CILEx L6 Advanced Contract Law — Questions and Answers
Question 1: What did the Supreme Court decide in Marks & Spencer plc v BNP Paribas Securities Services [2015] regarding implied terms?
- The traditional two tests (business efficacy and officious bystander) remain the correct approach; a term is not implied merely because it is reasonable (Correct answer)
- Implied terms should always reflect the reasonable expectations of the parties
- The business efficacy test was replaced by a test of commercial common sense
- An implied term can be used to rewrite a bad bargain
Correct answer: The traditional two tests (business efficacy and officious bystander) remain the correct approach; a term is not implied merely because it is reasonable
In Marks & Spencer v BNP Paribas [2015] UKSC 72, the Supreme Court reaffirmed that terms are implied only where the two traditional tests are satisfied (business efficacy or the officious bystander test), and rejected any broader 'reasonable expectations' approach.
Question 2: What is the significance of Arnold v Britton [2015] UKSC 36 for contractual interpretation?
- Courts must give words their natural meaning; commercial common sense does not allow courts to rewrite clear contractual language (Correct answer)
- Commercial common sense always overrides the natural meaning of words
- Ambiguous terms should always be resolved against the party who drafted them
- Extrinsic evidence is admissible to vary the meaning of clear contractual terms
Correct answer: Courts must give words their natural meaning; commercial common sense does not allow courts to rewrite clear contractual language
In Arnold v Britton, the Supreme Court (Lord Neuberger) emphasised that the starting point is the natural and ordinary meaning of the words. Commercial common sense cannot justify departing from clear language, even if the result proves commercially disadvantageous.
Question 3: What is the Achilles rule from Bain v Fothergill [1874] and has it been abolished?
- It limited a buyer's damages for a seller's failure to show good title to land to expenses only (not loss of bargain); abolished by s.3 Law of Property (Miscellaneous Provisions) Act 1989 (Correct answer)
- It prevented sellers from claiming damages for a buyer's failure to complete
- It allowed buyers to recover the full value of the land regardless of the seller's conduct
- It was a rule of specific performance applicable only to land contracts
Correct answer: It limited a buyer's damages for a seller's failure to show good title to land to expenses only (not loss of bargain); abolished by s.3 Law of Property (Miscellaneous Provisions) Act 1989
The rule in Bain v Fothergill limited damages for failure to make good title to land to recovery of expenses, not loss of bargain. It was abolished by s.3 Law of Property (Miscellaneous Provisions) Act 1989 — since then, ordinary principles of damages apply.
Question 4: What is the approach to penalty clauses following Cavendish Square Holding BV v Makdessi [2015]?
- A clause is a penalty only if it is extravagant and unconscionable in comparison with the legitimate interests of the innocent party; the genuine pre-estimate test is no longer the sole test (Correct answer)
- Any clause requiring payment of a fixed sum on breach is a penalty
- The penalty rule applies only to consumer contracts
- A clause is automatically a penalty if it exceeds the actual loss suffered
Correct answer: A clause is a penalty only if it is extravagant and unconscionable in comparison with the legitimate interests of the innocent party; the genuine pre-estimate test is no longer the sole test
In Cavendish Square [2015] UKSC 67, the Supreme Court replaced the simple 'genuine pre-estimate of loss' test with a broader test: is the clause a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate business interest of the innocent party?
Question 5: What is 'economic duress' in contract law and what test applies?
- Illegitimate pressure that caused the claimant to contract, where the pressure went to the nature of the act (not merely the circumstances), assessed objectively (Correct answer)
- Any financial pressure that causes a party to contract
- Pressure causing hardship that makes performance more expensive
- Any commercial pressure that influences a party's decision to contract
Correct answer: Illegitimate pressure that caused the claimant to contract, where the pressure went to the nature of the act (not merely the circumstances), assessed objectively
Economic duress (DSND Subsea v Petroleum Geo-Services [2000]; Pakistan International Airline Corporation v Times Travel [2021] UKSC 40) requires: (1) illegitimate pressure, (2) that was a significant cause inducing the contract, and (3) that the victim had no practical choice.
Question 6: What is the rule in White & Carter (Councils) Ltd v McGregor [1962] on affirmation after anticipatory breach?
- An innocent party may affirm the contract after anticipatory breach and sue for the full price, even if the other party wishes to terminate — unless they have no legitimate interest in performance (Correct answer)
- The innocent party must always accept the repudiation and minimise their loss
- The innocent party may only affirm if they have already started performance
- Affirmation after anticipatory breach is only possible with the court's permission
Correct answer: An innocent party may affirm the contract after anticipatory breach and sue for the full price, even if the other party wishes to terminate — unless they have no legitimate interest in performance
In White & Carter v McGregor [1962] AC 413, the House of Lords held an innocent party may affirm and continue performing despite anticipatory breach, then sue for the full price — unless they lack a legitimate interest in performing (the 'legitimate interest' qualification from Lord Reid).
CILEx L6 Advanced Contract Law
What did the Supreme Court decide in Marks & Spencer plc v BNP Paribas Securities Services [2015] regarding implied terms?