LAWS10078 Contract Exam Notes-PRE CONTRACTUAL LIABILITY, Study notes of Law

Download LAWS10078 Contract Exam Notes-PRE CONTRACTUAL LIABILITY and more Study notes Law in PDF only on Docsity! PRE CONTRACTUAL LIABILITY Promises and Contract Law: Comparative Perspective Wasted pre- contractual expenditure following termination of contract negotiations Should a party negotiating a contract incur liability for negotiating expenses of the other party if negotiations for a contract are broken off? When the negotiations break down and a contract is not concluded, a party could have incurred huge sums of expenses in terms of contracting service like lawyers etc to help with the negotiations. Where the money expended by one negotiating party has conferred some objective benefit on the other party there may be a claim in unjustified enrichment, however, the party is unlikely to recover for wasted expenses. If we take the strict view to this then we can see the contract relation as two stages: the negotiations stage and the contract signing i.e. agreement. It is the latter where duties and rights are assumed and there is consensus in idem. There is no middle ground, i.e. no liability can arise for wasted pre- contractual expenditure, unless caused by a tortious act, each party assuming his own risks. However, there are people of the view that the parties should be entitled to recover for pre- contractual expenditure- this could cause possible problems like posing a risk to the freedom not to contract and could skew the risk allocation between the parties. Common Law solution to the problem of pre-contractual expenditure: promissory and proprietary estoppel. The idea of estoppel can be briefly describes as it would be unconscionable to allow a party in some instances to adopt a position which is at odds with a position previously adopted by it. At common law estoppel by representation provides a defence against a party seeking to deny a representation of fact which it has previously made. Equity recognises estoppel as preventing party which has made a promise from acting inconsistently with that promise. The doctrine of promissory estoppel holds that if A has made a clear or unequivocal promise to B, which has affected B’s position, and it would be inequitable to allow A to go back on his promise, then A will be prevented from acting inconsistently with that promise. In US thus then B would be given a direct right to enforce A’s promise by raising a claim against A and thus bypassing consideration requirement. In England, B is given a defence to any action by A to enforce a position contrary to A’s promise. In England the courts have restricted the doctrine to cases where the promise relates to a right stemming from a pre-existing legal relationship existing between the parties. In US, a belief that a legal relation in the future will exist suffices. This narrow reading by English courts has restricted the recovery of pre-contractual expenditure. In USA however, where the promise made need not relate to a pre-existing right between the parties, this evidently opens up the way for promissory estoppel to play a role in relation to liability for pre-contractual expenditure, as happened in the Hoffman v Red Owl Case. In England the law is largely governed by the case of Walford v Miles, 1992. In this case the defendants were the owners of a company a property of a photographic business. Negotiations between them and the plaintiffs began for the sale of that business. The defendant agreed orally, to terminate negotiations with any other competing party if the claimant furnished the defendant with a letter of comfort from the claimant’s bank indicating that they have the necessary finances to purchase the business. This condition was complied with. They ended negotiations with others, but eventually sold off the business to another third party. The court held: As to good faith, it is said that there is no principle of English law whereby a party negotiating in circumstances such as the present owes a duty of good faith. This is not so; if an appropriate agreement has been concluded there will, in the absence of contrary express provision, be an obligation upon the parties to behave reasonably. It is necessary first to ask what legal right has been invaded and then to ascertain what consequences flow from the invasion of the right. In the present case all that has been lost is the opportunity to negotiate. This cannot be tangibly assessed. Loss of opportunity to negotiate is not a head of damage known to the law. While accepting that an agreement to agree is not an enforceable contract, the Court of Appeal appears to have proceeded on the basis that an agreement to negotiate in good faith is synonymous with an agreement to use best endeavours and as the latter is enforceable, so is the former. This appears to me, with respect, to be an unsustainable proposition. The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively , a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined "in good faith." However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adverserial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a "proper reason" to withdraw Promissory estoppel: promissory or reliance based principle? Promissory estoppel has been argued to be more of a reliance based principle than a promissory one, in that it aims to protect the detrimental reliance of one party in whose favour the undertaking is made by the other party. The promissory view can be supported by a historical analysis of the development of the ideas of consideration and promissory estoppel. Promissory estoppel was designed to mitigate the unjust results of the consideration rule. The promissory view is evident in the famous High Trees House Case, where Denning J stated that the basis for holding the landlord to his undertaking to accept reduced rent not merely as the landlord being estopped from denying later contrary statements, but rather because a promise was made which was intended to create legal relations and to the knowledge of the person making the promise, was going to be acted on by the person wo whom it was made and which was in fact so acted on. This can be seen as an attempt to create a free standing form of unilateral promissory liability, ie. Following the American way. However, conservative interpretations of this case led to the English result. Court practice also indicates towards the promissory and not reliance based nature of promissory estoppel. If promissory estoppel were genuinely a species of reliance based liability, one would expect an examination of whether such reliance was actually present to be a crucial part of the court’s analysis. The fact that this does not occur tends to suggest that promissory estoppel is at hear an expression of promissory principle. In addition to this, true reliance based theories, would suggest that the some detriment should be shown by the party acting in reliance of the undertaking, however, English courts are of the position that the party only needs to prove that they were affected by the promise, not that it has suffered any loss. Promissory estoppel and failed contractual negotiations Hoffman v Red Owl, US case- Hoffman had received various assurances from Red Owl that they’d gran him a franchise. On the faith of those assurances, Hoffman sold various existing concerns he had, including a bakery. One of the assurances he was given was in the nature of we are ready to go- get your money together. This reliance on any duty which he believed he was under in terms of a supposed contract between the parties, but rather as spent simply on recommendation of the defender’s representative. This just illustrates that the wasted pre-contractual expenditure must have been undertaken in reliance on the existence of a contract, that the belief of the pursuer in the existence of a contract resulted in the expense. There are two judges in the Khaliq decision that doubt if there remained the need for the availability of the equitable remedy, given the changes brought in the form of personal bar by ROW(S)A. Mr Khaliq’s claim boils down to relying on assurances made by Londis. Only Londis could have appraised him of the correct position, but didn’t do so until after Khaliq undertook expenditure on the basis of a false image they’ve created in his mind. Such circumstances have constituted grounds for recovery and it would be regrettable if the established remedy were now deemed to have been superseded. Other solutions to the problem of pre-contractual liability DCFR provision on liability for wasted pre-contractual expenditure draws on a number of good faith elements. While the parties are in general free to negotiate and not liable for a failure to reach an agreement, the negotiating process gives rise to a duty to negotiate in accordance with good faith and fair dealing, and not to break off negotiations contrary to such good faith and fair dealings. Breach of this duty of good faith results in liability for any resultant losses. This style would entail to encompass performance measure losses (loss of profit) as well as restoration measure losses, those that arise from wasted pre-contractual expenditure typically. Another scenario: There ought not be any liability given the absence of any explicit assumption of liability on the part of the faulting party. It can be argued that the person acting in reliance of assumptions should have been more careful, or cautious before embarking on extensive expenditure without absolute certainty of any contract at the end of it. This approach of denying voluntary based pre-contractual liability is largely the approach in English law. FORAMTION OF CONTRACT Contract Agreement- consensus in idem Most voluntary obligations are created as a result of an agreement between the parties. A contract is formed when parties have reached consensus in idem i.e. the meeting of the minds, on the essential terms of the contract, provided they have the intention to create legal relations. As a result of this agreement they are obliged to perform their obligations. Performance of these obligations may be suspended until a condition has been purified, and thus performance will not be enforced until the said condition precedent or subsequent has been fulfilled. Agreement is thus crucial in the formation of contract- they need not be agreement on all the terms of the contract, but there must be an agreement as to the essential terms of the contract. What is essential is dependent on case to case basis. E.g. in a contract for the sale of land, the land itself is essential so would be the purchase price. The content of the agreement must be reasonably certain. The case of RTS Flexible Systems ltd v Molkerei Alois Muller GMBH, where Lord Clarke explained: the general principles are not in doubt. Whether there is a binding contract between the parties and if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre- condition to a concluded and legally binding agreement. Where the parties have begun to perform their agreement the court may infer that they have waived the need for a formal written agreement and that there is therefore a binding contract. Therefore, in looking to establish whether there was consensus in idem between the parties, the test is an objective one and not a subjective one. This is because by looking into the subjective intentions, it could open up the possibility allowing a party who has made a bad bargain get away from the deal by claiming that they did not subjectively agree to the terms. This would lead to uncertainty in knowing whether or not a contractual obligation will be enforced by the court. Therefore, the courts ask the question of whether a reasonable person, looking into the actions of the parties would infer that they had reached an agreement even though subjectively no agreement has been concluded. Muirhead & Turnbull v Dickson- where there was disagreement as to the whether the contract was one for sale or hire purchase, in relation to the selling arrangements for a piano between the parties. D defaulted on the payments and C sought to repossess the piano. The C claimed that it was a contract for hire purchase and thus ownership in the piano did not pass until the last instalment was paid. D claimed that it was a contract for the sale and thus ownership passed when the contract was formed, even though payments were to made in instalments. The Inner House claimed that a reasonable person looking into the affairs of the parties would infer that it was a contract for sale and thus C could not repossess. Commercial contracts are not made by what people think in their inmost minds. Commercial contracts are made according to what people say. Mathieson Gee v Quigley- one party proceeded on the basis that the contract was for hire of a plant to remove silt and the other proceeded on the basis that it was one for the removal of silt as opposed to the hire of machinery. The HL held there was no objective consensus. If it clearly appears to the court that the true construction of the documents is such as to show there was no true agreement, then it is plainly an impossible task for the courts to find the terms of an agreement which never existed. The evidence of dissensus must be very strong to infer that no agreement was ever reached, as Scottish courts will if the evidence is ambiguous, tend to uphold rather than cut down bargains. R & J Dempster v Motherwell Bridge & Engineering- the object of our law of contract is to facilitate the transactions of commercial men and not to create obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose them to unnecessary pitfalls. In the event that party A provides services to party B before the remuneration for party A has been agreed, the courts will imply that a contract has been formed and that there was an implied term that A would receive reasonable remuneration for services rendered- Avintair v Ryder Airline- where a contract was implied despite there being dissensus on the essentials. Offer and Acceptance analysis Problems There is a degree of artificiality about the analysis, however, it provides a framework, albeit imperfect, upon which to proceed and this produces some degree of certainty. It is also of limited value when both offer and acceptance happen simultaneously, as the exchange is sufficient enough to show agreement for e.g. buying a newspaper from a newsstand. Offers An offer is a statement of terms which the offeror proposes to the offeree as the basis of an agreement, couple with a promise, express or implied, to adhere to these terms if the offer is accepted. Therefore legal relations are created as soon as a valid offer is met with a valid an unqualified acceptance. Whether a statement constitutes an offer is ultimately a question of construction i.e. would a reasonable person infer from the evidence that the statement was intended to be an offer? Offers can be differentiated from invitations to treat- which are statements expressing the willingness of a party to receive offers which can then be accepted. This has been demonstrated in the case of Harvey v Facey, where A asked B if he was willing to sell his estate and asked him to telegraph lowest cash price. B responded by stating the lowest cash price £900. A then went on to accept this. It was held that there was no contract between the parties. B’s telegraph of lowest cash price is seen as an ITT. Fenwick v MacDonald Fraser and Patridge v Crittenden- all advertisement are presumed to be ITTs even if displayed as an offer with a price tag. However this presumption can be rebutted, as is seen in the case of Carllil v Carbolic Smoke Ball Co- where the defendants advertised that they would pay £100 to anyone who inhaled their smoke ball and caught the influenza. To show their seriousness they deposited £1000 in a bank. This was evidence to honour the terms of the advertisement and thus it was held that there was a contract. Good on display in a shop window are considered to be invitations to treat in England as per the case of Fisher v Bell, where criminal charges in relation to the defendant selling flick knives were dropped as his charge was termed offering to sell well in fact the flick knives in display were invitation to treat. Goods displayed on supermarket shelves are also considered to be ITTs in England as