SQE1 - Solicitors Qualifying Examination Part 1 Contract Law Principles Questions and Answers — Questions and Answers
Question 1: A brother and sister agree that if the sister lends the brother £5,000 to start a new business, he will give her a 10% stake in the company. They write down the terms on a piece of paper and both sign it. Six months later, the business is successful, but the brother refuses to transfer the shares. Which legal principle will be most relevant in determining if a binding contract exists?
- The doctrine of consideration.
- The presumption regarding the intention to create legal relations in social and domestic agreements. (Correct answer)
- The 'mirror image' rule of offer and acceptance.
- The requirement for certainty of terms.
Correct answer: The presumption regarding the intention to create legal relations in social and domestic agreements.
In English law, there is a rebuttable presumption that agreements made in a social or domestic context, such as between family members, are not intended to be legally binding. While the agreement involves business matters, the core relationship is domestic. The court would need to determine if the presumption has been rebutted by the evidence, such as the written and signed document, which suggests a more formal, commercial intent. The case of Balfour v Balfour established this presumption, while cases like Merritt v Merritt show it can be rebutted.
Question 2: A construction company contracts with a supplier for the delivery of 10 tonnes of steel on a specific date. The contract includes a clause stating that for every day the delivery is late, the supplier must pay the construction company £1,000. The steel is delivered five days late. This clause is most likely to be interpreted by a court as:
- A penalty clause, and therefore unenforceable.
- A condition of the contract, allowing for termination.
- A warranty, allowing for damages only.
- A liquidated damages clause, and therefore enforceable if it is a genuine pre-estimate of loss. (Correct answer)
Correct answer: A liquidated damages clause, and therefore enforceable if it is a genuine pre-estimate of loss.
This clause specifies a sum payable upon a breach of contract. The key legal question is whether it is a valid liquidated damages clause or an unenforceable penalty clause. A liquidated damages clause is an agreement where the parties have made a genuine pre-estimate of the likely loss that would be caused by the breach. A penalty clause, by contrast, is designed to deter a breach by imposing a liability that is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach. If the £1,000 per day is a genuine pre-estimate of the construction company's losses (e.g., costs of project delay), it will be upheld.
Question 3: Which of the following statements concerning the legal principle of consideration in English contract law is correct?
- Consideration must be adequate but need not be sufficient.
- Past consideration is always valid consideration.
- Consideration must move from the promisee. (Correct answer)
- Performing an existing public duty is always good consideration.
Correct answer: Consideration must move from the promisee.
A fundamental rule of consideration is that it must move from the promisee. This means that the person who is receiving the promise must be the one who provides the consideration. The other options are incorrect: consideration must be sufficient (have some value in the eyes of the law) but need not be adequate (a fair price); past consideration is generally not good consideration; and performing an existing public duty is not good consideration, as established in Collins v Godefroy.
Question 4: A company director is negotiating the sale of her business. During negotiations, she tells the potential buyer that the company's profits for the last financial year were 'in excess of £500,000'. The buyer relies on this statement and buys the business. It later transpires the profits were only £300,000. The statement about the profits is most likely to be classified as:
- A warranty.
- A condition.
- A representation. (Correct answer)
- An innominate term.
Correct answer: A representation.
A representation is a statement of fact made by one party to another before or at the time of contracting, which induces the other party to enter into the contract but does not form part of the contract itself. If it is untrue, it can give rise to a claim for misrepresentation. A warranty is a contractual promise that a statement is true, and its breach gives rise to a claim for damages but not usually termination. A condition is a fundamental term, the breach of which allows the innocent party to terminate the contract. Given the statement was made pre-contract to induce the sale, it is most accurately classified as a representation.
Question 5: A homeowner emails a local builder, 'I will pay you £20,000 to build a single-storey extension to my kitchen according to the attached plans. I need it finished by 1st October.' The builder replies by email, 'I accept your offer to build the extension for £20,000 based on the plans. My team can start in two weeks.' A binding contract is formed at which point?
- When the homeowner sends the initial email.
- When the builder begins the work.
- When the builder's acceptance email is received by the homeowner. (Correct answer)
- When the homeowner's email server sends the initial email.
Correct answer: When the builder's acceptance email is received by the homeowner.
For instantaneous methods of communication like email, the general rule of acceptance (the 'receipt rule') applies. The contract is formed when the acceptance is communicated to the offeror, which means when the acceptance email is received by the homeowner. The postal rule, where acceptance is effective on posting, does not apply to instantaneous communications (Entores Ltd v Miles Far East Corporation). Sending the initial email is just an offer, and starting the work would be conduct indicating acceptance, but the communicated acceptance via email forms the contract at the point of receipt.
Question 6: A party is induced to enter into a contract due to a fraudulent misrepresentation. Which of the following remedies is available to the innocent party?
- Damages only.
- Specific performance only.
- Rescission of the contract only.
- Rescission of the contract and damages. (Correct answer)
Correct answer: Rescission of the contract and damages.
Where a fraudulent misrepresentation has occurred, the innocent party has the right to rescind the contract (i.e., set it aside and be restored to their pre-contractual position) and can also claim damages for the tort of deceit. The aim of the damages is to put the claimant back in the position they would have been in had the misrepresentation not been made. The other options are incorrect as they represent an incomplete list of the available remedies for this specific type of misrepresentation.
SQE1 - Solicitors Qualifying Examination Part 1 Contract Law Principles Questions and Answers
A brother and sister agree that if the sister lends the brother £5,000 to start a new business, he will give her a 10% stake in the company.
They write down the terms on a piece of paper and both sign it.
Six months later, the business is successful, but the brother refuses to transfer the shares.
Which legal principle will be most relevant in determining if a binding contract exists?