A contract is a legally binding or valid agreement between two parties. A contract is an agreement which will be enforced be the law. This Definition is satisfied when the following elements are present:
There must be an agreement. Since nobody can agree with himself (though he may resolve to do or do an act), there must be at least two parties to an agreement. One of them will make an offer, and other in every respect, there is agreement between the parties.
The parties must intend their agreement to result in legal relations. This means that the parties must intend that if one of them fails to fulfil a promise undertaken by the agreement, he shall be answerable for that failure in law. It is evident that not all agreement is intend to produce legal consequences.
If, for example,
John agrees to lend his cycle to his friend Arun but later refuses to let him have it, an action for damages will not lie against John because the two friends did not con-template, when entering in to the agreement, that it should be enforceable in law. Similarly, if a father fails to pay his son the promised pocket money, it is obvious that the son cannot sue the father. The former agreement is of purely social character, the latter is a domestic arrangement. Neither of these agreements qualifies as a contract.
‘ English law is not content with these two requirements. It requires further that either consideration must be present or that the contract should be in a deed.
‘ The parties must have capacity to contract.
‘ The reality of the contract must not be affected by circumstances which render the contract unenforceable, voidable, void or illegal.(charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.3)
Formation of contract
The essence of contract is that there should be an agreement between the contracting parties. This agreement is normally constituted by one party making an offer and the other indicating its acceptance. The acceptance must correspond to the offer in all material aspects. The negotiations between the parties need not always lead to a contract. Inquiries may be made or offers invited but no offer may be made or, if one is made, it need not be accepted. Before the concepts of offer and acceptance can be considered in detail, it is necessary to distinguish certain statements preliminary to the offer from the offer itself. (Charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.11)
‘ Offer
An offer is a definite promise to be bound by specific terms. It can be defined as’an n expressed or implied statement of the terms on which the maker is prepared to be contractually bound if it is accepted unconditionally. An offer can be made to a single individual, to a class of person or even to the world at large. The offer can be accepted only by the person or one of the persons to whom it is made to. The person who makes the offer is referred to as the ‘offeror’ and the person to whom the offer is made to is referred to as the ‘offeree’
Hillas & co Arcas ltd.
The claimants agreed to purchase from the defendant 22,000 standards of wood of fair specification over the seasons of 1930.
There was also an option to purchase more in the year 1931. The 1930 transaction took place but the defendant refused to supply wood in 1931 saying the agreement was too vague. The court believed that the offer was not too vague. The 1930 contract was regarded as evidence for the 1931 transaction.
‘ The Acceptance
‘A positive act by a person to whom an offer has been made which, if unconditional, bring a binding contract into effect.’ The contract comes into effect once the offeree has accepted the terms presented to them. This is the point of no return; after acceptance, the offeror cannot withdraw their offer and both parties will be bound by the terms that they have agreed. Acceptance may be by express words, by action or inferred from conduct. (Charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.17)
Brogden v Metropolitan Railway Co 1877
The facts: for many years the claimant supplied coal to the defendant. He suggested that they should enter into a written agreement and the defendant’s agent sent a draft to him for consideration. The parties applied to their dealing the terms of the draft agreement, but they never signed a final version. The claimant later denied that there was any agreement between him and the defendant.
Decision: the conduct of the parties was only explicable on the assumption that they agreed to the terms of the draft.
‘ Consideration
Consideration is an essential part of most contracts. It is what each party brings to contract. A valuable consideration in the sense of the law may consist either in some right, interest, and profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. ‘From Currie v Misa 1875’
Example of consideration
Arun promises to give Baron GBP 100. Baron has to give nothing in return. As there is no consideration, this is a graduations promise and not legally enforceable.
Valid consideration
‘ Consideration may be executed (an act in return for a promise) or Executory (a promise in return for a promise). It may not be past, unless one of three recognized expectations applies.
‘ There are two broad types of valid consideration ‘ executed and Executory. If consideration is past then it is not enforceable.
‘ Executed consideration is an act in return for a promise. The consideration for the promise is a performed, or executed, act.
‘ An offers reward for the return of lost property, his promise becomes binding when B performs the act of returning A’s property to him. A is not bound to pay anything to anyone until the prescribed act is done. Therefore in Carlill’s case, the claimant’s act, in response to the smoke ball company’s promise of reward. (ACCA, Corporate & business law p.68)
‘ Intention to create legal relations
An agreement will only become a legally binding contract if the parties indented this to be so this will be strongly presumed in the case of business agreement but not presumed if the agreement is of a friendly social or domestic nature.
Jones v Vernons Pools 1938
The facts: the claimants argued that he had sent to the defendant a football pools coupon on which his predictions entitled him to a dividend. The defendants denied having received the coupon. A clause on the coupon stated that the transaction should not ‘give rise to any legal relationship’ but ‘ be binding in honour only’.
Decision: this clause was a bar to an action in court.
‘ Legal capacity of the parties to act
Not all people are completely free to enter into a valid contract. The contracts of the groups of people listed below involve problematic consent, and are dealt with separately, as follows:
‘ People who have a mental impairment;
‘ Young people (minors);
‘ Bankrupts;
‘ Corporations (people acting on behalf of a company); and prisoners.
‘ People who have a mental impairment
Generally speaking, people are free to enter into contracts even though they may have a mental impairment, or are temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place. People with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making. Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit). Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if: The other party knew (or ought to have known) of the disability or lack of capacity and it would be unfair for them to take advantage of that; and The benefit received by the other person has not been sold to a third party who did not know the previous transaction might not be valid. Generally, to escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time.
‘ Binding contracts and young people
Contracts for the supply of “necessaries” will generally be binding. There are no hard and fast rules to identify what is “a necessary”, but it does include the sorts of things the young person needs to live a reasonable lifestyle. It includes basics such as:
‘ Food
‘ Clothing
‘ A place to live
‘ Medicine And so on.
It will also include any contracts relating to the young person’s education, apprenticeship or something very similar, if it can be shown to be of benefit to the young person. While a court has not yet considered the issue specifically, mobile phones are probably not necessaries. The young person contracting in this situation will be held bound to pay a reasonable price (although that may not be the contract price) for necessaries actually sold and delivered. (“Delivery” is a technical term. Generally, delivery takes place when the seller has given the buyer the power to take the goods away.) Where necessaries have been sold but there has been no delivery, the young person does not have to take delivery or pay for the goods.
‘ Non-binding contracts and young people
Two classes of contracts are not binding on a young person, namely:
‘ Contracts which are not for necessaries; and
‘ Contracts for the repayment of money lent or to be lent (that is, any form of credit contract).
Where a young person has already paid money under a non-binding contract, that money will not be recoverable unless no benefit has been received by the young person. The young person can, however, refuse to make any further payments under the contract. It is not certain who then own goods that are not necessaries. It appears that they become the property of the young person unless the young person has fraudulently misrepresented their age. Even after turning 18, a person cannot confirm a prior contract and then become bound by it. Any money paid by a young person under such circumstances may be recovered.
Bankrupt people are not deprived of their general capacity to contract. During their imprisonment, prisoners may enter contracts, including contracts to buy and sell prison still apply, so that the permission of Corrections Victoria is required before a prisoner may sign for, deliver or receive any document.
‘ Consent of the Parties
Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract which is binding upon the parties. The ultimate consequences of establishing that no proper consent was given to enter the contract are matters dealt with when considering remedies for breach of contract. Proper consent may be affected by any of the following matters:
‘ Mistake;
‘ False statements;
‘ Duress; and
‘ Undue influence/un-consiconability.
‘ Mistake
Only a few types of mistakes will cause the contract to be non-binding on the parties to it: they must be mistakes that go to the very basis of the agreement. For example, where there is a contract for the sale of a car that both parties assume to exist, although in reality it has been destroyed by fire, this contract is non-binding on the parties. By contrast, where the parties are only mistaken about the model of the car, then this contract would be binding.
Another example is when a person signs a written document mistakenly believing that it relates to something entirely different from what in fact it does relate to, in this case the person will not be bound by it. This means that if X is told to sign a document which X reasonably believes to be something like a character reference to assist Z to obtain a loan from a finance company, and the document is later discovered to have been a guarantee of the loan contract, then the guarantee will not be binding on X.
A third example is when Y cannot read, due to blindness or illiteracy or other disability. Someone else tells Y what is in the document and Y signs it. The document Y signed is not what Y was told it was. The document Y signed would not be binding on Y.
By contrast, if a person who signs a document believing it to be a contract does not read the terms and conditions that person will be bound by the contract and will not be entitled to plead mistake.
Other factors may also be relevant to a successful plea of mistake. For instance, whether or not the defence of mistake will be allowed often depends on whether an innocent third party will be adversely affected by a decision that the contract is non-binding. Again, if the signer was careless and failed to take reasonable precautions, the defence will not be allowed to succeed. For these reasons, it is wise to seek legal advice about whether or not a court would hold the contract binding on these grounds.
