Vitiating Factors Misrepresentation

Vitiating Factors / Misrepresentation
Misrepresentation Act 1967
9.1 Vitiating Factors
9.1.1 Introduction
Even where it is established that the essential elements of a legally binding contract are present,
and the terms can clearly be identified, the agreement may not be legally enforceable because of
the presence of some vitiating factor. Thus, where fraud is present or a fundamental mistake as to
the contract has been made by one or both parties, the contract may be either totally void or
voidable at the option of the innocent party.
The main vitiating factors which we will examine are Misrepresentation, Duress and Undue
Influence, Mistake and Illegality (with particular reference to Restraints of Trade).
***
9.2 Misrepresentation
9.2.1 Introduction
Introductory note
The law of misrepresentation is an amalgam of common law and statute. Before the
Misrepresentation Act 1967 the law was already complex because Equity provided the remedy of
rescission for ‘innocent' misrepresentation (in effect, any misrepresentation). Courts of Law (as
distinct from Courts of Equity) provided for damages and in some cases rescission for fraudulent
misrepresentation. The law was adjusted by the Misrepresentation Act 1967 .
A further complicating factor is that an action for damages for fraudulent misrepresentation, is
part of the law of tort, where it is also called ‘deceit', and cases where the fraudulent
misrepresentation has induced a contract can be regarded as a specialized subset of the tort of
fraudulent misrepresentation. In some cases negligent misrepresentation inducing a contract will
also amount to the tort of negligent mis-statement.
There is a clear exposition of the structure of the law in the chapter on Misrepresentation in
Chitty on Contract , 29th edition (for which edition the relevant chapter was completely
rewritten).
Definition
An action for misrepresentation is the remedy for a party who has entered into a contract in
reliance on a false statement (representation) of fact by the other party but the statement has not
become incorporated in the contract as a term, i.e. the statement is not part of the bargain that the
parties have made. Where the statement has become a term the remedy will be an action for
breach of contract.
Example
X, wishing to buy a used car privately, enters into negotiations with Y who has advertised his car
for sale. The odometer of the vehicle in question is turned back to nought. In the course of
negotiations Y makes a number of statements including a (false) statement that the car has a very
low mileage. A few days later X returns and agrees to buy the car. The written note of the
transactions makes no statement as to the mileage of the car.
The remedy in this instance will be an action for misrepresentation and not an action for breach
of contract.
Where there is an actionable misrepresentation it renders the contract voidable, i.e. valid until
avoided at the instance of the innocent party.
We shall deal first with the distinction between representations and terms, then the concept of
actionable misrepresentation and the remedies available, and conclude by looking at clauses
which purport to exclude liability for misrepresentation.
9.2.2 Representations and terms
A reminder
Statements made by the parties in the course of negotiations leading up to the formation of a
contract are classified as either representations or terms.
Whether a statement is a representation or a term is primarily a question of intention. If the

parties have indicated that a statement is to be regarded as a term, the court will implement their
intention. In other cases, the following guidelines may be applied:
Manner and timing of statement
A statement is not likely to be a term if the person making the statement asks the other party to
check or verify it, as where the seller of a boat stated that it was sound but asked the buyer to
have it surveyed; Ecay v Godfrey (1947) 80LL LR 286. If the statement is made with the
intention of preventing the other party from finding a defect, and succeeds in this, the court may
consider it to be a term. Thus in Schawel v Reade (1913) 2 IR 64, the vendor of a horse said to
the buyer, “you need not look for anything, the horse is perfectly sound” and the House of Lords
held that the statement was a term.
Where there is a distinct interval of time between the making of the statement and the conclusion
of the contract, this may indicate that the parties do not intend the statement to be a term;
Routledge v McKay [1954] 1 WLR 615.
Importance of statement
A statement is likely to be a term if it is such that the injured party would not have entered the
contract had it not been made.
Bannerman v White (1861) 10 CB NS 844

A prospective purchaser of hops asked whether they had been treated with sulphur, adding that if
they had, he would not even trouble to ask the price. The seller's (erroneous) statement that
sulphur had not been used was held to be a term.
Special knowledge and skill
Where one of the parties possesses superior knowledge and skill relating to the subject matter,
the court may conclude that any statement made by such a party is a term.
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623,
A car dealer gave a false statement as to the mileage of a Bentley. The Court of Appeal held the
dealer's statement to be a term, thus distinguishing Oscar Chess Ltd v Williams [1957] 1 WLR
370 where, on a part-exchange deal, a private car owner falsely (but honestly) stated the age of
the car to the dealer. The statement was held to be a representation; the dealer was in at least as
strong a position to verify the truth of the statement.
See: The Judgment of Lord Justice Denning (as he then was) in Oscar Chess v Williams
The crucial question is: was it a binding promise or only an innocent misrepresentation? The
technical distinction between a "condition" and a "warranty" is quite immaterial in the case,
because it is far too late for the buyer to reject the car. He can at best only claim damages. The
material distinction here is between a statement which is a term of the contract and a statement
which is only an innocent misrepresentation. This distinction is best expressed by the ruling of
Lord Holt, "Was it intended as a warranty or not?", using the word warranty there in its ordinary
English meaning: because it gives the exact shade of meaning that is required. It is something to
which a man must be taken to bind himself.
In applying Lord Holt's test, however, some misunderstanding has arisen by the use of the word
"intended". It is sometimes supposed that the tribunal must look into the minds of the parties to
see what they themselves intended. That is a mistake.
Lord Moulton made it quite clear that "The intention of the parties can only be deduced from the
totality of the evidence". The question whether a warranty was intended depends on the conduct
of the parties, on their words and behavior, rather than on their thoughts. If an intelligent
bystander would reasonably infer that a warranty was intended, that will suffice. And, when the
facts are not in dispute, is a question of law. That is shown by Heilbut v. Buckleton itself, where
the House of Lords upset the finding by a jury of a warranty.
It is instructive to take some recent instances to show how the Courts have approached this
question. When the seller states a fact which is or should be within his own knowledge and of
which the buyer is ignorant, intending that the buyer should act on it and he does so, it is easy to
infer a warranty. See Couchman v. Hill (1947 King's Bench, page 554) where the farmer stated
that the heifer was unserved and Harling v. Eddy (1951, Volume 2, King's Bench, page 739)
where he stated that there was nothing wrong with her. So also if he makes a promise about
something which is or should be within his own control. See Birch v. Paramount Estates Ltd.
decided on 2nd. October 1956 in this Court, where the seller stated that the house would be as
good as the show house. But if the seller, when he states a fact, makes it clear that he has no
knowledge of his own but has got his information elsewhere, and is merely passing it on, it is not
so easy to imply a warranty. Such a case was Routledge v. McKay (1954, Volume 1, Weekly
Law Reports at page 636) where the seller "stated that it was a 1942 model and pointed to the
corroboration found in the boon", and it was held that there was no warranty.
Turning now to the present case, much depends on the precise words that were used. If the seller
says "I believe it is a 1948 Morris. Here is the registration book to prove it," there is clearly no
warranty. It is a statement of belief, not a contractual promise. But if the seller says "I guarantee
that it is a 1948 Morris. This is borne out by the registration book, but you need not rely solely
on that. I give you my own guarantee that it is," there is clearly a warranty. The seller is making
himself contractually responsible, even though the registration book is wrong.
In this case much reliance was placed by the Judge on the fact that the buyer looked up Glass's
Guide and paid £290 on the footing that it was a 1948 model: but that fact seems to me to be
neutral. Both sides believed the car to have been made in 1948 and in that belief the buyer paid
£290. That belief can be just as firmly based on the buyer's own inspection of the log book as on
a contractual warranty by the seller.
Once that fact is put on one side, I ask myself: What is the proper inference from the known
facts? It must have been obvious to both that the seller had himself no personal knowledge of the
year when the car was made. He only became owner after a great number of changes. He must
have been relying on the registration book. It is unlikely that such a person would warrant the
year of manufacture. The most he would do would be to state his belief, and then produce the
registration book in verification of it. In these circumstances the intelligent bystander would, I
suggest, say that the seller did not intend to bind himself so as to warrant that it was a 1948
model. If the seller was asked to pledge himself to it, he would at once have said "I cannot do
that. I have only the log-book to go by, the same as you".
The Judge seems to have thought that there was a difference between written contracts and oral
contracts. He thought that the reason why the buyer failed in Heilbut Symons and Routledge v.
McKay was because the sales were afterwards recorded in writing, and the written contracts
contained no reference to the representation. I agree that was an important factor in those cases.
If an oral representation is afterwards recorded in writing, it is good evidence that it was intended
as a warranty.
If it is not put into writing, it is evidence against a warranty being intended. But it is by no means
decisive. There have been many cases where the Courts have found an oral warranty collateral to
a written contract such as Birch v. Paramount Estates. But when the purchase is not recorded in
writing at all, it must not be supposed that every representation made in the course of the dealing
is to be treated as a warranty. The question then is still: Was it intended as a warranty? In the
leading case of Chandelor v. Lopus in 1603 a man by word of mouth sold a precious stone for
gold affirming it to be a bezoar stone whereas it was not. The declaration averred that the seller
affirmed it to be a bezoar stone, but did not aver that he warranted it to be so. The declaration
was held to be ill because "the bare affirmation that it was a bezoar stone, without warranting it
to be so, is no cause of action." That has been the law from that day to this and it was
emphatically re-affirmed by the House of Lords in Heilbut Symons v. Buckleton (1913 Appeal
Cases at pages 36 and 50)
Statement reduced to writing
Where the agreement has been reduced to a written document, statements appearing in the
written contract will normally be regarded as terms. Subject to the matters discussed above,
statements excluded from the written contract are likely to be regarded as representations.
Nevertheless, the court will look to the intention of the parties to see whether they intended a
contract partly written and partly oral; J Evans and Son (Portsmouth) Ltd v Andrea Merzario Ltd
[1976] WLR 1078.
***
9.3 Actionable Misrepresentation
9.3.1 Definition
An actionable misrepresentation is a false statement of fact made during pre-contractual

negotiations by one party which induces the other party to enter into a contract.
False statement of fact
To be actionable, the statement must be one of some specific existing fact or past event. Thus the
vendor who states that “the drains are in good working order” or “the car's engine has been re-
conditioned” is clearly making a false statement of fact which would be actionable if manifestly
false.
However, the position is rarely so straightforward and it is necessary to distinguish between

statements of fact, which are actionable if false, and statements of opinion or belief; statements
of future conduct or intention; statements of law and cases of silence or non-disclosure which are
not in general actionable.
(i) Statements of opinion or belief
Such statements, if false, do not constitute actionable misrepresentation.
Bisset v Wilkinson [1927] AC 177

The owner of a farm, which had never been used as a sheep farm stated that he believed it would
support a certain number of sheep. The court held the statement to be one of opinion not fact.
Of course, very often, the makers of such statements are dealers or agents who have special
knowledge or skill in relation to the subject-matter, or are in a stronger position to know the
truth. Here the court may infer an implied representation of fact; see, for example Smith v Land
and House Property Corporation (1884) 28 Ch D 7 where the plaintiff put his hotel up for sale
declaring that it was let to a ‘most desirable tenant'. The tenant was not desirable, he was
bankrupt! The defendant refused to complete and was sued. The Court of Appeal held that the
plaintiff's statement was a statement of fact, not a mere opinion.
See also Esso Petroleum Co Ltd v Mardon (1976) QB 801. A petrol company offering an
inaccurate sales forecast were liable in damages to the tenant who contracted in reliance on the
forecast.
Brown v Raphael [1958] Ch 636 CA
Clearly, many (but not necessarily all) statements made by advertisers are classed as “mere puff”
and are not actionable because they have no factual basis (e.g. “we take the drama out of a
crisis”).
(ii) Statements of future conduct or intention
A statement by a person as to what he will do in the future is not a statement of fact, e.g. “over
the next five years, our investment plans amount to five million pounds”. But even here a person
who wilfully lies about his intentions may be guilty of a (fraudulent) misrepresentation of fact, as
illustrated by the following case.
Edgington v Fitzmaurice (1885) 29 Ch D 459

A company raised money from the public by saying that the money would be invested in the
expansion of the business. In fact, the directors' real intention was to use the money to pay off
the company's debts. The statement was held to be a fraudulent misrepresentation of fact. Bowen
L J, in a famous judicial pronouncement said:
“There must be a mis-statement of an existing fact; but the state of a man's mind is as much a
fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's
mind at a particular time is, but if it can be ascertained, it is as much a fact as anything else. A
misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact.”
The same principle would also apply to a dishonest statement of opinion or belief; see (i) above.
(iii) Statements of law
A false statement as to what the law is, is not an actionable misrepresentation, e.g. “a valid
contract of hire purchase does not need to be in writing.” However, in practice, such bold
statements are rarely made and statements containing legal propositions may be related to the
subject matter in such a way that they are really statements of fact. For example, in Solle v
Butcher (1950) 1 KB 671 a statement that a flat was “new” and therefore not subject to the Rent
Acts was held to be fact.
Besides, this principle may have to be called into question since the House of Lords declared, in
Kleinwort Benson v Liverpool City Council [1999] 1 AC 953 that a mistake of law could render
a contract void for mistake, contrary to the traditional view that it could not. A mistake, and
misunderstanding induced by misrepresentation, are similar, so the doctrines of mistake
(discussed in a later chapter) and misrepresentation are related.
(iv) Silence or non-disclosure
The general rule here is that to remain silent does not amount to misrepresentation. Thus a
commercial traveller who kept quiet, at a job interview, the fact that he had serious motoring
convictions was not guilty of misrepresentation; Hands v Simpson Fawcett (1928) 44 TLR 295.
Obviously, if he had been directly asked whether he had such convictions and had denied it, he
would have been liable.
However, as was stated by Lord Campbell L C in Walkers v Morgan (1861) 3 D F & J 718,
although simple reticence does not amount to a legal wrong ... a single word or a nod or a wink
or a shake of the head or a smile from one party might amount to misrepresentation. And of
course it is also possible to have a misrepresentation by conduct.
Thus to deliberately physically conceal dry rot in a building may amount to misrepresentation.
R v Barnard (1837) 7 C & P 784D, in Oxford, wore a cap and gown in order to persuade
shopkeepers to let him have goods on credit. The fact of appearing so dressed was held to
amount to a false pretence; this was a criminal case but there is no reason to suppose that the
same principles would not apply to civil liability.
In Sykes v Taylor-Rose [2004] EWCA Civ 299 the seller who was asked if there was anything
the buyer had a right to know was held not liable in misrepresentation despite the fact that a
murder had occurred several years before. To some extaent - caveat emptor or 'let the buyer
beware' still operates.
The rule about silence not being misrepresentation is subject to four exceptions:
1. Statement a half truth
Clearly, a statement that is partial, i.e. fails to present the whole truth, can constitute
misrepresentation; Tapp v Lee (1803) B & P 367. Thus a vendor of property who states that the
property has planning permission for business purposes but fails to add that the permission is a
temporary one and is shortly due to expire would be guilty of misrepresentation.
2. Change of circumstances
A duty of disclosure may arise where the circumstances have changed, i.e. a statement which
was true when made has become false by the time it is acted upon. An example is the following
case:
With v O'Flanagan (1936) Ch D 575
A doctor, negotiating the sale of his practice, correctly stated that it produced an income of
£2,000 per annum. However, by the time the contract was signed four months later the practice
had declined so that it was worth no more than £5 per week. It was held that the failure of the
vendor to disclose this state of affairs was an actionable misrepresentation.
3. Contracts uberrimae fidei (of the utmost good faith)
These are a type of contract which require full disclosure of all material facts. The most
important example of such contracts are contracts of insurance.
Norwich Union Insurance Ltd v Meisels [2006] exemplifies the principle.
4. Parties in a fiduciary relationship
Where the parties are in a relationship based on good faith (e.g. principal and agent, solicitor and
client, doctor and patient) a duty of disclosure will arise.
See: Conlon and Another v Simms [2006] EWHC 401 CH
Inducement
To amount to an actionable misrepresentation, a false statement of fact must be material in the
sense that it induces the misrepresentee to enter the contract. If the misrepresentee relies on his
own judgment or investigations, there will be no liability on the part of the misrepresentor, as in
the following case:
Attwood v Small (1838) 6 Ch & Fin 232

The vendors of a mine made exaggerated statements as to its earning potential and the purchaser
instructed a firm of expert surveyors to check the veracity of the statements. The surveyors
reported that the vendor's statements were correct. It was held that the vendors were not liable –
the purchasers had been induced to enter the contract by the expert's report and not by the
vendors. (The purchasers in such a situation would, of course, have an action against the
surveyors).
A complication to the above principle is introduced by the following case:
Redgrave v Hurd (1881) Ch D 1

P, a solicitor, wished to take a partner and negotiated with Hurd. P told Hurd that the income of
the practice was £300-£400 per annum and Hurd was shown papers purporting to prove this. If
Hurd had carefully read these documents he would have seen that the practice was virtually
worthless. He did not read them but the court nevertheless held the misrepresentation to be
actionable, and the plaintiff's action for breach of contract failed. It made no difference that a
prudent purchaser would have discovered the true position.
Obviously, if the plaintiff is unaware of the misrepresentation at the time of the contract there
can be no liability ( Horsfall v Thomas (1862) 1 H & C 90) and the position is the same if he is
aware of it but it is proved that it cannot possibly have affected his judgment; Smith v Chadwick
(1884) 9 AC 187.
The misrepresentation does not have to be the sole inducing factor.
See: Peekay Internmark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA
CIV 386 stated that the principle in Redgrave v Hurd required actual knowledge and not
constructive knowledge.
9.4 Types of Misrepresentation
In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent.

These are considered below.
9.4.1 Fraudulent misrepresentation
Definition
“Fraudulent” in this sense was defined by Lord Herschell in Derry v Peek (1889) 14 App Cas
337 as a false statement that is “made (i) knowingly, or (ii) without belief in its truth, or (iii)
recklessly, careless as to whether it be true of false.” The essence of fraud is the absence of
honest belief; in Derry v Peek , a share prospectus falsely stated that the company had the right
to use mechanical power to draw trams, without explaining that governmental consent was
required for this. In fact, the directors honestly believed that obtaining consent was a pure
formality, although it was ultimately refused. The House of Lords held that there had been no
fraudulent misrepresentation.
Lord Herschell however did point out that though unreasonableness of the grounds of belief is
not deceitful, it is evidence from which deceit may be inferred. There are many cases,
"where the fact that an alleged belief was destitute of all reasonable foundation would suffice of
itself to convince the court that it was not really entertained, and that the representation was a
fraudulent one."
On the other hand, there need be no intention to defraud. An intention to deceive (with no
intention to cause the claimant loss) is sufficient.
9.4.2 Negligent misrepresentation
Negligent mis-statement at common law
Until 1963, damages could only be claimed for misrepresentation where it was fraudulent. All
non-fraudulent misrepresentations were classed as “innocent” and damages were not available
for such innocent misrepresentations. In 1963, the House of Lords stated, obiter, in Hedley Byrne
Co Ltd v Heller Partners Ltd [1964] AC 465 that in certain circumstances damages may be
recoverable in tort for negligent mis-statement causing financial loss. The liability depends on a
duty of care arising from a “special relationship” between the parties. It is now clear that a party
can claim damages under the principle in Hedley Byrne where a negligent mis-statement has
induced him to enter a contract; Esso Petroleum Co Ltd v Mardon (1976) QB 801. Broadly
speaking, the special relationship will only arise where the maker of the statement possesses
knowledge or skill relevant to the subject matter of the contract and can reasonably foresee that
the other party will rely on the statement.
Negligent misrepresentation under the Misrepresentation Act 1967
Section 2(1) of the Act of 1967 introduced, for the first time, a statutory claim for damages for
non-fraudulent misrepresentation. Section 2(1) provides that where a person has entered a
contract after a misrepresentation has been made to him by another part thereto and a result
thereof he has suffered loss, then, if the person making the misrepresentation would be liable to
damages in respect thereof had the misrepresentation been made fraudulently, that person shall
be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he
proves that he had reasonable ground to believe and did believe up to the time the contract was
made that the facts represented were true.
It should be noted that the sub-section assumes all non-fraudulent statements to be negligent and
puts the burden on the maker of the statement to disprove negligence.
Wholly innocent misrepresentation
We have seen that before 1963, the word “innocent” was used to describe all misrepresentations
that were not fraudulent.
In the light of Hedley Byrne and s.2(1) of the Act of 1967, the word innocent may now be used
to refer to a statement made by a person who has reasonable grounds for believing in its truth. To
avoid confusion, “wholly innocent” is a better description.
9.5 Remedies for Misrepresentation
Once it has been established that an actionable misrepresentation has occurred, it is necessary to
consider the remedies available to the injured party. These are:
9.5.1 Rescission
9.5.2 Damages for misrepresentation
9.5.3 Damages in lieu of rescission
9.5.1 Rescission
Rescission means setting aside the contract. This may be done by the injured party applying to
the court for an order rescinding the contract, or the injured party may rescind by notifying the
other party or by any other act indicating repudiation of liability, e.g. notifying the police or a
Justice of the Peace.
Rescission is available whether the misrepresentation is fraudulent, negligent or innocent. The

effect of rescission is to terminate the contract “ab initio”, i.e. the parties are put back in the
position they would have been in had the contract never been made. In order to achieve this
position, an order of rescission may be accompanied by the court ordering an indemnity. This is
a money payment by the misrepresentor which is designed to restore the parties to their position
had the contract not been made. It is limited to payments in respect of obligations necessarily
created by the contract and is to be distinguished from damages.
The distinction is illustrated by the following case:
Whittington v Seale Hayne (1900) 82 LT 49

Poultry breeders took a lease of premises as a result of an innocent misrepresentation that the
premises were sanitary. They were not and the contract was rescinded. It was held that an
indemnity could be recovered in respect of rent, rates and repairs as these were obligations
necessarily created by taking the lease. The indemnity would not however cover loss of business
profits, loss of stock and medical expenses etc as these were losses related to the plaintiffs'
business and the plaintiffs were not obliged to carry on a business under the terms of the
contract. Such items, had they been awarded, would have amounted to damages.
An indemnity may still be awarded after the Misrepresentation Act 1967 although it will not be
appropriate where damages are in fact awarded either under that Act or at common law. This
means that the remedy remains particularly significant where the contract is rescinded for a
wholly innocent misrepresentation.
There are certain “bars” to rescission, i.e. situations in which a party may lose the right to
rescind. These are:
(i) Affirmation
Long v Lloyd (1958)1 WLR 753
Affirmation will occur where the injured party, with full knowledge of the misrepresentation,
states (expressly or impliedly) that he intends to continue with the contract. Thus if X, having
bought a vehicle from Y as a result of a misrepresentation as to its condition, subsequently
agrees to share with Y the cost of necessary repairs and continues to use it, he may be said to
have affirmed the contract;
Lapse of time in seeking a remedy may be evidence of affirmation. In the case of non-fraudulent
misrepresentation, rescission may be barred where, even though there is no delay in seeking a
remedy once the plaintiff is aware of the misrepresentation, a period of time has elapsed since
the contract.
Leaf v International Galleries [1950] 2 KB 86
P bought a picture as a result of an innocent misrepresentation that it was a Constable. Some five
years later he discovered it was not genuine and the Court of Appeal held that rescission was
barred.
(ii) Impossibility of restitution
The injured party will lose the right to rescind if the parties cannot be restored to their original
position:
Clarke v Dickson (1858) E B & E 148
The plaintiff invested money in a partnership to exploit a lead mine as a result of a

misrepresentation by the defendants. Later the partnership was in financial difficulty and with the
plaintiff's consent it was converted into a limited company and the partnership capital was
converted into shares. On discovery the falsity of the representations, the plaintiff sought
rescission of the contract. It was held that rescission could not be granted because the partnership
was no longer in existence, having been replaced by the company, and it was not possible to
restore the parties to their original positions.
In the above case the property had totally changed in nature but where the property has merely
deteriorated the court may rescind with a cash adjustment; Erlanger v New Sombrero Phosphate
Co (1878) 3 App Cas 1218.
(iii) Third party rights
Rescission is not available where an innocent third party has acquired rights to the subject-matter
of the contract. This bar to rescission also operated in Clarke v Dickson above as creditors had
acquired rights over the company.
It should be noted that two further bars to rescission were abolished by s.1 Misrepresentation Act
1967 , i.e. where the misrepresentation had become incorporated as a contractual term, and
where, after a non-fraudulent misrepresentation, the contract had been executed. This should be
borne in mind when looking at some of the older cases.
9.5.2 Damages for misrepresentation
Damages for misrepresentation may be claimed or, as the case may be, awarded under the
following heads:
(i) Damages for fraudulent misrepresentation
This is essentially a claim for compensation in the tort of deceit. The object is to restore the
plaintiff to the position he would have been in had there been no misrepresentation, i.e. the
amount by which he is out of pocket by entering the contract. Thus in McC onnel v Wright
(1903) 1 Ch 546, the plaintiff was induced to buy shares by a fraudulent misrepresentation. He
recovered the difference between the purchase price and the actual value of the shares, assessed
at the time of the contract.
Damages for breach of contract, on the other hand, are normally on the “loss of bargain” basis
i.e. the injured party is put in the position he would have been in if the contract had not been
broken. Thus if in McConnel (above), the shares had been warranted as having a certain value,
then the plaintiff could recover (in an action for breach of contract) that value. In practice the
difference can be striking.
By way of example, suppose the vendor of a business makes certain misrepresentations which, if
true, would mean the business was worth £100,000. The purchaser puts down a deposit of
£50,000, the balance to be paid at a later date. In fact the business is really worth £25,000.
Damages on the tortious basis (i.e. for misrepresentation) would amount to £25,000; on the
contractual basis to £75,000.
(ii) Damages for negligent misrepresentation
The plaintiff may elect to claim damages under Hedley Byrne provided the ingredients of the tort
are established. The measure of damages here will be on the same basis as deceit (i.e. the “out of
pocket” rule discussed above), however the remoteness test will be one of reasonable
foreseeability.
As an alternative the plaintiff may base claim for damages on s.2(1) of the Misrepresentation Act
1967 . As explained later, where the plaintiff has entered into a contract, s.2(1) will be the
normal remedy, not Hedley Byrne.
Under s.2(1), the maker of the statement is deemed to have been negligent and bears the burden
of disproving negligence. The wording of the subsection (which is not a model of clarity)
appears to introduce what has been called a “fiction of fraud”. This apparently requires the
plaintiff to establish that the defendant would have been liable in damages if the statement had
been made fraudulently. The main consequence is that the measure of damages under s.2(1) is on
the same basis as damages for deceit, i.e. the out of pocket rule. Similarly, the remoteness test
will be the same as that laid down in Doyle v Olby (above). This was affirmed by the Court of
Appeal in Royscott Trust Ltd v Rogerson [1991] 3 All ER 294. Despite earlier cases (e.g. Watts
v Spence (1976) Ch 165) placing damages under s.2(1) on the contractual basis, it would now
seem to be established, as a result of Sharneyford Supplies Ltd v Edge (1987) Ch 305 that
damages under s.2(1) are indeed on the same basis as the tort of deceit.
The following case, which repays careful study, is the leading decision on s.2(1):
Howard Marine and Dredging Co Ltd v Ogden and Sons [1978] QB 574
There took place negotiations for the hire of certain sea-going barges and the owner's negotiator
misrepresented their capacity. He relied on Lloyd's Register which was in fact incorrect – the
correct information was on file at the owner's head office. The Court of Appeal held that there
was liability under s.2(1); the presumption of negligence had not been rebutted in this case and
so the burden on the misrepresentor is a heavy one. It is clear that the reasonable grounds of
belief must continue up to the time when the contract was made and so the statute imposes an
absolute obligation on the representor not to state facts which he cannot prove he had reasonable
grounds to believe. (Such an obligation does not necessarily exist under Hedley Byrne).
(iii) Remoteness
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158,
HELD : in a fraudulent misrepresentation action the plaintiff may recover for all the direct loss
incurred as a result of the misrepresentation, regardless of foreseeability. This is therefore a more
generous basis than either contract (reasonable contemplation) or negligence (reasonable
foreseeability) and can, in practice, bring the damages up to the contractual level or even exceed
it, as happened in the Doyle case.
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254
Affirmed that foreseeability is irrelevant in a claim for fraudulent misrepresentation, and cannot
ordinarily be used to limit damages. However, in that case, the House of Lords threw doubt on
whether this principle applies also to claims under Misrepresentation Act s.2(1). In such cases,
foreseeability may be relevant to identifying which damages are recoverable, just as it is relevant
in tort cases under Hedley Byrne.
(iv) Hedley Byrne and s. 2(1) compared
Given that there are two possible actions for negligent misrepresentation, it may be useful at this
point to consider the relative advantages and disadvantages of each:
1. Section 2(1) only applies “where a person has entered into a contract”, thus if there is an
operative mistake (see later) and the contract is void, no action for damages under s.2(1) would
be possible since there is no contract.
2. Under Hedley Byrne you don't have to prove that a misrepresentation as such has been made,
i.e. it could be a statement of opinion or law.
3. An action may be brought under Hedley Byrne where the misrepresentation was made by a
third party to the contract.
4. Hedley Byrne may be applicable where negotiations do not result in a contract between the
plaintiff and defendant but the plaintiff nevertheless suffers loss in reliance on the
misrepresentation.
5. The great advantage, however of s.2(1) is the fact that it provides the plaintiff with an
assumption of negligence on the part of the defendant – under Hedley Byrne there is a far greater
burden of proof.
Nevertheless, in all cases where the plaintiff has entered into a contract as a result of negligent
misrepresentation, an action under s.2(1) will be the normal remedy.
(v) Contributory negligence no defence to fraudulent misrepresentation
In an action for negligent mis-statement under Hedley Byrne the Law Reform (Contributory
Negligence) Act 1945 will apply, so that damages may be reduced to take account of contributory
negligence.
Standard Chartered Bank v Pakistan National Shipping Co [2000] 1 Lloyd's Rep 218 (HC)
HELD: contributory negligence was not relevant in a claim for fraudulent misrepresentation. The
decision was upheld by a majority of the Court of Appeal in Standard Chartered Bank v Pakistan
National Shipping Co [2000] EWCA Civ 230.
(vi) In fraud cases agents are personally liable
Standard Chartered Bank v Pakistan National Shipping Co [2002] UKHL 43; [2003] 1 All ER
273
When the same case reached the House of Lords, the only live question was whether the agent
who made the misrepresentation was personally liable. Mr Mehra apparently had some money.
‘His' company, on whose behalf (and therefore acting as agent) he told the lie, did not. The
House of Lords rejected his argument that he was not personally liable. They found that as agent
he was personally liable for any fraudulent misrepresentation; and so long as he acted within his
authority, the principal would also be liable.
9.5.3 Damages in lieu of rescission
Prior to the 1967 Act damages could not be claimed for a wholly innocent misrepresentation, i.e.
one that is neither fraudulent or negligent. The remedy for wholly innocent misrepresentation
was rescission, accompanied by an indemnity.
However, s.2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured
party would be entitled to rescind, to award damages in lieu of rescission. Note that damages
under s.2(2) cannot be claimed as such, they can only be awarded by the court. The power of the
court under the subsection can only be used in the case of non-fraudulent misrepresentation (i.e.
negligent and wholly innocent misrepresentation) and cannot be used where one of the bars to
rescission exist.
Where damages are awarded under s.2(1) the court must (by virtue of s.2(3)) take into account
any damages awarded in lieu of rescission under s.2(2).
See: UCB Corporate Services Ltd v Thomason [2005] EWCA CIV 225 discretion to refuse
recission was exercised and no substantial damages were awarded in lieu of the rescission
denied.
9.6 Exclusion of Liability for Misrepresentation
9.6.1 Concept
Attempts to exclude liability for misrepresentation are not uncommon, e.g. by estate agents. The
law on this is to be found in s.3 of the Misrepresentation Act 1967 which provides:
“If a contract contains a term which would exclude or restrict –
(a) any liability to which a party to a contract may be subject by reason of any misrepresentation
made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as
stated in s.11(1) of the Unfair Contract Terms Act 1977 ; and it is for those claiming that the
term satisfies that requirement to show that it does.”
A couple of points in connection with s.3 should be noted. It is clear that it cannot be evaded by
the contract term in question deeming that statements of fact are not representations; Cremdean
Properties Ltd v Nash (1977) 244 EG 547. But a term which stated that an auctioneer had no
authority to make any representation was held to fall outside s.3 as it was not an exclusion clause
at all but a limitation on the apparent authority of the auctioneer; Overbrooke Estate Ltd v
Glencombe Properties Ltd (1974) 3 All ER 511.
The Unfair Terms in Consumer Contracts Regulations 1999 are unlikely to add anything to s.3 as
amended by UCTA s.11(1). However UTCCR may be useful against a term where there is some
doubt about whether the kind of liability excluded is or is not a misrepresentation within the
meaning of s.3.
Mistake
Great Peace Shipping Limited v Tsavliris (International)

