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In the second place, equity evolved a doctrine called "promissory estoppel". In this instance, it says that, if one person makes a clear and unambiguous promise that he will accept a modification or discharge of the existing obligation, and it would be inequitable for him to go back on his promise and the other party has acted on that promise, then equity will not permit him to insist on his strict legal rights. Remember that if there is a clash between equity and law, equity prevails. The leading case on this is Central London Property Trust Ltd v. High Trees House Ltd (1947) (to be discussed later). There is some dispute in the cases as to whether the promisee need have acted to his detriment.

E. THE INTENTION TO CREATE LEGAL RELATIONS

Earlier, we touched on the necessity for the parties to a contract to intend that their agreement should have legal consequences. We must now deal with this in more detail. The principle is that, even if consideration is present, an agreement is not a binding contract unless there is an intention that legal consequences shall flow from it. There are various types of situation where this can occur.

If Intention Is Expressly Negatived

If, in their agreement, the parties expressly state that they do not intend that their agreement shall be legally binding, this is, normally, conclusive. These are so-called "gentlemen's agreements" or "in honour only" agreements. The usual example quoted is Rose & Frank

Co.

Rose & Frank Co. v. J R Crompton & Bros Ltd (1925)

An agency agreement between the parties contained the following statement:

"This arrangement is not entered into, nor is this memorandum written as a formal or legal agreement, but it is only a definite expression and record of the purpose and intention of the parties concerned, to which they each honourably pledge themselves".

HELD: This negatived contractual intent.

However, whether the particular words used have the effect of so negativing contractual intent is a question of legal construction of the contract. In Edwards v. Skyways Ltd (1964), the company told an employee whom it was going to dismiss that he would receive an "ex gratia" payment.

HELD: The words did not mean that contractual intent was negatived. They were only a denial by the company that it previously had any legal liability to pay the amount.

Statements that Induce a Contract

Where people are negotiating for a contract, or salespeople are attempting to sell their products, statements are often made which induce a contract, or which may give the impression that a contract has been made.

Difficulties can then arise as to whether the statement was "a mere puff" – not meant to be taken seriously – or whether it was a representation intended to have contractual effect. An early example of the former was in Weeks v. Tybald (1605).

A father "affirmed and published" that he would give £100 to anyone who, with the father's consent, should marry his daughter.

HELD: The statement was a "mere puff" made to excite suitors.

A more serious example was in Heilbut, Symons & Co.

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Heilbut, Symons & Co. v. Buckleton (1913)

The manager of a company led P to believe that the company was a "rubber company". Therefore, P applied for, and was allotted, shares in the company. It was not a "rubber company". P contended that he had applied for the shares on the strength of that warranty.

HELD: Nothing the manager had said was intended to have the effect of creating a legally binding collateral contract between him and P.

Bowerman v. Association of British Travel Agents (1995)

The claimant had booked a ski holiday with a tour operator who was a member of the defendant association, a trade association of travel agents and tour operators that sought to protect the public against the insolvency of its members. A notice displayed in the tour operator's office described the defendant's scheme of protection under which, in the event of a member's insolvency, the defendant would reimburse a customer and seek to arrange for him to continue with a booked arrangement as far as possible. The tour operator became insolvent and the holiday was arranged with another tour operator who received the claimant's deposit and balance paid by him from the defendant association. This payment did not, however, include the holiday insurance premium paid by the claimant. He sought a refund of the sum attributable to the insurance.

HELD: The notice displayed in the insolvent tour operator's office would be understood by the ordinary member of the public as importing an intention to create legal relations with customers of members of the defendant association. It contained an offer of a promise which a customer was entitled to accept by choosing to do business with a member of the defendant association. The protection scheme was a scheme in relation to the defendant association's members but it was a scheme of protection of the customers of those members. The defendant association was offering to protect the reader of the notice, the prospective customer. It was an inevitable inference that the defendant association was going to do something for the customer if the member should fail financially by stepping in and dealing directly with the customer. The scheme of protection of which the notice formed part satisfied the criteria of a unilateral contract and contained promises which were sufficiently clear to be capable of enforcement.

There was a direct contractual relationship between a customer of a failed member of the defendant association and the association itself. Accordingly, the claimant's action succeeded.

Social Agreements

Rarely, if ever, do social agreements give rise to the implication that legal consequences were intended. The winner of a golf competition had no legal right to the prize, because no one connected with the competition intended such results to flow from the entry of competitors (Lens v. Devonshire Club (1914)).

Domestic Agreements

In the case of agreements between members of a family, some are and others are not intended to have legal consequences. There is no reason why a husband cannot contract with his wife, or a father with his son. However, on the other hand, such pacts are frequently not meant to have this effect. It is, obviously, much easier to imply contractual intent in an agreement between two commercial organisations operating at "arm's length" than it is between immediate members of a family. As always, if the situation is not expressly stated, the court has to construe the agreement, and all the circumstances surrounding it.

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Balfour v. Balfour (1919)

The wife of a man working in Ceylon had to remain in England for medical reasons. Her husband promised to pay her an allowance of £30 a month.