‘ False statements
There are serious false statements and minor false statements that might be made by parties contracting with each other. Different consequences flow, depending on the seriousness of the false statement made. False statements might be made where either:
The parties come to agree and contract because one of them has been motivated to agree by a statement of fact (something said or written) that is not true. Commonly, these types of statements have not actually been included in the contract itself but were an encouragement to enter into the contract. For this reason, they are viewed as though they were part of the contract; and/or
The parties have agreed and there is a contract, but the statements or terms in the contract exist only because one of the parties has made a false statement.
False statements affect the question of whether or not a contract exists. Very serious false statements mean a court would view the contract as void (see: Glossary) and unenforceable. The consequence is that monetary damages sufficient to place the wronged party back to their original position must be paid.
In other (less serious) instances, the court will find the contract valid but the wronged party will be entitled to reject the contract or to treat it as at an end. Here, monetary damages sufficient to place the wronged party in the position they would have been in, had the contract been properly completed, must be paid.
Where a false statement has put the wronged party at a disadvantage or caused some loss, but not enough damage has been done to justify ending the contract, then the contract will be valid and the wronged party will be bound to the contract, but entitled to sufficient monetary damages to make up for the loss suffered as a consequence of the false statement.
The two most important factors considered to determine the level of seriousness at which a false statement will be viewed are as follows.
The false statement: a condition or a warranty?
“Conditions” of a contract are so important that without them one or other of the parties would not enter the contract. If a false statement amounts to a condition of the contract, the wronged party is entitled to rescind (see: Glossary) the contract. A court may view the condition so seriously that without it the contract is void; that is, with the false statement taken out of the contract, there is no contract.
Less important statements are called “warranties”. Where the false statement amounts to a warranty, the wronged party will only be permitted to receive sufficient monetary damages to make up for any loss suffered; the contract will continue to exist and the parties will continue to be bound by it.
What type of false statement was made?
There are three types of false statements:
‘ fraudulent misrepresentation;
‘ innocent misrepresentation; and
‘ Negligent misrepresentation.
‘ Fraudulent misrepresentation
To prove fraud, it is necessary to show that the person making the statement knew it was false, had no belief in its truth, or knew it might be false and recklessly went ahead and made it anyway, not caring whether it was true or false. It is very difficult to prove fraud. Once proved, however, the innocent party can rescind the contract; sue for damages for deceit, or both.
‘ Innocent misrepresentation
An innocent misrepresentation will be made where the false statement is made with no intention to deceive. An innocent misrepresentation could nevertheless be a serious false statement (being a condition of the contract), or a breach of warranty. The level of seriousness will be determined by an appraisal of all the circumstances of the contract. If innocent and without negligence, the only available remedy is rescission
‘ Negligent misrepresentation
A negligent misrepresentation will arise where a party to the contract is under a special duty of care to the other party. This special relationship will be held to exist where the person making the false statement claimed to have some special skill not generally possessed by an ordinary member of the community, and where that person was prepared to exercise this special skill on behalf of the person to whom the false statement was made. The wronged party must be able to show that:
‘ the person making the false statement could reasonably be expected to foresee that the false statement would be relied upon;
‘ in the circumstances it was reasonable to rely on the statement;
‘ the statement was made without due care; and
‘ The statement was false.
Once again, the level of seriousness of a false statement made in these circumstances can vary. Where there is a serious breach, the innocent party can rescind the contract and recover damages for negligence.
‘ Duress
Proper consent may be affected by duress. Duress is held to have occurred where there has been actual or threatened violence either to the other contracting party directly or to their immediate family, near relatives or close associates. The duress may be made by someone acting under the instructions of the party to the contract. The net effect, though, will have been that a party has been forced into the contract by being deprived of their free will to act.
Duress now extends to contracts entered into as a result of threats to a party’s economic well being, that is, a threat to a person’s business or trade. This form of duress is called economic duress.
The consequence of establishing duress is often that the contract is voidable at the election of the wronged party. Where the wronged party elects to have the contract declared void, monetary damages sufficient to place the wronged party in their original position must be paid. Where the wronged party elects to continue with the contract, monetary damages to cover any loss suffered because of the duress must be paid.
‘ Undue influence/Unconscionability
Proper consent may be affected by undue influence. Undue influence is exercised by taking unfair and improper advantage of the weakness of the other party, to the extent that it cannot be said that that party intended voluntarily to enter into the contract.
The main reason for the rule against the use of undue influence is to correct abuses of trust and confidence. It is applied where the parties are in a relationship where one party may be able to exercise considerable influence over the other party.
There are two categories of undue influence.
The first is where no special relationship exists, but the stronger party will have used some fraud or wrongful act expressly to gain an advantage from the weaker party. The weaker party will have to prove that undue influence was actually exerted.
The second is where the parties are in a confidential relationship; most cases of undue influence fall into this category. A confidential relationship exists when one party’s position towards the others involves a dependency or trust, in the form of authority or an expectation to give fair and independent advice to the weaker party. Where a confidential relationship is found to exist, a presumption of undue influence will arise. It is then necessary for the stronger party to show that the contract was not the result of any undue influence.
A confidential relationship and the presumption of undue influence can be established in either of two ways.
First, the parties may be in a well recognised special relationship, for example, solicitor and client, doctor and patient, religious or spiritual adviser and devotee.
Second, the confidential relationship, although not falling within any well recognised relationship, is such that the complaining party is able to show that the other party was in a position of influence. For example, it could be the relationship between a bank and its customer, because of a special position of trust that the bank had come to occupy in connection with the conduct of this customer’s affairs. (It has been stressed, however, that in ordinary circumstances no presumption of undue influence arises out of a banker-customer relationship.)
‘ Legality of the agreement
Being able to distinguish between the different categories of contract is important as the consequences flowing from each are different. Contracts can be illegal or void at both statute and common law.
Categories of contracts
Figure 1 category of contracts
An agreement rendered void by statute is void and will not be enforced by the courts. Any money paid or property transferred under such an agreement may be irrecoverable. A ‘contract’ deemed illegal when it is formed is totally void. Illegality may arise either because the contract is of a kind prohibited by statute, or because it is of a class regarded as contrary to public policy. Neither party has any rights or remedies. Consequences of statutory illegality depend upon when the contract becomes illegal
Consequences of statutory illegality depend upon when the contract becomes illegal. If it is illegal as formed, the contract is void ab initio and property is only recoverable if disclosure of illegality is not essential to the cause of action. If the contract is illegal as performed, the contract is void, but not void ab initio. The guilty party has no rights, but the innocent party is little affected.
Contracts which would violate the social or moral attitudes of the community and are void ab initio include:
‘ contracts to commit a crime, a tort or a fraud on a third party;
‘ contracts that are sexually immoral or which prejudice the status of marriage;
‘ contracts prejudicial to the administration of justice
Contracts which would violate the social or moral attitudes of the community and are void ab initio include:
‘ contracts to the prejudice of public safety, or of good relations with other countries;
‘ contracts which tend to promote corruption in public life
‘ contracts to defraud the revenue; and
‘ Contracts that involve a breach of duty.
Three types of contract are void at common law:
Contracts which attempt to oust the jurisdiction of the courts.
‘ [Distinguish between contracts which are binding in honour only (where the parties expressly declare that they do not intend to create legal relations, e.g., Jones v Vernon’s Pools Ltd ( [1938]) from contracts which attempt to oust the jurisdiction of the courts];
‘ Contracts prejudicial to the status of marriage; and
‘ Contracts in restraint of trade.
‘
1.2. Explain different types of contracts and explains their impact. Any special rules need to be considered.
The law recognizes that legally binding contracts can be written, verbal, or a mixture of both. However, for business purposes, written contracts are usually preferred due to the following reasons:
‘ The contents (‘terms’) are in writing for all to see
‘ They can ensure that precise language is used in describing the terms of the agreement
‘ There is, therefore, less opportunity for misunderstandings and conflicting assumptions
‘ There is less need to rely on memories of what was originally agreed
‘ The individuals involved in the transaction may change over time.
Here are various types of contracts in business law depending upon various legal transactions like transfer of property, sale of goods, etc. A formal legal advice is always recommended prior to making or accepting a business contract. Let us take a look at the different types of contracts in the words of business law.
‘ Written contracts
If the contract has been formally written and signed by the parties, there is an assumption that all the terms of the agreement are contained in the written document regardless of what may have been verbally agreed. Additionally, contracts can be a combination of written and verbal agreements if the written agreement lacks detail and only covers very few terms. Prior to signing, a written contract must:
‘ Be presented to and understood by all parties to be valid; and
‘ Be recognized by all parties as a contract, that is, it must look like a contract and not simply a receipt or docket
Also, once a contract is signed, it is assumed that all the terms have been read and agreed to.
‘ Express Contracts
In this type of contract, the parties to the contract state the terms and conditions either by word of mouth or in script, at the time of forming the contract. A definite written or oral proposal of the contract is accepted by an offeree in a way that plainly defines legal consent to the terms of the contract.