Limited [2002] CA
Lord Phillips MR
MISTAKE
A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of
contract in a number of different circumstances. They may prevent the mutuality of agreement
that is necessary for the formation of a contract. In order for two parties to conclude a contract
binding in law each must agree with the other the terms of the contract. Whether two parties have
entered into a contract in this way must be judged objectively, having regard to all the material
facts. It may be that each party mistakenly believes that he has entered into such a contract in
circumstances where an objective appraisal of the facts reveals that no agreement has been
reached as to the terms of the contract. Such a case was Raffles v. Wichelhaus (1864) 2 H&C
906. The parties believed that they had entered into a contract for the purchase and sale of a
cargo of cotton to arrive "ex Peerless from Bombay". That term was capable of applying equally
to a cargo of cotton on two different ships, each called "Peerless" and each having sailed from
Bombay, one in September and one in December. The court accepted that parole evidence could
be adduced to prove which shipment the parties had intended to be the subject of the contract.
Had one party intended the October shipment and the other the December shipment, the
agreement necessary for a binding contract would have been absent.
29. Raffles v. Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal
of the negotiations between the parties may disclose that they were at cross-purposes, so that no
agreement was ever reached. In such a case there will be a mutual mistake in that each party will
erroneously believe that the other had agreed to his terms. This case is not concerned with the
kind of mistake that prevents the formation of agreement.
30. Another type of mistake is that where the parties erroneously spell out their contract in terms
which do not give effect to an antecedent agreement that they have reached. Such a mistake can
result in rectification of the contract. Again, this case is not concerned with that type of mistake.
31. In the present case the parties were agreed as to the express terms of the contract. The
defendants agreed that the "Cape Providence" would deviate towards the "Great Peace" and, on
reaching her, escort her so as to be on hand to save the lives of her crew, should she founder. The
contractual services would terminate when the salvage tug came up with the casualty. The
mistake relied upon by the defendants is as to an assumption that they claim underlay the terms
expressly agreed. This was that the "Cape Providence" was within a few hours sailing of the
"Great Peace" . They contend that this mistake was fundamental in that it would take the "Great
Peace" about 39 hours to reach a position where she could render the services which were the
object of the contractual adventure.
32. Thus what we are here concerned with is an allegation of a common mistaken assumption of
fact which renders the service that will be provided if the contract is performed in accordance
with its terms something different from the performance that the parties contemplated. This is the
type of mistake which fell to be considered in Bell v. Lever Brothers . We shall describe it as
"common mistake", although it is often alternatively described as "mutual mistake".
***
11.1 Introduction
11.1.1 Underlying principle: Caveat Emptor
Bell v Lever Bros Ltd [1932] AC 161
“If mistake operates at all, it operates so as to negative or in some cases to nullify consent”
per Lord Atkin, p217.
The underlying principle of the law of contract is still caveat emptor (“let the buyer beware”).
The situations in which a contract will be avoided on the ground that one or both parties have
made a mistake will be somewhat limited.
Nevertheless the cases reveal that in certain circumstances a contract may be void at common
law on the ground of a mistake and in some cases even where the contract is valid at law it may
nevertheless be voidable in equity on the ground of mistake.
A mistake which has the effect of rendering a contract void is described as an “operative”
mistake.
It used to be thought that mistakes as to law would not be operative, but in Kleinwort Benson v
Liverpool City Council [1999] 1 AC 953 the House of Lords declared that this rule is not part of
English law.
The law relating to mistake will be considered under five heads:
1. Common Mistake; (11.2)
2. Mutual Mistake; (11.3)
3. Unilateral Mistake; (11.4)
4. Mistake as to Identity; (11.5)
5. Mistake Relating to Documents. (11.6)
***
11.1.2 Classification of mistake
Commentators are not agreed as to the classification of Mistake.
Treitel deals with Mistake by contrasting Mistake nullifying consent (Parties reach agreement
which is based on a fundamental mistaken assumption) with Mistake negativing consent (Where
mistake prevents the parties from reaching an agreement e.g. where they intend to contract about
different things)
Treitel classification:
Mistake nullifying consent
(1) Mistake as to the existence of the subject matter
Consent is nullified where both parties are mistaken as to the existence of the subject matter.
Galloway v Galloway (1914)
(2) Mistake as to the identity of the subject matter
A variant of mistake as to quality
(3) Mistake as to the possibility of performing the contract
(a) Physical impossibility
Sheikh Bros v Ochsner [1957] AC 136
(b) Legal impossibility
Cooper v Phibbs (1867) LR 2 HL 149
(c) Commercial impossibility
Griffith v Brymer (1903) 19 TLR 434
Great Peace Shipping v Tsavliris Salvage (The Great Peace) (2002)
(4) Mistake as to quality
If there is no misdescription, mistake as to quality generally does not nullify consent.
Scott v Littledale (1858)
Kennedy v Panama etc Royal Mail Co (1867)
Bell v Lever Bros [1932] AC 161 ***
Rose v Pim [1953]
Oscar Chess v Williams [1957] 1 WLR 370

(5) Mistake as to quantity
Cox v Prentice (1815) 3 M&S 344
(6) Cases in which a fundamental mistake does not nullify consent
Clark v Lindsay (1903) 19 TLR 202
Couturier v Hastie (1856.
McRae v Commonwealth Disposals Commission (1951)
Barrow Lane & Ballard v Phillips [1929] 1 KB 574
S.6 Sale of Goods Act 1979
Mistake negating consent
(1) Mistake as to the person
Cundy v Lindsay (1878) 3 App Cas. 459
King's Norton Metal v Edridge Merrett & Co (1897)
Phillips v Brooks [1919] 2 KB 243
Lewis v Averay [1972] 1 QB 198
Ingram v Little [1961] 1 QB 31.
Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919.
(2) Mistake as to the subject matter
Raffles v Wichelhaus (1864)
Falck v Williams [1900] AC 176
Smith v Hughes (1871) LR 6 QB 597
(3) Mistake as to the terms of the contract
Mistake must induce the contract

Some commentators divide the mistake into two, that is, common mistake shared by the parties,
and mistake in communication. Because mistake in communication can be on all sides (mutual
mistake), or on one side only (unilateral mistake), we will adopt the following classification:
***
11.2 Common Mistake: Common Law
Great Peace Shipping Limited v Tsavliris (International)

Limited [2002] CA
Lord Phillips MR
A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of
contract in a number of different circumstances. They may prevent the mutuality of agreement
that is necessary for the formation of a contract. In order for two parties to conclude a contract
binding in law each must agree with the other the terms of the contract. Whether two parties have
entered into a contract in this way must be judged objectively, having regard to all the material
facts. It may be that each party mistakenly believes that he has entered into such a contract in
circumstances where an objective appraisal of the facts reveals that no agreement has been
reached as to the terms of the contract. Such a case was Raffles v. Wichelhaus (1864) 2 H&C
906. The parties believed that they had entered into a contract for the purchase and sale of a
cargo of cotton to arrive "ex Peerless from Bombay". That term was capable of applying equally
to a cargo of cotton on two different ships, each called "Peerless" and each having sailed from
Bombay, one in September and one in December. The court accepted that parole evidence could
be adduced to prove which shipment the parties had intended to be the subject of the contract.
Had one party intended the October shipment and the other the December shipment, the
agreement necessary for a binding contract would have been absent.
29. Raffles v. Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal
of the negotiations between the parties may disclose that they were at cross-purposes, so that no
agreement was ever reached. In such a case there will be a mutual mistake in that each party will
erroneously believe that the other had agreed to his terms. This case is not concerned with the
kind of mistake that prevents the formation of agreement.
30. Another type of mistake is that where the parties erroneously spell out their contract in terms
which do not give effect to an antecedent agreement that they have reached. Such a mistake can
result in rectification of the contract. Again, this case is not concerned with that type of mistake.
31. In the present case the parties were agreed as to the express terms of the contract. The
defendants agreed that the "Cape Providence" would deviate towards the "Great Peace" and, on
reaching her, escort her so as to be on hand to save the lives of her crew, should she founder. The
contractual services would terminate when the salvage tug came up with the casualty. The
mistake relied upon by the defendants is as to an assumption that they claim underlay the terms
expressly agreed. This was that the "Cape Providence" was within a few hours sailing of the
"Great Peace" . They contend that this mistake was fundamental in that it would take the "Great
Peace" about 39 hours to reach a position where she could render the services which were the
object of the contractual adventure.
32. Thus what we are here concerned with is an allegation of a common mistaken assumption of
fact which renders the service that will be provided if the contract is performed in accordance
with its terms something different from the performance that the parties contemplated. This is the
type of mistake which fell to be considered in Bell v. Lever Brothers . We shall describe it as
"common mistake", although it is often alternatively described as "mutual mistake".
11.2.1 Definition
Here, the parties, although apparently in agreement, have entered into the contract on the basis of
a false and fundamental assumption. It is called common mistake since both parties make the
same mistake. The contract is not necessarily void at law in these circumstances.
The cases may be categorised as follows:
1. Mistake as to the existence of the subject matter (res extincta)
The contract will be void at common law if, unknown to the parties, the subject matter of the
agreement does not exist or has ceased to exist.
Thus, a cargo of corn, en route to London per the ‘Kezia Page', had to be sold at a port of refuge
in Tunis as it had begun to ferment. Unaware of this, the respondents agreed a sale of the corn in
London. It was held that no contract of sale had come into being as the subject matter effectively
did not exist; Couturier v Hastie (1856) 5 HLC 673. The case must be contrasted with McRae v
Commonwealth Disposals Commission (Infra).
Similarly, the parties may contract on the basis of a false assumption which underlies the
contract, as in Scott v Coulson (1903) 2 Ch 249 where the plaintiff contracted to sell to the
defendant a policy of life insurance on the life of a certain Mr Death. However, at the time of the
contract, Death was already dead. The court set aside the transaction. This case is considered by
Treitel alongside the mistake as to quality cases and reference should be made to it in that
context as well.
A statutory version of this principle is to be found in s.6 , which provides that where there is a
contract for the sale of specific goods and the goods without the knowledge of the seller have
perished at the time when the contract was made, the contract is void. (Infra)
But even where the subject matter is not in existence, the contract is not automatically void.
There are three possibilities which may have to be considered before the law of mistake:
Kyle Bay Ltd v Underwriters Subscribing under Policy 019057/08/01 [2007] EWCA Civ 57
A nightclub was gutted by arson on a nearby proprty. The club was unable to operate for over a
year and they claimed under their insurance policy for lost profits. The settlement the claimants
had been advised to sign was £108,319 less than they believed they were entitled to under the
policy.
The Court of Appeal upheld the decision of the High Court, the mistake in the compromise
agreement did not stop the contract from being performed. The Test the Court of Appeal applied
was whether the mistake rendered the subject matter of the contract essentially and radically
different from the subject matter the parties believed to exist. The answer to that in the case was
not.
Lord Justice Neuberger:
The case on mistake
On this issue, the facts are simple and were not in dispute before the Judge. The settlement for
the claimant's business interruption claim against the defendant underwriters was settled at about
£205,000 on the common assumption that the Policy was not declaration-linked, whereas it was
so linked, and, had the parties been aware of this, they would (I assume for present purposes)
have settled at a figure about 50% higher.
As the Judge said, the leading modern case in which the circumstances in which a common
mistake can vitiate a contract were considered was the decision of this court in Great Peace
Shipping Ltd –v-Ttsavliris Salvage (International) Ltd [2002] EWCA Civ 1407 , [2003] QB 679
. Relying on what Lord Phillips of Worth Matravers MR (giving the judgment of the court) said
at paragraphs [73] to [76], the Judge held that the proper test to apply in this case was whether
the mistake in question rendered the contract in issue "impossible of performance" (the
expression also used by Lord Phillips when ultimately formulating the critical question in the
Great Peace case itself at paragraph [162]). At least on the face of it, it seems difficult to quarrel
with the Judge's view that, if that is the right test, it was self-evidently not satisfied here.
Mr Butler, who appears for the claimant, runs as his main argument the contention that this test
was inappropriate in a case such as this; his alternative argument is that the test, if properly
applied, was in any event satisfied here. I should in this context refer to the decision of this court
in Brennan –v- Bolt Burdon [2004] EWCA Civ 1017 , [2005] QB 303. In that case, a personal
injuries action was settled on the common assumption that the claim form had been served out of
time, and a subsequent decision of this court showed that that assumption was wrong. The
claimant unsuccessfully sought to impeach the settlement.
In paragraph [22] of his judgment, Maurice Kay LJ gave three reasons why the Great Peace
decision gave rise to difficulties for the claimant, the first of which was that it was "quite simply
not a case of impossibility of performance. The compromise has at all times remained
performable…". Sedley LJ, however, was more concerned about the application of the
"impossibility of performance" test in cases of common mistake of law – see at paragraphs [60]
to [61]. At the end of paragraph [59], he had identified the "difficulty…in seeing how the effect
of [a common mistake of law…on an agreement by which litigation is compromised] can be
equiparated with the impossibility of a contractual venture". The third member of the court,
Bodey J, did not discuss this aspect.
In my opinion, it is unnecessary for us on this appeal to decide which view is preferable. Indeed,
I suspect that ultimately, the two approaches may essentially amount to the same thing. If the
doubts of Sedley LJ are justified, then, as Mr Butler argues, the right test is that propounded by
Steyn J in Associated Japanese Bank (International) Ltd –v- Credit du Nord SA [1989] 1 WLR
255. In a passage at p. 268F, cited and expressly approved in the Great Peace case at paragraphs
[90] and [91], Steyn J said that, in order to vitiate a contract, "the mistake must render the subject
matter of the contract essentially and radically different from the subject matter which the parties
believed to exist". He justified this at p. 268E on the basis that "the law ought to uphold rather
than destroy apparent contracts".
It appears to me that, by approving Steyn J's observations and by applying the "impossible to
perform" test, this court in the Great Peace case must have considered that the two approaches
amounted to much the same thing. In practice, the concept of impossibility of performance, at
least in a case such as this, can be said to raise an issue of definition: if one defines the contract
as the assessment of compensation under a declaration-linked policy, then it is, at least in a
sense, impossible to perform if both parties negotiate on the basis that the policy is not
declaration-linked. It seems to me, therefore, that there is much to be said for applying, as Mr
Butler argues we should, Steyn J's test in the Associated Japanese Bank case in the instant case.
In my judgment, applying that approach, the mistake in this case did not render what the parties
believed to be the "subject matter of the [Settlement agreement] essentially and radically
different" from what it actually was. The parties correctly believed that they were settling a
business interruption claim resulting from a fire at certain premises at which the claimant ran a
night club; they made no mistake as to the period of interruption or the estimated level of gross
profit, or indeed any other mistake about the claim or the nature of the cover, save that they
assumed that it was on the gross profits basis, rather than on the declaration-linked basis. The
difference between the actual and assumed subject matter of the settlement can in my view
certainly be characterised as significant, but it is not an "essential…and radical…" difference.
I suspect that it is normally not easy to say precisely why a difference such as there is in this case
is not, or indeed is, radical and essential. If that is right, this case is no exception to the norm.
However, it seems to me that the following factors strongly drive one to the conclusion that the
difference in this case was not radical or essential. In conceptual terms, once one appreciates
what was correctly assumed or agreed (as discussed in the preceding paragraph), it is hard to say
that if one corrects the one aspect which was wrongly assumed, it would radically and essentially
alter the nature of the contract. What was wrongly assumed was a detail, albeit a significant
detail, of the basis on which the Policy was written: it did not go to the validity of the Policy, the
parties, the property or nature of the business, or even the nature of the risks covered. In addition,
if it is appropriate to look at the matter in commercial terms (as I believe it is in this case at any
rate), although the claimant received some 33% less than it should have done, which is a
significant, even a substantial, reduction on its entitlement, I do not think it can fairly be
characterised as an "essentially or radically" different sum from its entitlement.
Accordingly, I think the Judge was right to dismiss the claim in so far as it was based on
common mistake. I would leave open the question whether it would, in any event, be right to
hold the settlement vitiated by mistake, given that the question of whether the Policy was
declaration-linked had been raised by the claimant and considered by the parties in the very
negotiations which resulted in the Settlement which is now sought to be impeached on the
ground of a common mistake that it was not declaration-linked.
(a) Warranty, and the construction of the contract
One party may have impliedly warranted the existence of the subject matter, as in McR ae v
Commonwealth Disposals Commission (1950) 84 CLR 377. The defendants purported to sell the
salvage rights to an oil tanker sunk on the Jourmand Reef. The plaintiffs mounted a salvage
operation and discovered that there never had been any such tanker. The High Court of Australia
held that the defendants had impliedly warranted the existence of the tanker and in breach of this
warranty were liable in damages. The defendants recovered reliance interest damages, but the
argument that the contract was void was rejected.
(b) Chitty (29th ed. 5-041) points out that there is an overlap between the doctrine of mistake,
and the doctrine of implied terms. For example, in The Great Peace (discussed below) the parties
both mistakenly believed that a vessel chartered for a salvage operation was conveniently close
to the vessel which need help. When the charterer cancelled the contract, they refused to pay a
cancellation fee on the grounds that the parties had made a mistake about the location of the
ships. The court held there had been no fundamental mistake. As in McR ae v Commonwealth
Disposals Commission , the court rejected the theory that the doctrine of mistake is based on
there being an implied term that the contract will be void if certain facts are not as the parties
believe. However, the court made clear that on facts like this, before considering whether
mistake is relevant, the court must first consider whether the contract has provided for which
parties bears the risk if the facts are not as the parties suppose.
(c) Misrepresentation
Rescission and/or damages may be available where one party has misrepresented the existence of
the subject-matter.
(d) Assumption of risk
The true construction of the contract may be that one party has assumed the risk of the subject-
matter not being in existence, e.g. if in Couturier v Hastie the purchaser had assumed the risk of
the non-existence of the com.
2. The particular problem of sales of goods
Treitel draws attention to the difficulty in sales of goods cases. In summary:
In McR ae 's case the risk of non-existence of the subject matter was thrown on one party; in this
case the defendant who was held to have warranted the existence of the goods.
Section 6 of the Sale of Goods Act 1979 provides:
“Where there is a contract for the sale of specific goods, and the goods without the knowledge of
the seller have perished at the time when the contract is made, the contract is void. “
Barrow Lane & Ballard v Phillips [1929] 1 KB 574
“Where a contract relates to specific goods which do not exist, the case is not to be treated as one
in which the seller warrants the existence of those specific goods, but as one in which there has
been failure of consideration and mistake.”
Per Wright J.
As Treitel has observed – The seller will not be held to have warranted the existence of the goods
in English law any more than the buyer will be held to have bound himself to pay for them in any
event.
“Neither party is bound and the contract can properly be called void.”
(Treitel Law of Contract (11th Edition) p. 296)
3. Mistake as to title
Treitel regards this category as falling within the concept of legal impossibility. The mistake will
nullify the consent.
The contract will be void at common law in the situation, rare today, where one party agrees to
transfer property to the other which the latter already owns and neither party is aware of this fact.
Cooper v Phibbs (1867) LR 2HL 149

The court set aside an agreement whereby A had agreed to lease a fishery to B, but unknown to
either, the fishery was already owned by B.
The use of the term ‘set aside' seems to indicate that the contract was valid at law and only
voidable in equity. ( Solle v Butcher [1950] 1 KB 671). The contract is void at law, a view
supported by Lords Atkin and Wright in Bell v Lever Bros [1932] (Infra).
4. Mistake as to quality
There is authority in the cases that a common mistake as to the quality of the subject-matter, as
opposed to its existence, is not operative at common law.
HELD: if A sells to B a painting which both parties mistakenly believe to be the work of the
famous John Constable (and therefore very valuable), but which in fact is not his work (and
therefore worth far less), the contract is valid at law, assuming the absence of actionable
misrepresentation or the other matters outlined above. The mistake concerns the quality of the
subject-matter.
Leaf was based on the earlier and rather difficult case of Bell v Lever Bros [1932] AC 161, a
decision of the House of Lords. Indeed the judgments in Bell , discussed below, are somewhat at
variance but the orthodox interpretation of the case (and the one followed in most subsequent
cases) is that a common mistake as to quality, however fundamental, can never render the
contract void at common law. Nevertheless, there are dicta in the speeches of the House of Lords
in Bell which suggest that a contract may be void if the common mistake as to quality is
sufficiently fundamental. This view was accepted by Steyn J in Associated Japanese Bank v
Credit du Nord [1988] 3 All ER 902.
5. Bell v Lever Bros Ltd [1932]
In the absence of a breach of a contractual term or misrepresentation the victim of a mistake as to

quality will generally have no remedy for a mistake as to quality rarely, if ever, renders the
contract void.
Bell v Lever Bros [1932] AC 161
In Harrison & Jones v Bunten & Lancaster [1953] 1 QB 646
A contract was upheld as valid even through both parties believed the kapok to be pure when in
fact it was not and of no use to the buyer. See also Kennedy v Panama etc Royal Mail Co (Supra)
where Blackburn J referring to the Roman law doctrine of error in substantia (mistakes of quality
going to the substance of the contract) may render a contract void. (Treitel considers this).
Bell v Lever Bros [1932] AC 161 (HL)

Bell and Snelling agreed to serve for a period of four years as Chairman and Vice-Chairman of a
Lever Bros subsidiary company. Lever Bros wished to terminate the contract early and agreed
with Bell and Snelling to pay £50,000 compensation split between them. Lever Bros then
discovered breaches by Bell and Snelling of their service contracts which would have allowed
Lever Bros to terminate the contracts without payment of compensation. There was no fraudulent
concealment on the part of Bell and Snelling and the House of Lords had to consider whether the
compensation agreements were void for mistake.
Treitel observes:
“The mistake related only to a quality of the service contracts and was not fundamental”
“The contract released is the identical contract in both cases and the party paying for the release
gets exactly what he bargained for.”
Lord Atkin.
Lord Thankerton took the view that mistake, even if it was as to a fundamental quality, was not
operative unless it related to some assumption which both parties regarded as essential.
Treitel's observations
Treitel observes that the cases and examples given (some of which follow) cannot be perfectly
reconciled but that there is a principle which runs through them:
“A thing has many qualities. A car may be black, old, fast and so forth. For any particular
purpose one or more of these qualities may be uppermost in the minds of the persons dealing
with the thing. Some particular quality may be so important to them that they actually use it to
identify the thing. If the thing lacks that quality, it is suggested that the parties have made a
fundamental mistake, even though they have not mistaken one thing for another, or made a
mistake as to the existence of the thing. The matter may be tested by imagining that one can ask
the parties, immediately after they made the contract, what its subject matter was. If, in spite of
the mistake, they would give the right answer the contract is valid at law. Thus in Bell v Lever
Bros the parties would have said, quite rightly, “We are contracting about a service agreement.”
Treitel Law of Contract (11th Edition) p292
In Nicholson & Venn v Smith-Marriott they might have said, rightly, “We are contracting about
antique table linen,” in which case the contract would be valid; or they might have said,
wrongly, “We are contracting about a Carolean relic,” in which case the contract would be
void.”
Treitel Law of Contract (11th Edition) p292
6. Lord Atkin's examples from Bell v Lever Bros Ltd
The House of Lords recognised that some mistakes as to quality could be fundamental.
“Mistake as to quality) will not affect assent unless it is the mistake of both parties and is as to
the existence of some quality which makes the thing without the quality essentially different
from the thing as it was believed to be.”
Lord Atkin, Bell v Lever Bros Ltd [1932] AC 161at 218
Treitel notes that Lord Thankerton stated that a mistake as to quality of the subject matter must
relate to:
“something which both must necessarily have accepted in their minds as an essential and integral
element of the subject matter.”
Lord Atkin then goes on to give a number of illustrations – all of which are considered in Treitel
fully.
Lord Atkin's illustrations
According to Lord Atkin a mistake as to quality will not make a contract void where:
(a) a man bought a horse mistakenly believed to be sound
(b) if he bought a dwelling house mistakenly believed to be habitable
(c) if he bought a garage on a road which was about to be starved of all traffic by the
construction of a by-pass.
(d) A buys a picture from B; both believe it to be the work of an old master and a high price is
paid. It turns out to be a modern copy.
(Treitel Law of Contract (11th Edition) p 290)
In the absence of a warranty or misrepresentation the buyer has no remedy. The contract is valid.
See Solle v Butcher where a lease was not void because the parties believed the premises to be
free from rent control. (Infra)
See also Oscar Chess v Williams [1957] 1 WLR 370 where the parties made a mistake as to a
car's age so that the buyer paid more for the car than he would have done had he known the truth.
7. Concluding thoughts: Treitel's observation
“The suggested test for determining whether a mistake is fundamental, presupposes that both
parties would give the same answer to the question “what are you contracting about”?” If they
would give different answers, the mistake, whatever else its effect may be, will not nullify
consent. A seller may intend to sell antique table linen and the buyer to buy a Carolean relic. If
the parties are thus at cross-purposes consent may be negatived.”
(Treitel Law of Contract (11th Edition) p 294)
See (Infra):
Raffles v Wichelhaus (1864) 2 H&C 906
Falck v Williams [1900] AC 176
***
11.3 Mutual Mistake
11.3.1 Definition
A mistake is said to be “mutual” where the parties misunderstand each other's intentions and are
at cross-purposes.
Unlike common mistake, in this situation the parties do not both make the same mistake
Please ensure that you read this case!
Great Peace Shipping Limited v Tsavliris (International) Limited

English Court of Appeal: Phillips MR, May and Laws LJJ: 14 October 2002
SALVAGE: CONTRACT FOR HIRE OF STAND-BY VESSEL: BELIEVED TO BE IN

CLOSE PROXIMITY: MUTUAL MISTAKE: WHETHER CONTRACT VOID AT LAW:
WHETHER CONTRACT VOIDABLE IN EQUITY
Summary
The Court of Appeal has held that there is no basis on which to rescind a contract on the grounds
of a mutual mistake where the contract is valid and enforceable at common law. In other words,
the doctrine of equitable mistake established by Lord Denning in Solle v Butcher ([1950] 1 KB
671) no longer exists. .
11.3.2 Operative mistake
A mistake which (as Treitel puts it) ‘negatives' consent does not necessarily make the contract
void. The contract will be valid in spite of the mistake if the person “so conducts himself that a
reasonable man would believe he was assenting to the terms proposed by the other party, and
that other party, upon that belief enters into a contract with him.”
Treitel goes on to say ‘that this “objective principle” is sometimes regarded as a kind of estoppel
by representation.” (which would require detriment) but that a person who invokes the “objective
principle” need only show that he has entered into the contract relying on the appearance of
contract created by the other party's conduct.
The illustration given by Treitel is that of a person who by mistake bids for the wrong lot at an
auction. The parties are not ad idem but the bidder by his conduct is prevented from relying on
the mistake.
11.3.3 Illustrations of operative mistake
Operative mutual mistake is illustrated by:
Raffles v Wichelhaus (1864) 2 H & C 906

D agreed to buy cotton from the plaintiffs ex the ship “Peerless” from Bombay. Two ships of that
name were due to leave Bombay; it seems D had in mind the ship leaving in October and P had
in mind the ship leaving in December. The court held that the transaction was too ambiguous to
be enforced as a contract.
It will be noticed that the problem in the above case is essentially one of defective offer and
acceptance, and so the test applied by the court in this type of case is to ask what a reasonable
third party would take the agreement to mean.
Would he take the agreement to mean what one party, A, understood it to mean or what the other
party, B understood it to mean. It is only when the transaction is totally ambiguous under this
objective test that the contract is void for mutual mistake.
Compare the following cases:
Wood v Scarth (1855) 2 K & J 33

D offered in writing to let a pub to the plaintiff at £63 per annum. After a conversation with the
defendant's clerk, the plaintiff accepted by letter, believing that the £63 was the only payment
under the contract. The defendant had intended that a £500 premium would also be payable and
he believed that his clerk had explained this to the plaintiff. It was held that the contract as
understood by the plaintiff would be enforced and the court awarded him damages.
Scriven v Hindley (1913) 3 KB 564

At an auction, lots of hemp and also of tow (an inferior commodity) were up for sale. The
defendants bid for two lots believing that both were for hemp whereas one was for hemp and
tow.
The bid was accepted. The defendants believed that they had bid for hemp. Their bid was about
right for hemp but extravagant for tow, although the auctioneer was unaware of the true nature of
the defendant's mistake – he thought they were ignorant of the value of tow. However, the
catalogue and samples were misleadingly described and marked, and these factors, together with
other circumstances, meant that a reasonable person could not say whether the contract was for
hemp or tow. The contract was held to be void.
Treitel Law of Contract (11th Edition) p 309 categorises this as a case of mistake negligently
induced.
See also: Tamplin v James (1880) 15 Ch D 215 where there was no misdescription in the
particulars at an auction and the mistake was due to the plaintiff's carelessness).
***
11.4 Unilateral Mistake
11.4.1 Definition
Here one party is fundamentally mistaken concerning the contract and the other party is aware of
the mistake, or the circumstances are such that he may be taken to be aware of it.
11.4.2 Operative mistake
For a unilateral mistake to be operative, the mistake by one party must be as to a fundamental
term of the contract itself, rather than an error of judgment as to the quality of the subject-matter.
The distinction is illustrated by the following pair of cases:
In the first case it was a mistake as to a term of the contract, whereas in the second it was a
mistake as to the quality of the subject matter.
Hartog v Colin and Shields (1939) 3 All ER 566

The defendants offered hare skins to the plaintiff at a certain price ‘per pound' but had intended
to offer them at the same price ‘per piece'. The value of a piece was one third that of a pound. It
was held that the circumstances were such that the plaintiffs must have realised the defendants'
error, which, as it concerned a term of the contract, rendered the contract void.
(Treitel analyses the distinction by remarking that consent is negatived if the parties intend to
contract on different terms (as in Hartog), whereas mistakes as to the person (infra) or the subject
matter ( Smith v Hughes ) only negative consent if they are fundamental.)