confirmed in the case of Pharmaceutical Society of London v Boots Cash Chemist – the reasoning behind this being that the customer accepts the goods not when he picks them from the shelf but when he takes them to the cashier. This is an artificial understanding. It should be the opposite and this would still enable a customer to change her mind by returning the goods before she starts to place her goods on the checkout belt (i.e. communicating his or her acceptance). It has been accepted in England that automatic vending machines are treated as standing offers, which was accepted as soon as a driver had driven to a point where he could no longer return- Thornton v Shoe Lane Parking. An offer is only valid if it has been effectively communicated to the offeree- Thomson v James. This is consistent with the principle that the approach to ascertaining agreements is objective: an uncommunicated intention is subjective fact which cannot be known to the party whom it is intended to affect. Burr v Bo’ness Commissioners, an offer must be authorised by the offeror. Postal offers- Carmarthen Developments v Pennington- the offer takes effect when the mail is delivered by pushing the letter through the letter box. If an offer is made to a specific person, then only that person can accept the offer- Fleming Buildings v Forrest- an offer made to Mrs Fleming could not be accepted by KWF Ltd a company owned by the defendants. However, if the offer is unilateral i.e. made to the general public then it can be accepted by anyone- Carllil . An offer can be withdrawn at any time before the offeree’s acceptance has been communicated to the offeror. This withdrawal of an offer must also be communicated to the offeree. Where the offer has been reduced to writing in the form of a contract, there is authority to suggest that oral withdrawal communication to the offeree is effective so that the offeree’s subsequent formal written acceptance does not conclude a contract- Macmillan v Cadlwell The offeror can give up his withdrawal right by claiming that the offer is open for a certain time period- the offer is described as firm. In Scotland this would amount to a promise that would be legally binding on the The Development of Interpretation of Contract in Scotland Traditional approach Traditional institutional writers suggested that the first rule of interpretation is the express tenor of the deed and the intention of the parties thence appearing. This postulates a subjective approach. Modern commentators suggest that the court should seek to find what the parties must be deemed to have intended when the matter is examined objectively- reflected in the Private Law (Interpretation) (S) Bill The Parole Evidence Rule Lenient rules on admissibility will permit the parties to lead evidence outside the terms of the contract, bringing the court closer to their common intention. Strict rules will limit the court to the consideration of the actual wording of the contract. The scots parole evidence rule can be summarised as follow- the aid is extrinsic evidence to ascertain the parties intentions is not admissible. However, this doctrine has been influenced by English law and a few exceptions have developed. Following the case of Morton v Hunter, a distinction between latent and patent ambiguities was drawn. Patent ambiguities are expression in themselves susceptible of more than one meaning. Latent ambiguities are expressions which are apparently clear, but which are seen to be ambiguous from the surrounding circumstances, as disclosed by the contentions of the parties. If the ambiguity is a latent one, then the evidence of intention is admissible to assist in its interpretation. If patent, then no evidence is admissible. Even where the ambiguity is a patent one, the Scots courts have often held evidence to be admissible.38 The Scottish Law Commission's recommendation that the parole evidence rule be repealed in the context of interpretation of juridical acts is therefore not surprising. Wording of the Contract The case of Bank of Scotland v Dunedin Property Investment Co Ltd illustrates the importance of applying the ordinary meaning of words and phrases. Lord Rodger explained that he found it helpful to start with the view expressed by Lord Mustsill in Charter Reinsurance v Fagan: to believe that most expressions do have a natural meaning, in the sense of their meaning in ordinary speech… the inquiry will begin and usually finish by asking what is the ordinary meaning of the words used. However, Lord Kirkwood and Caplan in Bank of Scotland adopted a different view referring to the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society, where Lord Hoffman doubted whether words were capable of having an ordinary meaning. He stated- the meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammers, the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The attitude exhibited by a legal system towards the use by parties of special meanings for terms is a prime indicator of the extent to which that system adopts either an objective or subjective approach. In the case of a wholly objective system, assuming that such a system exists, the interpretation of a reasonable third party would be preferred over the parties' common understanding as to the meaning of a specific phrase. A system which, by contrast, holds the common intention of the parties as the most important factor, would uphold that intention by giving effect to the special meaning. Thus, the common intention prevails unless there has been reliance by a third party on the contract. In Scotland, at present, the courts have the ability to give effect to particular meanings applied by the parties to words and phrases.63 The particular meaning may have to be specifically averred, but once this is done extrinsic evidence can be used to establish the meaning.64 The solution proposed by the Scottish Law Commission was to give effect to the meaning intended by the parties. This special rule for contracts is modified to protect third parties. In Scotland, it is clear that this rule is designed to cover both the situation where one party uses an expression in a special sense, and where both contracting parties use the expression in a special sense. The Scottish Law Commission clearly considered that protecting reliance interests was an important policy, and that it was in line with Scotland' overall objective approach to interpretation. Context The word ‘context’ is itself ambiguous. On the one hand, it can simply refer to the contract itself, looked at as a whole. Thus, a term must be interpreted by looking at the remaining terms of the contract. On the other hand, it may also refer to factors outside the ambit of the contract, including evidence relating to the position of the parties at the time the contract was entered into and the aim and purpose of the transaction. The Scottish Law Commission considered that the word was sufficiently certain not to require a definition in the draft Bill.73 The report does, however, provide the following definition: ‘The context of an expression in a juridical act consists of the parts of the juridical act which precede or follow it.’74 The report also notes that the juridical act itself may enlarge the context, for example, by incorporating terms by reference. 75 The Scottish legal usage of the word ‘context’ does not, however, appear to extend to the circumstances of the parties at the time the contract was entered into. Factual context of the contract at the time of formation- A court may wish to consider matters such as the type of transaction and the situation and the nature of the parties. In order to do so, it will need to hear evidence as to the parties' circumstances. Youell v. Bland Welch - The notion is what the parties had in mind, and the Court is entitled to know, what was going on around them at the time when they were making the contract. This applies to circumstances which were known to both parties, and to what each might reasonably have expected the other to know. In theory at least, evidence of surrounding circumstances is not admissible unless the contract contains an ambiguity.86 However, the requirement of an ambiguity is not emphasised in the main Scottish texts,87 nor is it evident in (p.80) more recently decided cases. Despite the SLC confirming that an ambiguity needs to be present before hearing of evidence of surrounding circumstances, a Scottish court ruled that it was not necessary to find an ambiguity- Waydale Ltd v. DHL Holdings (UK) Ltd . If we understand ambiguity to be a word having more than one meaning, then in many cases, it is not clear whether the court has actually found an ambiguity to exist prior to hearing evidence of the surrounding circumstances- seen in the Stewart Milne Group Ltd v. Skateraw Development . This may be because the Scots courts have the ability to class ambiguities as latent, i.e. ‘expressions which are apparently clear, but which are seen to be ambiguous from the surrounding circumstances, as disclosed by the contentions of the parties.’93 By doing so the court is then able to hear evidence on the surrounding circumstances, even although the contract, on the face of it, appears to contain no ambiguity. Prior communings and negotiations are currently inadmissible under Scots law 114 and the Scottish Law Commission has proposed no change to this (p.84) rule.115 They are also inadmissible in English law, an approach which was forcefully reaffirmed by Lord Wilberforce in the influential case of Prenn v. Simmonds .116 Even Lord Hoffmann, who has recently advocated the most open rules of admissibility ever contemplated in English law, stops short of suggesting that prior negotiations should be admissible.117 Rectification is possible in both jurisdictions and this may explain why there appear to be fewer calls to admit such evidence as part of the interpretative process. Lord Steyn has suggested that evidence of prior negotiations (together with evidence of the subsequent conduct of parties, which is considered below) marks the ‘great divide between the common law and civilian systems.’122 Given that civilian systems traditionally adopt a more subjective approach to the entire issue of contractual interpretation, evidence of prior negotiations is more likely to be admissible because it may help the court to reach the goal of determining the parties' common intention. Common law systems, taking a more objective approach, refuse to admit such evidence for several reasons. Lord Wilberforce questioned the utility of such evidence given that the parties' positions will change many times prior to reaching consensus in idem.123 Others have argued that protection of third parties rules out itsadmissibility.124 Third parties who rely on the contract will have no knowledge of prior negotiations. The interpretative process might be lengthened immeasurably if one were forced to look at the numerous statements and drafts which precede the finally agreed terms. However, in Bankf of scotland v Dunedin Property Investment- Pre-contractual negotiations were found to be admissible in order to establish the state of the parties' knowledge of the surrounding circumstances at the time of entering into the contract- being more in line with the civilian approach. The general rule as to evidence of the parties subsequent conduct is such that it is not admissible generally in Scotland. Relaxation on the rules of admissibility A marked relaxation in the rules of admissibility of extrinsic evidence for commercial contracts can be seen in certain recent English House of Lords judgments, particularly in speeches by Lord Hoffmann. Thus, in Mannai Ltd v. Eagle Star Ass Co Ltd he stated-In the case of commercial contracts, the restriction on the use of background has been quietly dropped. There are certain special kinds of evidence, such as previous negotiations and express declarations of intent, which for practical reasons … are inadmissible in aid of construction…. But apart from these exceptions, commercial contracts are construed in the light of all the background which could reasonably have been expected to have been available to the parties in order to ascertain what would objectively have been understood to be their intention: building upon the speeches of Lord Wilberforce in Prenn v. Simmonds . However, Lord Wilberforce only recommended for relaxation where the literal interpretation would lead to absurdity. Further building on this, in Investors Compensation Scheme Ltd v. West Bromwich Building Society 152 which has become the leading case, Lord Hoffmann sets out five (p.88) separate principles: 1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. 2. The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. 3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. 4. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reasons have used the wrong words or syntax: see Mannai Investments Co Ltd v. Eagle Star Ass Co Ltd [1997] AC 749 . 5. The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. certainly protect the tertius, lender, or cautioner from being subjected to private meanings not evident to an objective observer of the contract terms, though it has the potential to create the somewhat complex result that the contract is taken to mean one thing for A and B but something different for C. (4) the position of third parties; (5) the use of maxims or rules of interpretation; and (6) the permissibility and function of so-called “entire contract clauses”. The Cases Investors Compensation Scheme v West Bromwich Building Society- But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381 , 1384–1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989 , is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of “legal” interpretation has been discarded. The principles may be summarised as follows. (the five points above). Finally, on this part of the case, I must make some comments upon the judgment of the Court of Appeal. Leggatt L.J. said that his construction was “the natural and ordinary meaning of the words used.” I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in choosing between competing unnatural meanings. Secondly, Leggatt L.J. said that the judge's construction was not an “available meaning” of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Through the Looking-Glass . Alice and Humpty-Dumpty were agreed that the word “glory” did not mean “a nice knock- down argument.” Anyone with a dictionary could see that. Humpty-Dumpty's point was that “a nice knock- down argument” was what he meant by using the word “glory.” He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant. Chartbrook Ltd v Persimmon Homes Ltd- that, although a court would not easily accept that linguistic mistakes had been made in formal documents, if the context and background drove a court to conclude that something had gone wrong with the language of a contract the law did not require it to attribute to the parties an intention which a reasonable person would not have understood them to have had; that where it was clear both that there was a mistake on the face of the document and what correction ought to be made in order to cure it, in that it was clear what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties by using the language in the contract to have meant, the court was entitled to correct the mistake as a matter of construction that there was always a commercial context to a contract negotiated between businessmen, and to interpret the definition in accordance with the ordinary rules of syntax made no commercial sense; and that, *1102 accordingly, taking into consideration the background and context but not the pre-contractual negotiations and applying the established principles of construction, the claimants' construction could not be upheld, and the construction put forward by the defendants was more appropriate. As to (1) admissibility, the general rule is that evidence of negotiations leading up to a contract and of the parties' subjective intentions is not admissible for the purpose of construing the contract. The leading modern case confirming the rule and explaining its rationale is Prenn v Simmonds [1971] 1 WLR 1381 . It is axiomatic that the process of construction of a contract is an objective one and evidence as to what one party intended or wanted is not admissible because