Constituent Parts of the Law on Contracts - Article Example

CONTRACT LAW Tutorial 7: Undue Influence 2.1. Meaning and Types of Undue Influence Meaning Undue influence refers to an influence which averts an individual from arriving at a self-governing decision regarding a contract or a transaction. Any contract or reward obtained by the use or application of undue influence is held legally accountable by the court of law. Undue influence arises where there is an inequality of bargaining power in a relationship and the stronger party abuses the trust and confidence reposed in him by the weaker party1. There is a high likelihood of the exercise of undue influence in certain relationships wherein one person holds a substantial position of trust and / or authority over the other and has adequate control to influence the decision of others, such as the relationship between parent and child, doctor and patient, teacher and student, lawyer and client, husband and wife etc. Undue influence is alleged to be implemented or used in case of lack of adequate substantiation to the contrary, and hence it is customary for the third parties involved in such a transaction to advise their customers, clients to request autonomous legal counsel prior to entering into an agreement at the behest of the person who is deemed to be in an influential position owing to their particular relationship. Types: There are two basic types of undue influence: actual and presumed. Actual undue influence refers to a situation whereby one of the parties to the contract enters into a transaction owing to the inappropriate exercise of influence by the other party. To institute the existence and exercise of actual undue influence the party desiring to set aside the contract must establish that: - There is a relationship of dominance that puts the other party in a position of power or authority, allowing them to manipulate / persuade the aggrieved party - The victim would not have entered into the contract without the influence exercised by the other party (dominant party).2 While presumed undue influence, on the other hand, refers to incidences where the one of the parties to a contract was influenced into entering into a contract by the other party and where there is a relationship of trust and confidence between the both the parties to the contract. Such contracts may be set aside by the aggrieved party after they have adequately and effectively established that: - There was a pre – existing relationship of trust and confidence between them and - The pertinent contract was clearly detrimental to them In cases involving presumed undue influence, the court of law presumes the existence of a relationship of trust and confidence if the parties to the contract comprise of teacher and student, solicitor and client, doctor and patient, etc. 2. Difference between Duress and Undue Influence Duress and Undue Influence may be differentiated from each other in several ways. The law of duress entails that the force on the aggrieved party must be applied through intimidation, while in case of undue influence there must exist the destruction of free will by means, other than intimidation or threat, and typically entails the implication of imperious influence and emotional force. Undue influence is characterized by the misuse of relationship of faith and confidence on the other party, while duress is characterized by overtly confrontational and aggressive negotiating circumstances. In case of duress, the parties to the contract are usually unrelated apart from their business association, whereas in the case of undue influence, there is a pre – existence of some form of personal interrelationship. The law governing the doctrine of duress necessitates that the pressure exerted on one of the parties to the contract be of such a nature, as would prevail over an imaginary person of common firmness. On the other hand, the court, in cases involving undue influence explicitly takes into consideration individual characteristics. For instance, a court while considering the concern of undue influence, with respect to a will, may specifically take into account such personal qualities, as the age, complexity, business insight, requirement and reliance of the person whose inheritance was confronted. In the case of duress on the other hand, the courts largely apply what may largely be regarded as an objective norm, i.e., the standard of an individual of regular firmness, as opposed to the explicit consideration of the personal characteristics of the parties involved.3 2.1. Case Study: Daniel v Drew [2005] EWCA Civ. 507 (06 May 2005)4 Facts: In this case, Daniel allegedly persuaded his aged aunt to bestow a considerable advantage on him at the expense of her own son in an ‘upsetting’ and ‘prolonged’ discussion, coupled with intimidation and threatening remarks suggesting that he would take legal action against her, in case of failure to do as suggested. Judgment: The judge ruled that Mrs. Drew (the aged aunt) was a vulnerable person, unskilled in matters related to business, fretful