D was shown a sample of oats by the plaintiff. The defendant bought them in the belief that they
were “old” oats; he did not want “new” oats. They were new oats.
The court was of the view that the mistake was merely as to the quality of the subject-matter and
could not render the contract void, even if the plaintiff seller knew of the mistake.
(But if the buyer mistakenly believed that the seller had warranted that the oats were old and the
seller was aware of this mistake, the mistake would be operative.
If a sale of oats believed by one party to be warranted as ‘old' and not intended by the other party
to be so warranted the contract may be void. The mistake then would be a mistake as to the terms
of the contract and would negative consent (Treitel)).
***
11.5 Mistake as to Identity
This topic is worthy of separate analysis, classified here as a unilateral mistake and by Treitel as
a mistake negativing consent.
11.5.1 Definition
Where one party is mistaken as to the identity of the other party, in certain circumstances the
contract may be void at common law.
Almost all the decided cases of operative mistake in this area are in fact instances of unilateral
mistake, as the non-mistaken party is aware of the mistake because he has engineered it through
his own fraud.
Even where the contract is not void, it may be voidable for fraudulent misrepresentation and if
the goods which are the subject matter have passed to an innocent third party before the contract
is avoided, that third party may acquire a good title (see below for examples).
11.5.2 For the contract to be void, certain requirements must be satisfied:
The identity of the other party must be of crucial importance
Cundy v Lindsay (1878) 3 App Cas 459

The plaintiffs received an order for linen from a rogue, Blenkarn, who gave his address as 37,
Wood Street, Cheapside. In the correspondence, he imitated the signature of a reputable firm,
Blenkiron and Co, known to the plaintiffs, who traded at 123, Wood Street, Cheapside. The
plaintiffs were thus fraudulently induced to send goods to Blenkarn's address, where he took
possession of them and disposed of them to the defendants, innocent purchasers. It was held that
the contract between the plaintiffs and Blenkarn was void for mistake as the plaintiffs intended to
deal only with Blenkiron and Co. No title in the goods passed to Blenkarn (because the contract
was void) and therefore none passes to the defendants who were liable in conversion to the
plaintiffs.

Identity was held not to be crucial. Here, a rogue called North entered the plaintiff's shop and
having selected some jewellery, wrote a cheque and announced himself as Sir George Bullough
of St James' Square, a man of means of whom the plaintiff had heard. The plaintiff, having
checked this addressed in a directory, allowed North to take away a ring. He then pledged the
ring with the defendants, who had no notice of the fraud. In an action by the plaintiffs to recover
the ring from the defendants, it was held that the contract between the plaintiffs and North was
not void for mistake, because the plaintiffs had intended to contract with the person in the shop,
whoever it was. The only mistake was as to the customer's credit-worthiness, not his identity.
The contract was, however, voidable for fraud but because the defendants had acquired the ring
in good faith before the contract was sought to be set aside, they acquired good title.
Despite Phillips v Brooks , identity was held to be crucial in Ingram v Little [1961] 1 QB 31. The
plaintiffs, elderly ladies, advertised their car for sale. A rogue, calling himself P G M Hutchinson
of an address in Caterham, offered to buy it. The plaintiffs would only accept a cheque when
they had checked, from a directory, that there was such a person at that address. The cheque was
worthless and the rogue disposed of the car to the defendant, who took in good faith. It was held
that the contract between the plaintiffs and the rogue was void for mistake. The decision in this
case is very difficult to distinguish from Phillips v Brooks .
See also: Shogun Finance v Hudson [2003] UKHL 62
11.5.2 The decision in Lewis v Averay
The decision in Phillips v Brooks was followed by Court of Appeal in Lewis v Averay [1972] 1
QB 198 where the plaintiff, a post-graduate student advertised a car for sale and was visited by a
rogue posing as the actor Richard Greene, who offered to buy it. The rogue signed a cheque but
the plaintiff only allowed him to take the car away after being shown a forged studio admission
pass. The cheque was worthless and the rogue sold the car to the defendant, an innocent
purchaser. The Court of Appeal held that the contract, though voidable, was not void. The court
took the view that, where the parties are face to face, there is a presumption that a person intends
to deal with the person before him, as identified by sight and hearing. There was insufficient
evidence in this case that the plaintiff intended to deal only with the well-known actor.
11.5.3 The decision in Shogun Finance v Hudson
Cundy v Linday has come to be regarded as establishing a principle that a mistake as to identity
will be fundamental, and render the contract void, where a the parties communicate in writing;
although there may be a valid contract, regardless of a mistake as to identity, where parties deal
face to face. This principle has been confirmed by a bare majority of the House of Lords in
Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919. The judgments contain important
discussions of the doctrine of mistake general.
Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919

A rogue obtained a car on hire purchase. He pretended to be a Mr Patel – a case of ‘identity
theft.' The car dealer contacted the hire purchase company, Shogun Finance, with Mr. Patel's
details. Shogun Finance checked Mr Patel's credit, and agreed to extend finance. This involved
the finance company buying the car then renting to the ultimate customer. They thought they
were renting it to Mr Patel. They were in reality renting it to a rogue. The rogue sold it Mr
Hudson. If the contract with the rogue posing as Mr Patel was valid (if voidable for
misrepresentation) Mr Hudson got good title to the car (under Hire Purchase Act 1964 s.27). If
the contract was void, Mr Hudson got no title, and the car still belonged to the finance company.
The minority in the House of Lords thought that, contrary to Cundy v Lindsay , the fact that there
was no face to face communication between the finance company and the rogue posing as Mr
Patel did not prevent them from having a valid contract (in which case M. Hudson would be
entitled to the car). The majority followed Cundy v Lindsay and decided that a mistake as to
identity where the parties are not face to face means the contract is void. Therefore the rogue
never had good title to pass to Mr Hudson, and the finance company still owned the car.
A mistake as to identity should be distinguished from a mistake as to the capacity in which

a party deals
Hardman v Booth (1863) 1 H & C 803,

P intending to sell cloth to Thomas Gandell Co, negotiated with one Edward Gandell at the firm's
offices. Edward, an employee and not a member of the firm, intended to take possession of the
goods for his own use. Having obtained possession, he sold them to the defendant, an innocent
third party. It was held that the contract between P and Edward was void. P had believed he was
a representative of the firm and never intended to deal with him personally.
It is sometimes stated that an additional requirement for the contract to be void is that the
mistaken party must have taken reasonable steps to verify the identity of the other party. It may
be that this is more in the nature of an evidential burden to establish that the identity of the other
party is crucial.
The mistaken party must have in mind an identifiable person with whom he intends to
contract
Norton Metal Co v Edridge Merrett Co Ltd (1897) 14 TLR 98.

This requirement was not satisfied: P received a letter purporting to be from “Hallam and Co”
with an impressive letterhead. In fact Hallam was a fictitious firm consisting entirely of a rogue
named Wallis. The plaintiffs despatched goods on credit to the bogus company. The court took
the view that the plaintiffs had intended to contract with the writer of the letter, whoever it may
be, and the contract was not void for mistake. The only mistake was as to the credit-worthiness
of the other party and not as to his identity. This decision should be compared with Cundy v
Lindsay, and Shogun Finance (above), where the rogue posed as a real person who was
creditworthy.
The other party must be aware of the mistake
In the cases discussed above, identity was fraudulently misrepresented and therefore this
requirement was satisfied.
An unusual case in this context is:

Boulton v Jones (1857) 2 H&N 564.
P was employed by Brocklehurst, a pipe hose manufacturer, with whom the defendants had had
previous dealings. The plaintiff took over Brocklehurst's business and on the same day the
defendants ordered hose form Brocklehurst. The plaintiff supplied the goods but the defendants
refused to pay on the ground that they intended to contract, not with the plaintiff, but with
Brocklehurst as they wished to enforce a set-off against him. It was held that there was no
contract, although the precise state of knowledge of the plaintiff was not made clear. If the
plaintiff was unaware of the fact that the offer was not intended for him them, arguably, the
contract was valid.
11.5.5 The practice where there is a sale of goods in a Lewis v Averay situation
Sale under a voidable title: s.23 SOGA 1979
“When the seller of goods has a voidable title to them, but his title has not been avoided at the
time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith
and without notice of the seller's defect of title.”
Confirms common law rule that a person cannot avoid a voidable contract to the prejudice of
third party rights acquired in good faith and for value.
Lewis v Averay [1972] 1 QB 198 (CA)
Contrast:
Cundy v Lindsay (1878) 3 App Cas. 459
Ingram v Little [1961] 1 QB 31.
Communication of rescission –
Car & Universal Finance Ltd v Caldwell [1965] 1 QB 525

Buyers of motor vehicles are now protected by Hire Purchase Act 1964 s.27 (as amended). A
private person who buys in good faith, and without notice that there is a hire purchase, from the
bailee under a hire purchase agreement, acquires good title.
However, the buyer cannot acquire title if there is in fact no hire purchase agreement because the
supposed agreement with the bailee is void:
Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919.
Note : If the innocent third party does not acquire title under section 23 he may do so under
section 25 of the Act (Infra)
Disposition by a Buyer in Possession: S.25 SOGA 1979
“Where a person, having bought or agreed to buy goods, obtains with the consent of the seller
possession of the goods or the documents of title to the goods, the delivery or transfer, by that
person or by a mercantile agent acting for him, of the goods or the documents of title under any
sale, pledge or other disposition thereof [ or under any agreement for sale, pledge or other
disposition thereof] * to any person receiving the same in good faith and without any notice of
any lien or other right of the original seller in respect of the goods, shall have the same effect as
if the person making the delivery or transfer were a mercantile agent in possession of the goods
or documents of title with the consent of the owner.”
Consent of the seller
Du Jardin v Beadman Bros [1952] 2 All ER 160
‘Seller = owner' so it is possible therefore to obtain title down the chain from a thief. [TO –
THIEF – B1 – B2: B2 can get title.]
Having bought or agreed to buy goods
Does not apply to Hire Purchase – debtor does not agree to buy in HP: See HPA 1964 Pt.III ss.27
– 29. (Infra)
Possession of the Goods
3P only protected if obtains possession of the goods and not if he has merely bought or agreed to
buy them
Good Faith and Notice
Newtons of Wembley v Williams [1965] 1 QB 560
B in possession was not a Merc Agent. Treat him notionally as one; examine behaviour. If
behaves as [MA] would 3P gets title. If not 3P does not get title.
National Employers Mutual General Insurance Association Ltd v Jones [1990] 1 AC 24 HL
***
11.6 Common mistake: Equity
11.6.1 Introduction
Where a contract is void at common law on the ground of common mistake (e.g. existence of the
subject matter, title and quality) the court, exercising its equitable jurisdiction, may refuse
specific performance of the contract.
Alternatively, the court may rescind any contractual document between the parties, and in order
to do justice between them, impose terms.
In Cooper v Phibbs , while setting aside the lease, the House of Lords imposed a requirement
that the “lessor” should have a lien on the fishery for such money as he had spent on
improvements during the time he wrongly thought it belonged to him.
11.6.2 Where there is a mistake as top quality although the agreement is probably valid at law, it
is not voidable in equity
The case of Solle v Butcher [1950] 1 KB 671 broke new ground in that the Court of Appeal
enunciated a new doctrine of common mistake in equity under which the courts have a
discretionary jurisdiction to grant such relief as in the circumstances seems just. It will come as
no surprise to learn that Lord Denning was involved in this decision.
Other examples of this equitable jurisdiction include Grist v Bailey [1967] Ch 532 and Magee v
Pennine Insurance [1969] 2 QB 507 (again Lord Denning).
However, in Great Peace Shipping v Tsavliris Salvage (The Great Peace) [2002] EWCA Civ
1407; [2003] QB 679, the Court of Appeal declared that where the contract is valid at common
law, there is no jurisdiction to set it aside in Equity.
In The Great Peace the defendant owned a ship which was in trouble. Both defendant and
claimant believed The Great Peace was close to the ship in trouble. It was not. The defendant's
discovered this and cancelled the contract (because The Great Peace would take longer to get to
where it was needed than the charterers had anticipated). The owners of the Great Peace, the
claimant, claimed a cancellation fee. The defendants refused to pay. The owners succeed, on the
basis that the contract, although a bad deal for the charterers, was possible to perform, and
contained no warranty about the relative position of The Great Peace to the ship in trouble.
The Court of Appeal, in refusing to set aside the contract in The Great Peace, effectively, though
not formally, overrules Solle v Bucher . The Court said that the test for whether a contract is void
for mistake is in Bell v Lever Bros, and the idea in Solle v Butcher that there is an alternative,
equitable ground for ‘setting aside' a contract for mistake is inconsistent with Bell v Lever Bros ,
and is wrong.
See: Sedley Solle v Butcher bites the dust
11.6.3 Mutual mistake in equity
If the contract is void at law on the ground of a mutual mistake, equity “follows the law” and
specific performance will be refused, and any contractual document the parties have entered into,
e.g. a lease, will be rescinded. However, even where the contract is valid at law, specific
performance will be refused if to grant it would cause hardship. Thus the remedy of specific
performance was refused in a sequel to Wood v Scarth (1855), in Wood v Scarth (1858) 1 F & F
293.
11.6.4 Unilateral mistake in equity
As with mutual mistake, equity follows the law and will rescind a contractual document affected
by operative unilateral mistake or refuse specific performance.
Webster v Cecil (1861) 54 ER 812
D, having refused to sell his property to P for £2,000, wrote offering to sell it to him for £1,250.
This offer was immediately accepted. The defendant had intended to write £2,250. It was held
that the mistake was operative and specific performance was refused.
11.6.5 Mistake Relating to Documents
Non est factum
As a general rule, a person is bound by his signature to a document, whether or not he has read or
understood the document.
L'Estrange v Graucob [1934] 2 KB 394.
Where he has been induced to sign a contractual document by fraud or misrepresentation, the
transaction will be voidable.
Similarly, if one of the other forms of mistake discussed in this chapter are present, the contract
may be void.
In the absence of these factors, the plea of non est factum (not my deed) may be available
The plea is an ancient one and was originally used to protect illiterate persons. It eventually
became available to literate persons who had signed a document believing it to be something
totally different from what it actually was.
Foster v Mackinnon (1869) LRCP 704
D, a senile man with poor eyesight, was induced to sign a document which he was told was a
guarantee. In fact, it was a bill of exchange upon which the plaintiff ultimately became entitled.
It was held that D, who had not been negligent, was not liable on the bill; the plea of non est
factum succeeded.
An unrestrained right to raise the plea would lead to abuse and uncertainty and so the
courts have placed two restrictions on the right to raise the plea:
(i) the signer's mistake as to the nature of the document must be fundamental or radical, and
(ii) the signer must not have been careless in signing the document.
With regard to (i) the courts originally took the view that the plea was not available where the
signer's mistake was merely as to the contents of the document rather than as to its character or
class; Howatson v Webb [1908] 1 Ch 1. This test was not a realistic one and was substituted by
the House of Lords in Saunders v Anglia Building Society [1971] AC 1004.
The test is now that there must be a fundamental or radical difference between the document
actually signed and what the signer believed it to be.
With regard to (ii), the Court of Appeal had ruled in Carlisle and Cumberland Banking Co v
Bragg [ 1911] 1 KB 489 that negligence on the part of the signer only defeated the plea if the
document was a negotiable instrument. The distinction was illogical and Bragg's case was
overruled by Saunders; the position is now that the plea cannot be raised by a signer who has
been careless.
Saunders v Anglia Building Society [1971] AC 1004.
An elderly widow wished to transfer the title of her house to her nephew by way of gift. Her
nephew and a man named Lee prepared a document assigning the property to Lee and asked her
to sign. She signed it unread as she had lost her spectacles and trusted her nephew. Lee
mortgaged the property to the Building Society and disposed of the moneys raised for his own
use. He defaulted on the repayments and the Building Society sought possession of the house.
Saunders (the widow's executrix) sought a declaration that the assignment to Lee was void by
reason of non est factum.
In the view of both the Court of Appeal and the House of Lords, the plea could not be raised
because, (i) the transaction the widow had entered was not fundamentally different from what
she intended at the time she entered it; and (ii) she had been careless in signing the document;
she could at least have made sure that the transfer was to the person intended by her. The effect
of Saunders v Anglia Building Society is, if anything, to restrict the circumstances in which the
plea of non est factum can be successfully raised.
Rectification
Where the parties are agreed on the terms of the contract but by mistake record them incorrectly
in a subsequent written document, the remedy of rectification may be available. The court can
rectify the error and order specific performance of the contract as rectified.
The remedy is an exception to the parol evidence rule as oral evidence is admissible to show that
the written document is in error.
In order to obtain rectification the following must be established:
(i) There must be a concluded antecedent agreement upon which the written document was
based. The agreement need not necessarily be a finally binding contract, Joscelyne v Nissen
[1970] 2 QB 86.
(ii) The written document must fail to record what the parties had agreed. In Frederick E Rose
(London) Ltd v William H Pim Co Ltd [1953] 2 QB 450 the parties had contracted for the sale of
a type of horsebean and the written contract referred to “horsebeans”. The goods delivered were
not of the type the parties had in mind. Rectification was refused since the written contract
correctly recorded what the parties had agreed.
(iii) The written document must fail to express the common intention of the parties. However, if
one party mistakenly believes the document gives effect to that intention and the other party is
aware of this mistake but nevertheless is guilty of sharp practice in allowing the contract to be
executed, rectification may be ordered, A Roberts Co v Leicestershire CC [1961] Ch 555.
(iv) It must be equitable to grant the remedy; in particular, it will be refused where third parties
have acquired rights on the faith of the written contract.
Rectification is an equitable doctrine. A court can correct obvious slips of the pen under ordinary
rules of evidence, without the need to grant rectification.
A note on mistake. When approaching questions on mistake it is advisable to remember that the
law of mistake is often a last resort, i.e. there may have been an actionable misrepresentation or a
warranty which will provide the plaintiff with a remedy.
Duress and Undue Influence
There are two important cases at the foot of this section where judgments have been extracted to
give you an opportunity to read more deeply.
Barclays Bank v O'Brien [1994] AC 180

A security obtained by misrepresentation or undue influence may not be enforced – the creditor
should take pains to make sure that no unfair advantage was gained.
The Etridge case
Royal Bank of Scotland v Etridge (No . 2) [2001] UKHL 44; [2002] AC 773
Introductory
Adam Opel Gmbh and Renault SA v Mitras Automotive (UK) L:td [2008] EWHC 3205 QB
Read this case to get a feel for the subject.
David Donaldson QC sitting as a Deputy High Court judge
"The general principles of the law relating to economic duress have been elaborated over the last
forty years in a number of decided cases, and were not in issue before me. It was common
ground that they are accurately summarised by Dyson J in DSND Subsea Ltd v Petroleum Geo
Services ASA, [2000] BLR 530 at para. 131 and repeated in his later decision in Carillion
Construction Ltd v Felix (UK) Ltd, [2001] BLR 1 as follows:
"The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is
that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate,
and (c) which is a significant cause inducing the claimant to enter into the contract: see Universal
Tanking of Monrovia v. ITWF [1983] AC 336, 400 B–E, and The Evia Luck [1992] 2AC 152,
165 G.
In determining whether there has been illegitimate pressure, the court takes into account a range
of factors. These include whether there has been an actual or threatened breach of contract;
whether the person allegedly exerting the pressure has acted in good or bad faith; whether the
victim had any realistic practical alternative but to submit to the pressure; whether the victim
protested at the time; and whether he confirmed and sought to rely on the contract. These are all
relevant factors. Illegitimate pressure must be distinguished from the rough and tumble of the
pressures of normal commercial bargaining."
At common law if a party enters into a contract under duress the contract may be set aside on
ground of duress unless it has been affirmed expressly or impliedly after the duress has been
withdrawn.
Duress may take several and various forms and, in particular, may take the form of economic
duress, but whatever form it may take it must amount to a coercion of the will – such that there
was no true consent.
The court will consider a range of factors in determining whether a duress was present and, in
particular will wish to see whether the person coerced protested, whether he had an alternative
course of action available and whether he sought and took independent advice.
Shivas v Bank of New Zealand [1990] 2 NZLR 327
Prologue
The classical conception of contract at common law had as its first premise the belief that private
agreements should be enforced in accordance with their terms. The premise of course was
subject to important qualifications. Promises procured by fraud, duress or undue influence were
not generally enforced by the courts; and the same was true with certain exceptions of promises
made by infants and incompetents. Again, agreements that had as their object illegal ends were
not usually enforced, as for example, in cases of bribes of public officials or contracts to kill
third persons. Yet even after these exceptions were taken into account, there was still one ground
on which the initial premise could not be challenged: the terms of private agreements could not
be set aside because the court found them to be harsh, unconscionable or unjust. The
reasonableness of the terms of a private agreement was the business of the parties to that
agreement. True, there were numerous cases in which the language of the contract stood in need
of judicial interpretation, but once that task was done there was no place for a court to impose
upon the parties its own views about their rights and duties. ‘Public policy' was an ‘unruly horse',
to be mounted only in exceptional circumstances and with care.
This general regime of freedom of contract can be defended from two points of view. One
defence is utilitarian. So long as the tort law protects the interests of strangers to the agreement,
its enforcement will tend to maximise the welfare of the parties to it, and therefore the good of
society as a whole. The alternative defence is on libertarian grounds. One of the first functions of
the law is to guarantee individuals a sphere of influence in which they will be able to operate,
without having to justify themselves to the state or to third parties: if one individual is entitled to
do within the confines of the tort law what he pleases with what he owns, then two individuals
who operate within those same constraints should have the same right with respect to their
mutual affairs against the rest of the world.
Whatever its merits, however, it is fair to say that this traditional view of the law of contract has
been in general retreat in recent years. That decline is reflected in part in the cool reception given
to doctrines of laissez-faire, its economic counterpart, since the late nineteenth century, or at
least since the New Deal. the total ‘hands-off' policy with respect to economic matters is
regarded as incorrect in most political discussions almost as a matter of course and the same
view is taken, moreover, towards a subtle form of laissez-faire that views all government
interference in economic matters as an evil until shown to be good. Instead, the opposite point of
view is increasingly urged: market solutions – those which presuppose a regime of freedom of
contract – are sure to be inadequate, and the only question worth debating concerns the
appropriate form of public intervention.
That attitude has, moreover, worked its way (as these things usually happen) into the fabric of
the legal system, for today, more than ever, courts are willing to set aside the provisions of
private agreements.
One of the major conceptual tools used by courts in their assault upon private agreements has
been the doctrine of unconscionability. That doctrine has a place in contract law, but it is not the
one usually assigned it by its advocates. The doctrine should not, in my view, allow courts to act
as roving commissions to set aside those agreements whose substantive terms they find
objectionable.
‘Unconscionability: A critical reappraisal'

Epstein (1975) 18 J Law & Econ 293. 293-294
Concept
The agreement may be the result of some improper and excessive pressure exerted by one party
over the other. The problem is dealt with by the common law doctrine of duress and the equitable
doctrine of undue influence. These will be discussed in turn.
15.1 Duress
15.1.1 Definition and scope
Duress is a common law concept which, if established, renders the contract voidable.
The scope of duress at common law was originally very narrow and confined to actual or
threatened unlawful physical violence or constraint of the other party.
Thus in an Australian case:
Barton v Armstrong [1975] 2 All ER 465

A threatened to have B killed if he did not buy A's shares in a company of which B was the
managing director. The majority of the Privy Council held that the agreement was vitiated by
duress.
Latter v Bradell (1880) 50 LJCP 166
Consent was not vitiated where no physical violence was threatened or inflicted – a housemaid
had protested at being required to take a medical examination.
15.1.2 Juridical basis of duress
Originally the courts refused to recognise “duress of goods”, i.e. a threat to damage a person's
property as constituting duress.
However, it is now recognised that the doctrine extends to goods: in The Siboen [1976]) 1
Lloyd's Rep 293, Kerr J said, obiter, that a person coerced into a contract by the threat of having
his house burnt down or a picture slashed could plead duress.
For conduct to amount to duress the threat must be illegitimate because the threat is wrongful or
that what is threatened is a legal wrong – or because it is contrary to public policy.
See The Olib [1991] 2 Lloyd's Rep 108
The basis of duress is an unlawful threat amounting to “coercion of the will”.
15.1.3 Pao On v Lau Yiu Long
Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65

