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Flashcards in Contract law 2 Deck (75)
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1

Tell what are illegal contracts - pacta Illicita

Pacta illicita means illegal contracts, an agreements which are unlawful in their aims or in their performance, the courts will not enforce the agreements

2

Give examples of pacta illicita

-Contracts to commit crimes
-Contracts to commit delicts
-Contracts to promote immorality
-Contracts contrary to public policy (sponsiones ludicrae about Gambling but Gambling act 2005)
-Contracts restraining of trade (most common of restrictive covenants, only legal if reasonable and in public interest)

3

What are restrictive covenants

Restriction in the contracts, most commonly used with employees after they leave an employer - can be temporal, geographical, subject based on a mixture

4

What are the general principles courts apply when dealing with restrictive covenants?

1) they are void and unenforceable: the party relying on it will have to persuade the court of their legality
2) It is easier to defend and rely upon restrictive covenants in business contracts or in a partnership contract than in employment contract
3) It will only be valid if
-It protects legitimate business interest, merely preventing lawful competition is not a legitimate business interest
-Reasonable between parties
-In the public interest
4) Must not be excessive given its aim

5

Tell about restrictive covenants case Office Angels v Rainer-Thomas 1991

A restrictive covenant preventing former employees of an employment agency
in the City of London from dealing with and soliciting custom from all 6,000
clients of their former employer was too wide. In Office Angels Ltd v Rainer-
Thomas and O'Connor the High Court holds the restriction to be unenforceable
because the employees had known only 100 of those clients at their branch of
the agency. A restriction seeking to prevent the former employees from
engaging in employment agency work in an area including most of the City was,
according to the Court of Appeal [1991] IRLR 214, unreasonably onerous and
also invalid.

6

Tell about Schroeder Music Publishing Co Ltd v MacAulay 1974 case relating to restrictive covenants

Macaulay, a novice songwriter aged 21, entered a standard form agreement with Schroeder
Music, whereby they would have the exclusive benefit of his compositions. The global
copyright was assigned to another party in return for a fixed percentage of any royalties. This
was to last five years and could be automatically extended for five years if the royalties went
above £5000. Schroeder Music could terminate or assign the contract, but Macaulay could
not, and Schroeder was under no obligation to publish or promote anything. Macaulay
claimed the agreement was contrary to public policy.
Judgment: The House of Lords held the standard form agreement could not be justified as
moulded under the pressures of negotiation, competition and public opinion. Macaulay had
no bargaining power. The defendants purported to be able to arbitrarily decline to exploit the
plaintiff's work in which event the plaintiff's remuneration under the agreement would be
limited to a £50 advance payable thereunder during the five-year period. The defendants'
power to assign precluded the argument that the restrictions would not be enforced
oppressively. The defendants had failed to justify restrictions which appeared unnecessary
and capable of oppressive enforcement.

7

What will the courts consider regarding the restrictive covenants? (4)

-Nature of the business,
-Area where the customers come from,
-Position held by the employee,
-Length of time during which there is the potential to harm the employers interest

8

Restrictive covenants case Mason v Provident Clothing Co Ltd 1913

3Years, 25miles
“any person, firm, or company carrying on or engaged in a business the same as or similar to that of the [respondent], or assist any person employed or assisting in any such business, within twenty-five miles of London aforesaid where the company carry on business.

He didn't have access to trade secrets, and was unlikely to come across with such particular employers that could have potentially harmed. Not reasonable to this profession

9

What is are three interests of the employer that they set the covenants for?

1) Trade secrets and confidential information
2)Poaching of clients
3)Influence over existing customers

10

Poaching of clients case Fitch v Dewes 1921

where the defendant was a solicitor’s managing clerk the principle here is where there is an express term in the contract of employment it is more likely to be enforced where it relates to trade secrets and customer information. The clause will not be valid if it merely protects an employer against competition from an ex-employee.

11

Influence over existing customers case Scottish Farmers Dairy Co. V McGhee

Facts: A milkman was contractually bound not to carry on business as a milkman within one mile of his former employer’s business. Held: The clause was found to be reasonable as the preservation of the employer’s trading interests was a legitimate interest of every trader. In this case, it was particularly relevant that the only contact the employer had with his customers was through the milkmen. It was thought that, if a popular milkman joined a rival employer, the goodwill for that area would automatically transfer to the rival because customers would
Afraid loyal customers will follow the “maker”
continue to buy milk from their usual milkman. Therefore, the prohibition was reasonable in all the circumstances.

12

Restrictive covenants relating to the sale of the business

To protect the 'goodwill' value of the business, contributing from the reputation of the business and the customers of the business. This usually includes to keep from the seller of opening or operating a business within a certain area for a certain time.

13

Tell about error in a contract

Parties enter into a contract as a result of an error, the contract might be set aside as invalid (avoidable) or might be regarded so defective that it was never a legally binding contract in a first place. Must be material error that it had induced the contract.

14

What is the general rule considering errors?

1) where it is essential, contract will be void
2) if not essential, will be voidable, and will remain valid until court pronounces otherwise.

15

What is an essential error?

Essential error is an error as to subject matter, identify of parties, price, quality, nature of contract.

