Equity Law: An Introduction

The law of England and Wales could be described as a body of rules, some of which are defined by legislation, others that have evolved through centuries of judgments being delivered in the courts. The latter is known as the common law of the country and is based on the legal precedents or rules developed from these cases. There is, however, a third source of law in England – that of Equity – which serves to act as a supplement to the laws of England, stepping in to enhance its application where the result would be contrary to natural justice or too harsh.

Equity introduction: the origins of equity

In the 11th century, as the common law developed a claimant could only bring a case if it fell within the strict forms established. In relation to property, for example, they had to show legal title.

Often a claimant had an interest in property that fell short of this, and which arguably it would be unjust to deny, such as in early forms of trusts where the property was conveyed to one person with the intention that it was held for the benefit of another.

In that situation, where justice was denied through the courts, the claimant could petition the King. The Lord Chancellor would deal with the petitions on the King’s behalf. Thus a two-court system evolved, one dealing with the common law with it’s more rigid rules, and one administered by the Court of Chancery based on legal principles, fairness and flexibility.

The two bodies of law were often seen as being in contradiction. Where the two laws conflicted, equity would prevail.

One common example of equity in practice is the law of trusts. Trust evolved as an equitable addition to property law and was used where one person held legal title to a property, but the courts held that it was fair, just and equitable that the legal owner used the property for the benefit of another. This was the first legal recognition that there could be a split between legal and beneficial ownership.

In the 1870s the primacy of Equity was enshrined in law through the Judicature Acts. This legislation also combined the two courts into one court structure, although the two systems of law remain distinct. The majority of modern courts apply both sets of rules to proceedings.

Equity introduction: The Equitable Principles

Equitable principles are expressed as a series of legal maxims, which reflect the more flexible application of this strand of the law. They can be deviated from in specific cases, and individually do not cover the whole ground. The most commonly referred to maxims are:-

1.  Equity sees that as done what ought to be done
2.  Equity will not suffer a wrong without a remedy
3.  Equity delights in equality/Equality is equity.
4.  One who seeks equity must do equity.
5.  Equity aids the vigilant not the indolent.
6.  Equity imputes an intent to fulfil an obligation
7.  Equity acts on persons rather than objects
8.  Equity abhors a forfeiture
9.  Equity does not require an idle gesture
10.  He who comes into equity must come with clean hands
11.  Equity delights to do justice and not by halves
12.  Equity will take jurisdiction to avoid multiplicity of suits
13.  Equity follows the law
14.  Equity will not assist a volunteer
15.  Where equities are equal, the law will prevail.
16.  Between equal equities the first in order of time shall prevail
17.  Equity will not complete an imperfect gift
18.  Equity will not allow a statute to be used as a cloak for fraud
19.  Equity will not allow a trust to fail for want of a trustee
20.  Equity regards the beneficiary as the true owner.

They overlap and create a system designed to remove injustice from the application of common law. The overriding message is that equity acts on the person and will not suffer a wrong to be without a remedy.

Equity introduction: what remedies are available in the Law of Equity?

Remedies are….

Equitable remedies offer typically more flexible and arguably more intuitive solutions to a dispute than other forms of remedy They tend to be used by the courts where non-equitable remedies such as damages would not provide an adequate solution for the claimant. They also differ from other remedies available to a claimant as their application is at the discretion of the court based on the facts of the case.

Examples of equitable remedies include:

1.  Injunction
2.  Specific performance
3.  Account of profits
4.  Recission
5.  Rectification
6.  Equitable estoppel
7. Specific property remedies, such as constructive trusts.
8.  Subrogation
9.  In very specific circumstances, an equitable lien.
10.  Equitable compensation
11.  Appointment or removal of fiduciary
12.  Interpleader

For equitable remedies to be available, a claimant would have to show that there had been an infringement of a right, and that equity should provide an alternative to damages.

In practice, the two most commonly used remedies are generally injunctions and specific performance.

An injunction is mainly used to stop someone from doing something. For example, an injunction may be used to stop a building project from commencing, or from preventing publication of a potentially damaging material.

Specific performance can be used to direct a party to do something, such as performing a contractual obligation.

Equity introduction: How does Equity work in practice?

‘Equity sees that as done what ought to be done’ is often the first equitable principle mentioned and it has many modern day practical examples.

Put more simply this principle means that when you are required by law to perform an act, equity will regard this to have been done as it ought to have been done, even before it has happened. This gives rise to the concept of ‘equitable conversion’.

Equitable conversion acknowledges an interest in the outcome of a contract before the terms of that contract have been performed. This has consequences for both parties if something goes wrong. So, for example, if you enter a contract for the sale of property, the buyer is considered to have obtained an equitable right that becomes a legal right once the transaction is completed. This equitable interest in the outcome of the contract means that if there is a breach, the buyer may be entitled to specific performance.

Alternatively, this principle will step in where a technical breach of a contract term has occurred, but that breach has significant and unduly harsh consequences. So, for instance, where a life insurance policy has lapsed due to failure to pay premiums, the equitable principle could be invoked. This happened in a case where the letter from the insurer advising of the failure to pay, and the consequent risk of cancellation, was not received by the policyholder. If it had been received by the policyholder, who was terminally ill, the payments would have been made, and the policy would still have been in force at the time of his death.  The insurance company agreed that the matter should be dealt equitably and as if the policyholder had made the payments. They allowed his widow to receive the sum assured, less the outstanding premiums.

Seeking legal advice

As the equitable principles can be applied by all courts in England, recourse to them is not uncommon.  In cases where the standard legal remedies don’t provide adequate redress, knowing which equitable remedies may be able to assist is critical to ensure that justice is done.  This branch of law is not without its difficulties though, and it is always advisable to speak to a solicitor to fully understand how the law may work for you.

What is Duress in Contract Law?

In law, duress is a concept that can have different contextual meanings. Within the context of contract law, duress refers to circumstances in which a person or party is forced into a contractual agreement through the use of illegitimate pressure. This may be by way of a threat of physical violence, a threat to property or through economic pressure.

The doctrine of duress is often considered alongside the doctrine of undue influence. Undue influence refers to circumstances in which a party has entered into a contract as a result of undue pressure but this pressure is not sufficient to establish duress.

Duress and undue influence are both grounds on which a contract may be cancelled because the consent of one of the parties was obtained as a result of pressure that the law regards as unacceptable or illegitimate. As such, duress and undue influence are used to redress circumstances where a contractual relationship has been created and exploited by one party to gain an unfair advantage over the other.

Below we consider in more detail the doctrine of duress, the different types of duress and related case law, together with the effects of duress where proven.

The different types of duress

Duress is a common law doctrine. It has evolved to extend to any form of unlawful threat or coercion that is used to induce a party to enter into a contract. Historically, the doctrine of duress was confined within very narrow limits, ie; to actual or threatened violence to the person. However, through the development of case law, there are now several different types of duress, including but not limited to threats against the person.

The main categories of duress include:

  • Duress to the person
  • Duress to goods
  • Economic duress

Duress to the person

Duress to the person commonly refers to violence, either actual or threatened, against the person or party who has been induced to enter into a contractual agreement by reason thereof.