P threatened to break a contract unless they were given an indemnity to cover the loss arising as
a result of entering into the contract. There was no duress or coercion of the will. The guarantee
was not vitiated by duress. HELD: Lord Scarman said that in determining whether there was
coercion of the will such that there was no consent, it is material whether the person alleged to
have been coerced (i) did or did not protest, (ii) whether at the time he did or did not have an
alternative course open to him such as an adequate legal remedy, (iii) whether he was
independently advised, (iv) whether after entering the contract he took steps to avoid it. These
are all matters relevant in considering whether the plaintiff acted voluntarily or not.
Lord Scarman:
Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. Their Lordships
agree with the observation of Kerr J. in The "Siboen" and the "Sibotre" [1976] 1 Lloyd's Rep.
293 at p. 336 that in a contractual situation commercial pressure is not enough. There must be
present some factor " which could in law be regarded as a coercion of his will so as to vitiate his
consent": loc. cit. This conception is in line with what was said in this Board's decision in Barton
v. Armstrong [1976] A.C. 104 at p. 121 by Lord Wilberforce and Lord Simon of Glaisdale—
observations with which the majority judgment appears to be hi agreement. In determining
whether there was a coercion of will such that there was no true consent, it is material to inquire
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, as was recognised in
Maskell v. Homer [1915] 3 K.B. 106, relevant in determining whether he acted voluntarily or
not.
In the present case there is unanimity amongst the judges below that there was no coercion of
Lau's will. In the Court of Appeal the trial judge's finding (already quoted) that Lau considered
the matter thoroughly, chose to avoid litigation, and formed the opinion that the risk in giving the
guarantee was more apparent than real was upheld. In short, there was commercial pressure, but
no coercion. Even if this Board was disposed, which it is not, to take a different view, it would
not substitute its opinion for that of the judges below on this question of fact.
It is, therefore, unnecessary for the Board to embark upon an inquiry into the question whether
English law recognises a category of duress known as " economic duress ". But, since the
question has been fully argued in this appeal, their Lordships will indicate very briefly the view
which they have formed. At common law money paid under economic compulsion could be
recovered in an action for money had and received: Astley v. Reynolds (1731) 2 Str. 915. The
compulsion had to be such that the party was deprived of " his freedom of exercising his will" (at
p. 916). It is doubtful, however, whether at common law any duress other than duress to the
person sufficed to render a contract voidable: see I Blackstone's Commentaries 12th ed. pp. 130-
131 and Skeate v. Beale (1841) 11 Ad. and E. 983. American law (Williston, op. cit.) now
recognises that a contract may be avoided on the ground of economic duress. The commercial
pressure alleged to constitute such duress must, however, be such that the victim must have
entered the contract against his will, must have had no alternative course open to him, and must
have been confronted with coercive acts by the party exerting the pressure: Williston, op. cit.
paragraph 1603. American judges pay great attention to such evidential matters as the
effectiveness of the alternative remedy available, the fact or absence of protest, the availability of
independent advice, the benefit received, and the speed with which the victim has sought to
avoid the contract. Recently two English judges have recognised that commercial pressure may
constitute duress the pressure of which can render a contract voidable: Kerr J. in The Siboen
(supra) and Mocatta J. in North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd.
[1978] 3 All E.R. 1170. Both stressed that the pressure must be such that the victim's consent to
the contract was not a voluntary act on his part. In their Lordships' view, there is nothing
contrary to principle in recognising economic duress as a factor which may render a contract
voidable, provided always that the basis of such recognition is that it must amount to a coercion
of will, which vitiates consent. It must be shown that the payment made or the contract entered
into was not a voluntary act.
15.1.4 Economic Duress
There are a number of recent cases in which the courts have recognised a doctrine of “economic
duress”.
This may occur where parties are already in an existing contractual relationship and one party
takes advantage of the plight of the other to renegotiate the contract on terms advantageous to
himself.
North Ocean Shipping Co Ltd v Hyundai Construction Ltd (The Atlantic Baron) [1979] QB 705
A contract was made to build an oil tanker for an agreed price. The dollar was devalued and the
shipbuilders refused to complete unless the buyer promised to pay a further ten per cent. The
buyer agreed and made the payment as the ship was urgently needed to fulfil a charter. At this
point it will be noticed that the facts resemble Stilk v Myrick (see under “Consideration”)
however in this case the judge (Mocatta J) found a technical consideration in the fact that the
shipyard had increased a letter of credit. Nevertheless it was held that the payment could in
principle be recovered on the ground of duress, although the buyers had lost their right to
rescind. They had paid the money and made no further protest until several months after taking
delivery of the ship – this was held to constitute an affirmation. In effect the buyers had
complained too late. j
The parties need not, of course, already be in an existing contractual relationship for economic
duress to arise. In Universe Tankships of Monrovia v ITTF (The Universe Sentinel) [1983] 1 AC
366, the plaintiff's ship was “blacked” by a trade union, and in order to secure its release from
blacking, the plaintiffs paid a sum of money into the union's welfare fund. A majority of the
House of Lords held that the agreement was vitiated by economic duress.
The Evia Luck [1990] 1 Lloyd's Rep 319
Threatened blacking of a ship in Sweden (in a contract governed by English Law) rendered a
contract voidable for economic duress despite being legal in Sweden.
15.1.5 Commercial pressure/threats do not amount to duress merely because what is threatened is
a legal wrong
Treitel gives the illustration of a party entering into a new contract after a threat to break an
earlier contract.
D&C Builders v Rees [1966] 2 QB 617
A part payment was accepted in full settlement in circumstances where there was an economic
duress.
Pau On v Lau Yiu Long makes it clear that it will not necessarily be the case that any threat to
break a contract will amount to a duress.
15.1.6 The dividing line
The dividing line between economic duress and what has been called “hard and fair bargaining”
or mere commercial pressure will always be difficult to draw and will turn on detailed findings
of fact by the court – see, for example, Atlas Express Ltd v Kafco (Importers and Distributors)
Ltd [1989] QB 833; [1989] 3 WLR 389.
Finally, it should be noted that (as with misrepresentation) duress need not be the only or main
reason for the plaintiff entering the contract in order for the contract to be vitiated; Barton v
Armstrong [1975] 2 All ER 465.
***
15.2 Undue Influence
15.2.1 Concept
The narrow scope of the common law doctrine of duress led to the development, in equity, of the
doctrine of undue influence. The doctrine applies to certain situations where improper pressure
(not amounting to duress at common law) was brought to bear on a party to enter a contract.
The effect of undue influence is to render the contract voidable.
15.2.2 The classes of case
There are two classes of case which fall within the doctrine; first, where there is no special
relationship between the parties in which case undue influence must be proved, and secondly,
where, because of the relationship between the parties, there is a ‘presumption' of undue
influence.
15.2.3 No special relationship

These cases are sometimes called cases of Class 1 undue influence. Where there is no special
relationship between the parties, the plaintiff must establish that the defendant exerted
dominating influence over the plaintiff which he used to extract an advantageous bargain. The
modern law of duress overlaps with this class of case.
Williams v Bayley (1866) LR 1 HL 200
A young man forged his father's signature on some promissory notes and presented them to a
bank, who discovered the forgery. At a meeting between the bank, the father and the son, the
bank threatened to prosecute the son unless some satisfactory arrangement could be arrived at,
and the possible penalty of transportation for life was referred to. As a result, the father entered
into an agreement to mortgage his property to pay for the notes. The House of Lords set aside the
agreement on the grounds of undue influence – the father could not be said to have entered the
agreement voluntarily. Note that this is not a case of duress because the threat here is not in itself
unlawful, i.e. to report a person for a criminal offence.
It would seem that in this type of case, the plaintiff must establish actual coercion or that the
defendant exercised such domination or control that the plaintiff's independence of decision was
substantially undermined. Many of the cases under this heading involve gifts, not contracts,
although the principles are the same.
15.2.4 Where there is a special relationship
A transaction may be set aside on the ground that a presumption of undue influence arises from
the nature of the relationship between the parties.
Sometimes called class 2A undue influence, the presumption applies to the following
relationships – parent and child; guardian and ward; solicitor and client; trustee and beneficiary;
religious adviser and disciple; principal and agent. It will be noticed that in all these relationships
trust or confidence is reposed by one party in another to such a degree that the former becomes
defendant on the latter. (In spite of this, or perhaps because of it, it seems that the presumption
does not apply between a husband and wife!)
However there is a category sometimes called class 2B undue influence, where it has to be
proved on the facts that a relationship of undue influence existed. The list of such special or
“fiduciary” (based on good faith) relationships is not closed. Thus even where the relationship
does not fall into one of recognised classes above, it is possible to establish that the presumption
arises from the particular facts. Thus “... in any case where one person turns to another for
advice, or assistance, and the court thinks that the relationship of the parties, for example, their
relative ages, or experience, or blood relationship, is such as to require confidence and good
faith, the duty not to abuse that confidence may be imposed” (Atiyah).
In Lloyd's Bank v Bundy [1975] QB 326, the Court of Appeal applied these principles to a bank
and one of its customers. An elderly farmer gave the bank a guarantee in respect of his son's
overdraft and mortgaged the farmhouse to the bank as security. It was clear that the farmer had
placed himself entirely in the hands of the assistant bank manager and had been given no
opportunity to seek independent advice. On the particular facts of the case, the transaction was
set aside.
National Westminster Bank v Morgan [1985] AC 686

The House of Lords made it clear that the presumption of undue influence does not arise from
the mere relationship of banker and customer.

The orthodox view is that the presumption may be rebutted by showing that there was no undue
influence. However, the cases show that a transaction falling into this category may be set aside
even though the conduct of the defendant falls well short of “domination” or “undue influence”.
Thus in Goldsworthy v Brickell [1987] 1 All ER 853 the plaintiff was an eighty-five year old
farmer, who owned a valuable farm, and he came to trust and depend on the defendant, a
neighbouring farmer, for help and advice. There was no personal domination as the plaintiff was
fit and active with a strong personality. Nevertheless it was held that there was a presumption of
undue influence in the relationship between them. An agreement whereby the plaintiff let his
farm to the defendant on very favourable terms was set aside.
15.2.5 Rebutting the presumption
What, then is the effect of establishing that a presumption of undue influence arises? The
position is that unless the presumption is rebutted, the transaction is liable to be set aside.
The presumption of undue influence can be rebutted if it can be proved that the transaction was
entered into with free will.
It was established in Goldsworthy v Brickell that if, despite the suspicious circumstances, the
transaction was a truly spontaneous act of free will, this may rebut the presumption. It must be
proved that the ‘weaker' party fully understood and intended the transaction that was in fact
entered into.
The burden of proving that the necessary relationship exists the burden of proving that it does
exist is on the party seeking to set the transaction aside.
Lloyd's Bank v Bundy [1975] QB 326
If the claimant received competent advice from an independent third party adviser then this may
be sufficient to rebut the presumption. But the mere existence of independent advice may not be
enough; in Inche Noriah v Sheik Allie Bin Omar (1929) AC 127 an aged widow who gave away
almost the whole of her property to her nephew had consulted a solicitor but the solicitor was not
fully aware of the circumstances, nor did he advise her that she could equally well have benefited
her nephew by will.
15.2.6 The Etridge case
The House of Lords heard eight mortgage cases of which seven were typical: a husband in
business had borrowed money from the bank, and the bank had taken a mortgage on his house,
which involved the wife signing away her rights. When the husband's business failed the bank
tried to repossess the house, and the wife (with the husband probably agreeing) argued that her
husband had exercised undue influence in persuading her to sign. If they could persuade the
court to set aside the transaction between bank and wife, the couple might be able to keep their
home.
In several cases following O'Brien, a wife (who after all had wanted and ‘benefited' from the
bank loan to the husband) succeeded in setting aside a mortgage transaction. The banks felt the
situation was unfair, and was an obstacle to lending. The House of Lords looked again at the
question of how much banks should do to ensure they were not ‘caught out' by this type of case.
The relationship between husband and wife is not one where there is an automatic and
irrebutable presumption of undue influence (class 2A), but is one where it is sometimes possible
to prove in particular cases that the couple had the type of relationship where there was a
rebuttable presumption (class 2B).
Some dicta in the case cast doubt on the distinction between class 2A and 2B, although the
leading speech by Lord Nicholls seems to recognize it. In any event, the case is really about class
2B situations.
From the point of view principle the important point is encapsulated in the following quotation
from Lord Nicholls: “Proof that the complainant placed trust and confidence in the other party in
relation to the management of the complainant's financial affairs, coupled with a transaction
which calls for explanation, will normally be sufficient, failing satisfactory evidence to the
contrary, to discharge the burden of proof. On proof of these two matters the stage is set for the
court to infer that, in the absence of a satisfactory explanation, the transaction can only have been
procured by undue influence.” So – a three stage test: 1. prove trust and confidence in relation to
financial affairs; 2. prove the transaction was one which calls for explanation – that there was
something unusual about it which should have place the bank on enquiry; 3. since an explanation
is called for, can a satisfactory explanation of the transaction be given?
The case goes on to give practical advice about the kind of advice the wife would have needed to
ensure that they were not acting under undue influence, and on this score clarifies and in effect
replaces the guidelines given in O'Brien. In particular their Lordships thought that the solicitor
should check the wife is happy to take advice from him or her, and if so, it is usually sufficient
for the solicitor to warn the wife of the risks. They also stated that it usually an unnecessary
expense for the wife to have a separate solicitor. They rejected the suggestion that the solicitor is
the bank's agent. And they gave advice on ensuring that communication between bank and wife
and her solicitor was effective.
Their Lordships suggested that it was hard decide in which cases the bank was put on enquiry,
and that in any case where one person was in effect guaranteeing the debts of another, the same
precautions should be applied.
15.2.7 Remedy for undue influence is Rescission: bars to rescission
The remedy for a plaintiff who has entered into a contract tainted by undue influence is
rescission of the contract. The remedy may be lost in two ways:
(i) Affirmation
If, after the undue influence has ceased, the influenced party expressly or impliedly affirms the
transaction, the right to rescind will be lost. It seems that a private, secret mental reservation not
to affirm will not suffice. The most significant factor will be the lapse of time after the
termination of the influence. In Allcard v Skinner (1887) 36 Ch D 145, the plaintiff, under the
influence of the defendant spiritual adviser, gave a large sum of money to the defendant. Six
years after leaving the religious order in question the plaintiff sought to recover the money but it
was held that her claim was barred by delay.
(ii) Third party rights
If third party rights have intervened, for example by a resale of the property which is the subject-
matter of the contract, rescission will not be available. Of course, if the third party is actually
aware of the undue influence then the transaction which he has entered into will be likewise
tainted and will also be voidable; Bridgeman v Green (1757) Wilm 58.
15.3 Inequality of Bargaining Power
There is no doubt that the cases just discussed on undue influence are part of a wider principle of
fairness in contract bargaining. A similar type of case is the “unconscionable bargain”.
Fry v Lane (1888) 40 Ch D 312
It was held that where a purchase is made from a poor and ignorant person at a considerable
undervalue, the vendor having had no independent advice, the court has an equitable jurisdiction
to set the contract aside. I
Cresswell v Potter [1978] 1 WLR 225
The doctrine was applied to a post office telephonist, who, being a member of the ‘lower income
group' and ‘less highly educated' was held to be the modern equivalent of poor and ignorant!
Lloyd's Bank v Bundy [1975] QB 326

Lord Denning M R had sought to establish a single doctrine whereby all the instances where the
courts intervene to set aside unconscionable transactions (including duress and undue influence)
are based on a single unifying principle, namely, “inequality of bargaining power”.
However, in National Westminster Bank v Morgan [1985] AC 686 the House of Lords refused to
accept such a wide principle. Lord Scarman said, “... there is no precisely defined law setting
limits to the equitable jurisdiction of a court to relieve against undue influence.”
Legislation has gone some way to prevent abuse of unequal bargaining power. On the other hand
the English courts have been slow to increase the scope for redressing ‘unfairness' at common
law. In this respect many civilian law jurisdictions, and many United States jurisdictions offer far
greater protection to the weaker party to a bargain. To a lesser extent this is also true in
Commonwealth jurisdictions, which have developed the remedial constructive trust, a concept
not recognized in English law.
TWO CASE STUDIES

Lord Justice Scott
The present law
The post Avon Finance v. Bridger cases are not easy to reconcile with one another. They were
all, bar Coldunell v. Gallon and Bank of Baroda v. Shah, cases of wives becoming sureties or
giving security for their husband's debts. In pings North Trust v. Bell and Barclays Bank v.
Kennedy the creditor was held disentitled to enforce the security. The vitiating feature was undue
influence or misrepresentation on the part of the debtor unknown to the creditor. In neither case
was there any explicit finding that the debtor was acting as agent for the creditor. In both cases a
finding of "agency" would, to my mind, have been highly artificial. In both cases the creditor had
left it to the debtor husband to deal with the surety, his wife, and had done nothing to satisfy
itself that she understood what she was doing or to protect her from abuse by the debtor of the
influence and reliance that would be likely to be present. The two cases are, in my opinion, in
line with the earlier authorities. So too is Avon Finance v. Bridger, save that it extended a
principle previously confined to the husband/wife cases to a case of parents giving security for
the debts of their son.
Coldunell v. Gallon is somewhat of a halfway house. In expressing the view that the son's acts
alone would not, without the creditor's knowledge or authority, prejudice the enforceability of
the security, Oliver L.J. was expressing the general principle applicable to cases in which the
relationship between the third party surety and the debtor is a matter of irrelevance to the
creditor. But in a later remark Oliver L.J. said that the law should not "require [the lender] to do
more than fairly point out to the guarantor the desirability of obtaining independent advice". This
requirement is not present in the law of suretyship generally. It may be, therefore, that Oliver L.J.
was recognising that there are classes of sureties for whom special protection should be given,
that the case fell within the class, but that, on the facts, the creditor had done enough to prevent
any equitable intervention in aid of the surety.
Midland Bank plc v. Perry, Bank of Baroda v. Shah and Bank of Credits Commerce International
v. Aboody were cases in which, in effect, the same rules were applied as would have been
applicable regardless of any special relationship between surety and debtor. In Bank of Baroda v.
Shah there was no relationship between sureties and debtor, at least none known to the creditor,
that would have justified any special protection. In Bank of Credit & Commerce International v.
Aboody, the point was, strictly, immaterial because the court had, on other grounds, found
against the surety. But Perry is, in my opinion, inconsistent with the pre Avon Finance v. Bridger
line of authorities and, also, with Barclays Bank v. Kennedy. It does not recognise wives who
provide security for their husband's debts as requiring from courts of equity any different
approach from that applicable to sureties generally. Absent notice or agency whereby a creditor
may be affected by the debtor husband's improprieties towards his wife, the surety, the creditor is
not concerned with what has passed between debtor and surety and need not concern itself with
whether or not the surety understands the transaction, notwithstanding the relationship between
the surety and the debtor and the creditor's knowledge of it.
Midland Bank v. Shepherd, too, does not treat wives who become sureties for their husband's
debts any differently from other sureties. But neither had Howes v. Bishop or Talbot v. von Boris
done so. None of these cases, however, involved any charge over property.
These authorities seem to me to leave the developing law, if not at the crossroads, at least at the
junction of two diverging roads. One road would treat the special protection previously provided
by equity for married women who provide security for their husband's debts as now of only
historical interest. The analysis provided by Slade L.J. in Bank of Credit & Commerce
International v. Aboody would be comprehensive. Third party security taken by creditors would
be impeachable on account of misrepresentation or undue influence by the debtor only if the
creditor had knowledge of the relevant facts or if the debtor had been acting as the agent of the
creditor. A true agency would be necessary, not a spurious finding of agency in order to enable
apparent justice to be done in hard cases. The creditor would not be concerned with the question
whether or not the surety had an adequate understanding of the transaction. The surety would
have to look after himself or herself, as most sureties have always had to do. The foundations of
this road would have been laid by Coldunell v. Gallon, Midland Bank plc v. Perry, Bank of
Baroda v. Shah and Bank of Credit & Commerce International v. Aboody.
Travellers along the other road would recognise that, for the historical reasons identified by
Dixon J., equity has in the past treated married women differently and more tenderly than other
third parties who provide security for the debts of others. They would notice that Avon Finance
v. Bridqer had added to the protected class a case in which vulnerable elderly parents had agreed
to provide security for the debts of their adult son. And they would, I think, conclude that, if a
protected class is to continue to be recognised, the class ought, logically, to include all cases in
which the relationship between the surety and the debtor is one in which influence by the debtor
over the surety and reliance by the surety on the debtor are natural and probable features of the
relationship. In cases falling within this protected class, security given by the surety would, in
certain circumstances, be unenforceable notwithstanding that the creditor might have had no
knowledge of and not have been responsible for the vitiating feature of the transaction. Turnbull
v. Duval, Chaplin v. Brammall, Avon Finance v.. Bridqer, Kings North Trust Ltd. v. Bell, and
Barclays Bank v. Kennedy all, in my opinion, provide support for this road.
In cases falling within this protracted class, equity would hold the security given by the surety to
be unenforceable by the creditor if:
(i) the relationship between the debtor and the surety and the consequent likelihood of influence
and reliance was known to the creditor; and
(ii) the surety's consent to the transaction was procured by undue influence or material
misrepresentation on the part of the debtor or the surety lacked an adequate understanding of the
nature and effect of the transaction; and
(iii) the creditor, whether by leaving it to the debtor to deal with the surety or otherwise, had
failed to take reasonable steps to try and ensure that the surety entered into the transaction with
an adequate understanding of the nature and effect of the transaction and that the surety's consent
to the transaction was a true and informed one.
These requirements emerge, in my opinion, from the authorities to which I have referred.
The choice between the two roads cannot, in my opinion, be made simply by reference to
binding authority. Binding authority can be found to justify either. The choice should, I think, be
a matter of policy. Ought the law to treat married women who provide security for their
husband's debts, and others in an analogous position, as requiring special protection? The
position of married women today, both generally and vis-a-vis their husbands, is very different
from what it was when the equitable principles underlying Turnbull v. Duvall and Chaplin v.
Brammall were being formulated. It is arguable that married women no longer need the
protection afforded to them by cases like these. Many women, it is true, do not. But the tendency
in households for business decisions to be left to the husband and for the wife, whether or not she
is a joint owner of the matrimonial home and whether or not she has a separate job, to have the
main domestic responsibilities still persists. And in the culturally and ethnically mixed
community in which we live, the degree of emancipation of women is uneven. The likelihood of
influence by a husband over his wife and of reliance by a wife on her husband to make the
business decisions for the family was the justification in the first place for the tenderness of
equity towards married women who gave their property as security for their husband's debts. In
my opinion, that justification is still present. I, for my part, would take the second of the two
roads. I would treat the old authorities pre Avon Finance v. Bridger as still good law.
There is an additional reason for doing so. None of the modern cases has, in terms, overruled
these authorities. None has explicitly stated that married women who provide security for their
husband's debts are in no different position from other sureties. It is unsatisfactory that a long
and established line of authority should be treated as overruled sub silentio.
Each case within the protected class must, in the end, depend on its own facts. But I would
regard a clear written recommendation to the surety to take independent advice before signing
the security document as advisable in most cases. I would regard it as inadvisable for the security
document to be sent to the surety for signature unless accompanied by a recommendation to that
effect. I would regard it as particularly inappropriate for the creditor simply to entrust the
security document to the debtor with a view to the debtor obtaining the surety's signature. If the
surety is invited to sign the security document in the creditor's offices, the creditor should, before
the document is signed, explain its nature and effect to the surety. The background to all of this is
knowledge on the part of the creditor that security is being taken from the surety for the benefit
of the debtor and that the surety is a person who is likely to be influenced by and to have some
degree of reliance on the debtor. In these circumstances the creditor should be seeking to ensure
that unfair advantage is not taken of the surety. If, however, a creditor has taken reasonable steps,
such as advising the surety to take independent advice, or, if the surety declines to do so, offering
a fair explanation of the security document before the surety signs it, I can see no reason why
equity should intervene.
It goes without saying that if the debtor has employed undue influence or misrepresentation in
order to persuade the surety to enter into the transaction and the creditor has knowledge that this
has happened, the security will be unenforceable. It will be unenforceable also if the facts justify
a finding that the debtor has been appointed the creditor's agent. The debtor's misfeasance will
then be the creditor's misfeasance. But this, I think, will, in the class of case I am considering, be
very rare. Banks, building societies and finance houses do not appoint their debtors as their
agents for the purpose of procuring additional security. They may, and often do, inform their
debtors that loan facilities will be available if certain security can be provided. They may, and
often do, leave it to the debtors to see if they can procure the additional security. But, in my
opinion, that is no basis for an inference of agency.
Cases like Howes v. Bishop, Talbot v. von Boris, and Midland Bank v. Shepherd, in which wives
became contractually bound in support of their husband's debts but did not provide any security
over their property, stand a little aloof from the principles I have been discussing. Cases like
Turnbull v. Duval, Bank of Montreal v. Stuart, Kings North Trust v. Bell and Barclays Bank v.
Kennedy all relate to charges given by wives over their own property. The present case, too, is
such a case. The historical reasons underlying the emergence of these principles, as explained by
Dixon J., may explain why cases, in which there had been no disposition of property by the
surety wife but merely the acceptance by her of a contractual obligation to pay her husband's
debts, did not attract the same approach as the cases in which security over property had been
given. Chaplin v. Brammall is, however, an exception. It is not necessary for us in the present
case to decide whether this distinction is a legitimate one and I do not think we should assume to
do so. Promissory notes are bills of exchange to which special rules are applicable. Contractual
liability on a joint account on which an overdraft is to be allowed need not attract the same
attention as the grant of a charge over property. I do not think we should decide, in the present
case, more than we need. In any event, Howes v. Bishop, Talbot v. von Boris and Midland Bank
v. Shepherd are binding on us and, if the cases in which security over property has been given
are set to one side, there are no counter authorities which weaken their authority, save, perhaps,
Chaplin v. Brammall.
There is one final comment I would make. In a case of the class I have been considering, the
creditor will often, I think, find itself in a position of having to explain the security transaction to
the proposed surety if an unimpeachable security is to be obtained. The creditor should not, in
my opinion, be taken in so doing to have assumed a duty of care. If the surety is a customer or if
the creditor assumes the role of advisor, it may be that the creditor will be found to have owed a
contractual or tortious duty of care to the surety. Midland Bank plc v. Perry is an example. But if
there is no more than that the creditor, in an attempt to satisfy itself that the surety properly
understands the proposed transaction and that the transaction will not subsequently be
impeachable, offers an explanation of the transaction and of the security document, I do not think
that the creditor should be taken to have assumed a tortious duty of care. If the explanation was
inadequate, the security might not be enforceable but it would not follow that liability in
damages would attach. As I have already observed, equity ought not to place creditors in the
dilemma of having to choose between, on the one hand, risking the security being unenforceable,
and, on the other hand, undertaking a duty of care.
The Etridge case
Equity identified broadly two forms of unacceptable conduct. The first comprises overt acts of
improper pressure or coercion such as unlawful threats. Today there is much overlap with the
principle of duress as this principle has subsequently developed. The second form arises out of a
relationship between two persons where one has acquired over another a measure of influence, or
ascendancy, of which the ascendant person then takes unfair advantage. An example from the
19th century, when much of this law developed, is a case where an impoverished father prevailed
upon his inexperienced children to charge their reversionary interests under their parents'
marriage settlement with payment of his mortgage debts: see Bainbrigge v Browne (1881) 18 Ch
D 188.
#
In cases of this latter nature the influence one person has over another provides scope for misuse
without any specific overt acts of persuasion. The relationship between two individuals may be
such that, without more, one of them is disposed to agree a course of action proposed by the
other. Typically this occurs when one person places trust in another to look after his affairs and
interests, and the latter betrays this trust by preferring his own interests. He abuses the influence
he has acquired. In Allcard v Skinner (1887) 36 Ch D 145, a case well known to every law
student, Lindley LJ, at p 181, described this class of cases as those in which it was the duty of
one party to advise the other or to manage his property for him. In Zamet v Hyman [1961] 1
WLR 1442, 1444-1445 Lord Evershed MR referred to relationships where one party owed the
other an obligation of candour and protection.
#
The law has long recognised the need to prevent abuse of influence in these 'relationship' cases
despite the absence of evidence of overt acts of persuasive conduct. The types of relationship,
such as parent and child, in which this principle falls to be applied cannot be listed exhaustively.
Relationships are infinitely various. Sir Guenter Treitel QC has rightly noted that the question is
whether one party has reposed sufficient trust and confidence in the other, rather than whether
the relationship between the parties belongs to a particular type: see Treitel, The Law of
Contract, 10th ed (1999), pp 380-381. For example, the relation of banker and customer will not
normally meet this criterion, but exceptionally it may: see National Westminster Bank Plc v
Morgan [1985] AC 686, 707-709.
#
Even this test is not comprehensive. The principle is not confined to cases of abuse of trust and
confidence. It also includes, for instance, cases where a vulnerable person has been exploited.
Indeed, there is no single touchstone for determining whether the principle is applicable. Several
expressions have been used in an endeavour to encapsulate the essence: trust and confidence,
reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on
the other. None of these descriptions is perfect. None is all embracing. Each has its proper place.
#
In CIBC Mortgages Plc v Pitt [1994] 1 AC 200 your Lordships' House decided that in cases of
undue influence disadvantage is not a necessary ingredient of the cause of action. It is not
essential that the transaction should be disadvantageous to the pressurised or influenced person,
either in financial terms or in any other way. However, in the nature of things, questions of
undue influence will not usually arise, and the exercise of undue influence is unlikely to occur,
where the transaction is innocuous. The issue is likely to arise only when, in some respect, the
transaction was disadvantageous either from the outset or as matters turned out.
Burden of proof and presumptions

