BUSINESS LAW - BSP 190

Unit 2: Contract Law (Part 2)

Persons in law; Legal capacity to contract;
Content of contracts; Letter of intent;
Exemption clauses

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 Persons in Law (1)
• Distinction between:
Natural persons = individuals/human beings
Juristic persons = legal personality is not
restricted to human beings, also bodies and
associations of persons can constitute a
person in law (e.g. companies) > so called
artificial personality

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 Persons in Law (2)

• The juristic personality allows one or more

natural persons to act as a single entity for legal
purposes, endowed with a legal name, rights,
privileges, responsibilities and liabilities under
law > completely independent from the persons
behind > companies (various kinds exist > see
“Basics of company law”)
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 Legal capacity to contract (1)
• Legal capacity is an indispensable requirement for a
contract to be valid
• Purpose of rules on capacity is to protect the persons
who lack legal capacity or to protect the contractual
partner
• The law prescribes different legal consequences in the
event lacking full capacity, for the party without the
necessary capacity and for the contractual partner
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 Legal capacity to contract (2)

• In the case of natural persons the issue of

capacity concerns three different classes:
Minors
Persons of unsound mind (e.g. insane)
Drunkards

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 Legal capacity to contract (3) – Minors (1)

• General rule: all persons of full age (18) have contractual

capacity
• As today in times of high mobility young people may enter
contracts as much as adults, the law is therefore seeking to
protect these people from contracts to the
detriment/disadvantage of the minor
• Basic common law rule is, that contracts made by a minor
with an adult are binding the adult, but do not bind the
minor, unless he ratifies the contract after reaching 18
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 Legal capacity to contract (4) – Minors (2)

• It’s necessary to precisely distinguish as follows: some

contracts are valid binding on minors others are
voidable and some are void
• 3 categories:
Valid contracts binding on the minor and therefore
enforceable against the minor
Contracts voidable by minors, a minor may enter but can
also back out if he wants to
Void contracts, which are unenforceable against minor
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 Minors – Valid contracts

• Valid contracts > according to the Minors’ Contracts

Act 1987 there are 2 categories of such valid/binding
contracts
(1) Executed contracts for necessaries
(2) Contracts of service for the minor’s
benefit

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 Minors – Valid contracts - Contracts for
necessaries (1)

Executed contracts for necessaries > “goods

suitable to the condition in life of the minor…and
to his actual requirements at the time of the sale
and delivery” > this can vary from minor to minor (!)
> If the contract corresponds to this two-part test,
they are necessaries in the legal sense

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 Minors – Valid contracts - Contracts for
necessaries (2)
Nash Vs. Inman (1908)
The case: The claimant was a Tailor. The defendant, the
son of an architect, was a minor undergraduate at
Trinity College, Cambridge. He ordered clothes
(including 11 fancy waistcoats) to the value of 122
Pounds. The claimant sued the defendant for payment.

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 Minors – Valid contracts - Contracts for
necessaries (2a)
Nash Vs. Inman (1908)
The court’s decision: Although the court was prepared
to accept that the supply of such clothing could be
suitable to the condition in life of the undergraduate,
the action failed. The father of the defendant could
prove that his son was already adequately supplied
with clothes and did not require more at the time the
contract was formed. Therefore, what the tailor
supplied could not be classed necessaries.
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 Minors – Valid contracts - Contracts for
necessaries (3)
• Further the contract must be executed, that means
the minor is only liable to pay for goods actually
delivered to him
• The minor is only obliged to pay a reasonable price
> if the price is not reasonable, the contract is indeed
enforceable but the supplier may be only able to
recover a reasonable amount rather than the contract
price
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 Minors – Valid contracts - Contracts for
necessaries (4)
• Summary (Checklist) :
Goods or services suitable to the particular minor’s
station in life
Goods or services answering to the minor’s actual
needs at the time of the sale and delivery
Delivery of goods or services to the minor
Reasonable price
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Minors – Valid contracts - Contracts of service
for the minor’s benefit (1)
• Common law recognizes that the minor may need to
support himself financially, he must have the capacity to
enter valid contracts of service > minors therefore are also
bound by contracts of service, on condition that the terms
of contract are on the whole beneficial to them
• But, some terms of detriment/disadvantage of the minor
will not automatically invalidate the contract, if it operates
still mostly for the minor’s benefit
• Practically concerned are contracts of employment giving
the minor some training experience or instruction for an
occupation (e.g. apprenticeship)
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Minors – Valid contracts - Contracts of service
for the minor’s benefit (2)
De Francesco Vs. Barnum (1890)
The case: By deed, a 14-year old girl entered into a seven-year
apprenticeship with De Francesco to be taught in stage dancing.
The deed provided that the whole period she should be entirely
at the disposal of the master; that he was under no obligation to
maintain or employ her; that he could send her abroad; that he
could terminate the contract without notice; that she was not
allowed to marry without his permission and that she would
accept no professional engagement without his express consent.
The girl accepted a professional engagement with the defendant
without the master’s consent. The master took action to prevent
the engagement.
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Minors – Valid contracts - Contracts of service
for the minor’s benefit (2a)
De Francesco Vs. Barnum (1890)
The court’s decision: That the master could not sue the
defendant for inducing a breach of the apprenticeship
contract as it was unreasonably harsh and thus invalid.
In other words, as the apprenticeship deed was not for
the minor’s benefit it could not be enforced.

