Transcript FORMATION OF CONTRACT

COMMERCIAL LAW 1
2011/2012 ACADEMIC YEAR
LECTURE 1
UGBS, 13th SEPT 2011
Rowland Atta-Kesson Esq.
INTENTION TO CREATE
LEGAL RELATIONS
• In commercial matters the courts presume
that the parties intend to create a legal
relationship, while
• In agreements of social or domestic nature
no such presumption is made.
• In either case, however, the presumption
may be overturned by actual evidence to
the contrary.
Social & Domestic
Arrangements
• Most social and domestic arrangements
do not amount to binding contracts since
they are not intended to be such.
• Cases that amount to social/domestic
arrangements tend to fall into 2 broad
areas
– Family arrangements
– Other social arrangements
Family arrangements
• BALFOUR v BALFOUR
• A husband, who was a civil servant based in Sri
Lanka, brought his wife to England.
• Eventually he had to return but his wife had to stay
in England for medical reasons.
• He agreed to pay her £30 per month maintenance
during his absence.
• When he failed to pay the allowance she sued.
• Her action failed on 2 grounds; (1) she had not
provided any considerations for the £30 per
month, and (2) the parties had no intention of
creating a legally binding agreement.
• MERRIT v MERRIT [1970]
• The husband left the matrimonial home to live with
another woman.
• At a meeting with his wife, he agreed in writing to
pay her £40 per month maintenance from which
she had to repay the mortgage and, when the
repayment was completed, to transfer the house
into her sole ownership.
• The wife did in fact pay off the mortgage but the
husband then refused to transfer the house to her.
• The CA held that there was intention to create a
legal relationship and therefore held the husband
to his agreement.
• JONES v PADAVATTON [1969]
• A mother agreed with her daughter that if the daughter gave up
her job in the USA and read for the Bar in England, the mother
would pay her an allowance of $200 a month.
• On this basis, the daughter came to England and began her
legal studies in November 1962
• In 1964 the mother bought a house for £6000, whereupon the
earlier agreement was now varied so that the daughter, instead
of receiving her allowance, would live in part of the house and
let the rest, using the rent to cover expenses and her
maintenance.
• In 1967, the parties had an argument and as a consequence
the mother brought an action for the possession of the house.
• The mother based her claim on the allegation that the
agreement was not made with the intention of creating a legal
relationship.
• Majority in the CA held that there was no intention to create a
legal relationship between the parties and gave the mother
possession of the house
Other social arrangements
• SIMPKINS v PAYS [1955]
• The defendant owned a house in which she lived with her
granddaughter, and the plaintiff, a paying lodger.
• The three regularly took part in a competition in a Sunday
newspaper.
• Whilst the entries were entered under the defendant’s name,
all of them contributed to the competition, though there was
no regular arrangement as to the payment of postage and
other expenses.
• One week the entry was successful but the defendant refused
to pay the plaintiff his share of the price and claimed that
there was no intention to create a legally binding relationship.
• Held: the plaintiff was entitled to his share, the judge stating
that there was sufficient ‘mutuality in the arrangements
between the parties’ to establish a legally binding agreement
to share any prize that might be won.
COMMERCIAL AGREEMENTS
• In these types of agreements there is a
strong presumption that there is an
intention to create a legally binding
relationship.
• This presumption can, of course, be
rebutted, but in fact very strong evidence
is required to do this.
• One way of rebutting the presumption is
by inserting an express statement to this
effect in a written statement.
• APPLESON v H. LITTLEWOOD [19390
and JONES v VERNON’S POOLS LTD
[1938]
• The plaintiffs in both cases attempted to
claim monies which they had alleged had
been won in a football pool.
• The words ‘Binding in honour only’ were
contained on each coupon.
• Held, the words were sufficient to rebut
the presumption and the plaintiffs thus
failed.
• ROSE & FRANK CO v JR CROMPTON & BROS [1925]
• An English company agreed to sell certain carbon copy
materials in the USA through a New York based firm.