to evade altercation and keen to obey. Daniel, on the other hand, was younger and insistent in nature, and intentionally took advantage of his aunt's naiveté in business matters. He thereby confirmed that Mrs. Drew's consent was obtained in circumstances that were clearly against the expression of free her free will and hence amounted to actual undue influence. Relationship to the doctrine of undue influence: Undue influence occurs in cases where in the relationship between two persons, one has obtained a considerable measure of influence, or dominance, over the other, of which the dominant person subsequently takes undue advantage. Moreover, undue influence is presumed to have taken place when one person places considerable trust in the other to manage or handle their dealings and wellbeing, and the latter deceives this trust by choosing to pursue their own selfish interests. The principle of undue influence, thus, is not only limited to cases of misuse of dependence and confidence by one person on the other but it also includes, cases / situations whereby the right of expression of free will of a susceptible or defenseless individual has been explicitly or implicitly exploited. TUTORIAL 8: ILLEGALITY 1. There are two major types of illegality which may affect the enforceability of a contract. These include: Illegal Purpose and Illegal Performance. An Illegal Purpose refers to transactions wherein the purpose of the contract is illegal. In such cases, the courts will not sustain it and neither party is eligible or entitled to implement it, (even though one of the parties to the contract was unaware about the legality or the absence thereof of such a contract or the fact that it might lead to financial / monetary loss or loss of property as a consequence). Illegal Performance on the other hand refers to those transactions where the contract itself is legal but has been executed in an illegal manner (for instance, one of the parties to the contract has indulged in a criminal offence while executing it), the courts will not permit the party accountable for the illegal performance to enforce the contract but the innocent party may on the other hand, enforce it5. Difference between Illegality and Other Vitiating Factors There are several factors which render a contract as void or voidable. These factors are referred to as vitiating factors and include: mistake, misrepresentation, duress and undue influence, and illegality6. Figure 1: Vitiating Factors Source: O'Riordan, J., (2003). A2 Law for OCR, Heinemann, Pp. 227 A mistake may occur before or after the formation of a contract and may render the contract void or voidable depending on the relevant circumstance of each individual case and the type of mistake occurred. While in case of illegality, all contracts are rendered void ab initio, i.e. void from the very beginning. Since such contracts are prohibited by statute, such contracts are cancelled by the courts of law and cannot be performed by either of the parties concerned. Representations are statements made before or during the formation of the contract. If a person sings a contract on the basis of some of these representations that later turn out to be untrue it is known as misrepresentation. In case of misrepresentation either of the party may claim damages and seek to render them unenforceable. While in case of illegal contracts, such contracts are unenforceable by law and neither parties to the contract is entitled to sue or claim damages. In case of duress and undue influence, the enforcing of a contract requires genuine consent of both the parties involved regarding the formation and execution of the contract. The contract may be cancelled by the court of law, in case where it is established that there was an application of unfair pressure, intimidation or influence placed on one or both the parties concerned. 2. In the case of Letitia, who owns two pubs in Hotton, the agreement entered into with Landlord brewery comprises of two main clauses: i. She is expected to purchase beer from Landlord brewery for a period of 5 years in respect of one pub and for a period of 25 years with respect to the other pub and ii. She is not permitted to open another pub or work for any other pub within 5 miles from Hotton Town center for a period of 2 years after expiry or transfer of her leases from the brewery. Contracts in restraint of trade are void ab initio at common law and hence unenforceable. In the above case, Letitia is restricted by Landlord brewery to set up another business and / or work in other pub within a specified geographical area. However, there are certain exceptions to this rule. In ascertaining the legitimacy of terms concerning restraint of trade one fundamental principle is that the restraint of trade must be not more than what is satisfactory to defend the legitimate interest of the person claiming the benefit of such restraint, i.e., the restraint will be termed as void if it permeates beyond the standards of simple adequacy. Secondly, such restraint must be designed solely with the