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 Minors – Contracts voidable by minors (1)
• Contracts of this category are entered valid but they are not
binding and could be disaffirmed at the minor’s discretion > that
means that the minor is free to continue the contract or to avoid
it before reaching 18 or within a reasonable time after
• The common feature of such contracts is that they involve a
subject-matter of some permanency (contracts of continuous or
recurring obligations) > involve long-term interests
• There are four principal classes:
Contracts to purchase shares in a company / Contracts to
lease property / Contracts to enter a partnership / Contracts
of marriage settlement
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 Minors – Contracts voidable by minors (2)

• These contracts cannot be enforced against the minor

during minority, but the minor can force an adult to
perform the contract
• If, however, a minor repudiates/disaffirms a contract
which has been partly performed by the other party,
the minor has to pay for the benefit received (!)

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 Minors – Contracts voidable by minors (3)
• When a minor refuses to perform a voidable contract
the other party can recover from the minor any
property acquired under the contract
• Example: A minor receives goods under a contract and
then refuses to pay for the goods, the court may order
the minor to return the goods to the claimant to
prevent the minor’s unjust enrichment.

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 Minors – Void contracts

• Void contracts are unenforceable against minors

• Formerly, classes of such contracts were listed under
s.1 of the Infants Relief Act 1874 (now Minors
Contracts Act 1987):
Contracts of loan (e.g. for the repayment of money lent
or to be lent)
Contracts for goods supplied other than necessaries
Promissory notes (e.g. IOUs – “I owe you”)
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 Persons of unsound mind and drunkards (1)
• Where necessaries are matter of contract with persons of
unsound mind as well as drunkards, then s.3 of the Sales
of Goods Act 1979 applies once again, the contract is
binding, but the person deserving protection (mentally
disordered or drunken) has to pay only the reasonable
price
• In the case of other contracts the following is true for both
groups of persons: if they are incapable of understanding
the nature of their act at the time the contract was formed
and this was evident to the contractual party, the contracts
are voidable rather than void
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 Persons of unsound mind and drunkards (2)
Imperial Loan Vs. Stone (1892)
The case: There was an action on a promissory note.
The defendant pleaded that, at the time making the
note, he was insane, and that the claimant knew that
he was it. The jury found that he was, in fact, insane
but could not agree on the question of whether the
claimant knew it. The judge of the lower court rendered
judgement for the defendant.
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 Persons of unsound mind and drunkards (2a)
Imperial Loan Vs. Stone (1892)
The higher courts decision: That the judge of the lower court
was wrong. The High Court overruled the lower court. The
defendant, in order to succeed, must convince the court on
both issues. (1. being insane and 2. that the (sober) contract
partner knew about it)
>>> This means that the mentally disordered person or the
drunkard not only have to prove their disability, but also
have the burden of proving the other party’s knowledge (!)

