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LAW OF CONTRACT

CHAPTER 2

Contracts of Carriage I Since the origination of commerce in this world, parties involved in such activities entered into various forms of contract. At early stages, almost all of these were concluded orally, but with the expansion of commercial activities there appeared to be a trend towards entering into written contracts. Such moves occurred due to various reasons including the granting of legal rights and duties on the parties to the contract to be bound by expressed ways of executing them. However, the introduction of written contracts has not completely ousted the use of oral means, but in actual sense, commercial activities of considerable magnitude compel the execution of written contracts. This has effected as means of statutory requirements in some countries while parties consider that it is a necessary approach by tacit application in countries where there is no mandatory requirements introduced by its statutes. This suggest that oral contracts are binding on the parties as much as the written ones, but there may appear to be certain differences to this statement especially regarding the evidentiary value of the existence of contract and their execution in disputed circumstances. In general, contract of carriage is a „contract‟ between a carrier of goods or passengers and the sender, consignor, consignee or passenger the case may be. The terms of such contract are usually stipulated on the reverse side of the document such as in the case of bill of lading or airway bill. Therefore, it is important to gather a full detailed understanding about Law of Contract before landing on the specific area of contract of carriage.

2.1 Formation of Contract The starting point of any discussion regarding „contract‟ is the notion of „agreement‟. It is actually the thing that gives rise to arriving at a contract by the individuals involved in a bargaining process. An agreement is entered by making of mutual promises by the parties so involved as aforesaid with undertaking to provide goods or services to each other. An agreement is not a mental state but an act, and, as an act, is a matter of inference from conduct. In commercial transactions unlike in mere exchange of promises that do not go to the extent of creating legally binding effect, agreements that give rise to the creation of rights and liabilities in a more legally binding manner are known as „contracts‟. In a more simple way, it means “an agreement entered into voluntarily by two or more parties, each of whom intends to create one or more legal obligations between or among them”. Consequently, the parties to a contract will be able to seek the execution of agreed promises while reserving the right to seek redress in case of breach of such promises in accordance with the applicable law. Nevertheless, the law that applies to contract varies in relation to the country as well as its legal system. Therefore, there exists of differences between the common law and civil law to the degree of its defined concepts and extents of application as stipulated either in case law or statutes in relation to such system that is used. However, the main ingredients such as offer and acceptance operate as fundamental elements of both those systems of law with some degree of variance in

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relation to the binding character of the contract may it be either the „consideration‟ in common law situation or „causa‟ in civil law system. Sri Lanka and South Africa having some unique situation where their legal system is a mixed one, simply apply those concepts in variation depending on the law on which such contract stand. For example, contracts made under common law require the existence of consideration while contract made under civil law require the existence of causa. These things will be discussed relevantly at length in the foregoing chapter at a later stage. Apart from the national laws that apply to contracts relating to those respective States, there are around 6 international instruments by way of conventions that apply to international dealings including the most general one being the United Nations‟ Convention on Contracts for the International Sale of Goods (CISG) 1980 commonly known as the Vienna Sales Convention. In order to form a contract, there need to be the presence of an „offer‟, „acceptance‟, „intention to create legal relationship‟ and „consideration or the causa‟ as the case may be. However, in commercial contracts the notion of consideration has thus traversed a long distance in placing it at a higher level in international law relevant to this area of interest.

2.2 Legal Requirements of Contract Offer This is the foremost requirement of a contract that enables the parties to arrive at an agreement. The presence of a definite offer made either to a particular person or to the public at large is therefore, the most important ingredient at the beginning. It denotes the unequivocal expression of willingness to contract on certain conditions without further negotiations that is made by a person called an „offeror‟. In the famous case of Carlill v. Carbolic Smoke Ball Co., [(1892) 2 QB 484] the defendants, who were the proprietors of a medical preparation company called Carbolic Smoke Ball published an advertisement in which they offered to pay 100 sterling pounds to any person who succumbed to influenza after having used one of their smoke balls for a while, as a market strategy. They also mentioned that they had deposited a sum of 1,000 sterling pounds with their bankers to justify their promise. The plaintiff Carlill having relied on the said advertisement bought and used the product as prescribed, but was contracted with influenza, and sued the defendant for the 100 pounds. In the case, the defendant argued that there was no offer to any particular person, and even if there had been, the plaintiff has failed to notify the defendant of her acceptance. The Court of Appeal rejected this argument that an offer cannot be made to the world at large while Bowen Lord Justice (LJ) made some remarkable findings upholding the facts that, the contract is made with the world and the offer made to the entire world, and therefore, it is open for anybody who comes forward and performs the condition on the faith of the advertisement thereby allowing the plaintiff‟s redress. However, an offer needs to be distinguished by mere „invitation to treat‟ like in the case of „expression of interest‟ or „auctions‟. In Carlill‟s case, Bowen LJ further went on to state that “it is not like cases in which you offer to negotiate, or you issue advertisements that you have got a stock of books to sell, or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate – offers to receive offers – offers to chaffer”. It was accepted in Payne v. Cave [(1789) 3 Term Rep 148] that the auctioneer‟s request for bids is not a definite offer but it only „set the ball rolling‟. In Harris v. Nickerson [(1873) LR 8 QB 286] it was held that an advertisement that specified goods will be sold by auction on a certain day, does not constitute a