In the case of Antonio v Antonio (2008), where a wife who owned a lucrative business entered into a shareholders’ agreement with her husband following a campaign of threats of violence culminating in an assault, the court found that the agreement had been induced by duress. The contract was set aside.

Further, where there is duress to the person, this need not be the main reason, it must merely be one of the reasons for entering into an agreement. There is no obligation to show that the party would not have entered the agreement but for any violence or threat of violence, it simply being sufficient that the illegitimate means of persuasion was ‘a’ cause.

In the Privy Council case of Barton v Armstrong (1976) threats to kill made by the chairman of a company to a managing director to coerce him into entering into an agreement to buy his interest in the company, rendered the contract voidable. In this case the contract was signed predominantly out of commercial necessity. The fact that duress was not the only, or even the main, reason for entering into the contractual agreement did not matter.

Duress to goods

A contractual agreement entered into in consideration of the release of goods from unlawful destruction or detention, or to avoid the threat of the same, may in limited circumstances amount to duress.

Whilst this area of law is not clearly defined, the higher courts have, at the very least, recognised that this type of illegitimate pressure may leave the person or party with no alternative but to submit to the threat.

As the law currently stands, a party who has been coerced into paying money for the return or protection of their goods would be entitled to recover those sums under the law of restitution. In Maskell v Horner (1915) the Claimant was able to recover sums paid to the Defendant following threats to seize the Claimant’s stock if he did not pay a toll fee for his market stall.

However, in the case of Occidental Worldwide Investment Corporation v Skibs (1976) – commonly referred to as The Siboen and The Sibotre – the court recognised that where a person is compelled to sign a contract, for example, under the imminent threat of having their house burnt down, that the law should not uphold the agreement. It is likely, therefore, that the courts may intervene in circumstances where a threat to property is serious.

Economic duress

Economic duress is the threat to damage a person or party’s financial interests, most commonly an actual or threatened breach of contract unless the other party agrees to a variation in contractual terms.

The doctrine of economic duress is a relatively modern concept in English common law, first recognised in the case of The Sibeon and The Sibotre. Here there was a threat by charterers of two ships to break their charterparties by not paying the agreed charter rate unless that rate was lowered. Whilst the Court found for the owners on the basis of misrepresentation, it accepted the principle that economic duress could apply.

More recently, in DSND Subsea Ltd v Petroleum Geo Services ASA (2000), the necessary ingredients for economic duress were defined as follows:

“The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract.”

The court distinguished illegitimate pressure from the “rough and tumble of the pressures of normal commercial bargaining”. Rather, in determining whether there has been illegitimate pressure, account will be taken of the following factors:

  • whether there has been an actual threatened breach of contract
  • whether the person allegedly exerting the pressure has acted in good or bad faith
  • whether the victim had any realistic practical alternative but to submit to the pressure
  • whether the victim protested at the time, and
  • whether he affirmed and sought to rely on the contract.

It should also be noted that the relaxed view on causation in the special context of duress to the person does not prevail in the less serious context of economic duress. Here the duress must, at the very least, be a significant cause of why a party entered into a contract.

The effects of duress

The effect of an allegation of duress, where proven, is to render a contract voidable. As such, this allows a party to ask the court to set the contract aside and seek restitution of any monies paid under it.

A contract that is voidable simply means that the contract is still legally binding until rescinded by the party, although arguments may still arise as to whether the contract in question has, as a matter of fact, been affirmed. Any entitlement to set aside a contract will be lost if the party either expressly, or by its conduct, affirms the contract.

The challenges of alleging duress

The law on duress is by no means clear. It operates entirely on common law principles and in many areas is likely to undergo further development, not least in relation to the doctrine of economic duress. In the main, however, the courts are reluctant to interfere with the freedom of contract and will often summarily dismiss these types of allegations or, at the very least, adopt a restrictive approach.

In appropriate cases the doctrine of duress can still be an effective way for a party to avoid contractual obligations, particularly if those obligations were entered into under protest. However, litigants should be extremely cautious about relying on duress – either as a defence where the other party seeks to enforce a contract, or to otherwise set aside a contract – and are often better served by looking to other contractual, tortious or equitable remedies. Legal advice should always be sought on specific matters.

What is Estoppel?

Estoppel is a long-established doctrine in English law which, put very simply, prevents a person who agrees one set of facts with another individual going back on their word. For instance, if you have been told that you no longer owe a debt, but the creditor later insists on payment in full they may be estopped from enforcing their right to repayment.

Estoppel is not, however, a simple doctrine and there are a number of different ways in which it can operate. The link between the different types of estoppel is hard to determine and can make it difficult to provide general advice. While the application of the doctrine can be a beneficial way of defending your rights or a prior agreement, legal advice is always recommended to ensure that you protect your position with the maximum effect.

Common types of estoppel

Such is the complicated nature of the doctrine of estoppel, a definitive list of the kinds of estoppel that are common to the law of England largely eludes. Broadly, however, estoppel can be divided into four distinct groupings:

1. Estoppel by representation;
2. Promissory estoppel;
3. Proprietary estoppel;
4. Estoppel by convention.

Estoppel by representation

This is sometimes referred to as an evidential rule, and its principles are used when a case is brought to court.  It can be used to prevent a plaintiff denying that a statement or set of facts are true where they had previously represented that they were. The plaintiff would be estopped from doing so if the defendant had acted to his detriment believing the plaintiff’s original statement was honest. This rule prevents people from saying one thing out of court, inducing someone to rely on it, and then go into court to deny what they said was true.

Estoppel by representation cannot be used as the basis of litigation. It is commonly referred to as being a ‘shield, not a sword’. However, its very operation can help build a case. For instance, someone says that they have passed property to you and you rely on that representation by making improvements to the land and buildings that they said were yours. If the transfer does not occur and the owner makes attempts to recover the property, you may be able to rely on the fact that they represented that the property had passed to you, to estopp them from denying that fact and defend the claim.

Promissory estoppel

Promissory estoppel is often seen as an extension of estoppel by representation. This is because it includes many of the elements required for the latter.

To establish promissory estoppel, you need to establish three elements:

1. An unambiguous promise by words or conduct;
2. A change of position in reliance on those words or behaviour. Detriment does not have to be proved.
3. Injustice if the promise were to be revoked.

Again it is a ‘shield, not a sword’ so cannot be used as a basis of an action, but could be used as a defence.

One such example could be in the context of a landlord/tenant relationship. As part of the lease, the tenant is obliged to pay rent. The tenant has been complying with their obligation and paying rent timeously. However, the tenant falls on hard times, and the landlord tells them they will not charge them rent until they are back in employment. After a couple of months, the tenant gets a new job but does not restart rental payments. The landlord attempts to sue for payment of the rent for the whole period. While they would be entitled to the rent from the point that their tenant found employment, they would be prevented from seeking the rent for the period that their tenant was unemployed as they had represented that they would not charge rent, and the tenant acted on that.

Proprietary estoppel

Proprietary estoppel occurs where someone relies on the belief that they have, or will have, an interest in land that belongs to someone else. This reliance will mean that the person to whom the land is promised expends money or otherwise acts to their detriment in the belief that the property or land is, or will be, theirs.

