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ASPECTS OF CONTRACT AND NEGLIGENCE FOR BUSINESS

vimukthi AdithyaBM 53/11

Acknowledgment

I would like to thank Mr. Pulasthi for sharing his valuable ideas with us regarding Aspects of Contract and Negligence for Business. His lecture gave me some valuable points and the hand-outs that were given came in handy while doing the report. My friends at ICBT who helped at various situations and the books at the library helped me to gain a good knowledge.

Executive summaryA contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which in enforceable in a court law. Simply a contract is a legal binding between two or more parties. The basic elements of a contract are: Offer and Acceptance or agreement, Intentions to create legal relations and Considerations. There are mainly three main requisites for an offer to be considered an offer in law, they are: Should Consist of a statement of present intent to enter a contract; should be A definite proposal that is certain in its terms; and Communication of the offer to the identified, prospective offeree.In talking about Invitation to treat, it lacks an intention to be legally bound, the case Fisher v Bell (1961) is a prime example of an Invitation to treat.There are several occasions where agreements in social or domestic context are binding and courts take several approaches, cases like Merritt v Merritt are examples for this. In talking about consideration there are four main principles governing the sufficiency and nature of it. They are: Consideration must move from the promisee, Consideration need not to move from the promisor, Past consideration is not good consideration, Consideration must be sufficient but need not be adequate.Even though past consideration is not good considerations cases like Lampleigh v Braithwaite proves that past consideration is sufficient at times.Terms and representations also play a major role in contracts, where the terms are contractual and are obligations of the contract, where the representations are not. One should also understand that going beyond an existing contractual duty can also going g beyond a public duty can be a valid consideration at times.Warranties and conditions are also very important aspects of a contract, but there is a huge difference between them .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 but not when a warranty is breached. Torts are civil wrongs recognized by law as grounds for a lawsuit. The case between Donoghue and Stevenson is a very important and a major case which talks about duty of care, the neighbour principle and about breach of duty. It is after this case the Neighbour principle was introduced by Lord Atkins.

Table of Contents

Introduction1P 12Contract2Requisites for an offer to be considered an offer in law2Invitation to treat2-3Postal Rule3The approach court takes in examining and determining whether agreements in a domestic or social context are binding3-4 Main principles governing the sufficiency and nature of consideration4Can performing a duty owned to a third party be considered as consideration in return for a promise by another? 5Instances where past consideration can be sufficient5Differences between terms and representations6

Facts and reasoning of a case going beyond an existing contractual duty can be a valid consideration6Facts and reasoning of a case going beyond a public duty can be a valid consideration7 P 2 7Difference between a warranty and a condition7 Effect of the phrase it is warranted that you will be present at the criterion theatre 16 weeks prior to commencement of the opera? 7Effect of Mrs. Poussard not attending the opera 16 weeks prior to the commencement of the opera? 8Effect of Mrs. Poussard missing 10 days of practices? 8Effect of Mrs. Poussard not being able to perform during the opening week8P 3.18Incorporation of Exclusion clauses into a contract8-9The approach court takes in examining and determining whether contracts entered into by minors are binding9What is Tort? 9Concept of substantial performance 9-10P 3.210Duty of care10Neighbour Principle11Breach of duty11P 3.311Situations where a person is liable in tort, in instances where harm is caused to another without intent/negligence 11-12Instances in which it is justifiable, for one party, to take an abnormal risk in carrying out his duties12P 4.1 Arguments put forward by both parties in Donoghue v Stevenson case13P 4.2 Decision of the case Donoghue v Stevenson in relation to:Duty of care 14Neighbour Principle 14Reasonable foreseeability14P 4.3 the types of defences available for negligence15Conclusion and recommendations16Reference 17

1. IntroductionLaw is one of the main and most important aspects a business should consider and follow. It is really important for a business to know and have some knowledge about legality and mainly should have an idea about contracts.This report mainly looks into concepts such as contracts, contents of contracts, Torts and specific tort of negligence. This report also looks into various case laws which are used to prove certain scenarios, such instances are where past consideration can be sufficient, going beyond an existing contractual duty can be a valid consideration, and going beyond a public duty is a valid consideration.This report also looks into the differences between terms and representation and also differences between a warranty and a condition. Finally this report also looks into the case between Donoghue v Stevenson and talks about duty of care, neighbour principle and breach of duty and at the same time this also looks into the arguments put forward by both the claimant and the defendant in the Donoghue v Stevenson case.

