AQA A Level Law (7162): Law of contract – Study Guide

Contract law decides when a promise becomes legally binding, what has been promised, and what happens if it is broken. The topic is assessed through applied problem questions, where you advise a party, and essays on theory and evaluation. This guide follows the order of a problem question: is there a contract, what are its terms, can liability be excluded, is it flawed, has it ended, and what remedy is available.

Where this fits in the specification

Law of contract is one of the optional substantive areas in AQA 7162, studied alongside the nature of law, criminal law and tort. The strongest answers state the rule with its authority, apply it to the facts and reach a reasoned conclusion, and show awareness of how well the law works in practice.

The rules and theory of contract law

The law is found in case law and in statutes such as the Consumer Rights Act 2015, the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967.

On theory, the traditional idea is freedom of contract: adults of full capacity may agree whatever terms they choose, and the courts will not rewrite a bad bargain. Closely linked is the sanctity of contract, that agreements should be kept. Against this, the law has moved to protect weaker parties, especially consumers, through statutory implied terms and controls on unfair terms, which reflects concern about inequality of bargaining power. Atiyah’s argument that freedom of contract has declined as the state has regulated more is a standard point. English law has not recognised a general duty of good faith (Walford v Miles, 1992), although some judges have accepted it in relational contracts (Yam Seng v ITC, 2013). Evaluate by weighing certainty and commercial convenience against fairness.

Essential requirements of a contract

Four elements are needed: agreement (offer and acceptance), consideration, intention to create legal relations, and, for some contracts, formality.

Offer and acceptance

An offer is a definite promise to be bound on specified terms if accepted. It must be distinguished from an invitation to treat, which only invites offers. Goods on a shop shelf are an invitation to treat (Pharmaceutical Society v Boots, 1953), as are goods in a shop window (Fisher v Bell, 1961) and most advertisements (Partridge v Crittenden, 1968). A unilateral offer to the world, accepted by performance, was found in Carlill v Carbolic Smoke Ball Co (1893).

Acceptance must be a final and unqualified agreement to the terms, communicated to the offeror. A counter-offer destroys the original offer (Hyde v Wrench, 1840). Silence cannot be acceptance (Felthouse v Bindley, 1862). The postal rule makes acceptance effective when posted (Adams v Lindsell, 1818), while for instant methods acceptance takes effect when received (Entores v Miles Far East, 1955).

Consideration

Consideration is something of value given in return for a promise. It must be sufficient but need not be adequate (Chappell v Nestle, 1960). It must not be past (Re McArdle, 1951). Performing an existing duty is generally not good consideration (Stilk v Myrick, 1809), but a practical benefit can be (Williams v Roffey Bros, 1991). Part payment of a debt does not discharge the whole (Foakes v Beer, 1884).

Intention to create legal relations

Presumptions apply. Social and domestic agreements are presumed not to be legally binding (Balfour v Balfour, 1919), although the presumption can be rebutted where the parties are not living in harmony (Merritt v Merritt, 1970). Commercial agreements are presumed to be binding unless clearly excluded.

Contract terms: general

A term is a promise that forms part of the contract, unlike a representation, which is a statement that may have induced the contract. Factors include the importance of the statement, the parties’ relative expertise and the timing (Bannerman v White, 1861; Oscar Chess v Williams, 1957; Dick Bentley v Harold Smith Motors, 1965).

Terms are classified by importance.

• A condition goes to the root of the contract; breach allows termination and damages (Poussard v Spiers, 1876).
• A warranty is minor; breach gives damages only (Bettini v Gye, 1876).
• An innominate term can be treated either way depending on the seriousness of the consequences of the breach (Hong Kong Fir Shipping v Kawasaki, 1962).

Terms may be express or implied. Terms may be implied by fact where the court needs to give business efficacy to the contract (The Moorcock, 1889), by custom and by statute.

Terms implied by statute in consumer contracts

The Consumer Rights Act 2015 implies terms into contracts between a trader and a consumer. Goods must be of satisfactory quality (section 9), fit for a particular purpose made known to the trader (section 10) and as described (section 11). Remedies include a short-term right to reject, repair or replacement, and price reduction. For services (section 49), the trader must perform with reasonable care and skill. These terms cannot be excluded or restricted against a consumer.

Exclusion clauses

An exclusion clause tries to exclude or limit liability. A court asks three questions: was it incorporated, does it cover the breach, and is it allowed by statute?

1. Incorporation: by signature, a signed document binds even if unread (L’Estrange v Graucob, 1934), subject to misrepresentation; by notice, it must be given before or when the contract is made (Olley v Marlborough Court, 1949; Thornton v Shoe Lane Parking, 1971); by course of dealing.
2. Construction: ambiguity is read against the party relying on the clause.
3. Statutory control: the Unfair Contract Terms Act 1977 provides that liability for death or personal injury caused by negligence cannot be excluded (section 2(1)) and that other negligence exclusions must satisfy the reasonableness test (section 2(2)). In consumer contracts, the Consumer Rights Act 2015 makes such a notice or term ineffective for death or personal injury and subjects other terms to a fairness test, so an unfair term is not binding on the consumer.

Vitiating factors

These are factors that make a contract void or voidable.