For instance in the case of Inwards v Baker [1965] 2 QB 29 a father promised that he would leave land to his son in his will, and encouraged him to build a house on it. His son did so and lived there for 30 years. However, on the father’s death, it transpired that the land had not been transferred in the will. The executors were estopped from evicting the son.

Proprietary estoppel can provide the basis for a case, where someone seeks to enforce their right to land that was promised to them. This sets it apart from estoppel by representation and promissory estoppel. It means that you can bring a claim to be granted an interest in land, and not just defend yourself from having claims brought against you.

For instance, in the case of Thorner v Major [2009] UKHL 18, the claimant had worked for 30 years for his father’s cousin – Peter – without payment, on the understanding that he would inherit the farm on Peter’s death. However, when Peter did pass away, he left no valid will. The claimant raised an action asserting that he was entitled to the farm under the law of proprietary estoppel. The unpaid work that he had done was carried out on the understanding that one day he would inherit the land. The House of Lords agreed that it would be ‘unconscionable’ for him not to inherit and the farm was passed to him.

Estoppel by convention

Estoppel by convention extends the boundaries of estoppel to include stopping people from arguing a point because of the way that they have acted over time. Instead of focusing on the behaviour of one party who induces another to act in a certain way, estoppel by convention looks at the way in which both parties to a contract have acted due to an assumed state of the law or facts. If consistent over time these actions could amount to a convention.

The critical requirements of this type of estoppel are that:

1. The assumption is shared by the parties;
2. The party which claims the benefit of the convention must have relied on it. Reliance can be as little as being influenced by it in some way.
3. It must be inequitable for the party to act contrary to the convention so that he is estopped from doing so.

Importantly here estoppel by convention does not require inducement by one party, nor detriment through reliance from the other. On that basis, an assessment of inequity will become a large part of the consideration.

Other types of estoppel

Although these are the four significant categories of estoppel, it is not an exhaustive list. Estoppel is the root of the doctrine of res judicata, for instance. This is where a party is prevented from re-litigating an issue which has already been determined and is also known as ‘cause of action estoppel’ or ‘issue estoppel’.

Why you should seek legal advice

Estoppel can be an extremely useful mechanism in litigation, and in asserting rights. It is far from straightforward though. There are many different types of estoppel, and as a doctrine, it has wide application. Proprietorial estoppel, for instance, can act in a way which protects your property rights or compensates you should a promised bit of land not be forthcoming. The operation of this doctrine is complicated, and legal advice is recommended to consider whether you have rights that can be enforced, or defended by estoppel.

What is Entrepreneurs’ Relief?

As an entrepreneur, either on your own or part of a company set up, you are used to taking risks in the name of business growth. With that risk comes the possibility of huge rewards, but cash flow can be critical to your success or failure. Sometimes a business venture will stop working for you, and you will decide to sell up to fund a new start-up or invest in a new business.

If you are thinking of selling a business asset or your business in its entirety you should make sure that your company is structured in such a way to make you eligible for Entrepreneurs’ Relief on any gain made.

What is Entrepreneurs’ Relief?

Entrepreneurs’ Relief is an allowance which reduces the rate of capital gains tax payable for those eligible to 10%. For higher rate taxpayers this can mean a reduction in tax payable on any gain made of 50%. You can apply throughout your life as an entrepreneur, although you can only claim Entrepreneurs’ Relief for gains up to a lifetime cap of £10,000,000. For successful entrepreneurs, this can mean a saving of £1,000,000 in tax payments over their lifetime.

Who is eligible for Entrepreneurs’ Relief?

You don’t have to have sole control of a business to take advantage of Entrepreneurs’ Relief, you can also be a partner in the business – but in each instance you must have owned the business for at least one year before you sell.

What can you dispose of?

You can dispose of all your business or part of it if you are a sole trader or a partner and be entitled to relief. Under certain circumstances, you can also be entitled to the relief on gains made on the selling of shares and securities. Shares you gained through an Enterprise Management Incentive (EMI) scheme can also qualify. EMI is where an employee is granted an option to acquire ordinary shares in his employers’ company. The price of the shares is fixed when the options are granted and notified to the HMRC. Disposal of assets that you lent to your business can also qualify.

  • Disposal of all or part of your business

If you are selling your business then not only must you be a sole trader or partner, but you have to have owned the business for at least one year before the date that you sell it. The same conditions apply if you are simply closing it, although, in that circumstance, you must also dispose of your business assets within three years to qualify.

  • Sale of assets you lent to the business

To qualify for Entrepreneurs’ Relief, you must have sold at least 5% of your part of the business, or your shares in a personal company. A business is a personal company if you own 5% of the shares and voting rights. Also, you must have owned the asset but let your business or personal company use it for at least a year up to the date that you sold your business or shares, or for a year before the date that the business closed.

  • Disposal of shares or securities

If you are selling shares or securities of a company to qualify for Entrepreneurs’ Relief, you must own at least 5% of the shares and voting rights. Also, for the one-year period before the sale, you must be an employee or office holder of the company.

  • Disposal of shares obtained through an EMI scheme.

To qualify for Entrepreneurs’ Relief, you must have been an employee or office holder for a one-year period before the sale. You do not require to own the shares throughout that period physically, but you must have had the option to buy them for a year before their sale.

For disposal of shares or securities, whether through an EMI scheme or not, the business must be a trading company or a holding company of a trading group. The definition of a trading company focuses on its main activities. They require to be ‘trading activities’. If the company stops being a trading company, you may still be eligible for Entrepreneurs’ Relief if you sell your shares within three years.

What are trading activities?

One of the biggest stumbling blocks in accessing this relief is establishing that the business is a trading company. There is no definition of trade in tax legislation, although it is known to cover ventures which seems to extend the definition to profitable one-off transactions. Conversely, a company does not have to make a profit to be defined as ‘trading’. The HMRC seem to be more transparent on what is not a trading activity. Examples include:

•  Property development;
•  Investment activities;
•  Licencing arrangements.

However, businesses, or groups, which have a mix of trading and non-trading activities can still be classed as trading for Entrepreneurs’ Relief as long as the business does not include non-trading activities to a ‘substantial extent’. Substantial extent is thought to mean no more than 20% of activities to be non-trading.

In general cash-rich companies encounter difficulties proving that they are a trading company, as the HMRC take the view that cash should properly be extracted as a dividend, upon which most taxpayers would pay tax at a higher rate than 10%.

An experienced legal adviser can look at the structure of your company to make sure it is compatible with the trading requirements. You can also make an application to the HMRC to obtain an opinion on whether your company is a trading company. By using an experienced legal adviser, any response can be scrutinised and steps put in place to make changes to your company to bring it within that definition if that is possible.

Common pitfalls

There are many reasons why you might not qualify for Entrepreneurs’ Relief. By being aware of what they are, you can structure your business to avoid them. A legal adviser will be able to advise how to do that, so you don’t miss out on this tax break.

