**CONTRACT LAW**

The Three Essential Elements of a Binding Contract

1\. Agreement — a definite offer accepted by the other party 2. Intention to create legal relations — the parties intended legal consequences 3. Consideration — something of value exchanged for the promise

An offer is an expression of willingness to contract on certain terms, made with the intent that it becomes binding the moment it is accepted. The courts apply an objective approach — what would a reasonable person consider was intended — rather than the parties' subjective internal thoughts.

An offer must be distinguished from an invitation to treat, which is a preliminary statement inviting negotiation and cannot itself be accepted to form a contract.

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| Type of Communication | Classification | Key Rule |

| Goods on display in shop | Invitation to treat | Customer makes the offer at checkout; cashier accepts (Pharmaceutical Society v Boots) |

| General advertisement | Invitation to treat | Too many potential acceptors; seller not bound to have stock |

| Reward advertisement | Offer (unilateral contract) | Can be accepted by performing the stated act (Carlill v Carbolic Smoke Ball Co) |

| Auction — fall of gavel | Acceptance of bidder's offer | Bid is the offer; fall of gavel is acceptance |

| Auction "without reserve" | Unilateral offer by auctioneer | Auctioneer bound to sell to highest bidder (Barry v Davies) |

| Invitation to tender | Invitation to treat (usually) | Tenders are the offers — but if tender review is promised, unilateral contract may arise (Blackpool & Fylde Aero Club) |

• Bilateral contracts: a promise in return for a promise.
• Unilateral contracts ("if" contracts): a promise in return for an act — e.g. "If you find my dog, I will pay you £50."

⚖ Carlill v Carbolic Smoke Ball Company \[1893\]

A company's newspaper advertisement promising £100 to anyone who used their smoke ball and still caught flu was held to be a binding offer of a unilateral contract — not merely a sales puff — because money had been deposited in a bank to demonstrate sincerity.

Acceptance is an unqualified expression of assent to the terms of an offer. It must be communicated to the offeror by the offeree or their authorised agent. Silence does not constitute acceptance.

• Counter-offer: A conditional response ("I agree, but only if the price is lower") destroys the original offer and constitutes a new offer that cannot subsequently be accepted.
• Battle of forms: Where businesses exchange different standard terms, the "last shot" rule usually applies — the last set of terms sent before performance begins governs the contract.

The Postal Rule

Acceptance by post is effective at the moment of posting — even if the letter is delayed or lost. The rule only applies if: (a) it was reasonable to use the post; (b) the letter was properly addressed, stamped and posted; and (c) the offeror did not exclude the postal rule (e.g. by requiring notice in writing).

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| Method of Termination | Key Rule |

| Rejection (express or counter-offer) | Counter-offer destroys the original offer — cannot later be accepted |

| Revocation | Must be communicated to the offeree; can be via a reliable third party; options (paid-for open offers) are irrevocable |

| Lapse of time | After the specified time, or after a reasonable time if none stated |

| Death of offeror/offeree | Terminates the offer in most circumstances |

Revocation of Unilateral Offers

Where an offeree has commenced performance of a unilateral contract, the offeror may be prevented from revoking the offer. Starting the requested act may make the offer irrevocable.

For a contract to be binding, the parties must agree on all material terms. If terms are too vague (e.g. agreeing to buy "on hire purchase terms" without specifying those terms), the contract may be void for uncertainty. Courts may look at trade usage or existing arbitration clauses to resolve ambiguities and uphold the contract wherever possible.

The law acknowledges that not all agreements are intended to have legal consequences. Courts apply rebuttable presumptions based on whether the agreement is commercial or domestic.

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| --- | --- | --- |

| Type of Agreement | Presumption | Rebuttal |

| Commercial | Strong presumption of intention to create legal relations | Very difficult to rebut — requires express statement that agreement is "binding in honour only" (Rose & Frank v Crompton) |

| Domestic / Social | Presumption of NO intention to create legal relations | Rebutted by: separation / solicitors involved; high-value assets; joint business venture; express statement of binding intent |

⚖ Esso Petroleum v Commissioners of Customs and Excise \[1976\]

Free promotional World Cup coins offered with petrol purchases were held to be part of a legally binding transaction because they had significant economic value to Esso's sales promotion — the commercial context prevailed.