P. 1a) ContractA contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which in enforceable in a court law. Simply a contract is a legal binding between two or more parties. The basic elements of a contract are: Offer and Acceptance or agreement Intentions to create legal relations Considerations

b) Requisites for an offer to be considered an offer in law?An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". An offer is a statement of the terms on which the offeror is willing to be bound. (Guenter Treitel).Any offer must; Consist of a statement of present intent to enter a contract; A definite proposal that is certain in its terms; Communication of the offer to the identified, prospective offeree. (law.jrank)If any of these elements are missing, there is no offer to form the basis of a contract.

c) Invitation to treatMany would describe invitation to treat in a number of ways, but simply this means an offer to receive an offer. As the name invitation suggests, it is just an invitation for the customers or the general public to submit an offer and it lacks an intention to be legally bound.When we take the British law into consideration any type of advertisement over public media or a price tag on a certain item is just an invitation to treat and is not an offer for sale. (businessdictionary).E.g. The case Fisher v Bell (1961) is a prime example of an Invitation to treat. The defendant, Bell displayed aflick knifein the window of his shop. On 14th of December 1959, the claimant, Fisher who is a chief inspector of police force, brought forward information against the Defendant alleging the Defendant has contravened section 1(1) by offering the flick knife for sale. Under the Restriction of Offensive Weapons Act 1959, section 1(1), it was illegal to offer for sale or hire any knife which has a blade which opens automatically.But is actually the display of the flick knife an offer? No it is just an invitation for the interested people to make an offer. So later it was decided that merely displaying an item is just an invitation to treat and invitation to treat doesnt create any legal binding.

d) Postal RuleThe postal rule is an exception to the general rule that an acceptance is only created when communicated directly to the offeror. An acceptance is binding and the contract is said to be perfected when the acceptor places his acceptance in the mailbox for return mail even if, in fact it never reaches the offeror. (duhaime). The postal rule doesnt apply to any instantaneous methods of communication such as fax, telephone, telex, etc.

e) The approach court takes in examining and determining whether agreements in a domestic or social context are binding. Social and domestic agreements play a major role in taking about intention to create legal relations. There is a presumption that the parties do not intend to create legal relations, but this is not the case always. At times these social and domestic agreements can be legally binding.Lets take the cases Balfour v Balfour (1919) KB 571 and Merritt v Merritt (1970) 1 WLR 1211 as an example to this. In the case Balfour v Balfour, Mr. Balfour was employed in Ceylon. He and his wife returned to UK on leave, but it was agreed that for health reasons she would not return to Ceylon with him. He promised to pay her 30 per month as maintenance. Later the marriage ended in divorce and the wife sued for the monthly allowance, which the husband no longer paid. Held This agreement purely a social and a domestic agreement, which was an informal agreement, made between the husband and wife and this was not intended to be legally binding.

In the case Merritt v Merritt, Mr. Merritt had left the matrimonial home, which was owned by him to live with another woman. Mr. Merritt and Mrs. Merritt met and held a discussion in Mr. Merritts car, at that time he agreed to pay her 40 per month out of which she agreed to keep up the mortgage payments on the house. The wife refused to leave the car until the husband signed a note of these agreed terms and an undertaking to transfer the house into her sole name, when the mortgage has been paid in full. However after the completion of the mortgage husband refused to transfer the houeHeld Even though this was a social and domestic agreement, in the circumstances the intention to create legal relation was established through a piece of note, which included all the agreed terms and which was signed, therefore it was legally binding.

