Law of Contract

ATTORNEYS-AT-LAW PRELIMINARY YEAR EXAMINATION

COMPILATION – RIKAZ RIFFARD

ATTORNEY-AT-LAW, LLB (HONS) (LONDON)
CONTACT - 0776601016
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SUBJECT AREAS

1. OFFER

2. ACCEPTANCE

3. CONSIDERATION & JUSTA CAUSA

4. MISREPRESENTATION

5. TERMS / CONDITIONS / WARRANTIES / UCTA / EXCLUSION CLAUSES

6. DAMAGES

7. INTENTION TO CREATE LEGAL RELATIONS

8. OBJECTIVE & SUBJECTIVE TEST

9. UNENFORCEABLE CONTRACTS (VOID / VOIDABLE / ILLEGALITY)

10. CAPACITY TO CONTRACT (MINORITY / LUNACY / PRODIGALITY /

DRUKENNESS)

11. MISTAKE

12. DURESS

13. UNDUE INFLUENCE

14. FORM

15. REMEDIES

16. QUANTUM MERUIT

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11. ERROR / MISTAKE

Two types;
1. Contracting parties may each have something different in mind as the subject.
2. One party may labour under a mistake of subject which the other party may be unaware.
Both parties may be in mistake of something fundamental such as the very existence of the .subject matter.
There is agreement but the contract may be held to collapse for want of content.
Categories of Mistake –

• A person is said to do an act under mistake when his will is influenced by an erroneous belief.
• Erroneous belief could be in regard to the existence (or non-existence) of some fact.
Subjects of such erroneous belief could include mistake on;
1. Identity of a person.
2. Subject matter of the contract.
3. The nature, quality and quantity of the subject matter.
4. Nature of the transaction.
5. Motive.

 Common Mistake: common to both parties.

 Unilateral Mistake: mistake exists only on one party.
 Mutual Mistake: both parties may be mistaken about the other party’s intention.

Mistake may negate a contract in two distinct ways;

1. Mistakes that prevents formation of an agreement being made. This may relate to a term of the
offer in which case, no contract comes in to existence. Error in regard to motive would not affect
the contract.
2. Mistakes that nullify a contract that is already made. This could be due to some condition
precedent to the operation of the contract. It is required to examine how fundamental is the
matter to which the error relates for it to be sufficiently basic to result in the failure of a condition
precedent.

A mistake has to be a mistake of fact. It cannot be a mistake of law.

Hartog v. Collin & shields (1939) 3 AAR 566
Smith v. Hughes (1871) LR 6 QB 597
Shogun Finance Ltd v. Hudson (2003) UKHL 62
King’s Norton Metal Co v. Edrige Merrot & Co (1897) 14 PLR 98

12. DURESS

“The Roman Dutch law provided relief to a person who had entered into a contract under physical or moral
constraint.”
- Voet
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In English common law a contract is voidable if it was made under duress

1. Duress to the person

The common law of duress confined the doctrine within very narrow limits. Only duress to the person
was recognised during the nineteenth century and this required actual or threatened violence to the
victim.

Barton v Armstrong – A (the former chairman of a company) threatened B (the managing director) with
death if he did not agree to purchase A's shares in the company. There was some evidence that B
thought the proposed agreement was a satisfactory business arrangement both from his own point of
view and that of the company. B executed a deed on behalf of the company carrying out the agreement.
He sought a declaration that the deed was executed under duress and was void. The Privy Council held
that if A's threats were "a" reason for B's executing the deed he was entitled to relief even though he
might well have entered into the contract if A had uttered no threats to induce him to do so. The onus
was on A to prove that the threats he made contributed nothing to B's decision to sign.

2. Duress to goods

The nineteenth century limitation on duress meant that it could not be applied to ‘duress on goods’. If a
person unlawfully detained or threatened to detain another’s goods, this was not considered to be
sufficient duress to enable a contract to be avoided.

Skeate v Beale – A tenant who was threatened with the levying of distress by his landlord in respect of
rent owed, promised to pay part immediately and the balance within one month. When the tenant failed
to pay the balance, as agreed, the landlord brought an action for the balance. The tenant pleaded that
the distress was wrongful in that a smaller sum only was owed. He had consented to the agreement
because the landlord threatened to sell the goods immediately unless the agreement was made. This
plea of duress was rejected.