Conversely, a parent promising a child £10 weekly pocket money for chores is not legally binding — the relationship is very close and the amount nominal. Domestic agreements will be binding where the parties deal at arm's length (e.g. separated spouses settling finances through solicitors) or where the stakes are high.

Consideration is the third essential element of a binding contract. It is defined as "something in return" for a promise — either a benefit to the promisor or a detriment to the promisee. A party must prove they provided consideration to enforce a promise.

Three Rules of Consideration

1\. Consideration need not be adequate (need not be of equal value) — but must have some value 2. Consideration must be sufficient (must be recognised by law as appropriate for a bargain) 3. Past consideration is not good consideration — acts performed before the promise was made cannot support it

An exception to the past consideration rule applies if three conditions are met:

• The act was done at the promisor's request
• There was a mutual understanding that the act would be compensated
• The promise would have been legally enforceable if made in advance

⚖ Re Casey's Patents \[1892\]

A manager who had promoted patent rights was allowed to enforce a later promise for a share in the patents because it was understood at the time of the work that he would be rewarded. The subsequent promise was treated as fixing the amount of a reasonable sum already implied.

The Basic Rule and the Williams v Roffey Exception

General rule: performing an existing contractual duty is NOT good consideration for a promise to pay more. Exception (Williams v Roffey Bros): Performance of an existing duty CAN be consideration if it confers a practical benefit on the other party (such as avoiding a penalty clause in a related contract) AND was not obtained by duress.

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| --- | --- |

| Concept | Rule |

| Rule in Pinnel's Case (confirmed in Foakes v Beer) | Part payment of an undisputed debt is NOT good consideration for a promise to forgo the balance. Creditor can sue for remainder. |

| Common law exceptions | Part payment WITH something extra (e.g. paying early; adding goods) IS good consideration |

| Promissory estoppel (High Trees case) | Equity prevents creditor going back on a clear promise to accept less if it would be unconscionable to do so — even without consideration |

Limitations of Promissory Estoppel

• It is a SHIELD (a defence) not a sword — cannot be used to sue • There must be a clear promise to waive legal rights • The promisee must have acted on the promise • It usually SUSPENDS rights rather than extinguishing them — full payment can be resumed on reasonable notice • The party relying on it must have "clean hands"

Only contracting parties have rights and liabilities under an agreement. The doctrine of privity states that only those "privy" to a contract can sue or be sued on it. This is closely linked to consideration — a person cannot enforce a promise for which they provided no consideration.

⚖ Tweddle v Atkinson (1861)

A son could not enforce a contract between his father and father-in-law to pay him money, even though the contract expressly gave him the right to do so. He was not a party and had provided no consideration.

The Act is the primary exception to the privity doctrine. A third party may enforce a contractual term in two situations:

• The contract expressly provides that they may enforce it
• A term purports to confer a benefit on them — unless it is clear that the parties did not intend this to be enforceable by the third party

The third party must be expressly identified by name, class (e.g. "employees"), or description. A common example is a gift receipt — it confers direct contractual rights on the recipient.

An agent has the power to change the legal relations of a principal by contracting with a third party. Once the contract is formed, the agent typically "drops out" leaving a direct legal relationship between the principal and the third party.

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| Type of Authority | Definition | Example |

| Express actual authority | Specifically stated in words or writing | Agent told to purchase goods up to £5,000 |

| Implied actual authority | Derived from circumstances, role, or trade custom | Salesperson has implied authority to receive payments |

| Apparent (ostensible) authority | Principal represents to a third party that the agent has authority, even if they do not | Sales manager restricted to 3 cars per deal — employer bound if customer unaware of restriction |

Apparent Authority — Three Conditions

1\. The PRINCIPAL must have represented (by words or conduct) that the agent had authority 2. The third party must have RELIED on this representation 3. The third party must have ALTERED their position (e.g. entered the contract) in reliance on it

Capacity refers to the legal power to enter binding contracts. The general rule is that all persons have full contractual capacity. Specific categories have restricted capacity.

General Rule

Minors are NOT bound by contracts they enter. However, the other party REMAINS bound and can be sued by the minor.