the whole question is how far the other party was willing to go to meet his objective. But when it comes to “negotiations” the rationale is not so straightforward. There has in recent times been a revolution in the material the court can look at to aid it in the process of interpretation. Negotiations between the parties are clearly in fact part of the background knowledge reasonably available to the parties at the time the contract was made. If the matter is approached as one of principle the question should simply be one of relevance. As to the boundaries of the principle, the logical dividing line is between those cases where the evidence of pre-contractual negotiations serves to do no more than establish what each party's divergent negotiating position was, and those cases where the evidence establishes a consensus between the parties on the point at issue. In the latter case the evidence is not adduced to mount the impermissible argument: “you can see I wanted X so you should construe the contract as providing for X.” It is adduced to mount the altogether different argument: “you can see we agreed on X, so you should construe the contract as providing for X.” To adopt that dividing line would be to adopt a principled approach to the question of admissibility based on the relevance and helpfulness of the material rather than a mechanical one under which the classification of a particular background fact, however helpful or relevant, as a “negotiation” precludes the court from deriving any assistance from it to resolve questions of construction. That approach in no way cuts across the principle that construction is always concerned with the objective and not the subjective. Where the evidence establishes that, objectively, the parties reached a consensus on a particular point, that is *1106 helpful, and if interpreted objectively, in no way represents a departure from the objective approach. Where pre-contractual material furnishes a clear insight into the purpose of the disputed provision, admitting it is likely to promote certainty rather than the reverse and would promote the interests of justice. The starting and finishing points are the language of the contract but the use of other material would assist the court to interpret that language by seeing what a reasonable person with all the background material would have in mind when entering into the contract. All language is contextual and is not to be construed in vacuum. There is no legal rule of construction that words are only to be given their ordinary meaning. The exclusionary rule accords with contractual certainty and with the ability to obtain speedy advice on contracts. The abolition of the rule would undermine the advice a lawyer could give and would also lengthen court proceedings. The rule also protects the interests of third parties. There is no good reason for the House of Lords to do away with the rule. Contractual certainty and speedy advice are important, but a lawyer is bound to ask questions about the pre-contractual negotiations and discussions. Therefore it is not right to suggest that there is going to be a dramatic change to contractual certainty and the speed of advice if those negotiations are admitted. It will not make commercial litigation impossible. The interests of third parties might be affected but the interests of the parties to the contract are more important than those of third parties. Third parties are successors and cannot take what the parties have not got. The nemo dat principle applies and that is a risk which third parties take when they take an assignment of a contract. The primary interest is that of the contracting parties and not of the third parties. When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what *1114 a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties is no reason for not giving effect to what they appear to have meant. The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in *1121 obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Criticising the Hoffman approach: Multi-link Leisure Developments Ltd v North Lanarkshire Council- In any event, Lord Hoffmann's observations were made in the context of commercial contracts, whereas this case is about a Scottish lease of heritable property. In our opinion, it is sufficient in this case to follow the approach recommended by Lord Mustill in Charter Reinsurance Co Ltd v Fagan (quoted with approval by Lord President Rodger in Bank of Scotland v Dunedin Property Investment Co Ltd , p 661). Our inquiry should start (and will finish) by asking what is the ordinary meaning of the words used. GOOD FAITH Good Faith in the Scots Law of Contract: An Undisclosed Principle? What is good faith? This is of major divide between civilian and common law legal systems. Where the great Continental civil codes all contain some explicit provision to the effect that contracts must be per- formed and interpreted in accordance with the requirements of good faith, 9 English and Irish law are almost equally explicitly opposed to such broad concepts. This is not to say that the Common Law is happy to countenance bad faith in contracts; but the approach is, to paraphrase some well-known remarks of Lord Bingham, to avoid any commitment to over-riding principle in favour of piecemeal solutions in response to demonstrated problems of unfairness. In the continental systems good faith means: first it is broadly divided into subjective and objective good faith. Sub- jective good faith is concerned with knowledge of facts or events, or absence of knowledge, and affects mainly property law and possession. In this sense good faith is perfectly familiar in English and indeed Scottish law, both of which offer substantial protection to the bona fide possessor and to the good faith purchaser of goods from a seller with- out title while denying it to the acquirer in bad faith. It is objective good faith, however, which is chiefly relevant to con- tract law. Objective good faith is about external, or community, norms and standards imposed upon contracting parties. Over time these norms and standards have been distilled into particular rules, notably in Germany. But the content of good faith is not fixed or static. There can be no doubt that, if there is a general principle of good faith in Scots contract law, it has been mostly latent and inarticulate until now. Indeed, as Professor Thomson’s contribution to this volume shows, there are judicial dicta against such a principle, at least insofar as it might connote a duty to take another’s interests into account, or a power to strike down a bargain as unfair. Our law can be characterised by the high value which it places upon compelling performance= Conventional obligations can themselves be considered as exigible simply on grounds of good faith- each party to a contract necessarily engages the trust of the other, hence no action by each other which defeats the expectations in good faith formed by the other is a fair or reasonable action. This can be seen by the exercise of the remedy of specific implement, the principles of mutuality and the right of retention as a means of pressuring the contract breaker into proper performance. Interpretation The objective approach to contract interpretation reflects the requirements of good faith inasmuch as contracting parties are thereby protected from unfair surprise. Supplementation There are at least some cases where a party who knows of and takes advantage of another party’s error in forming a contract with that party having not been allowed to enforce the contract even where there has been no misrepresentation like that in Stewart Trs v Hart. Moreover, the doctrine of terms implied in law includes some which may be implied in contracts generally which look like expressions of good faith. Correction must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so *1850 obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.” . It could be dangerous to reformulate the principles, but I would add six comments on the summary given by Lord Simon. First, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 , 459, Lord Steyn rightly observed that the implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied *1851 into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon's first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 , para 27, although Lord Simon's requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by [him] with the utmost care”, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), p 300, para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon's second requirement is, as suggested by Lord Sumption JSC in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence. Before leaving this issue of general principle, it is appropriate to refer a little further to the Belize Telecom case, where Lord Hoffmann suggested that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract. First, the notion that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied is quite acceptable, provided that (i) the reasonable reader is treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy. (The difference between what the reasonable reader would understand and what the parties, acting reasonably, would agree, appears to me to be a notional distinction without a practical difference.) The first proviso emphasises that the question whether a term is implied is to be judged at the date the contract is made. The second proviso is important because otherwise Lord Hoffmann's formulation may be interpreted as suggesting that reasonableness is a sufficient ground for implying a term. (For the same reason, it would be wrong to treat Lord Steyn's statement in Equitable Life Assurance Society v Hyman [2002] 1 AC 408 , 459 that a term will be implied if it is “essential to give effect to the reasonable expectations of the parties” as diluting the test of necessity, who himself describes the test as stringent. It is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied, because it is apparent that the Belize Telecom case [2009] 1 WLR 1988 has been interpreted by both academic lawyers and judges as having changed the law. The second point to be made about what was said in the Belize Telecom case concerns the suggestion that the process of implying a term is part of the exercise of interpretation. Although some support may arguably be found for such a view in the Trollope case [1973] 1 WLR 601 , 609, the first clear expression of that view to which we were referred was in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 , 212, where Lord Hoffmann suggested that the issue of whether to imply a term into a contract was “one of construction of the agreement as a whole in its commercial setting.” Lord Steyn quoted this passage with approval in the Equitable Life case [2002] 1 AC 408 , 459, and, as just mentioned, Lord Hoffmann took this proposition further in the Belize Telecom case [2009] 1 WLR 1988 , paras 17–27. Thus, at para 18, he said that “the implication of the term is not an addition to the instrument. It only spells out what the instrument means”; and at para 23, he referred to “The danger … in detaching the phrase ‘necessary to give business efficacy’ from the basic process of construction”. Whether or not one agrees with that approach as a matter of principle must depend on what precisely one understands by the word “construction”. I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann's analysis in the Belize Telecom case could obscure the fact that construing the words used and implying additional words are different processes governed by different rules. Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not *1853 there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context. 28 In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term. This appeal is just such a case. Further, given that it is a cardinal rule that no term can be implied into a contract if it contradicts an express term, it would seem logically to follow that, until the express terms of a contract have been construed, it is, at least normally, not sensibly possible to decide whether a further term should be implied. Implications of Belize The impliactions of Belize, which put forward a new formula, is not wholly clear. The article argues that Lord Hoffmann was right. There is a clear linkage between interpretation and implication. Whether you are interpreting the express words of a contract, or whether you are interpreting the gaps between the words of the contract as a whole, you are, in both cases, seeking to identify and give effect to the meaning or intention of the parties. Interpretation is the process by which the court identifies the common intention of the parties. This is an objective process. Interpretation is a necessary prerequisite before implication can take place. Implication of terms is a means (but not the only means) by which effect is given to the parties’ intention once identified by the court.17 The basic principle that runs through interpretation and implication is the same: the need to identify and give effect to the meaning or intention of the parties. There is then the question whether it remains necessary, or even helpful, to continue to make reference to tests based on “business efficacy” or the “official bystander”. Both the officious by stander and the business efficacy tests emphasise the intention of the parties at the time of contracting. The intention must be of both parties, and a term will not be implied if this reflects the intention of just one party. Both tests have come in for heavy criticism over the years. The business efficacy test has been criticised on the ground that “necessity” is a slippery and uncertain concept,55 and that the word “has a degree of imprecision about it” with the consequence that “the implication of terms is often difficult to predict”.56 One party may say that the contract works perfectly well without the implied term, the other may say that it does not. The officious bystander test has been ridiculed by Lord Hoffmann as constituting “an entire music hall act” and a “little pantomime” because of the make-believe exchange between the officious bystander and the contracting parties.57 This raised doubts as to whether the law relating to implied terms in fact was really fit for purpose in the twenty-first century. There has also been much uncertainty as to the precise relationship between the two tests. On one view, the tests are cumulative.58 Both tests must be satisfied before a term can be implied in fact. In some cases, the courts have said that all implied terms are subject to the requirement of necessity.59 If that is correct, “necessity” is made a requirement of the officious bystander test as well as the business efficacy test and all cases covered by the officious bystander test must also fall within the business efficacy test if a term is to be implied.60 But this seems to require too much, for if it can be established that the parties regarded the term as obvious, and would have accepted it, that should be enough for the purpose if such implication is simply to give effect to the intention of the parties. On another view, the tests are alternative.61 A term may be implied when it satisfies either the business efficacy test or the officious bystander test. The difficulty with this approach is that a term could be implied on the ground that it was necessary to make the contract work even though there is clear evidence that one or other of the parties (or even both of them) would not have agreed to the term. In order to avoid this happening it has been suggested that business efficacy is merely a practical test for determining the intention of the parties: “in most cases, it can be assumed that they would have agreed to a term which is necessary to make their agreement work”. On this approach the business efficacy test is made a sub-set of the officious bystander test, which would allow the implication of “obvious” terms even if they were not needed to make the contract work.63 Sometimes, of course, the business efficacy and the officious bystander tests may both point to the implication of a term and, in this sense, “may overlap”,64 but it is submitted that without a proper explanation of the theory which underpins the implication of terms through the use of these tests–a theory later presented by Lord Hoffmann in Belize–this observation adds little to our understanding of the application of the tests themselves. In an article published in the Cambridge Law Journal in 2004, Adam Kramer provides the theoretical underpinning of the case for subsuming the implication of terms in fact within a broad doctrine of interpretation.85 Relying on research in the field of linguistics, Kramer argues that communication is based upon the process of “pragmatic inference”. This means that when we use express words to communicate we leave it to the person we are communicating with to supplement the linguistic meaning of the words we use by drawing on shared background knowledge and broader context.86 In other words, the process of pragmatic inference lies at the heart of what we call “interpretation”. Kramer stresses that a communicator can intend what goes without saying and what does not cross his mind.87 This still represents the communicator’s “true intention” for he intends his utterances to be interpreted against the background of social norms, understandings and “reasonable expectations”. Kramer illustrates the process of pragmatic inference by using an example of Ludwig Wittgenstein:88 “when someone asks me to ‘show the children a game’, the unspoken inference is that they do not intend me to show them how to gamble with dice”. 