‘ Implied Contracts
Contracts indirect in actuality and contracts implied in law are both an element of implied contracts. Other than a real implied contract consists of firm obligations that arise from a mutual agreement and goal of promise, which is not expressed orally. An implied contract cannot be labeled as implied in law because such a contract lacks the requirements of a true contract. The term ‘Quasi Contract’, is however, a more specific recognition of contracts implied in law. Implied contracts depend on the reason behind their existence. Thus, for an implied contract to expand there must be some transaction, act or conduct of a party in order for them to be legally bound. A contract will not be implied if there are any chances of harm or inequity. If there is no clarity of message, implication and understanding between the two parties, the court will not conclude any contractual relationship between the two parties. If the parties continue to follow their contractual terms, even after the contract has ceased to exist, an assumption arises that the two parties have mutually agreed to a new contract that has same provisions as the old contract and a new implied contract is formed.
‘ Executed Contracts
An executed contract is termed as an agreement in which no other business is missing out to be executed by either party. This explanation could be incorrect to a certain point, since completion of occupation will mean that the contract has ended. But in case of executed contracts, there exists some act or transaction or an obligation that has to be performed at various point of time in the future according to the contractual conditions.
‘ Bilateral and Unilateral Contracts
If two entities exchange a mutual and give-and-take promise that implicates the completing of an act, an obligation or a transaction or self-control from execution of an be active or an obligation, with respect to each party involved in the contract, is termed as bilateral contract in the verbal communication of law. It is also called a two-sided contract for the reason that of the two-way promises made by parties concerned in the contract. An independent contract is agree made by only one party. The offeror promises to execute a definite act or an obligation if the offeree agrees on performing a requested act that is understood as a legally enforceable contract. It just requires an acceptance from the other party to get the contract executed. Thus, this is a one-sided contract since only the offeror is spring to the court of law. One important point of this category of contract is that, the offeree cannot be sued for abstaining, abandoning or even failing to execute his act, since he does not promise something.
‘ Aleatory Contracts
A common agreement which comes into consequence only in case of a happening of an uncertain event or a natural misfortune is termed as an aleatory contract. In this type of contracts, both the parties may take for granted risks. For example, a fire insurance policy or a travel insurance is a type of Aleatory contract as the procedure holder will not accept any benefits of the contract unless in an event of fire occurrence or a plane crash (in case of travel insurance).
‘ Unconscionable Contracts
Unconscionable contracts are persons that are unfair and excessively one-way favors of the party who stand at a superior end of the bargaining power. The word unconscionable means an insult to impartiality and decorousness. No mentally healthy and honest person would ever accept an unconscionable contract and enter into it. Unconscionability of the contract is gritty by analyzing the situations and circumstances of the parties involved in the contract, when the contract was made. This policy is applied only in cases, in which it would be unjust or an affront to the integrity of the law system to enforce a contract like that. The court of law has found that unconscionable contracts are a result of utilization of illiterate and bankrupt clients.
‘ Adhesion Contracts
Union contracts are the ones that are drafted by a party who has a better benefit in bargaining. This means that the party who has a bargaining advantage leaves the other party with no other option than to either accept the contract or to reject it. Generally known as ‘take-it or leave-it’ contracts, they are often considered because for most of the businesses, it is difficult to negotiate and bargain all the terms and setting of every contract. It is not necessary that all adhesion contracts are unconscionable contracts, since in some cases it is quite coincident for one party to have a superior bargaining advantage leaving no alternative for the other party. This often happens in monopolistic markets. However, courts of law refuse to implement such contracts of adhesion on the grounds that there was no mutual understanding or an acceptance between the two parties involved in an adhesive contract.
‘ Void and Voidable Contracts
A void contract implies that the involved parties are not liable to any legal obligations or rights, meaning that the parties are not legally bound with reference to that contract. In fact, a void contract means a contract has ceased to exist and that there is no contract existing between the two parties. A voidable contract, on the other hand, is an agreement between any two or more parties that has a legal binding. A voidable contract can be treated as never been lawfully bound on a party that has been a casualty of fraudulent execution or if that party was distress from any legal disability. In addition, a contract is not void unless and awaiting any of the involved parties, choose to pleasure it as a void contract by confronting its execution.
‘ Verbal agreements
Verbal agreements rely on the good faith of all the parties involved and can be difficult to prove as opposed to written contracts. The following are some ways in which verbal agreements can be supported:
The conduct of the other party both before and after the agreement
‘ Specific actions of the other party
‘ Past dealings with the other party
As desirable as a written contract is, in certain situations it may be counter-productive, such as:
If the value of the transaction is not particularly high; and/or
The presentation of a substantial document, possibly with many provisions, may raise more questions and uncertainty in the minds of the parties involved than it resolves, often ending in the transaction not proceeding.
‘
1.3. Explain terms of contract their meaning effects.
Earlier than toward the inside into a contract, a variety of statement will often be made by one party in order to support or induce the other party to enter into the contract. A divergence may later arise as to which of the statements made should be measured a part, or a term, of the agreement, and which should be taken as simply pre-contract talk, and consequently not a part or term of the contract. Parties to a contract are bound only by its terms, not by any secondary report that may have been ended. The judges can look at verification of aim by one or other of the parties that the ruling should be part of the contract. For form, the longer the rest is between the assembly of the statement and the success of the final contract and contract, the less likely it is that the declaration will be considered to be a term of the contract. The fact that the maker of the statement had a special information or skill compare with the other party will make the statement more likely to be a term. Anywhere the agreement was subsequently reduced to writing and the report was not included, it is less likely to be an experience.
Express term and implied terms.
As a general rule, the parties to a contract may include in the agreement whatever terms they choose. This is the principle of freedom of contract. Terms clearly included in the contract are express terms. The law may complement or replace terms by implying terms into a contract.
‘ Express terms
An Express term is a term expressly agreed by the parties to a contract to be a term of that contract. In examining a contract, the courts will look first at the terms expressly agreed by the parties.
An apparently binding legal agreement must be complete in its terms to be a valid contract.
Scammell v Ouston 1941
The facts: the defendants wished to buy a motor- van from the claimants on hire- purchase. They placed an order ‘on the understanding that the balance of purchase price can be had on hire – purchase terms over a period of two years’. The hire ‘purchase terms were never specified.
Decision: the court was unable to identify a contract which it could uphold because the language used was so vague.
It is always possible for the parties to leave an essential term to be settled by other means, for example by an independent third party. (ACCA, Corporate & business law p.89)
Where an agreement appears vague or incomplete, the courts will seek to uphold it by looking at the intention of the parties: Hillas &Co Ltd v ARCOS Ltd 1932. If the parties use standards printed conditions, some of which are inappropriate, such phrases may be disregarded.
Nicolene v Simmonds 1953
The facts: the claimant offered to buy steel bars from the defendant. A contract was made by correspondence, in which the defendant provided that ‘the usual conditions of acceptance apply’. The defendant failed to deliver the goods and argued that there had been no explicit agreement.
Decision: the words should be disregarded. The contract was complete without these words; there were no usual conditions of acceptance. (ACCA, Corporate & business law p.90)
‘ Implied terms
Terms may be implied by the courts, by statute or by custom.
There are occasions where certain terms are not expressly adopted by the parties. Additional terms of a contract may be implied by law; through custom, statute or the courts to bring efficacy to the contract. Implied terms may override express terms in certain circumstances such as where they are implied by statute.
An Implied term can be defined as follows.
A term deemed to form part of a contract even though not expressly mentioned. Some such terms may be implied by the courts as necessary to give effect to the presumed intentions of the parties. Other terms may be implied by statute, for example, the sale of Good Act.’
Terms implied by custom
The parties may enter into a contract subject to customs of their trade. Any express term overrides a term which might be implied by custom.
Hutton v Warren 1836
The facts: the defendant landlord gave the claimant, a tenant farmer, notice to quit the farm. Ha insisted that the tenant should continue to farm the land during the period of notice. The tenant asked for ‘a fair allowance ‘for seeds and labour from which he received no benefit because he was to leave the farm.
Decision: by custom he was bound to farm the land until the end of the tenancy; but he was also entitled to a fair allowance for seeds and labour incurred.
Terms implied by the courts
Terms may be implied if the court concludes that the parties intended those terms to apply to the contract.
The Moorcock 1889
The facts: the owner of a wharf agreed that a ship should be moored alongside to unload its cargo. It was well know that at low water the ship would ground on the mud at the bottom. At ebb tide the ship settle on a ridge concealed beneath the mud and suffered damage.
Decision: it was an implied term, thought not expressed, that the ground alongside the wharf was safe at low tide since both parties knew that the ship must rest on it.
A term of a contract which is left to be implied and is not expressed is often something that goes without saying ; so that, if while the parties were making their bargain an officious bystander were to suggest some express provision for it, they would say ‘why should we put that in? That’s obvious’: this was put forward in Shirlaw v Southern Foundries 1940. The terms are required to give efficacy to the contract, that is, to make it work in practice.