Maskell v Horner – Toll money was taken from the plaintiff under a threat to close down his market stall
and to seize his goods if he did not pay. Lord Reading CJ stated that if a person pays money, which he
is not bound to pay, under a compulsion of urgent and pressing necessity or of seizure, he can recover
it as money had and received under the law of restitution. It was held that there was a wider restitutionary
rule that money paid to avoid goods being seized or to obtain their release could be recovered. Further,
it was held that in the present case there was a compulsory agreement to enter into, whereas in Skeate
the agreement was entered into voluntarily.

3. Economic Duress

In recent times the courts have extended the concept of duress from its earlier limits so as to recognise
that certain forms of commercial pressure could amount to economic duress. The first modern case to
make this clear was:-

The Sibeon and The Sibotre – Kerr J stated: "if I should be compelled to sign a lease or some other
contract for a nominal but legally sufficient consideration under an imminent threat of having my house
burnt down or a valuable picture slashed through without any threat of physical violence to anyone, I do
not think that the law would uphold the agreement... The true question is ultimately whether or not the
agreement in question is to be regarded as having been concluded voluntarily."

Subsequently it was confirmed that duress could take the form of economic duress:-

The Atlantic Baron – The builders of a ship demanded a 10% increase on the contract price from the
owners largely because the value of the US dollar fell by 10%, or threatened not to complete the ship.
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The owners paid the increased rate demanded from them, although they protested that there was no
legal basis on which the demand could be made. The owners were commercially compelled to pay since,
at the time of the threat, they were negotiating a very lucrative contract for the charter of the ship being
built. Mocatta J decided that this constituted economic duress. The illegitimate pressure exerted by the
building company was their threat to break the construction contract. Where a threat to break a contract
had led to a further contract, that contract, even though it was made for good consideration, was voidable
by reason of economic duress. However, the right to have the contract set aside could be lost by
affirmation. The plaintiffs had delayed in reclaiming the extra 10% until eight months later, after the
delivery of a second ship. This delay deafeated the plaintiff's claim for the rescission of the contract to
pay the extra 10%.

Pao On v Lau Yiu Long – The plaintiff had threatened not to proceed with a contract for the sale of
shares, unless the other side agreed to a renegotiation of certain subsidiary arrangements. Anxious to
complete the main agreement, but knowing that they could claim specific performance of it, the
defendant, wishing to avoid litigation, agreed. When the plaintiff later tried to enforce these arrangements
the defendant claimed that they had been extracted by duress, and were therefore voidable. The Privy
Council held that the plaintiff was entitled to succeed. On the facts, the defendant considered the matter
thoroughly, chose to avoid litigation and formed the opinion that there was no risk in the subsidiary
arrangements. In short, there was commercial pressure, but no coercion. Lord Scarman agreed with the
observations of Kerr J in The Sibeon and The Sibotre that in a contractual situation, commercial pressure
is not enough. There must be present some factor 'which could be regarded as a coercion of his will so
as to vitiate his consent'. In determining whether there was a coercion of will such that there was no true
consent, it is material to enquire: whether the person alleged to have been coerced did or did not protest;
whether, at the time he was allegedly coerced into making the contract, he did or did not have an
alternative course open to him such as an adequate legal remedy; whether he was independently
advised; and whether after entering the contract he took steps to avoid it. All these matters are relevant
in determining whether he acted voluntarily or not.

The Universe Sentinel – The ITWF blacked a ship, The Universe Sentinel, to prevent it from leaving
port. They made several demands in relation to pay and conditions and also demanded the ship owners
pay a large sum of money to the Seafarers International Welfare Fund. The ship owners agreed in order
that the ship could leave port and then sought to recover the sum paid to the welfare fund. Held: The
money had been extracted under economic duress and could be recovered. The House of Lords held
that earlier case law had been wrong to look at coercion of the will so as to vitiate consent. During an
analogy with the defence in criminal law where it is recognised that a defendant acting under duress has
the intention to commit the offence but is excused from the crime because they had no choice but to
submit.