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promise to potential bidders that the sale will actually be held. Here, the plaintiff who came to bid failed to recover damages for loss suffered in travelling to the advertised place of an auction sale which was ultimately cancelled. There are many instances where invitation to treat are made instead of making definite offers. Those are in fact attempts to induce offer and not an offer itself. Some interesting points were highlighted in Partridge v. Crittenden [(1968) 2 All ER 421] where the appellant had inserted a notice in a periodical entitled Cage and Aviary Birds which read „Bramblefinch cock and hens, 25s each‟ that appeared under „Classified Advertisements‟ and carried no words that it was an „offer for sale‟. Subsequently, he was charged and convicted for unlawfully offering wild live bird for sale in contrary to the Protection of Birds Act 1954. But however in appeal, the conviction was quashed stating that there was no offer for sale with Lord Parker insisting that “…when one is dealing with advertisements and circulars, unless they indeed come from manufacturers, there is business sense in their being construed as invitations to treat and not offers for sale”. An interesting point that needs to be clarified at this juncture is whether price list displayed in a shop window are offers or mere invitation to treat. As held in Fisher v. Bell [(1961) 1 QB 394] it is clear that, according to ordinary law of contract, the display of an article with a price on it in a shop window is an invitation to treat, and therefore, it is in no sense an offer for sale the acceptance of which constitutes a contract. While offers could be made in various forms and types including written, oral and other means of communication, the next important aspect to deal with is the duration of which an offer could stand and how these offers could be terminated by the offeror. There are various instances where such offers could be terminated, and these include; (a) Rejection or failure to accept on a condition attached to the offer In case where the person to whom the offer was made rejects to accept such offer, that offer is deemed to have been rejected. Further, if a condition is attached to the offer and the person who comes forward to accept it fails to accept subject to such condition, then again, the offer is deemed to have been unsatisfied. There may be instances where the person who accept does such act on a condition introduced by the latter or makes an offer that does not correspond to the original offer made. It is a clear situation where a counter-offer has been made, and will not be considered as an acceptance of the original offer. In Hyde v. Wrench [(1840) 49 ER 132] an offer was made to sell an estate at a certain price, but the plaintiff made a low price offer instead to the offeror. The offer was refused but the plaintiff sought to accept the initial offer subsequently. The court held that there was no contract made since the initial offer did not exist thereafter for the reason that a counter offer was made in place. But however, it should be noted that a mere inquiry about the terms of an offer does not amount to counter offer thus leaving the offer intact as in the case of Stevenson v. McLean [(1880) 28 WR 916]. (b) Revocation by the offeror An offeror may turn down his offer before an acceptance is made upon communicating in the same manner in which the offer was made to the person(s) he has made such offer. This was upheld in Payne v. Cave stating that there is no legal obligation that exists until such moment. In interesting point was raise in Routledge v. Grant [(1828) 4 Bing 653] where the defendant offered to buy the plaintiff‟s house for a certain sum, and a definite answer to be given within six weeks from the date of offer. The court held that the defendant could withdraw at any moment before acceptance, even

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before the lapse of required time limit. Sometimes there could exist of complications as to the mode in which the rejection could be made. In the English case Dickinson v. Dodds [(1876) 2 ChD 463] the defendant gave a written offer to plaintiff to sell a house for an agreed amount with clear indication that it would be left over until a certain date. But however, the defendant sold the house just one day before the said agreed date to a third party for the same amount. The same day, the plaintiff was informed of this action by another parson, and the plaintiff in the morning on the agreed date handed over a formal letter of acceptance to the defendant. The Court of Appeal held that the plaintiff knew that the defendant was no longer minded to sell to him, before making a formal attempt in accepting the offer. Therefore, the conducts of the parties are relevant factors in determining the mode in which an offer could deem to have been rejected. However, in international trade in particular, these confusions could extend to various unnecessary disputes between the parties, and therefore, a proper compromise has been reached by Article 2.1.4 of the UNIDROIT Principles where it provides that; (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before it has dispatched an acceptance. (2) However, an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. (The „offeree‟ means the person who accepts the offer) (c) Lapse of time in case when an offer has specified a time period in which it needs to be accepted Normally, an offer is open for a reasonable time even in the absence of any expressed time period within which it has to be accepted. But however, an offer could specify a time period within which it is expected to be accepted. In case where the allotted time period has lapsed, then it is considered that the offer has been terminated. In Ramsgate Victoria Hotel Co. v. Montefiore [(1866) LR 1 Exch 109] the defendant applied for shares in the plaintiff company in June upon paying a deposit into plaintiff‟s account. However, the defendant did not hear anything until the end of November, when he was informed by the plaintiff that the shares had been allotted to him and further requiring him to pay the balance due, which the defendant refused. The court found that the defendant‟s refusal is justified on the ground that his offer should have been accepted within a reasonable time frame, and the interval between June and November was excessive. (d) Death or incapacity of the person offering or accepting In case death or incapacity of the person who offer or accept would certainly terminates the offer made as there would lack any continuance of the offer so made. This was confirmed in many judgments while in the Canadian Case Re Irvine [(1928) 3 DLR 268] the court held that an acceptance handed by an offeree to his son for posting, but not in fact posted until after the offeree‟s death, was invalid. But however, there may still arise confusions whether an acceptance made prior to the death constitute valid contract, and answering needs to be done carefully. There aren‟t much authority in English law concerning this matter but however in Reynolds v. Atherton [(1921) 125 LT 690] the court was of the view that an offer ceases, by operation of the law, on the death of the offeree. Nevertheless, it has to be measured within a careful study to distinguish situations between the issue whether the communication of acceptance has reached the offeror prior to the death of the offeree or not, because in the former case, at least the agreement has been made.