The court may also imply terms because the court believes such a term to be a ‘necessary incident’ of this type of contract. (ACCA, Corporate & business law p.91)
Liverpool City Council v lrwin 1977
The facts: the defendants were tenants in a tower block owned by the claimants. There was no formal tenancy agreement. The defendants withheld rent; alleging that the claimants had breached implied terms because inter alia the lifts did not work and the stairs were unlit.
Decision: tenants could only occupy the building with access to stair and/or lifts, so terms needed to be implied on these matters.
Where a term is implied as a ‘necessary incident’ it has precedent value and such term a will be implied into future contracts of the same type. (ACCA, Corporate & business law p.91
Exclusion of responsibility terms
It is reachable to have a phrase in the contract which excludes one of the parties on or later than accountability for rather that may go incorrect in the concert of the contract or borders that responsibility. It is called an exclusion clause or an exemption clause. For example, an exclusion beginning liability for dent done to the lawn by a builder’s backhoe might be included in a contract between the planner and a home owner who is having an extension built to their residence. The courts have normally taken the view that exclusion clauses are unfair and have tried to limit their giving in. Courts will by and large take to mean the exclusion clause touching the meeting annoying to rely on it and, at the smallest amount, comprehend it by a whisker. Everywhere a contract is a manuscript signed by the parties, they will generally be bounce by the exclusion clause in it. Anywhere a contract is an unsigned document e.g. tickets, receipts and dockets, the court will look at what a reasonable person would take for granted the document to be. Only anywhere a reasonable person would assume the document to be part of the contract between the parties will the exclusion clause in the document be able to be relied on. It must also be exposed that the exclusion clause was brought to the notice of the other party.
Task 02
2.1. Apply the elements of contract in the scenario of Alan and Cath.
An agreement must contain four essential elements to be regarded as a contract. If any one of them is missing, the agreement will not be legally binding. They are offer, Acceptance, intention of legal consequences and Consideration. The requirement of intention to create legal relations in contract law is aimed at sifting out cases which are not really appropriate for court action. Not every agreement leads to a binding contract which can be enforced through the courts.
Commercially based agreements will be seen as including a rebuttable intention to create a legally binding agreement. However, the law presumes that domestic or social agreements are not intended to create legal relations. For example, an arrangement between siblings will not be presumed to be a legally binding contract. A person who wants to enforce a domestic or social agreement will need to prove that the parties did intend to create a legally binding agreement. Given task 2, there is a written agreement between husband and wife however depending on the circumstances even in domestic agreements sometimes the intention to create legal relations is presumed. These facts are same as Merritt v Merritt case. Merritt v Merritt [1970] EWCA Civ 6 is an English contract law case, on the matter of creating legal relations. While under the principles laid out in Balfour v Balfour, domestic agreements between spouses are rarely legally enforceable; this principle was rebutted where two spouses who formed an agreement over their matrimonial home were not on good terms.
The Court of Appeal held that nature of the dealings, and the fact that the Merritts were separated when they signed their contract, allowed the court to assume that their agreement was more than a domestic arrangement. Held that the decision in Balfour v Balfour will not apply to this case, because in Balfour v Balfour, the parties reached their agreement when they were living in amity, but in this task 2, they negotiated the terms when they decided to separate. Therefore a reasonable person would regard their agreement as intended to be binding in law. Therefore the husband wants to transfer the house to wife’s name.
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2.2. Evaluate the effect of different terms in given contracts.
Contractual terms can either be conditions, warranties or in nominate terms. Traditionally, contractual terms were classified as either conditions or warranties. The category of in nominate terms was created in Hong Kong Fir Shipping. It is important for parties to correctly identify which terms are to be conditions and which are to be warranties. Where there has been a breach of contract, it is important to determine which type of term has been breached in order to establish the remedy available.
A condition is a major term of the contract which goes to the root of the contract. If a condition is breached the innocent party is entitled to repudiate (end) the contract and claim damages in poussed V spiers (1876) 1 QBD 410 case, Madame Poussard entered a contract to perform as an opera singer for three months. She became ill five days before the opening night and was not able to perform the first four nights. Spiers then replaced her with another opera singer.
The court held that the defendant’s refusal was justified and that they were not liable in damages. What chiefly influenced the court was that poussard’s illness was a serious one of uncertain duration and the defendants could not put off the opening night until she recovered. The obligation to perform from the first night was a condition of the contract. Failure to carry out this term entitled the producers to repudiate poussard’s contract.
Warranties are minor terms of a contract which are not central to the existence of the contract. If a warranty is breached the innocent party may claim damages but cannot end the contract: in Bettini v Gye (1876) QBD 183 case Bettini agreed by contract to perform as an opera singer for a three month period. He became ill and missed 6 days of rehearsals. The employer sacked him and replaced him with another opera singer. The court Held that, Bettini was in breach of warranty and therefore the employer was not entitled to end the contract. Missing the rehearsals did not go to the root of the contract.
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2.3. Evaluate the effect of different term in given contracts.
The provided facts are same like Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26 case. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] EWCA Civ 7 is a landmark English contract law case. It introduced the concept of in nominate terms, between “warranties” and “conditions”. Diplock LJ emphasised that some terms could lead to either the right to terminate a contract as a remedy, or to the mere entitlement to damages (or no right to terminate). What mattered was not whether you call a particular contract term a “warranty” or a “condition” but how serious the breach of the term was.
The meaning of the term “seaworthiness” has a very broad meaning ranging from trivial defects like a missing life preserver or a major flaw that would sink the ship. Accordingly, it is impossible to determine ahead of time what type of term it is. Thus, the type of breach must be determined by the judges. “Seaworthiness” is defined both by common law and by statute. In McFadden v Blue Star Lines [1905] 1 KB 607 it was stated that, to be seaworthy, a vessel must have the degree of fitness that an ordinarily careful and prudent ship owner would require his vessel to have at the commencement of a voyage, having regard to all possible circumstances. And the Marine Insurance Act 1906 s 39(4) provides that “a ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the adventure insured.”
In the Hong Kong case, the issue was not whether the unseaworthiness was “serious” or “minor”; rather the question was whether the undoubtedly serious unseaworthiness had had an effect sufficiently grave to allow the charterer to repudiate. On the facts, given that the charterer had had the “substantial benefit” of the contract for some 80% of the time period, the court held that the breach was adequately remedied by damages.
The Hong Kong Fir decision was met with some alarm in the shipping world, where certainty is crucial. The problem was the delay element; one had to “wait and see” the effect of the breach. The enormous costs involved in chartering mean that parties cannot afford to leisurely loiter, whilst pondering the consequences of the breach. Soon after, in The Mihailis Angelos [1971] 1 QB 164, it was held the impossibility of the ship owner to meet the “expected ready to load” date, ipso facto entitled the charterer to repudiate for anticipatory breach of condition. (The charterer was relieved to be able to cancel, as his proposed cargo of apatite had not materialized) PS. Lord Denning used the word “warranty” in a very different way. Therefore the defendants are liable for wrongful repudiation. Here we can apply the in nominate term approach. Rather than seeking to classify the term itself as a condition or warranty, the court should look to the effect of the breach and ask if the breach has substantially deprived the innocent party of the whole benefit of the contract. Only where this is answered affirmatively is it to be a breach of condition. 20 weeks out of a 2 year contract period are not substantially depriving the defendants of whole benefit and therefore they are not entitled to repudiate the contract.
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Task 03
3.1. Differentiate tort liability with contractual liability.
Winfield defined tortuous liability as follows: ‘Tortious liability arises from the breach of a duty primarily fixed by law; this duty is towards persons generally and its breach is repressible by an action for un liquidated damages’ The main purpose served by the definition is to distinguish the law of torts from other branch of the law and we now examine the main area of difference between the law of tort and the law of contract.
A contractual obligation differs in nature from a delictual obligation in three aspects. Firstly contractual obligations arise only from agreement between parties. However, delictual obligations are contractual obligations that are imposed by law on the party bound. Secondly, duties arising from contract are owed to the parties to the contract (or their assignees), whereas delictual obligations are owed to a large and indeterminate class of persons. Thirdly, a delictual obligation imposes negative duties, while a contractual obligation may impose positive or negative duties.
According to Winfield one distinction between the law of tort and the law of contract is that the scope of the rights and duties of parties in the former is wider than in the latter. In case of torts and duties are imposed by law and are owed to persons in general while in the case of contracts the duty is created by prior consent and agreement by the parties and is owed by one party to the other. However, such a general statement must necessarily be qualified in some respects. There are several instances where the prior consent of the defendant is a relevant factor in cases of tortuous liability. Under the English occupiers Liability Act of 1957, a distinction is drawn between the duty owed by an occupier to a trespasser and that owed by him to a visitor whom he has permitted to enter his premises.