89 Kramer argues that just as matters can be inferred from express words, e.g., from “show the children a game”, they can also be inferred from silence. Here the process of pragmatic inference is being used to fill gaps in the communication. But the strictness of the test for supplementing the contract is said to vary according to how “primary” (i.e., independent of the expressed information)thatsupplementalinformationis.Kramerarguesthatthetestfor implying wholly new terms into a contract (primary information) should be stricter than when one is supplementing express terms with details (secondary information) through ordinary interpretation.90 Nevertheless, in both cases the basic process is still the same: the objective determination of the tacit intention of the parties Criticising Hoffman approach- Davies is particularly concerned that Lord Hoffmann’s approach in Belize leaves the court with greater room to alter the bargain made in an attempt to “improve” an agreed contract- Although, Lord Hoffmann stated that this should not be done, it may be difficult to control the scope given to the term “reasonableness” and its objective nature. Reasonable policy factors may be appropriate for implication of terms in law, but not for implication in one particular, individualised instance. The main criticisms made by Davies were adopted by the Court of Appeal of Singapore in Foo Jong Peng v Phua Kiah Mai,104 which rejected the Belize principle that implication is an exercise in interpretation. Andrew Phang J.A., relation to the one contract which matters — that with the defenders. Further it was, as we understood it, argued that it could not be said to have been clear that their position in relation to the obtaining of a bank reference would not change. We were referred to no evidence which suggested that there could be circumstances in which their position might change, and even when on 23 June 2004 the pursuers became aware of the defenders' obvious reluctance to allow matters further to drift, the pursuers still insisted, as the Sheriff Principal pointed out, on their position in relation to the bank reference. They were, in effect, suspending performance until the contract terms were changed. That, in our opinion, plainly could be said to amount to an anticipatory repudiation. As was said by Lord Browne-Wilkinson in Dymocks Franchise Systems (NSW) Pty Limited v Todd and Others at page 870: PDPF GP Ltd v Santander UK pl- 15 year lease and 2 licence agreements that allowed the tenant to make alterations to the premises. 2 weeks before ish, the landlord served a schedule of dilapidations on the tenant – seeking removal of the alternations and replace floor coverings. The tenants declined to carry out the works on the basis of insufficient notice- should a term of reasonable notice be implied into the two licence agreements? The licence agreements provide that on termination of the lease the landlord can require the tenant to remove the alterations and restore the premises to their previous state. If the landlord does not issue such a requirement, the tenant is to leave the premises in good condition and repair. I prefer, however, to approach the question on a broader basis, by considering the view of a reasonable person who had all the relevant background knowledge: Rainy Sky SA v Kookmin Bank, [2011] 1 W.L.R., p.2907B–C , per Lord Clarke of Stone-cum-Ebony. Such a person would take into account a number of factors. First, the repair and reinstatement burdens formed a valuable part of the consideration. If the landlord had shouldered those burdens, the passing rent would have been much higher. Accordingly, one would reasonably expect that the landlord would wish to insist on performance of these obligations. I prefer, however, to approach the question on a broader basis, by considering the view of a reasonable person who had all the relevant background knowledge: Rainy Sky SA v Kookmin Bank, [2011] 1 W.L.R., p.2907B–C , per Lord Clarke of Stone-cum-Ebony. Such a person would take into account a number of factors. First, the repair and reinstatement burdens formed a valuable part of the consideration. If the landlord had shouldered those burdens, the passing rent would have been much higher. Accordingly, one would reasonably expect that the landlord would wish to insist on performance of these obligations. Implication is part of the exercise of construction: Attorney General of Belize v Belize Telecom Ltd . It is warranted where the implied term is required to spell out what a reasonable person would understand the licence agreements to mean. That is not the case here. The implied term proposed by the tenant would be inconsistent with the parties' express stipulation that the landlord could issue its requirement “on the termination of the lease”. Accordingly, I reject this argument. Joint Liquidators of direct Sharedeal Ltd, Petitioners- A firm whose business involved buying and selling of shares using client money failed to comply with regulations requiring the identification and segregation of client monies. As it is regrettably foreseeable that a failed firm may on occasion have inadequate records of its client money, a mechanism is needed to give effect to the statutory trust and to the rateable distribution of the client money pool. Counsel's primary case is that the court should treat such a mechanism as implied in CASS 7. It seems to me that the decisions of the Court of Appeal and the majority of the Supreme Court point to a purposive approach to CASS 7 that would allow the implication of machinery to give effect to the policy that the regulatory document was designed to achieve. That is the entitlement of all clients who had given their funds to the firm to participate in the client money pool, regardless of the firm's failure to comply with its regulatory obligations in relation to the identification or segregation of the trust funds. In Attorney General of Belize v Belize Telecom Ltd the Privy Council considered an argument that terms were to be implied into the articles of association of a company. In its judgment, which Lord Hoffmann delivered, the Privy Council stated (in [2009] 2 All E.R., p.1133, para.21) that “… in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.” I am content to adopt that approach in relation to CASS 7 as it is consistent with what Lord Dyson stated (para.17 above). FRUSTRATION An external event may occur which will relieve the parties of their obligations to perform what they have contractually undertaken- a.k.a. frustration. When a frustrating event occurs, it does not affect the contract. Instead the parties are automatically freed from their obligations to perform any contractually agreed undertakings which were due to be performed after the frustrating event- i.e. it affects or suspends future performance. This would entail that if contractual performance has begun and thereafter a frustrating event occurs, then the parties would still be obliged to fulfil any previous obligations e.g. holiday 4 weeks, after week 2 cottage is destroyed, the tenant still has to pay for the 2 weeks, but not for the future 2 weeks. THE CONTRACT STILL EXISTS IRRESPECTIVE OF THE FRUSTRATING EVENT. How can subsequent events operate to free the parties of future performance? While the matter is controversial an answer can be found by considering the resolutive conditions. Parties can expressly stipulate that they will be relieved of future performance if a certain condition is purified (condition subsequent). It is submitted that in the absence of express contractual provisions, the law will imply certain resolutive conditions into contracts. For example, it is an implied resolutive condition that a contract is not incapable of performance. If as a result of a subsequent event, performance of a contract becomes impossible then the implied resolutive condition is purified and the contract is frustrated. Similarly, it is an implied resolutive condition that performance of a contract is not illegal: if as a result of a subsequent event, performance of a contract becomes illegal then the implied resolutive condition is purified and the contract is frustrated. Finally, it is an implied resolutive condition that performance of the contract will not be radically different from that anticipated by the parties at the time of formation: if as a result of a subsequent event, performance of a contract would be radically different from that originally envisaged then the resolutive condition is purified and the contract is frustrated. When does frustration arise? Supervening impossibility The destruction of the subject matter of the contract will render the contract frustrated, in the absence of contrary provisions in the contract. For example: Taylor v Caldwell - A agreed to let a music hall to B. When the hall was destroyed by fire before the date of the concert, the contract was frustrated. Both parties were relieved of their obligations to perform. Destruction of the subject matter can be constructive i.e. Mackeson v Boyd, where the parties were in a lease for a furnished mansion, war broke out and the house was requisitioned by the government and the furniture put away- the tenant could no longer use the furniture and the court found that the contract was frustrated. A resolutive condition can only be implied if the parties to a contract have not expressly stipulated to the contrary. This is ultimately a question of construction of the terms of the contract. When the parties have clearly undertaken to perform in any event, the doctrine of frustration cannot operate. In Gillespie v Howden[134], a shipbuilder agreed to build a ship to certain specifications and warranted that she would carry 1,800 tons of cargo. When the ship was built according to the specifications, she could only carry 1,600 tons. The shipbuilder argued that the original contract had been frustrated because it was physically impossible to build a ship that would carry 1,800 tons of cargo and also meet the specifications. The court held that, since the shipbuilder had expressly warranted that a ship built to those specifications would carry 1,800 tons of cargo, he had undertaken an absolute obligation and, accordingly, there was no room for the operation of the doctrine of frustration. Supervening illegality When performance of a contract becomes illegal after the contract has been formed, the contract will be frustrated. In the leading case of Cantiere San Rocco SA v Clyde Shipbuilding & Engineering Co [ 135], an Austrian firm entered into a contract with the defender, a Scottish company, under which the defender would build a set of marine engines. The price was to be paid in instalments, the first instalment to be paid when the contract was signed. This was duly done. Before the work was begun, the First World War broke out and it became illegal to trade with an Austrian company as it had become an enemy alien. The contract was therefore frustrated and both parties were relieved of further performance of the contract. Frustration would not have operated if the parties had expressly stipulated what was to occur in the event of war between Austria and the United Kingdom: for example, they might have agreed that while performance should be suspended during hostilities, the parties should continue with performance as agreed once peace was restored. Commercial frustration A contract will be frustrated when a subsequent event occurs which goes to the root of the parties' contract in that performance would be radically different from that originally envisaged by the parties when they made the contract. In other words, it is an implied resolutive condition that performance will not be radically different from what, as a matter of construction, the parties intended: if a subsequent event renders performance radically different, the condition is purified and the parties relieved of future performance of the contract. Before the courts will imply such a condition, they must be satisfied that the subsequent event does indeed render performance radically different. It is not sufficient that performance has become less profitable or, indeed, unprofitable for one of the parties: economic hardship per se is not frustration: Hong Kong and Whampoa Dock Co v Netherton Shipping Co Ltd. Tsakiraglou & Co v Noblee & Thurl GmbH- The parties had entered a cif contract for the purchase of Sudanese groundnuts. Under the contract, the price included the cost of transport. The seller undertook responsibility for the carriage of the nuts from East Africa to Hamburg where the buyer was located. In determining the price of the nuts, the parties had anticipated that the nuts would be shipped via the Suez canal. After the sale had been agreed, the canal was closed as a result of war. The nuts had to be shipped via the Cape of Good Hope. This increased the transport costs that would still have to be paid out of the agreed price thus lowering the seller's profits. In these circumstances, the seller argued that the contract for the sale of the nuts had been frustrated. The House of Lords held that the contract of sale had not been frustrated. While the voyage around the Cape of Good Hope was longer than via the Suez canal, the nuts would still be fit for human consumption when they arrived in Hamburg. The performance of the contract of sale was therefore not radically different from that anticipated by the parties. The only difference was that the seller would make less profit and this was a risk which he undertook in a cif contract where it was his responsibility to arrange for the transport of the goods. It should be noted that the increase in transport costs was not astronomical and the seller would still have made a profit on the sale, albeit a smaller one. Parties may make express provision in their contract on the course of action to be taken if certain events occur. It is a question of construction of the clause whether it is intended to cover all delays howsoever caused or whether the clause only applies to delays arising from events commonly occurring in international trade. In the former case, the doctrine of frustration will not operate even if the delay is for a very long period as the owner has expressly undertaken that risk. In the latter, there is room for the operation of the doctrine of judgement hints at the idea of frustration being effective where an even leads the contract purpose substantially different from what was intended originally. Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc sheds light on an issue which has not received much consideration. This is the way in which the rules of interpretation should be applied to a long term contract which has, arguably, been affected by changed circumstances. Should the interpretative rules be amended to take into account unanticipated changes in circumstances which have an impact on the way the contract operates? In this case, a change in accounting practices meant that negative goodwill became included in audited accounts as part of pre-tax profits or losses, even though that figure was not subject to taxation, and this change had an impact on the sums payable under the Deed of Covenant. The defender argued that, at the time the Deed of Covenant was entered into, no-one could have contemplated that this change would occur and, therefore, it should not affect the level of payments to the pursuer from year to year. The pursuer argued that the defender should be held to a literal meaning of the Deed despite the fact that the change was not and could not have been anticipated when the contract was formed. Lord Glennie found that the words in question did in deed have a natural and ordinary meaning: on the basis of the words used I should forma provisional view of what the parties intended. Where background information is to hand and the parties have relied on it the provisional view must be reassessed in light of that information to see whether it makes sense or needs reconsideration. This seems to be a different view on interpretation of contracts than the typical Hoffman view as expressed in the Investors case (doubting whether words can have a meaning outside of their context). Lord Gennie justifying his reasoning claims that the court should ask what are the purposes and values expressed or implicit in the deed, as understood in the context of the facts and matters in existence at the time the contract was entered into and having identified those purposes, attempt to reach an interpretation which applies the wording of the deed to the changed circumstances in the manner most consistent with them. This is not, to my mind, re-writing the contract so as to alter the bargain the parties have made. It simply recognises that to find a construction consistent with the parties’ objectives may involve doing some slight violence to the wording of the contract or Deed... This may be necessary not only where something must have gone wrong in the drafting but also where, because of changed circumstances, the drafting gives a result which neither party could have intended. As an alternative to the case on construction, the defender argued that there was scope in Scots law for the idea of “equitable adjustment”, suggests that the Scottish courts could equitably re-adjust relations between the parties following frustration of a contract. Lord Glennie was not persuaded that the doctrine was part of Scots law27 and characterised Wilkie (no doubt correctly) as an unhelpful authority.28 He reasoned that if the doctrine was part of Scots law, it must also be part of English law and, indeed, other legal systems.29 This seems an odd conclusion. Although Scots and English law tend to use the same English case to define frustration (Davis Contractors Limited v Fareham UDC)30 this similarity masks historical and structural differences. MUTUALITY Mutuality relates to self help remedies a party to a contract can exercise without court assistance. These are retention and recession. Mutuality can be described as the interdependence or unity if contract. A crucial idea around the concept of mutuality is that where both parties have rights and duties under the contract, these rights and duties are interdependent or reciprocal and the enforceability of one party's rights is conditional upon the same party performing its own duties. This means that if one party performs then the other party is not obliged to perform and a party which has not performed or is not willing to perform cannot compel the other party to perform. An important limitation upon mutuality is that, before its consequences come into play, it must be shown that the obligations in question are indeed interdependent or, in Erskine's phrase, 'are the causes of one another'. Accordingly, there cannot be withholding of performance under one contract for claims arising under non-contractual relationships between the parties. Forster v Ferguson & Forster- There is sometimes said to be a presumption that a contract is to be regarded as a whole and that all the stipulations on either side are interdependent for the purposes of mutuality. In Inveresk plc v Tullis Russell Papermakers Ltd 2010 SC (UKSC) 106 Lord Hope avoids the word 'presumption' but says at para 42 that 'the analysis should start from the position that all the obligations that [the transaction] embraces are to be regarded as counterparts of each other unless there is a clear indication to the contrary.' In complex contracts, however, it will not necessarily be the case that each and every obligation on the one side is to be treated as the counterpart of each and every obligation on the other side. While typically mutuality applies within the confines of a single contract, it may also do so where two or more contracts form part of a single transaction between the parties, with the obligations in each being inter-related as a result. So in one case buyers of two ships under two separate contracts for which only a single price was payable were allowed to refuse to pay the whole price in respect of a breach in relation to only one of the contracts- Claddagh Steamship Co v Steven Materiality of breach The application of the mutuality principle may also be limited by the requirements of materiality in relation to the initial non-performance. In a number of Outer House cases Lord Drummond Young has developed a theory that for a breach to justify a party in withholding performance it must be such as to threaten the future performance of the contract- Hoult v Turpie. At least two levels of materiality of breach have been identified in Scots law: that required for the less drastic remedy of withholding performance or suspension of the contract (retention) being lower than that for the more far-reaching action of terminating it altogether (rescission) - accepted in Inveresk. A party may therefore choose only to withhold or suspend performance in respect of a material breach for which she could terminate; but not the other way around.The exact nature of the difference between these two levels of materiality has not been much explored nor has there been identification of the level at which not even retention is allowed. The courts have sometimes talked of 'trifling' breaches for which the defensive remedies cannot be used- Barclay v Anderston Foundry Co. It is quite possible that the concept of materiality is truly only relevant to rescission and that there is no need to show materiality in relation to retention for which the only requirement would be that the breach is more than trivial. Hazards of self help The obvious danger in using a self-help remedy and stopping performance, whether by way of retention or rescission, is that the step turns out not to be justified either because there was no breach or because the breach was not material enough. If so, then the non-performance intended to be a remedy for breach itself turns out to be a breach. The best-known illustration is Wade v Waldon[22], where the manager of the Glasgow Palace and Pavilion Theatres engaged a well-known artiste to appear under a contract which required the latter to send in 14 days ahead of his performance what was described as 'bill matter' giving details of his performance which would be used for advance publicity. The bill matter was not sent and the manager terminated the contract. But in the subsequent litigation it was held that the artiste's breach did not justify termination and that the manager was guilty of breach and liable in damages in consequence. The party who wishes to invoke the remedies of retention or, more especially, rescission can seek some protection by obtaining a judicial declaration of entitlement to act, the remedy in Scotland being known as a declarator. Such a remedy requires no action from the defender. The practical problem may be the need for a speedy decision which a court may not always be able to give especially in a complex commercial case. Retention This is where one party withholds performance of their obligations because the other party is in breach of their obligations. Its effect is to suspend or postpone the aggrieved party's obligations to perform until such time as the contract-breaker cures its breach. Retention is an effective way of bringing pressure to bear upon a contract-breaker to carry out the contract and is thus consistent with the emphasis which Scots contract law places upon performance as the entitlement of a contracting party. The requirement of interdependence was confirmed by the House of Lords in Bank of East Asia v Scottish Enterprise[26], but found in the particular circumstances not to mean that every obligation on one side of the bargain was dependent upon all the obligations on the other side. The Scottish Development Agency (SDA, predecessors of Scottish Enterprise) contracted with Stanley Miller (Scotland) Ltd for construction works. The parties recognised that SDA would be unable to make payments under the contract as they fell due. Millers arranged finance through the Bank of East Asia to which were assigned Millers' rights to payment from the SDA. An instalment of the price, some £416,964.72, had been due from the SDA to Millers (and hence to the assignee bank) on 15 May 1990. Millers went into receivership around 29 May 1990 with the works admittedly incomplete and the part completed defective. The loss and damage to the SDA as at 15 May was worth £168,512.40. The SDA suffered further loss after 29 May through having to remedy the defects and complete the works using another, more expensive contractor, and through delay in letting the finished works. Could the SDA retain or withhold the payment due on 15 May in respect of the breaches of contract by Millers both before and after 15 May? The House of Lords held that, while there could be retention of the £416,964 in respect of the breaches up to 15 May 1990, the defence was not available for breaches after that date ie the bulk of the consequential losses. The bank was therefore entitled to payment of the sum due on 15 May with a deduction for the damage suffered at that date. The losses arising after 29 May did not depend upon the breaches in existence at 15 May. It is not the law that each and every obligation of one party to a contract is necessarily and invariably the counterpart of each and every obligation on the other side. Macari v Celtic FC [ 27]. M, manager of Celtic, was dismissed following his failure to obey the instructions of the club board as to a residence requirement in his contract. M argued that the board had previously undermined his position thereby breaching the implied obligations of 'mutual trust and confidence' in the employment contract[28] and entitling him to withhold performance under the residence requirement. It was held that the employee's duty to obey his employer's lawful instructions under the contract was not the counterpart of the duty of mutual trust and confidence especially when the employee was otherwise carrying out his duties and drawing his (substantial) salary. So M was in material breach rather than lawfully retaining performance. There is an air of artificiality in this judgment since the implied obligation is one which goes to the very basis of the employment relationship and can indeed be seen as counterpart to all the obligations undertaken by the employee. The decision can be defended perhaps on the basis that, faced with such a breach by the employer, the employee cannot be allowed to pick and choose which of his obligations he will or will not perform. The case of Forster, it was found that the duty of good faith incumbent between partners went to the root of the contract thus being a counterpart of every other obligation. Lien is an example of retention- special lien, the right to withhold the property only existing in respect of the correlative obligation arising under the contract by which the aggrieved party gained possession of the property. This may be contrasted with a general lien in which possession of the property may be retained for all debts due by the other party under this and other transactions. General lien arises only in certain relationships: examples include solicitor and client, banker and customer, factor (or mercantile agent) and principal, and innkeeper and guest. Lien, whether special or general, is the child of possession; if possession is lost so is the right of lien. The parties can exclude retention by contractual provision. But the language of any such exclusion will have to be clear to receive effect. following June. Action can of course be dangerous as it will be interpreted objectively and thus potentially inconsistently with the actual intention of the party concerned. Effect of rescission The party exercising the remedy frees itself from performance of obligations arising under the contract in the future. A further twist may arise where there is a gap in time between breach and rescission. Under the principle of mutuality, which prevents a party in breach seeking the counterpart performance from the other party, the contract-breaker X may be barred from action in relation to its performance of post- breach obligations. Graham v United Turkey Red[92] a commission agent was dismissed for material breach of contract but was able to recover from his principal what he was owed under the contract in respect of his performances up to the breach, although the mutuality principle disabled him from contractual action in respect of commission earned between the initial breach and the principal's rescission two years later when he found out about the agent's misconduct Restitution This involves putting the parties back into the position they would have been if there had never been a contract. As noted above, rescission is essentially prospective in effect and does not involve unwinding what has happened to restore the parties to their pre-contractual position. None the less there are circumstances in which rights of restoration or restitution arise. The principal example in practice is probably the mutual restitution which follows rescission of a supply of goods contract when the goods are not of satisfactory quality. The customer is entitled to be repaid the price and the goods should be returned to the supplier. This right is limited, however, by the requirement that the remedy be exercised within a reasonable time after the supply. A third example of restitution following termination concerns advance payments where the payer does not receive the performance which was due to him under the contract. For instance, I pay for my theatre ticket when I book it but the performance does not take place. It seems clear that if I do not receive the counterpart performance to which my advance payment entitles me under the contract, there must be restitution of that payment. ERROR To be legally relevant, errors must be about facts, or the state of things as they are or have been, or about the law itself. Mere mis-predictions of the future – for example, buying shares because I believe that their value will rise in the future given the way I think the market is going – will not be enough. To make this mistake a legally relevant error so that I can get out of the contract to buy the shares, I will have to show that I had held wrong information about the company – how much money it had in the bank, who its directors and employees were, who it had contracts with, for example. I will then also have to show that the error caused me to contract and moreover was not my own responsibility. Then, and only then, can I get out of the contract. In other words, there must be “error plus”, and mere unilateral error is insufficient for reduction or avoidance of the contract. The law’s requirements are meant to make it tough to use error to get out of a contract – if it was not tough, the plea would be all too easy to make, and the stability of contracts would be seriously undermined. This relates to issues that can be seen as affecting the essential validity of the contract. Where A and B are parties to an apparent contract, one or both of them may be entitled to be released from performance of their obligations. Because consensus in idem is tested objectively in Scots law, there are exceptional cases where it might follow that no contract has been formed even although each party considered subjectively that an agreement had been reached. In this situation the apparent