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Acceptance An agreement is reached where the offer so made is accepted by a person known as the „offeree‟ fulfilling the conditions to which such offer is attached to with the intention to be bound by it. Therefore, „acceptance‟ is the next most important element in contract. The act of acceptance takes various forms and nature depending on the mode on which the offer is expected to be accepted. It will vary from instantaneous communications to stipulated periods of times with the offeree is bound to adhere accordingly. However, silence can never be unequivocal evidence of consent as held in Manco Ltd. v. Atlantic Forest Products Ltd. [(1971) 24 DLR (3d) 194] and in turn, an acceptance cannot be made in silence as far as law of contract is concerned. But however, the American position is quite different in this regard where it allows silence as a mode of acceptance in some instances especially in situations where past history of transactions between the same parties constituted an implied acceptance even in case of maintaining silence in wake of offers that are expected to be accepted by offerees as held in Ammons v. Wilson [176 Miss 645 (1936)]. While non-communication of the acceptance in the required mode would turn it down at the offeror‟s end, inference needs to be drawn from circumstances as to correctly identifying the method of communication prescribed by the offeror. In the past, it was most relied on postal means, but with the developments in technology, it has shifted to electronic means of communication. However, the rules governing all these modes have well rooted into the system within the doctrine of offer and acceptance. For example, in a case where acceptance is deemed to be of postal way, the contract is formed at the time of posting the letter of acceptance. In such circumstance, the Post Office acts as the common agent of the parties. This was upheld in Adams v. Lindsell [(1818) 1 B & Ald 681] though many arguments against its view have been developed thereafter in various circumstances including Re London and Northern Bank, ex p Jones [(1900) 1 Ch 220] where it raised concerns as to what would appear in case the letter is not properly stamped? Nevertheless, there‟s lot of concerns about the risks involved in such process especially considering the delay factor, loss of document and the like, and these could only be overcome in selecting much trustable means. This has been the result that many offers are nowadays made in different forms requiring much speedier and reliable modes such as telecommunication, fax, e-mail, telex and etc. According to a much recent finding by Lawton LJ, the factors of inconvenience and absurdity are but illustrations of a wider principle, namely, that the rule does not apply if, having agreed to all the circumstances, including the nature of the subject-matter under consideration, the negotiating parties cannot have intended that there should be a binding agreement until the party accepting an offer or exercising an option has in fact communicated the acceptance or exercise to the other. Intention to create legal relationship Apart from the subject matter, the main intention of the parties in arriving at the contract is to create legal relationship in a way that they bind each other with much certainty having legal implications that define the rights and liabilities throughout the existence of such contract. It would not only benefit them in continuing with confidence on agreed terms, but also guarantees the respective remedies at times of dispute if any. Therefore, the intention to create legal relationship plays a pivotal role in that context while bringing the parties to negotiate in arriving at binding terms and conditions. In doing so, it is a common feature that the parties reach agreement as to main and fundamental terms at first stage and thereafter attend to the more detailed ones. In the circumstance

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where the parties agree on the said main terms, the parties are said to have agreed to a fixture comprising of subject details. It is often said that the parties are unable to walk out of contract without compensation, if the main terms have been agreed upon. The question falls into a situation at what instance the parties really become liable in this chain with two of the most developed systems of the law standing on two different views of the matter. The American view is that the parties are bound by the contract as soon as they agree to the main terms even though they have not reached compromise as to its other detailed terms while the English law upholds that the parties are not bound by the contract unless and until all relevant terms have been agreed upon. It is therefore an important step to carefully study whether a valid contract has been negotiated between the parties in case of international or cross border trade, especially referring to the applicable law for such contract. Consideration The doctrine of consideration is a creation of English law that has rooted into the system for a considerably long period though it lacks a well defined meaning. However, it is associated with the enforceability character of a contract and meant to represent the reason for the promise to be binding on the parties similarly as in the case of causa or cause in civil law system. Throughout centuries, a true definition was attempted without much success thus transforming it from a mere moral obligation to that of a commercial value. Eastwood v. Kanyon {(1840) 11 Ad & El 438] suggested that it was neither a mere rule of evidence nor a synonym for moral obligation that brought some hope for a better terminological meaning which was developed as the price paid by the offeree for the promise the offeror. It can also be said that it is something of value such as a payment given by a promissor to a promisee in exchange for something with a value given in exchange by the said promisee to a promissor as a result of a bargain. As said before, it could consist of a payment but is not limited to such as it could also be an act or forbearance to act. Therefore, it is quite clear that consideration „must be of value‟, but it also needs to be understood that this value „need not be adequate‟ though it „must be legally recognizable‟. Therefore, it is quite often called „valuable consideration‟ within the context of law of contracts though it needs not be always money thus referring to classical modes of money-less payments involved especially in agriculture based trade. Importantly, consideration must be sufficient and corresponds to the offer as held also in Foakes v. Beer [1884) 9 App Cas 605] where a partial payment of a debt was considered sufficient that corresponded to the offer releasing the debtor from the full amount. An interesting situation would thus arrive where past consideration is found to be insufficient as argued in Stillk v. Myrick [(1809) 2 Camp 317]. Here a captain of the ship promised to divide the wages of two deserters among the other remaining crew if they would sail home from Baltic. The court held that this promise is unenforceable on the ground that the crew by contract were already obliged to sail back the ship through all perils of the sea. Therefore, it was concluded that past consideration does not create new contracts in the absence of any new consideration so provided in relation to a promise. However, a much liberal view was expressed in Williams v. Roffrey Bros & Nicholls (Contractors) Ltd [(1990) 1 All ER 512] where the defendants have received a benefit for the promise in a way they had saved the disadvantage of having to hire another serviceman in overcoming the penalty clause thereby effecting a variation in the agreement that demonstrated the existence of a consideration. In this case, the defendants were a firm of building contractors who entered into a contract for the refurbishment of a block of flats. In doing so, they had sub-contracted the carpentry work to the plaintiff who could not complete all work by the agreed period due to financial