• Misrepresentation is a false statement of fact that induces the contract. It may be fraudulent (Derry v Peek, 1889), negligent (Misrepresentation Act 1967, section 2(1)) or innocent. Silence is generally not misrepresentation, although half-truths can mislead. Remedies include rescission and, depending on the type, damages (section 2(2) lets the court award damages instead of rescission).
• Mistake can make a contract void: common mistake where both parties share the same fundamental error (Bell v Lever Brothers, 1932; Great Peace Shipping v Tsavliris, 2002), mutual mistake (Raffles v Wichelhaus, 1864) and unilateral mistake as to identity (Cundy v Lindsay, 1878).
• Duress is illegitimate pressure (Barton v Armstrong, 1976; Atlas Express v Kafco, 1989) and undue influence is abuse of a relationship of trust (Royal Bank of Scotland v Etridge (No 2), 2001); both make the contract voidable.

Discharge of a contract

A contract can end by performance, which must usually be complete and precise (Cutter v Powell, 1795), though substantial performance may suffice (Hoenig v Isaacs, 1952). It can end by agreement, by breach and by frustration. Breach includes actual breach and anticipatory breach, where one party shows in advance that they will not perform (Hochster v De la Tour, 1853). Frustration occurs when a later event makes performance impossible, illegal or radically different, through no fault of either party (Taylor v Caldwell, 1863; Krell v Henry, 1903). It does not apply where performance is merely harder or more expensive (Davis Contractors v Fareham UDC, 1956).

Remedies

• Damages aim to put the claimant in the position they would have been in had the contract been performed (expectation loss). Loss must not be too remote (Hadley v Baxendale, 1854; Victoria Laundry v Newman Industries, 1949), the claimant must mitigate the loss; damages for distress are possible in some cases (Jarvis v Swans Tours, 1973).
• Liquidated damages are a pre-agreed sum, valid unless a penalty (Cavendish Square Holding v Makdessi, 2015).
• Specific performance orders the contract to be carried out, only where damages are inadequate, and never for personal service contracts.
• Injunctions restrain a breach (Warner Brothers v Nelson, 1937); rescission and restitution return the parties to their original positions.

Worked example

Facts: Zara agrees to buy a printing machine from Dalton Ltd for 12,500 pounds, delivery on 1 March. Dalton cancels without excuse on 20 February, saying the price has risen. Zara buys a similar machine on 25 February from another seller for 14,200 pounds.

1. Contract: Dalton’s catalogue entry was an invitation to treat, Zara’s order was the offer and Dalton’s written confirmation was acceptance. There is consideration (price for machine) and commercial intention is presumed.
2. Breach: refusal to deliver before the date is an anticipatory breach, so Zara may treat the contract as ended.
3. Damages: expectation loss is the extra cost of replacing the machine, 14,200 - 12,500 = 1,700 pounds. Zara acted reasonably in mitigating by buying promptly.
4. Remoteness: if Zara also lost 600 pounds profit on a job that Dalton knew about, that may be recoverable under the second limb of Hadley v Baxendale, making 1,700 + 600 = 2,300 pounds. If Dalton did not know, it is probably too remote.
5. Specific performance is unlikely because a similar machine was available.

Common mistakes

• Treating an advertisement or shop display as an offer, or saying consideration must be adequate.
• Confusing a term with a representation, or a condition with a warranty.
• Applying the Consumer Rights Act 2015 to business-to-business contracts, or listing cases without applying them.
• Mixing up void and voidable.

Exam technique

Command words include advise, explain, discuss and evaluate. For problem questions use issue, rule and authority, application, conclusion. For essays weigh both sides and reach a judgement. Cite a statute section only where you are sure of it.

Check your understanding

1. Is a price tag on a shop shelf an offer? No, it is an invitation to treat (Pharmaceutical Society v Boots).
2. Why did the claimant fail in Re McArdle on consideration? The consideration was past, as the work was finished before the promise.
3. What distinguishes a condition from a warranty? A condition goes to the root of the contract and allows termination; a warranty gives damages only.
4. Which Act implies satisfactory quality into a sale of goods to a consumer? The Consumer Rights Act 2015, section 9.
5. Can liability for death by negligence be excluded in a business contract? No, UCTA 1977 section 2(1) forbids excluding liability for death or personal injury caused by negligence.
6. What is the effect of frustration? The contract ends automatically, without either party being in breach.
7. A buyer is promised goods at 800 pounds and has to pay 950 pounds elsewhere. What are the expectation damages? 150 pounds, if mitigation was reasonable.

Frequently asked questions

Is law of contract compulsory in AQA A Level Law? No. Law of contract is one of the optional substantive areas in AQA A Level Law 7162, examined on Paper 3 as an alternative to human rights.

What are the essential requirements of a contract? A contract needs agreement through offer and acceptance, consideration, intention to create legal relations and, for some contracts, formality.

What is an innominate term? An innominate term can be treated as a condition or a warranty depending on how serious the consequences of the breach are, as in Hong Kong Fir Shipping v Kawasaki (1962).

How should you answer an AQA contract problem question? Use issue, rule and authority, application, then conclusion: identify the issue, state the rule with a case or statute, apply it to the facts and reach a conclusion. For essays, weigh both sides and reach a judgement.