#
Whether a transaction was brought about by the exercise of undue influence is a question of fact.
Here, as elsewhere, the general principle is that he who asserts a wrong has been committed must
prove it. The burden of proving an allegation of undue influence rests upon the person who
claims to have been wronged. This is the general rule. The evidence required to discharge the
burden of proof depends on the nature of the alleged undue influence, the personality of the
parties, their relationship, the extent to which the transaction cannot readily be accounted for by
the ordinary motives of ordinary persons in that relationship, and all the circumstances of the
case.
#
Proof that the complainant placed trust and confidence in the other party in relation to the
management of the complainant's financial affairs, coupled with a transaction which calls for
explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to
discharge the burden of proof. On proof of these two matters the stage is set for the court to infer
that, in the absence of a satisfactory explanation, the transaction can only have been procured by
undue influence. In other words, proof of these two facts is prima facie evidence that the
defendant abused the influence he acquired in the parties' relationship. He preferred his own
interests. He did not behave fairly to the other. So the evidential burden then shifts to him. It is
for him to produce evidence to counter the inference which otherwise should be drawn.
#
The case of Bainbrigge v Browne, 18 Ch D 188, already mentioned, provides a good illustration
of this commonplace type of forensic exercise. Fry J held, at p 196, that there was no direct
evidence upon which he could rely as proving undue pressure by the father. But there existed
circumstances 'from which the court will infer pressure and undue influence.' None of the
children were entirely emancipated from their father's control. None seemed conversant with
business. These circumstances were such as to cast the burden of proof upon the father. He had
made no attempt to discharge that burden. He did not appear in court at all. So the children's
claim succeeded. Again, more recently, in National Westminster Bank Plc v Morgan [1985] AC
686, 707, Lord Scarman noted that a relationship of banker and customer may become one in
which a banker acquires a dominating influence. If he does, and a manifestly disadvantageous
transaction is proved, 'there would then be room' for a court to presume that it resulted from the
exercise of undue influence.
#
Generations of equity lawyers have conventionally described this situation as one in which a
presumption of undue influence arises. This use of the term 'presumption' is descriptive of a shift
in the evidential onus on a question of fact. When a plaintiff succeeds by this route he does so
because he has succeeded in establishing a case of undue influence. The court has drawn
appropriate inferences of fact upon a balanced consideration of the whole of the evidence at the
end of a trial in which the burden of proof rested upon the plaintiff. The use, in the course of the
trial, of the forensic tool of a shift in the evidential burden of proof should not be permitted to
obscure the overall position. These cases are the equitable counterpart of common law cases
where the principle of res ipsa loquitur is invoked. There is a rebuttable evidential presumption
of undue influence.
#
The availability of this forensic tool in cases founded on abuse of influence arising from the
parties' relationship has led to this type of case sometimes being labelled 'presumed undue
influence'. This is by way of contrast with cases involving actual pressure or the like, which are
labelled 'actual undue influence': see Bank of Credit and Commerce International SA v Aboody
[1990] I QB 923, 953, and Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705,
711-712, paras 5-7. This usage can be a little confusing. In many cases where a plaintiff has
claimed that the defendant abused the influence he acquired in a relationship of trust and
confidence the plaintiff has succeeded by recourse to the rebuttable evidential presumption. But
this need not be so. Such a plaintiff may succeed even where this presumption is not available to
him; for instance, where the impugned transaction was not one which called for an explanation.
#
The evidential presumption discussed above is to be distinguished sharply from a different form
of presumption which arises in some cases. The law has adopted a sternly protective attitude
towards certain types of relationship in which one party acquires influence over another who is
vulnerable and dependent and where, moreover, substantial gifts by the influenced or vulnerable
person are not normally to be expected. Examples of relationships within this special class are
parent and child, guardian and ward, trustee and beneficiary, solicitor and client, and medical
adviser and patient. In these cases the law presumes, irrebuttably, that one party had influence
over the other. The complainant need not prove he actually reposed trust and confidence in the
other party. It is sufficient for him to prove the existence of the type of relationship.
#
It is now well established that husband and wife is not one of the relationships to which this latter
principle applies. In Yerkey v Jones (1939) 63 CLR 649, 675 Dixon J explained the reason. The
Court of Chancery was not blind to the opportunities of obtaining and unfairly using influence
over a wife which a husband often possesses. But there is nothing unusual or strange in a wife,
from motives of affection or for other reasons, conferring substantial financial benefits on her
husband. Although there is no presumption, the court will nevertheless note, as a matter of fact,
the opportunities for abuse which flow from a wife's confidence in her husband. The court will
take this into account with all the other evidence in the case. Where there is evidence that a
husband has taken unfair advantage of his influence over his wife, or her confidence in him, 'it is
not difficult for the wife to establish her title to relief': see In re Lloyds Bank Ltd, Bomze v
Bomze [1931] 1 Ch 289, at p 302, per Maugham J.
Independent advice
#
Proof that the complainant received advice from a third party before entering into the impugned
transaction is one of the matters a court takes into account when weighing all the evidence. The
weight, or importance, to be attached to such advice depends on all the circumstances. In the
normal course, advice from a solicitor or other outside adviser can be expected to bring home to
a complainant a proper understanding of what he or she is about to do. But a person may
understand fully the implications of a proposed transaction, for instance, a substantial gift, and
yet still be acting under the undue influence of another. Proof of outside advice does not, of
itself, necessarily show that the subsequent completion of the transaction was free from the
exercise of undue influence. Whether it will be proper to infer that outside advice had an
emancipating effect, so that the transaction was not brought about by the exercise of undue
influence, is a question of fact to be decided having regard to all the evidence in the case.
Manifest disadvantage
#
As already noted, there are two prerequisites to the evidential shift in the burden of proof from
the complainant to the other party. First, that the complainant reposed trust and confidence in the
other party, or the other party acquired ascendancy over the complainant. Second, that the
transaction is not readily explicable by the relationship of the parties.
#
Lindley LJ summarised this second prerequisite in the leading authority of Allcard v Skinner, 36
Ch D 145, where the donor parted with almost all her property. Lindley LJ pointed out that
where a gift of a small amount is made to a person standing in a confidential relationship to the
donor, some proof of the exercise of the influence of the donee must be given. The mere
existence of the influence is not enough. He continued, at p 185:
'But if the gift is so large as not to be reasonably accounted for on the ground of friendship,
relationship, charity, or other ordinary motives on which ordinary men act, the burden is upon
the donee to support the gift.'
In Bank of Montreal v Stuart [1911] AC 120, 137 Lord Macnaghten used the phrase 'immoderate
and irrational' to describe this concept.
#
The need for this second prerequisite has recently been questioned: see Nourse LJ in Barclays
Bank Plc v Coleman [2001] QB, 20, 30-32, one of the cases under appeal before your Lordships'
House. Mr Sher QC invited your Lordships to depart from the decision of the House on this point
in National Westminster Bank Plc v Morgan [1985] AC 686.
#
My Lords, this is not an invitation I would accept. The second prerequisite, as expressed by
Lindley LJ, is good sense. It is a necessary limitation upon the width of the first prerequisite. It
would be absurd for the law to presume that every gift by a child to a parent, or every transaction
between a client and his solicitor or between a patient and his doctor, was brought about by
undue influence unless the contrary is affirmatively proved. Such a presumption would be too
far-reaching. The law would out of touch with everyday life if the presumption were to apply to
every Christmas or birthday gift by a child to a parent, or to an agreement whereby a client or
patient agrees to be responsible for the reasonable fees of his legal or medical adviser. The law
would be rightly open to ridicule, for transactions such as these are unexceptionable. They do not
suggest that something may be amiss. So something more is needed before the law reverses the
burden of proof, something which calls for an explanation. When that something more is present,
the greater the disadvantage to the vulnerable person, the more cogent must be the explanation
before the presumption will be regarded as rebutted.
#
This was the approach adopted by Lord Scarman in National Westminster Bank Plc v Morgan
[1985] AC 686, 703-707. He cited Lindley LJ's observations in Allcard v Skinner, 36 Ch D 145,
185, which I have set out above. He noted that whatever the legal character of the transaction, it
must constitute a disadvantage sufficiently serious to require evidence to rebut the presumption
that in the circumstances of the parties' relationship, it was procured by the exercise of undue
influence. Lord Scarman concluded, at p 704:
'The Court of Appeal erred in law in holding that the presumption of undue influence can arise
from the evidence of the relationship of the parties without also evidence that the transaction
itself was wrongful in that it constituted an advantage taken of the person subjected to the
influence which, failing proof to the contrary, was explicable only on the basis that undue
influence had been exercised to procure it.' (Emphasis added)
#
Lord Scarman attached the label 'manifest disadvantage' to this second ingredient necessary to
raise the presumption. This label has been causing difficulty. It may be apt enough when applied
to straightforward transactions such as a substantial gift or a sale at an undervalue. But
experience has now shown that this expression can give rise to misunderstanding. The label is
being understood and applied in a way which does not accord with the meaning intended by Lord
Scarman, its originator.
#
The problem has arisen in the context of wives guaranteeing payment of their husband's business
debts. In recent years judge after judge has grappled with the baffling question whether a wife's
guarantee of her husband's bank overdraft, together with a charge on her share of the matrimonial
home, was a transaction manifestly to her disadvantage.
#
In a narrow sense, such a transaction plainly ('manifestly') is disadvantageous to the wife. She
undertakes a serious financial obligation, and in return she personally receives nothing. But that
would be to take an unrealistically blinkered view of such a transaction. Unlike the relationship
of solicitor and client or medical adviser and patient, in the case of husband and wife there are
inherent reasons why such a transaction may well be for her benefit. Ordinarily, the fortunes of
husband and wife are bound up together. If the husband's business is the source of the family
income, the wife has a lively interest in doing what she can to support the business. A wife's
affection and self-interest run hand-in-hand in inclining her to join with her husband in charging
the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by
the business. The finance may be needed to start a new business, or expand a promising business,
or rescue an ailing business.
#
Which, then, is the correct approach to adopt in deciding whether a transaction is
disadvantageous to the wife: the narrow approach, or the wider approach? The answer is neither.
The answer lies in discarding a label which gives rise to this sort of ambiguity. The better
approach is to adhere more directly to the test outlined by Lindley LJ in Allcard v Skinner, 36 Ch
D 145, and adopted by Lord Scarman in National Westminster Bank Plc v Morgan [1985] AC
686, in the passages I have cited.
#
I return to husband and wife cases. I do not think that, in the ordinary course, a guarantee of the
character I have mentioned is to be regarded as a transaction which, failing proof to the contrary,
is explicable only on the basis that it has been procured by the exercise of undue influence by the
husband. Wives frequently enter into such transactions. There are good and sufficient reasons
why they are willing to do so, despite the risks involved for them and their families. They may be
enthusiastic. They may not. They may be less optimistic than their husbands about the prospects
of the husbands' businesses. They may be anxious, perhaps exceedingly so. But this is a far cry
from saying that such transactions as a class are to be regarded as prima facie evidence of the
exercise of undue influence by husbands.
#
I have emphasised the phrase 'in the ordinary course'. There will be cases where a wife's
signature of a guarantee or a charge of her share in the matrimonial home does call for
explanation. Nothing I have said above is directed at such a case.
A cautionary note
#
I add a cautionary note, prompted by some of the first instance judgments in the cases currently
being considered by the House. It concerns the general approach to be adopted by a court when
considering whether a wife's guarantee of her husband's bank overdraft was procured by her
husband's undue influence. Undue influence has a connotation of impropriety. In the eye of the
law, undue influence means that influence has been misused. Statements or conduct by a
husband which do not pass beyond the bounds of what may be expected of a reasonable husband
in the circumstances should not, without more, be castigated as undue influence. Similarly, when
a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of
hyperbole may be only natural. Courts should not too readily treat such exaggerations as
misstatements.
#
Inaccurate explanations of a proposed transaction are a different matter. So are cases where a
husband, in whom a wife has reposed trust and confidence for the management of their financial
affairs, prefers his interests to hers and makes a choice for both of them on that footing. Such a
husband abuses the influence he has. He fails to discharge the obligation of candour and fairness
he owes a wife who is looking to him to make the major financial decisions.
Illegality and Restraint of Trade
A brief note on Competition policy
The law has tried to protect competition for a long, long time. At common law, a contract in
restraint of trade has to be reasonable if it is to be enforceable. The essence of the restraint of
trade doctrine is still contained in the famous speech of Lord MacNaghten in Nordenfelt v Maxim
Nordenfelt Guns and Ammunition Co [1894] AC 535:
The public have an interest in every person's carrying on his trade freely: so has the individual.
All interference with individual liberty of action in trading, and all restraints of trade of
themselves, if there is nothing more, are contrary to public policy . . . .
More recently, the old common law rules have been supplemented by statutory provisions. The
earliest laws in the UK were enacted in the period following the Second World War, when
businesses had to adjust to the requirements of peacetime and switch from co-operation in the
national interest to an environment in which they had to compete for business.
Later, the European Economic Community (and, before it, the Coal and Steel Community and
the Atomic Energy Community) established rules designed to preserve competition as an
essential part of creating a common market. These rules remain essentially in force today, and
they are now closely followed by domestic laws in all EC Member States – as well as in
candidate states, of which Turkey is the current example, and other countries which have simply
adopted a tried-and-tested set of rules (Russia).
• The importance of compliance

Competition rules are backed by tough sanctions – in the case of the Competition Act 1998,
enough to make offender's eyes water, according to the then Director-General of Fair Trading.
Not only are there sanctions for organisations that breach the rules, but there are also criminal
sanctions for individuals who lead their employers into illegal activities. Breaches of the rules,
even inadvertent, can have serious consequences.
The consequences of breaching competition rules are not limited to the penalties that can be
imposed by the authorities. The reason we have competition rules is to protect the consumer
from conspiracies of businesses who, left to their own devices, would be inclined to maximise
profits rather than supplying the market at a price where supply and demand are in equilibrium.
In other words, competition laws are designed to prevent businesses getting away with making
fewer goods (or supplying less or fewer services) at a higher price, so that consumer welfare is
maximised. Businesses involved in such conspiracies against the public, or who abuse their
market power to make super-normal profits, can expect the media to take an interest in their
activities and breaches of the rules can be public relations disasters.
Those affected by breaches of the rules also have rights to claim damages from the businesses
that have caused them damage. Claims for damages have been rare up to now, but following the
Crehan case (although that was ultimately unsuccessful) it can be expected that more claims will
be made. Law suits are pending in the replica football kit affair, for example.
Competition law is important enough to merit putting substantial effort into avoiding breaches.
Compliance requires first a familiarity with the rules, so the largest part of this presentation is
devoted to an explanation of the substantive rules and their enforcement.
Crehan v Inntrapreneur [2006] UKHL 38.
12.1 Illegal and Void Contracts
As a general proposition, the courts will not enforce contracts whose purpose is illegal and this
includes not only agreements that are criminal in intent but also injurious to society in the wider
sense.
The Law Commission published a consultation paper on Effects of Illegality on Contracts and
Trusts in 1999 (Law Com. No. 154), but has not yet recommended any reform of the law.
In order to have an understanding of that topic, however, it will be necessary to look at the
question of illegality generally.
12.1.1 Illegal contracts
Contracts may be illegal under English law in one of two ways, either by statute or on the
grounds of public policy. (The effects of illegality under foreign law are more complex, and are
not covered here).
Illegal by statute
A contract may be expressly forbidden by statute or the prohibition may be implied, e.g.
Cope v Rowlands (1836) 2 M & W 149

A statute required that persons acting as stockbroker must obtain a licence or forfeit £25. The
plaintiff did brokerage work for the defendant without a licence. In the absence of an express
prohibition, the brokerage contract was held impliedly illegal since the object of the licences was
to protect the public.
Contracts illegal under public policy
A further group of contracts are illegal at common law on the grounds of public policy and
include contracts to commit a crime, a tort or a fraud.
Everett v Williams (1725), see 9 LQ Rev 197.

A contract by two highwaymen to ambush a coach was illegal.
Similarly, contracts promoting sexual immorality are likewise illegal.
Pearce v Brooks (1866) LR 1 Exch 213

A prostitute hired a carriage “of intriguing design” for the purposes of her trade. The contract
was held illegal.
The modern approach
The modern tendency is for the courts to look more benignly on agreements which contemplate
stable extra-marital relations, thus in Somma v Hazlehurst [1978] 2 All ER 1011 (overruled but
not on this issue) an unmarried couple rented a room but the contract was not struck down on the
grounds of public policy.
Other contracts illegal on public policy grounds are contracts prejudicial to public safety,
contracts prejudicial to the administration of justice (e.g. stifling a prosecution), contracts
promoting corruption in public life and contracts to defraud the revenue.
12.1.2 The Consequences of illegality
Where a contract is illegal, the consequences are in general as follows:

(i) The contract is void and therefore neither party can sue upon it – ex turpi causa non oritur
actio (no right of action arises from a base case);
(ii) Money paid or property transferred under the contract are normally not recoverable;
(although there are exceptions; for example, in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548;
[1992] 4 All ER 409 the owner of the money was not a party to the gaming contract, and the
casino was order to repay the stolen money which had been used for gambling).
(iii) Related transactions will also be void, see e.g. Fisher v Bridges (1854) 3 E & B 642.
12.1.3 Void Contracts
Certain contracts are expressly declared to be void by statute.
The most notable examples are wagering contracts (rendered void by the Gaming Act 1845 ) and
restrictive trading agreements (controlled by the Restrictive Trade Practices Act 1976 ).
Individual resale price maintenance agreements are rendered void by the Resale Prices Act 1976
.
In addition mere are three categories of contract that are void at common law on the grounds of
public policy; (i) contracts to oust the jurisdiction of the courts; (ii) contracts prejudicial to the
status of marriage, and (iii) contracts in restraint of trade, which will now be considered more
fully below.
***
12.2 Contracts in Restraint of Trade
Prior to the case of Mitchel v Reynolds (1711) 1 P Wms A contract regulating or preventing
trade was void.
Lord Smith L.C. said,
"it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his
own mode of carrying it on according to his own discretion and choice. If the law has regulated
or restrained his mode of doing this, the law must be obeyed. But no power short of the general
law ought to restrain his free discretion."
In Mitchel v Reynolds , allowing for a more flexible approach, it was decided that a restraint was
prima facie valid if it was supported by consideration and did not extend over the whole
kingdom. The validity of present day restraints is considered below.
12.2.1 Definition
Esso Petroleum v Harper's Garage (Stourport) Ltd [1968] 2 AC 269
“A contract in restraint of trade is one in which a party (the covenantor) agrees with any other
party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not
parties to the contract in such manner as he chooses.”
Lord Hodson, adopting the formulation put forward by Diplock LJ in Petrofina (Great Britain)
Ltd v Martin [1966] Ch 146
“Every member of the community is entitled to carry on any trade or business he chooses and in
such manner as he thinks the most desirable in his own interests, so long as he does nothing
unlawful; with the consequence that any contract which interferes with the free exercise of his
trade or business, by restricting him in the work he may do for others, is a contract in restraint of
trade. It is invalid unless it is reasonable as between the parties.”
Lord Morris, (ibid) referring to Lord Denning MR in Petrofina .
***
12.2.2 Types of contract
Much of the case law concerns contractual clauses in contracts for the sale of a business or in
written contracts of employment.
Vendor/Purchaser covenants
The buyer of a business, e.g. a shop, will want an assurance that the seller will not immediately
set up in competition next door and entice back the old customers.
Employer/Employee covenants
An employee, on terminating his employment with a particular employer, will agree not to work
for a competing employer nor set up a competing business.
Both types of agreement usually have some limits of area and duration.
12.2.3 Effect of restraint covenants
Covenants: prima facie void

Covenants in restraint of trade are contrary to public policy and prima facie void, unless they can
be regarded as reasonable as between the parties and as regards the public interest.
The rule, whereby the restraint could not be general, no longer applies. In Nordenfelt v Maxim
Nordenfelt Guns and Ammunition Co [1894] AC 535 the owner of an armaments business who
sold it was held to a covenant applicable for 25 years anywhere in the world.
Burden of proof
The burden of proving that, as between the parties, the restraint is reasonable lies on the
promisee; the burden of proving that as far as the public interest is concerned, the restraint is
unreasonable lies on the promisor. Reasonableness is considered as at the time of the agreement.
Commercial Plastics v Vincent [1965] 1 QB 623
12.3 The principles of enforcement
12.3.1 Three conditions must be satisfied
In employer/employee and vendor/purchaser covenants three conditions must be satisfied:
(a) there must be an interest to protect
(b) the restraint must be reasonable, and
(c) it must not be contrary to the public interest.
While the principles will apply both to employer/employee and vendor/purchaser covenants the
law is very much stricter in relation to the former and the latter will be considered later in so far
as the criteria differ.
12.3.2 There must be an interest to protect
The interest to be protected comes from the relationship of vendor/purchaser or

employer/employee.
Where there is no such relationship, a bare promise not to compete will not be upheld.
Freedom from competition is not an interest which may be protected, as such.
An agreement imposing a restriction on an employee after leaving an employer will only be

reasonable between the parties if there is some proprietary interest of the employer meriting
protection:
The valid proprietary interests are trade secrets and trade connection.
Treitel notes that the common law will give the employer a degree of protection where
there is no covenant:
* Using or disclosing trade secrets (at any time)
Faccenda Chicken v Fowler [1986] ICR 297
* Soliciting the employer's customers (only to solicitation during employment)
* Using or disclosing confidential information (Normally limited to employee's conduct during

employment but thereafter if he sells memorised lists (as opposed to using it himself)
The proprietary interests may all be protected specifically by covenant.
The restriction must be no wider than reasonably necessary to protect such interest. The
employer may not protect himself against competition from his employee. (A vendor of a
business may be able to protect himself against competition.)
The classic statement of these principles by Lord MacNaghten is to be found in Nordenfelt's

Case (1894) AC 535.
Two cases illustrate these principles:
Forster v Suggett (1918) 35 TLR 87

D was employed as the works manager of the P's glass works. He agreed that for five years after
termination of employment with P, he would not divulge any secret manufacturing process learnt
during employment, nor would he work in the glass industry in the UIC. It was held that the
restraint was reasonable to protect P's legitimate interest and was enforceable.
Herbert Morris Ltd v Saxelby [1916] 1 AC 688

The respondent was employed by the appellants as a draftsman in their business of
manufacturing lifting machinery. The company had its head office in Loughborough and
branches in eight large cities. The contract of employment contained a clause that for seven years
after leaving he would not become engaged anywhere in the UK in any similar business. The
House of Lords held that the clause was wider than reasonably necessary to protect the
appellant's interest – the appellants were merely trying to reduce competition.
Lord Atkinson said that the clause would deprive the respondent ...
“for a lengthened period of employing, in any part of the United Kingdom, that mechanical and
technical skill and knowledge which ... his own industry, observation and intelligence have
enabled him to acquire in the very specialised business of the appellants, thus forcing him to
begin life afresh, as it were, and depriving him of the means of supporting himself and his
family”.
12.3.3 Employer / Employee covenants Trade secrets, know-how and trade connection
An employer is entitled to protect his trade secrets but may not restrict an employee from using
his skill and knowledge – even if that skill was acquired while the employee worked for the
employer.
Herbert Morris v Saxelby [1916] 1 AC 688
The interests which the law will protect are trade secrets and trade connection.
(a) Trade secrets
Trade secrets include secret formulae, processes and confidential information (but excluding
information which is confidential only in the sense that during employment the employee must
not reveal it.
(b) Know-how
Know-how, once considered as not within legal protection, given commercial application and
potential is likely to be protected.
Treitel observes that Pearson LJ in Commercial Plastics v Vincent [1965] 1 QB 623 has hinted at
this.
(c) Trade connection
An employer is entitled only to protection in cases where the employee was likely to have come
into contact with clients or customers and to have acquired influence over them.
Restraints protecting business connection have been upheld in the case of:
A milk roundsman – Home Counties Dairies v Skilton [1970] 1 WLR 526
A solicitor's clerk – Fitch v Dewes [1921] 2 AC 158
A restraint against an employee who had had no contact with the employer's clients would not be
upheld.
12.3.4 The restraint must be reasonable

The Court will only enforce restraint covenants which go no further than is reasonably necessary
to protect the employer's interest.
The Court will not uphold a covenant which seeks to protect employer's activities which the
employee was not involved in.
A covenant in a tailor's service agreement against working as a hatter was struck down as
unreasonable
Attwood v Lamont [1920] 3 KB 571
(a) Area of restraint
To some extent an employer may actually protect himself against competition from an employee
because the law allows a restraint preventing an employee from setting up in business – to
prevent exploitation of trade secrets or trade connection – within a given (reasonable) area for a
given (reasonable) time.
An area restraint will be struck down as void if it covers an area wider than is necessary for the
protection of the employer's interest.
Mason v Provident Clothing & Supply Co Ltd [1913] AC 724

A restriction on a canvasser was held void as the area of restraint (25 miles of London) was one
thousand times larger than the area of employment.
Fitch v Dewes [1920] 2 Ch 159

A life-long restraint on a solicitor's managing clerk not to work within seven miles of Tamworth
was held to be reasonable in the circumstances.
Arbuthnot Fund v Rawlings [2003] EWCA Civ 518 Chadwick LJ considered the Home Counties
Dairies v Skelton and Littlewoods v Harris [1997] approaches.
# The first task of the court - faced with the contention that post-termination restraints on an
employee's ability to engage in future business activity are not enforceable - is to construe the
contract under which those restraints are said to be imposed. That, as it seems to me, is a task
which the court ought to carry out on an application for interim relief (if there is one) if it can
properly do so. Unless the court is satisfied that there are disputed facts which bear on the
construction of the relevant contractual terms, and that those facts cannot be resolved without a
trial, the court at the interlocutory stage is as well able to construe the relevant contractual terms
as a court will be at a trial. There is no need to put off until trial determination of the question -
what do the contractual terms mean? The court can, and should, determine the scope of the
restraints which, as a matter of construction, the contractual terms seek to impose.
# It is not suggested, in the present case, that there are disputed facts which need to be resolved
before the task of construction can properly be undertaken. In addressing that task, it is necessary
to keep in mind two factors; the first is that the exercise is one of construction; and that, in the
construction of a covenant in restraint of trade, the same principles are to be applied as in the
construction of any other written term. The principles are conveniently set out in this context in
the judgment of Lord Justice Harman in this Court in Home Counties Dairies Ltd v Skilton
[1970] 1 WLR 526. At page 533 he pointed out that it is the first principle in construing written
documents that the court should consider the circumstances at the time when they were made,
and the position of the parties who entered into them. He referred to the observations of Sir
Nathaniel Linley MR in Haynes v Doman [1899] 2 Ch 13, 25;
"Agreements in restraint of trade, like other agreements, must be construed with reference to the
object sought to be attained by them. In cases such as the one before us, the object is the
protection of one of the parties against rivalry in trade. Such agreements cannot be properly be
held to apply to cases which, although covered by the words of the agreement, cannot be
reasonably supposed ever to have been contemplated by the parties, and which on a rational view
of the agreement are excluded from its operation by falling, in truth, outside, and not within, its
real scope."
# That approach is particularly apposite in a case such as the present. The opening words of
clause 15.1, which govern the sub-clauses which come after it, are these:
"In order to protect the goodwill confidential information trade secrets and business connections
of the company ..... "
Those words direct the reader to construe what comes afterwards with that object in view. Unless
compelled by the language to do so, the court should not construe what comes afterwards so as to
encompass activities which could never have been thought by the parties as likely to damage the
goodwill or business connections which the clause (as a whole) is intended to protect.
# The second factor which it is necessary to keep in mind is that it is not the function of the court
to strive to give to the clause a meaning which enables it to have effect within the constraints of
public policy if that is not the meaning which, as a matter of construction, the parties are to be
taken to have intended that it should have. As Lord Justice Simon Brown put it in J A Mont (UK)
Ltd v Mills [1993] IRLR 172 at paragraph 28 on page 176:
" ..... the court should not too urgently strive to find within restrictive covenants ex facie too
wide, implicit limitations such as alone could justify their imposition."
# The court must steer a course between giving to the clause a meaning which is extravagantly
wide; and giving to the clause a meaning which is artificially limited. The task of the court, in
construing the contractual term is simply to ask itself: "what did these parties intend by the
bargain which they made in the circumstances in which they made it?"
(b) Duration of the restraint
The Court will consider the nature of the business to be protected when determining
reasonableness as to duration.
In Fitch v Dewes [1920] 2 Ch 159
A life-long restraint on a solicitor's managing clerk not to work within seven miles of Tamworth
was held to be reasonable because the clients of the firm would have been likely to have wanted
to deal with the former managing clerk for a very long time.
12.3.5 Other interests meriting protection
From time to time the courts are prepared to recognise other interests as meriting protection,
apart from trade secrets and business connection.
Greig v Insole [1978] 1 WLR 302

A case arising out of the Packer cricket affair, when Packer established a rival set of teams to
games to international test cricket, and poached players. It was held that the governing bodies of
cricket had a legitimate interest in the administration of the game to justify the imposition of
reasonable restraints on the players. However it was also held that the bans in question,
preventing players who had joined the Packer organisation from playing in test and county
cricket, were too wide. In this case, however, it should be noted that there was no contract
between the governing body and the players.
See also:
Eastham v Newcastle United Football Club Ltd [1964] Ch 413
See also the exclusive dealing cases:
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269
A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308
Treitel suggests that these new interests are ‘commercial' interests and that an expressly drawn
covenant would be needed to protect them whereas, at common law, the other interests, to a
limited extent, are protected in the absence of a covenant.
12.3.6 Reasonableness
Exceptionally, agreements between an employer and an employee will be held unreasonable as

regards the public interest.
Wyatt v Kreglinger and Fernau [1933] 1 KB 793

An employee (a wool worker) was promised a pension on his retirement and it was agreed that
he would not receive the pension if he competed against his employers in the wool trade. The
Court of Appeal held the transaction void – it was contrary to the public interest to deprive the
community of a valuable skill.
The Court will examine the relative strength of the bargaining position of the parties. The Court
will be particularly concerned to ensure that the dominant party does not take advantage of the
weaker party.
Public interest is almost impossible to define. It is unlikely that a particular restraint will be
struck down simply because some broad based economic interest will be effected. Precision of
drafting will be required. The public interest is likely to focus on the freedom of the individual to
work with restriction.
12.3.7 Construction of restraint clauses
It is clear that the court cannot redraft a restraint clause that is too wide but it can, as a matter of
construction, reach the conclusion that the parties intended to limit the clause to matters which
are legitimate to protect. The following case is an illustration of this approach:
Littlewoods v Harris [1978] 1 All ER 1026