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difficulties that resulted from underestimation of cost and faulty supervision. The defendants agreed thereafter with the plaintiff to pay a „further‟ rate for each completed work according to which the plaintiff carried and completed few, but received payment only with regard to one part. Apart from the more general elements of contract discussed above, several other important requisites must be present in creating valid contracts. These may include the capacity to contract, consent as well as statutory requirements imposed by the respective law that governs the contract to be entered. If it fails to fulfill these requisites, the contracts will end up being void or voidable. It is important to note that the contracts that become void do not impose any rights or obligations from its beginning while in the case of voidable contracts the existence of such ceases with the finding of such contract as void. Therefore, in the latter case the rights and obligations of the parties remain attached to the contract until such time it is found to be void as aforesaid. In Goode v. Harrison [(1821) 5 B & Ald 147] Best J held that a contractual obligation remains until a contracting party thinks proper to put an end to it. The circumstances that lead to void and voidable situations have to be dealt with the relevant issues that need to be assessed in the light of legal requisites. Therefore, it is of utmost importance to analyze those requisites as follows; Capacity to contract In general, contracts may be entered into by individuals or a group of individuals. These individuals may vary from a natural person to juristic or legal person where the former means a human being while the latter refers to legally constituted corporate bodies or statutory organs of the State. The former case where contracts involving a natural person as a party is the most simplest case notwithstanding the factual complications that it may pose in number of situations. The complications referred here are the ones associated with the competence of the said natural person to contract. It is a basic theory that contracts can only be entered into by majors, who have attained the respective age of majority applied in accordance with the applicable law. In most cases, the age of majority is either legally established or considered to be 18 and under the law in Sri Lanka, this is legally established as 18 by virtue of the Age of Majority Act. Therefore, in conjunction with the common law rule, a contract made by a minor is voidable at his option unless he ratified it upon the attainment of majority. Nevertheless, in certain circumstances this rule would not strictly apply especially with regard to human necessaries where minors enter into various contracts concerning daily needs as consumers. According to Peters v. Fleming [(1840) 6 M & W 42], the word „necessaries‟ is not confined to articles necessary to the support of life, but includes articles and services fit to maintain the particular person in the station of life in which he moves. These include food, clothing and lodging while in Barber v. Vincent [(1680) Freem KB 531(horse)] it was held that means of conveyance required by a minor for the exercise of his calling and legal advice required by him as held in Helps v. Clayton [(1864) 17 CBNS 553] are some of the other necessities. Apart from mere necessaries mentioned above, there may arise in circumstances that compel a minor to be bound by contracts of service referring to employment or apprenticeship in meeting with his livelihood earning. As held in Flower v. London and North Western Rly Co [(1894) 2 QB 65] a contract of such nature is valid unless declared void by court in event of dispute and in Chaplin v. Leslie Frewin (Publishers) Ltd [(1966) Ch 71] it was held that the court must decide whether the agreement was entered into for the benefit of the minor upon careful examination of its terms. In relation to non-natural persons, the attention must be had to incorporated bodies, partnerships and statutory organs. The first category represents legally incorporated entities called „juridical

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persons‟ established in accordance with the respective company law of a State that reflects a separate person independent of any natural persons involved in its existence and operation. Therefore, such corporate bodies bear an existence of its own outside its shareholders, and have distinct rights and liabilities from the said shareholders so that those entities could enjoy the competence of entering into contracts by its own and its own name and style. In doing so, these entities become responsible for their acts unless in situations where the natural persons representing such entities have committed any ultra vires act that leave out these entities from liabilities thus transferring such to the private individuals involved with it who are really to be blamed. The case Ashbury Railway Carriage Co v. Riche [(1875) LR 7 HL 653] was where the objects of the company, as stated in the memorandum of association, were „to make, sell or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals and other materials, and to buy and sell any such materials on commission or as agents‟. But in the instant case, the directors had agreed to assign to a Belgian company, a concession, which they had bought for the construction of a railway in Belgium. The court held that the subject matter of this agreement relating to the construction of a railway is not included in the company‟s memorandum and therefore, entering into such a contract is an act ultra vires. In this context, it is clear that even a corporate entity must operate within its capacity to contract, and any act that goes beyond would ultimately amount to voidable circumstance. Apart from the nature of personality, there may be situations where permanent or temporary incapacities over-rule competence of contracting such as the presence of mental disorders, drunkenness and intoxication that lack the necessary ingredient of consciousness required to contract. This defect also related to the doctrine of consent that would be dealt later, but as they denote lack of capacity rather than being physically induced, it is proper to discuss at this juncture. In case of mental disorder, the vital element that needs to be realized is that the parson was suffering from it to the extent that he was incapable of understanding the nature of the contract he is entering into. This was upheld in Boughton v. Knight [(1873) LR 3 PD 64]. In that case, the contract becomes voidable on the option of the patient. But however, the judgment of Molton v. Camroux [(1848) 2 Exch 487] introduced an reservation that such an option is available only in case where the other party was known or ought to have known of his disability at the time of contract. Drunkenness on the other hand is no different to the one discussed above as it too relates to the mental status even within a temporary parameter. Likewise in the said earlier case, the extent to which the voidable factor traverses would depend on the knowledge of the other party. However, in both these said matters, statutory law seem to have introduced certain limitations in most jurisdictions to safeguard suppliers of necessaries thus imposing a reasonable price to be borne by the person with such incapacity as a matter of public policy. Consent Imperatively, the granting of consent to contract makes parties bound by the respective undertakings while any lack of consent would thus lead to confusion whether a party had any intention to be bound by what he is entering. Issues surrounding this complication consist in situations where a party has been dragged or pushed into a contract in an unduly manner. These would include lack of consent by misrepresentation, duress or undue influence in which a party had never intended to knowingly or willingly contract. By definition, misrepresentation is a statement of fact, which is untrue, made by one party to induce the other party to the contract. Therefore, obtaining one‟s consent to contract in such circumstance is not absolutely the proper expression of