Conversely, in the law of contracts the increased use of standard form contracts and ‘implied terms’ which the law deems the parties to have agreed to, has to a great extent eroded the true freedom of the parties to make independent decisions regarding the terms of such contracts. Therefore, the parties may find themselves bound by terms imposed on them by the law rather than by prior agreement between them. However, we could argue on the other hand that no person is bound by a contract against his will, may find himself subject to terms imposed by the law rather than the agreed terms of the contract alone.
We could also argue that in spite of the increased use of standard of the contract is still determined by agreement between the parties. For example, the question whether A delivers to B 100 or 200 tons of fruit, depends on the terms of the contract agreed upon by them. On the other hand, in the case of the occupiers Liability Act, while the occupier of premises will owe a duty of care to visitors whom he permitted to enter his premises, the extent of that duty is determined by the act in question.
We can see a further distinction between the law of tort and contract when we examine the aims of these two branches of law. The primary aim of the law of tort is to grant redress or compensation to the victim of a tort for the harm caused to him. In other words the law seeks to put him as far as possible in the same position as if he had not suffered any damage or injury.
The aim of the law of contract on the other hand is to enforce the promises made by one party to the other, and in the event that this is not possible, to grant damages to the latter, or in other words put him as far as possible in the same position as if the contract had been performed. However, this distinction too has been somewhat blurred in recent times and it is now possible for a plaintiff to bring an action in both tort and contract on the same facts. In the law of contract the rule that a promise is not legally binding without either consideration or the formality of a seal has been relaxed in many instances and in the area of tort several cases have held that a negligent defendant is liable even though he has not caused damage to the plaintiff by any positive act [Rose v Caunters where a solicitor who negligently executed a will was held liable to a disappointed legatee].
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3.2. Explain negligence in law of tort with other concepts associating with it.
The concept of negligence or culpa is one of the foundations of the Aqulian acting on the Roman Dutch law. In the English law however, it is of much later origin. The early common law concentrated almost entirely on intentional harm and moreover was more concentrated with the nature of the injury caused then with the basis of the defendant’s conduct. so long as the loss or injury was of a kind recognized in law as being compensable, it was immaterial whether it was caused through the defendant’s intentional or negligent misconduct.
It was during the 19th Century and the advent of the industrial revolution that the concept of negligence began to evolve as a basis of Tortious liability in the English law. The development and expansion of industries and machinery and new modes of transport etc. resulted in a wider range of loss and injury suffered by individuals. The old stereotypes remedies available were insufficient to provide a solution to the problems which began to arise as a result of the social and economic upheaval which prevailed at the time, and the courts increasingly began to rely on the concept of negligence in confronting them. Further the basis of negligence being ‘fault liability’ it proved to be more advantageous to the proponents of industrialization than the concept of ‘strict liability’ or liability without fault. However, the principle of negligence also resulted in expanding liability in other directions as for example, liability for nervous shock, negligent misstatements, omissions, etc. the importance of this basis of liability can be seen in the fact that the vast majority of litigation in the law of depict involves negligence.
Negligence is not a tort in itself but a basis of liability in Tortious actions, it may be defined as’ the failure to exercise towards another, in given circumstances that degree of care which the law considers that a reasonable man should exercise in these circumstances’
In order to establish negligence as a Cause of Action under the law of TORTS, a plaintiff must prove that the defendant had a duty to the plaintiff, the defendant breached that duty by failing to the required standard of conduct, the defendant’s negligent conduct was the cause of the harm to the plaintiff, and the plaintiff was, in fact, harmed or damaged.
The concept of negligence developed under English Law. Although English Common Law had long imposed liability for the wrongful acts of others, negligence did not emerge as an independent cause of action until the eighteenth century. Another important concept emerged at that time: legal liability for a failure to act. Originally liability for failing to act was imposed on those who undertook to perform some service and breached a promise to exercise care or skill in performing that service. Gradually the law began to imply a promise to exercise care or skill in the performance of certain services. This promise to exercise care, whether express or implied, formed the origins of the modern concept of “duty.” For example, innkeepers were said to have a duty to protect the safety and security of their guests.
The concept of negligence passed from Great Britain to the United States as each state (except Louisiana) adopted the common law of Great Britain (Louisiana adopted the Civil Law of France). Although there have been important developments in negligence law, the basic concepts have remained the same since the eighteenth century. Today negligence is by far the widest-ranging tort, encompassing virtually all unintentional, wrongful conduct that injures others. One of the most important concepts in negligence law is the “reasonable person,” which provides the standard by which a person’s conduct is judged.
‘ Proximate Cause
Proximate cause exists where the plaintiff is injured as the result of negligent conduct, and plaintiff’s injury must have been a natural and probable result of the negligent conduct. In order for a defendant to be liable, the plaintiff must establish both negligence and proximate cause.
Please note that the law speaks of the defendant’s conduct as being “a proximate cause” of an accident, as opposed to “the proximate cause”. Many accidents have more than one proximate cause. It is typically not necessary for liability that the defendant’s negligence be either the only proximate cause of an injury, or the last proximate cause. A defendant may be liable even where an injury has multiple proximate causes, and whether those causes occur at the same time or in combination. A plaintiff may be able to bring a cause of action against two or more defendants by proving that the acts of each were proximate causes of the plaintiff’s injury, even where the defendants’ negligent acts were distinct.
Imagine a situation where a plaintiff is driving down the road, and is suddenly cut off by a person who runs through a stop sign on a side street. The plaintiff slams on her brakes, and is able to avoid striking that car. However, the plaintiff is rear-ended by another driver who was not paying attention to the events in front of his car. The plaintiff may be able to bring an action against both drivers – the one who cut her off and the one who rear-ended her – on the basis that their negligent acts, although independent, were both proximate causes of her injuries.
The Elements of a Negligence Action
A typical formula for evaluating negligence requires that a plaintiff prove the following four factors by a “preponderance of the evidence”:
‘ The defendant owed a duty to the plaintiff (or a duty to the general public, including the plaintiff);
‘ The defendant violated that duty;
‘ As a result of the defendant’s violation of that duty, the plaintiff suffered injury; and
‘ The injury was a reasonably foreseeable consequence of the defendant’s action or inaction.
For example, a person driving a car has a general duty to conduct the car in a safe and responsible manner. If a driver runs through a red light, the driver violates that duty. As it is foreseeable that running a red light can result in a car crash, and that people are likely to be injured in such a collision, the driver will be liable in negligence for any injuries that in fact result to others in a collision resulting from the running of the red light.
‘ Gross Negligence
Gross negligence means conduct or a failure to act that is so reckless that it demonstrates a substantial lack of concern for whether an injury will result. It is sometimes necessary to establish “gross negligence” as opposed to “ordinary negligence” in order to overcome a legal impediment to a lawsuit. For example, a government employee who is on the job may be immune from liability for ordinary negligence, but may remain liable for gross negligence.
Similarly, where a plaintiff signs a release (as may be required, for example, before entering a sports competition), for public policy reasons many jurisdictions will apply the release only to conduct which constitutes “ordinary negligence” and not to acts of “gross negligence”. The reason for this is quite simple: It is not good public policy to allow a defendant to escape liability for reckless indifference to the safety of others, particularly in contexts where the defendant is responsible for creating unsafe conditions, or is profiting from their existence. Consider, for example, a commercial venture engaged in a high risk recreational activity, such as a company that offers rock climbing tours. If a tour member is injured when safety equipment provided by the company unexpectedly fails, a valid release may protect the company from a lawsuit. However, if the company knows up front that the equipment is defective and uses it anyway; it would not be protected by the release.
‘ Children and Negligence
Minors are typically held to a different standard of care than adults. For example, a minor’s negligence may be evaluated against what reasonably careful person of the same age, mental capacity and experience would exercise under the same or similar circumstances. Very young minors (e.g., minors under the age of seven) are typically presumed to be incapable of negligence.
Most jurisdictions also consider the fact that minors act upon childish instincts and impulses when considering injuries to minors. As a consequence, a defendant knew or should have known that a child (or children) were present, or were likely to be present, in the vicinity, the defendant may required to exercise greater vigilance. By way of example, a person driving by an unfenced playground where children often play baseball should be on alert that a child may impulsively chase a ball into the street.
‘ Comparative Negligence
When comparative negligence applies, the damages a plaintiff is awarded will be reduced in proportion with the plaintiff’s fault for his own injuries. (e.g., a jury determines a plaintiff’s damages to be $100,000.00, and finds that the plaintiff is 40% at fault. The plaintiff would thus be awarded $60,000 against the defendant.)
‘ Contributory Negligence
Where “contributory negligence” principles are applied, if the plaintiff in any way contributed to his or her own injury, the plaintiff is barred from recovering damages. The extreme consequence of this approach has led to its being limited or abandoned in many jurisdictions.
One historic limitation has been to examine the context of an accident to determine who had the “last clear chance” to avoid its occurrence, and to excuse a plaintiff’s contributory negligence where the defendant is found to have had and to have failed to exercise that “last clear chance”.