contract is null, ie it has never been formed[2]. Scots law also holds that, before contractual obligations are created, the parties must have reached agreement as a result of their voluntary consents to be bound. Where a party's consent is defective, the apparent contract may be null if, for example, he had no rational capacity to consent. But where the defect in consent is not so fundamental, the contract will be held to subsist if the objective criteria for determining consensus are satisfied. A party may nevertheless be released from his obligations under the contract if his consent has been improperly obtained. In other words, the contract can be annulled, ie set aside and treated as if it was null. Until this is done, the contract exists as if it was valid Similarly, where a party purports to contract but does so under error, the party's consent to the apparent contract may be so fundamentally flawed that even on objective criteria no contract was in fact formed. It is more likely, however, that the error does not prevent the formation of the contract but may be a ground for having the contract set aside, ie annulled [4]. Because it is important for third parties to be able to rely on apparently valid contracts, Scots law is reluctant to hold that such contracts are null: this is done by testing consensus objectively. For the same reason, the grounds upon which a contract can be set aside – reduction – are kept within a narrow compass although the precise scope of these grounds is a matter of controversy. The distinction between a null and an annullable contract is of the utmost importance. A null contract does not and never has existed: it has never been formed. Therefore it cannot create contractual obligations. Since ex hypothesi no contract exists, any remedy to re-adjust the parties' positions must be found in the law of unjustified enrichment. Where a contract is annullable, it subsists until it is reduced. Once it is reduced, it is treated as though it never existed, ie reduction has the effect of rendering the contract retrospectively null. Where a contract is annullable, reduction takes place in two ways. The party entitled to reduce the contract can do so simply by intimating the fact that the contract is annulled to the other party [14]. If the other party disputes the annulment, a declarator may have to be obtained from a court to establish that the contract has been annulled. Alternatively, the party entitled to reduce the contract may bring an action of reduction in the Court of Session. This may well be necessary if the contract is in the form of a deed upon which third parties could rely. As we have seen, reduction may also be pled as a defence ope exceptionis: such a defence is competent in the sheriff court. The right to have the contract reduced may be lost by the party seeking reduction. This would occur in the following situations: (1) if there has been unnecessary delay in seeking reduction;( 2) if the party entitled to reduction has at any time before seeking reduction affirmed the validity of the contract: before affirmation operates as a bar the party must know about the defect which renders the contract annullable 3) if restitutio in integrum is not possible at the time reduction is sought. What this means is that the party seeking reduction must be in the position to restore both parties to their pre-contractual positions (Boyd & Forrest v Glasgow & South-Western Railway Co) Error There is no doubt that at one time the scope of error as a ground for annulment of a contract was, in theory at least, potentially wide. Stair boldly stated that 'Those who err in the substantials of what is done, contract not'[80]. But Stair also recognised that a person seeking relief on the ground of error faced great difficulties: 'But the exception upon error is seldom relevant, because it depends upon the knowledge of the person erring, which he can hardly prove'[81]. So even in the seventeenth century, in practice error was of limited utility as a ground of annulment. From the nineteenth century onwards, the doctrine received a further set back when the Scottish courts accepted that consensus in idem should be tested objectively. This meant that where agreement had been inferred from an objective assessment of the parties' acts, a party's subjective error could not be used to deny the existence of a contract. Yet justice demanded that when a party had contracted under error, sometimes he should be entitled to be freed from performance of his obligations. This led to the recognition that when a party's error had been induced as a consequence of a misrepresentation made to him by the other party or his agent this constituted a ground to have the contract reduced (Stewart v Kennedy) According to the case of Stewart v Kennedy- error in substantials means: I concur ... as to the accuracy of the general doctrine laid down by Professor Bell [Principles para 11] to the effect that error in substantials such as will invalidate consent given to a contract or obligation must be in relation to either (1) its subject-matter; (2) the persons undertaking or to whom it is undertaken; (3) the price or consideration; (4) the quality of the thing engaged for; if expressly or tacitly essential; or (5) the nature of the contract or engagement supposed to be entered into. I believe that these five categories will be found to embrace all the forms of essential error which, either per se or when induced by the other party to the contract give the person labouring under such error a right to rescind it.” Error that prevents the formation of contract parties can enter into a contract under an error which is so fundamental that a reasonable person examining the evidence of their acts cannot infer that agreement was reached, ie on objective criteria there was no consensus in idem because as a result of the parties' error there is – objectively – no congruence of offer and acceptance. In other words, there is dissensus and no contract has been formed. In these circumstances, the purported contract is null. We have already seen an example of dissensus in the case of Mathieson Gee (Ayrshire) Ltd v Quigley[84]. Here one party's offer contemplated a contract of hire while the other party's 'acceptance' contemplated a contract of services: after construing the documentary evidence, the House of Lords held that an objective observer could not infer that an agreement had been reached. As a result of their error as to the nature of the purported contract, the offer and acceptance were incongruent and no consensus in idem had been reached. Raffles v Wichelhaus[85] provides another striking illustration of the operation of the principle, albeit that it is an English decision. Here the purported contract was for the sale of the cargo on board the good ship, Peerless, which was due to set sail from India. In fact, two ships named Peerless were due to set sail within a few months of each other. It was established that the offer was made on the assumption that the ship concerned was Peerless I, while the acceptance was made on the premise that the ship was Peerless II. The court held that on objective criteria the parties had never reached agreement as a result of their error as to the subject matter of their purported contract. Dissensus can also arise where only one of the parties is in error, at least when that error has been induced by the misrepresentation of the other party. In Morrisson v Robertson[86], a rogue, Telford, fraudulently misrepresented to Morrisson that he was the son of Wilson of Bonnyrigg, a dairyman of good credit. Telford then purported to buy two cows from Morrisson, on behalf of Wilson. When he obtained the cattle – without, of course, paying – Telford sold them to Robertson, a bona fide purchaser for value. The Inner House held that no contract had been formed between Morrisson and Telford, acting as agent for Wilson. As a result of Telford's fraud, Morrisson made an offer to sell the cows to Wilson, an offer which could only be accepted by Wilson or his genuine agent. Since Telford was not Wilson's agent, he could not accept the offer on his behalf. Accordingly, owing to Morrisson's error as to Telford's identity, induced by Telford's misrepresentation, Morrisson's offer had – on objective criteria – never been accepted. This case shows that an error as to the identity of a party can prevent the formation of a contract, ie give rise to a case of dissensus when the purported contract is null. It also illustrates that such an error can be induced as a result of a misrepresentation – which in this case was, of course, fraudulent. Where it is alleged that there has been an error as to the identity of a contracting party, the courts have argued that a contract has nevertheless been formed in spite of the error albeit that the contract may be subject to reduction, ie it is annullable. For instance, in McLeod v Kerr[90], Mr Kerr advertised his car for sale. A rogue answered the advertisement. After negotiations, Mr Kerr agreed to sell the car for £385. The rogue paid by cheque. In fact the cheque book had been stolen and the cheque was subsequently dishonoured. Meanwhile the rogue had sold the car to a bona fide purchaser for value. In these circumstances, the Inner House of the Court of Session held that a contract had been formed even although the rogue had used a false When a person enters into a contract under an error as to the legal effect of the transaction, it is now settled that the contract cannot be reduced unless the error was induced by the misrepresentation of the other party or his agent- Ellis v Lochgelly Iron and Coal Co Ltd Angus v Bryden- error as to subject-matter) Sale of fishing rights. B offered to buy all of A’s fishing rights. A accepted the offer to buy “all the whole [certain fishing rights] in the River Ayr”, and this was accepted by B, who thought the phrase included both river and sea fishings. B also knew that A thought only the river fishings were being sold. Held, only the river fishings were to be conveyed. But the court said that, had the sea fishings also been included, then A would have been labouring under an error in transaction about the subject matter of the contract, known to and not corrected by B, and this would have made the contract reducible at A’s instance. In my opinion, the ratio of Steuart's Trs. v.Hart is that an unintentional error being an error of expression by one party to a contract known to and taken advantage of by the other party is a wrong for which our law provides a remedy, the error being of the nature of essential error, that is, one but for which the party making the error would not have contracted (Menzies v.Menzies). In my opinion that ground of judgment clearly appears from the opinion of Lord President Inglis. At p. 199 he said- In short, the allegation is, that the sellers were acting under essential error and that the purchaser knew that and took advantage of it. That case certainly presents an appearance of relevancy, and I think it is fairly established by the evidence.” Subsequently he makes clear his opinion that such was a wrong which the court was entitled to right. The other opinions also appear to me to proceed upon that same ground. I refer in particular to the opinion of Lord Deas. Furthermore, as the Lord Ordinary in Spook Erection v.Kaye pointed out, the case has been referred to with approval either explicitly or by implication in judicial opinion since the case of Stewart v.Kennedy. More particularly that ground of judgment is specifically referred to in the speech of Lord Keith of Avonholm in Anderson v.Lambie. The law makes a distinction between error of expression and error of intention. The latter error is that with which the cases of Stewart v.Kennedy and Menzies v.Menzies were concerned. See also Gloag on Contract (2nd ed.), pp. 440 and following. It is now clearly determined that error in intention, even if essential, but not induced by the other party, cannot ground an action of reduction. Such error affecting intention arises where it is present in the contract and the party founding on the error is ignorant of the true facts. (See Gloag on Contract, p. 440.) It is perhaps pertinent to observe that such would be the error which would exist in the case where a rare and valuable book was bought from a bookstall by a knowledgeable and eagle eyed book collector at its stated price, one far below what it would otherwise fetch at auction or be priced by an antiquarian book seller. In such a case the book seller intends to sell the book and has fixed the price accordingly. In such an event if he sells too cheap, he is not by reason of his mistake protected from his loss. In that context the error arises because he did not know the true facts and on the general principle stated in Stewart v.Kennedy he cannot recover. On the other hand if one party offers to sell A and the other party in accepting the offer makes clear that he intends to do so but by mistake appears to accept B, so that the error is made in transmitting the acceptance of A, then the offeror knowing that the purpose of the acceptance is related to A, cannot deliberately proceed to acceptance as though it was an offer of B . (page 887 onwards) Such an approach seems to me to fall within the dictum of Lord Reid in Anderson v.Lambie, 1954 S.L.T. where at p. 78 he said this: “In my judgment, if the two parties both intend their contract to deal with one thing and by mistake the contract or conveyance is so written out that it deals with another, then as a general rule the written document cannot stand if either party attacks it. That appears to me to be supported both by authority and by principle.” In the present case the pursuer seeks to prove that neither party was under error as to the terms of the contract intended to be constituted by the offer and qualified acceptance. The formal acceptance of the defenders did not suggest that they were extending their original offer or regarding the qualified acceptance as one which included subjects not originally included within the offer by the defenders. Differing from the Lord Ordinary in Spook Erection v.Kaye, and in agreement with the opinion of Lord Dunpark in Steel v.Bradley Homes, I consider that Steuart's Trs. v.Hart is still good law and is therefore binding upon me. Contrast – *Spook Erection (Northern) Ltd v Kaye Sale of land. Sellers thought wrongly that the land was burdened with a 990 year lease (error in substantials about quality of subject-matter?), while the buyers knew that the lease was only for 99 years and about to expire (affected sale value). Held, contract not to be reduced. Seller’s error affected motive only (nothing in the contract about the lease) and there was no misrepresentation by the buyer. Wills v Strategic Procurement (UK) Ltd-The pursuer claims that the defender's agent knew that his solicitor was in error in agreeing to a form of settlement which would prevent the damages claim being prosecuted in London. He knew that the pursuer intended to pursue the matter south of the border. Mr Wills offers to prove that, through its agent, the defender “took advantage” of a known mistake on the part of Mr Wills' solicitor when he agreed to a form of settlement which, unlike dismissal, would involve a total abandonment of the claim. I am satisfied that the decision in Stewart v Kennedy did not overrule Steuart's Trustees , so I answer this question in the affirmative. The outcome in Steuart's Trustees depended upon the knowledge of one party that the other was in error. Stewart v Kennedy did not proceed upon the basis of an uninduced, but known error. Lord Herschell rejected any contention that a contract could be set aside simply because one party understood and intended it to be other than it really was. There was reference to an exception in respect of induced essential errors, but there is nothing to suggest that his Lordship intended to reject the reasoning of the Inner House in Steuart's Trustees v Hart . That case is not mentioned in any of the speeches. Lord Watson adopted a relatively expansive approach as to when an error as to the nature of a contract might be regarded as an error in substantialibus in terms of Professor Bell's classification. He rejected the proposition that the mere existence of such an error in the mind of one party allows the court to annul the contract. Induced error: misrepresentation If an error is induced by a misrepresentation, the contract can be reduced even although the error is in motive and does not go to the root of the contract, ie it is not in substantialibus: Ritchie v Glass. B tells A that the car does 50 miles to the gallon. A is induced by B's statement to purchase the car. The car only does 25 miles to the gallon. A can have the contract reduced on the ground that he entered into the contract under an error induced by B's misrepresentation. It does not matter (i) whether or not the error is in transaction or (ii) whether or not the error so induced goes to the root of the contract. Before a contract can be reduced, the pursuer must show that the error was induced by what we shall describe as an operative misrepresentation. To be operative, the following criteria must be satisfied:  The misrepresentation must have been made to the pursuer by the other party to the contract or his agent  The misrepresentation must be an inaccurate statement of fact- Brownlee v Miller. As such the following are not misrepresentations: o Trade puffs o Statements of pure opinion- However, if the arty knows the position and lies about his true state of mind then it is misrepresentation. Edgington v Fitzmaurice- where the company invited people to invest in their shares, and the finance was used to finance expansion, when in fact it was to pay off debts. The court held they were liable for misrepresentation. Where a party has special knowledge he is liable for misrepresentation even if the other party ought to have known the truth, this was the case in Esso Petroleum v Mardon o Statements of future intention- if B lies to A, ie at the time he made the statement B has no intention of doing X in the future, that is a misrepresentation as B has misrepresented his state of mind - Bell Bros (HP) Ltd v Reynolds  The misrepresentation must take the form of a statement or positive misleading conduct made prior to the conclusion of the contract. Consistent with the right to negotiate as good a bargain as possible, silence does not usually constitute a misrepresentation- Hamilton v Allied Domecq plc (the case suggest silence can give rise to liability in delict). If there is a duty to disclose then silnce can amount to misrepresentations. Duty to disclose arises in a fiduciary relationship and when it is a contract uberrimae fidei.  