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| --- | --- |

| Exception | Test / Rule |

| Contracts for necessaries | Goods/services suitable to the minor's "condition in life" and "actual requirements" at time of delivery — extends to items appropriate to their social status |

| Contracts of service (employment/apprenticeship) | Binding if the contract is, on balance, BENEFICIAL to the minor |

⚖ Proform Sports Management Ltd v Proactive Sports Management \[2006\] — "Wayne Rooney Case"

A 15-year-old Rooney was entitled to terminate an agency contract because it was not a contract for necessaries and was not beneficial in the way a training contract would be.

Contracts are valid unless: (a) the person was incapable of understanding the nature of the transaction; AND (b) the other party knew of the incapacity. If both conditions are met, the contract is voidable. If the other party is unaware, the contract remains binding.

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| --- | --- |

| Type | Capacity Rule |

| Registered companies (Companies Act 2006) | Can be bound by ultra vires contracts if the third party acted in good faith — but advisable to check capacity |

| Statutory corporations (e.g. local authorities) | Ultra vires contracts are void — capacity defined by specific statute |

| Limited Liability Partnerships (LLPA 2000) | Unlimited contractual capacity |

For "small print" to form part of a contract it must be incorporated through one of three methods:

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| --- | --- |

| Method | Key Rule |

| Signature | Signing binds the party to all terms regardless of whether they read them — except where the document was misrepresented |

| Reasonable notice | For unsigned documents: notice must be given BEFORE or AT the time of contract; the document must be clearly contractual; onerous terms need extra highlighting |

| Previous consistent course of dealing | Parties with a regular history of dealing on the same terms may be bound — requires regularity and consistency |

Onerous Terms — Extra Notice Required

Particularly harsh or unusual terms require more than standard notice — the party relying on them must take additional steps to bring them to the other party's attention (e.g. bold print, specific verbal mention).

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| --- | --- |

| Classification | Remedy for Breach |

| Condition (fundamental term) | Innocent party may TERMINATE the contract AND claim damages — even if the breach itself is minor |

| Warranty (minor term) | Innocent party may claim DAMAGES only — contract must continue |

| Innominate (intermediate) term | Remedy depends on the EFFECT of the breach: if it deprives the innocent party of substantially the whole benefit, they can terminate; otherwise damages only (Hong Kong Fir Shipping approach) |

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| --- | --- |

| Basis | Examples |

| By custom | Terms based on well-known and legally binding trade customs — must not contradict express terms |

| In fact (business efficacy) | Terms so obvious they "go without saying" — implied to give commercial sense to a contract |

| In law | Necessary incident of a specific type of contract (e.g. employer's implied duty to provide a safe working environment) |

**6.2.2 Terms Implied by Statute**

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| --- | --- | --- |

| Contract Type | Statute | Key Implied Terms |

| Business-to-Business (B2B) — goods | Sale of Goods Act 1979 (SGA) | s13: match description (condition); s14(2): satisfactory quality (condition); s14(3): fit for particular purpose (condition) |

| B2B — services | Supply of Goods and Services Act 1982 (SGSA) | s13: reasonable care and skill (innominate); s14: within reasonable time (innominate) |

| Business-to-Consumer (B2C) | Consumer Rights Act 2015 (CRA) | Goods: ss9-11 (satisfactory quality, fit for purpose, match description — non-excludable); Services: ss49-52 (care and skill, reasonable price, reasonable time) |

Consumer Remedies — "Pecking Order" for Goods (CRA 2015 ss 19–24)

1\. Short-term right to reject: 30 days to return faulty goods for a full refund 2. Repair or replacement: if 30-day limit has passed 3. Price reduction or final right to reject: if repair/replacement is not possible or fails For Services (s 54): right to repeat performance or price reduction

Exemption clauses attempt to limit or exclude a party's liability for breach. To be upheld, they must clear three hurdles: incorporation, construction, and statutory control.

The Three Hurdles for Exemption Clauses

1\. INCORPORATION — Is the clause validly part of the contract? (signature / reasonable notice / course of dealing) 2. CONSTRUCTION — Does the wording of the clause actually cover the breach that occurred? 3. STATUTORY CONTROL — Does UCTA 1977 (B2B) or the CRA 2015 (B2C) render the clause void or ineffective?

If the wording of a clause is ambiguous or uncertain, the courts apply the contra proferentem rule — the clause is construed against the person trying to rely on it. To exclude liability for negligence, the language must be exceptionally clear and unambiguous.