Harris was executive director of the mail-order firm of Littlewoods. He entered into a restraint
clause whereby he agreed not to work for any company in the Great Universal Stores group for a
period of 12 months after leaving Littlewoods. Harris had acquired a great deal of confidential
information with regard to the catalogue which is the whole foundation of the mail-order
business. Great Universal Stores were Littlewoods' main rival in the mail-order business,
however Great Universal Stores operated worldwide and their business was not confined to mail-
order, whereas Littlewoods operated only in the UK. Littlewoods sought an injunction against
Harris to prevent him from working for Great Universal Stores.
The Court of Appeal held that although the clause, on its literal wording, was too wide, by
construing the clause by reference to circumstances existing when the contract was made, it was
possible to limit it to those matters it was clearly intended to protect, i.e. the mail-order business
in the UK.
12.3.8 Drafting of restraint covenants
It is of crucial importance to ensure that the restraint clause is not drafted to widely. As will be
seen, the Court has power to strike out offending clauses and leave valid clauses intact provided
the clause or contract as a whole when then construed makes sense. The Court does not have
power to add to or vary or re-write a clause. The danger of a valid provision being failing
because a part of the same clause is struck down as void is ever present.
Commercial Plastics v Vincent [1965] 1 QB 623
See the section on severance towards the end of this section.
12.3.9 Agreements between the buyer and seller of a business
Restraints imposed on the seller of a business to restrict competition are more readily upheld
than restraints on employees but are generally subject to the same principles.
In particular, there must be a proprietary interest meriting protection, and so:
(i) only the actual business sold is entitled to protection. See, for example, British Reinforced
Concrete Co v Schleff [1921] 2 Ch 563, and therefore
(ii) a restriction which purports to restrain a business not actually carried on will be void –
Vancouver Malt and Sake Co Ltd v Vancouver Breweries Ltd [1934] AC 181.
(iii) Area covenants in vendor/purchaser cases are readily enforced even if the area is worldwide
as in the Nordenfelt case.
Note that this would effectively prevent the vendor dealing even with people he had had no
contact with while he owned the business ( Plowman & Son v Ash [1964] 1 WLR 568).
12.3.10 Difficult cases
Treitel makes the point that the distinction between employer/employee and vendor/purchaser
contracts is by no means exhaustive. He suggests that covenant by a retiring doctor or solicitor
would not fall into either category Bridge v Deacons [1984] AC 705 and asserts that the Courts
will not subject such covenants to the strict employer/employee rules.
Treitel then gives the illustration of the man who sells his business to a company and then
becomes managing director of the company working under a covenant. Treitel suggests that this
type of case would be treated in the same more generous manner as vendor/purchaser covenants.
On the other hand, Treitel gives the illustration of a writer or composer agreeing not to dispose of
his work save to a particular publisher and suggests that this will be treated akin to an
employer/employee covenant – even though there was no contract of employment between the
two parties.
A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308
12.3.11 Agreements between manufacturers to restrict output and fix prices
Such agreements are prima facie void at common law but the courts have been prepared to
uphold where reasonable, e.g. to avoid a glut on the market; English Hop Growers v Dering
(1928) 2 KB 174. See also:
Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1919] 1 KB 418

Two manufacturers agreed not to employ each others employees for five years after they left
their original employer. The Court of Appeal held that the contract was void as it covered all
employees whether they knew trade secrets or not and that it was of excessive duration.
In fact such agreements are now almost entirely subject to statutory control under the Restrictive
Trade Practices Act 1976 .
12.3.12 Exclusive dealing agreements
“Solus” agreements, for example, whereby a garage agrees to purchase all its supply of petrol
from one oil company, are within the doctrine of restraint of trade and are prima facie void.
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269

The owner of two garages agreed, inter alia, to sell only Esso's petrol, in return for a rebate on
the price per gallon. On one of the garages, the tie was to last for nearly four and a half years and
on the other it was to last for 21 years, being contained in this case in a mortgage of the premises
to Esso. The House of Lords upheld the four and a half year agreement although the agreement
for 21 years was held to be unreasonable and void as being longer than necessary to protect
Esso's interests i.e. the continuity and stability of their marketing operation.
However, if a trader, when purchasing or leasing new premises, covenants with the vendor or
lessor (in the conveyance or lease) to buy only the latter's products, and then goes into
possession, the exclusive dealing tie is outside the restraint of trade doctrine; Harper's Case . This
would apply to a person who buys or takes a lease of a public house or garage subject to a tie; the
reason is that the person has surrendered no freedom previously enjoyed.
The approach of the courts to exclusive dealing ties is illustrated by Alec Lobb (Garages) Ltd v
Total Oil Ltd [1985] 1 WLR 173. The plaintiffs, whilst in financial difficulties, leased their
garage to the defendant oil company for 51 years at a premium of £35,000. The defendants sub-
leased it back to the plaintiffs for 21 years at an annual rent of £2,500, with a mutual right to
break at 7 or 14 years. The sublease contained a solus tie whereby the plaintiffs agreed to sell
only the defendants' petrol. The Court of Appeal held that the lease and lease-back were subject
to the restraint of trade doctrine but the tie was valid as being reasonable in the circumstances.
The principal purpose of the agreement was as a financial rescue operation from which the
plaintiffs benefited as they received ample consideration (£35,000) for the lease and they were
free to exercise the break clause after 7 or 14 years.
A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308.
Exclusive service agreements, such as where, for example, a songwriter agrees to provide his
services for a music publisher for a period of time, are within the restraint of trade doctrine (i.e.
prima facie void) if oppressive and one-sided.
12.4 Effects of the contract being void
The effects discussed below relate to contracts void at common law and will apply by analogy to
contracts void by statute unless the statute in question has special provisions dealing with the
matter. The effects are as follows:
The contract is void insofar as it contravenes public policy
Wallis v Day (1837) 3 B & A 113

A contract of employment contained a provision which was alleged to be a void restraint of
trade. This did not prevent the plaintiff being able to recover arrears of salary. It follows from
this that subsequent or collateral transactions are not necessarily void unless they relate solely to
that part of the original transaction that is itself void.
Money paid or property transferred is recoverable
Authority for this proposition is to be found in Herman v Charlesworth (1905) 2 KB 123.
Severance
Severance is the power of the court to remove a void provision in a contract and enforce the
remainder. The power exists in the case of void contracts and there is authority that an illegal
contract may be subjected to severance, Carney v Herbert (1985) AC 301.
Severance will not be possible if it would eliminate the whole or substantially the whole of the
consideration given by a party to the contract; Wyatt v Kreglinger and Fernau [1933] 1 KB 793.
It may be possible to sever in the sense of removing the void part of a promise and enforcing the
rest. This will be possible providing the severance does not alter the meaning of the contract in
any way.
Goldsoll v Goldman (1915) 1 Ch 292
D sold a jewellery business to the plaintiff, D covenanting that he would not deal in real or
imitation jewellery in the United Kingdom or in other specified foreign places. The restraint as to
the latter was too wide in the circumstances, as was the reference to real jewellery since the
business dealt only in imitation jewellery in the United Kingdom. The void restrictions were
severed leaving a valid contract in restraint of trade.
Contrast: Attwood v Lamont [1920] 3 KB 571
D was employed as a tailoring cutter for the plaintiff, a general outfitter. The defendant
covenanted not to subsequently engage in a number of trades carried on by the plaintiff's
business, including tailor, milliner, draper, hatter and haberdasher within a ten mile radius. The
court refused to sever so as to leave the tailoring restriction valid; the covenant formed a single
indivisible covenant for the protection of the plaintiff's entire business. It was not a series of
covenants for the protection of each department of the plaintiff's business. The whole covenant
was therefore void.
It should further be noted that the court will not re-draft the covenant in any way, thus applying
the so-called “blue pencil test”. The court will merely strike out the offending words; what is left
must make sense without further additions.
12.5 Competition Law

Many contracts between businesses which restrain trade will fall foul of the Competition Act
1998 , or at the EU level, of EU competition law, except where the relevant competition
authorities have permitted exceptions to the rules against anti-competitive practises. Competition
law is too complex to summarise here, but it is important to be aware that in practice some
agreements in restraint of trade may raise competition law issues as well as common law issues.
Discharge of Contracts
13.1 Discharge of Liability
We are concerned here with the various ways in which the parties may become discharged
(released) from their contractual obligations.
1. Performance (13.2)
2. Breach (13.3)
3. Agreement (13.4)
4. Frustration (13.5)
13.1.1 Definition
The difficulty of exposition of discharge by performance or by breach is that performance and

breach are in reality mirror images of each other (“two sides of the same coin” Anson).
E.g. X contracts to build a shed for Y for £800. X carries out the work, feels that he has
performed his obligations, has no further obligation under the contract, and claims the £800
contract price. However, Y may claim that X's performance is defective i.e. that X is in breach of
contract, and that he, Y, is released from his contractual obligation to pay, or at least X should
remedy the defect or make a deduction from the contract price because of the defective work. X
may claim the work is not defective.
THUS – in reality performance and breach should be considered at one and the same time. In
addition, of course, the extent of one's contractual obligations is to be discovered from the terms
of the contract. They will provide the answer to the question of what performance is to be
required.
Conversely, if performance is defective i.e. there is breach of a term, we need to know what sort
of term (condition, warranty or intermediate term) in order to ascertain whether or not the
innocent party has any right to repudiate the contract i.e. to regard himself as discharged from his
contractual obligations.
13.2 Discharge By Performance
13.2.1 Historical approach

An historical approach is useful. The original rule at Common Law was always that performance
must be precise and exact. In other words, the obligation under the contract was entire and only
an entire performance would entitle a party to payment under the contract.
Cutter v Powell (1795) 6 Term Reports 320

D agreed to pay Cutter 30 guineas provided he executed his duties as second mate on a voyage
from Kingston, Jamaica to Liverpool. Cutter began the voyage but died when the ship was 19
days short of Liverpool. Cutter's wife sought a proportion of his wage equivalent to the amount
of the voyage for which Cutter had acted as second mate. It was HELD that she failed because
Cutter hadn't performed his entire contractual obligation.
Similarly in:
Bolton v Mahadeva [1972] 2 All ER 1322

P agreed to install a central heating system in D's house for a lump sum of £560. He installed a
system which failed to heat the house adequately and gave off fumes. D refused to pay. The
Court of Appeal HELD that it was a lump sum contract and the obligation entire; the plaintiff
could recover nothing.
13.2.2 Harsh rule
Both of the above decisions are harsh because the defendant either receives a benefit or makes a
profit without having to pay anything. Consequently, the courts have developed certain doctrines
in order to achieve justice between the contracting parties:
(i) Substantial Performance
If the contract has been substantially performed, though not necessarily literally or exactly, the
injured party cannot treat himself as discharged from his obligation to pay, though he will have a
counterclaim or a right of set-off for any loss sustained by reason of the incomplete performance.
No right to repudiate
In other words, the injured party has no right to repudiate for breach of condition but does have a
right to compensation for breach of warranty.
What is substantial performance?
What constitutes substantial performance is a question of degree in the circumstances of each

particular case. It is usually established if the actual performance is not far short of the required
performance and the cost of remedying the defects is not too great in proportion to the overall
contract price.
Dakin & Co Ltd v Lee [1916] 1 KB 566

The plaintiff builders contracted to carry out certain repairs to the defendant's house for £1,500.
P sought the contract price and D resisted on three grounds:- the underpinning of a wall was two
feet thick instead of four feet; four inch solid columns instead of five inch hollow ones had been
used; the joists over a bay window were not bolted as stipulated. All defects could have been
rectified at a cost of £80. The Court of Appeal HELD that P was entitled to the contract price less
an amount in respect of the part of the work which had been carried out contrary to specification.
Conclusion:
Whether entire performance is a condition precedent or not to any payment is a question of

construction of the terms of the contract in each particular case. Clearly the court construed the
contracts as requiring entire performance in both Cutter v Powell and Bolton v Mahadeva. In
modern times such construction is not uncommon in cases involving contracts of sale of goods,
but is very much exceptional in other cases.
(ii) Acceptance of Partial Performance
The usual rule is that a party who partly performs a contract (i.e. there is no substantial
performance, and thus a breach of condition is committed) is not entitled to recover anything.
HOWEVER – a claim to remuneration may arise if the other party accepts the partial
performance.
In sale of goods cases this is recognised by the Sale of Goods Act 1979 s.30(1):
“Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the
buyer may reject them, but if he accepts them he must pay for them at the contract rate.”
Quantum meruit
In other cases any such claim rests upon a quantum meruit basis (a reasonable sum in respect of
the benefit conferred by the partial performance). The basis of the liability here is that if Y
accepts X's partial performance, both parties by implication mutually release one another from
the original contract and agree to a new contract to pay for the work done or the goods supplied.
The doctrine of partial performance applies only if the party not in default has a genuine
choice either to accept or to reject partial performance.
Sumpter v Hedges [1898] 1 QB 673
P agreed to erect certain buildings on the D's land for £565. He did part of the work and then
abandoned the contract. D completed the buildings himself, using materials left on the site by the
plaintiff. P sued to recover the value of the work done and of the building materials used. It was
HELD that P couldn't recover for the work he had done because the defendant had no option but
to accept the partly erected buildings. Conversely, he could recover the value of the materials
used because the defendant did have a choice whether or not to use them in completion of the
building.
(iii) Prevention of Performance
If one party is prevented from completing his contractual obligations by the default of the other
party, the injured party can either recover damages for breach of contract or alternatively
reasonable remuneration on a quantum meruit basis for work already done.
Planché v Colburn (1831) 8 Bing 14 P had agreed to write a book on Costume and Ancient
Armour for a series published by the defendants called “The Juvenile Library”. He was to
receive £100 on completion of the book, to which end he collected materials and wrote part of
the book. D then abandoned the series. The plaintiff was HELD to be entitled to recover 50
guineas on a quantum meruit basis.
(iv) Divisible Covenants
Many of the partial/substantial performance difficulties may be evaded if the court discovers the
contract to consist of a number of severable obligations rather than one entire obligation.
Whether this is so or not is a question of construction of the intention of the parties in each
particular case.
E.g. X agrees to sell to Y 120 tons of wheat for £12,000 to be delivered 10 tons per month
between January and December 1989. There is no specification of time of payment. X makes
appropriate 10 ton deliveries in January, February and March, but fails to make any further
deliveries.
If the contract is one entire obligation then X is entitled to nothing until he makes all 12
deliveries.
If the obligations are severable then payment is due each month upon delivery and X can recover
for the January, February and March deliveries.
Suggested Approach to Performance Difficulties
Problems involving performance revolve around construction of the contract. The suggested
approach is as follows:
(i) Is the contract an entire obligation requiring precise performance? If it is, nothing less will do,
e.g. re Moore & Re Moore & Co Ltd v Landauer & Co Ltd [1921] 2 KB 519This will be unusual
except in sale of goods cases.
(ii) If precise performance is not required, are the contractual obligations divisible?
(iii) If not, has there been substantial performance, acceptance of partial performance or
prevention of performance?
13.2.3 There remains for consideration two further aspects relating to performance:
Time of Performance
(i) When the contract doesn't stipulate a time within which the contractual obligations must be
performed, performance must be within a reasonable time.
(ii) When there is a time stipulation in the contract then that is the time for performance.
(iii) In either case what is the effect of late performance? This depends upon whether time is of
the essence of the contract or not i.e. in the nature of a condition or not.
United Scientific Holdings Ltd v Burnley BC [1977] 2 All ER 62
The House of Lords stated that time is of the essence of the contract if such is the genuine
intention of the parties, and such intention may be expressly provided for or inferred from the
nature of the subject matter or the surrounding circumstances.
An interesting consideration of the problem can be seen in:
Charles Rickards v Oppenheim [1950] 1 KB 616

D purchased a Rolls Royce chassis from P. P contracted to build a body to go on the chassis, the
work to be completed by March 20th at the latest. It was not completed by that date, but the
defendant continued to press for delivery. However, on June 29th D wrote to the plaintiffs and
said that he wouldn't take delivery after July 25th. P didn't deliver by July 25th and the defendant
treated the contract as repudiated. The Court of Appeal HELD that he was entitled to do so. The
original date of the 20th March had been of the essence of the contract, but the defendant had
waived it as such by his conduct. But, he had given reasonable notice of a new date, July 25th as
being of the essence of the contract.
Time fixed for performance
Tender of Performance
If one party makes a valid tender of performance and the other party refuses to accept it, he is
freed from liability for non-performance provided that the tender is made under such
circumstances that the other party has a reasonable opportunity of examining the performance
tendered in order to ascertain conformity with the contract.
Startup v MacD onald [1843] 6 Man & C 593

The parties contracted for the sale of ten tons of linseed oil to be delivered “within the last 14
days of March.” The plaintiff delivered the oil at 8.30 pm on Saturday, 31st March and the
defendant refused to accept delivery because of the lateness of the hour. It was HELD that the
tender of the oil in the circumstances was equivalent to performance and the plaintiff was
entitled to damages for non-acceptance.
***
13.3 Discharge by Breach
13.3.1 Definition
When can the innocent party terminate the contract and regard himself as discharged from his
contractual obligations because of the other party's breach?
It is always possible to sue for damages for breach of contract (i.e. for breach of condition or
warranty), but the right of the innocent party to treat the contract as discharged arises only where
there has been a breach of condition, or a repudiatory breach in the case of an intermediate term,
viz.
(a) Where the party in default repudiates either before performance is due (anticipatory breach)
or before the contract has been fully performed.
(b) The defaulting party has committed breach of a term of major importance.
13.3.2 Repudiation before or during performance
Such repudiation may be either express or implied, and it must be established that the defaulting
party has made it clear beyond reasonable doubt that he no longer intends to perform his part of
the contract.
Breach before performance becomes due is known as – Anticipatory Breach
In this situation the innocent party may accept the breach and immediately sue for breach of
contract, or he may refuse to accept the breach and wait until the due date for performance,
hoping the other party will change his mind.
Hochster v De La Tour [1853] 2 E & B 678

In April the defendant agreed to engage the plaintiff as a courier during a foreign tour starting on
the 1st June. On 11th May the defendant wrote to the plaintiff informing him of a change of
mind and that his services would no longer be required. The plaintiff sued for damages
immediately and succeeded.
N.B. It may be dangerous for the innocent party to wait for the due date for performance as the
contract continues at the risk of both parties.
Avery v Bowden (1855) 5 E & B 714

B chartered A's ship and agreed to load her with cargo at Odessa within 45 days. After a while B
told A that he had no cargo and advised him to leave. Instead, A waited at Odessa hoping B
would find a cargo. Before the end of the 45 days the Crimean War broke out between England
and Russia and performance of the contract became illegal. HELD: The refusal by B to provide a
cargo was an anticipatory breach and A could have sued immediately. When he chose not to do
so the contract remained on foot until performed. However, in the meantime both parties were
discharged from the contract by frustration (subsequent illegality in this case) due to the outbreak
of war. Thus, B was not liable to A for breach of contract.
N.B. There are some problems surrounding the relationship between anticipatory breach and
damages due to the decision in White & Carter (Councils) Ltd v McG regor [1961] 3 All ER
1178. These will be considered later in the section on Remedies.
13.3.3 Breach occurring during performance
Such breach raises a difficult question of construction of the contract for the court, for it has to
decide whether an act alleged by one party to be a repudiatory breach in fact amounts to such in
law.
Thus, in the general law of contract, if X breaches the contract and Y repudiates, alleging a
breach of condition by X, then if the court agrees, Y has acted perfectly properly. However, if
the court finds X's breach to be of warranty only, then Y also will be in breach of contract due to
wrongful repudiation.
Mersey Steel & Iron Co v Naylor Benzon & Co [1884] 9 App Cas 434
Some guidance as to the test of construction to be applied, at least in sale of goods cases, was
given by the Court of Appeal in:
Maple Flock Co Ltd v Universal Furniture Products [1934] 1 KB 148
“First, the ratio quantitatively which the breach bears to the contract as a whole, and secondly,
the degree of probability or improbability that the breach will be repeated.”
Thus, in the case itself the buyer was held not to be entitled to repudiate on the following facts:
the contract was for 100 tons of rag flock; the first 15 deliveries were in order; the 16th was
defective; deliveries 17-20 were in order. Thus, only 12 tons of the deliveries had been defective,
and the breach was unlikely to be repeated.
Cf Munro & Co Ltd v Meyer [1930] 2 KB 312The buyer was held to be entitled to repudiate the
whole contract for 1,500 tons of meat and bone meal, when more than half of the total quantity
delivered was found to be seriously defective.
13.3.4 Breach of a term of major importance

The relevant law here was considered in the earlier section on terms
(conditions/warranties/intermediate terms).
Consequences of repudiation or breach of a major term
There are two possibilities here. The innocent party will either (a) treat the contract as still
operative or (b) treat the contract as terminated.
(a) Contract still operative
Breach in itself does not discharge the innocent party from his obligations, he must accept the
breach. Thus, if he refuses to accept the breach, the contract remains in being for the future on
both sides.
Howard v Pickford Tool Co [1951] 1 KB 417
“An unaccepted repudiation is a thing writ in water and of no value to anybody; it affords no
legal rights of any sort or kind.”
per Asquith L J
THUS –
In the case of breach of a major term the plaintiff cannot repudiate or sue for damages until he
accepts the breach, and in the case of an unaccepted anticipatory breach the plaintiff cannot sue
for damages until the due date for performance arrives.
(b) Contract treated as terminated
The contract will be terminated for the future as from the moment the acceptance of the breach is
communicated to the defaulting party.
However, it is clear from the House of Lords decision in Johnson v Agnew [1980] AC 367;
[1979] 1 All ER 883 that the breach doesn't operate retrospectively, i.e. the defaulting party will
be liable in damages both for any earlier breaches and also for the breach leading to the
discharge of the contract, but will be excused any further performance.
***
13.4 Discharge by Agreement
13.4.1 Definition
Just as a contract is formed by agreement so it can be discharged or varied by agreement; BUT –
just as consideration is essential to agreement so it is substantially necessary for discharge or
variation, unless the release is executed by deed. The process is known as ACCORD AND
SATISFACTION; the accord is the agreement and the satisfaction the consideration.
13.4.2 Two forms of accord and satisfaction
There are two forms of discharge by agreement:
(a) Bilateral (b) Unilateral.
(a) Bilateral
Applies to executory agreements. X and Y mutually release one another from their obligations.
(b) Unilateral
If X has performed his part of the contract a promise from him to release Y from further
performance will not bind him unless Y provides consideration.
Pinnel's Case (1602) 5 Co Rep 117a, Elton Cop Dyeing Co Ltd v Robert Broadbent & Son Ltd
(1920) 89 LJKB 186
Of course, even if Y hasn't provided consideration, he may be able to set up promissory estoppel
by way of defence.
13.4.3 Third party rights
Under Contracts (Rights of Third Parties) Act 1999 , s. 2, in a contract to which the Act applies,
where the third party has ‘assented to' or relied on the term from which he benefits, then the
parties who made the contract cannot vary it or rescind it without his consent.
***
13.5 Discharge by Frustration
Whilst the doctrine has seen expansion from its inception, it is still narrow in application; Lord
Roskill stated that it is: "not lightly to be invoked to relieve contracting parties of the normal
consequences of imprudent bargains."
CTI Group v Transclear SA [2008] EWCA Civ 856

Court of Appeal
The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To
show frustration it would be necessary to demonstrate that performance of the new contract
would be fundamentally different from that originally contemplated. The Court of Appeal also
confirmed that frustration can apply to a contract for the sale by description of unascertained
goods of a specified origin.
13.5.1 Concept
Frustration occurs whenever a contract, after its formation, becomes impossible to perform
without default of either party; the doctrine is often called subsequent or supervening
impossibility, and its effect is that the parties are released from their contractual obligations.
Origins : Paradine v Jane : Absolutism
Until the nineteenth century the common law adopted a doctrine of absolute obligation to
perform a contract. Hence, in:
Paradine v Jane (1647) Aleyn 26

A tenant was sued for arrears of rent and in defence pleaded that for the last three years he had
been dispossessed of his farm by the King's enemies. The court rejected his plea and the tenant
was liable for the rent, even though he was unable to take the benefit of the lease.
Gryf-Lowczowski v Hinghingbrooke Healthcare NHS Trust [2005] EWHC 2407

Gray J reviews the modern law of Frustration and starts with an extract from Lord Reid's speech
in Davis Contractors v Fareham UDC [1956] (Infra)
This case is worth looking at before reading the detail below.
Effect mitigated
The basic principle of frustration was formulated to alleviate the harshness of the absolute
obligation doctrine by Blackburn J in:
Taylor v Caldwell (1863) 3 B & S 826 | Full report
The defendant agreed to hire to the plaintiff a music hall and Surrey Gardens for the purposes of
entertainment. Before the day of the performance, due to the default of neither party, the music
hall was destroyed by fire. The plaintiff sued the defendant for breach of contract. The court
HELD the defendant not liable, the contract being frustrated by the fire.
Underlying Theories
There are two underlying theories: (a) the implied term theory, (b) and the just solution theory.
Some cases base their approach upon (a), others upon (b).
Treitel lists a third theory where frustration follows from destruction of the basis of the contract.
This can be seen as a different way of expressing the implied term theory. Treitel also lists
construction as a fourth theory, since the issue always comes down to one of construction of the
contract; and failure of consideration (which is certainly incorrect) as a fifth.
(a) The Implied Term Theory
The contract will be discharged only where the court can imply a term into the contract that the
contract shall come to an end upon the occurrence of the events in question.
This view is expressly supported by Lord Loreburn in Tamplin Steamship Co Ltd v Anglo-
Mexican Petroleum Products Co Ltd [1916] 2 AC 397
(b) The Just Solution Theory
The contract is discharged by operation of law; otherwise the parties would have to perform a
contract radically different from that originally undertaken.
This view is expressly supported by (amongst others) Lord Radcliffe in Davis Contractors Ltd v
Fareham UDC [1956] AC 696
13.5.2 The circumstances in which frustration may apply
Destruction of the subject-matter of the contract
Taylor v Caldwell (1863) 3 B & S 826 | Full report
The non-occurrence of a particular event which forms the basis of the contract
This invites a comparison of two of the “Coronation Cases” arising out of the postponement of
the coronation of Edward VII due to his sudden illness.
Krell v Henry [1903] 2 KB 740

D agreed to hire a flat from the P for June 26th and 27th, 1902. The contract contained no
reference to the coronation processions, but they were to take place on those days and were to
pass the flat. The processions were cancelled due to the illness of Edward VII and P sued to
recover rent not already paid. It was HELD by the Court of Appeal that the plaintiff failed; the
processions and the location of the flat were the foundation of the agreement and the contract
was frustrated.
Cf Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 D chartered the SS Cynthia from P for
June 28th and 29th, 1902 for the express purpose of taking paying passengers to see the
coronation naval review by Edward VII at Spithead and to tour the assembled fleet. The review
was cancelled due to Edward VII's pneumonia but the fleet remained assembled. The Court of
Appeal HELD that the contract was not frustrated. Vaughan Williams and Romer L JJ felt that
neither the review nor the tour were at the foundation of the contract (they were matters of
importance to the charterer only and not to the owner); Stirling L J felt that both the review and
the tour were objects of the contract, and the tour could still be effected.
The decision in Krell v Henryhas often been criticised as potentially opening the floodgates to
contractors to escape from contracts which have become less profitable due to changed
circumstances. Consequently, it has rarely been followed in subsequent cases:
Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509
Non-availability of one of the parties due to death, illness or other circumstances
This applies to contracts for personal services, e.g. contracts of employment.
Condor v Barron Knights Ltd [1966] 1 WLR 87
Edward Lottian Condor, a talented drummer, was contracted to play seven nights per week with
the Barron Knights pop group, when he had a minor nervous breakdown. He was advised by a
doctor that to continue the demanding schedule might well lead to a major breakdown, and the
contract was HELD to be frustrated.
Apparently, even contracts of employment determinable by notice on either side can be

frustrated by long term illness – Notcutt v Universal Equipment Co (London) Ltd [1986] NLJ
Reps 393.
Frustration of the common adventure
FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 A

steam ship was chartered for a period of five years, 1912-1917. However, in 1915 the
government requisitioned the ship for use as a troopship. The charterers were willing to continue
paying the agreed freight, but the owners claimed the charterparty to be frustrated as they wished
to obtain a larger amount by way of compensation from the Crown.
The House of Lords HELD that there was no frustration, the interruption being of insufficient
duration and insufficiently continuous to make it unreasonable for the parties to continue.
Cf Jackson v Union Marine Insurance Co Ltd [1874] LR 10 CP 125 where the interruption was
of sufficient duration for the contract to become frustrated.
Building contracts
Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119

DK contracted with MWB to build a reservoir within six years. After two years the Minister of
Munitions required DK to cease work, remove and sell its plant. MWB claimed the contract
subsisted on the basis of a contract provision allowing a time extension in the event of
difficulties. The House of Lords HELD the contract to be frustrated on the basis that if it were
resumed after such interruption it would effectively be a different contract.
Supervening illegality
Avery v Bowden (1855) 5 E&B 714
Leases
It was for some time uncertain whether the doctrine of frustration can apply to leases; leases
create proprietary rights which usually receive special treatment in English law. However, the
House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 HELD that
frustration can apply but the circumstances of its operation would be very rare.
Unifying themes
A unifying thread running through all of the above cases is that the contract will not be frustrated
unless its foundation has been destroyed so that performance becomes impossible or
fundamentally different from what was agreed. It is not enough that the contract has become
more onerous or expensive to perform.
Tsakiroglou & Co Ltd v Noblee & Thorl GMBH [1962] AC 93 The appellants agreed to sell
ground nuts to the respondents and to shop them from Sudan to Hamburg in Nov/Dec 1956.
However, on 2nd November the Suez Canal was closed and remained closed for five months.
The price of the nuts had been calculated on the basis of shipment via the canal which was the
normal route, though there was no term in the contract designating it the exclusive route. The
appellants refused to perform the contract. The House of Lords HELD that there was no
frustration; it was still possible to ship the nuts via the Cape of Good Hope, a journey some 3,000
miles longer. The journey wouldn't be commercially or fundamentally different from that by the
canal, merely much more expensive.
Davis Contractors Ltd v Fareham UDC [1956] AC 696