Common problems include:

•  Different classes of shares: This can impact on the availability of Entrepreneurs’ Relief in many ways. You can consider a restructuring that holds open the possibility of relief should you sell.
•  Deferred Buyback: This can impact on whether or not you remain an employee for the required period.
•  Winding up: Particularly if another company is set up shortly afterwards to carry out the same trading activities.
•  Leaving a partnership: Receipt of a capital payment can be viewed as being income, rather than a gain.
Lack of appropriate paperwork: Particularly where shares are transferred to family members.

When should you take legal advice?

At first glance, the rules surrounding Entrepreneurs’ Relief may seem straightforward. However, with no strict definitions of many of the key qualifying factors, and the risk of attracting unwanted HMRC scrutiny, ensuring your sale falls within the parameters outlined by the legislation can be difficult. Given that the potential gains could be huge this is not something that can be left to chance. Do not sell without first consulting with a specialist Entrepreneurs’ Relief legal adviser. They will be able to review your company and it’s structure and consider whether there are any changes that could be made pre-sale to ensure that you benefit from this tax relief.

Types of Trust

Trusts offer a way to protect and manage your assets both during your lifetime and after your death. Assets that can be put into trust include money, shares and investments, and property.

Although there are many different types of trusts, they all consist of the same tri-partite fiduciary relationship between a settlor, trustee and beneficiary.

The settlor is the person who puts their assets into the trust. For example, the settlors could be parents or grandparents wanting to protect their assets for the benefit of their children or grandchildren.

The trustee is the person who manages the trust. This can be the settlor or another party could be appointed, such as a professional adviser.

The beneficiary is the party or parties who will benefit from the trust. For example, grandparents can place assets into a trust for their grandchildren’s university education. They may choose the child’s parents to be the trustees. While the beneficiary is usually a ‘natural person’ or persons, it is possible for organisations to benefit such as companies and charities.

The benefits of using a trust

There are many reasons that people consider putting assets into trust.
The reasons may relate to the protection of the beneficiary. For instance, you may choose to set up a trust to support the beneficiary because they cannot manage their finances due to their age or physical or mental incapacity.

Other reasons may revolve around protecting the assets themselves. Once an asset is held in trust, it belongs to neither the settlor nor the beneficiary. It can, in certain circumstances, be protected from external threats and claims to the assets arising from bankruptcy, legal action or relationship breakdown and family disagreements, provided recovery proceedings have not already commenced.

Using trusts for estate planning and asset management, among consideration of other potential tax planning options, can be a way in which you can manage your tax liabilities while still keeping assets within the family.

There may also be circumstances where a trust can ring-fence and shield assets from inheritance tax liability or an assessment of assets should you be taken into long-term care. However, setting up a trust purely for that purpose may be seen as a deprivation of assets and in such circumstances, your home may still be included in any assessment of assets for this purpose.

To ascertain whether a trust offers the most appropriate or effective option for your needs, it’s important to be clear on what your financial objectives and requirements are.

Common types of trust

There are a number of different types of trust, all of which have different tax implications and benefits to a settlor. In brief, the most common types of trusts are:

Bare Trusts: The assets are held in the name of the trustee. The beneficiary, however, has the right to all of the capital and income at any time, as long as they are over the age of 18. This is a simple trust that can be used to ensure young children don’t get access to large sums of money before they are ready! Transfers to a bare trust may be exempt from inheritance tax as long as the settlor lives for seven years post transfer.

Interest in possession Trusts: The beneficiary is entitled to the income as it arises, but not the assets itself. These trusts are often used where there has been a divorce and a remarriage, but ultimately the wish is for some assets to go to the children from the original relationship. After the settlor dies, the current spouse will have the benefit of the income and possession of the property (in the case of a house), but after their death, the asset will be passed to the children. In certain circumstances, this type of trust can protect your house from being sold to fund care home fees. You may also avoid paying inheritance tax while the asset remains in trust and remains the ‘interest’ of the beneficiary.

Discretionary Trusts: As its name suggests trustees of these types of trust can make decisions about how to use the trust income, and sometimes the capital. This will all be in accordance with the trust deed. Trustees may be able to decide who gets paid out; which beneficiaries to make payments to; how often payments are made and any conditions to be imposed. These are more flexible and are commonly used when the future needs of the beneficiary are uncertain – so they are often used in the case of grandchildren who may have different demands, or where the beneficiary lacks capacity through age or otherwise, and needs the trustees to make decisions about the funds. They can also be used to benefit you, as the settlor. For instance, if you were unable to work due to illness, a discretionary trust could be used to ensure that you have money in the future.

Mixed Trusts: As the name suggests these trusts are a combination of more than one type of trust. They enable your trust to meet a wide variety of needs and are taxed according to the tax rules that apply to each different part.

Accumulation Trust: These trusts allow the trustees to accumulate the income, instead of paying it all out and add it to the capital. Often termed maintenance trust, the power to accumulate the assets is available until a certain date, usually when the beneficiary reaches a certain age, when they then become entitled to the full income.

You can also have mixed trusts and specific trusts for children and vulnerable people. These trusts are subject to special treatment in terms of the tax rules, and professional advice as to the benefits of them should be sought.

The drawbacks of using trusts

The drawbacks of trusts will differ depending on the type that most suits your needs.

While trusts are a useful option for estate planning and asset protection, they mean that you no longer own the asset, so you will no longer be able to dispose of it as you may like, should your life take an unexpected turn.
Some trusts have been hit with sharp tax increases making any potential savings in inheritance tax minimal. It is also important to understand whether transferring assets into and out of trusts will give rise to tax liabilities such as capital gains tax.

Other types of trust will make it impossible for you to access the asset or the income and make it less easy to respond to personal changes in circumstances as ownership of your asset no longer rests with you. They also create administrative duties for the trustees.

Legal advice should be taken to ensure you proceed with the most appropriate type of trust for your requirements, and to draw up the trust deed itself.

What steps do I need to take to set up a trust?

Trusts are complicated; it is essential that they are the best option for your needs and that you select the right type to achieve the outcome that you want .

The trust must also be set up and administered correctly to be effective, which means consulting a solicitor.  To save time and costs, it is helpful to consider the following information before any meeting:

1.    Which assets to include;
2.    Who the trustees are;
3.    What powers they will need to achieve your aim;
4.    Who the beneficiaries are.

This will make any meeting with a solicitor more focused and efficient.  They will be able to recommend the correct type of trust for you to help achieve your goals.

Why you should seek legal advice.

Given the potential financial and tax implications following the setting up of a trust, obtaining professional advice as soon as possible is highly recommended to ensure the suitability of the trust in meeting your needs and that an effective trust deed is drawn up.

What is Discharge of Contract?

Discharge of contract refers to the ending of a contractual agreement between parties. 

Entering into a contract creates legally binding rights and obligations for all parties to it, and by discharging the contract, those rights and obligations are no longer enforceable. This can either be because the terms of the contract have been fulfilled, or because the parties agree to end the contract. 

Where there is a refusal or inability to carry out the obligations by one or more parties, this will also terminate a contract. 

There are also statutory consumer rights that will allow a consumer to discharge the contract within a specific timeframe. 

Depending on how the contract is discharged, there can be additional legal and financial consequences. 