The error induced by the misrepresentation does not have to go to the root of the contract, ie it does not have to be in substantialibus. Nevertheless the error has to be material in the sense that the matter misrepresented was sufficiently important that it would have been a factor which would have induced a reasonable person to enter the contract- Menzies v Menzies Because of these complex criteria, it may be difficult to establish that a misrepresentation is operative [120]. But if a party can prove that she entered into a contract under an error induced by an operative misrepresentation then she is entitled to reduction of the contract. This widens the scope of error as a ground of annulment since the error can be an error in motive as well as an error in transaction and, in either case, does not have to be in substantialibus. So for example, when a party enters into a transaction under error as to its legal effect, the error does not give rise to reduction if it was uninduced: people should not enter into contracts without taking legal advice! If on the other hand, the error was induced by an operative misrepresentation, the contract can be set aside[121]. In this way a compromise is reached in Scots law between the need for certainty in contractual relations and the desire that sometimes, at least, a party should be able to withdraw from a contract entered into under error. When the misrepresentation is innocent, ie unintentional and not negligently made, the misrepresentee's only remedy is reduction and restitution of the price: and, as always, restitutio in integrum must be possible. Where, however, the statement which forms the basis of the misrepresentation has been incorporated as a term of the contract[122], the misrepresentee can elect to sue for breach of contract as an alternative to reduction. When a misrepresentation is not innocent, the misrepresentee in addition to reduction may be entitled to sue for damages in delict. This will arise if the misrepresentation was made fraudulently or carelessly. The difficulty in the former case is that the misrepresentee must prove the mens rea of fraud, ie that the misrepresentor knew that his statement was false or believed it was false or was recklessly indifferent to whether it was true or false ENFORCEMENT OF PERFORMANCE Remedies looking to performance Action for payment Probably the most common breach of contract is failure to pay money due under the contract. There are literally thousands of actions of this kind every year in Scotland, most of them undefended. Two other points are of significance. The Late Payment of Commercial Debts (Interest) Act 1998 grants, by way of an implied term, rights to businesses to claim simple interest at rates fixed by order on late payments of debt by other businesses and the public sector. Parties may contract out of the regime after the debt has been created but any attempt to do so before the debt is created is void unless a substantial remedy is provided for late payment. Terms providing for postponement of payment must be reasonable. Specific Implement Specific implement is the appropriate remedy when a positive act of performance other than the payment of money is sought from the contract-breaker such as delivery of goods or other property or the rendering of services. It is often thought that specific implement (SI) is the primary remedy for enforcement of contractual obligations. The remedy is accepted by institutional writers as the ordinary means whereby performance of a positive obligation can be compelled. R etail Park Investments Ltd v Royal Bank of Scotland plc (No 2) RPI, the landlord of commercial premises under a 25-year lease which still had seven years to run, sought specific implement of a clause under which the tenants, RBS, were obliged to keep open and use the premises for the purposes of retail banking. RBS proposed to vacate the premises leaving in place only cash-dispensing machines. At first instance, Lord Coulsfield held that mere provision of cash-dispensers was insufficient compliance with the terms of the lease, relying on the parties' understanding at the time of entry into the lease in 1977 and on the express reference to keeping the premises open during normal business hours. However, a good objection to a decree of specific implement is impossibility of enforcement. Given the changing nature of retail banking, in Lord Coulsfield's view it was not possible to frame the order in such a way that RBS would know precisely what compliance required; it would also not be possible for the court to police compliance over the lengthy remaining period of the lease[12]. On appeal, this view was rejected. An Extra Division considered that precise specification of what compliance required was not necessary in an order of specific implement: imprisonment or other penalty only followed wilful breach of the order. With a non-wilful breach the court could give the defender a further opportunity to comply. The court could therefore specify the end to be achieved but leave open the precise means of doing so. Nor was it fatal to the granting of an order that compliance would require several actions over a period of several years. English case of Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [13]. In this case, the Court of Appeal granted landlords decree to hold tenants to their lease although the latter's operations from the premises were running at a growing loss. There was a vigorous dissent from Millett LJ (as he then was), asserting the traditional English principle that damages were the primary remedy for breach of contract; but the majority equally vigorously pointed out that bargains should be kept, that the parties had been free to contract that failure to keep open should sound only in damages but had not done so, and that the tenant had acted with unmitigated commercial cynicism rather than keep an unambiguous promise [14]. The House of Lords overturned the Court of Appeal and its move away from established English principles. Lord Hoffmann's leading speech noted that 'specific performance is traditionally regarded as an exceptional remedy.' He drew attention to the problems of supervision by the court, the heavy-handed nature of the supporting sanctions, the imprecision of the order and the need to bring litigation to an end, although also distinguishing between cases where the order was to continue an activity (in which the difficulties were greatest) and those in which a result was to be achieved (in which they were less) Given the possible hardship to the defendant a Scottish court might have refused specific implement even after Retail Parks. But against this conclusion, the effect of ordering continued performance of the contract in cases like this is not necessarily to condemn the defendant to continue trading at a loss and so, ultimately, to insolvency. Absent contractual provision to the contrary, the tenant can assign or sublet to a third party [18] or enter into negotiations with the landlord to buy out the remaining term of the lease. The effect of the court's decree is to set a baseline for such actions or negotiations and to prevent what would otherwise be the freedom of the tenant to throw up its contract and leave the landlord with the burden of proving and quantifying a damages claim. For this reason, the apparent expansion of the scope of specific implement seems well founded. SI and Interdict Grosvenor Developments (S) plc v Argyll Stores- not possible to enforce a positive obligation by interdict. Therefore, interdict can only be used to enforce negative obligations (which would normally include refraining a party to the contract from taking a certain action). This ruling has been approved by Church Commissioners for England v Abbey National plc Contractual obligations may be negative in character in that they require a party not to do something or to refrain from action, for example a restrictive covenant. The general obligation not to breach is another instance. The distinction is most clearly illustrated by the cases about tenants in commercial leases who quit in breach of obligations to keep the premises open and use them for business purposes. If the tenant notifies the landlord of its intention to quit before actually doing so, then interim interdict can certainly be obtained immediately to prevent the occurrence of the abandonment, while a permanent interdict might if necessary be obtained later[23]. However, specific implement would probably be needed if the tenant continued to occupy but simply failed to use the premises: for example, by having business signs and equipment there but no staff or stock[24]. Again, if the tenant leaves and the landlord only finds out afterwards, interdict is incompetent because compliance would force the tenant to the positive action of resuming occupation and use[25]. That requires the procedure of specific implement and there is no such thing as interim specific implement at common law[26]. Fortunately, it has now been held in Church Commissioners that, although interim specific implement as such is not available, an interim remedy can be obtained under sections 46 and 47(2) of the Court of Session Act 1988 which give the court general powers to make specific orders in proceedings pending before it. Interdict Interdict is a preventative remedy by which the court forbids or prohibits the carrying out or continuation of some action. An interdict may be permanent or interim (that is, temporary). A perpetual interdict will follow a full consideration of the facts and the rights of the respective parties and like most litigation may take some time to obtain. An interim interdict can however be obtained extremely quickly and is designed as a temporary remedy preserving the status quo and preventing prejudice to a party pending later and fuller investigation. The court has to be persuaded (1) that there is a prima facie case (that is, an arguable case and an issue to try), and (2) that the balance of convenience between the parties favours the grant of the remedy. An interim interdict can be recalled almost as quickly as it is granted if the interdicted party can show grounds why it should be discharged. Breach of interdict is contempt of court and invites the appropriate sanctions. From the point of view of possible law reform the question is whether it should be competent to grant an interdict if its effect is to compel something to be done, rather than prohibit something from being done. Almost any obligation can be framed in positive or negative terms. Add to this the fact that obligations may be couched in negative terms but have a positive result and vice versa, and the failings of the distinction become clear. To the inherent difficulty of the distinction between negative and positive conduct has been added an entirely unnecessary layer of terminological confusion. This stems from remarks of Lord McLaren in Wemyss v Ardrossan Harbour Co11 which were heavily relied upon in Grosvenor Developments. The remarks referred to a "negative interdict"12 which, in that case, referred to an interdict having positive effect. The usage does have a certain logic, based on the thinking that an interdict by its very nature is negative and, therefore, that an interdict which results in positive conduct is a negative or "anti" interdict. Nevertheless, the term is rather confusing. Lord President Hope has described its use as "unfortunate. In Grosvenor Developments (Scotland) plc v Argyll Stores Ltd, 1987 the defenders were tenants of the principal premises in a shopping centre owned by the pursuers. The premises were leased and run as a supermarket. The lease contained a provision that the defenders were required to continue in occupation of the premises and to conduct business as a supermarket until the expiry of the lease in January 2016. The defenders gave notice to the pursuers that they intended to cease trading and vacate the premises from January 24th 1987. The pursuers then raised an action for interdict and interim interdict against the defenders from "ceasing to continue to occupy and use the supermarket premises....". At first instance, the Sheriff granted interim interdict. The Sheriff Principal subsequently allowed the appeal of the defenders and recalled the interim interdict.23 The pursuers appealed to the Court of Session where an Extra Division of the Inner House upheld the decision of the Sheriff Principal and refused the appeal. It is perfectly clear that the pursuers sought enforcement of the positive obligation on the defenders to continue to occupy the supermarket premises. However, the interdict sought was framed in negative terms – do not cease to continue to occupy - in effect, a double negative. The court relied on Burn-Murdoch as authority for the proposition that it is the substance rather than the form of interdict which is the important factor in determining competency. All three judges in Grosvenor considered the interdict sought to be too imprecise.25 Lords Kincraig and Jauncey, in reaching this view, did so by reference to the criteria for specification and precision of specific implement. This illustrates the close proximity of the remedies DAMAGES Remedy providing a substitute for performance Lord President Inglis once stated that it was 'impossible to say that a contract can be broken even in respect of time without the party being entitled to claim damages' Webster v Cramond. It thus appears that although the remedy began as an alternative where specific implement would not be granted, damages may now generally be obtained for breach of contract. The aim of an award of damages for breach of contract is to provide monetary compensation to the aggrieved party for the losses suffered as a result of the breach. Thus damages cannot be punitive or exemplary nor in general can they be based upon the gains which are earned by the contract-breaker through his breach. In Teacher v