Learning Outcome: To explain when the parties will be regarded as intending the agreement to be legally binding.
An agreement will only be recognised as a contract if the parties intended that the agree-ment should be legally binding. With agreeagree-ments of a friendly, social or domestic nature, this intention is rarely present. In fact, the law presumes that there is no such intention in the absence of strong evidence to the contrary. Therefore, an arrangement between friends to meet for a meal, or between husband and wife for apportioning housekeeping duties, would not be legally binding contracts. In Balfour v. Balfour (1919) an agreement in an ongo-ing marriage that the husband should pay a specified amount to the wife as a housekeepongo-ing allowance while he was away on career duties was not held to be binding. However, it might be different if the agreement was made after the marriage had broken up (so long as there was consideration). An agreement made between husband and wife in Merritt v. Merritt (1970) was held to be legally binding. Here the husband had left the matrimonial home and under the agreement, the husband was to pay the wife £40 per month and the wife was to use this money in satisfying the outstanding mortgage payments on the house.
With business agreements, on the other hand, there is a strong presumption that legal relations are intended. A business agreement would be identified where, e.g. one or both contracting parties were a company or business, the agreement was of a clearly commercial nature or the contract involved money and money was factor of significance. If the parties do not wish to be legally bound they must clearly say so, usually in a written contract for purposes of proof. An agreed statement that an arrangement is ‘not to be subject to the jurisdiction of the courts’ would show that the parties did not wish to be legally bound; see Rose and Frank v. Crompton Bros Ltd (1925). ‘Binding in honour only’ clauses on football pool coupons are another example.
It is not always easy to distinguish social and business contracts, and so determine whether or not a presumption to be legally bound exists. In Simpkins v. Pays (1955) three parties were involved; a landlady, her granddaughter and a lodger. On that basis any agree-ment between the three might reasonably be seen as a social arrangeagree-ment. However, the issue before the court related to the parties together entering a competition on a regular basis. The aim was clearly to win money, and the arrangement was deemed to be of a busi-ness nature. Here the landlady received a prize in her name which she refused to share.
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If the parties are still negotiating then obviously they do not intend to be legally bound yet. Similarly, an ‘agreement’ where at least one vital term is left unsettled is clearly not bind-ing yet. Therefore an option to renew a lease ‘at such rental as may be agreed between the parties’ would have no effect, because the parties still have some negotiating to do.
However, it might be different if the option was to renew ‘at a market rent’, because this could be settled by outside evidence and without further negotiation.
Collective agreements between employers and trade unions as to wages and other terms of employment are not normally binding. They are presumed to be intended as working arrangements and not binding contracts subject to the jurisdiction of the courts.
2.5 Misrepresentation
Learning Outcome: To explain when an apparently valid agreement may be avoided because of misrepresentation.
During the negotiations preceding a contract, statements are often made with a view to inducing the other party to enter into a contract. If any such statement is false, the party thereby misled is not agreeing to what is the true state of affairs and the contract may be voidable for misrepresentation. Misrepresentation, therefore, may be defined as a false statement of fact (not of law or a mere expression of opinion), made by one party to the other before the contract, and made with a view to inducing the other party to enter into it.
The statement must have been intended to be acted upon, and it must actually have deceived the other party and induced him to make the agreement.
Even a misleading half-truth can be a misrepresentation as when a person, completing a pro-posal form for life assurance, stated that he had had two previous propro-posals accepted but omit-ted to mention that several other proposals had been rejecomit-ted [London Assurance v. Mansel (1879)]. However, as a general rule, silence cannot amount to misrepresentation and there is no duty to disclose facts, even though the silent party knows that the other party is deceiving him-self. In contracts for the sale of goods, this rule is known as caveat emptor (let the buyer beware).
There are two exceptional instances when there is a duty to disclose. The first is a duty to correct statements which were true when made but, because the facts have changed, they have subsequently become false and it would be unfair to let them stand. In With v.
O’Flanagan (1936), it was held that a true statement about the profits from a doctor’s prac-tice should have been corrected when the pracprac-tice was sold some months later and in the meantime the profits had fallen because of the doctor’s illness.
The other exception relates to contracts of the utmost good faith (uberrimae fidei), con-tracts where one party alone possesses full knowledge of the material facts and must dis-close them. This applies in contracts of insurance with respect to material facts affecting the decision whether to insure and in fixing the amount of the premium; in contracts for the sale of land with regard to defects in title; in a prospectus inviting subscription for shares as to matters required by statute; and in contracts for family arrangements.