So, when going through these cases we can clearly see that the courts would consider some cases as legally binding even though they are social and domestic agreements, if there is reasonable evidence such as the signed note in Merritt v Merritt to prove that the agreement was indented to create a legal binding. f) Main principles governing the sufficiency and nature of considerationConsideration is a legal detriment that is suffered by the promisee and that is requested by the promisor in exchange for his or her promise. A valid contract requires some exchange of consideration. As a general rule, in a bilateral contract, one promise is valid consideration for the other. In a unilateral contract, the agreed performance by the offeree furnishes the necessary consideration and also operates as an acceptance of the offer. (law.jrank)The main principles of consideration are: Consideration must move from the promisee Consideration need not to move from the promisor Past consideration is not good consideration Consideration must be sufficient but need not be adequate

g) Can performing a duty owned to a third party be considered as consideration in return for a promise by another?Yes, performance of duties owned to third parties, for a promise can also be considered as a consideration. In order to prove this we can take the case Scotson v Pegg (1861) EWHC Exch J2 as an example. A purchaser of some coal paid Pegg to carry and to unload the coal. The claimant was the supplier of the coal who had also paid the defendant to carry and unload the coal. The claimant brought an action to recover the money paid arguing the defendant was already under an existing duty to carry and unload the coal and thus provided no consideration. (e-lawresources)Held - An existing contractual duty owed to a 3rd party to the contract can amount to valid consideration for a new promise. Consequently the claimant could not recover the sums paid and the defendant was entitled to get paid twice for doing the same thing. (e-lawresources)

h) Instances where past consideration can be sufficientIts usually said that past consideration is not good consideration, but there are instances where past consideration has been valid. Past consideration can be valid if it was produced by a request.Lets take our memories way back into 1615, to the case of Lampleigh v Braithwaite which proves us that past consideration can be sufficient or valid. Braithwaite had killed a man and was due to be hung for murder. He asked the claimant to do everything in his power to obtain a pardon from the King. Lampleigh went to great efforts and managed to get the pardon requested. The defendant then promised to pay him 100 for his efforts but never paid up. (e-lawresources).Held - Whilst the promise to make payment came after the performance and was thus past consideration, the consideration was proceeded by a request from the defendant which meant the consideration was valid. The defendant was obliged to pay the claimant 100. (e-lawresources.com). We can also understand that it is not an easy task to travel a very long distance and then get the pardon from the king.

i) Differences between terms and representationsOne should understand that not everything that is said during the negotiations for a contract end up being actual terms of the contract; some information only amounts to a representation. Which simply means that a term play an important role in a contract and are more valuable than a representation. Few differences are given below.

TermsRepresentations

These are contractualThese are non contractual

Are obligations of the contractThese are statements of fact or opinion

These become a part of the contractThese do not become a part of the contract, but it induce the contract only

j) I. Facts and reasoning of a case going beyond an existing contractual duty can be a valid consideration The case of Hartley v Ponsonby (1857) 7 EB 872 proves us that going beyond an existing contractual duty can be a valid consideration. Half of a ship's crew deserted on a voyage. The captain promised the remaining crew members extra money if they worked the ship and completed the voyage. The captain then refused to pay up. (e-lawresources)Held - The crew were entitled to the extra payment promised on the grounds that either they had gone beyond their existing contractual duty or that the voyage had become too dangerous frustrating the original contract and leaving the crew free to negotiate a new contract. (e-lawresources)

II. Facts and reasoning of a case going beyond a public duty can be a valid considerationThe case of Glasbrook Bros v Glamorgan County Council (1925) AC 270 proves us that going beyond a public duty can be a valid consideration. The defendant owners of a colliery asked the police to provide protection during a miner's strike. The police provided the protection as requested and provided the man power as directed by the defendants although they disputed the level of protection required to keep the peace. At the end of the strike the police submitted an invoice to cover the extra costs of providing the protection. The defendants refused to pay arguing that the police were under an existing public duty to provide protection and keep the peace (e-lawresources)Held - In providing additional officers to that required, the police had gone beyond their existing duty. They were therefore entitled to payment. (e-lawresources)