Failure to fulfil your obligations within a contract correctly can result in lengthy and costly legal disputes. It is critical therefore to ensure that you have discharged the contract appropriately to avoid any further liability. 

Discharge of Contract by Performance 

Discharging a contract by performance means the contract is satisfied by all parties carrying out the terms agreed within the contract. Performance is the preferred way of discharging a contract; however, disputes can arise regarding what constitutes ‘performance’. 

What is Performance? 

The general rule is that the parties to the contract must perform all the terms precisely in order for them to discharge their obligations. 

There may be circumstances, however, where this doesn’t occur, yet a court would still find that performance has been carried out sufficiently to discharge the parties’ obligations. This can include situations such as where the terms of the contract consist of separate agreements that can be completed in isolation from each other. 

Performance may also be seen as completed where one party voluntarily accepts partial performance of an obligation, and also where one party prevents the other from carrying out their duties. 

Partial performance may also be accepted where there has been substantial performance of the terms, which means that the party has almost completed their entire contractual obligation. However, this is a complex area and what is considered substantial is again a matter for the courts. 

For example in Re Moore & Landauer (1921), tins of fruit were contracted to be delivered in cases of 30 tins but were instead provided in cases of 24. The court held that substantial performance hadn’t occurred even though the number of tins that had to be delivered in total was the same. 

Discharge of Contract by Agreement 

It is also possible to discharge a contract by all parties agreeing to extinguish the rights and duties created by the contract. You can do this where parties still have rights existing in the contract (a ‘bilateral discharge’), or where only one party has rights remaining (a ‘unilateral discharge’). You can discharge a contract by agreement in situations where you want to: 

  • end the contract (usually for some other compensation);
  • terminate the current contract and substitute it with a new one; 
  • vary the original terms; or 
  • for one of the parties to waive their right for the other to perform.

As the agreement is essentially a new contract between the parties, all agreements must be made by deed or all the necessary elements of a contract must be present to make the agreement binding. 

How do I discharge a contract by agreement? 

Various legal steps need to be taken in order to discharge a contract by agreement; particularly where the purpose is to vary or substitute terms. It is important therefore to seek legal advice before entering into any new or additional agreements. 

Discharge of contract by frustration 

Frustration of a contract occurs where, due to circumstances not considered at the time of the contract, the terms of the contract become impossible to perform, or the commercial purpose of the contract is no longer viable. 

Examples of frustration include: 

  • Where, after the formation of the contract, the agreed actions of the parties become illegal
  • Destruction of an object essential to performing the contract
  • Incapacity of one of the parties (in a contract of personal service)
  • Where a specified event vital to the contract doesn’t occur (there may be issues where there is more than one event)
  • Government interference, such as in times of national emergency or war
  • Unforeseen and excessive delays 

The doctrine of frustration covers a wide range of circumstances which may end the obligations of the parties. However, its application is very narrow, and there are various elements the court will need to consider when looking at frustration, such as how long a delay must be before it is said to be frustrating and whether a specified event is deemed vital to the contract.  

Frustration will not apply in circumstances where: 

  • The change only incurs an increase in expense or loss of profit to either party 
  • There is an alternative way to perform the duties 
  • There is an express provision within the contract that deals with frustration 
  • The frustrating event is self-induced 

Relying on frustration to discharge contractual obligations can be complicated and difficult to enforce as it is only applicable in very narrow circumstances. However, in cases where frustration is appropriate, there are various remedies available.

The Law Reform (Frustrated Contracts) Act 1943 provides guidelines to ascertain losses arising from frustration. Specifically:

  • Any money paid before the frustrating event can be recovered 
  • Any money due after the event is no longer payable 
  • Expenses incurred before the frustrating event can be recovered as long as they don’t exceed what would have been payable to you by the contract before frustration
  • Where a party has obtained a valuable benefit from the contract (other than money) before the frustrating event, the court may order that party to pay a sum for receiving that benefit. 

Each of these remedies can be applied in conjunction with one another, therefore you can recover any money and expenses already paid and you will not need to pay anything further. You may also be entitled to a sum where the other party has obtained a valuable benefit. 

Even where frustration can be used as a way of discharging the contract, various complexities need to be addressed relating to money owed, expenses incurred and disputes regarding other benefits. Speaking to a qualified solicitor will provide you with the best advice on how to proceed. 

Discharge of contract by breach 

Discharging a contract by breach occurs where one of the parties either fails to perform their obligations (‘actual breach’) or by implying that they intend not to fulfil their duties when the time comes to perform them (‘anticipatory breach’). 

What is an actual breach?

An actual breach occurs where there is a failure by one of the parties to perform the terms of the contract. This can be one or more of the terms depending on the seriousness of the breach. 

What is an anticipatory breach? 

An anticipatory breach arises where a party indicates prior to the performance of the terms of the contract becoming due, that they do not intend to carry out their contractual obligations.

What happens if a party breaches a contract? 

If there has been an actual breach, there are various remedies available for the non-breaching party, including damages and injunctions. Anticipatory breaches are more complicated. 

For an anticipatory breach, the non-breaching party doesn’t need to wait until the date that the performance was due to start, and can commence action immediately. There are specific rules surrounding acceptance of the breaching party’s intention that need to be fulfilled before action can be initiated. 

In certain circumstances, an anticipatory breach also gives the non-breaching party the option to affirm the contract and demand that the breaching party perform on the due date.

If you think your contract may be subject to an anticipatory or actual breach, you should seek legal advice as soon as possible.  

When should I seek legal advice? 

The rules surrounding discharge of contract are complex, therefore whether you feel that another party to a contract is not fulfilling their obligations, or whether you would like to vary the terms of an existing contract, it is essential to seek professional legal advice from a qualified solicitor.

What is Consideration in Contract Law?

Consideration is one of three key elements required to make a contract valid and binding. The three essential components which must be present to make a contract enforceable are:

  • that an agreement has been reached between all parties;
  • that there is an intention by all parties to be legally bound by the agreement, and 
  • that all parties have provided valuable consideration. 

Consideration covers the ‘bargain’ element of a contract and is based on an exchange of promises. Both parties should provide something of value in return for something else, becoming both a promisor and a promisee. Effectively, each party must receive a benefit and suffer a detriment. 

Currie v Misa (1875) is the key case that defined consideration as “… some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other”. 

It’s also important for consideration to be something of value in the eyes of the law (Thomas v Thomas [1842]) – promises of love and gifts are excluded. 

For example, Andrea (the promisor) promises to walk Nik’s (the promisee) dog every Tuesday. Andrea’s promise will only be enforceable by Nik as a contract if he has provided consideration. Consideration would usually take the form of a payment of money, but could consist of some other service, such as Nik feeding her chickens once a week. 

What amounts to consideration? 

There are two types of consideration: executed and executory.

Executed consideration is where consideration has already been carried out. 

For example, Louise promises to donate £50 to charity if Angharad runs a marathon. When Angharad completes the marathon, the consideration is executed. 

The other type of consideration, executory, occurs where there is an exchange of promises to perform acts in the future.

For example, Pete promises to deliver a mattress to Amy at a future date, and Amy promises to pay for the mattress on delivery. If Pete fails to deliver the mattress in the future, there is a breach of contract and Amy can sue. If Pete delivers the mattress, his consideration then becomes executed. 