‘ Mixed Comparative and Contributory Negligence
Some states follow a mixture of comparative and contributory negligence, whereby a plaintiff who is less than fifty percent at fault may recover damages reduced by the plaintiff’s proportion of fault, but a plaintiff who is more than fifty percent at fault may not recover damages, or may recover only a percentage of economic damages, against the defendants. (For more explanation of damages, please see this associated article.)
‘ Vicarious Liability
Vicarious liability occurs when one person is held responsible for the negligence of another. Typically, this applies in an employment context, where the employer (master) is responsible for the negligent acts of the employee (servant) which occur within the context of the employment relationship. For example, an employer may be liable for an accident caused by an employee as the result of the negligent operation of a delivery vehicle. (For more information on liability in agency relationships, please see this associated article.)
Often, parents may be held vicariously liable for the negligent acts of their children. However, many jurisdictions have limited the vicarious liability of parents, and some have eliminated it.
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3.3. Explain vicarious liability and its role in the business context.
It is a generally accepted principle that a person is liable only for the wrongs that he himself has committed. However, a rule of tort law knows as vicarious liability creates situations in which one person is held legally liable for the wrongs of another although he himself is personally blameless. The liability of one party for the action or inaction of another party, even though the party held liable is not directly responsible for any injury. For example, an employer of an employee who injures someone through negligence while in the scope of employment is vicariously liable for damages to the injured person. In contrast, a defendant who engages an independent contractor is not liable to others for the acts or omissions of the independent contractor. An independent contractor is a person who performs services for another person under an express or implied agreement and who is not subject to the other’s control, or right to control, over the manner and means of performing the services.
The doctrine of vicarious liability generally operates within the law of torts. It has become well-established in English law and historically has been called ‘Master and Servant liability,’ which clearly indicates the circumstances in which the doctrine becomes applicable in tort law.
The general rule in tort law is that a person who authorizes a tort will personally be liable for damage or harm as a result. However, vicarious liability defines the circumstances in which a person is liable for the torts of another without express authorization or ratification. The most common example of vicarious liability is the liability of an employer for the torts of his employees committed in the course of employment. It is not necessary in such circumstances for the employer to have breached any duty that was owed to the injured party, and therefore it operates as strict or no-fault liability. It is possible that the injured party could be either an employee or a stranger, and the employer can be held vicariously liable in both situations. The most important element to establishing a case for vicarious liability is that the wrongdoer be acting as a servant or employee, and that the wrong done be connected to the employee’s course of employment. Vicarious liability can only be imposed if it is proved that the employee was acting ‘in the course of employment.’ This criterion is essential, and requires a clear connection between the employment duties and the employee’s acts complained of. As such, most employers will be insured in order to avoid such liability. In addition, in order to establish vicarious liability, it is necessary to show that an employee was employed under a contract of service, or in the case of an independent contractor, a contract for services. English law has also established that an employer can be held vicariously liable for a breach of statutory duty by an employee, for example in circumstances such harassment or bullying within the workplace.
Vicarious liability ‘in the course of employment’ The principle of vicarious liability is only applicable in the case of servants and not in the case of independent contractors. For an employer to be held liable, the wrong must be committed ‘within the course of employment.’ This criterion is a question of fact, and it is immaterial whether the wrong committed by the employee was authorised or not. An employer will only avoid liability in this situation if it can be shown that an employee acted ‘on a frolic of his own,’ or in other words, if the employee acted in a way that was unconnected with his employment. Recently, the courts have been willing to impose liability in far-reaching circumstances on the issue of whether the wrong was committed ‘in the course of employment.’ Important in this context is the case of Lister v. Hesley Hall Ltd. This case establishes that an employer cannot avoid liability by showing that an employee engaged in an intentional and unauthorised wrongdoing. Thus, the important factor in establishing vicarious liability is the connection with the ‘course of employment.’ However, it is important to note that an employer cannot avoid liability if an employee acts in a way that could be described as ‘incidental’ to his employment and the duties to which he is entrusted with. Therefore, in establishing whether vicarious liability exists, the question to be asked is firstly, whether the act complained of was committed ‘in the course of employment’ and secondly, whether the act is reasonably ‘incidental’ to the employee’s employment duties. If there is a connection, it is irrelevant whether the employee’s act was unauthorised. In the wake of Lister, a more recent trend has been to impose liability upon an employer for violent acts committed by employees. In the Court of Appeal case of Mattis v. Pollock (t/a Flamingos Nightclub) a nightclub owner was held vicariously liable for the violent acts of an employed doorman. The Court of Appeal applied the rationale of Lister and held that a ‘broad’ approach was required in assessing whether an individual’s acts were sufficiently connected with the duties of his employment so as to justify imposing vicarious liability.
Vicarious Liability under a statutory duty -An employer can also be held vicariously liable for an employee’s breach of a statutory duty. This duty differs to that of a common law duty in that the duty does not rise by operation of common law principles, but by statute. As such, the statute imposes a duty on the employee personally and makes no reference to the employer. An employer can be held liable for the breach of a statutory duty even where the statutory duty is owed by the employee personally and individually. This circumstance would potentially arise in the context of harassment within the workplace, where one employee has been harassed or bullied by another- see the case of Majrowski v. Guy’s and St Thomas’s NHS Trust. However, emphasis will be placed on the intention of the legislature in creating the statute in deciding whether vicarious liability should be imposed.
Conclusion
Where vicarious liability is imposed on an employer, both the employee and employee will be held jointly liable. This operates to allow the employer to claim a contribution from the employee under the Civil Liability (Contribution) Act 1978. It must be noted that in the context of an independent contractor, an employer would be held vicariously liable where he authorised or ratified the tort.
It is clear that vicarious liability will continue to operate significantly for an employee’s acts committed within the ‘course of employment.’ However the case of Lister has expanded the approach taken by the courts in determining the circumstances for the applicability of vicarious liability, and has broadened the extent of the ‘in the course of employment’ criteria. Although essential, this criterion has expanded to the point of allowing claims for vicarious liability in cases where liability would not have arguably been imposed. The extension of the liability to statutory duty only highlights this point. In turn, the expansion of vicarious liability will have far-reaching implications for employer’s in the future.
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Task 4
4.1. Apply the rules on tort of negligence and comment whether Ciara can claim damages from Arthur Anderson.
We want to analyze whether Ciara can claim damages from Arthur Anderson for that purpose we have to decide whether can get pure economic lose for negligent misrepresentation in tort law or not. Ciara bought Danial dine with the misperception of Arthur Anderson’s information.
A misrepresentation is a false statement of fact or law which induces the representee to enter a contract. Where a statement made during the course of negotiations is classed as a representation rather than a term an action for misrepresentation may be available where the statement turns out to be untrue. There are three types of misrepresentation innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation the affect of a finding of misrepresentation is the contract is voidable ie the contract exists but may be set aside by the representee. The remedy available depends on the type of misrepresentation, but generally consists of rescission and or damages. The right to rescind the contract may be lost in some circumstances. The law relating to misrepresentation is mainly found in common law with the Misrepresentation Act 1967 providing some further details.
The majority of professionals are aware that the provision of negligent advice or a negligent misstatement may expose them to liability. However, such professionals may not be aware of the extent of their potential liability. Negligent misstatement relates to a representation of fact, which is carelessly made, and is relied on by another party to their disadvantage.
For some time it has been possible to claim for economic loss arising out of a negligent misstatement where no contractual or fiduciary relationship exists between the parties. This is provided however that a special relationship or a sufficient proximity exists between the parties.
Duty of care in negligent misrepresentation
A professional is defined as a person practicing a profession, the standard to be applied by the court in determining whether a defendant has acted with care is basically determined by reference to;
‘ What could be reasonably expected of a person professing that skill (and not a greater level of skill), and
‘ The relevant circumstances as at the date of the alleged negligence and not a later date.
A professional can avoid liability if it is established that the professional acted in a manner that was widely accepted in Australia by peer professional opinion as competent professional practice. However, if the court determines that the opinion is unreasonable or there is a duty to warn of risk, then the professional will not escape liability.
For a plaintiff to recover damages for a negligent misstatement, Ciara must establish; A duty of care, this is established through a relationship or proximity between the parties. This may be circumstantial, e.g., a professional relationship, or casual. Policy considerations, such as the public interest, may also be important.
‘ A breach of duty, Ciara must establish that;
‘ Arthur Anderson made a representation or statement,
‘ Arthur Anderson knew, or ought to have known, it was being requested for a serious purpose,
The representation and statement by Arthur Anderson would be acted upon; if the statement was inaccurate they could suffer loss. Damage, Ciara must establish that there is a connection between Ciara’s omission and the damage they have suffered, the element. This means establishing that they have relied to their detriment on Arthur Anderson’s information or advice.