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 The contents of contract
• Starting point is that the parties have fulfilled all described
requirements for a valid contract and the questions which
arise now are:

What is part of the contract and

what are the obligations under the
contract?
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 The contents of contract
• Problems can arise in a number of ways:
Pre-contractual negotiations > different statements
> What is part of the contract?
There may be a contract in writing, but one party
may allege that it does not correctly reflect their
intentions
There may be a pure oral contract, and the parties
may dispute as to what was said or promised and
by whom
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The contents of contract – Contractual terms -
Definition
• Promises and undertakings contained in a contract are
known as the terms of contract
• First precondition for a term is to be reasonably
certain (certainty of terms)
• Terms of contract have to be distinguished from other
pre-contractual statements like “mere puffs” or
representations (here: statements)
• Terms of the contract can be divided into express
terms and implied terms
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The contents of contract– Contractual terms -
Express terms (1) – Written contract (1)
• In order to ascertain the express terms of the contract we have
to look at the intention of the parties and the importance of
the statement
• Written contract usually considered as terms rather than
representations
• Pre-contractual statements not transferred in the written
document are regarded to be mere representations
• If the written contract is additionally signed, then even if the
parties have not read it, they are assumed to have agreed
everything it contains
• In contrast, anything that has not been stipulated in the
contract has never been intended to be included
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The contents of contract – Contractual terms -
Express terms (2) – Written contract (2)

• More complicated is the situation where a contract is

partly in writing and partly oral > this time, the
written contract is not complete and does not, in fact,
represent the whole transaction > the court has to
consider the intention of the parties and therefore to
look at all the facts/evidence, even oral, to prove a
collateral agreement

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The contents of contract– Contractual terms -
Express terms (3) – Written contract (3)

• If the purchaser relies on a statement of a seller with

specialist’s skills or expertise the statement is normally
considered to be a term of contract
• However, where the purchaser himself is an expert,
the statement may be a representation only,
especially in the case of a private seller without
specialist knowledge like in the following case
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The contents of contract– Contractual terms -
Express terms (4) – Written contract (4)
Oscar Chess Ltd Vs. Williams (1957)
The case: In May 1955, the defendant acquired a new car
from the claimants who were motor car dealers and who
took the defendant’s Morris (Car type) in part exchange. The
defendant said it was a 1948 model, as per the registration
book, and the claimants gave him an allowance of 290
Pounds. The registration book had been altered by an
unknown third party and the car was, in reality, a 1939
model worth 175 Pounds. The lower court judge held that
the construction year of the car was a term of contract
(more precisely a condition of the contract).
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The contents of contract– Contractual terms -
Express terms (4a) – Written contract (4a)
Oscar Chess Ltd Vs. Williams (1957)
The higher court’s decision: That the defendant’s
statement as to the age of the car was a mere
representation, not a term of contract. The defendant
had no special knowledge as to its age and the
claimants knew that he was relying on the date in the
registration book. Moreover, they themselves were
perfectly capable as car dealers to determine the true
age of the car.
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The contents of contract– Contractual terms–
Implied terms (1)
• Freedom of contract gives the right to contract with
whomever we want on whatever terms we want > parties
include terms in a contract of their own choice
• However, in some cases the law may imply terms into the
contract although the parties have not expressly
mentioned the issue
Example: If you buy a new pair of shoes, which then fall
apart, such case in point constitutes a breach of contract by
the seller. Normally he may not have stated expressly that
the shoes are in good condition, but the term is implied into
the contract by the Sale of Goods Act 1979.
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The contents of contract – Contractual terms –
Implied terms (2)
• There are three ways certain terms can be implied into
contracts:
By statute (e.g. Sale of Goods Act 1979 > Goods must
belong to the person selling them; condition of the good shall
correspond with the description; good shall be of satisfactory
quality; goods must be fit for the purpose for which they are
sold etc. )
By the court (Example: If you rent a flat at the top of the
house, “it goes without saying” that you can walk through the
house to reach it.)
By custom (e.g. Terms may be implied by custom if they are
certain, reasonable and well-known to all affected by them,
and if they do not offend any statute)
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The contents of contract – Contractual terms –
Classification of terms (1)

• If a particular statement is a term of contract it

can be either a condition, a warranty or an
innominate term > this distinction is important
in relation to the different consequences and
remedies in the case of breach of the different
terms