HELD: The agreement was not intended to have legal force (also, the wife had not provided any consideration for the promise).

A different situation may arise in the "pools syndicate" type of agreement. It is quite a widespread practice for members of a household, a group of friends, or employees in a business to participate on a regular basis in a football pools scheme or some other form of prize competition. A leading case is Simpkins v. Pays (1955). The defendant owned a house in which she lived with X, her grand-daughter, and the claimant, a paying boarder. The three took part together, each week, in a competition organised by a Sunday newspaper. The entries were made in the defendant's name but there was no regular rule as to the payment of postage and other expenses. One week, the entry was successful and the defendant obtained a prize of £750. The claimant claimed a third of this sum but the defendant refused to pay, on the ground that there was no intention to create legal relations but only a friendly adventure.

Judgment was given for the claimant. The court held that there was an intention to create legal relations, and it was "a joint enterprise to which each contributed in the expectation of sharing any prize that was won".

In contracts or agreements between more distant family members than husband and wife, contractual intent is easier to imply. For instance, a lady added an extra room to her son-in- law's house at a cost of £600. There was an understanding between them that she should live there for the rest of her life. However, after about a year, she left of her own accord. It was held that, although there was a contract to permit her to reside for her lifetime, there was no intention that the cost of £600 should amount to a contract of loan (Hussey v. Palmer (1972)).

Other Cases

The issuing of "free travel" passes by transport undertakings may or may not be intended to be contractually binding. Such a pass issued to an employee "as a matter of course" and as one of the "perks" of the job will, probably, not have contractual force (Wilkie v. LPTB (1947)), whereas one issued to an old-age pensioner and written in legal language will, probably, be binding (Gore v. Van der Lann (1967)).

If a statement is made in anger or as a jest, this fact may well negative contractual intent. So, as always, it is a question of the proper construction of the contract to ascertain the intention of the parties.

F. CAPACITY TO CONTRACT

In general, anybody over the age of 18, who, at the time, is sober and mentally unimpaired, is capable of contracting.

This also applies to corporations which can contract in exactly the same way as living persons – but, of course, they must do it through the agency of a human being. A corporation can contract under its corporate seal or by parol.

However, certain categories of person have no capacity (or only limited capacity) to contract.

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Minors

By the Family Law Reform Act 1969, a minor is a person under the age of 18 years. She becomes adult at the beginning of her 18th birthday – i.e. at one minute past midnight.

Most contracts with a minor are "voidable" at her option. That is to say, she – but not the other party – has the right not to be bound by the contract. Such contracts are as described below.

Binding on the Minor, unless she repudiates them during her minority, or within a reasonable time after reaching her majority.

This category covers the majority of contracts into which a minor enters, except those mentioned below.

So, it is at the minor's option whether she wishes to be bound by her contract or not.

Smith v. King (1892)

A minor became liable to a firm of brokers for £547. After he reached his majority (then 21) the firm sued, and he compromised by giving two bills of exchange for £50. One of the bills was endorsed to Mr Smith, who took it in ignorance of the circumstances.

HELD: The debt was contracted during minority and, so, it was voidable.

Unenforceable against a Minor, e.g. under the Consumer Credit Act 1974 it is an offence to send literature to a minor inviting him/her to borrow money or obtain goods or services on credit. An exception to this general rule exists where the money borrowed has been used for the purchase of necessaries (see below). In this case the lender can recover such part of the loan as was actually spent on necessaries.

Where an adult guarantees a loan to a minor then, prior to 1987, that guarantee would be treated as unenforceable. Now, however, Section 2 of the Minors' Contracts Act 1987 provides that such a guarantee shall no longer be treated as unenforceable merely because the contract with the minor cannot be enforced.

Section 3 deals with the situation where a minor acquires goods under an unenforceable or repudiated contract. The courts are empowered to order restitution of the property "if it is just and equitable to do so". The important difference between this provision and the former power contained in the Infants Relief Act 1874 is that the court is no longer restricted to cases where the minor has acted fraudulently, e.g. giving a false age in order to obtain a loan.

However, contracts for "necessaries" are binding on a minor. Necessaries are those things a person immediately needs, such as food; drink; clothing; accommodation; medicines. Necessaries are not confined to those things which are absolutely required to keep him alive but they extend to all such things as are reasonably necessary for him in the station in life to which he belongs. They exclude luxuries, and also a surplus of necessary items (e.g. a contract to buy two shirts would, probably, be binding but one for a dozen would not be.)

In Nash v. Inman (1908) the claimant was a West End tailor and the defendant was a minor undergraduate at Trinity College, Cambridge. The claimant sued the minor for the price of various items of clothing, including eleven fancy waistcoats. It was proved that the defendant was well supplied with such clothes when the claimant delivered the clothing in question. Accordingly, the claimant's action failed because he had not established that the clothes supplied were necessaries.

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Other contracts binding on a minor are those which are beneficial for him/her, such as:

Contracts of apprenticeship or service

Education

Mentally-disordered Persons

Except for contracts for necessaries, contracts are not binding on such persons, unless they specifically ratify them during a lucid period.