• The transaction, which was made in writing, gave the
plaintiffs the sole rights to market and sell the products in the
USA and Canada for period of 3 years with an option to
extend the period.
• The document contained a clause, which was described as
and “Honourable Pledge Clause”, and which provided: “This
arrangement is not entered into….as a formal or legal
agreement and shall not be subject to legal jurisdiction to the
law courts either of the United States or England.”
• The original agreement began in July 1913 but at the end of
the 3-year period the option to extend was exercised; as a
result the agreement was to last until March 1920.
• In 1919, the English defendants terminated the agreement
and failed to given appropriate notice as required by the
agreement, and also refused to fulfill orders received by
them prior to their decision to terminate the agreement.
• The CA decided that with regard to the
orders already received there arose a
separate and binding contract which the
defendants were bound to fulfill.
• With respect to the grant of the selling rights,
the court found that as the parties had
specifically declared that the document was
not to bring about legally binding
consequences then one could exist; as a
result there was no obligation to giver orders
or to receive them, though once they were
given and accepted the defendants were
bound to execute the order.
• EDWARDS v SKYWAYS LTD [1964]
• The plaintiff was employed as an airline pilot
• the defendants, his employers, informed him that they were
making him redundant and gave him 3 months’ notice.
• By virtue of his contract the plaintiff was a member of the
defendants’ contributory pension fund which entitled him to
one of two options on leaving their service.
• He cold either take his contributions out of the fund or
received a paid-up pension which would take effect when he
was 50 years of age.
• The plaintiff’s professional association, negotiating on his
behalf, agreed with the defendants that if the plaintiff chose
the first option the defendants would make him an ex gratia
payment equal to the defendant’s contribution to the fund.
• The plaintiff accepted the agreement and chose to withdraw
his contributions.
• The defendants then paid him his total contributions but
refused to make the ex gratia payment.
• The plaintiff sued for breach of contract and won.
• The judge stated that the words ex gratia
did not give rise to a negative contract
agreement but simply meant that the
employers did not admit to any preexisting legal liability on their part.
• They failed to discharge the burden of
overturning the presumption that there
was an intention to create a legal
relationship and were thus liable to make
the payment.
TUTORIAL 4 (A)
• Husband and wife enter into an agreement
whereby she will not visit her mother more
than three times a year if he pays her
monthly “a reasonable sum to be arranged
between us”. For the first six months he pays
GhC100 a month at the suggestion of his
wife but then refuses to pay a penny more
alleging that the agreement is :
– (a) not intended to be legally binding, and
– (b) too vague and uncertain to be a good contract
• ADVISE WIFE
TUTORIAL 4(B)
• A asked B to come and stay at his house
for a fortnight. A’s wife died on the day
before B arrived. B after paying the
expensive train fair found that A could not
receive him and was obliged to stay at a
hotel.
• ADVISE B.
Tutorial 4(C)
• It is said that an agreement, even though it
is supported by consideration, is not
binding as a contract, if it is made without
an intention to create legal relations.
Critically examine this statement with the
help of illustrations from the decided
cases.
CAPACITY
• Generally, the law assumes that all
parties to a contract have the power to
enter into that contract.
• However, the law places restrictions on
the ability of a number of groups of
persons to enter into contractual relations
Infants/Minor
• Section 4 of the 1st Schedule to the
Companies Act
– Infant means a natural person under the age of
21 years or any other age that is declared by an
enactment to be full age for legal purposes
• Article 28(5) of the 1992 Constitution
– Child means a person below the age of 18 years
• Section 1 of the Children’s Act 1998, (Act
560)
– Child means a person below the age of 18 years
• At common law, the only class of contract which
was binding on a child was a contract for
‘necessaries’
• In all other cases, the common law treated a
minor’s contracts as being either voidable at the
option of the minor, either before or after
becoming an adult, or enforceable against him
unless he ratified them after attaining majority.