A number of the rules govern consideration:

  1. Consideration must not be past 

Consideration cannot be something that has happened in the past. 

The case of Roscorla v Thomas (1842) illustrates that past conduct is not sufficient. An agreement to purchase a horse had been completed between a buyer and a seller. Upon completion of the contract, the seller promised that the horse was “free from vice”. But, the buyer soon discovered that the horse was vicious and so the buyer sued for breach of promise. 

The court held that the buyer’s claim must fail because the promise was made after the sale and was unsupported by consideration. 

  1. Consideration must be sufficient, but need not be adequate

While some value must be given to a promise for it have contractual force, the consideration doesn’t need to be adequate. 

Usually, a court will not look into whether adequate value has been given as the courts do not normally interfere with the bargain struck between the parties.

For example, Pat agrees to give James an antique lamp worth £400 in exchange for a picture painted by James (which has little value). While the painting may be worth much less than the lamp, there has been sufficient consideration even if it’s not adequate. 

Sufficient also means that the promise must not be illusory, i.e. have no substance. 

For example, Carol cannot promise to buy Elliot’s car in return for ‘whatever Carol feels like paying’. This type of consideration is discretionary and illusory. 

  1. Consideration must move from the promisee

You’ll need to show that you’ve provided consideration if you want to enforce the contract. A third party providing consideration is not enough.

For example, If Rachel promises to pay Kirsty £100 if Andrew will clean the oven and Andrew does so, Kirsty won’t be able to enforce Rachel’s promise (unless Kirsty had procured Andrew to clean the oven). 

In some cases, a third party may be able to enforce rights created in her favour by a contract which she was not a party to, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met.

It’s important to note that while consideration must move from the promisee, it doesn’t have to move to the promisor.

For example, Ashley promises to pay Marc for the wedding cake provided by Marc’s wife.

4. Forbearance to sue

Promising not to sue can also be good consideration. This can occur where one person has a valid claim against another but promises to forbear from enforcing it.

For example, Aislinn destroys Aaron’s bike in an accident. Aaron contracts with Aislinn that he will not sue for property damage, in exchange for Aislinn giving Aaron her bike. 

5. Existing duties

Legal or contractual duties that you are already required to perform can’t be used as consideration for a new contract. 

For example, if someone is under a public duty to undertake a particular task, this is not sufficient consideration for a contract. 

In Collins v Godefroy (1831), Godefroy promised to pay Collins for providing evidence. However, the court held that Collins couldn’t enforce the promise as he was under a statutory duty to give evidence. 

But, if the promisee provides more than what his public duty imposes on him, this is good consideration. 

In Glasbrook v Glamorgan (1925), Glasbrook asked the police to help at a mining site because of fears of a conflict between protestors and miners. 

The local authority of Glamorgan then presented Glasbrook with a bill for their services. Glasbrook refused to pay for their services because, according to Glasbrook, it was the duty of the police to carry out these services. 

But the court held that Glasbrook had to pay for the services because he had requested them, and these services were seen as not within the duty of the police. 

Is consideration required for all contracts?

Consideration is one of the three vital elements needed to create a valid contract, so the only way to avoid the requirement is by using a formal contract such as a deed. 

A deed must be used if you want to transfer property or land and it sets out the rights promised by the contract. Because it is a complex document, the deed will need to be produced by a solicitor. 

Traditionally, deeds had to be ‘signed, sealed and delivered’. But now, this means that the document must be signed and attested by independent witnesses. 

What is promissory estoppel?

In some circumstances, the long-standing equitable doctrine of promissory estoppel can come into play, preventing someone from undertaking an act that they would usually be entitled to do under the contract.

This can occur where someone says something or does something which induces another person to act to their detriment. 

The person who has acted to their detriment can make a claim of promissory estoppel at the court. To be successful, they must show that an assurance was made and the assurance was relied upon to their detriment. Essentially, they must show that it would be unconscionable or unfair for the promisor to go back on their promise. 

The court will take into account the degree of detriment suffered by the person making the claim and it has discretion in what relief to offer to the claimant. 

Why take legal advice? 

If you are looking to draft or negotiate a contract, or are facing a contract dispute, it’s vitally important that you seek out the advice of an experienced solicitor who can identify issues relating to contract fundamentals such as consideration, and will ensure that your rights are protected under the contract. A solicitor will also make sure that the contract is valid and enforceable and avoid any issues relating to estoppel. 

What is an Exclusion Clause in Contract Law

In a business-to-business context, a common way of apportioning risk is for the parties to exclude or restrict their liability to one another in the event of default. Some clauses seek to completely exclude liability, whereas others limit it. This may be, for example, by capping the amount payable in damages in the event of a breach, or by restricting the types of loss recoverable or the remedies available.

Understanding how to incorporate enforceable exclusion and limitation of liability clauses can be crucial when negotiating or drafting such clauses, so as to adequately balance the rights and obligations of both parties. 

This article examines the question of ‘what are exclusion clauses?’ – providing a brief overview of some of the main legal principles involved. However, before entering into any business-to-business contract, expert legal advice should always be sought.

What are exclusion clauses and when are they not permitted?

An exclusion clause is a contractual term that excludes or limits liability, the latter often being referred to as a limitation of liability clause.

It is not possible, however, for the parties to simply exclude or limit liability in any way they chose, not least in an unreasonable way. Exclusion and limitation of liability clauses are subject to both statutory and common law controls. 

In particular, the Unfair Contract Terms Act 1977 regulates the exclusion and limitation of liability in both negligence and for breach of contractual obligations. Under the 1977 Act, liability can never be excluded or limited for the following:

  • death or personal injury caused by negligence.
  • implied terms as to title and quiet possession under the Sale of Goods Act 1979, the Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services Act 1982.

For public policy reasons, it is also not possible for a party to exclude or limit liability for its own fraud, either in inducing the other party to enter into the contract through fraudulent misrepresentation or during the course of it.

What are exclusion clauses and when are they permitted?

For business-to-business contracts, the following types of liability can be excluded or limited by way of specific contractual provision:

  • loss or damage other than death or personal injury resulting from negligence. Where a contract term purports to exclude or limit liability for negligence, a person’s agreement to or awareness of it is not of itself to be taken as indicating his or her voluntary acceptance of any risk.
  • implied terms as to conformity of goods with description or sample, or relating to their quality or fitness for a particular purpose under the 1979 and 1973 Acts. This covers both sale of goods and hire-purchase.
  • in contracts where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods or hire-purchase, implied terms as to conformity of goods with description or sample, or relating to their quality or fitness for purpose. This primarily covers corresponding terms implied under the 1982 Act relating to contracts for services where goods are also supplied.
  • liability by reason of pre-contractual misrepresentation or any exclusion of any remedy available by reason of such a misrepresentation, other than for fraudulent misrepresentation.
  • where one of the parties is a business contracting on the other’s written standard terms, the other cannot exclude or restrict liability for breach of contract, nor claims to permit a contractual performance substantially different from what is expected, or claims to allow no performance at all.