B&S Contractors v Victor Green Publications – A contractor who had undertaken to erect stands for
an exhibition at Olympia told his client, less than a week before the exhibition was due to open, that the
contract would be cancelled unless the client paid an additional sum to meet claims which were being
made against the contractor by his workforce. The consequence of not having the stands erected in time
would have been disastrous for the client in that it would have gravely damaged his reputation and might
have exposed him to heavy claims for damages from exhibitors to whom space on the stands had been
let. In these circumstances it was held that the payment had been made under duress and that the client
was entitled to recover it back.

Remedies for Duress

(A) The effect of duress is to make the contract voidable (not void). The injured party will, therefore, be
entitled to have the contract set aside for operative duress, unless he has expressly or impliedly
affirmed it. The victim of duress must seek rescission as soon as possible after the original pressure
has ceased to operate (the Atlantic Baron)

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(B) As duress has been equated with the tort of intimidation it would follow that a remedy for damages
would lie in tort.

(C) There is, as yet, no authority on the question of whether or not an injured party who has affirmed the
contract may nevertheless recover damages in tort. Chitty has the view that damages should be
recoverable, since otherwise a party who has lost the right to avoid the contract is left without a
remedy for a clearly unlawful act

13. UNDUE INFLUENCE

“Equity gives relief on the ground of undue influence where an agreement has been obtained by certain
kinds of improper pressure which were thought not to amount to duress at common law because no element
of violence to the person was involved”
- Treitel

The term undue influence in Roman Dutch law has been borrowed from English equity jurisprudence. Thus
the English law relating to undue influence is considered part of the law of Sri Lanka and has also been
accepted in South Africa as fully consistent with the principles of Roman Dutch law.

A person who has been induced to enter into a transaction (e.g. a gift, a contract or guarantee) by the undue
influence of another (the wrongdoer) is entitled to set that transaction aside as against the wrongdoer. The
effect of undue influence, like duress, is to render the contract voidable.

Undue influence was described by Lindley LJ in Allcard v Skinner as “some unfair and improper conduct,
some coercion from outside, some overreaching, some form of cheating and generally, though not always,
some personal advantage gained”

(1) Actual Undue Influence

Williams v Bailey – A son forged his father's signature on promissory notes and gave them to their bankers.
At a meeting of all the parties at the bank, one of the bankers said to the father: "If the bills are yours we are
all right; if they are not, we have only one course to pursue; we cannot be parties to compounding a felony."
The bank's solicitor said it was a serious matter and the father's own solicitor added, "a case of transportation
for life." After further discussion as to the son's financial liability the bank's solicitor said that they could only
look to the father. The father then agreed to make an equitable mortgage to the bank in consideration of the
return of the promissory notes. The father succeeded in an action for cancellation of the agreement. It was
held by Lord Westbury that the security given for the debt of the son by the father under such circumstances,
was not the security of a man who acted with that freedom and power of deliberation that must be considered
as necessary to validate a contract to give security for the debt of another.

(2) Presumed Undue Influence

In these cases the complainant only has to show, in the first instance that there was a relationship of trust
and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that
the wrongdoer abused that relationship in procuring the complainant to enter the impugned transaction.

Once a confidential relationship has been proved, the burden shifts to the wrongdoer to prove that the
complainant entered into the impugned transaction freely e.g. showing that the complainant had
independent advice.

a) Presumption of undue influence as a matter of law

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Certain relationships as a matter of law raise the presumption that undue influence has been exercised.

(i) Wright v Vanderplank – parent and child

(ii) Wright v Carter – solicitor and client
(iii) Mitchell v Homfray – doctor and patient
(iv) Ellis v Barker – trustee and beneficiary
(v) Roche v Sherrington - religious adviser and disciple

Allcard v Skinner – In 1867 an unmarried woman aged 27 sought a clergyman as a confessor. The
following year she became an associate of the sisterhood of which he was spiritual director and in 1871
she was admitted a full member, taking vows of poverty, chastity and obedience. Without independent
advice, she made gifts of money and stock to the mother superior on behalf of the sisterhood. She left
the sisterhood in 1879 and in 1884 claimed the return of the stock. Proceedings to recover the stock
were commenced in 1885. It was held by the Court of Appeal that although the plaintiff's gifts were
voidable because of undue influence brought to bear upon the plaintiff through the training she had
received, she was disentitled to recover because of her conduct and the delay.