Drunken Persons

Exactly the same applies to a drunken person. To be bound, he/she must ratify the contract when sober.

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(Continued over)

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132 Contract Law 2: Contract Regulations

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A. PRIVITY OF CONTRACT

It is a fundamental principle of law that two people cannot by a contract impose liabilities on, or bind, a third party; nor can anybody have rights or obligations imposed upon him/her by a contract, unless he/she is a party to it. This principle is called privity of contract.

Sometimes, this rule can cause absurdities or injustice, and in appropriate cases the law has found ways around it. However, the general principle is of great importance. Let us state it in another way. Only the parties to a contract can enjoy rights or acquire obligations under that contract. Again, there have been repeated suggestions that a named third party would be able to take the benefit of the contract. However, in Midland Silicones v. Scruttons (1962) a sub-contractor had to pay the full loss to the owner of goods. A limitation in both his and the main contract did not help him against someone he had no contract with.

The application of the rule takes two forms – as follows.

Attempts to Confer Rights on Third Parties

The problem usually arises when third parties attempt to sue to enforce rights they think they have acquired under a contract to which they are not a party. The law will not permit them to sue.

Price v. Easton (1833)

A man owed Price a sum of money. He agreed with Easton that he would work for him, if Easton would pay off his debt to Price. The work was duly done but Easton failed to pay Price. Consequently, Price sued Easton.

HELD: Price could not recover the money, because he was not a party to the contract for work.

At this early stage of the development of the doctrine, it could be – and, indeed, was – argued that the reason why Price could not sue was because he had provided no consideration. However, the case of Tweddle v. Atkinson (1861) established that the question of consideration was immaterial. The rule of privity of contract stood on its own two feet. In that case, as we saw earlier, the respective fathers of a husband and wife made a contract between themselves to each pay the husband a sum of money. They further agreed that the husband should have the right to sue if one of them defaulted. The father of the wife died without having paid, and the husband sued his executor. It was held that he could not do so. The judge said:

"It is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit".

In Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd (1915), Lord Haldane restated the rule as follows.

"In the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it".

The leading authority in more recent years is Beswick v. Beswick (1968). A coal merchant made over his business to his nephew. As part of the deal, the nephew promised that he would pay an annuity to the uncle's widow after his death. The uncle died, and the nephew failed to pay the annuity. The widow then sued in two capacities – in the first place, in her own right and, second, as administratrix of the uncle's estate. It was held by Lord Denning that she could not sue in the first capacity, as she was no party to the contract. She could, however, sue as administratrix of the estate, and get an order for specific performance of the contract.

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134 Contract Law 2: Contract Regulations

The next problem is whether a party to a contract can recover damages in respect of a third party's loss; and, if so, can the third party compel the money to be handed over to him/her? The answer is "yes" in both cases. In Lloyd's v. Harper (1880), it was said:

"Where a contract is made with A for the benefit of B, A can sue on the contract for the benefit of B, and recover all that B could have recovered if the contract had been made with B himself".

The second question was answered in Jackson v. Horizon Holidays Ltd (1975).

Mr Jackson contracted with Horizon for the company to provide holiday accommodation of a certain standard for the whole Jackson family. The accommodation turned out to be woefully inadequate, and Mr Jackson sued.

HELD: He could recover for distress to himself, as a party to the contract, and also on behalf of his wife and child, who were not parties.

Any money recovered on behalf of third parties was in trust for them, and had to be accounted for to them.

In Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd (1994), the parties entered into a standard form of building contract, one of the terms of which precluded a party from assigning the benefit of the contract. The contract related to the development of a large estate and both parties were aware that the properties, when built, would be occupied by or purchased by third parties. It became necessary for the building owner, one of the parties to the contract, to institute proceedings against the builders and to claim substantial damages after he had parted with the ownership of the land to third-party property owners.

HELD: A prohibition of the assignment of a contract can be rendered ineffective if both parties agree to its release. In the absence of such mutual agreement, however, and where on the facts the parties are to be treated as having entered into the contract on the basis that the original landowner is entitled to enforce the contract for the benefit of those who actually sustain loss through defective performance, the original landowner is entitled to an award of substantial damages.

The court stated:

"The present case falls within the rationale of the exceptions to the general rule that a complainant can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both parties, was going to be occupied, and possibly purchased, by third parties .... Therefore, it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party .... In such a case, it seems proper ... to treat the parties as having entered into the contract on the footing that the building owner would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold the builders liable for breach."

Attempts to Impose Liabilities on Third Parties

A person cannot be bound by the terms of a contract unless he/she is a party to it. However, contracts between two people can affect the rights of third parties. Conversely, a person may commit a tort by interfering with the parties in the performance of their contract.

Lumley v. Gye (1853)

Johanna Wagner was employed by Lumley as an opera singer. For his own purposes, Gye maliciously induced Miss Wagner not to perform.

HELD: Gye was liable to Lumley for the tort of wrongful interference with contractual rights.

Instances of attempts to impose liabilities on strangers fall into three main categories:

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