P2a) Difference between a warranty and a condition 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: But on the other hand Warranties are minor terms of a contract which arenot central to the existence of the contract. If a warranty is breached the innocent party may claim damages but cannot end the contract. (e-lawresources)

b) Effect of the phrase it is warranted that you will be present at the criterion theatre 16 weeks prior to commencement of the opera?Using the word Warranted will not have much of an effect on the actual contract. Saying it is warranted that you will present, is just like anticipating or expecting her to come before 16 weeks, so even if this phrase is breached Spiers & Pond cannot repudiate the contract but they can only claim damages.

c) Effect of Mrs. Poussard not attending the opera 16 weeks prior to the commencement of the opera?Even though she has breached the contract by not attending the opera 16 weeks prior to the commencement of the opera Spiers & Pond cannot terminate this contract since she has only breached a warranty of the contract not a condition. Warranties are minor terms of a contract and they are not central to the existence on the contract, so since Mrs. Poussard has breached a warranty of the contract Spiers & Pond could only claim damages for their loss rather than repudiating the entire contract.

d) Effect of Mrs. Poussard missing 10 days of practices?In here too Mrs Poussard missing 10 days of practices is not a breach of a condition so a breach of this doesnt give a right to terminate the contract and not showing for practices on the set date could only affect the theatrical performances and might have cost some money for Spiers & Pond which they can claim for their damages but since this breach didnt go to the root of the contract they are not entitled to terminate the contract.

e) Effect of Mrs. Poussard not being able to perform during the opening weekMrs. Poussard being unable to sing during the opening week is a breach of a condition which means breaching a condition goes to the root of the contract and since a condition was breached Spiers & Pond could terminate the contract.

P 3.1 a) Incorporation of Exclusion clauses into a contractThe most common type ofunfair termsareexclusion clauseswhereby one party seeks to exclude their liability arisingunder the contract.There are two ways how an exclusion clause can be incorporated into a Contract. They are:I. By advance notice to the other party that the exclusion clause is to be a term of the contract Notice by display Notice in a document Notice by a course of dealingII. By signature of the party agreeing to be bound by the exclusion clause

b) The approach court takes in examining and determining whether contracts entered into by minors are bindingAccording to the general common law rule minors are not bound by contracts they entered unless they ratified them after reaching majority. There are special instances where a court might determine that a contract entered into by minors is binding. They are: A minor is bound by a contract for necessaries only if it is on the whole for his benefit. Contract for employment is binding on a minor, if viewed as a whole, it is for his benefit if not, and it will only be binding on the minor if he ratifies it on attaining his majority.

c) What is Tort?Torts are civil wrongs recognized by law as grounds for a lawsuit. These wrongs result in an injury or harm constituting the basis for a claim by the injured party. While some torts are also crimes punishable with imprisonment, the primary aim of tort law is to provide relief for the damages incurred and deter others from committing the same harms. The injured person may sue for an injunction to prevent the continuation of the tortious conduct or for monetary damages. (Cornell university)

d) Concept of substantial performance Substantial performance is a partial performance that satisfies the essential or primary requirements of a contract. It may be accepted under certain circumstances on a pro rata basis or upon payment of damages for the unfinished or defective execution. (businessdictionary)We can take the case of Dakin & Co. V Lee (1916) as an example to substantial performance. Builders promised to build a house according to specification and failed to carry out exactly all the specifications.Held The CA held that the builders were entitled to recover the contract price, less so much as ought to be allowed in respect of the items found to be defective.

