CONTRACT LAW

1. What is a Contract?

A contract is a legally enforceable agreement between two or more parties. Not every agreement is a contract. For an agreement to be enforceable in law, it must meet specific requirements. These requirements ensure that the agreement is serious, intentional, and supported by an exchange of value.

2. Requirements for a Valid Contract

To form a valid contract, there must be an offer, acceptance, consideration, and an intention to create legal relations. An offer is a clear expression of willingness to enter into a contract. Acceptance is the unqualified agreement to that offer. Consideration refers to something of value exchanged between the parties. Finally, the parties must intend for their agreement to have legal consequences.

3. Consideration

Consideration is the price paid for a promise. It can consist of a benefit to one party or a detriment to the other. The key requirement is that it must be bargained for and form part of the exchange.

Consideration must not be past. This means that something already done cannot count as consideration for a new promise. In addition, performing an existing contractual duty is generally not valid consideration for a new promise.

In Gilbert Steel Ltd. v University Construction Ltd., the parties agreed to increase the price of steel during an existing contract. The court held that this new promise was not enforceable because the supplier was already obligated to provide the steel. Therefore, there was no new consideration. This case illustrates that a promise to do something you are already legally required to do is not valid consideration.

4. Implied Promises and Business Efficacy

Sometimes courts will imply terms into a contract to make it workable and effective. This is done where it is clear that both parties intended the agreement to function in a meaningful way.

In Wood v Lucy, Lady Duff-Gordon, the plaintiff had exclusive rights to market the defendant’s designs, but there was no explicit promise that he would actually do anything. The court held that a promise to use reasonable efforts could be implied. Without such a promise, the contract would have no practical value. This case demonstrates that courts may imply obligations where necessary to give the contract business efficacy.

5. Intention to Create Legal Relations

Even if there is offer, acceptance, and consideration, there is no contract unless the parties intended to create legal relations. This requirement distinguishes enforceable agreements from casual or social arrangements.

In Balfour v Balfour, a husband promised to send money to his wife while they were living apart. The court held that this was not a binding contract because it was a domestic agreement, and there was no intention to create legal relations.

In contrast, commercial agreements are generally presumed to be legally binding. However, this presumption can be rebutted. In Rose & Frank Co v Crompton & Bros, the parties included a clause stating that their agreement was not legally binding. The court upheld this clause, demonstrating that parties can expressly exclude legal enforceability even in a business context.

6. Promissory Estoppel

Promissory estoppel is an equitable doctrine that can make a promise enforceable even without consideration. It applies where one party makes a promise, the other relies on it, and it would be unfair to allow the promisor to go back on it.

The key elements are a clear promise or assurance, reliance by the promisee, detriment suffered as a result of that reliance, and unfairness if the promise is not enforced.

In Hughes v Metropolitan Railway Co., a landlord led a tenant to believe that strict contractual rights would not be enforced during negotiations. The court held that the landlord could not later insist on those rights. This case establishes that a party may be prevented from enforcing strict legal rights if their conduct has led the other party to rely on a different understanding.

In Combe v Combe, the court clarified that promissory estoppel cannot create a new cause of action. It can only be used as a defence to prevent a party from enforcing strict rights.

In Ryan v Moore, the court emphasized that detrimental reliance is essential. The promisee must have changed their position in reliance on the promise.

7. Proprietary Estoppel

Proprietary estoppel is a related doctrine that applies specifically to rights in property. It arises where one party is led to expect a right or interest in property, relies on that expectation, and suffers a detriment.

In Crabb v Arun District Council, the plaintiff relied on a promise of access to land. When that access was later denied, the court held that it would be inequitable to allow the promisor to go back on the assurance. The court therefore recognized a right of access.

In Cowper-Smith v Morgan, the Supreme Court of Canada confirmed that proprietary estoppel requires an assurance, reasonable reliance, and detriment. If these elements are met, equity may enforce the expectation.

8. Breach of Contract and Remedies

A breach of contract occurs when a party fails to perform their obligations. When a breach occurs, the law provides remedies to protect the innocent party.

The main remedies are damages, specific performance, and injunctions. Damages are the most common remedy and involve monetary compensation. Specific performance is a court order requiring a party to perform their contractual obligations. An injunction is a court order preventing a party from doing something.

9. Specific Performance and Injunctions

Courts are generally reluctant to order specific performance, especially in contracts involving personal services. However, they may enforce negative obligations through injunctions.

In Warner Bros v Nelson, an actress agreed not to work for other studios but breached the contract. The court refused to force her to work for the plaintiff but granted an injunction preventing her from working elsewhere. This case shows that courts will enforce negative covenants but will not compel personal service.

10. Damages: The Basic Principle

The fundamental principle of damages is that the injured party should be placed in the position they would have been in if the contract had been performed.

This principle was stated in Wertheim v Chicoutimi Pulp Co.. The goal is compensation, not punishment.

11. Cost of Performance vs Diminution in Value

When a contract is breached, damages may be calculated in different ways depending on the circumstances.

In Groves v John Wunder Co., the court awarded the cost of completing the work, even though it exceeded the increase in property value. This reflects a focus on giving the plaintiff what they were promised.

In contrast, in Peevyhouse v Garland Coal & Mining Co., the court limited damages to the diminution in value because the cost of performance was grossly disproportionate. This case shows that courts may limit recovery where full performance would be economically unreasonable.

12. Special Types of Damages

In some cases, damages may go beyond simple financial loss.

In Jarvis v Swans Tours Ltd., the court awarded damages for disappointment and loss of enjoyment in a holiday contract. This shows that damages for mental distress may be available where the purpose of the contract is enjoyment.

In Whiten v Pilot Insurance Co., the court awarded punitive damages for bad faith conduct by an insurer. Punitive damages are awarded in exceptional cases to punish and deter egregious behaviour.

In Attorney-General v Blake, the court allowed recovery of profits made from a breach of contract. This remedy is rare and only available in exceptional circumstances where ordinary damages are inadequate.

13. Remoteness of Damages

Not all losses caused by a breach are recoverable. Damages must not be too remote.

In Hadley v Baxendale, the court established that damages are limited to losses that arise naturally from the breach or were reasonably foreseeable at the time of contracting.

In Victoria Laundry v Newman Industries, the court clarified that losses must be reasonably foreseeable as likely, based on the knowledge available at the time of the contract.

14. Mitigation of Damages

A party who suffers a breach of contract must take reasonable steps to reduce their losses. They cannot recover damages for losses that could have been avoided.

In Asamera Oil Corp v Sea Oil & General Corp, the court emphasized that damages are limited to losses that could not reasonably have been mitigated. This principle ensures fairness and prevents unnecessary losses from being shifted to the breaching party.

Final Overview

To analyze a contract problem, it is helpful to follow a structured approach. First, determine whether a valid contract exists. Second, identify whether a breach has occurred. Third, consider the appropriate remedy. Finally, assess any limitations on recovery, including remoteness and mitigation.