The relationship between husband and wife does not, as a matter of law raise a presumption of undue
influence – Midland Bank v Shepherd; nor does the rule apply between employer and employee –
Matthew v Bobbins

b) Presumption of undue influence raised upon proving the existence of a relationship under which the
complainant generally reposed trust and confidence in the wrongdoer

The relationship of a banker and a customer will not normally give rise to a presumption of undue
influence but it can do so in exceptional cases of the customer has placed himself entirely in the hands
of the bank and has not been given any opportunity to seek independent advice

Lloyd's Bank v Bundy – A guarantee was given to the bank by an elderly farmer, a customer of the
bank, for his son's debts. The guarantee was secured by a mortgage of Bundy's house in favour of
the bank. An assistant manager of the bank, with the son, later told the father that they would only
continue to support the son's company if he increased the guarantee and charge. The father did so,
the assistant manager appreciating that the father relied on him implicitly to advise him about the
transaction. The Court of Appeal set aside the guarantee and charge. Lord Denning held that the
relationship between the bank and the father was one of trust and confidence. The bank knew that
the father relied on them implicitly to advise him about the transaction. The father trusted the bank.
This gave the bank much influence on the father. Yet the bank failed in that trust. They allowed the
father to charge the house to his ruin. There was also a conflict of interest between the bank and the
father, yet the bank did not realise it, nor did they suggest that the father should get independent
advice. If the father had gone to his solicitor or any man of business there is no doubt that they would
have advised him not to enter the transaction as the house was his sole asset and the son's company
was in a dangerous state. Sir Eric Sachs made it clear that, in ordinary circumstances, a bank does
not incur the duty consequent upon a special relationship where it obtains a guarantee from a
customer. But once it is possible for a bank to be under that duty, it is, as in the present case, simply
a question for "meticulous examination" of the particular facts to see whether that duty has arisen.
On the special facts here it did arise and had been broken.

Manifest Disadvantage

With both presumptions (as a matter of law and upon proving the existence of a relationship under
which the complainant generally reposed trust and confidence in the wrongdoer) the transaction
must be to the ‘manifest disadvantage’ of the party claiming undue influence – National
Westminster Bank v Morgan

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14. FORM

CONTRACTS VOID UNLESS IN PARTICULAR FORM

Statutory Provisions Relating to Form of Transactions of immovable property:

Section 2 of the Prevention of Frauds Ordinance – No sale, purchase, transfer, assignment, or

mortgage of land or other immovable property, and no promise, bargain, contract, or agreement for
effecting any such object, or for establishing any security, interest, or encumbrance affecting land or
other immovable property (other than a lease at will, or for any period not exceeding one month),
nor any contract or agreement for the future sale or purchase of any land or other immovable
property, and no notice, given under the provisions of the Thesawalamai Pre-emption Ordinance, of
an intention or proposal to sell any undivided share or interest in land held in joint or common
ownership, shall be of force or avail in law unless the same shall:

(a) be in writing and

(b) signed by the party making the same, or by some person lawfully authorized by him or her in the
presence of a licensed notary public and
(c) two or more witnesses present at the same time, and
(d) Unless the execution of such writing, deed, or instrument be duly attested by such notary and
witnesses.

Emalia Fernando v Caroline Fernando – executant signed in hospital room in the presence of a notary
and witness. Notary and witness later attested it in a separate room. Held that the deed was not valid

Fructus Naturales - They are the natural fruits of the land on which they arise, such as grass, timber or fruit
trees. They are considered to be part of the real property, and not separate chattels in relation to any legal
conveyance of the property.

Fructus Industrales - They are the produce of land that requires periodical application of labour for its
production. In Sri Lanka, the produce of this description are never covered by Section 2.

CONTRACTS UNENFORCEABLE UNLESS IN PARTICULAR FORM

Many types of contracts require in writing; to render them enforceable by law. They are:

I. Promise to Marry:

Section 19 of the General Marriage Registration Ordinance – No action shall lie for the recovery
of damages for breach of promise of marriage unless such promise have been made in writing.

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II. Sale of Goods:

Section 5 (1) of the Sale of Goods Ordinance – A contract for the sale of any goods shall not be
enforceable by action unless some note or memorandum in writing of the contract be made and
signed by the party to be charged.