This list is by no means exhaustive, rather it provides statutory examples of when exclusion clauses are expressly permitted, albeit only to the extent that the term satisfies the requirement of reasonableness.

What are exclusion clauses and what is the requirement of reasonableness?

Any exclusion or limitation of liability clause will be subject to a requirement of reasonableness. It is for those claiming that a contract term satisfies this requirement to show that it does. The test of “reasonableness” is set out under section 11 of the 1977 Act. This provides that:

“the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”.

In assessing reasonableness, regard should be had to the following guidelines set out under Schedule 2 of the 1977 Act:

  • the strength of the bargaining positions of the parties relative to each other, taking into account, among other things, alternative means by which the customer’s requirements could have been met.
  • whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having a similar term.
  • whether the customer knew or ought reasonably to have known of the existence and the extent of the term, having regard, among other things, to any custom of the trade and any previous course of dealing between the parties.
  • where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable.
  • whether the goods were manufactured, processed or adapted to the special order of the customer.

In addition, where a term of a contract seeks to limits liability to a specified sum of money, the cost and availability of insurance may be relevant in an assessment of reasonableness.

Although the 1977 Act provides that these guidelines apply specifically to contracts involving the sale and supply of goods, they are usually treated as having more general application. Further, these statutory guidelines are not exhaustive.

What are exclusion clauses and what are the effects of falling foul of the reasonableness test?

If an exclusion or limitation clause falls foul of the statutory provisions under the 1977 Act, either because it purports to exclude a type of liability which cannot be excluded, or because it falls foul of the requirement of reasonableness, it will be ineffective. The court will not rewrite the clause to substitute an alternative, rather liability will become completely uncapped, subject to the usual rules relating to the recovery and assessment of damages.

The risk of an entire exclusion or limitation of liability clause being unenforceable can be minimised by drafting it, using sub-clauses, as a series of separate terms easily distinguishable from one another. 

In business-to-business contracts, clauses are far more likely to be enforceable, and be construed less strictly, if they limit liability rather than exclude it entirely. However, as the wording of exclusion clauses tends to vary so much, many cases turn on their specific facts.

What are exclusion clauses and when are they outside the control of the Unfair Contract Terms Act 1977?

There are in fact a number of contracts to which the 1977 Act, and therefore the test of reasonableness, does not apply. Broadly speaking, these include:

  • international supply contracts
  • contracts of insurance
  • contracts relating to interest in intellectual property rights
  • contracts relating to interests of land
  • contracts of employment, except in favour of the employee
  • contracts relating to the formation, dissolution or constitution of a company or to the rights or obligations of its members.

In circumstances where the provisions of the 1977 Act do not apply then, subject to common law and any industry-specific rules, the parties are free to draft whatever exclusion or limitation they may agree. 

Legal advice in relation to the question ‘What are exclusion clauses?’

Exclusion and limitation of liability clauses are a sensible way of allocating risk but need careful and expert drafting if they are to be enforceable. 

In the event that such clauses are not properly incorporated into the contract, are excluded by statute or at common law, or fall foul of the reasonableness test, they will be ineffective. Accordingly, the liability which the clause purported to exclude or limit will become completely uncapped.  In these circumstances, the financial and other consequences for you and your business could be significant. 

By seeking legal advice prior to entering into a contract, your legal adviser can help you with the following matters during the negotiation and drafting process:

  • incorporating the clause into the contract
  • ensuring that the liability in question is covered by the clause
  • identifying any cases or legislation regulating its effect
  • applying the requirement of reasonableness

By fully understanding ‘what are exclusion clauses?’ you can agree on a contract that adequately balances the rights and obligations of both parties.

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

Guide to Legal Remedies

Legal remedies are the means with which a court of law, in a civil law context, enforces a right, provides compensation or makes some other court order as a means of resolving a contractual, tortious or other type of dispute. Such remedies can generally be divided into two categories: legal and equitable.

Legal remedies allow the innocent or aggrieved party to recover damages. In contrast, equitable remedies provide a non-monetary solution to resolving a dispute. Equitable remedies are typically granted when compensation cannot adequately resolve the wrongdoing. 

This article examines the legal remedy of damages available to the court in the context of both contract and tort law, in particular the general principles relating to the recovery of damages. We also touch upon the two main equitable remedies that may be prescribed in a contractual or tortious context.

Damages 

Damages represent the principal legal remedy available in contract and tort law, the purpose of which is compensatory. In short, damages are an award of money to compensate the innocent or aggrieved party for any breach or wrongdoing.

The overriding aim of an award of damages arising from a breach of contract is to put the innocent party, so far as money can do it, in the position he would have been in had the contract been properly performed. In contrast, damages awarded in respect of a wrongful or negligent act is to put the injured party in the position he would have been in had the tort not occurred.

In either context, there are various different legal principles that will determine whether or not a claimant will be successful in recovering damages, in particular causation, remoteness and mitigation.

Causation

Causation is a principle used in the assessment of damages for both breach of contract or tort. To claim contractual or tortious damages, the claimant must first prove, on a balance of probabilities, that the breach of contract or duty actually caused the loss complained of.

In establishing whether or not there is a a causal connection between the breach and the loss sustained, the courts will apply the “but for” test. In other words, if the loss would have happened in any event, then the breach could not be said to have caused the loss.

Factors that may require special consideration are whether or not there are multiple causes of the damage, and/or whether there have been intervening acts contributing to or exacerbating the damage.

Remoteness

Remoteness is a principle used to determine legal causation. This is different from factual causation that examines whether the damage actually resulted from the breach. Once factual causation has been established, it is necessary to ask whether the law is prepared to attribute the damage to the particular breach of contract or duty, notwithstanding the factual connection. 

Damage that is too remote is not recoverable, even if there is a causal link between the breach and the loss. In breach of contract claims, remoteness comprises a two-limb test: first, whether the loss arises naturally from the breach and, second, whether the loss was within the reasonable contemplation of the parties as being a consequence of the breach at the time they entered into the contract.

In applying the test of remoteness in a contract claim, the court may also look to whether or not the defendant can be said to have assumed responsibility for the type of loss in question.

In tort law, in particular negligence and nuisance, the test for remoteness of damage is whether the kind of damage suffered was reasonably foreseeable by the defendant at the time of the breach of duty. Provided that the kind of damage is reasonably foreseeable, it does not matter that the way in which the wrongdoing was inflicted or its extent was unforeseeable. 

Mitigation

Mitigation refers to the duty upon the claimant to minimise his/her loss and to avoid taking unreasonable steps that increase that loss. An injured party cannot recover damages for any loss, whether caused by a breach of contract or breach of duty, which could have been avoided by taking reasonable steps. 

Whilst the duty to mitigate is not an actionable breach of duty, any failure to mitigate loss will impact on the level of damages recoverable. However, in mitigating any loss, the claimant is only required to act reasonably.

Equitable remedies

Damages may not always be an adequate remedy or, indeed, an appropriate one. This may be the case in the context of an anticipatory breach of contract, ie; where the contract has not yet been breached but action is proposed that will amount to breach, or where legal intervention is necessary to prevent a future tortious wrong. In such circumstances, it may be more appropriate to seek some form of equitable remedy, in addition to or in lieu of any claim for damages.