objective of safeguarding the valid interest of the applicant which would otherwise be at stake. It cannot be simply introduced to shield the claimant against the likelihood of business rivalry. In view of this background, the first clause that requires Letitia to purchase beer from Landlord brewery is partly valid and hence enforceable. The part which requires Letitia to purchase beer from Landlord brewery for a period of 25 years in respect of the second pub, however, falls under the category of restraint of trade and hence is rendered void. The period mentioned in the terms of contract is beyond the purview of reasonableness and hence cannot be enforced. The second clause on the other hand is not opposed to public policy but is in restraint of trade. It is however, designed to protect Landlord brewery against genuine competition and hence is enforceable by law. 3. In order to eliminate the randomness of events concerning illegality in various cases, certain reformative measures may be implemented which contain adequate discretionary measures to ascertain and decide whether the plaintiff's participation in some form of illegality be allowed to act as a form of protection to his claim. In such cases, the courts of law must take into consideration a range of factors such as the gravity, extent and scope of the illegality involved as well as the proportionality of refuting respite. The principle of public policy is ex dolo malo non orilur actio, which suggests that no court will provide assistance to a person who bases his action on an immoral or illegal act. If such an individual is found to be guilty of indulging in such an illegal act, then the court contends that the person has no right to be offered any assistance or relief under the law. It is on this basis that the court states, not for the benefit of the defendant, but because they will not offer assistance or grant any kind of aid to the plaintiff, on account of his illegality. Thus, even if the defendant and the plaintiff were to switch sides, in a manner, such that the defendant was to seek justice against the plaintiff, the latter would then have the edge over the former, although both of them are equally at fault. TUTORIAL 9: PERFORMANCE, AGREEMENT, AND FRUSTRATION 1. A contract may be discharged by several ways which includes: performance, breach, agreement as well as frustration. A contract is regarded as complete after both the parties to the contract have successfully completed their contractual obligations. If the terms of the contract are such that it requires payment as a precondition to successful completion of the contract, then such completion is obligatory for the other party in order to ensure proper discharge of the contract. Such a condition which requires prior payment is known as a condition precedent to the contract and hence may cause potential injustice to the parties involved. This was established in the case of Cutter v Powell [1795] the defendant agreed to pay Cutter a fixed remuneration for the services rendered by him, in the capacity of an accomplice on board a vessel, after a specific period of time. Cutter died when the vessel was 19 days away from the destination and his widow failed to claim for the agreed compensation for the duration worked since the contract expressly stated payment of compensation after the services were duly rendered. It was held that when a person expressly consents to perform an activity for a lump sum amount, he may only be allowed to sue in case of non payment of his dues, after the contractual obligations are duly performed and completed by him. The courts proclaimed that it would not entail a contract in favor of the plaintiff since he made an express agreement and failed to perform. It further established that no one should be permitted to claim payment unless they have done what they initially negotiated at the time of formation of the contract. This case asserts the fact that the strict rule pertaining to the full execution of a contract which entailed compliance of the condition precedent to the recovery of dues was in fact, unjust and unfair on the part of the plaintiff7. 2. Entire contract refers to a contract “the consideration of which is entire on both the sides”. The entire fulfillment of a promise by either of the parties concerned is a precondition for the fulfillment of any part of the promise by the other. Thus if a contract stipulates payment of a gross sum for a specific and definite consideration the contract could be regarded as an entire contract. Severable or Divisible contract on the other hand refers to a contract “the consideration of which, is by its terms, susceptible of apportionment on either side, so as to correspond to the unascertained consideration on the other side; as, a contract to pay a person the worth of his services, so long as he will do certain work; or to give a certain price for every bushel of so much corn as corresponds to a sample." 