The object of this statute is to ensure that when there is no contract in writing, there is some overt act (which
can be proved with evidence and from which criminal intend can be inferred) to rend the bargain binding.

III. Promissory Notes:

Section 10 (1) of the Money Lending Ordinance – In every promissory note there shall be distinctly
set forth upon the document—
(a) the capital sum actually borrowed;
(b) the amount of any sum deducted
(c) the rate of interest

Section 10 (2) – Any promissory note not complying with the provisions of this section shall not be
enforceable:

IV. Partnership Agreements:

Section 18 of the Prevention of Frauds Ordinance – No promise, contract, bargain or agreement,

unless; it be in writing and signed by the party, shall be of force for establishing partnership.

CONTRACTS REQUIRING NO FORMALITIES

All contracts other than above mentioned falls within this category. A part of a document may have certain
requisites of form, but other parts may not.

15. REMEDIES

Rescission

The remedy in cases of undue influence is rescission. Damages are not available.

TSB Bank v Camfield – where rescission is ordered the whole transaction will be set aside.

Bars to rescission

(i) Impossibility of restitution

O’Sullivan v Management Agency & Music Ltd – However, the fact that restitution integrum is
impossible will not be a bar to rescission.

(ii) Delay

Delay defeats equity e.g. Allcard v Skinner

Severance

It may be possible for the court to sever from an instrument affected by undue influence the objectionable
parts leaving the part uncontaminated by undue influence enforceable – Barclays v Caplan

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SPECIFIC PERFORMANCE:

The modern Roman Dutch law jurisdictions of Sri Lanka and South Africa recognise the English law
principles governing specific performance.

A decree for specific performance is a discretionary remedy issued by court which orders a contracting party
to perform its obligations under a contract in the event of his failure or refusal to do so.

Note: Specific performance will not be ordered by a court of there is an adequate remedy at law.

Any case concerning specific performance inevitably requires a consideration of three issues:-

(1) Damages inadequate

If the plaintiff can show that damages will be inadequate, the courts may grant his claim for specific
performance. Damages will be inadequate if:-

a) Plaintiff cannot get a satisfactory substitute

b) Award of damages would be unfair to the plaintiff
c) Quantum of damages is difficult to assess; or
d) In Sri Lanka under Section 51 of the Sale of Goods Ordinance the seller refuses to deliver
‘specific or ascertained’ goods

(2) Judicial discretion

“Equity will only grant specific performance if, under all the circumstances, it is just and equitable to do
so” – Stickney v Keeble

This is governed by a number of rules:-

a) There must be mutuality of relief to both parties – Blackett v Bates

b) Not ordered if impossible to comply with – Watts v Spence
c) Refused if plaintiff has acted dishonestly
d) Refused if plaintiff fails to perform promise which induced defendant to the contract – Lamare v
Dixon
e) Refused if it would cause severe hardship to defendant

(3) Type of Contract

The final consideration is the type of contract. For instance, equity will not order specific performance of
contracts involving personal service.

INJUNCTION:

A court may be able to restrain a party from committing a breach of contract by injunction. There are three
types of injunction:

(a) Interlocutory injunctions are designed to regulate the position of the parties pending a hearing
(b) Prohibitory injunction orders a defendant not to do something in breach of contract
(c) A mandatory injunction requires a defendant to reverse the effects of an existing breach

The general rule is that an injunction will not be granted if the effect is to directly or indirectly compel the
defendant to do acts for which the plaintiff could not have specific performance e.g. to require performance
of a contract for personal services

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Exceptions to this general rule include:

(i) Service contracts gaining negative obligations which can be enforced by injunction without
compelling positive performance of the whole contract
(ii) A negative stipulation which is too wide can be severed and enforced in part

Warner Bros v Nelson – where the defendant, an actress, agreed (1) to act for the plaintiff and, at
the same time, (2) not to act or sing for anybody else for 2 years without the plaintiff’s written consent
and (3) no other employment could be taken up during this period without the plaintiff’s consent. It
was held that the defendant could be restrained by an injunction from breaking the second
understanding. She would not be forced to act for the plaintiff because she could earn a living by
doing other work.