The arguments of Denning LJ in the cases Candler v Crane Christmas & Co are proved correctly when the House of Lord was prepared to extend the duty of care in the Hedley Byrne cases.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] (HL) in this case, House of Lord held that the plaintiff was failed to claim the economic loss to the defendant, because the advice given by the defendant was prefaced by disclaimer of responsibility for the accuracy of the statement. Besides that, House of Lord held that they are some indication of situation that the duty of care could arise in pure economic loss caused by negligent misstatements which are:
Plaintiff economic loss should be reasonably foreseeable
Have a ‘special relationship’ between the defendant and the plaintiff. Therefore, the duty of care owed by the defendant for negligent misstatement is not as broad as the general duty of care (Neighbourhood Principle) created by the case Donoghue v Stevenson. The duty of care was owed in the negligent misstatement when the situation that the parties are in ‘Special relationship’. the Major development in ‘special relationship’ came into the case above Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] (HL).To impose the duty of care into the tort law, there had to be a ‘special relationship’ exists between the plaintiff and defendant. However, create a ‘special relationship’ not necessary is a contractual client relationship. There is lack of judicial consensus to give an exact meaning of ‘special relationship’ therefore the ‘special relationship’ was treated in a narrow term. The special relationship just can exist into the business relationship. In the Hedley Byrne case, judge decides that there are few conditions needed to achieve to constitute a ‘special relationship’ between the person who gives an advice and another person that who sought on the advice.
Plaintiff must rely on the advice given by the defendant
Defendant must aware that his advice will be relied on by the plaintiff. Plaintiff reliance on defendant’s advice must reasonable in all circumstances. Mutual life and citizen’s Assurance Co Ltd V Evatt [1971] AC 793, [1971] All Er 150, PC the Privy Council held the plaintiff can’t claim their economic cost loss cause by the negligent misstatement to the defendant. Because the defendant was Insurance Company although they give an advice but the financial advice they had given was not an expert in their professional. After this case happened, it restricted the ‘special relationship’ principle that establish in the case Hedley Byrne. In this case Privy Council added another condition that needed to constitute the special relationship.
When the defendant who given the advise must expert in the part of their business or professional.
This condition had been proven by the cases Esso Petroleum Co Ltd v Mardon [1976] QB 801, [1976] 2 All ER 5, CA in this cases, Esso give an advise regarded the expert number of annual petrol trade to the Mr. Mardon, however Mr. Mardon’s new filling station are fail to achieve the expert number given by Esso because of the rerouting of a highway. House of lord held that, a duty of care will arise to the Esso Company because the advice they give to the Mardon was in their part of professional and business. Therefore, the Mr. Mardon can claim the economic loss cause by the negligent misstatement to the Esso Company. (Richard Card & Jennifer James, 1990, pg 323)
Besides that, in the Caparo Industries v Dickman state that the duty of care will arise not only that the statement will be relied on, and the consequence of the person who relied on the statement must suffer in economic loss. Besides that, the defendant must have knowledge that their statement would both be communicated to and be relied on by, the plaintiff. (Vivienne Harpwood, 2000, pg83)
Caparo Industries v Dickman [1990] 1 All ER 568 case, House of Lord held that no duty of care owed by the defendant as an auditor to plaintiff who was actual or potential shareholder. (Richard Card & Jennifer James, 1990, pg 347)
The purpose of the statement made by auditor is to help the company to control all the money transaction and protect the company existing shareholder as a body. Therefore, the individual shareholder cannot use it as information that deciding to purchase more share and make the profit on it. Consequently, the auditor was not owed duty of care to shareholder because the statement was not including in investing purpose. Unless, the auditor are fully aware that the shareholder would relied on his statement. This can be shown in the case below.
JEB Fasteners Ltd v Marks, Bloom & Co [1981] 3 All ER 289 in this case, a firm of accountant, who carelessly made a financial statement of Y company, and the plaintiff relied on it. The court held that, the firm of accountant imposes the duty of care to plaintiff because the defendant fully aware that the plaintiff will investing in or taking over Y company thus, defendant will knew that the plaintiff will rely on the published accounts. (Richard Card & Jennifer James, 1990, pg 323)
In the case Caparo Industries v Dickman the House of Lord establish the modern three stage of duty of care. It state that, the duty of care would arise they are three factors:
‘ Reasonable Forcibility
‘ Proximity between the defendant and plaintiff
‘ Is it fair, just and reasonable to impose a duty of care to defendant
Exception ‘Special relationship’ in negligent misstatement
After the two cases Esso Petroleum Co Ltd v Mardon and Mutual life and citizen’s Assurance Co Ltd V Evatt, the special relationship no longer just exists into a business relationship and existed into professional relationship too. While social relationship still excluded, unless the parties can be clearly prove that carefully considered advice for being sought.
Chaudhry vs Prabhakar [1988] 3 All ER 718 the court of appeal held that the duty of care will arise on the defendant who are the friend of plaintiff that give a negligent advice to the plaintiff to selection of a second car. The defendant will liable on it, although defendant not as a professional in the mechanic area.
This is an exception existed the duty of care in a social relationship. Because the Court of Appeal clearly measure that the case above was an unusual case, the judgment in this case was made in a special facts. Consequently, this judgment not consists into general rule of liability in all cases
Exception ‘Special relationship’ in tort
In the general rule of ‘special relationship’ in tort, there is no duty to control the act or conduct of third person for prevents their conduct resulting injury to another. While, there had two exceptions state that the person (actor) has a duty to control the act of third person which are state in the Section 315 of the Restatement.
First exception, when special relationship exists into actor and third person. Second exception, when actor has a special relationship with the other that the actor has owed a duty of care to protect gets injured by the act of Third person.
Pure Economic Loss
Economic loss is a term of art which refers to financial loss and damage suffered by a person such as can be seen only on a balance sheet rather than as physical injury to the person or destruction of property. There is a fundamental distinction between ‘pure economic losses’ and ‘consequential economic loss’, as pure economic loss occurs independent of any physical damage to the person or property of the victim. Usually, “pure economic loss” in tort, particularly in negligence, is not recoverable as damages or otherwise. It has also been suggested that it be called “commercial loss” as injuries to person or property could be regarded as “economic”.
From reading several cases, the term ‘pure’ suggests that a loss must be untainted and self-representative, standing apart from other losses such as personal injury. This is a form of loss suffered by a claimant that is not consequential due to a result of physical damage to a person or property. Common categories of pure economic loss are expenditure, loss of profit, profitability or loss of some other form of financial gain. It is therefore important to determine whether a claim is in fact consequential or pure economic loss, as the latter is usually not recoverable inlaw as damages. In a claim for personal injury following negligence of the defendant, the claimant may be unable to resume work suffering a loss of earnings which is a usual head of damage. We can see that this is clearly a product of personal injury thus representing consequential loss not pure economic loss. From previous readings, economic loss is recoverable using the law of contract, and unless contractual terms or agreements have been breached, there cannot be a claim for loss. Even so, there are other categories of torts known as ‘economic torts’ that act as a vehicle of recovery for economic interests.
What Is Involved?
Negligence is an element of common law applied predominantly in tort cases to achieve compensation in monetary forms for the harm done under the term ‘damages’ for injuries incurred both physically and mentally. If a claimant is able to prove that the defendant acted negligently to cause injury, then a claim for damages can be made to compensate them for harm to their body, property, mental well-being, financial status, or intimate relationships. The ‘pleural plaques’ case in the House of Lords: Johnston V NEI defines damages as it illustrates whether being diagnosed with ‘pleural plaques’ was a true claim against Johnston’s previous employers in negligence. Lord Scott refuted the claim stating that Johnston may develop a more serious asbestos-related condition and this cannot, by itself, form the basis of a claim in negligence. It is clear therefore that in the absence of injury there is no warrant for claim. However, since this judgement, the “aggregation theory” enabled claimants to recover final awards of between ??12,500 and ??20,000, or provisional damages (leaving open the possibility of a further claims if claimants developed an asbestos-related disease) of between ??5,000 and ??7,000. It is evident by looking at Lord Denning’s case; Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd that English law has had problems dealing with cases of pure economic loss as restrictions imposed, particularly within tort and common law, suggest they are in place for the fear unquantifiable claims.
There are four basic elements which make up the vehicle of negligence in Tort, these are, a duty of care owed by a defendant, the breach of that duty, the causal relationship between the breach of duty and the damage suffered and finally, damage to the claimant. It is important to note that not all issues will breach duty of care as English law recognises certain categories where there is a direct obligation to adhere to this. English law does not accept a duty of care for everyone, for all circumstances and for all forms of harm as this is too broad and I believe this would expose the law to opportunists. In the leading case from 1932; Donoghue v Stevenson, the speech given by Lord Atkin’s illustrates the “neighbour” principle, which was derived from the Christian principle of “loving your neighbour” in Luke 10 where Lord Atkin’s states;
‘. . . persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions that are called in question . . .’