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The contents of contract – Contractual terms –
Classification of terms (2) – Conditions (1)
• Condition is a term of major importance and forms
the main and vital basis of the contract
• It is so essential to the very nature of the contract
that if it is broken, the innocent party can repudiate
the contract, e.g. treat the contract as discharged
and furthermore may claim damages
• He will not be bound to do anything further under
that contract
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The contents of contract – Contractual terms –
Classification of terms (3) – Conditions (2)
Poussard Vs. Speirs and Pond (1876)
The case: Madame Poussard had entered into an agreement to
play a part in an opera. One day before the first performance
she was taken ill and was unable to appear for 11 days. The
defendants had hired a substitute, and discovered that the only
way in which they could secure a substitute to take Madame
Poussard’s place was to offer that person the complete
engagement. This they had done, and they refused the services
of Madame Poussard when she represented herself after the end
of her illness. She then sued for breach of contract.
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The contents of contract – Contractual terms –
Classification of terms (3a) – Conditions (2a)
Poussard Vs. Speirs and Pond (1876)
The court’s decision: That the failure of Madame
Poussard to perform the contract as from the first night
was a breach of condition, and that the defendants
were within their rights in regarding the contract as
discharged.

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The contents of contract – Contractual terms –
Classification of terms (4) – Warranties (1)
• Warranty is a term of minor importance, which
means that it is only collateral or subsidiary to the
main purpose of the contract
• Therefore, the contract might be able to continue as
well after the breach of warranty > it is not so
fundamental as to effect a discharge of the contract
• Such a breach of warranty only gives right to an
action for damages
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The contents of contract – Contractual terms –
Classification of terms (5) – Warranties (2)
Bettini Vs. Gye (1876)
The case: The claimant was an opera singer. The defendant
was the director of the Royal Italian Opera in London. The
claimant had agreed to sing in Great Britain in theatres,
halls and drawing rooms for a period of time beginning on
30 March 1875, and to be in London for rehearsals six days
before the engagement started. The claimant was taken ill
and arrived on 28 March 1875, but the defendant did not
accept the claimant’s service, treating the contract as
discharged.
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The contents of contract – Contractual terms –
Classification of terms (5a) – Warranties (2a)
Bettini Vs. Gye (1876)
The court’s decision: That the rehearsal clause was
subsidiary to the main purpose of the contract, and its
breach constituted a breach of warranty only. The
defendant had no right to treat the contract as discharged
and therefore had to compensate the claimant, but had a
counterclaim for any damage he had suffered by the
claimant’s late arrival.

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 The contents of contract – Contractual terms –
Classification of terms (6) – Innominate terms (1)
• Very recent development in the courts to look first at the
effect of the breach on the injured party before
determining the class of the term > could be characterised
as a wait-and-see approach
• This method gives the court some flexibility in relation to
the appropriate remedy which will be decided by the court
according to what seems fair to both parties > either to
entitle the innocent party to rescind the contract or
otherwise to entitle him only to claim damages, depending
upon circumstances
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 Letters of Intent (1)
• Letter of Intent is used when parties want or need to
start a project but drawing up a relevant contract
would take to long
• Allows the parties to start their work quickly and with
a view to finalising the contract shortly afterwards
• Disputes can arise regarding the legal rights of the
parties when the actual contract has not been
finalised while the work has started
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 Letters of intent (2)

• Whether or not a Letter of Intent is considered to be a

contract in its own right it needs to be ascertained in
each case
• To be a binding contract, the Letter of Intent must
have all the characteristics of a contract; in particular,
the parties have to provide consideration, have an
intention to create legal relations and there must be
sufficient certainty as to the contractual terms
43
 Letters of intent (3)
RTS Flexible Systems Vs. Mueller (2010)
The case: A letter of intent was drawn up between M
manufacturing dairy products, and R to supply and install some
machinery for packaging its products. This letter of intent was
due to be in force for four weeks setting out the contractual price
for machinery and stating that the final contract would be on
M’s contractual terms with amendments. R thus started with
installing the machinery, but after the four-week period expired,
the final contract had not been agreed. A dispute arose R
refusing to finish installing the machinery and M refusing to pay
for the machinery. As a consequence, R sued for payment.
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 Letters of intent (3a)
RTS Flexible Systems Vs. Mueller (2010)
The court’s decision: That the parties’ conduct – after
the letter of intent had expired – suggested their
intention to enter into a contract which they had done
so although no written document had been signed. R
won the case and could claim the money. The drafted
letter of intent fulfilled the necessary requirements!