16. QUANTUM MERUIT

Quantum meruit is a reasonable sum of money to be paid for services rendered or work done when the
amount due is not stipulated in a legally enforceable contract.
It simply means "the amount he deserves" or "as much as he has earned". In most cases it denotes a claim
for a reasonable sum in respect of services or goods supplied to the defendant.
It is the measure of damages where an express contract is mutually modified by the implied agreement of
the parties, or not completed.
An action in quantum meruit is available to recover money for services or goods supplied to a defendant in
circumstances where the claimant is not recompensed by performing his obligations or supplying the goods.
The claimant must usually show that the defendant expressly or impliedly requested or freely accepted the
services or goods in question.
Depending on the facts, the claimant might find it difficult to prove how much the claimant is entitled to
receive under the principle of quantum meruit.
A claim for quantum meruit cannot arise if the parties have a contract to pay an agreed sum. In such
circumstances, the parties' relationship is governed by the law of contract. However, a claim for quantum
meruit may arise where the parties:
 Have not agreed a contract, or there is a so-called quasi-contract. For example, the parties may
have agreed some of the contractual terms, but may have failed to reach an agreement on an
essential term, such as price.
 Have not fixed a price for the services or goods supplied.
 Have an agreement to pay a reasonable sum for the services or goods supplied.
 Have agreed a scope of work under the original contract and the work carried out falls outside that
scope.
Quantum meruit can also apply where there is a breached contract. For example, a contractor is contracted
to work on a school. The contractor does some work but then quits (breach of contract). The contractor is
entitled to be paid for the services he has already provided for the school on the basis of quantum meruit
(however the school may be entitled to damages arising out of the need to look for a new contractor).
When a person hires another to do work for him, and the contract is either not completed or is otherwise
rendered unperformable, the person performing may sue for the value of the improvements made or the
services rendered to the defendant. The law implies a promise from the employer to the workman that he
will pay him for his services, as much as he may deserve or merit.
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The measure of value set forth in a contract may be submitted to the court as evidence of the value of the
improvements or services, but the court is not required to use the contract's terms when calculating a
quantum meruit award. (This is because the values set forth in the contract are rebuttable, meaning the one
who ultimately may have to pay the award can contest the value of services set in the contract.)
When there is an express contract for a stipulated amount and mode of compensation for services, the
plaintiff cannot abandon the contract and resort to an action for a quantum meruit on an implied claim.
However, if there is a total failure of consideration, the plaintiff has a right to elect to repudiate the contract
and may then seek compensation on a quantum meruit basis.
If a plaintiff is prohibited from completing work based on a long-term service contract where other contracts
have been negotiated, the plaintiff may ask a court to determine a judgment based on the amounts that the
defendant benefited. Third parties may also bring actions against the plaintiff.
Elements of Quantum Meruit :
Courts have crafted four basic elements that the plaintiff must prove before she may recover under the
doctrine of quantum meruit:
1) that valuable services were rendered;
2) that the services were rendered to the defendant;
3) that the services were accepted, used, and enjoyed by the defendant;
4) that the defendant was aware that the plaintiff, in performing the services, expected to be paid by
the defendant.
Case Laws :
Sumpter v Hedges - Mr Sumpter was a builder. He had a contract to build two houses and stables for Mr
Hedges for £560. He did work valued at £333 and said he had to stop because he had no more money.
Substantial payments on account have in fact been made to the builder. Hedges finished the building, using
materials which Sumpter had left behind. Sumpter sued for the outstanding money. Bruce J found that Mr
Sumpter had abandoned the contract, and said he could obtain money for the value of the materials but
nothing for the work.
The Court of Appeal found that Mr Sumpter had abandoned the building work and emphasised that it left
Mr Hedges without any choice of whether to adopt the work. It held that Mr Hedges had to pay for the
building materials that he used, but did not need to reimburse Mr Sumpter for the half-built structures.
The Court held that, quantum meruit payment would require the inference of a new contract for the partial
work, independent from the lump sum contract. Yet, on the facts, there is no inference of a new contract for
partial works. As the only applicable contract is the lump sum contract, the employee was not entitled to
recover the contract price for his partial performance of the contractual works.
Universal Acupuncture Pain Servs. V. Quadrino & Schwartz, 02-9469 – Held that attorneys are entitled
to recover in quantum merit for services rendered to a client in a contingency case where the client
discharges the attorneys before the case's completion, even if the client fails to recover any damages

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