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his state of mind. Bowen J observed in Edgington v. Fitzmaurice [(11885) 29 ChD 459] that it is not the state of mind what is represented as it is very difficult to prove what the state of a man‟s mind at a particular time, and a misrepresentation as to the state of a man‟s mind is, therefore a misstatement of fact. An interesting question may arise whether silence could constitute misrepresentation. The general rule is that mere silence is not misrepresentation as held in Fox v. Mackreth [(1788) 2 Cox Eq Cas 320 but however] it may constitute misrepresentation in three instances, namely, where the silence distorts positive representation; where the contract requires the disclosure of facts; and where a trustworthy relation exists between the parties to contract. It is important to note that a misrepresentation does not render a contract voidable unless it was intended to cause and has in fact caused the believer to enter into contract. It is in fact, the exact reason that lacked the necessary ingredients of proper consent. The other important area lies on the fact where the consent has been obtained by threats or undue persuasion. Duress and undue influence that have resulted in obtaining a party to enter into a contract is therefore falls within this aspect though it cannot be defined within the narrow interpretations of the said threats or undue persuasion as it spread over a much larger area. This has certainly directed the attention towards claiming the contracts so made as void rather than being voidable. But however, unlike in the case of misrepresentation, the victim of duress and undue influence is quite perhaps aware that he does not consensually arrive at the agreement and therefore it can be concluded that the contract is indeed void. Fulfillment of Statutory requisites Statutes would render certain contracts void or voidable depending on their nature, and these may vary from jurisdiction to jurisdiction depending on their respective statute laws. Apart from the requirement that certain contracts, especially having commercial character be in writing in order to give the legal bearing, the inclusion and exclusion of certain terms would thus be required by relevant statutes. A classic example is the Unfair Contract Terms Act 1977 in England that does not permit the inclusion of certain exclusion of liability clauses in order to protect the consumers as well as other parties to contract. This would thereby guarantee fair trading in the consumer world by claiming those contracts that violate the statutory provisions as void. Furthermore, section 43(7) of the Transport Act 1962 states that “The Boards shall not carry passengers by rail on terms and conditions which (a) purport, whether directly or indirectly, to exclude or limit their liability in respect of the death of, or bodily injury to, any passenger other than a passenger travelling on a free pass, or (b) purport whether directly or indirectly, to prescribe the time within which or the manner in which any such liability may be enforced”. Furthermore, section 151 of the Road Traffic Act 1960 provides that “A contract for the conveyance of a passenger in a public service vehicle shall, so far as it purports to negative or to restrict the liability of a person in respect of a claim which may be made against him in respect of the death of, or bodily injury to, the passenger while being carried in, entering or alighting from the vehicle, or purports to impose any conditions with respect to the enforcement of any such liability, be void”. Apart from the abovesaid, there may exist of certain other conquering factors that lead to annul contracts or make them voidable such as illegality, mistake and on grounds of public policy. If the purpose for which the contract is made found to be illegal, then the contract is considered to be void. The list of illegal contracts includes among other thing, agreements to commit a crime or a civil wrong or a fraud on a third party, to defraud the revenue, contract that is sexually immoral, a contract prejudicial to the administration of justice and a contract that tends to corruption in public life. In this case, the contract is illegal in its inception and neither party can rely on the fact that he did not intend to break the law. There can be certain instances where the contract is lawful on the