16

Describe four types of errors

1) Uninduced unilateral error - one party in error but error not induced by other party (here contract is valid)
2)Common error - where parties share the same mistake, contract will be invalid
3) Mutual error - here the parties misunderstand each others intentions, so they are at cross purposes
4) Error induced by representation - error induced by misrepresentation as to fact by or on behalf of the other party of to the contract. Either innocent, fraudulent or negligent

17

Tell about unilateral error case Royal Bank of Scotland v Purvis 1990

Purvis inherited money, husband was running a business and was overdraft, you need to guarantee it, she did, husband went bankrupt and bank went to recover the money from Purvis, she claimed that she didn’t understand, But ruled, she was not forced to do it, only error from her part

18

Tell about common Error case Dawson v Muir 1851

Confused over mutual key element of the contract, so invalid. [T]hough the point may not be settled beyond question – it is conceived that a sale will stand though the article turns out to have a value which neither seller nor purchaser suspected.” Dawson is cited and discussed in McLaughlin. A kiln was sold for £2, with neither party realising that it contained lead worth £300. It was held that the sale included the lead. Sheriff Principal Taylor suggests that it was not so much a case of mutual error as one of mutual ignorance, and thus distinguishes it for the purposes of his decision in McLaughlin. But the distinction between error and ignorance may be rather a fine one here, given that both are about gaps between reality and what people believe to be reality.

19

Tell about a mutual error case Muirhead & Turnbull v Dickson 1905

Parties involved were in dispute whether the contract between them was one of hire purchase or sale. Hire purchase is contract created which allowed consumers to buy goods on credit, after the payments the ownership transfers. Dickson claimed it was actually a sale. Court ruled it was a sale, despite of the fact that there were a mutual misunderstanding. Muirhead and Turnbull could not retain the piano.

20

Tell about mutual error case Raffles v Wichelhaus 1864 IMPORTANT

Mr. Raffles offered to sell an amount of Surat cotton to Mr. Wichelhaus. The cotton was to be brought with a ship Peerless to Liverpool from India, but there were misunderstanding over which ship to use, as there were two Peerlesses departing from India months apart. When the cotton arrived Liverpool, Mr. Wichelhaus refused to pay as in his mind it was months late. Sued for breach of contract, held that the contract between the complainant and defendant was not enforceable. There was ambiguity over the ship when the contract was discussed, No consensus and no idem (meeting of the minds) to form a binding contract.

21

Error induced by representation case Menzies v Menzies 1893 quote

Lord Watson: “Error becomes essential whenever it is shown that but for it one of the parties would have declined to contract. He cannot rescind unless his error was induced by the representations of the other contracting party, or of his agent, made in the course of negotiation, and with reference to the subject matter of the contract.”

22

What type of statements do not amount to misrepresentation?

-Exaggerated / optimistic statements of the nature of advertisement
-Expressions of opinion
-Expressions of Hope/expectations

23

Tell about innocent representation

Pre-conditions, they need to be able to return to the same position they were before hand

24

Explain Restitutio in integrum

Means restoration to original position, is one of the primary guiding principles behind the awarding of damages in common law negligence claims.

25

Tell about innocent misrepresentation case Boyd & Forrest v The Glasgow and South-Western Railway Co 1915

One of the engineers changed the details of the specification based on his own personal experience, rather than detailing with the information provided by surveyance. It was not fraud or negligence, and he truly believed this was the better choice. Innocent mistake! BUT court ruled that as the damage was already done it was impossible for them to return to the original position they were in.

26

Tell about Negligent misrepresentation case Hedley Byrne v Heller & Partner 1964

A negligent misstatement may give rise to an action for damages for economic loss. When a party seeking information or advice from another – possessing a special skill – and trusts him to exercise due care, and that party knew or ought to have known that the first party was relying on his skill and judgment, then a duty of care will be implied.
Byrne were advertising agents placing contracts on behalf of a client on credit terms. Byrne asked about the Heller & Partners credit reference from the bank, which was all the way favourable, but bottom exclusion in the letter of that do not rely on anything that we say. Byrne relied, and suffered financial loss as the client went into liquidation. Court held that the disclaimer was enough to remove liability, and Byrne lost.

27

For Pure economic losses conditions need to meet: (4)

1) Fiduciary relationship of trust & confidence arises/exists between the parties
2) The party preparing the advice/information has voluntarily assumed the risk
3) There has been reliance on the advice/info by the other party
4) Such reliance was reasonable in the circumstances

28

Tell about negligent misrepresentation case Esso Petroleum Co. v Mardon 1976

Mr. Mardon entered to a tenancy agreement with Esso Petroleum in respect of a new Petrol station, Essos experts gave estimation of him selling 200,000 gallons of petrol, The planning permission changed the prominence of the petrol station which would have an adverse affect on the sales rate. Esso made no amendments to the estimate. The rent under the tenancy was also based on the erroneous estimate. Consequently it became impossible for Mr Mardon to run the petrol station profitably. In fact, despite his best endeavours the petrol station only sold 78,000 gallons in the first year and made a loss of £5,800. The Court of Appeal held that there was no action for misrepresentation as the statement was an estimate of future sales rather than a statement of fact. However, the claimant was entitled to damages based on either negligent misstatement at common law or breach of warranty of a collateral contract.

29

What does Miscellaneous Provision (Scotland) Act 1985 say

s. 10 “ A party to a contract who has been induced to enter into it by negligent misrepresentation made by or on behalf of another party to the contract shall not be disentitled, by reason only that the misrepresentation is not fraudulent, from recovering damages from the other party in respect of any loss or damage he has suffered as a result of the misrepresentation; and any rule of law that such damages cannot be recovered unless fraud is proved, shall cease to have effect.

30

Tell about Fraudulent Misrepresentation case Derry v Peek 1889

Defendant stated the company had right to use stream powered trams (in company prospectus) as oppose to horse powered trams. However, at the time the right to use steam powered trams was subject of approval of the Board of Trade, which was later refused. The Claimant had purchased shared based on the fraudulent statement. Held that is was not fraudulent but in honest believe that the approval was forthcoming.