• Contracts in which the minor acquired an interest
of a permanent or continuous nature, such as a
contract to acquire an interest in land, were
binding until the minor disclaimed them, either
during minority or within a reasonable time after
becoming an adult.
• The aim of the law is to protect minors on the one
hand, and to safeguard the interests of traders
Contracts for necessaries
• It has always been held that a minor may
be liable for the supply, not merely of the
necessaries of life, but of things suitable to
his or her station in life and particular
circumstances at the time
• Certain things are not necessaries
• RYDER v WOMBWELL (1868)
• W, a minor with an income of £500 a year,
bought from R a pair of crystal, ruby
and diamond solitaires and an antique
goblet in silver gilt.
• It was held that neither of these articles
could be necessary, even though W
was the son of a deceased baronet and
‘moved in the highest society’
• Other things may be of a useful character but
the quality or quantity supplied may take
them out of the character of necessaries
• NASH v INMAN [1908]
• A tailor supplied a Cambridge undergraduate
with clothing which included 11 fancy
waistcoats at 2 guineas each.
• It was proved that although he was a minor,
he had already a sufficient supply of clothing
according to his position in life
• The English CA held that the tailor had failed
to prove that the clothing was suitable to the
undergraduate’s actual requirements at the
time of the sale and delivery.
• Necessaries also vary according to the
minor’s station in life or peculiar
circumstances at the time of the contract .
PETERS v FLEMING
• The court must take into consideration the
character of the goods supplies, the actual
circumstances of the minor, and extent to
which the minor was already supplied with
them.
• In Section 2(3) of Act 137,
– Necessaries means goods suitable to the
condition in life of the person to whom they are
delivered and to the actual requirement of that
person at the time of delivery
Contract of employment and
training
• A minor may enter into a contract of
employment so as to earn a living or into a
contract for the purpose of obtaining
instruction or education so as to qualify for
a suitable trade or profession whereby he
or she may profit himself afterwards.
• Provided that there are beneficial to the
minor, these contracts are binding
• CLEMENTS v LONDON & NORTH
WESTERN RAILWAY COMPANY [1894]
• A minor entered into a contract of
employment with a railway company,
promising to accept the terms of an
insurance against accidents in lieu of his
rights of action. It was held that the
contract, taken as a whole, was for his
benefit and that he was bound by his
promise.
• ROBERTS v GRAY [1913]
• The defendant wished to become a professional
billiards player and entered into an agreement with
the plaintiff, a leading professional, to go on a joint
tour.
• The plaintiff went to some trouble in order to
organize the tour, but a dispute arose between the
parties and the defendant refused to go.
• The plaintiff sued for damages of £6,000
• Held; the contract was for the minor’s benefit,
being in effect for his instruction as a billiards
player. Therefore the plaintiff could sustain action
for damages for breach of contract, and damages
of £ 1,500 were awarded.
• On the other hand, a contract of this class which is
more onerous than beneficial to the minor will
impose no liability.
• DE FRANCESCO v BARNUM
– B, aged 14 years, agreed to become De F’s
apprentice in ‘the art of choreography’ for 7 years. De
F was to teach her stage dancing, and during the
period of apprenticeship B was not take any
professional engagement with the consent of De F,
nor was she to marry.
– She was to receive certain payments for any
performances she might give, but there was no
provision for any other remuneration and De F did not
undertake to find her any engagements. The effect of
the deed was to place B entirely at the disposal of De
F.
– Held that the contract was not beneficial to B and was
unenforceable.
Other beneficial contracts
• The class of contracts for necessaries is not,
limited to contracts for employment and
training.
• It includes numerous contracts for
‘necessaries’ other than goods, e.g medical
treatment, preparation of marriage settlement
by solicitor, hire of a car to fetch a minor’s
luggage from railway station
• Provided these are reasonable and beneficial
to the minor, the other party can enforce
them.