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| --- | --- | --- |

| Statute | Applies to | Key Rule |

| UCTA 1977 s 2(1) | B2B — negligence | Death or personal injury: NEVER excludable |

| UCTA 1977 s 2(2) | B2B — other negligence losses | Only valid if REASONABLE (Schedule 2 factors apply) |

| CRA 2015 s 31 | B2C — goods terms | Cannot exclude satisfactory quality, fitness for purpose, or description — these are non-excludable statutory rights |

| CRA 2015 s 57 | B2C — service terms | Cannot exclude liability for failure to perform with reasonable care and skill |

UCTA Reasonableness Test — Schedule 2 Guidelines

• Relative BARGAINING STRENGTH of the parties • Whether the customer received an INDUCEMENT (e.g. lower price) to agree to the clause • Whether the customer KNEW or should have known about the clause • For limitation clauses: the defendant's available RESOURCES and ability to obtain INSURANCE

The privity doctrine means only contracting parties can rely on an exemption clause. However, under the Contracts (Rights of Third Parties) Act 1999, a named or identified third party (e.g. "employees") who the clause was intended to protect may rely on it to the same extent as a contracting party.

Continued in Part 2 — Chapters 8–13

Purpose of Damages

Damages are COMPENSATORY — to place the claimant in the position they would have been in had the contract been properly performed. They do NOT punish the defendant. • Nominal damages (e.g. £10) — acknowledge a breach where no loss is suffered • Substantial damages — for genuine loss • Claimant must prove CAUSATION — the breach (not some other factor) caused the loss

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| Type of Loss | Definition | Example |

| Expectation (loss of bargain) | Puts claimant in position as if contract was performed | Vase sold as Ming (£50k) worth only £1k but genuine value would be £60k — damages = £59k |

| Reliance loss | Covers expenses incurred in reliance on the contract being performed | Used where expected profit is too speculative to calculate |

• Pecuniary losses: financial consequences — lost profit, property damage (easily calculated).
• Non-pecuniary losses: physical inconvenience, pain, suffering, mental distress. Damages for disappointment or distress are rare in contract — usually only awarded if the contract's primary purpose was to provide pleasure or peace of mind (e.g. a wedding or holiday).

The Remoteness Test (Hadley v Baxendale)

A defendant is NOT liable for all losses — only those not too remote. Losses must be within the REASONABLE CONTEMPLATION of the parties at the time of contracting. • Natural/inevitable consequences: recoverable • Special circumstances: only recoverable if the defendant KNEW of them at the time of contracting

A claimant must take reasonable steps to mitigate (reduce) their loss — they cannot claim for damages that could have been avoided. E.g. a wrongfully dismissed employee must look for alternative employment. The burden of proving failure to mitigate lies with the DEFENDANT.

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| --- | --- |

| Measure | When Applied |

| Cost of cure | Cost of reinstating or fixing defective work — applied unless disproportionate to the benefit gained |

| Difference in value | Difference between value as delivered and value as promised (defective goods) |

| Loss of amenity / consumer surplus | Where cost of cure is disproportionate and there is no market value difference — smaller award for loss of consumer benefit (Ruxley Electronics v Forsyth) |

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| --- | --- | --- |

| Clause Type | Definition | Enforceability |

| Specified (liquidated) damages clause | Genuine pre-estimate of likely loss — parties agree in advance what is payable | BINDING even if actual loss is higher or lower |

| Penalty clause | Extravagant or disproportionate sum designed to pressure performance | UNENFORCEABLE — damages assessed by court in usual way |

⚖ Cavendish Square Holding BV v Makdessi \[2015\] UKSC 67

The Supreme Court held that a penalty clause is one that imposes a detriment out of all proportion to any legitimate interest the innocent party has in enforcing the contract. The relevant question is whether the clause is unconscionable or extravagant — not merely whether it is a genuine pre-estimate.