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face of it though it is illegal in real sense, but due to the fact that it is intend to exploit for an illegal purpose; the contract is illegal in its inception. The other situation would be when a contract is lawful in its formation but one party intends to exploit it for an illegal purpose, then the innocent party need not be adversely affected by the guilty intention of the other as held in Oom v Bruce [(1810) 12 East 225]. In the case of matters against public policy, a contract is not deemed to be illegal but void according to Denning LJ Bennett v Bennett [(1952) 1 KB 249] who described how restraint of trade would end up being void though not illegal. Some of these instances include a contract to oust the jurisdiction of the court, a contract that tends to prejudice the status of marriage as well as a contract in restraint of trade. Mistake is the other important factor that would lead to determine the fate of a contract. The situation is two folded where there can be a common mistake as to the agreement and where an agreement has been reached by mutual or unilateral mistake of the parties. An example for the former is provided as follows; An offer made by A to sell a painting for a certain amount was accepted by B with both parties believing that it was painted by a famous artist. But however, it was found that the piece of art has been painted by an amateur. Due to this mistake, the agreement cannot stand. Here, it can be understood that the contract is void but laws of equity might provide some comfort to maintain continuance of the contract for the benefit of the parties. In Harrison and Jones Ltd v Bunten and Lancaster Ltd [(1953) 1 QB 646], Picher J rejected the contention that a common mistake would make a contract void while holding that when goods, whether specific or unascertained, are sold under a known trade description without misrepresentation, innocent or guilty, and without breach of warranty, the fact that both parties are unaware that goods of that known trade description lack any particular quality is, in my view, completely irrelevant; the parties are bound by their contract, and there is no room for the doctrine that the contract can be treated as nullity on the ground of common mistake, even though the mistake from the point of view of the purchaser may turn out to be of a fundamental character. It was much later decided in Great Peace Shipping Co Ltd v Tsavliris Salvage Ltd [(2003) QB 679] that for a common mistake of fact or law to vitiate a contract of any kind, it must render the performance of the contract impossible. On the other hand, mutual or unilateral mistake exist in situation where for example, X offered to sell certain pearls which Y admittedly accepted, but later claimed that he thought those that were offered were real ones and not imitation as it appear to be in fact. A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract while a unilateral mistake is where only one party to a contract is mistaken as to the terms or subject matter contained in a contract. In both cases it would result in claiming that despite appearance there is no genuine agreement as it lacks corresponding offer and acceptance.

2.3 Terms and Classifications Upon fulfilling the foremost requirements coupled with the other necessary legal requisites in creating contracts outlined above, it is thereafter, important to identify the details of that contract especially to determine the extent to which the parties would be bound to honour their obligations. These details will vary depending on the subject and nature for which such contract is made, but in

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basic means, there may be found details that are expressly agreed upon by the parties as well as other details that simply appear to exist by virtue of the application of relevant indicators by way of implications. However, all the said details would thus be referred to as „terms of contract‟ whether expressly agreed upon or implied into the contract by virtue of such application, and these are all conqueringly important throughout the existence of the contract and especially in the execution of such contractual obligations by the parties. The first category commonly known as „express terms‟ are the ones that the parties agree specifically by their conduct to apply to the contract while the second category denotes „implied terms‟ which are thus implied into such contract due to various relevance. However, the implied terms could well be equally important as express terms in certain circumstances, but all such terms will not be equally important in all circumstances as there may appear to have terms that are of major importance while some other as of minor importance. Apart from these two main types of terms, there can be found another category of terms known as „innominate terms‟ that play a significant role in the present subject. Express Terms In simple language, express terms mean those that were agreed between the parties irrespective of the manner in which the contract was made, i.e. oral or written. Though it will be much easier to identify express terms in a written contract, it is equally important in oral contracts in relation to the words used in the expression that arrived at such contract. In Smith v. Hughes [(1871) LR 6 QB 597] the dispute was related to the use of the word, where the question was whether the vendor described the subject matter of the contract as „good oats‟ or „good old oats‟. But however, identification as to the real contents of the words used is much easier in written contracts, and in such circumstances where it is definitely clear and exact, the use of parol evidence1 can be prohibited to prove anything more. According to Lawrence J in Jacobs v. Batavia and General Plantations Trust [(1924) 1 Ch 287], it is firmly established as a rule of law that parol evidence cannot be admitted to add to, vary or contradict a deed or other written instrument. Accordingly, it has been held that…parol evidence will not be admitted to prove that some particular term, which had been verbally agreed upon, had been omitted by design or otherwise from a written instrument constituting a valid and operative contract between the parties. But however, more recent tendency prove that oral statements shall be considered as binding in situations where it can be shown that the parties did not intend the writing to be exclusive but wished to be read in conjunction with such oral statements. In Walker Property investments (Brighton) Ltd v Walker [(1947) 177 LT 204] it was held that the oral agreements should be read with the written instrument so as to form one comprehensive contract. Here, the Defendant in 1938, then in treaty for the lease of a flat in a house belonging to the plaintiffs, stipulated that, if he took the flat, he was to have the use of two basement rooms for the storage of his surplus furniture and also the use of the garden. Subsequently, a written agreement was drawn up for the lease of the flat, which made no reference either to the storage rooms or to the garden. In SS Ardennes (Cargo Owners) v Ardennes (Owners) [(1951) 1 KB 55 and (1950) 2 All ER 517] the plaintiffs were growers of oranges in Spain and the defendants were shipowners. The plaintiffs wished to export their oranges to England and shipped them on the defendants‟ vessel on the faith of an oral promise by the defendants‟ agent that the vessel would sail straight to London. In fact she went first to Antwerp, so that the oranges arrived late in London and the plaintiffs lost a favourable market. When the plaintiffs claimed damages for breach of contract, the defendants relied on the bill of lading which

1 Parol evidence is a rule that prevents a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of the contract that appears to be whole.