In taking about any exceptions to this concept, there are few exceptions to the doctrine of substantial performance. They are; If the contract explicitly states that specific and complete performance is required. If performance can be completed by a minor alteration, then the party must correct the mistake.In order to prove exceptions to this concept we can use the case Bolton v Mahadeva (1972) 1 WLR 1009 The claimant installed central heating in the defendant's home. The agreed contract price was 560. The defendant was not happy with the work and refused to pay. Defects in the work amounted to 174. Held - The action by the claimant to enforce the payment failed since the court held there was no substantial performance. (e-lawresources)

P 3.2a) Duty of careDuty of carerefers to the circumstances and relationshipswhich the law recognises as giving rise to a legal duty to take care. A failure to take such carecan result in the defendant being liable to pay damages to a party who is injured or suffers lossas a result of their breach ofduty of care. Therefore it is necessary for the claimant to establish that the defendant owed them aduty of care. (e-lawresources)When talking about the case Donoghue v Stevenson, the manufactures should have some reasonability towards the customers, in other words a duty of care towards the customers and they are expected to produce goods in a way, that it will not harm their customers or the public. In this case Even though the two parties did not have direct contract the defendant has caused harm and breached his duty of care.

b) Neighbour Principle The Neighbour principle was first brought up Lord Atkin in the case Donoghue v Stevenson. In Donoghues case she had not purchased the ginger beer but had received it as a gift; she was a neighbour rather than a party to the contract. Atkin said of the principle. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be persons who are closely and directly affected by my act that I ought to have them in [mind] when I am [considering these] acts or omissions. (lawgovpol)

c) Breach of dutyBreach of dutyin negligence liability may be found to exist where the defendant fails to meet the standard of care required by law.Once it has been established that the defendant owed the claimant a duty of care, the claimant must also demonstrate that the defendant was inbreach of duty. The test ofbreach of dutyis generally objective;however, there may be slight variations to this.According to the case Donoghue v Stevenson, there has been a breach of duty by selling a ginger beer with a decomposed snail and the manufactures of the Ginger beer was unable to produce it in such a way that it doesnt cause any harm or damages to its customers. If the manufactures had taken reasonable efforts to keep up with the standard, they should have ensured the quality of his product before sale. A reasonable performance of duty would have been able to prevent the harm caused to the claimant

P 3.3a) Situations where a person is liable in tort, in instances where harm is caused to another without intent/negligence Yes, in some torts the defendant is liable even though the harm to the claimant occurred without intention or negligence on the defendants part. This can be further understood clearly by the case Rylands v Fletcher (1868) The defendant owned a mill and constructed a reservoir on their land. The reservoir was placed over a disused mine. Water from the reservoir filtered through to the disused mine shafts and then spread to a working mine owned by the claimant causing extensive damage. (e-lawresources)Held - The defendants were strictly liable for the damage caused by a non- natural use of land.

b) Instances in which it is justifiable, for one party, to take an abnormal risk in carrying out his dutiesIn order to explain about this we have to go back into 1950s to the case Watt v Hertfordshire (1954) 1 WLR 835 The claimant was a fireman. A woman had been involved in a traffic accident and was trapped underneath a lorry. This was 200-300 yards away from the fire station. The fire services were called to release the woman. They needed to transport a heavy lorry jack to the scene of the accident. The jack could not go on the fire engine and the normal vehicle for carrying the jack was not available. The fire chief ordered the claimant and other firemen to lift the jack on to the back of a truck. There was no means for securing the jack on the truck and the firemen were instructed to hold it on the short journey. In the event the truck braked and the jack fell onto the claimant's leg causing severe injuries. (e-lawresources)Held - There was no breach of duty. The emergency of the situation and utility of the defendant's conduct in saving a life outweighed the need to take precautions.