There are two main equitable remedies available to the court: injunctions and specific performance. Unlike damages, which are available as of right, these equitable remedies are granted at the court’s discretion. 

Injunctions

An order for injunctive relief may be mandatory or prohibitory. The former requires a party to do something, whilst the latter stops a party from doing something. The courts are typically more willing to grant prohibitory injunctions, restraining a party from taking a certain step, than they are to order mandatory injunctions, which would require the taking of action.

Injunctions can be ordered on an interim basis, effectively preserving the status quo until the underlying dispute between the parties can be resolved. They can also be ordered on a final basis.

In contractual disputes, injunctions are commonly used to restrain a respondent from dealing with or disposing of property until a disputed issue has been determined. In tortious claims, injunctions are most commonly used in the torts of nuisance and trespass to prevent further wrongdoing.

Specific performance

An order for specific performance may, in limited circumstances, be an appropriate alternative remedy to damages in a contractual dispute. Specific performance compels a party to perform its contractual obligations. This can include, for example, requiring the breaching party to deliver goods that have already been paid for or to render payment for services already received.

The courts are, however, often reluctant to order a party to unwillingly perform their contractual obligations. Accordingly, in considering whether to grant specific performance the court will look closely to whether damages would be an adequate remedy in the context of the particular type of contract. By way of example, the court would be unlikely to order specific performance of a contract for personal services. 

The court will also look to whether there is any bar to equitable relief, for example, whether the claimant’s own conduct has in some way been improper and, as such, whether or not the claimant has come to court with “clean hands”.

For an in-depth look at legal remedies 

The topic of legal remedies is a highly complex and substantial area of law. This article provides only an overview of some of the legal principles involved. For detailed guidance on legal remedies students should refer to specific texts or analysis on the subject, with reference to any statutory provisions and all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought. 

What is Mistake in Contract Law?

This article examines the meaning and effect of the doctrine of mistake in contract law, including the different types of mistake, how these may impact on the validity of a contract and the legal remedies available for ‘mistake contracts’. 

What is a ‘mistake contract’?

Mistake is a legal concept in contract law. It refers to an erroneous belief held by one or both parties to a contract at the time the agreement is entered into. A contract entered into under a mistake (or a ‘mistake contract’) may arise in various different ways including:

  • a mistake as to the subject matter or nature of the transaction.
  • a mistake as to the terms of the contract.
  • a mistake as to the identity of the person with whom the contract is entered into.

Mistake should not be confused with misrepresentation. A misrepresentation is a false statement of fact made by one party to another – whether innocent, negligent or fraudulent – which, whilst not being a term of the contract, induces the other party to enter the contract.

The effect of an actionable misrepresentation is to render the contract voidable, giving the aggrieved party the right to rescind the contract or to have it set aside by the court. A mistake, on the other hand, can potentially render a contract void or voidable. A void contract is one that is declared a nullity, such that it is wholly lacking in legal effect and no rights or obligations can be derived under it.

Types of ‘mistake contracts’

English law recognises three different types of mistake:

  • common mistake – both parties make the same mistake.
  • mutual mistake – the parties are at cross-purposes with each other.
  • unilateral mistake – only one party makes the mistake.

Common mistake contract

A common mistake occurs where the parties entered into a contract operating under a shared misapprehension or misguided belief as to a matter of existing fact or law.  A common mistake that goes to the very root of the contract will potentially render the contract void.

The court must be satisfied that the mistake is so fundamental, such that performance under the contract is either impossible, or performance is essentially different from that which the parties anticipated.

In particular, a contract will be void at common law where the subject matter of the contract no longer exists, for example, a contract for the sale of goods where those goods have already perished. Similarly, the contract will be void if the buyer makes a contract to buy something that in fact already belongs to him.

A contract will not generally be void for mistake if it relates to the quality of the subject matter, as this is unlikely to render performance fundamentally different to that originally agreed. 

Mutual mistake contract

A mutual mistake is one where the parties are at cross-purposes. In other words, it is a misunderstanding between the parties entering into a contract as to a material fact. 

A mutual mistake will only affect the validity of the contract if the mistake is so fundamental that it nullifies consent. If the mistake goes to the heart of the contract, the contract will be rendered void. 

The courts will apply an objective test to see if the contract can be saved, ie; what would a reasonable person have understood the contract to mean. If, in light of the parties’ words and conduct, there is only one possible interpretation of what was agreed, the contract will still be valid. If, on the other hand, a reasonable person could not determine the meaning then the contract will be held void for mistake.

Unilateral mistake contract

A unilateral mistake occurs where only one party is mistaken. This includes a mistake relating to the terms of the contract or mistake as to the identity of the person with whom the contract is entered into.

Whilst only one party must be mistaken about the terms of the contract, the other party must know or ought to have known of the mistake to invalidate the contract. The courts will apply a subjective test, ie; from the point of view of the mistaken party’s intention in entering into the contract.

Mistakes as to identity are generally induced by fraud in that one of the parties is claiming to be someone who they are not. As such, there is an overlap here with the law of misrepresentation and whether a contract is rendered void or voidable.

This distinction is particularly significant in the context of third party rights. By way of example, where goods have been acquired under a contract and sold on to a third party acting in good faith, the mistaken party can seek to recover the goods from the innocent third party if the contract is void. If, on the other hand, the contract is voidable, the purchaser will acquire good title.

Effects of a ‘mistake contract’

Only those mistakes that operate to negative consent will render a contract void. A ‘mistake contract’ that is void must be distinguished from one that is merely voidable. A contract that is void produces no legal relationship between the parties and has no legal effect. The contract is said to be void ab initio, ie; from the beginning, as if the contract was never made.

This means that neither party is able to sue the other on the contract, and any payments made or property transferred under the contract are recoverable since neither party has any entitlement to what he has received. Alternatively, if the contract is voidable, the contract will have been valid from the start and obligations may arise under it despite the mistake.

A voidable contract is one that a party is entitled to rescind or to have set aside by the court. However, until the mistaken party exercises its right to rescind, the contract remains valid and legally binding. Rescission has the effect of cancelling the contract and restoring the parties, so far as possible, to their pre-contractual position.

Remedies for a ‘mistake contract’

If argued successfully, mistake can lead to an agreement being found either void or voidable by the courts. If a contract is found to be void, where appropriate the court will order restitution, ie; recovery of any monies paid or property transferred by mistake. In circumstances where a contract is found to be voidable, the court may look to any one the following equitable remedies:

  • rescission – this is where the contract is set aside and the parties are returned to the position in which they were before the contract was made. 
  • specific performance – this is where the court can compel a party to perform its contractual obligations.
  • rectification – this is where the court can correct an error of expression where a written document does not accord with what was agreed orally. 

For an in-depth look at mistake contracts 

The law relating to mistake contracts can be highly complex. This article provides only an overview of some of the legal principles involved in the law relating to mistake. For more detailed guidance on this topic, students should refer to specific texts or analysis on the subject, with reference to all recent and leading case law. 

Legal disclaimer

The matters contained in this article are intended to be for information purposes only. This article does not constitute legal advice and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.