The appellants contracted with the respondents to build 78 houses for £94,000. Due to
unexpected strikes and materials shortages the contract took 22 months instead of 8 to perform
and cost £115,000. The appellants claimed that the contract was frustrated, and that they were
entitled to their actual costs on a quantum meruit basis. The House of Lords HELD that this was
not so; the contract had merely become more onerous and expensive not radically different.
Lord Reid explained the distinction between a contract becoming more onerous, and being of a
different kind:
“ In a contract of this kind the contractor undertakes to do the work for a definite sum and he
takes the risk of the cost being greater or less than he expected. If delays occur through no
one's fault that may be in the contemplation of the contract, and there may be provision for
extra time being given: to that extent the other party takes the risk of delay. But he does not
take the risk of the cost being increased by such delay. It may be that delay could be of a
character so different from anything contemplated that the contract was at an end, but in this
case, in my opinion, the most that could be said is that the delay was greater in degree than
was to be expected. It was not caused by any new and unforeseeable factor or event: the job
proved to be more onerous but it never became a job of a different kind from that
contemplated in the contract.
Lord Reid:
Frustration has often been said to depend on adding a term to the contract
by implication: for example, Lord Loreburn in Tamplin Steamship Co. Ltd.
v. Anglo Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397 at p. 404,
after quoting language of Lord Blackburn, said: " That seems to me another way of saying that
from the nature of the contract it cannot be supposed the parties, as reasonable men, intended it
to be binding on them under such altered conditions. Were the altered conditions such that, had
they thought of them, they would have taken their chance of them, or such that as sensible men
they would have said: ' If that happens, of course, it is all over between us"? What, in fact, was
the true meaning of the contract? Since the parties have not provided for the contingency, ought
a court to say it is obvious they would have treated the thing as at an end?
I find great difficulty in accepting this as the correct approach because it

seems to me hard to account for certain decisions of this House in this way.
I cannot think that a reasonable man in the position of the seaman in Horlock v. Beal [1916] 1
A.C. 486 would readily have agreed that the wages payable to his wife should stop if his ship
was caught in Germany at the outbreak of war, and I doubt whether the charterers in the Bank
Line case could have been said to be unreasonable if they had refused to agree to a term that the
contract was to come to an end in the circumstances which occurred. These are not the only cases
where I think it would be difficult to say that a reasonable man in the position of the party who
opposes unsuccessfully a finding of frustration would certainly have agreed to an implied term
bringing it about.
I may be allowed to note an example of the artificiality of the theory of

an an implied term given by Lord Sands in Scott & Sons v. Del Sel [1922]
S.C. 592 at p. 595: " A tiger has escaped from a travelling menagerie. The
" milk girl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of
contract: but even so it would seem hardly reasonable to base that exoneration on the ground that
' tiger days excepted ' must be held as if written into the milk contract".
I think that there is much force in Lord Wright's criticism in Denny, Mott
& Dickson at p. 275: " The parties did not anticipate fully and completely, if at all, or provide for
what actually happened. It is not possible, to my mind, to say that, if they had thought of it, they
would have said: ' Well, if ' that happens, all is over between us '. On the contrary, they would
almost certainly, on the one side or the other, have sought to introduce reservations or
qualifications or compensations ".
It appears to me that frustration depends, at least in most cases, not on
adding any implied term but on the true construction of the terms which are
in the contract read in light of the nature of the contract and of the relevant
surrounding circumstances when the contract was made. There is much
authority for this view. In British Movietonews Ltd. v. London & District
Cinemas, Ltd. [1952] A.C. 166 at p. 185 Lord Simon said: " If, on the other
hand, a consideration of the terms of the contract, in the light of the circum-
stances existing when it was made, shews that they never agreed to be bound in a fundamentally
different situation which has now unexpectedly emerged, the contract ceases to bind at that
point—not because the court in its discretion thinks it just and reasonable to qualify the terms of
the contract, but because on its true construction it does not apply in that situation ".
In Parkinson v. Commissioners of Works [1949] 2 K.B. 632 Asquith, LJ.

said (at p. 667): " In each case a delay or interruption was fundamental
enough to transmute the job the contractor had undertaken into a job of a
different kind, which the contract did not contemplate and to which it
could not apply, although there was nothing in the express language of
either contract to limit its operation in this way ". I need not multiply
citations but I might note a reference by Lord Cairns so long ago as 1876 to
additional or varied work so peculiar so unexpected and so different from
what any person reckoned or calculated upon " (Thorn v. The Mayor and
Commonalty of London, 1 App. Cas 120 at p. 127). On this view there is

no need to consider what the parties thought or how they or reasonable men in their shoes would
have dealt with the new situation if they had foreseen it. The question is whether the contract
which they did make is, on its true construction, wide enough to apply to the new situation: if it
is not
then it is at an end.
In my view, the proper approach to this case is to take from the arbitrator's
award all facts which throw light on the nature of the contract or which
can properly be held to be extrinsic evidence relevant to assist in its con-
struction and then, as a matter of law, to construe the contract and to
determine whether the ultimate situation as disclosed by the award is or
is not within the scope of the contract so construed.
The incidence of risk
Before the doctrine of frustration can apply the court must be satisfied that neither party has
agreed to run the risk of the event in question. The court construes the contract to see if the risk
is expressly provided for (a FORCE MAJEURE clause) or if there is evidence of intention to run
such risk. Indeed, FORCE MAJEURE clauses are common in modern commercial contracts so
that the parties know where they stand right from the outset.
Let us consider the circumstances in which this question of risk is particularly relevant:
(i) Express Provision
If the contract expressly provides for the risk in question that provision will usually apply and the
doctrine of frustration will not.
HOWEVER – such provision must be full and complete, and embrace totally the nature of the
risk in question.
Jackson v Union Marine Insurance Co Ltd [1874] LR 10 CP 125
A provision: “dangers and accidents of navigation excepted” didn't apply when a tanker's
availability under a charterparty was delayed for 8 months after it ran aground, because it was
deemed not to cover an accident causing injury of such an extensive nature.
SIMILARLY – in:
Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 A proviso to the effect that if
the work should be “unduly delayed or impeded” an extension of time for completion was to be
granted was deemed inapplicable to a delay causing a radical change in the obligation.
(ii) Can a contract be frustrated by events which are foreseeable by both parties?
The most obvious suggestion is that if the event was foreseeable the parties should have provided
for it in the contract. Indeed, many of the cases refer to frustration applying to “unexpected” or
“uncontemplated” events, and many obiter dicta express the view that a contract cannot be
frustrated by foreseen or foreseeable events.
However, the point remains undecided, and there is support for the opposite view, viz. Lord
Denning MR obiter in The Eugenia [1964] 1 All ER 161, and the strange decision of Goddard J
in W J Tatem Ltd v Gamboa [1938] 3 All ER 135 where he held a charterparty to be frustrated
by its foreseeable seizure, because it was not foreseeable that it would be seized for such a
lengthy period of time; i.e. a very high degree of foreseeability is required to exclude frustration!
(iii) A party cannot rely, as a basis for frustration, on an event foreseen by him but not by
the other party
Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274 The plaintiffs were granted the
right by the defendant to display an advertising sign on the defendant's hotel during a seven year
period. Within this period the hotel was compulsorily acquired and demolished, a risk of which
the defendants were aware and the plaintiffs were not. The defendant was HELD liable in
damages, the contract not being frustrated since the defendant could have provided for such risk
in the contract.
(iv) Lack of common assumption
A contract cannot be frustrated by an event which prevents performance in a manner

contemplated by one of the parties only.
Blackburn Bobbin Co Ltd v Allen & Sons Ltd [1918] 2 KB 467
Edwinton v Tsavliris [2007] EWCA CIV 547

Rix LJ said that a multi-factorial approach had to be taken to see if a contract is frustrated. This
case is worth reviewing.
For a detailed review of recent judicial analysis of Frustration - see Lord Justice Riux's judgment
extracted at the foot of this section.
Self-Induced Frustration
Frustration cannot apply where the alleged frustrating event arises from a deliberate act or choice
of one of the parties.
Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

The respondents chartered to the appellants a steam trawler fitted with an otter trawl. Both
parties knew that it was illegal to use an otter trawl without a licence from the Canadian
government. The appellants applied for five licenses for the trawlers they were operating,
including the respondent's trawler. However, they were granted three licenses only, which they
used for their own vessels, and proceeded to repudiate the charterparty on grounds of frustration.
The Privy Council HELD that there was no frustration; the failure of the charterparty was a result
of the appellant's own election.
N.B. It is uncertain whether a negligent act can amount to self-induced frustration, though the
House of Lords have suggested that it might in obiter dicta in Joseph Constantine Steamship
Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154
Furthermore, the burden of proof of self-induced frustration rests upon the party alleging it.
13.5.3 The effects of the doctrine of frustration
At common law
At common law the contract was terminated automatically and immediately, and both parties
were released from their future obligations under the contract; however, they were required to
fulfil any obligations which fell due before the occurrence of the frustrating event i.e. the loss lay
where it fell.
In other words the contract was not void right from the outset, but only from the occurrence of
the frustrating event (cf the effect of mistake which overrides the contract right from the
beginning).
This led to unfortunate consequences:
Appleby v Myers [1867] LR 2 CP 651
P undertook to erect machinery upon the D's premises, the work to be paid for upon completion.
When the work was almost completed both the premises and the machinery already erected were
destroyed by fire. It was HELD that the contract was frustrated; however, the plaintiff could
recover nothing for the work done since the obligation to pay didn't arise until completion.
Chandler v Webster [1904] 1 KB 493
P agreed to hire from D a room in Pall Mall to watch Edward VII's coronation procession. The
price was £141, payable immediately. The plaintiff paid £100, but before he could pay the
balance the procession was cancelled. P sought to recover the £100 paid. The Court of Appeal
HELD that not only did he fail to recover his £100, but also he was liable to pay the balance of
£41, an obligation which fell due before the occurrence of the frustrating event.
Chandler v Webster in particular provoked much judicial criticism, and was eventually overruled
to some extent in:
The Fibrosa [1942] 2 All ER 122
The respondents contracted with the appellants, a Polish company, to manufacture certain
machinery and to deliver it to Gdynia. Part of the price was to be paid in advance, and the
appellants paid £1,000. However, the contract was frustrated by the occupation of Gdynia by
hostile German forces in September 1939. The appellants requested the return of their £1,000.
This request was refused on the basis that considerable work had already been done on the
machinery.
Clearly, if Chandler v Webster had been followed then the £1,000 would have been irrecoverable
because it had already been paid at the time of the frustrating event. However, the House of
Lords HELD that the appellants could recover their £1,000. The basis for this was not the
contract which had ceased to exist, but an action in what is known as quasi-contract for the
restitution of money paid where there has been total failure of consideration. Consideration in
quasi-contract does not have the same meaning as the consideration necessary to formation of
contract; thus, if the party paying the money has received no part of the performance for which
he bargained (i.e. none of the machinery had been delivered) there is total failure of
consideration.
THUS – the position was improved, but was still unsatisfactory for two reasons:
(i) The party who had to return the pre-payment might have incurred expenses but would be
entitled to nothing (as in The Fibrosa ).
(ii) If the party seeking to recover the pre-payment had received any part of what he bargained
for, no matter how small, e.g. 1% of the machinery in The Fibrosa , there would be no total
failure of consideration.
An attempt to deal with these difficulties led to the enactment of:
***
The Law Reform (Frustrated Contracts) Act 1943
The Law Reform (Frustrated Contracts) act 1943
The Act applies to all contracts governed by English Law except:
* Contracts for the carriage of goods by sea or charterparties (other than a time charterparty or
charterparty by way of demise).
* Contracts of insurance.
* Contracts for the sale of specific goods where the goods have perished, s.7 Sale of Goods Act
1979 .
THUS – in modern times it is the 1943 Act which must be applied to ascertain the position of the
parties upon the occurrence of frustration and not the common law (unless the contract falls
within the exempted categories).
***
What is the effect of the 1943 Act?
(i) The right to recover money paid and the right to set-off expenses against pre-payment
Section 1(2):
“All sums paid or payable to any party in pursuance of the contract before the time when the
parties were so discharged ... shall, in the case of the sums so paid, be recoverable from him as
money received by him for the use of the party by whom the sums are paid, and, in the case of
sums so payable, cease to be so payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses before
the time of discharge in, or the purpose of, the performance of the contract, the court may, if it
considers it just to do so having regard to all the circumstances of the case, allow him to retain
or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an
amount in excess of the expenses so incurred.”
There are three main points to be made about s.1(2):
(a) It applies only when there has been a pre-payment or agreement to make a prepayment.
(b) It embodies the rule in The Fibrosa in terms of recovering pre-payments, but it is not now
necessary to prove total failure of consideration.
(c) It goes further than The Fibrosa in that it gives the court a discretionary power to permit the
payee to set-off against the sum paid or payable a sum not exceeding the value of any expenses
incurred in performing the contract before frustration occurred.
X can look to s.1(2) for £2,000 maximum (if anything);
X must look to s.1(3) (yet to be considered) for the remaining £7,000 (if anything); X couldn't
look to S.1 (2) at all if there had been no pre-payment or agreed pre-payment.
(ii) Restitution of Benefits other than Money where there has been Partial Performance
Section 1 (3) represents an attempt to deal with the difficulties created by cases like Appleby v
Myers [1867] LR 2 CP 651.
Section 1 (3):
“Where any party to the contract has, by reason of anything done by any other party thereto in, or
for the purpose of, the performance of the contract, obtained a VALUABLE BENEFIT (other
than the payment of money) before the time of discharge, there shall be recoverable from him by
the other party such sum (if any), not exceeding the value of the said benefit to the party
obtaining it, as the court considers just, having regard to all the circumstances of the case and in
particular:
(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or
for the purpose of, the performance of the contract, including any sums paid or payable by him to
any other party in pursuance of the contract and retained or recoverable by that party under
S.1(2), and
(b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of
the contract.”
Effectively, either party may be awarded compensation in respect of any non-monetary valuable
benefit conferred by him upon the other party in pursuance of the contract.
This involves a two-stage process:

(a) Identification and valuation of the “valuable benefit” which will set the upper limit of any
“just sum” award.
(b) Calculation of the “just sum”.
(a) Identification and valuation of the Valuable Benefit:
This is very difficult and controversial, for, if we take a case like Appleby v Myers there are two
alternative arguments, viz. Firstly, that no valuable benefit has been obtained because the
completed work has been totally destroyed; or secondly, on a more liberal interpretation, that a
valuable benefit was obtained by the owner in that work had been done on his land as per
contract immediately before discharge.
Perhaps, in an Appleby v Myers situation, the second interpretation is preferable in that the Act
does speak of a valuable benefit being obtained BEFORE the time of discharge, and the owner is
more likely to be insured against fire than the builder. However, even with a liberal interpretation
the Act wouldn't cover all situations, e.g. in Krell v Henry Krell would not be able to claim that
he conferred a valuable benefit upon Henry by arranging to have his furniture stored away whilst
Henry was in the flat.
Section 1(3) was considered by Robert Goff J, whose judgment was affirmed by the Court of
Appeal and House of Lords, in:
B P Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 125

Hunt, who owned an oil concession in Libya, contracted for its development with B P
Exploration. B P were to provide the capital and expertise, and if and when the oil was
developed and sold B P would be paid back from Hunt's share of the oil. After B P had done
considerable work and incurred great expense in developing the oil field successfully, the Libyan
government withdrew the concession and the contract was frustrated. B P claimed under s.1(3).
The House of Lords (affirming the judgment of Robert Goff J) HELD that B P had incurred
expenditure under the contract, and consequently a valuable benefit had been conferred upon
Hunt in the form of the increased value in his share of the concession.
(b) Calculation of the “Just Sum”:
The second stage is for the court to assess what sum (not exceeding the value of the benefit) it
considers just to award (if anything). In accordance with s.1(3) it must consider any sum
received by the plaintiff under s.1(2) if any, and the circumstances giving rise to the frustration
of the contract, i.e. the position AFTER the frustrating event, e.g. in Appleby v Myers , the fact
that the owner's valuable benefit no longer exists!
X can look to s.1(3) to the extent of £9,000, if he is deemed to have conferred a valuable benefit
from Y immediately before discharge (a big if!).
The court will take account the destruction of the machinery in the calculation of the “just sum”.
Section 1(2) does not apply because there is no pre-payment.
Perishing of specific goods – Section 7 SOGA 1979
“Where there is an agreement to sell specific goods, and subsequently the goods, without any
fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is
thereby avoided.”
The section applies only to specific goods and will operate therefore in cases where the property
passes under s.18 rr 2 and 3.
The consequences of frustration – s.7 SOGA 1979 cases
The Law Reform (Frustrated Contracts) Act 1943 is not applicable.
1. Both parties discharged from contractual obligation.
2. Where the price, or part thereof, has been paid it can be recovered on a total failure of
consideration
3. On a total failure of consideration the seller cannot deduct anything for expenses incurred
before frustrating event occurred.
4. Payments made under a contract cannot be recovered if there is only a partial failure of
consideration.
5. If price not paid but [S] has delivered some goods cannot sue for price.
Cutter v Powell (1795) 6 Term Reports 320
A seaman whose wages were due on completion of the voyage, died during it. His executrix
recovered nothing.
Unascertained goods
Doubtful if frustration will ever be successful – ‘genus numquam perit', cf. the perishing of the
entire bulk.
Appleby v Myers (1867) et al.
But see Sainsbury v Street [1972] 1 WLR 834
CTI Group v Transclear SA [2008] EWCA Civ 856

Court of Appeal
The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To
show frustration it would be necessary to demonstrate that performance of the new contract
would be fundamentally different from that originally contemplated. The Court of Appeal also
confirmed that frustration can apply to a contract for the sale by description of unascertained
goods of a specified origin.
For frustration other than that arising under s.7 SOGA 79
The Law Reform (Frustrated Contracts) Act 1943
1. Can recover payments even on partial failure of consideration (s.1(2) LR(FC)A 43).
2. Payee can retain part or all of sum otherwise recoverable if he has incurred expenses in or for
the performance of the contract (s.1(2) LR(FC)A 43).
3. Buyer can be compelled to pay for any goods received (s.1(3) LR(FC)A 43 – Cutter v Powell
overruled for frustration at common law (not under s.7 cases above)
See B P Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 125 per Robert Goff J.
***
CASE STUDY ON FRUSTRATION
Edwinton v Tsavliris [2007] EWCA CIV 547

Rix LJ said that a multi-factorial approach had to be taken to see if a contract is frustrated. This
case is worth reviewing.
# Two classic modern statements of the incidence of frustration are to be found in the dicta of
Lord Radcliffe in Davis Contractors Ltd v. Fareham Urban District Council [1956] AC 696 at
729 and Lord Simon of Glaisdale in National Carriers Ltd v. Panalpina (Northern) Ltd [1981]
AC 675 at 700. Lord Radcliffe said:
"…frustration occurs whenever the law recognises that without default of either party a
contractual obligation has become incapable of being performed because the circumstances in
which performance is called for would render it a thing radically different from that which was
undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."[1]
# Lord Simon said:
"Frustration of a contract takes place when there supervenes an event (without default of either
party and for which the contract makes no sufficient provision) which so significantly changes
the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or
obligations from what the parties could reasonably have contemplated at the time of its execution
that it would be unjust to hold them to the literal sense of its stipulations in the new
circumstances; in such case the law declares both parties to be discharged from further
performance."
# The reference by Lord Simon in that latter passage to the role that the concept of justice plays
in the doctrine has a distinguished pedigree, which he elaborated at 701:
"In the first place, the doctrine has been developed by the law as an expedient to escape from
injustice where such would result from enforcement of a contract in its literal terms after a
significant change in circumstances. As Lord Sumner said, giving the opinion of a strong Privy
Council in Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] A.C. 497, 510: "It is really a
device, by which the rules as to absolute contracts are reconciled with a special exception which
justice demands."…
Secondly, in the words of Lord Wright in the Cricklehood Property case [Cricklewood Property
and Investment Trust Ltd v. Leighton's Investment Trust Ltd [1945] AC 221] at p. 241: "…the
doctrine of frustration is modern and flexible and is not subject to being constricted by an
arbitrary formula." It is therefore on the face of it apt to vindicate justice wherever owing to
relevant supervening circumstances the enforcement of any contractual arrangement in its literal
terms would produce injustice."
# Lord Wilberforce (at 696H) and Lord Roskill (at 712D/E) also referred to the doctrine of
frustration as a means for finding just solutions or avoiding injustice.
# In The Super Servant Two [1990] 1 Lloyd's Rep 1, at 8, Bingham LJ on the same subject
included the following as a proposition established by the highest authority and not open to
question:
"The object of the doctrine was to give effect to the demands of justice, to achieve a just and
reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice
where such would result from enforcement of a contract in its literal terms after a significant
change in circumstances…"
# The particular problem of delay as a cause of frustration has to be tested as at the time it had to
be considered by the parties, but on an objective basis. For these purposes past and prospective
delay has to be taken into account. The issue, if disputed, requires an informed judgment and the
decision on such an issue by the tribunal of fact cannot easily be upset on appeal (subject of
course to any error of law). As Lord Sumner famously said in Bank Line, Limited v. Arthur
Capel & Co [1919] AC 435 at 454 –
"The probabilities as to the length of the deprivation and not the certainty arrived at after the
event are also material. The question must be considered at the trial as it had to be considered by
the parties, when they came to know of the cause and the probabilities of the delay and had to
decide what to do. On this the judgments in the above cases substantially agree. Rights ought not
to be left in suspense or to hang on the chances of subsequent events. The contract binds or it
does not bind, and the law ought to be that the parties can gather their fate then and there. What
happens afterwards may assist in showing what the probabilities really were, if they had been
reasonably forecasted, but when the causes of frustration have operated so long or under such
circumstances as to raise a presumption of inordinate delay, the time has arrived at which the fact
of the contract falls to be decided."
# To which has to be added an equally well-known passage from the speech of Lord Roskill
(with whom their other Lordships agreed) in Pioneer Shipping Ltd v. BTP Tioxide Ltd (The
"Nema") [1982] AC 724 at 752:
"But in others, where the effect of that event is to cause delay in the performance of contractual
obligations, it is often necessary to wait upon events in order to see whether the delay already
suffered and the prospects of further delay from that cause, will make any ultimate performance
of the relevant contractual obligations "radically different," to borrow Lord Radcliffe's phrase,
from that which was undertaken under the contract. But, as has often been said, business men
must not be required to await events too long. They are entitled to know where they stand.
Whether or not the delay is such as to bring about frustration must be a question to be determined
by an informed judgment based upon all the evidence of what has occurred and what is likely
thereafter to occur. Often it will be a question of degree whether the effect of the delay suffered,
and likely to be suffered, will be such as to bring about frustration of the particular adventure in
question. Where questions of degree are involved, opinions may and often legitimately do differ.
Quot homines, tot sententiae. The required informed judgment must be that of the tribunal of fact
to whom the issue has been referred. That tribunal, properly informed as to the relevant law,
must form its own view of the effect of that delay and answer the critical question accordingly.
Your Lordships' House in Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H. [1962] A.C. 93,
decided that while in the ultimate analysis whether a contract was frustrated was a question of
law, yet as Lord Radcliffe said at p. 124 in relation to that case "that conclusion is almost
completely determined by what is ascertained as to mercantile usage and the understanding of
mercantile men."
# In the light of these principles, it is instructive to consider as illustrations some of the well
known cases concerned with the frustration of a charterparty which have been relied on before
this court.
# Anglo-Northern Trading Company, Limited v. Emlyn Jones & Williams [1917] 2 KB 78

concerned the frustration of a one year time charter by requisition during the First World War.
The requisition occurred within three months from the end of the charter, in July 1916. There
was an exception, but no off-hire provision, for restraint of princes. There was no intimation of
the length of time for which the vessel was requisitioned. The arbitrator therefore held that there
was no frustration, but stated a special case for the court. In finding the charter to have been
frustrated, Bailhache J opined that –
"The main consideration is the probable length of the total deprivation of use of the vessel as
compared with the unexpired duration of the charterparty" (at 84).
# On appeal to this court, that case was heard together with another appeal, see Countess of
Warwick Steamship Company v. Le Nickel Société Anonyme [1918] 1 KB 372, also concerning
the requisition of a one year time charter, in that case occurring some six months from its expiry,
in October 1915. Bailhache J's dictum was approved (at 378). However, this court treated the
prospective delay, despite the absence of any particular evidence deployed or found upon in the
Anglo-Northern arbitration, as being the same in that case as in the Countess of Warwick
Steamship case, namely "it was a question of goodbye to them; that there was no expectation of
return" (at 379, 380). A finding of frustration founded on requisition in the middle of the Great
War was inevitable. It seems to me that in that context the dictum cited above contributes little
insight into different cases.
# Bank Line v. Capel [1919] AC 435 is the most famous of the First World War requisition
cases. There another vessel subject to a one year time charter was requisitioned, but the
requisition occurred before delivery, in May 1915. The charter as usual made provision for
restraint of princes and there was also a special clause giving the charterer an option to maintain
or cancel the charter if the vessel could not be delivered "through unforeseen circumstances".
Such clauses were relied on for saying that the doctrine of frustration could not apply, but
unsuccessfully. By September 1915 the owner was entitled to say that the charter had been
frustrated. Lord Sumner qualified Bailhache J's dictum in Tamplin's Case by saying that –
"…I agree in the importance of this feature, though it may not be the main and certainly is not
the only matter to be considered" (at 454).
# He also said –
"A contingency may be provided for, but not in such terms as to show that the provision is meant
to be all the provision for it" (at 456); and
"Delay even of considerable length and of wholly uncertain duration is an incident of maritime
adventure, which is clearly within the contemplation of the parties, such as delay caused by ice
or neaping, so much so as to be often the subject of express provision. Delays such as these may
very seriously affect the commercial object of the adventure, for the ship's expenses and over-
head charges are running on and, even with the benefit of Protection and Indemnity Club
policies, the margin of profit is quickly run off. None the less this is not frustration; the delay is
ordinary in character, and in most cases the charterer is getting the use of the chartered ship, even
though it is unprofitable to him…" (at 458/9).
# Tatem v. Gamboa [1939] 1 KB 132, already mentioned above, concerned a 30 day charter of a
vessel by the Republicans during the Spanish Civil War. After a fortnight the vessel was seized
by a Nationalist ship and detained for just under two months, whereupon she was redelivered to
her owner. The charterers claimed that the charter had been frustrated from the moment of
seizure, and Goddard J agreed. He was prepared to assume that the parties contemplated that the
vessel might be seized and detained, but not for the length of time in question (at 135/6). He said
(at 137/8):
"It is true that in many of the cases there is found the expression "unforeseen circumstances", and
it is argued that "unforeseen circumstances" must mean circumstances that could not have been
foreseen. But…it makes very little difference whether the circumstances are foreseen or not. If
the foundation of the contract goes, it goes whether or not the parties have made a provision for
it."
# Goddard J considered that the requisition cases mentioned above were of assistance to him in
this regard, since requisition must have been anticipated there.
# Mr Hamblen for Tsavliris relied strongly on Tatem v. Gamboa, as had his junior counsel, Mr
Hill, before the judge. In my judgment, right or wrong, its reasoning proves too much. If the
charter was frustrated at once, then that must have been because the prospective delay already as
at that time destroyed the contract: as may well have been the case with seizure of a vessel by
opposing forces during war-time, even if the issue of prospective delay is not discussed expressly
in the judgment. Such immediate frustration, however, is not the case here, for it is no longer
said that the charter was frustrated before 13 October 2003. Moreover, as the judge remarked,
there was no question in that case of any possibility of recourse to a court to obtain a remedy
against unlawful seizure. In my judgment, war-time requisition, seizure or trapping (see, for
instance, the subsequent cases arising out of the Iran-Iraq war and the closing of the Shatt-el-
Arab waterway) are of uncertain relevance. Some wars, as modern times have shown, may of
course be very short: the possibility therefore that an outbreak of war may come to a rapid end
may have to be considered: see The Wenjiang (No 2) [1983] 1 Lloyd's Rep 400 per Bingham J at
404/406. But subject to that possibility, the requisition, seizure or trapping of a vessel in the
course of a major conflict are quite unlike the present case. One cannot negotiate or litigate one's
way out of such consequences of war. If in such circumstances the charter has not made express
provision for what has occurred (as may yet happen, eg in the case of requisition, or by reference
to a war clause: see Kuwait Supply Co v. Oyster Management Inc (The "Safeer") [1994] 1
Lloyd's Rep 637), the possibility of frustration, subject to any default by either party, can never
be far away.
# It is certainly true, however, that a contract may be frustrated even though the supervening
event was foreseeable or contemplated. That, after all, is what happened in the requisition cases,
as it did again in The Nema, where the frustrating event was a lengthy strike: even though strikes
were of course not only foreseeable, but the subject matter of express provision in the contract in
that case.
# Apart from Tatem v. Gamboa, the authority on which Mr Hamblen placed greatest reliance
was Eridania SpA v. Rudolf A Oetker (The "Fjord Wind") [1999] 1 Lloyd's Rep 307. That,
however, was a very different kind of case. The claimants there were cargo owners whose goods
were being carried on a vessel whose owners had let her to disponent owners who had in turn
voyage chartered her to the buyers of the goods. The vessel had suffered an engine breakdown
on the voyage, which led to lengthy delays and prospective further delays for repairs. The judge,
Moore-Bick J, found that the voyage charter and bill of lading would have been frustrated, but
for the fact that the defendant owners and disponent owners were in breach of contract. His
reasons were primarily that –
"there was a significant risk that after nearly five months in this vessel this cargo would have
suffered very serious damage as a result of mould growth. From the point of view of both the
cargo-owner and the shipowner a contract for a voyage of about one month which involved no
appreciable risk of damage to the cargo resulting from its inherent qualities had been transformed
into one which involved both prolonged delay and a significant risk of serious damage. That in
my judgment rendered the performance of the contract radically different" (at 333).
# I am not in general assisted by this authority, which it seems to me turns ultimately on the
consequences for the cargo of the prolonged delay in question. However, Moore-Bick J did
emphasise the learning of The Nema, saying that –
"As Lord Roskill pointed out in The Nema, whether a contract has been frustrated in
circumstances such as those of the present case is essentially a matter of judgment. In a case
where an unforeseen event has led to a prolongation of the voyage which is sufficient to give rise
to a significant risk, or worse, of damage to the cargo, the question whether performance of the
voyage has become radically different is essentially one of fact and degree" (at 332).
Although there was an appeal to this court (at [2000] 2 Lloyd's Rep 191), it did not concern
issues of frustration.
# There were lengthy submissions before us from both parties as to the role in the doctrine of
frustration of the fact that a risk might be foreseen or foreseeable. We had cited to us numerous
passages from a major work of broad, detailed and exceptional scholarship by Professor Sir
Guenter Treitel QC, his Frustration and Force Majeure, 2nd ed 2004. Similar submissions in
reliance on this work were made to the judge. Mr Hamblen's summary of Professor Treitel's
thesis as relevant to present purposes is that foreseeability of a risk may be a weak or
inconsequential factor to take into account, unless the three tests of kind, extent, and degree are
met. As to kind and extent, both the type and the extent or length of the interference or delay
must be foreseeable; as to degree, the degree of foreseeability has to be very high.
# The significance of foreseen or of unforeseen but foreseeable events is in my judgment well, if