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| Remedy | Nature | When Available |

| Action for agreed sum | Debt action for a fixed sum owed | Where the money is due and payment date has passed — no need to prove loss, remoteness or mitigation |

| Specific performance | Court orders defendant to perform | Only if damages are inadequate (e.g. land — every plot is unique); discretionary; not for service contracts |

| Injunction | Restrains defendant from breach | Used for restrictive covenants; discretionary; will not force performance of a service contract indirectly |

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| --- | --- |

| Restitutionary Remedy | When Available |

| Recovery of money paid (total failure of consideration) | Payee has performed NONE of their obligations — if even partial performance, must sue for damages instead |

| Quantum meruit ("a reasonable sum") | (a) One party begins performance and the other breaches — performing party may claim reasonable sum as alternative to damages; (b) Where a contract was never actually formed |

| Restitutionary damages / Account of profits | Exceptional cases where fair response requires stripping the defendant's gains — awarded sparingly (Attorney-General v Blake — spy autobiography) |

| Negotiating damages | Compensation for the missed opportunity to negotiate a "release fee" from a restrictive covenant |

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| --- | --- | --- |

| Feature | Guarantee | Indemnity |

| Nature of obligation | Secondary — only triggered if primary debtor defaults | Primary — direct and immediate obligation |

| Writing requirement | Must be EVIDENCED IN WRITING and signed by guarantor | NO writing requirement |

| Common use | Guarantor promises to pay if borrower defaults | Allocating known risks (e.g. contamination costs on property sale) |

What Triggers the Right to Terminate?

A repudiatory breach arises from: • A breach of a CONDITION (fundamental term) • A VERY SERIOUS breach of an innominate term that deprives the innocent party of substantially the whole benefit A repudiatory breach does NOT automatically end the contract. The innocent party has a choice.

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| --- | --- |

| Choice | Consequence |

| Affirm the contract | Treat the contract as continuing — cannot later change mind and terminate for that same breach |

| Accept/discharge the breach | Treat the contract as at an end — both parties released from future obligations; innocent party may sue for damages |

Definition of Frustration

An unforeseen event, beyond the control of either party, that makes performance impossible or RADICALLY DIFFERENT from what was originally agreed. The contract is automatically terminated by law — the parties have no choice.

**10.2.1 What Constitutes Frustration — Three Criteria**

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| --- | --- |

| Criterion | Details |

| Radically different / impossible | Destruction of subject matter; unavailability of crucial person; non-occurrence of fundamental event; government intervention / illegality |

| Unexpected (not foreseeable) | Foreseeable risks or common occurrences (e.g. road closure) do NOT frustrate; force majeure clauses in contract take priority |

| Beyond the parties' control | Self-induced events CANNOT frustrate — if the defendant's own choice caused the unavailability, frustration is not available (The Super Servant Two) |

What Does NOT Frustrate

• Performance merely becoming more expensive or difficult • Delay — unless it so fundamentally changes the nature of the agreement that it is no longer what was bargained for

**10.2.2 Consequences — Law Reform (Frustrated Contracts) Act 1943**

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| --- | --- |

| Issue | Rule under the 1943 Act |

| Money paid before the frustrating event | CAN be recovered |

| Money due before frustrating event | Need NOT be paid |

| Expenses incurred in performance | Court has DISCRETION to allow recovery up to the amount paid or payable before the event |

| Valuable benefit conferred on the other party | Court may order a "just sum" to be paid for it |

The general rule is that obligations must be performed precisely and exactly before payment is due. If performance is incomplete, the payer is technically not required to pay any part of the price.

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| --- | --- |

| Exception | Rule |

| Divisible obligations | Contract split into distinct stages with separate payments — contractor paid in full for each completed stage even if they abandon the rest |

| Substantial performance | Work finished but slightly defective — contractor may claim full price minus cost of rectification. Generally "substantial" if cost of repair is no more than 1/14 of contract price. |

| Wrongful prevention | If one party prevents the other from completing — performing party entitled to damages (net profit) OR quantum meruit for work done |

| Voluntary acceptance of part performance | If non-defaulting party genuinely CHOOSES to accept partial performance — they must pay a reasonable sum. No payment if they had no real choice. |

Misrepresentation is a vitiating factor that makes a contract VOIDABLE — valid until the misled party (the misrepresentee) chooses to set it aside. Misrepresentation occurs when a party is misled into entering a contract by a false statement.

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| --- | --- | --- |

| Category | Legal Status | Remedy if False |

| Sales puff | Not legally actionable — extravagant talk not taken literally | None |

| Contract term | Forms part of the contract itself | Breach of contract — damages |

| Representation | Induces the contract but is not a term | Misrepresentation — rescission and/or damages |

To distinguish a term from a representation, courts look for the common intention of the parties using guidelines: relative skill/knowledge of parties; whether repeated in writing; importance attached to statement; whether maker invited verification; lapse of time before contract.