P4P 4.1 Arguments put forward by both the parties in Donoghue v Stevenson caseThe case between Donoghue v Stevenson [1932] AC 572 is one of the main and most important cases in the history which brought up new theories such as the neighbour principle.When talking about the arguments put forward by the two parties we can come to a conclusion that both parties never knew and had an idea about the neighbour principle before this.Lets now briefly discuss about the arguments put forward by the two parties. The Plaintiff (Donoghue) might have argued:Stating that it was the duty of the manufacture Stevenson to produce his goods (Ginger Beer) in such a way that it doesnt do any harm or damages to the consumers or the public who are consuming it and also it is their duty to ensure that no snails got into the bottles, and also to inspect that there was nothing in the bottles when the ginger beer was poured in and the bottle then sealed. She might have also argued stating that the defendant failed in both of duties and it was their negligence and there was a breach of duty by the manufacture. In the other hand the defendant Stevenson might have argued stating that:The claimant doesnt have any contract with him and that he cannot owe the claimant Mrs. Donoghue a duty of care since they did not have a contract. He further would have argued stating that this bottle was purchase by Mrs Donoghue friend and the contract was only then formed with her even though Mrs Donoghue drank and it and got sick.

So after all the arguments were put forward, next was where this so called Neighbour Principle came into the scene. Lord Atkins brought this up stating that in law neighbours arePersons who are 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 which are called in question.

P 4.2 Decision of the case Donoghue v Stevenson in relation to:

a) Duty of careThe case was won by the claimant Donoghue as there was a breach of duty of care by the defendant Stevenson who is the manufacture of the ginger beer. It is the duty of any manufacturer to ensure that his goods and services are produced in such a way that it wont affect or do any damages to the people who are consuming it, so in here they were unable to ensure quality and to perform their duty perfectly so the defendant lost the case.

b) Neighbour PrincipleAccording to the neighbour principle it states that one should take reasonable care to avoid acts or omissions which you can reasonably foresee would likely to injure your neighbour. So in this case Donoghue was the neighbour of her friend who actually purchased the ginger beer, so she should ensure that her neighbour doesnt get injured due to her acts. Even though a contract was not formed between Mrs Donoghue and Stevenson according to the neighbour principle which was brought up by Lord Atkins Mrs. Donoghue won the case. Later on it was stated that in law a neighbour seems to be a persons who are closely and directly affected by my act. So since Mrs. Donoghue was affected by the act of her friend, the neighbour principle was established and the defendant lost the case.

c) Reasonable foreseeability Reasonable foreseeability means that the claimant must be in the zone of danger that is created by the defendant's carelessness and the injury must be a type that islikely(not merely possible) to occur in the circumstances. It is both the claimant who must be foreseeable and the kind of injury that was caused. So in making the decision it was clearly proved that due to the defendants carelessness and the negligence the claimant had to face injuries and there has been a breach of duty by the defendant.

P 4.3 the types of defences available for negligence

There are mainly three defences available for negligence. They are: Contributory negligence This is one of the most common negligence defenses. It is used when the person who suffered damages was also negligent in some way. This could be because he was distracted, driving recklessly, or under the influence of drugs or alcohol. The argument is that if the individual was not participating in negligent behavior, he would not have been hurt because he would have been able to avoid the incident.

Comparative negligence - This defense only bars the plaintiff from recovering damages by the percent he is deemed to be at fault. For example, if a plaintiff were deemed two percent at fault and the defendant 98 percent at fault, his damages would be reduced by two percent rather than the entire amount.

Assumption of the risk this is one of the negligence defenses used when people are hurt while participating in dangerous activity. This is typically when they reasonably should have known they might be injured. Some examples of this could be sky diving or bungee jumping. It could also be applicable whenever someone knowingly uses faulty equipment to do a job, such as climbing on an unsafe ladder. This defense may be used in many jurisdictions whether or not a waiver has been signed. (wisegeek)

Conclusions and recommendations

Law holds a very important place for any business nowadays and it has already become a must for the entrepreneurs to know some legality, knowing what a contract is, knowing what includes in a contract and having a reasonable knowledge about various civil cases will help their cause. It is also very important for any businessmen to know how to produce their goods and services ethically and in a way that it wont do any harm or cause damages to their valued customer. Manufactures also should not be negligent and knowing law and the consequences of being negligent will help the producers to act in a way that they dont create any problems to the customers.It is also a must for the businesses to know about various terms and phases in a contract and also to know how and when they will affect them.

References

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