briefly, summarised in Chitty on Contracts, 29th ed, 2004 at paras 23-057/8. Para 23-057 which
deals with foreseen events can be seen to make the point that there is no rule of exclusion, at best
some prima facie indications. Thus –
"While an unforeseen event will not necessarily lead to the frustration of a contract, a foreseen
event will generally exclude the operation of the doctrine. The inference that a foreseen event is
not a frustrating event is only a prima facie one and so can be excluded by evidence of contrary
intention."
# However, there is no finding in terms that the detention by KPT which occurred in this case
was actually foreseen (or unforeseen) even by Tsavliris, merely that unreasonable detention by
port authorities is a "risk of the industry", and as such foreseeable. In such circumstances it is
para 23-058 which is perhaps particularly pertinent, which reads –
"Event foreseeable but not foreseen. When the event was foreseeable but not foreseen by the
parties, it is less likely that the doctrine of frustration will be held to be inapplicable. Much turns
on the extent to which the event was foreseeable. The issue which the court must consider is
whether or not one or other party has assumed the risk of the occurrence of the event. The degree
of foreseeability required to exclude the doctrine of frustration is, however, a high one: "
'foreseeability' will support the inference of risk-assumption only where the supervening event is
one which any person of ordinary intelligence would regard as likely to occur, or…the
contingency must be 'one which the parties could reasonably be thought to have foreseen as a
real possibility.' " "
# The latter quote by Chitty is from Treitel's work at para 13-09, itself citing the American
authority of Mishara Construction Company Inc v. Transit-Mixed Concrete Corp 310 NE 2d
363, 367 (1974). The judge took account of such submissions: see at para 84 of his judgment.
Submissions on appeal
# The submissions on appeal followed the same pattern as those at trial (see above), but refined
to take account of the fact that Tsavliris were no longer contending for a frustration date earlier
than 13 October. In particular, Mr Hamblen on behalf of Tsavliris submitted that the judge had
erred in his final conclusions at para 106. Thus he erred:
(i) in resisting the compelling case (which the judge had himself described as a "realistic
argument" (at para 106(iii)) for the frustration of a charter whose unexpired period was far
exceeded by the probable length of delay;
(ii) in being influenced or overly influenced by "the risk in the salvage context" (at para 106(iv)),
when that risk was poorly and too broadly defined, and, in the form in which it eventuated, was
neither found to have been actually foreseen nor could properly be said to be foreseeable, neither
in its type, nor in its extent, and not to the degree of foreseeability required by sound doctrine, at
any rate not as "a real possibility" (see Mishara and Treitel), and was arguably unprecedented;
(iii) in being influenced by "the decision by Tsavliris to opt in the first instance for a negotiated
setting" (at para 106(iv)), when that was relevant if at all to negative the complaint by Global of
self-induced frustration and otherwise was merely part of the background which led, with the
collapse of that strategy, to the frustration of the charter;
(iv) in concluding that Tsavliris had assumed the risk of detention under "the sphere of
responsibility" which it had undertaken under the charter (para 106(iv)), when the cause of the
detention which took place was not in truth about port dues at all, since from beginning to end
the KPT had made it clear that they wanted payment or security for the pollution caused by the
casualty and would not release any vessel until that was provided;
(v) in being influenced or overly influenced by the so-called "striking feature of the case" that as
at 13 October there was still time, before the charter could be said to be frustrated, to invoke the
assistance of the Pakistani courts (para 106(v)), when (a) the charter was already frustrated, and
(b) the prospects of a successful outcome within any reasonable time, especially following
appeal, were wholly uncertain and speculative, as was shown ultimately by the fact that (c) the
litigation did not succeed in obtaining the release of the vessel without further negotiations
involving the agreement of and payments by third parties.
# In sum, Mr Hamblen submitted that the judge had erred in not asking himself the critical
question as at 13 (or let it be 17) October 2003: whether the delay which had already taken place
added to the prospective delay amounted to a total, ongoing, indefinite delay of such
unreasonable and inordinate length, especially when viewed against the short period of the
charter and its extremely short unexpired portion, as to cause performance of the charter in those
circumstances to amount to that radically different thing which amounts in law to frustration. If
the judge had found what the prospective delay was as at 13 or 17 October, and, in the light of
that finding had asked himself the critical question, he would have been bound to say, as this
court should say, that the charter was by then frustrated, as Tsavliris had claimed in their letter of
21 October.
# On behalf of Global, Mrs Blackburn submitted that the judge was right for the reasons which
he gave, and, as she had also submitted at trial, for additional reasons (such as self-induced
frustration, breach of the safe port warranty of due diligence, the obligation to redeliver in
Fujairah, the rider clause) which formed part of the respondents' notice. She singled out Mr
Constantinides' evidence, both in relation to his strategy for a negotiated solution at any rate by
Christmas, and in accepting the risk of such unreasonable detention by KPT as had occurred in
this case as being definitely foreseeable as a risk of the industry, and the generally
uncontroversial evidence of the Pakistani law experts, as constituting the critical facts of the
case. The assessment of those facts was for the trial judge.
Discussion
# It is to be observed that Tsavliris's appeal does not amount to an attack on the judge's
restatement of the law, but on his application of that law to the facts of the case. To a certain
extent complaint is made about his findings of fact themselves, such as his attitude to the
uncertainties and length of litigation, particularly on appeal from the Pakistani trial court.
Ultimately however the complaint is that the judge weighed the facts, or the various factors
which he had to assess, wrongly and was therefore led to the wrong conclusion. He was helped
in that error by defining the risk which might have had to be calculated in the parties'
contemplation at the time of contracting too broadly, and in failing to consider sufficiently
explicitly the future period of uncertainty and delay.
# In the course of the parties' submissions we heard much to the effect that such and such a factor
"excluded" or "precluded" the doctrine of frustration, or made it "inapplicable"; or, on the other
side, that such and such a factor was critical or at least amounted to a prima facie rule. I am not
much attracted by that approach, for I do not believe that it is supported by a fair reading of the
authorities as a whole. Of course, the doctrine needs an overall test, such as that provided by
Lord Radcliffe, if it is not to descend into a morass of quasi-discretionary decisions. Moreover,
in any particular case, it may be possible to detect one, or perhaps more, particular factors which
have driven the result there. However, the cases demonstrate to my mind that their circumstances
can be so various as to defy rule making.
# In my judgment, the application of the doctrine of frustration requires a multi-factorial

approach. Among the factors which have to be considered are the terms of the contract itself, its
matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in
particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually
and objectively, and then the nature of the supervening event, and the parties' reasonable and
objectively ascertainable calculations as to the possibilities of future performance in the new
circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are
about the allocation of risk, and since the allocation and assumption of risk is not simply a matter
of express or implied provision but may also depend on less easily defined matters such as "the
contemplation of the parties", the application of the doctrine can often be a difficult one. In such
circumstances, the test of "radically different" is important: it tells us that the doctrine is not to be
lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that
there has to be as it were a break in identity between the contract as provided for and
contemplated and its performance in the new circumstances.
# What the "radically different" test, however, does not in itself tell us is that the doctrine is one
of justice, as has been repeatedly affirmed on the highest authority. Ultimately the application of
the test cannot safely be performed without the consequences of the decision, one way or the
other, being measured against the demands of justice. Part of that calculation is the consideration
that the frustration of a contract may well mean that the contractual allocation of risk is reversed.
A time charter is a good example. Under such a charter, the risk of delay, subject to express
provision for the cessation of hire under an off-hire clause, is absolutely on the charterer. If,
however, a charter is frustrated by delay, then the risk of delay is wholly reversed: the delay now
falls on the owner. If the provisions of a contract in their literal sense are to make way for the
absolving effect of frustration, then that must, in my judgment, be in the interests of justice and
not against those interests. Since the purpose of the doctrine is to do justice, then its application
cannot be divorced from considerations of justice. Those considerations are among the most
important of the factors which a tribunal has to bear in mind.
# Mr Hamblen submitted that whereas the demands of justice play an underlying role, they
should not be overstated. He referred the court to Chitty at para 23-008 ("But this appeal to the
demands of justice should not be taken to suggest that the court has a broad absolving power
whenever a change of circumstances causes hardship to one of the contracting parties…Such a
test is too wide, and gives too much discretion to the court"). I respectfully agree. Mr Hamblen
also referred to Treitel at para 16-009 ("The "theory" does not, in other words, supersede the
rules which determine the circumstances in which the doctrine of frustration operates"). I would
again respectfully agree, as long as it is not sought to apply those rules as though they are
expected to lead one automatically, and without an exercise of judgment, to a determined answer
without consideration of the demands of justice.
# Mr Hamblen further cited two authorities. In Notcutt v. Universal Equipment Co (London) Ltd
[1986] 1 WLR 641, this court had to consider a contract of employment which the trial judge had
found to have been frustrated by the permanent incapacity of an employee. The narrow issue was
whether the contract should have come to an end by frustration (without notice) or whether the
proper way of ending it was by the employer giving notice, during which period there would
have been a statutory requirement of sick pay. The appeal was dismissed. There was a
submission, based upon some of the dicta cited above, that an additional condition for the
incidence of frustration was that the survival of the contract should be unjust. In his judgment
(with which the only other member of the court, Sheldon J) agreed, Dillon LJ said (at 647):
"I do not for my part see that these references to justice or injustice introduce any further factor.
If the unexpected event produces an ultimate situation which, as a matter of construction, is not
within the scope of the contract or would render performance impossible or something radically
different from that which was undertaken by the contract, then it is unjust that the contracting
party should be held to be still bound by the contract in those altered circumstances. I approach
the facts of this case on the footing that the test to be satisfied is that explained by Lord Reid and
Lord Radcliffe in the passages set out above."
# In a case in which the contract was overcome by permanent disability and the court considered
that it would be unjust for the contract to survive in such circumstances, I see no difficulty with
these observations.
# In Eridania SpA v. Rudolf Oetker (The "Fjord Wind") [1999] 1 Lloyd's Rep 307 at 328/9
Moore-Bick J said, with reference to Bingham LJ's reference to the demands of justice in The
Super Servant Two (see above), that –
"his intention was clearly to describe the considerations which had given rise to the development
of the doctrine rather than to suggest that the Court is entitled to adopt a more liberal approach
than would be indicated by Lord Radcliffe's speech. I am unable, therefore, to accept Mr Gee's
submission that in this case I ought to have regard to some wider considerations of justice and
fairness than the earlier authorities would otherwise suggest."
That reflects the formulation of Chitty (above).

# I turn then to the facts of this case. I agree with Mr Hamblen that the critical question was
whether, as of 13 October, (or 17 October, and for present purposes I am content to adopt either
date), the delay which had already occurred and prospective further delay would have led the
parties at that time to have reasonably concluded that the charter was frustrated. No later date of
frustration was relied upon. For these purposes, since on the facts a delay of some 5 weeks had
already occurred and the prospective delay involved in a revised strategy involving litigating in
the Pakistani courts would involve a further 4 to 6 weeks at least, the first question to consider is
whether Mr Hamblen is right in his submission that the Bailhache J test of comparing the
probable length of the delay with the unexpired duration of the charter is the critical or main and
in any event overbearing test to apply (see Anglo-Northern, Bank Line, Tatem v. Gamboa).
# In my judgment it is not. It may be an important consideration, but it is, on our facts, only the
starting point. In the first place, the development of the law shows that such a single-factored
approach is too blunt an instrument. As stated above, a finding of frustration of a charter of no
longer than a year, based on requisition during the First World War, against the view that
requisition meant "goodbye to them", was in any event close to inevitable. Secondly, requisition,
like seizure in Tatem v. Gamboa, could not be rectified; whereas in our case, the consequences
of the detention by the port authorities remained very much a matter for enquiry, negotiation,
diplomacy, and, whatever the ordering of the tactics, legal pressure. Thirdly, where, as in our
case, the supervening event comes at the very end of a charter, with redelivery as essentially the
only remaining obligation, the effect of the detention on the performance of the charter is purely
a question of the financial consequences of the delay, which will fall on one party or the other,
depending on whether the charter binds or does not bind. It is not like the different situation
where the supervening event either postpones or, which may be even worse, interrupts the heart
of the adventure itself: as, for instance, in Tatem v. Gamboa or The Fjord Wind. In our case, the
purpose for which the Sea Angel had been chartered, namely the lightening of the casualty, had
been performed.
# Fourthly, in general terms the contractual risk of such delay caused by detention by
government authorities was firmly on the charterers, Tsavliris. I will develop this below: but in
essence it follows from their obligation to pay hire, subject to the off-hire clause, until redelivery.
And even the off-hire clause itself expressly provided for "detention by the authorities at home or
abroad" but not in terms which were relied on as covering the particular event here. Fifthly, as
was even common ground, the risk of detention by the littoral authorities arising out of a salvage
situation where there was a concern about pollution was, at any rate in general terms,
foreseeable. This remained the case even if, as Mr Hamblen submitted, the particular form in
which that risk showed itself in this case was unforeseeable, or only weakly foreseeable, or was
even unprecedented. Sixthly, that general risk was foreseeable by the salvage industry as a
whole, and was provided for by the terms of that industry: see SCOPIC and Brice's commentary
on it. Indeed, in my view the particular risk which occurred was within the provisions of
SCOPIC. As such, those matters were part of the matrix itself of the charter under enquiry. In
this connection, I bear in mind that Global were not themselves part of the salvage industry: but
they chartered the vessel to well-known international salvors, to perform salvage services
directly to a casualty, at a high price which reflected the emergencies and risks of such services:
and therefore the foreseeable risks of the salvage context, and the incidence of those risks subject
to SCOPIC, are properly part of the matrix of the charter. In justice, they bear particularly on
Tsavliris, the salvors, themselves.
# Seventhly, it is now common ground, on the particular facts of this case, that, short as the
charter was, a mere 20 days, and shorter still as the unexpired period of the charter was, a mere 3
days, there was no frustration until the strategy of commercial negotiation had initially failed (by
13 or 17 October), some five weeks after the detention began. So, in any event, this is not a case
like Anglo-Northern and Tatem v. Gamboa, where the charters were frustrated then and there by
the supervening event. Ours is one of those "wait and see" situations discussed in other
authorities. In such situations, it is a matter for assessment, on all the circumstances of the case,
whether by a particular date the tribunal of fact, putting itself in the position of the parties, and
viewing the matter in the role of reasonable and well-informed men, concludes that those parties
would or properly speaking should have formed the view that, in all fairness and consistently
with the demands of justice, their contract, as something whose performance in the new
circumstances, past and prospective, had become "radically different", had ceased to bind.
# For these reasons, some of which have been sufficiently grounded above, and others of which I
shall elaborate below, it seems to me that the primary point on which Tsavliris have founded
their claim to frustration fails. I turn to discuss particular aspects of these reasons.
The test as of 13/17 October

# Mr Hamblen submitted that the judge had not properly asked himself the right question as of
13/17 October because he did not state in terms what the length of the prospective delay was as
of the time in mid-October when the commercial strategy failed and it had become necessary to
have recourse to law. In my judgment, that criticism essentially fails. The judge had squarely
before him Mr Hamblen's argument, there made by Mr Timothy Hill, Mr Hamblen's junior on
this appeal, that "as of the 13th – 18th October…the probable length of delay, compared to the
unexpired period of the charterparty, meant that the charterparty was frustrated" (at para
106(iii)). He spoke again of "the prospective extent of the delay" at para 106(v). He had
previously for these purposes carefully considered the question of the availability of the
Pakistani court and the time-scale within which it might be able or not to grant effective relief (at
para 104). I am satisfied that the judge was answering the right question. As he said (ibid) –
"Plainly, if effective and timely relief could be anticipated, the charterparty could not yet be
regarded as frustrated."
# The judge's conclusion, however, was against the Tsavliris argument, both as a matter of those
facts which involved consideration of the evidence of the Pakistani legal experts and as a matter
of the judge's overall assessment of the situation. In particular, he had in mind the important
evidence that a decision on an application limited to an order for release of the vessel could be
achieved within 4 – 6 weeks, as well as the ramifications of any dilatory attempt by the KPT, if
so far unsuccessful, to string matters out during an appeal. His view of events, looking forward
as of 13/17 October, was justified by the cross-check of events as they unfolded (see Lord
Sumner in Bank Line). The judge was entitled to view the prospects of such delaying tactics, if
KPT should fail at first instance, as merely speculative. In fact there was no appeal.
# Although, as things turned out, the Pakistani judge's decision was not accepted by the KPT,
which continued to use every opportunity allowed it, even in the absence of an appeal, to spin
out further negotiations, until an application to commit its senior officers for contempt of court
finally brought matters to a head, it was the essential strategy adopted from the beginning by
Tsavliris, with the owners of the casualty and their Club acting in tandem, which ultimately bore
fruit. The only difference from that opening strategy which emerged over the period was that,
whereas resort to law was regarded as something to be avoided for as long as possible, it was in
time used, as it had always been contemplated it might be, as part of a combination of pressures
to reach a final result. In the meantime, it was not simply a matter for Tsavliris alone to decide
whether or not and when to go to law. The casualty owners, whose underwriters, the Club, were
also intimately interested, not only because of KPT's direct claims but also through their
SCOPIC obligations, also had to decide if and when to resort to law, as, equally or more
significantly, had Global themselves. It was in fact Global's legal suit which became the basis for
the parties' legal attack on the KPT. It was for Global, and their linked company the ultimate
owners of the Sea Angel, as much as anyone to calculate when and if the right moment had
arrived for legal action.
# In effect, one can see the parties moving towards the solution over a period: Tsavliris
instructed their lawyers on 19 September to prepare a legal notice; Global instructed their
lawyers on 2 October to issue proceedings; the owners of the casualty and the Club's English
lawyers, Eversheds, were perhaps more sceptical as to the usefulness of legal proceedings, but
the Club's financial power remained part of the solution. In these circumstances, I do not regard
the temporary breakdown of negotiations as of mid-October as a turning-point, so much as a
staging point in a continuous process. At the outset of that process, Tsavliris's managing director,
Mr Constantinides, regarded three months as a likely time for a solution, and he did not regard
such a period then as amounting to a frustrating delay.
# It seems to me that that is essentially what the judge is saying at paras 99 and 104/106 of his
judgment.
The foreseeability of the risk

# In my judgment, the submissions under this heading became over-refined. In a sense, most
events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to
frustration. Even events which are not merely foreseen but made the subject of express
contractual provision may lead to frustration: as occurs when an event such as a strike, or a
restraint of princes, lasts for so long as to go beyond the risk assumed under the contract and to
render performance radically different from that contracted for. However, as Treitel shows
through his analysis of the cases, and as Chitty summarises, the less that an event, in its type and
its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in
the case, may lead on to frustration.
# In the present case it was both highly relevant that the unreasonable detention of a vessel
participating in salvage services, whether owned or contracted in by the salvors, could be
foreseen and was actually provided for in SCOPIC, and also relevant, if it be the case, that the
actual circumstances of the detention were comparatively unusual or even unprecedented and
lasted for a long time. All such circumstances would need to be taken into account. In Mr Hall's
experience the particular circumstances of this detention were then unprecedented but now
needed to be taken into account; but in Mr Constantinides's experience, they "definitely" fell at
the time within the industry risk. It seems to me that, for the reasons discussed above (at paras
63/65), the judge's treatment of this issue was fair. Once a port authority acts unreasonably, the
precise circumstances and consequences must essentially be variants on a theme. The
foreseeability of this general risk, recognised within the industry, and provided for in its well-
known terms of trade (SCOPIC), provides a special and highly relevant factor against which the
issue of frustration needs to be assessed. However, like most factors in most cases, it must not be
exaggerated into something critical, excluding, preclusive: for if, on the special facts of a
particular case, the charter is frustrated, then the obligation to reward the salvor under SCOPIC
goes – despite his inability to demobilise his equipment.
The sphere of responsibility

# Under the topic of this factor, the judge mostly had in mind the responsibility for port dues
imposed on Tsavliris in clause 7 of the charter form (as well as in the specially adopted terms of
the recap fixture). I would prefer myself to put the point more broadly. This is firstly because, on
the facts of this case, I think that the charterer's responsibility for port dues can be overstated.
The issue raised by KPT was not really about port dues, it was, as Mr Hamblen I think rightly
submits, about KPT's determination to protect itself against its fears and the expenses of
pollution damage and wreck removal. If the demands for port dues had been reasonable, but
wrongly rejected by Tsavliris, then any consequent delay would have been for their account
under the charter. I do not see why an unreasonable demand for port dues, a fortiori a demand for
port dues as a pretence to cloak a claim against pollution damage caused by the casualty, should
be regarded as falling within the charterer's sphere of responsibility. That remains the case even
if it takes a little time to grasp the real nature of the reasons for the detention by the local
authorities. Moreover, where the demand for port dues is made an unreasonable excuse for the
unlawful detention of the vessel, I do not see why the responsibility for trying to extract the
vessel from her situation is not prima facie as much that of her owners (and disponent owners) as
her charterers. It is not as though her charterers have ordered the vessel into salvage services
under some general discretion as to her employment: she has been specifically contracted to such
services at a price which is intended to reflect the risks.
# The way I would therefore prefer to put the factor of the sphere of responsibility under the
charter which the judge had in mind is to emphasise that, generally speaking, the risk of delay
under the charter was upon Tsavliris as charterers. This is because of the essential structure of a
time charter, under which, absent express provision, time runs continuously against the charterer
until redelivery. Thus an off-hire clause is the place to find exceptions against the incidence of a
continuous liability for hire, but such a clause did not avail Tsavliris in this case, even though
clause 21(a)(v) expressly deals with detention by authorities.
# The point is also illustrated by other provisions of the charter form. Thus clause 27 expressly
provides a mutual exception against liability for loss or damage arising from restraint of princes,
but that does not avail to stop a liability for hire due to delay caused by such restraint. Restraint
of princes is of course of direct relevance in this case. Not of direct relevance, but again
illustrative of the general point are specific provisions to deal with other circumstances in which
detention of the vessel may arise. Thus constructive total loss of the vessel, which may arise
from trapping, is specifically dealt with in clause 20. Requisition, an old cause of dispute, is
specifically dealt with in clause 32. Both these clauses are additional off-hire clauses which
operate in circumstances of actual or potential frustration. Against this background, where the
charterer assumes the general risk of delay, subject to express provision, it necessarily requires
something special to frustrate the charter through mere delay: and a fortiori where, as here, the
consequences of the delay are purely financial since the charter is over, save for redelivery, and
the delay in question falls within a foreseeable risk of the salvage industry.
The dictates of justice

# I have referred to this factor above. It is not an additional test, but it is a relevant factor which
underlies all and provides the ultimate rationale of the doctrine. If one uses this factor as a reality
check, its answer should conform with a proper assessment of the issue of frustration. If it does
not appear to do so, it is probably a good indication of the need to think again. The question in
this case is whether it would be just to relieve Tsavliris of the consequences of their bargain, or
unjust to maintain the bargain, in a situation where they have assumed the general risk of delay,
and have done so in a specific context where the risk of unreasonable detention is foreseeable
and has at least in general been actually foreseen, as demonstrated by SCOPIC which, subject to
the limits of frustration, protects the salvor from the financial consequences of the delay; where
from the very beginning a solution was considered to be possible rather than impossible or
hopeless, but only after a period of some three months, and where that solution, although not
entirely or even mainly in Tsavliris's own control, was achievable with the co-operation of the
owners of the casualty and their Club, known to be in principle available, and the assistance of
legal action in the local courts; and where the outcome has confirmed the calculations of the
objectively reasonable participants in the events.
# In my judgment, the judge's conclusion, that the charter had not been frustrated by 13 or 17
October, shows the doctrine working justly, reasonably and fairly. At the appellate level, the
question is whether the judge's assessment of the various factors involved displays an error of
law or of rationality or a failure to appreciate the facts which should call for reversal by this court
– in an area where, as Lord Roskill has said, the informed judgment must be that of the tribunal
of fact to whom the issue has been referred. For the reasons which I have sought to explain in the
course of this judgment, I have concluded that the appellants, Tsavliris, have failed in their
burden to show that the judge was in error.
The respondents' notice

# It is therefore unnecessary to deal with the respondents' detailed notice. I would merely say
that, if this appeal had prima facie succeeded thus far, I would be surprised if the additional
matters raised in the respondents' notice would have made the difference. We did not ask Mr
Hamblen to reply on issues of self-induced frustration or safe port warranty of due diligence.
Conclusion
# I would dismiss this appeal.

Vitiating Factors Misrepresentation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Vitiating Factors Misrepresentation

Uploaded by

Copyright:

Available Formats

Vitiating Factors / Misrepresentation

Misrepresentation Act 1967

9.1 Vitiating Factors

9.2.2 Representations and terms

Whether a statement is a representation or a term is primarily a question of intention. If the

Manner and timing of statement

Bannerman v White (1861) 10 CB NS 844

Special knowledge and skill

Statement reduced to writing

9.3 Actionable Misrepresentation

An actionable misrepresentation is a false statement of fact made during pre-contractual

False statement of fact

However, the position is rarely so straightforward and it is necessary to distinguish between

(i) Statements of opinion or belief

Such statements, if false, do not constitute actionable misrepresentation.

Bisset v Wilkinson [1927] AC 177

Brown v Raphael [1958] Ch 636 CA

(ii) Statements of future conduct or intention

Edgington v Fitzmaurice (1885) 29 Ch D 459

(iii) Statements of law

(iv) Silence or non-disclosure

1. Statement a half truth

3. Contracts uberrimae fidei (of the utmost good faith)

Norwich Union Insurance Ltd v Meisels [2006] exemplifies the principle.

4. Parties in a fiduciary relationship

See: Conlon and Another v Simms [2006] EWHC 401 CH

Attwood v Small (1838) 6 Ch & Fin 232

A complication to the above principle is introduced by the following case:

Redgrave v Hurd (1881) Ch D 1

The misrepresentation does not have to be the sole inducing factor.

9.4 Types of Misrepresentation

In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent.

9.4.1 Fraudulent misrepresentation

9.4.2 Negligent misrepresentation

Negligent mis-statement at common law

Negligent misrepresentation under the Misrepresentation Act 1967

Wholly innocent misrepresentation

9.5 Remedies for Misrepresentation

9.5.2 Damages for misrepresentation

9.5.3 Damages in lieu of rescission

Rescission is available whether the misrepresentation is fraudulent, negligent or innocent. The

The distinction is illustrated by the following case:

Whittington v Seale Hayne (1900) 82 LT 49

Long v Lloyd (1958)1 WLR 753

(ii) Impossibility of restitution

Clarke v Dickson (1858) E B & E 148

The plaintiff invested money in a partnership to exploit a lead mine as a result of a

(iii) Third party rights

9.5.2 Damages for misrepresentation

(i) Damages for fraudulent misrepresentation

(ii) Damages for negligent misrepresentation

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158,

(iv) Hedley Byrne and s. 2(1) compared

(v) Contributory negligence no defence to fraudulent misrepresentation

(vi) In fraud cases agents are personally liable

9.5.3 Damages in lieu of rescission

“If a contract contains a term which would exclude or restrict –

Great Peace Shipping Limited v Tsavliris (International)

Bell v Lever Bros Ltd [1932] AC 161

per Lord Atkin, p217.

The law relating to mistake will be considered under five heads:

1. Common Mistake; (11.2)

2. Mutual Mistake; (11.3)