Misrepresentations may later become incorporated as terms in the contract. If so, it will be more advantageous for the party deceived to sue for breach of contract which, if successful, gives an automatic right to damages. Damages will not normally be awarded for misrepresen-tation if the person liable can prove that he reasonably believed that he was telling the truth.
It may not be easy to distinguish between contractual promises and mere representations, but the courts will usually hold that, in contracts of sale, statements made by dealers are contrac-tual terms and statements made by sellers who are not dealers are representations.
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In all instances of misrepresentation the contract is said to be voidable at the option of the party deceived. The contract may be rescinded or ended, and the parties restored to their original positions, for example by returning property transferred and money paid. The right to rescind will be lost if such restoration is not possible as when property has been resold or destroyed. The right will also be lost if the party deceived affirms the contract by going on with it, knowing of the misrepresentation.
The right of rescission is ‘equitable’, which means that the courts can refuse to grant it when they think that it would be unfair. The courts will insist that rescission be exercised reasonably promptly once the misrepresentation has been or should have been discovered by reasonable diligence; this rule is necessary to avoid uncertainty as to the ownership of property which might or might not have to be returned. What is ‘reasonably promptly’ is a question of fact. For things that change rapidly in value the time can be very short – some-times only weeks or less. Rescission will become effective from the time that it is made public, for example by notifying the other party or, if this is not possible, informing the police [see Car and Universal Finance Co. Ltd v. Caldwell (1965)].
A claim for damages is the other possible remedy for misrepresentation.
● Damages can be awarded if the claimant can prove that the misrepresentation was made deliberately and fraudulently. It is the claimant who must prove that there has been fraud and this is not easy. This is therefore not very common.
● Under the Misrepresentation Act 1967 s.2(1) damages may also be claimed unless the defendant can prove that, up to the time of contracting, he believed that the statements were true and had reasonable cause to believe so. This is sometimes referred to as negli-gent misrepresentation. It has the great advantage that negligence is presumed, so that the defendant must in effect prove his innocence.
● Under the 1967 Act s.2(2), damages may also be awarded at the court’s discretion, as an alternative to rescission, even for innocent misrepresentation. If the defendant can prove his innocence, however, the claimant has no right to damages. He can only ask the court to exercise its discretion in his favour. This is not common.
In addition to these civil remedies for misrepresentation, a false statement of fact may also give rise to criminal liability, for example under the Trade Descriptions Act 1968 or the Property Misdescriptions Act 1991.
Any term in the contract which tries to exclude liability for misrepresentation is void unless it can be shown to be reasonable; see Chapter 3, Section 3.2.
Examples
In Walker v. Boyle (1982), the wife owned a family house and wished to sell it. Statements for which she was respon-sible helped to persuade a buyer to make a contract to buy the house, paying a deposit of £10,500. The statements were misrepresentations, although not deliberately so. When the buyer discovered the facts, he:
●rescinded the contract;
●recovered his £10,500 deposit;
●recovered damages under the Misrepresentation Act s.2(1) for the additional expenses which he had incurred. (The statements had been made negligently.)
In Howard Marine Ltd v. Ogden (1978), damages were awarded for false statements about the carrying capacity of two barges. The statements were not deliberately false and fraudulent; but the owners should have checked the correct capacity, and therefore the Misrepresentation Act s.2(1) applied.
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2.6 Summary
At the end of this chapter, students should ensure that they are familiar with the following material:
● The essential features of a valid contract, namely:
(i) Agreement – shown by offer and acceptance (Sections 2.2.1 and 2.2.2).
(ii) Consideration – the rule that a simple contract is a bargain where each side gives consideration to the other; and the exception that in a specialty contract a promise can be binding without consideration if it is made by deed (Section 2.3).
(iii) Intention to create legal relations (Section 2.4).
(iv) Reality of the consent.
(v) Capacity of the parties to contract – the rule that exceptionally some parties’ power to make a valid or/binding contract is limited: particularly (although not in detail):
– infants;
– parties whose contracts may be ultra vires.
(vi) Legality – (Section 2.1.1) – not in detail.
● The rule that in general there are no requirements that the contract should be in any particular form, but that there are exceptional circumstances where written documents or even a deed may be required (Sections 2.1.2 and 2.1.3).
● The rules of misrepresentation which are required by the syllabus to be included here, and may often be the subject of examination questions. Students should pay particular attention to the Misrepresentation Act 1967.
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