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expressly allowed them to proceed „by any route and whether directly or indirectly‟ to London. The court held that the bill of lading, while it was evidence of the contract between shipper and shipowner, was not in the present case exclusive evidence, and oral promise made on behalf of the defendants was equally part of the contract and was binding upon them. While it could be established that terms of contract said or wrote clearly fall into the category of express terms, all those words would not necessarily become part of the contract. These statements may either be classified as terms of contract while some fall into the category of mere representations. Identifying the differences between these two is quite complicated though in actual sense, the statements that create legal obligation for whose breach an appropriate action lies can be considered a „term‟ whereas the ones that do not necessarily bind or induce a party to contract can be considered as „mere representation‟. As discussed earlier, misrepresentation would lead to a contract been treated voidable, and in such circumstance, damages may be awarded by court depending on their very nature. In case where the misrepresentation is found to have been made innocently without any presence of intention to cause damage on the aggrieved party, no damages will be awarded for such „innocent misrepresentation‟ as held in Heilbut Symons & Co v Buckleton [(1913) AC 30] while „fraudulent misrepresentation‟ would end up in awarding damages to the victim. The third situation in this context is „negligent misrepresentation‟ where such statement has been affected with gross negligence on the part of the party responsible. In Hedley Byrne & Co Ltd v Heller & Partners Ltd [(1964) Ac 465 and (1963) 2 ALL ER 575], the House of Lords held that damages could be obtained in some circumstances in this respect. Implied Terms Implied terms are the ones that are not inserted into the contract by the use of the language, but imported into the contract from its context often derived from either custom or rest upon statutory requirement or inferred by courts to mean the intentions of the parties to the contract. In simple way, these are terms that are not expressly used in the contract but imply into it by reference of a court decision or by application of a relevant statute. In the case of a term implied by custom the findings of Hutton v Warren [(1836) 1 M&W 466] is very useful where it was held that a local custom entitling a tenant who was bound to farm according to a certain course of husbandry, to a fair allowance for seed and labour on the arable land, at quitting his tenancy. In the case of statutory implication, certain statutes require the presence of important aspects such as certain types of contracts to be in only written form, prohibition of the use of certain exclusion of liability clauses in contracts of sale, retention of title to goods until full sale price is paid and etc. in the third case, terms are sometime implied into the transaction by rulings of court that has specifically attended to the intentions of the parties to the contract. Smith v Marrable [(1843) 11 M&W 5] was a case where a house was given on lease with reference to the term that it shall be reasonably fit for habitation, but later found to be infested with bugs and drainage was defective while a recent occupant had suffered from tuberculosis. It was held that he tenant will be entitled to repudiate the contract and to recover damages. Representations, Warranties and Conditions

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Apart from the above discussed construction, there may appear to be „representations‟ and „warranties‟ in contracts that denote statements made with respect to past, present and future statements of fact in relation to the subject matter. Such a representation represent the statements of fact from past to the time of entering into contract while warranties represent such statements of fact from the time of entering into contract to the future. For example, a warranty will include words such as “the product is warranted as free of defects, and the seller agrees to fix any defect within 3 days” while in some instances, there may appear to be lifetime or money-back warranties. Unlike in the case of representation, warranties obligate the party responsible to the terms of the contract thereby making it liable for the future. Such warranties can be found in both express and implied terms though the former terms would thus have much bearing on the contract than the latter. The other terminology that goes hand in hand with warranties is „condition‟, which refers to an uncertain future act or event, the occurrence of which determines the existence or extent of an interest, right or liability. For example, a purchaser of a car may agree to buy it only if it satisfies a certain test, or he may finalize the sale upon reserving the right to re-open the transaction at some stage. In most case, it could be seen that the use of a phrase such as „subject to‟ a future event or act imposes a future burden on the contract while agreeing to conclude the bargaining process. In view of the said, it can be concluded that a condition is a major term of the contract which goes to the root of the contract, the breach of which entitled the innocent party to repudiate the contract and obtain damages unlike in the case of warranties, which are minor terms having less influence of the existence of the contract, the breach of which does not entitles the innocent party to repudiate the contract but to obtain damages. For many long years it was asserted that all contractual terms were either conditions or warranties, but this approach has diminished with later constructions in this area especially after Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [(1962) 2 QB 26 and (1982) 1 ALL ER 474]. Here the Plaintiff owned a ship which they chartered to the defendants for a period of 2 years from delivery in February. When delivered, her engine room-staff were too few and too incompetent to cope with her antiquated machinery. It was admitted that the plaintiffs has thus broken a term in the contract to provide a ship „in every way fitted for ordinary cargo service‟ and that the ship was unseaworthy for such reasons. On her voyage to Osaka she was delayed for 5 weeks owing to engine trouble, and at least 15 more weeks were lost because, through the incompetence of the staff, the engines had become even more dilapidated. The ship was not made seaworthy until September, and in June the defendants repudiated the charter. The plaintiff sued for breach of contract and claimed damages for wrongful repudiation. The Court of Appeal held that the breach of contract of which the plaintiffs had admittedly been guilty did not entitle the defendants to treat the contract as discharge but only to claim damages. The court stood on the point of determination to what extent the terms of contract could be considered as serious or minor importance specifically concerning its result upon breach and not on its nature alone. Therefore, a breach of a term with minor significance that results in severe loss or damage sometime might be treated as a one that discharges the contract. The outcome of the decision in Hong Kong Fir Case made significant impact on the subject, and especially in the case of minor terms having a substantially greater degree of importance in the whole contract create some useful terms that do not fall within the meaning of express of implied, thus falling into a new category, known as „Innominate Terms‟. Innominate Terms Upon being constructed in light of the common law enumerated in Hong Kong Fir Case, a term that do not fall within the exact meaning of condition or warranty has come into being known as

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innominate or intermediate term. In general context, it refers to a wording that may turn out to be either a warranty or a condition depending on the result. Therefore, it is no longer valid to say that contracts are made purely on conditions and warranties as these innominate terms that cannot be recognized in pure sense but with the result it brings upon breach, too play an important role in the classification of terms in law of contract.

