CONTRACT LAW: necessary background knowledge for the Commercial Law module

At the very heart of the sale of goods legislation is the need for a CONTRACT of sale. As contract is
fundamental to this module it’s worth having a refresher of contract law.

Offer and Acceptance

An offer – a statement of willingness to be bound by the terms of the contract. Until there is an offer
that is accepted, there is no contract. And an offer has to be clearly intended to be accepted to form
a binding agreement – therefore if a seller puts some goods in the window with a price tag on –
that’s not an offer – instead it is an “invitation to treat”. The item with the price tag is taken to the
counter and it is the buyer that makes the offer (to buy) and the seller accepts that offer.

Equally, at an auction, when an auctioneer asks for bids – that is not making an offer, that is an
invitation to treat. Each bid is an offer and he will usually accept the highest one, forming a contract
at that point.

Acceptance – final and unqualified expression of assent to the terms of the offer. The acceptance
must be intended to accept and make a binding contract and it usually takes effect when it is
actually communicated to the offeror.

Postal rule – was an exception to this actual communication requirement. It allowed someone who
posted their acceptance in the mail, to assume it was received by the offeror. This is not something
that the commercial world appreciates. Usually actual notice is required for commercial situations
e.g. section 18 rule 3 (workshop 2)

Consideration

Unless the agreement is made as a deed, generally some form of consideration is required –a
gratuitous promise will not be enforced. A person to whom something is promised has to give
something in return if he wants to enforce that promise.

- must move from the promisee

NB There are certain very limited circumstances in which consideration is not required. Where a
promise has been made, but there has been nothing in return:

Promissory Estoppel – it is worth looking at promissory estoppel here as we come across it in when
we cover agency. In certain circumstances, a promisor can be “estopped” (stopped) from going back
on a promise to waive certain rights.

Lord Denning’s decision in Central London Property Trust v High Tree Ltd [1947] KB 130

Here the Landlord, Central London Property, agreed to half the rent of a block of flats in London
during the war – funnily enough, occupancy rates in the Blitz weren’t that high. The agreement did
not say for how long the reduced rates should go on for and more importantly, the tenant, High
Trees did not give any consideration for this promise. Later, after the war when occupancy rates
were high again, the landlord claimed for the full rent. Lord Denning said, obiter (= something said in
passing and not part of the judgment), that had Central London Property tried to renege on their
promise they would have been prevented/estopped from doing so for as long as the circumstances
(bombing and reduced occupancy) continued.

So, here is an example of the equitable doctrine of estoppel where:

- there was a promise which indicated that promisor would enforce/insist on his full legal
rights
- which was intended to affect the legal relationship between the two parties
- which the promisee relied upon
- in which case, it will be considered inequitable to allow the promisor to go back on his
promise
- can you see, that equity is used here as a defence? Equity has a saying: equity can be used
only as a shield, never a sword ie Equity cannot create new rights, just defend existing ones..

Privity of Contract

This is a concept, which is discussed in a variety of areas in the Commercial Law module.

Generally, third parties to a contract i.e. those who were not party to the contract, cannot enforce
the terms of the contract.

There are quite a few exceptions to the rule, but that it is the basic position: that only the parties to
a contract can acquire rights or liabilities under that contract.

So, if A made a contract with B, C cannot sue A or B for their breaches of contract.

The Commercial Law module covers Agency. An agent is engaged by the principal to carry out his
(the principal’s) instructions.

What if in this scenario where A contracts with B, A is actually C’s agent and makes the contract with
B “on behalf of” C. Who can sue on the contract if B breaches the terms of the contract?

In this scenario A is the agent and C is the ‘principal’. While the agent is a party to the contract with
the third party, B, he is not making the contract on his own behalf. Agency rules dictate that there is
no contractual relationship between the third party, B, and the agent. Instead, the principal, C, is
bound by the contractual relationship with the third party B. This is assuming, of course, that the
agent is acting with the authority of the principal – and we will go through all these circumstances
when we come to the topic of agency later on in the module.

Express terms and Implied terms

Contracts are made up of contractual terms. Some will be expressly agreed between the parties and
others may not be expressly stated but are “implied” to give effect to the intention of the parties (or
implied by custom or by the law).

Terms can be implied:

- by court – in fact or in law. In fact – to give the contract business efficacy – usually
something so obvious that it goes without saying
- by custom
 - by statute = and Act of parliament - this is where the Sale of Goods legislation comes into its
own.

