breach of contract (i.e. the careless audit) and the loss
complained of. The Court of Appeal held it wasn't. Glidewell
LJ reasoned as follows:
"The
passages in the Monarch Steamship case make
it clear that if a breach of contract by a Defendant is to
be held to entitle the Plaintiff to claim damages, it must
first be held to have been an "effective" or "dominant" cause
of his loss. The test in Quinn's case, that
it is necessary to distinguish between a breach of contract
which causes a loss to the Plaintiff and one which merely
gives the opportunity for him to sustain the loss, is helpful
but still leaves the question to be answered, 'How does the
Court decide whether the breach of duty was the cause of the
loss or maybe the occasion for the loss?'
The answer in my judgment is supplied by the Australian decisions
to which I have referred, which I hold to represent the law
of England as well as Australia in relation to a breach of
duty imposed on a Defendant whether by contract or in tort
in a situation analogous to breach of contract. The answer
in the end is "By the application of the Court's common sense".
34. This is a very clear statement of the test to be applied
but is of course unhelpful in that it leaves advisers trying
to predict what common sense view the Court is likely to take.
35. It should be emphasised that Galoo was concerned
with the first step in the two-step process of determining
whether a particular species of loss has been caused by the
relevant breach of contract. The second step of the process
is the remoteness test derived from the old case of Hadley
v. Baxendale (1854) 9 Ex. 341. The two-step process
has been criticised for artificiality but at least it had
the merit of distinguishing between the question of whether,
as a matter of common sense, a species of loss has been caused
by the breach of contract and whether recovery should be excluded
on the basis that the relevant loss could not have been contemplated
by the parties at the time the contract was made. This distinction
has now been blurred by the decision of Lord Hoffman in the
South Australia Asset Management v. York Montague Ltd.
[1997] AC 191. No doubt you are all familiar with the basic
facts of the cases which went up on appeal on that occasion.
They all involved valuations of property for lending banks
and the principal issue was whether the valuers, who had been
found to be contractually negligent, should be liable to the
Banks for all the losses sustained in the transactions even
though (as is well known) the losses were sustained largely
because of a collapse in the property market in the late 80s
and early 90s. Since it was established that the Banks would
not have lent (or would have lent a lesser amount) if a careful
valuation had been prepared, it was difficult to see why the
valuers should not be responsible for the whole of the losses
of the transaction at least from a "common sense" causation
point of view. Lord Hoffman did not take this route however.
He formulated the question in terms of the "scope" of the
duty of the valuer. He put it thus (at p.212C):
"How
is the scope of the duty determined? In the case of a statutory
duty, the question is answered by deducing the purpose of
the duty from the language and context of the statute (see
Gorris v. Scott (1874) LR 9 Exch 125). In the case
of tort, it will similarly depend upon the purpose of the
rule imposing a duty. Most of the judgments in Caparo
are occupied in examining the Companies Act of 1985 to ascertain
the purpose of the auditors' duty to take care that the statutory
accounts comply with the Act. In the case of an implied contractual
duty, the nature and extent of the liability is defined by
the term which the law implies. As in the case of any implied
term, the process is one of construction of the agreement
as a whole in its commercial setting. The contractual duty
to provide a valuation and a known purpose for that valuation
compel the conclusion that the contract includes a duty of
care. The scope of the duty, in the sense of the consequences
for which the value is responsible, is that which the law
regards as best giving effect to the express obligations assumed
by the valuer, neither cutting them down so that the lender
obtains less than he was reasonably entitled to expect, nor
extending them so as to impose on the valuer a liability greater
than he could reasonably have thought he was undertaking."
36. There are a number of critisims which can be made of Lord
Hoffman's speach: They are put very forcefully in Jane Stapleton's
Note in (1997) 113 LQR 1. However, for our purposes
it now seems that the better approach to questions of causation
and remoteness is to take a kind of synthesised approach derived
from Lord Hoffman and to consider whether it can be said that
the particular loss complained of falls within the "scope"
of the relevant contractual term. In my view that has replaced
the rather artificial but the clearly defined traditional
2-step approach with a much more nebulous concept.
37. Turning now to particular fact situations, the correct
approach to loss of opportunity cases was considered by the
Court of Appeal in Allied Maples Group Ltd v. Simmons
and Simmons [1995] 4 All ER 907. The case involved
negligence advice by a firm of solicitors in the context of
a takeover and the issue was whether, if proper advice had
been given, the Plaintiffs would have been able to negotiate
different terms from the other side to protect it from assuming
a liability. The question for the Court of Appeal was whether,
in cases where the Plaintiff's loss resulting from the negligence
depended on the hypothetical action of a third party, it was
necessary for the Plaintiff to prove on the balance of probabilities
that he would have been able to take action to minimise his
loss, or whether he could succeed by requiring the Court to
evaluate the chance on a percentage basis of his avoiding
the loss and award damages accordingly. The Court of Appeal
preferred the latter approach saying that in cases of this
kind the issue was one of quantification of damage rather
than causation. Accordingly, once the Plaintiff proved on
the balance of probability that he would have taken action
to obtain a benefit or avoid a risk, he did not have to go
on to prove on the balance of probability that the third party
would have acted so as to confer the benefit or avoid the
risk to the Plaintiff. Instead the Plaintiff was entitled
to succeed provided he showed that there was a substantial,
and not merely a speculative, chance that the third party
would have taken the action to confer the benefit or avoid
the risk to the Plaintiff.
38. In White Arrow Express Ltd v. Lamey's Distribution
Ltd [1995] CLC 1251, the Court of Appeal considered
what damages were payable when a party had contracted for
an enhanced level of service and only received what was described
as a basic level of service. The Claimant in that case had
attempted to quantify his loss as the difference between the
price he paid for the basic level of service and the additional
consideration which he paid for the enhanced level of service.
The Court of Appeal accepted that in principal if a person
contracts and pays for a superior service and receives a substantially
inferior service or inferior goods he has suffered loss. However,
the measure of damage in such cases was the difference between
the price paid (or, if it is lower, the market value of what
was contracted for) and the market value of what was obtained.
The Plaintiffs failed because their calculation, being the
difference between the enhanced price and the basic price
which they themselves are contracted for, was not the correct
measure of loss: It may have been the case that they received
a service, albeit inferior to what they expected, which was
nevertheless worth the price that they paid. In these kind
of cases it is necessary to lead evidence as to the market
price of what was delivered if damages are to be awarded.
39. Finally I would like to just to draw your attention to
the decision of the Court of Appeal in Attorney-General
v. Blake, Times 22.12.97, which holds great potential
for issues of damages in the future. The case arose out of
the well know affair of George Blake who in contravention
of the Official Secrets Act and his contract of employment
wrote a book about his experiences in the Secret Service.
This was a classic case where damages to the Crown by reason
of Blake's breach of contract were unquantifiable in money
terms. The Court of Appeal invited submissions as to whether
restitutionary damages might be appropriate and, although
such a claim was not made, expressed its view obiter as to
whether such a claim might lie. Lord Woolf suggested that
English law was sufficiently mature to allow a restitutionary-type
claim whereby the damages for breach of contract would be
calculated so as to recoup from the contract-breaker the profits
which he had made by his breach of contract. This of course
is a radical proposal since it has long been the law that
damages for breach of contract are compensatory only. It remains
to be seen whether in the next five years the obiter remarks
bear fruit.
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