A misrepresentation is an UNTRUE STATEMENT OF FACT that INDUCED the other party to enter the contract

• Must be a statement (oral, written or by conduct — e.g. Spice Girls v Aprilia) • Silence is generally NOT misrepresentation — but exceptions: fiduciary relationship; contracts of utmost good faith (insurance); half-truths; change in circumstances making a previously true statement false • Must be a statement of FACT not opinion or future intention — but lying about actual opinion/intention misrepresents the state of mind, which IS a fact • Must come from the OTHER CONTRACTING PARTY (not a third party) • Must have INDUCED the party to contract — must be a significant (not sole) reason

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| --- | --- | --- |

| Type | Test | Damages Basis |

| Fraudulent | Made knowing it is false, without belief in its truth, or recklessly (Derry v Peek) | Tort of deceit — ALL consequential losses; remoteness rules do not apply |

| Negligent (s 2(1) MA 1967) | Careless — burden REVERSED: defendant must prove they had reasonable grounds to believe it was true | Same as fraudulent — ALL consequential losses; remoteness rules do not apply |

| Innocent | Defendant had reasonable grounds to believe the statement was true | Damages NOT available as of right (court discretion under s 2(2)) |

Rescission is an equitable remedy that sets the contract aside and returns both parties to their pre-contractual positions (restitution). Because it is equitable and discretionary, it may be lost through bars to rescission:

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| --- | --- |

| Bar | Rule |

| Affirmation | Innocent party continues with the contract after discovering the misrepresentation |

| Undue delay / lapse of time | Waiting too long to rescind (Leaf v International Galleries) — fraud: time runs from discovery; others: from when it should have been discovered |

| Third-party rights | Bona fide purchaser acquires rights in the subject matter before rescission (Car & Universal Finance v Caldwell) |

| Impossibility of restitution | Cannot restore parties to original position (Crystal Palace FC v Dowie — employee had taken another job) |

Key Principle

Where a party is coerced or improperly pressured into a contract, the resulting agreement is VOIDABLE. The only remedy is RESCISSION (not damages). The bars to rescission apply equally to duress and undue influence.

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| --- | --- |

| Type | Definition / Test |

| Duress to the person | Threats of physical violence — needs to be only A reason (not the sole reason) the party entered the contract |

| Economic duress | Threats to economic/business interests — must show: (1) pressure causing lack of practical choice; (2) the pressure was ILLEGITIMATE; (3) pressure was a significant cause of entering the agreement |

Legitimate vs Illegitimate Pressure

Legitimate: threatening to sell goods to a competitor; driving a hard bargain Illegitimate: threatening to breach a contract; threatening to commit a tort; acting in bad faith Relevant factors: whether the threat was made in bad faith; whether the victim protested at the time; whether they had any practical alternative

⚖ North Ocean Shipping v Hyundai Construction (The Atlantic Baron) \[1979\]

Economic duress was found but rescission was refused because the claimants waited 8 months before acting — treated as affirmation and undue delay. Contrast with Atlas Express v Kafco where a small business successfully used economic duress as a DEFENCE against a claim for extra money promised under threat.

Duress and Consideration — Link to Williams v Roffey

Even if an upward variation satisfies the "practical benefit" test in Williams v Roffey (making it validly supported by consideration), the variation will be set aside if it was obtained through duress. Only the specific variation is rescinded — the original contract remains binding.

Undue influence focuses on relationships of inequality where one party takes unfair advantage of their dominance over another. Like duress, it makes a contract voidable, remedied solely by rescission, and subject to the same bars.

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| --- | --- |

| Type | Test |

| Actual undue influence | Must be PROVED ON THE FACTS — show that influence went beyond what is acceptable (Daniel v Drew — elderly woman pressured by nephew's threat of court action) |

| Presumed undue influence | Arises from: (a) a RELATIONSHIP OF TRUST AND CONFIDENCE; AND (b) a TRANSACTION THAT CALLS FOR EXPLANATION — i.e. a deal that is not for the party's benefit or exposes them to significant risk |

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| --- | --- |

| Relationship Type | Presumption |

| Presumed by law (irrebuttable) | Solicitor/client; doctor/patient; parent/minor child; religious adviser/follower |

| Proved on the facts | Husband and wife; other close relationships — innocent party must prove actual trust and confidence in that person regarding those matters |

Rebutting the Presumption

Evidence that the innocent party acted INDEPENDENTLY — most commonly, taking INDEPENDENT LEGAL ADVICE. If an independent solicitor advises the party and confirms this in writing to the creditor, the presumption is rebutted.