2.4 Breach of Contract and Frustration Once a contract has been entered, the parties are obliged to execute their respective undertakings accordingly. In case a party fails to honour such undertakings and thereby violate the contractual provisions, the contract is deemed to have been breached by that party. A breach of contract, no matter what form it may take, always entitles the innocent party to maintain an action for damage. It is important to note that the circumstance where a contract is said to be discharged differs from the circumstance of a breach. The right of a party to treat a contract as discharged arises only in two instances, where; (1) the party in default has „repudiated‟ the contract before performance is due or before it has been

fully performed; and (2) the party in default has committed a „fundamental‟ breach. Repudiation occurs where a party expresses by its words or conduct that he does not intend to honour his obligations when they fall due in the future. According to Lord Blackburn: “where there is a contract to be performed in the future, if one of the parties has said to the other in effect „if you go on and perform your side of the contract I will not perform mine‟, that in effect, amounts to saying „I will not perform the contract‟. In that case, the other party may say, „you have given me distinct notice that you will not perform the contract. I will not wait until you have broken it, but I will treat you as having put an end to the contract, and if necessary I will sue you for damages, but at all events I will not go on with the contract”. In effect, repudiation would result in recovering of costs incurred towards the contract by the innocent party until the time of discharge while in case of a mutual act that resulted in repudiation; the parties may walk away with proportionate value on such costs. In the case of fundamental breach, the innocent party may rely on the fact that most important term has thus been breached to warrant the discharge of the contract. In Davidson v Gwynne [(1810) 12 East 381] held that no breach will discharge the innocent party from further liability unless it goes to the whole root of the contract, not merely to part of it while in Hong Kong Fir Shipping Co Ltd Case it was held that unless it goes so much to the root of the contract that it makes further performance impossible and in Wallis, Son and Wells v Pratt and Haynes [(1910) 2 KB 1003] it was held that unless it affects the very substance of the contract. In event of a fundamental breach, the innocent party would be able to recover damages as compensation from the default party. In case of breach, the contract amounts to termination resulting in numerous consequences depending on the nature of the contract, gravity of breach, types of damages and status of parties. A breach of contract exist in the situations where, a party to a contract does not fulfill his contractual promise, or has given information to the other party that he will not perform his duty in accordance with the contractual provisions or if by his action and conduct unable to perform the contract. There may prevails several types of breaches such as „minor breaches‟, „material breaches‟,

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„fundamental breaches‟ and „anticipatory breaches‟. In case of a minor breach, the innocent party may only be able to recover the amount of the actual damage while in contrast, a breach of a term, which is considered to be of a major one such as a condition, the innocent party is entitled to recover extensive damages at varying degree. A material breach is one that affects the core subject of the contract where the party at default could either be compelled performance or pay damages. Anticipatory breach is an unequivocal indication that the party will not perform when performance is due, or a situation in which future non-performance is inevitable. This will afford the innocent party to immediately terminate the contract and sue the default party for damages without waiting for the contract to be actually breached at a future time. The other important situation, in which a contract is considered to terminate, is frustration. In general context, if a contract is made, and for whatever reason it later becomes impossible for one party to perform its obligations. This is often referred to as a situation in „force majeure‟ where the contract becomes impossible to be performed due to supervening factors. Avery v Bowden [((1856) 5 E&B 714] is a clear example of this situation where, a ship which was supposed to pick up some cargo at Odessa was prevented from loading cargo at an enemy port due to the outbreak of Crimean War thereby facing non-performance of its carriage duties. But however, if the contract has been partly performed by the time of frustration, the party that has performed to such extent needs to be compensated for such executed part.

2. 5 Remedies for Breach In view of the remedies that are available for breach of contract, discharge and frustration discussed above, it is important to carefully analyze those that are attainable through courts. The most common means of damages is money. These damages may either be for „liquidated‟, a stipulated amount set forth by the contract or „unliquidated‟ sums. In ascertainment of damages, the court will pay attention to several criteria such as „actual damage‟, „expectation losses‟, „loss of bargaining power‟ and sometimes even the „reputation loss‟. In the case of actual damage, the injured party must prove with substantial evidence, the loss or damage it has suffered due to the breach by way of oral and/or documentary proof while in other cases the damages are awarded on the basis of „reliance loss‟, which is the quantum of damage that could be relied upon by the injured party with the aim of placing him in the same position had there been occurred no damage. In its assumption, the court will not focus on damages that are too remote comparing to the act or omission and the resultant damage having concerning the causation that links both these. In Hadley v Baxendale [(1854) EWHC J70] it was held that the injured party may recover all those damages which arise fairly and naturally from the breach, or which may reasonably be supposed to have been in the contemplation of both parties at the time of entering into the contract known as inevitable damages as well as any special damage of which the party in breach was aware when he entered into the contract. Apart from mere monetary types of remedies, several other non-pecuniary means could be awarded including mitigation or preventive measures, specific performance and injunctions. The said first category remedies could be awarded only in circumstances where the apparent damage has not take place but is anticipated where reasonable steps could be taken to prevent such damage. But however, only reasonable steps taken with regard to such prevention are recoverable in terms of expenses so incurred towards such act as a move to close the „floodgates‟. The second category of remedies are awarded in circumstances where either the court thinks it is possible to still continue

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the contractual obligations, failing in which, it has no other alternative than awarding damages. The third category is a product of law of equity where the party in anticipatory breach is restrained from a specified activity that would lead to the breach of contract or an important term of it. Author: Dr. Dan Malika Gunasekera

Attorney-at-Law (Sri Lanka), LLm (Utrecht), Phd (Hamburg)

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