Lords Buckmaster and Tomlin opposed this theory of determining a duty of care as they believed it would welcome an unprecedented amount of claims and further had concerns of how trade could operate efficiently if this was in place. Considering both Lord Atkin and Buckmasters viewpoints, principally, I agree with Lord Atkin as his theory, albeit in an idyllic world, would determine the parameters for a duty of care. However, in my opinion, with such liability unevenly balanced, also supported by what I would call an evolving global ‘blame/claim culture’, it is not unreasonable, supported by areas previously discussed, to conclude that this theory would encourage an unquantifiable number of claims. Lord Buckmaster’s reference to the Versailles train crash in 1842 further supports my statement that all those injured could file for claim from the manufacturer which in essence is absurd. It is evident that there has to be limited liability, or ‘ring fenced’ liability in order to maintain control. This further highlights the courts’ fear that a situation could become uncontrollable. With this in mind, there was a clear need for a process to establish a duty of care and the 70’s saw the ‘Anns test’, a simplified process illustrated by Lord Wilberforce in his case; Anns V Mertin LBC which suggested;
‘. . If there is reasonable forseeability of harm to the plaintiff, there will be liability, unless there is some good reason, grounded in policy, there should not be liability. . ‘
In my opinion, the principles of Anns test are too general, as defining the terms ‘reasonable’ and ‘there is some good reason’ is subject to an individual’s appraisal. I believe that this would lead to inconsistencies and potentially significant differences in judgement as the vague phrasing is dependent on its perception. The 80’s saw a categorised reasoning system therefore Murphy v Brentwood DC overruled and superseded the decision Anns v Merton London Borough Council.
The courts wanted to categorise different situations to reflect the appropriate duty of care to resolve ambiguities which meant a defined relationship between the kind of harm and the degree of duty of care required which would narrow Ann’s generalist approach. Various categories meant that the two requirements Lord Atkin suggested (the forseeability of harm and the neighbourhood relationship, also referred to as proximity) held different weights of duty of care which was favoured in one of the leading cases by Lord Bridge in Caparo Industries Plc V Dickman which established the ‘three-fold test’. These principles required all three elements of the three stage test to be considered in deciding whether a duty is owed or not. Even so, the focus will be on proximity with justice and reasonableness as potential limiting factors. For cases involving negligent advice, the proximity test involves considering knowledge of reliance and reasonableness of reliance.
Until the 60’s, economic loss was considered a separate entity outside of negligence which was illustrated by Lord Denning’s dissent in Candler -v- Crane Christmas & Co. These principles were then followed by opposition from the House of Lords as illustrated in Hedley Byrne & Co Ltd v Heller & Partners Ltd where it was held that pure economic loss resulting from negligent misstatement was recoverable in theory but dependant on ‘special relationships between parties’. With particular reference to Hedley Byrne & Co Ltd v Heller & Partners Ltd it is evident that the courts could refine what is deemed recoverable for pure economic loss but their approach in my opinion resembles a reluctance to implement their theories for the fear of a reprisal.
Now, in the end of the arguments and rules on tort of negligence we can say Ciara can claim damages from Arthur Anderson.
4.2. Analyse the situation to decide whether the company is vicariously liable for the action of Mr. Plenty
It is generally accepted principle that a person is liable only for the wrongs that he himself has committed. However, a rule of tort law known as vicarious liability creates situations in which one person is held legally liable for the wrongs of another although he himself is personally blameless. This is another instance of strict liability and is usually invoked to hold a master liable for the wrongs committed by his servants.
This early concept of vicarious liability changed and evolved over the centuries into the present day rule of tort law that an employer is liable for the acts of his employees committed in the course of their employment.
Before discussing the task, it is important to note that it is not applicable in the case of all employees but only as regards those who fall within the legal definition of a ‘servant’. In other words it is incidental only to a ‘master and servant’ relationship. Secondly, it must be remembered that it is not based on any breach of duty owed by the defendant but on the fact that his servant’s tort is imputed to him.
The principle of vicarious liability is only applicable in the case of servants and not in the case of independent contractors. Therefore it becomes important to distinguish between the two. Two theories have been formulated to do so, namely control test and organization test. Here it is clear Mr. Plenty is a servant not an independent contractor. It should be noted that a master will not be liable only for those torts which were committed by him in the course of his employment. ‘A wrong falls within the scope of employment if it is expressly or impliedly authorized, or is necessarily incidental to something which the servant is employed to do’.
Once it is established that the sufficient relationship of employer and employee exists, it is necessary that any tort be committed in the course of employment. As with distinguishing an employer and employee relationship, there is no one test which adequately establishes which acts employers are vicariously liable for. Such determinations rest upon precedent, and the facts of each individual case. A preferred test of the courts was formulated by John William Salmond, some 100 years ago, which states that an employer will be held liable for either a wrongful act they have authorized, or a wrongful and unauthorized mode of an act that was authorized. The rationale for this is policy based; if an employer could simply issue detailed and long prohibitions on what an employee was not to do, they could never be found vicariously liable for the wrongdoings of their employees. However, a distinction can be drawn between acts which are prohibited, and acts which take employees out of the course of their employment. An illustration of the test is provided by two contrasting cases, Limpus v London General Omnibus Company and Beard v London General Omnibus Company, both involving road collisions. In the former, a driver pulled in front of another rival omnibus, in order to obstruct it. Despite express prohibitions from the employer, they were found liable; this was merely an unauthorized mode of the employee carrying out his duties (driving), not an entirely new activity. By contrast, in the latter case, London General Omnibus Company were not liable where a conductor (employed to collect fares on board the bus) negligently chose to drive the vehicle instead; this was completely outside of his duties. A wilful wrong of a servant may still be held to be in the course of employment even if it had been expressly forbidden by the employer. The latter would be protected from liability only if the act which had been forbidden actually restricted what the servant was employed to do. ‘It is a question of fact in each case whether the prohibition relates to the sphere of the employment or to the mode of performance’. In the case of Limpus v London Omnibus Co, a driver of the defendant’s omnibus had specific instructions not to race with or obstruct other omnibuses on the road. He disobeyed these orders and obstructed the plaintiff’s vehicle and damaged it. His employers were held liable because his act was a wrongful and unauthorized mode of carrying out an authorized job, which was to promote their business in competition with their rivals. The surrounding circumstances of wrongdoings are often important in deciding whether an act is in the course of employment or not.
For example, where a professional rugby player was expressly prohibited in contract from assaulting another player, it was held that as it had been contemplated by the drafters, such an act was in the course of his employment. Where in Century Insurance Co v Northern Ireland Road Transport Board an employee set alight to a petrol station, by throwing a match carelessly away while refuelling a petrol tanker, this was adjudged to have been in the course of his employment.
There have been contrasting judgments where employees have given lifts in their vehicles, during hours of employment, as to whether their employers can be vicariously liable. Two similar cases demonstrate this problem. The first, Conway v George Wimpey & Co Ltd involved a driver, who, despite express prohibitions, gave a lift to an employee of another firm, and negligently injured him in an accident. No liability was imposed on the employer, as this was deemed to be an activity outside of the employee’s duties. This can be compared to Rose v plenty, where liability was imposed where a small boy was injured in a road accident, while helping a milkman on his rounds. It has been stated that these two decisions are not reconcilable. However, Lord Denning offered some justification in Rose v Plenty for the distinction, stating that the employee, in allowing the boy to assist him, was not acting outside of his employment, but acting in furtherance of it (through the boy assisting his duties).
Rose v Plenty [1976] 1 WLR 141 is an English tort law case; this case’s facts are same like provided case study. Vicarious liability was tenuously found under John William Salmond’s test for course of employment, which states that an employer will be held liable for either a wrongful act they have authorized, or a wrongful and unauthorized mode of an act that was authorized. On appeal to the Court of Appeal, this judgment was reversed, with Lord Denning making the leading speech. It was established that, as in the case of Limpus v London General Omnibus Company the employee was merely acting in an unauthorised way, whilst still going about his duties of delivering milk: In the present case it seems to me that the course of the milk roundsman’s employment was to distribute the milk, collect the money and to bring back the bottles to the van. He got or allowed this young boy to do part of that business which was the employers’ business. It seems to me that although prohibited, it was conduct which was within the course of the employment; and on this ground I think the judge was in error. I agree it is a nice point in these cases on which side of the line the case falls; but, as I understand the authorities, this case falls within those in which the prohibition affects only the conduct within the sphere of the employment and did not take the conduct outside the sphere altogether. I would hold that the conduct of the roundsman was within the course of his employment and the masters are liable accordingly, and I would allow the appeal.
Whilst the majority of Lord Denning and Scarman LJ agreed upon this interpretation, Lawton LJ dissented, arguing that precedents set in two earlier cases, Twine v Bean’s Express Ltd and Conway v George Wimpey & Co Ltd, could not be distinguished from the instant case. In these cases, no liability was found on the part of the employer where passengers taken by employees – against specific instructions – were injured. Lord Denning distinguished the cases on the grounds that Leslie Rose had been furthering the employee’s duties, keeping Mr Plenty within the course of his employment. ‘