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 Exemption clauses (1)
• Often times, contract terms may try to exclude or to
(financially) limit one party’s liability for breach of contract,
misrepresentation or negligence > these terms are called
exclusion and limitation clauses, also referred to in general
terms as exemption clauses > Example: “The vendor shall
not be under any liability to the purchaser for any defects in
the goods or for any damage, loss, death or injury.”
• Exemption clauses can be found almost everywhere > e.g.
notices on walls, back of tickets, shop counters etc. >
Example: If you join a health club or gym, it is common for
the contract to say that the gym owner will not be
responsible if your injured while exercising.
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 Exemption clauses (2)

• Exemption clauses may be fair or unfair and therefore

need to be controlled > different ways to control them
(1) firstly, by common law rules
(2) secondly, the control via legislation (e.g. The
Competition and Consumer Protection Act 2010)

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 Exemption clauses (3) – Control at common
law (1)
• Frequently, exemption clauses attempt to discriminate
against the vendee (customer) > Vendor and vendee are
mostly not on equal terms and selling is often done on a
“take-it-or-leave-it” basis
• In order to be valid, an exemption clause must basically
fulfil two essential requirements at common law: it must
be
(1) incorporated into the contract and
(2) as a matter of construction, must cover the damage in
question/ the clause must extend to the loss that was caused
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 Exemption clauses (4) – Control at common
law (2) – Incorporation by signature

• Incorporation by signature > when a document with

contractual terms is signed, all contained terms –
inclusive the exemption clauses - are incorporated into
the contract even if the parties did not read or
understand them

49
 Exemption clauses (5) – Control at common
law (3) – Incorporation by signature
L’Estrange Vs. Graucob (1934)
The case: Shopkeeper L bought a slot machine from G. L
signed a sales agreement containing the following clause:
“Any express or implied condition, statement or warranty
statutory or otherwise, is hereby excluded”. L did not read
the relevant clause, which was in small print. The machine
did not work and L sued for damages.
The court’s decision: That the exclusion clause was binding
on L because he signed the agreement and there was no
case of fraud or misrepresentation. It is of no account
whether the party has read the document or not. (!)
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 Exemption clauses (6) – Control at common
law (4) – Incorporation by notice
• If the document is not signed, the party subject to the
exemption clause must have actual knowledge of it
• This requirement of notice must be given either
before or at the moment with the making of the
contract
• An exemption clause printed on a receipt typically
after the forming of the contract is consequentially
not valid (!) > a receipt is not a document which is
reasonably considered to contain contractual terms
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 Exemption clauses (7) – Control at common
law (5) – Previous dealings (1)
• It is also possible that an exclusion clause may be
incorporated, even where there has been insufficient
notice, for example in the case of a previous course of
dealing between the parties on the same terms
• The previous dealings must have been regular and
consistent > as in the care of a consumer, a
considerable number of past transactions may be
required
52
 Exemption clauses (8) – Control at common
law (6) – Previous dealings (2)
Patrotrade Vs. Texaco Ltd (2000)
The case: The parties have orally agreed the sale of
cargo and later the claimant sent a telex to the
defendant confirming the contract and setting out
some additional terms and conditions. The claimant
contended that these terms were incorporated on the
basis of five previous transactions in the previous 12
month on the same terms.
The court’s decision: That the terms were indeed
incorporated.
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 Exemption clauses (9) – Control at common
law (7) – Construction of exemption clauses
• After the successful incorporation of the exemption
clause in the contract, the next step is to check if the
clause extends to the loss that was caused > therefore
a valid exemption clause is still able to fail
• The basic approach is that liability can only be
excluded by clear words > ambiguous term in
wording of an exemption clause will be construed
against the party that attempts to rely upon the
wording (contra preferentem rule)
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 Exemption clauses (8) – Control at common
law (8) – Construction of exemption clauses
Andrews Bros. Vs. Singer & Co. (1934
The case: Here, the contract was for the sale and
purchase of what were described in the contract as
“new Singer cars”. The contract contained a clause
excluding “all conditions, warranties and liabilities
implied by statute, common law or otherwise”. One car
delivered under the contract was, technically speaking,
a used car because a prospective purchaser had used it.
The dealer was then sued for damages and tried to rely
on the clause in defending the claim.
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 Exemption clauses (8) – Control at common
law (8a) – Construction of exemption clauses
Andrews Bros. Vs. Singer & Co. (1934
The court’s decision: Decided that the supply of “new
Singer cars” was an express term of the contract. Since
the exclusion clause actually applied to “implied terms”,
the contra preferentem rule would prevent it being
used in relation to express terms. The exclusion clause
could not be relied on and the defence failed.

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