Calder[37], the defender, a timber merchant, broke his contract by investing in a distillery business money lent to him by the pursuer to invest in the timber business. It was held by the House of Lords that the damages were to be based on what the timber business would have made with the additional capital rather than on the defender's much larger gains from his distillery investment. English law has however begun to develop a concept of 'gain-based' as distinct from 'compensatory' damages; the former concentrates upon the contract-breaker's gain as the basis of recovery rather than upon the aggrieved party's loss. The leading case is the decision of the House of Lords in Attorney-General v Blake[38]. Here the Crown was held entitled to recover the gains made by a former British spy who had defected to the Soviet Union in the 1960s and later published his very profitable memoirs in breach of the lifelong duty of confidentiality which he owed as an employee of the Crown. The House of Lords emphasised that the remedy was exceptional and allowed here only because none of the usual remedies would be an adequate response to the situation. Further, the claimant needed to have a legitimate interest in preventing the other party's profit-making activities. In some subsequent decisions the English courts have denied recovery of this kind- AB Corporation v CD Company, The Sine Nomine. The few successful claims have generally involved deliberate breaches of contract aimed squarely at either making a gain or saving expenditure: Esso Petroleum Co Ltd v Niad- A petrol retailer had breached its agreement with an oil company by failing to reduce the price of petrol charged to customers in line with the prices recommended by the oil company; the retailer had profited from deductions from the cost of petrol charged by the oil company and therefore the oil company was entitled to receive appropriate recompense either by way of damages, an account of profits or a restoration of the amount by which the retailer's prices exceeded the oil company's recommended prices. From a Scottish point of view the attraction of the new remedy is its support for performance of the contract according to its terms: the taking away of gains made from breach gives parties an incentive to adhere to their contracts. But this may raise the possibility of a conceptual link between the remedy and specific implement: is it available only where the court might otherwise have ordered implement? On the other hand, if the remedy is limited to exceptional cases, it will in effect become a matter of judicial discretion rather than genuinely rule- based law, with all the consequential uncertainty for contracting parties; and if it is essentially a remedy against cynical or intentional breach aimed at making the gain in question, there will have to be difficult inquiries into the motivations lying behind people's conduct. Loss Houldsworth v Brand's Trs: The amount of loss is in general to be determined by a comparison between the position in which the aggrieved party would have been had the contract been performed properly and its made (ie it might have been a waste of money anyway), and there seems no reason why the position should be changed by the subsequent contract unless, perhaps, the expenditure was induced by pre- contractual representations or conduct of the other contracting party. To let the aggrieved party return to the position as if he had incurred no expenditure upon the contract may allow him to escape from a bad bargain and to do better than he would have done if the contract had been fully performed. That might be said, for example, of the shipwreck case. The English courts have sought to avoid this result by finding that reliance protection is limited by the amount of the expectation interest. Thus in C & P Haulage v Middleton[67], a party occupying the ground of another under licence carried out work on the premises at his own expense and for the purposes of the business he conducted there. But the licence was wrongfully terminated early. Since the licensee could not have recouped his expenditure in the remaining period of the licence, recovery of that expense as reliance damages was denied. It is, however, for the contract-breaker to show that the expenses would not have been recouped on full performance. These issues have not been much discussed in Scottish cases but there are examples of reliance-based recovery being allowed[69]. In Fielding v Newell[70], for example, a seller of heritage defaulted and the buyer's claim to the following expenditure was held relevant, namely legal and survey fees, travel and accommodation expenses, and telephone charges. Moreover, the expenses were incurred before the conclusion of the contract of sale.  In the context of commercial contracts, there may be recovery of at least small damages for the 'trouble and inconvenience' arising from the breach; the more serious the inconvenience, the bigger the amount: Webster v Cramond. This can be applied to non-commercial contracts as well[72]. But trouble and inconvenience are to be distinguished from injury to feelings or mental distress (solatium) and from loss of business reputation which, at least under the present law, are only recoverable in certain circumstances. So far as solatium is concerned, the general rule as laid down in Addis v Gramophone Co Ltd [ 73] is still against recovery. But if the dominant purpose of a contract is to provide pleasure or enjoyment (for example to take wedding photographs or videos [74], or to provide a holiday- Jarvis v Swan tours)or to alleviate mental distress (for example a solicitor's undertaking to obtain a remedy to prevent a client's molestation by a third party [76]), and if by breach it fails to do so, then damages may be recovered for that loss. But a major inroad on the application of Addis in employment cases was achieved in Malik v Bank of Commerce and Credit International[81], where the bank which had been closed by regulators as the result of its involvement in drug-trafficking and illegal money-laundering operations, was found liable to a former employee who, despite his own personal honesty and integrity, had been unable to gain new employment in the financial sector as a result of his previous associations. The employer was guilty of breach of the implied duty of 'mutual trust and confidence' in employment contracts; the employee's 'stigma' damages compensated him for the loss of his reputation flowing from his connection with the bank. Causation The loss must be caused by the breach of contract. The test of whether a breach caused a loss is to ask whether 'but for' the breach the loss would have occurred. But it is not necessary that the breach be the sole cause. Rather, it must make a material contribution to the loss. Thus where the breach is the first step in a chain of events leading up to the loss, each connected with the other, there may still be liability. In the Monarch Steamship case, a ship's unseaworthiness at the outset of its voyage from Manchuria to Sweden was a breach of contract. As a result, the ship was delayed at sea and during the delay the Second World War broke out. The British authorities requisitioned the ship for war purposes and ordered it to Glasgow from whence its cargo was trans-shipped to Sweden at extra cost to its owners. This extra cost was held to have been caused by the unseaworthiness; each step in the chain of events led back to the breach on the 'but for' test Remoteness The principle that loss arising from a breach of contract is only recoverable as damages if not too remote. Hadley v Baxendale. In Hadley, Alderson B formulated the principle of remoteness in a test commonly divided into two 'limbs' or 'legs': loss is recoverable if it either arises in the usual course of things or was in the reasonable contemplation of the parties as the probable result of the breach. This is taken to mean that there are usual losses and losses arising from special circumstances, the existence of which the parties must be aware before there can be recovery. In modern times, the English courts have tended to collapse the two parts of Hadley into a single test of reasonable contemplation or foreseeability, but this is not necessarily the approach of the Scottish courts. The present position seems to be that the remoteness test in contract is generally more restrictive than that in delict. This is sometimes expressed by saying that the test in contract involves 'reasonable contemplation' rather than the 'reasonable foreseeability' of delict. The reason for this distinction is that contracts are generally planned relationships in which the parties can apportion risk by agreement – for example, the price at which goods and services are supplied may reflect the risk that the supplier will be found liable for the customer's losses if the supply is late or defective or the liability may be excluded or limited by a suitable clause. But this is an uneasy basis for the distinction; many delicts occur between parties who are already in another legal relationship such as that of employer and employee. Lord Denning MR once suggested that there is in fact no difference between the tests in contract and delict; rather in each there is a distinction according to whether the loss suffered is economic (in which case the test is the restrictive reasonable contemplation) or involves physical damage to person or property (in which case the more expansive test of reasonable foreseeability is appropriate) Parsons case This suggestion has however found no support amongst other judges in either England or Scotland. It is clear that the Hadley test for contract was originally designed to limit the aggrieved party's recovery. Thus in Hadley itself, a mill-owner did not get the profits his mill would have earned had a carrier delivered a mill- shaft within the contractually stipulated period. But due to the language in hadley courts have expanded the liability considerably- In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd[101], the purchaser of laundry machines delivered late was held able to recover the ordinary business profits which he would have made had delivery been on time, although not the especially high profits which would have been made from Government contracts of which the supplier was unaware. This trend of expanding liability was somewhat reversed by the decision of the House of Lords in a Scottish appeal, Balfour Beatty v Scottish Power plc[105]. In this case a concrete aqueduct was being built by BB to carry the Union Canal over the Edinburgh city bypass. The aqueduct was formed by a process of 'continuous pour' of concrete coming from nearby batching plants over many hours. A power failure halfway through this process, which constituted breach by SP, interrupted the pour and led, after some delay, to the demolition of the work done and later reconstruction at a loss of £250,000. The House of Lords held that this loss was too remote on the first leg of Hadley v Baxendale, ie the loss did not arise directly in the ordinary course of events. It would have required special knowledge to make SP liable. Although business people were to be taken to have knowledge of the ordinary course of each other's business, knowledge of specialist technical aspects such as construction techniques was not to be imputed to the parties. In Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [ 107], Lord Hoffmann set out with characteristic boldness a new understanding of the remoteness test in contract. He argued that remoteness is dependent on the parties' agreement (objectively determined in the light of the relevant background known to the parties), rather than an external rule of law imposed upon them unless they excluded it expressly. The question therefore is, from this objective perspective, what would the parties have reasonably considered as the extent of the liability being undertaken? This means that foreseeability of a loss as a not unlikely consequence of breach is neither necessary nor sufficient to make a loss recoverable. O chartered a ship (The A) to C1 with redelivery fixed for 2 May 2004. In April 2004 O chartered The A to C2 for 191 days at $39.5k per day, with C2 being entitled to cancel if the ship was not available by 8 May. C1 was delayed en voyage and became unable to redeliver by 2 or, indeed, 8 May. The ship hire market rate had meantime fallen, and O and C2 renegotiated their contract, extending the cancellation date to 11 May and changing the rate of hire to $31.5k per day. O subsequently claimed against C1 for the breach of contract constituted by the late redelivery of The A, seeking a loss of $8k per day for the whole of the C2 contract (191 days), ie nearly $1.4 million. C1 defended the claim on the basis that O could only recover the difference in value between the C1 contract and the market rate reflected in the original C2 contract for the actual over-run period of nine days, ie $158k. C1 was able to show that this was the market's general understanding of the loss payable. Anything more required special contemplation at the time C1 made its contract. The decision of the House of Lords was that O could not recover the loss it claimed. On Lord Hoffmann's approach this was because the parties had in effect not agreed to the liability claimed. Although other members of the House of Lords showed varying degrees of sympathy for Lord Hoffmann's idea, they felt able to reach the same decision on the more orthodox ground that O's full loss was the result of volatile market conditions beyond the reasonable contemplation of O and C1 at the time of their contract. It thus remains to be seen whether Lord Hoffmann's new approach will gain support as perhaps a more rational explanation of how the courts actually decide remoteness cases. A Scottish case illustrating the fixing of a party with particular knowledge of special circumstances may be Cosar Ltd v UPS Ltd[108]. Here a delivery company failed to deliver tender documentation timeously with the result that the customer did not gain the contract in question. It was held that communications between the employees of the two parties about the nature of the package, plus labels referring to 'the tender opening session', could give the delivery company sufficient knowledge to make it liable for the loss of opportunity to tender and, more doubtfully, for the loss of the contract if the customer could show that the company's knowledge extended to the likelihood of the tender being successful. Mitigation A loss which could have reasonably been avoided by the aggrieved party is not recoverable. The aim is to encourage the aggrieved party to take action rather than sit back and let the breach earn profits for him, while at the same time not letting unreasonable action increase the loss for which the contract-breaker is liable. Sometimes the principle of mitigation is misleadingly described as involving a 'duty' upon the aggrieved party but there is no correlative right in the contract-breaker to have the loss reduced. The question is generally one of whether the behaviour in response to breach was reasonable or not with the contract-breaker having the onus of proving that an opportunity to mitigate was missed. The aggrieved party need not scour the market place to find a substitute performer while, equally, if the only reasonable substitute performer is much more costly, the contract-breaker will be liable for the full loss. In White & Carter Councils v McGregor[111], W refused to accept M's repudiation of the contract and performed his side of the bargain. He then brought an action for payment in defence to which M argued that in order to mitigate his loss W should have accepted the repudiation and brought the contract to an end. The House of Lords rejected this argument holding (1) that mitigation can only apply in an action for damages and not in one for payment of a liquid debt; and (2) that mitigation is only relevant after the contract is broken which does not occur until acceptance of the repudiation by the other party. If, however, a purpose underlying the mitigation principle is the prevention of waste, then there might well be sense in extending its scope to deal with situations like that in White & Carter as appears to be the case in the United States and, by means of other principles, Germany