**12.3.2 Undue Influence and Third Parties (Banks)**

A common scenario involves a commercial lender (bank), a surety (typically a wife) who provides security for a third-party debtor (typically her husband). If the husband uses undue influence to get the wife to sign security for his business loan, the bank may be unable to enforce it if it has constructive notice of the influence.

⚖ Royal Bank of Scotland v Etridge (No 2) \[2001\] UKHL 44

A creditor has CONSTRUCTIVE NOTICE if: (a) it is "put on inquiry" — this happens in ALL non-commercial cases where the loan is not for the joint benefit of debtor and surety; AND (b) it fails to take REASONABLE STEPS to ensure the surety is aware of the risks. Reasonable steps = insisting the surety receives independent advice from a solicitor.

Practical Outcome for Banks

• Bank receives solicitor's certificate confirming surety was independently advised → security upheld; any further claim by surety is against the solicitor • Bank fails to take these steps AND undue influence is present → surety may rescind the agreement; bank becomes an UNSECURED creditor against the husband

Void vs Voidable — Key Distinction

VOID contracts (mistake and illegality): treated as if they NEVER EXISTED — void ab initio. No remedies for breach; no damages available. Courts apply this very rarely. VOIDABLE contracts (misrepresentation, duress, undue influence): valid until the innocent party CHOOSES to rescind them. Rights of innocent third parties may be affected before rescission.

In contract law, "mistake" has a much more restricted meaning than in everyday usage. The doctrine only applies when a mistake is so fundamental that it NEGATES the agreement. The mistake must precede formation and have induced the parties to enter the contract.

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| --- | --- | --- |

| Type of Mistake | Definition / Test | Key Case |

| Common mistake | Both parties make the SAME fundamental error regarding a crucial fact — not the fault of either; must render performance impossible or radically different | Bell v Lever Bros — mistake about prior breachable conduct: NOT fundamental enough to void |

| Cross-purpose mistake | Parties at cross-purposes about a vital part of the contract — objective analysis cannot resolve the ambiguity | Raffles v Wickelhaus — two ships both named "Peerless": impossible to determine which was intended → void |

| Unilateral mistake | Only ONE party is mistaken — typically about the IDENTITY of the other. Identity must be vitally important; mistake about attributes (e.g. creditworthiness) is insufficient | Cundy v Lindsay (written — void); Lewis v Averay (face-to-face — voidable for misrepresentation, not void for mistake) |

The Rogue / Identity Mistake Distinction

WRITTEN dealings (Cundy v Lindsay): contract is VOID — the offer was not addressed to the rogue FACE-TO-FACE dealings (Lewis v Averay): strong presumption of intent to deal with the person present → contract is VOIDABLE for misrepresentation (not void for mistake) This distinction critically affects whether a bona fide third party purchaser gets good title to goods.

A contract is illegal if its formation, purpose or performance involves the commission of a legal wrong (crime, tort, or violation of public policy). Illegal contracts are generally void and benefits conferred cannot be recovered.

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| --- | --- |

| Type | Rule |

| Illegal act merely incidental (e.g. driver speeding) | Does NOT usually affect contract validity — driver is punished but contract stands |

| Both parties know of and intend illegal performance | Contract is VOID |

| Only one party intends illegality | Innocent party may still be able to enforce the contract |

| Illegal under statute (e.g. Competition Act 1998) | Contracts distorting, preventing or restricting trade are unenforceable |

**13.2.3 Covenants in Restraint of Trade**

Covenants restricting a person's ability to work for a competitor or set up a rival business are prima facie void — public policy encourages free trade and the ability to earn a living.

Two Requirements for an Enforceable Restraint

1\. LEGITIMATE BUSINESS INTEREST to protect — e.g. trade secrets, customer lists, goodwill. Restricting a low-level employee with no access to such information is unenforceable. 2. REASONABLE in: geographical area; duration; and scope of activities prohibited. Senior executives may justify longer and broader restraints than junior staff.

If a restraint is found reasonable, the enforcing party can seek DAMAGES or an INJUNCTION to stop the breach.

END OF DOCUMENT — CONTRACT LAW

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