8 In Hoenig v Issacs, the claimant was engaged by the defendant to decorate and furnish a flat at a predetermined cost of £750. The job was completed, but subject to certain imperfections which would cost £55 to repair. The defendant moved into the flat but declined to pay the balance that was due to the claimant, under the contract. The contract afforded payment of 'net cash as the work proceeds and balance on completion'. The defendant had already paid £350 and the claimant now sought to recover his outstanding dues which totaled to £400. The Court of Appeal held that the defendant had not declined to accept the work and hence the defendant could only proceed to claim for the damages caused to him on account of the defective work and was liable to pay for the work already completed by the claimant. The rule governing performance of a contract is relatively subtle in case of severable or divisible contracts as opposed to that in case of entire contracts, since the claimants in case of the former type of contract may proceed to recover their dues for the portion of work done unlike those in case of entire contract. 3. Substantial performance refers to transactions whereby a significant part of the work has already been completed but the court deducts a certain amount in respect of damages caused during performance or other similar minor defects. However, this could only occur in case of a breach of a condition. While in case of partial performance, some part of the work is completed but on a relatively lesser degree than otherwise would have been required for it to qualify as a substantial performance. The two basic differences between partial and substantial performance include: partial performance is required to be accepted by the other party whereby one of the parties to the contract agrees refraining from filing a suit for damages and in turn settles for a lesser payment, and the other key difference lies in the mode of payment. In terms of partial performance of a contract, the payment is made on the basis of quantum meruit, i.e., in accordance with the work done and deserved to be paid. Thus if only part of the work is done / completed, then the doctrine of partial performance entails part payment in respect of part of the work done. 4. In Hoenig v Isaacs (1952), Hoenig was appointed by Issacs to decorate his flat at a contract price of £750 to be paid as work progressed. However, Issacs subsequently paid only part of the compensation (£400) on the grounds that the work done by Hoenig was of inferior quality. Hoenig later on sued Issacs for non payment of his dues (the balance £350). It was held that Issacs was entitled to pay the entire amount after deducting the amount of damages which totaled to merely £56 caused on account of the defective work. In Bolton v Mahadeva (1972) the plaintiff had entered into a contract for installation of a central heating system for the defendant for £560. The heating system so installed turned out to be defective and had to incur an additional cost of £179 for repairs. The judge ruled that Bolton is not entitled to claim any payment since he had clearly failed to perform his part of obligation. An agreement to supply for a bathroom suite was divisible from the overall agreement, and hence had to be compensated for. The basic reasons for the differential treatment of both these contracts lies in the fact that in the degree of satisfaction in both the cases. In the former case the defendant was not satisfied only with a part of the work done unlike in the latter case, and hence was entitled to pay for the part of the work that was successfully completed. Secondly, the former contract represents a case of substantial performance while in case of the latter contract, the plaintiff was not satisfied with the entire work done and hence was refrained from claiming any payment by the courts of law. TUTORIAL 10: BREACH AND REMEDIES 1. Waste Beaters Ltd. entered into a four year contract with Buckley City Council for provision of waste paper recycling services. The basic terms of the contract stated that: 1. Waste Beaters Ltd. must provide the service in a “proper skillful and workmanlike manner and 2. The Council had a right to treat the contract as terminated for breach of any of the terms This contract is a case of an actual breach of contract whereby one of the parties to the contract concerned fails to perform the contract effectively as agreed or performs the contract in a defective manner causing loss of profit, or substantial damages to the other party to the contract. On the basis of the facts of the case it could be safely decided that Waste Beaters Ltd. had clearly breached the preconditions to the performance of the contract. Hence they may claim for the part of the contract successfully completed since the clause states that the Council deserves the right to terminate the contract if found to be below satisfactory levels. The Council on the other hand may proceed to terminate the contract, since it has expressly stated in the contract that failure to comply with its requirements would lead to breach of a contract and hence eventually lead to its termination. The Waste Beaters Ltd. had agreed to the terms during the formation of the contract and hence such a contract is perfectly valid and hence enforceable. However, the Council is entitled to pay Waste Beaters Ltd., part of the amount for the work that was duly completed and deduct the amount of damages caused to it on account of non compliance with the rules or failure to perform the contract satisfactorily. It may not withhold the entire amount, but only that amount which can be rightfully claimed as damages. 