• CHAPLIN v LESLIE FREWIN
(PUBLISHERS) [1965]
• The plaintiff, the minor son of a famous
father, made a contract with the defendants
under which they were to public a book
written for him, telling his life story and
entitled I Couldn’t Smoke the Grass on my
Father’s Lawn
• The plaintiff sought to avoid the contract on
the ground that the book gave an inaccurate
picture of his approach to life.
• Held, among others, that the contract was
binding because it was for the minor’s
benefit.
• When infants have themselves performed
their side of the contract, they may sue to
enforce it.
• LARTEY v BANNERMAN [1976]
– A father agreed with the defendant to buy a
house for his infant daughter.
– He made an advance payment towards the
agreed purchase price.
– Subsequently, the vendor had second thoughts
about the transactions
– The father sued for specific performance
– Defendant argued that on ground of mutuality,
the SP ought not to be granted, the CA held that
the mutuality argument is no bar to the minor’s
claim.
• STEINBERG v SCALA [1923]
• The plaintiff purchased shares in the defendant
company and paid certain sums of money on
application, on allotment and on one call.
• Being unable to meet future calls, she repudiated the
contract whilst still a minor and claimed: (a)
rectification of the Register of Members to remove her
name therefrom, thus relieving her from liability on
future calls; and (b) the recovery of the money already
paid
• The company agreed to rectify the register but was not
prepared to return the money paid.
• Held; that the claim under (b) failed because there had
not been total failure of consideration. The shares had
some value and gave some rights, even though the
plaintiff had not received any dividends and the shares
had always stood at a a discount on the market.
• In DAVIES v BEYNON-HARRIS [1931] a
minor was allowed to avoid a lease of a
flat without liability for future rent or
damages but was not allowed to recover
rent paid.
• However, in GOODE v HARRISON (1821)
a partner who was a minor took no steps
to avoid the partnership contract while a
minor or afterwards. He was held liable for
debts of the firm incurred after he came of
age.
Drunks
• A contract is voidable if drunkenness prevents an
individual from understanding the transaction he
has entered into and the other party is aware of
his level of intoxication
• It should be noted that a drunk will be liable to pay
a reasonable price for items considered to be
necessaries and in any event will be liable on the
contract should he ratify it on becoming sober
– Section 2(2) of the Sale of Goods Act, 1962 (Act 137)
states that “where necessaries are delivered to a
person under an agreement which is void because of
that person’s incapacity to contract, that person is
bound to pay a reasonable price for those
necessaries.
• MATTHEWS v BAXTER [1873]
• Matthews agreed to buy houses from
Baxter. He was so drunk as not to know
what he was doing.
• Afterwards, when sober, he ratified and
confirmed the contract.
• It was held that both parties were bound
by it.
Mentally disordered persons
IMPERIAL LOAN CO v STONE [1892]
• This was an action on a promissory note.
• The Defendant pleaded that at the time o f making
the note he was insane and that the Plaintiff knew
he was.
• The jury found that he was in fact insane but could
not agree on the question of whether the plaintiff
knew it.
• The judge entered judgment for the defendant.
• On appeal, it was held that the trial judge was
wrong. The plea of insanity must satisfy the two
test of unsound mind and knowledge of this fact by
the other party.
• PER LORD ESHER MR
• “When a person enters into a contract, and
afterwards alleges that he was so insane at
the time that he did not know what he was
doing, and proves the allegation, the contract
is as binding upon him in every respect,
whether it is executory or executed, as if he
had been sane when he made it, unless he
can prove further that the person with whom
he contracted knew him to be so insane as
not to be capable of understanding what he
was about. ”
• In HART V O’CONNOR [1985]
• The Privy Council refused to set aside an
agreement to sell farmland in New
Zealand because although the seller was
of unsound mind, his affliction was not
apparent.
• The price paid was not unreasonable.