Usually, statutes have been used to imply terms into contracts to protect the party in the weaker
bargaining position. Have you heard of the expression – caveat emptor? Buyer beware.

If you buy a house, for example, the standard position is that the seller doesn’t have to disclose any
of its defects, unless he is specifically asked about it and he lies about it.

A house is “real property”, but it is still very much an important warning to all buyers of goods, but
the Sale of Goods Act implies (to the benefit of the buyer) into the contract various terms designed
to ensure that the buyer receives certain basic benefits from a sale of goods transaction, as long as
the goods are sold in the course of business. The terms relate to, for example, the fact that the seller
has ownership of the goods he is selling (section 12 SGA); that if the goods are sold by description,
that they accord with that description (s.13); that the goods are of a satisfactory quality (section
14(2)); that they are fit for purpose (s.14(3)), and they match the sample that the buyer was given
(section 15).

Conditions and warranties and innominate terms

Classification of terms. Terms are classified into three types:

- Conditions
- Warranties
- Innominate terms

Their differences relate to their respective importance and what the consequences are when they
are breached.

Conditions – go to the “root of the contract”. They are the most important terms. A breach of these
terms means that an essential part of the contract has failed and as such the contract cannot feasibly
go on.

As such, a breach of a condition allows the innocent party to claim the full range of the remedies
available to him, not just damages (monetary compensation). For example, if in a sale of goods
transaction, the seller breaches a condition of the contract, the buyer would be entitled to treat the
contract as repudiated. He can refuse to take delivery of the goods and will not have to pay for
them. In fact, he does not need to return the goods to the seller. If the seller wants them back, he’ll
have to come and get them and if the buyer incurs storage expenses in the meantime, the seller will
have to reimburse the buyer. The buyer, could in fact choose to “affirm” the contract and expect the
contract to continue. He would still be entitled, however, to sue for damages.

Warranties – are less important than conditions. Because of that, a breach of a warranty is less
significant than a breach of a condition, so usually such a breach is less fatal to the continued
existence of the contract. Therefore the remedy available to the innocent party is usually just
damages and he cannot consider himself released from the contract (cannot treat the contract as
“repudiated”).

Innominate terms – the inbetweeners. When a term is classified as an innominate term, it is almost
a wait and see idea. The court looks to the effects of the breach on the innocent party to see if it was
a condition or a warranty. Ie an innominate term is a term which is classified AFTER the effects of the
breach are known. It gives the courts some flexibility.

NB: Just labelling a term in the contract as a “condition” or a “warranty” in the contract, doesn’t
make it so.

You’ll see, however, that the sale of goods legislation makes it clear when the terms it implies into
the contracts are conditions or not. So, for example, the implied condition in section 14 of the SGA -
that the goods sold are of a satisfactory quality – is stated to be a condition (see section 14(6)). The
breach of section 14 should therefore always entitle the buyer to both reject the goods, not pay
their price AND claim damages.

A relatively new section to the SGA, section 15A, added by the 1994 Act, addressed the position that
mere trivial breaches of these sections were entitling buyers to reject otherwise perfectly fine goods.
Section 15A states that if the breach is so slight that it would be unreasonable for the buyer to reject
them, the implied terms can be treated as warranties and therefore damages only would be
available.

Breaches of contract - causation

Where there has been a breach of contract, there must be a causal link between the defendant’s
(who committed the breach) breach and the actual damage/loss suffered by the claimant (the
innocent party). It is a matter of fact in each case

Remoteness of damages – Hadley v Baxendale

We will go over damages in subsequent workshops but it is worth understanding the cases of Hedley
v Baxendale and Victoria Laundry.

Once it is established that the breach caused the loss, you need to consider the remoteness issue –
Is the loss, which was caused by the breach of contract, too remote from the breach. Not all loss is
recoverable.

There are two limbs of loss established by the case of Hedley v Baxendale:

1. loss arising naturally from the breach of contract – arising in the ordinary course of things
2. loss which was reasonably within the contemplation of BOTH parties at the time the contract
was formed

For example, in the Victoria Laundry case, the claimant had made it known to the seller (so it was in
the reasonable contemplation of both parties (limb 2)) that a large government contract depended
on the boiler being on time to use it immediately. Late delivery. Claimant lost the lucrative
government contract = loss over and above that arising in the ordinary course of things (limb 1), but
recoverable under limb 2 because the seller knew about it.