2. This is an anticipatory breach of contract whereby one of the parties to the contract lacked proper intention to fulfill their part of obligations. Here in this particular case, John intended and agreed to purchase a second hand car from 9…. Motors, but M. Motors sold it to another person before the delivery date agreed with John. John required the prestigious second hand car for driving to his work which involved providing of high class corporate entertainment events. The failure of M. Motors to perform their contractual obligations led John to drive an inferior looking hired car which according to him cost him £15000 worth of damages apart from suffering of mental trauma, anxiety and distress. The law states that in case of breach of contract the remedies available to the aggrieved party include damages, injunctions and specific performance. However, the availability of such damages is highly dependent on the type of breach i.e. whether the breach is related to the fundamental term of the contract or of a warranty. John, in this case is entitled to claim aggravated damages from M. Motors. Aggravated damages can be claimed when the claimant has been exposed to substantial humiliation, distress, anxiety or embarrassment on account of the non performance of the contractual obligation by the other party. However, John may not be able to claim the sum amounting to £15,000 since, it was supposed to have caused by loss of business which neither party had known prior to entering into a contract as decided in a judgment in the case of Victoria Laundry v Newman, 1949. In this case, the defendant's failure to supply a laundry with a new boiler at the agreed time resulted in the laundry suffering general loss of profits and also a loss of a particularly lucrative government contract, which it could not take up on account of lack of extra capacity. The Court of Appeal decided that the defendant was liable for the laundry's loss of normal profits during the period of delay but not for the loss of the supposedly lucrative government contract since neither side had known about the existence of such a contract at the time of formation of the contract and the said loss was not liable to result from the breach of the contract10. 3. Mohammed is not entitled to claim the damages on two accounts. Firstly, he was informed expressly by Fixit that the repair system would not be completed within the stipulated time on account of supply problems. Hence, he had previous knowledge regarding the non availability of proper resources to fix the system and still abstained from using the same with prudence. Secondly, as mentioned in the above case, the claim of loss of contract worth £15,000 is unjustifiable. Neither party to the contract had any prior knowledge of such a contract or the extent of damage that Mohammed would have to bear in case of non performance of their duties regarding repairing of the system. Moreover, Fixit had offered to install a temporary system that would have protected him from loss of profits in his usual course of business. Thus in this particular case, Fixit had clearly advised Mohammed about other alternatives to fix the system, which he categorically declined. Thus Fixit is not liable to pay any damages whatsoever. In case the following clause concerning payment of damages was included in the contract: “If the repair work is not completed within one week, fixit will pay Mohammed, by way of agreed damages the sum of £5000 plus £2000 for every week the work remains unfinished” Then in such a case Fixit would be legally bound by the contract and the non compliance or non fulfillment of the terms expressly stated in the contract would have resulted in an actual breach of a stipulated condition and would then be entitled to pay for the damages as stipulated in the contract. References: Koffman, L., Macdonald, E., (2007). The Law of Contract, Pp. 375 , Oxford University Press. O'Donovan, J., (2005). Lender Liability, Sweet & Maxwell, Pp. 276 O'Riordan, J., (2003). A2 Law for OCR, Heinemann, Pp. 218 - 224 Oughton, D. W., Davis, M., (2000). Sourcebook on Contract Law, Pp. 456, Routledge Rush, J., Ottley, M., (2006). Business Law, CENGAGE Learning, Pp.133, 376 Story, W. W., (1972). A Treatise on the Law of Contract not Under Seal, Ayer Publishing, Pp.8 Whincup, M. H., (2006). Contract Law and Practice: The English System with Scottish, Commonwealth, and Continental Comparisons, Kluwer Law International, Pp. 356 BAILLI (2009). England and Wales Court of Appeal (Civil Division) Decisions, viewed: April 21, 2009 from: Read More