• PER LORD BRIGHTMAN
• “the validity of a contract entered into by a
lunatic who is ostensibly sane is to be
judged by the same standards as a
contract by a person of sound mind, and is
not voidable by the lunatic or his
representatives by reason of ‘unfairness’
unless such unfairness amounts to
equitable fraud which would have enabled
the complaining party to avoid the contract
even if he had been sane.”
Enemy Aliens
• It is contrary to public policy for courts to
enforce contracts between parties who
include enemy aliens.
• To do so constitutes providing assistance
to the enemy.
• An enemy alien is a national of a country
with whom Ghana is at war.
• DAIMLER CO LTD v CONTINENTAL TIRE &
RUBBER CO (GT BRITAIN) LTD (1916)
• When Britain was at war with Germany, the
House of Lords held that the respondent
could not sue and recover a debt from the
appellant.
• This was despite the fact that the respondent
was incorporated in England, because all of
the shares of the respondent were held by
German residents, except for one share
which was held by the company secretary
who was resident in Germany.
Corporate Bodies
ASHBURY RAILWAY CARRIAGE & IRON CO. v RICHE (1875)
• The company was formed for the purposes of making and
selling railway wagons and other railway plant and carrying on
the business of mechanical engineers and general
contractors.
• The company bought a concession for the construction of a
railway system in Belgium from Antwerp to Tournai and
entered into an agreement whereby Messrs Riche were to
construct the railway line.
• Messrs Riche commenced the work and the company paid
over certain sums of money in connection with the contract.
• The Ashbury company later ran into difficulties, and the
shareholders wished the directors to take over the contract in
a personal capacity and indemnify the shareholders.
• The directors thereupon repudiated the contract on behalf of
the company and Messrs Rich sued for breach of contract.
• HELD; the directors were able to repudiate because the
contract to construct a railway system was ultra vires and
void.
• NB: the common law position is that ultra vires
acts of the company are void and cannot be
ratified
• Under Section 204 of the Companies Act, 1963
(Act 179) by an ordinary resolution, the directors
may exceed their powers for a different purpose if
they believe that doing so is in the company’s
interest.
• The Ghanaian law has modified common law
• Sec 25(3) of Act 179
– an act of a company or a conveyance or transfer of
property to or by a company is not invalid by reason
of the fact that the act, conveyance or transfer was
not done or made for the furtherance of any of the
authorized businesses of the company or that the
company was otherwise exceeding its objects or
powers.
Government
• Section 79 of the Sale of Goods Act states
makes the Sale of Goods Act cover
contracts entered into by or on behalf of
the Republic.
Tutorial 5 (A)
• Abusua was a tailor who used to deal heavily in used clothes. Akpeteshie
was also his stock-in-trade. He was drunk virtually everyday and everybody
at Otrokpe knew for that.
• In his usual condition he entered into an agreement with Saman, a man who
never kept himself tidy, talked to himself most of the time and always slept
at the bus stop, in order to sell to Saman some of the used clothes.
• At the time of the agreement Saman kept running round in circles, jumping
into the air and shouting that he had seen his father’s ghost.
• After the “contract” had been made, Abusua supplied the clothes, Saman
promptly began using them and refused to pay for them arguing that at the
time of the agreement he was so out of mind as not knowing what he was
about.
• Abusua also argued that when he made the contract with Saman, he
(Abusua) was barely sober and he was not aware of Saman’s condidtion
and so Saman is bound to pay him.
• ADVISE THE PARTIES.
Tutorial 5(B)
• Kwasi Diasempa, an infant, carries on trade as
wine and spirit merchant at Besease Street,
Adukrom. He agrees to buy from Konkonsa and
Konkonsa agrees to sell to him a quantify of
champagne, the price to be paid three months
after delivery.
• Konkonsa at the time of the contract did not know
that Diasempa was an infant, but on discovering
this fact later claims that he was not bound by the
contract on the ground that it is void and refuses to
deliver the champagne. Diasempa wishes to sue
Kokonsa
• ADVISE DIASEMPA