Legal Aspects of Supply Chain Management - Case Study Example

Legal Aspects of Supply Chain Management - response to scenario Introduction - Supply Chain Scenario MorrisBury, a recently merged leading UK supermarket, has awarded UK based frozen food supplier, Freeze'n'Go plc, a multi-million pound contract to source various UK frozen foods for all its stores throughout Britain. MorrisBury estimates that a hundred thousand food miles will be saved by switching its frozen food contract to a UK own and grower base. This contract will also save and secure several jobs at Freeze'n'Go UK processing plant. Based on this contract agreement, there are several contractual issues that are required to be agreed and signed by both parties. Upon the instruction of the Managing Director (M.D.) of Freeze'n'Go, an official contractual report is being raised covering this issues and following the contract supplier guidelines of the common (English) law, statute or EC Laws where appropriate. The M.D. would like to clarify some details of the contractual report based on these guidelines. The less favoured common laws (or case laws) for contracts are developed through individual contractual decisions by judges necessary to decide cases brought before them. On the other hand, statutes formed via legislations have become the commonest source of contract laws. These statutes are actually derived through Acts of UK Parliament. Since the sales of goods are within the United Kingdom, it is important to note that all statutes can be applied to any combination of jurisdictions within the UK, whereas the common law jurisdictions are more limited. Constitution for full legally binding contractual acceptance by MorrisBury In order for the contract to be legally binding under local English law and statutes, it requires the main following contractual elements: an offer and an acceptance.With respect to frozen food contracts, these basic contract requirements require careful consideration. Offer of Contract With respect to offer of a contract, it is an expression of willingness for both parties, MorrisBury (buyer) and Freeze'n'Go (seller), to agree on certain bilateral terms that would benefit both sides. It must be made with the intention that the contract will become binding upon acceptance. The nature of an offer can be encapsulated by a case involving the defendant, Manchester City Council. The Council decided to sell houses that it owned to sitting tenants. In two cases, the claimants entered into agreements with the Council. The Council then resolved not to sell housing unless it was contractually bound to do so. In this case, the question arose as to whether or not the Council had entered into a contract. In the case [25], the Court of Appeal found that there was a binding contract. The Council had sent Storer a communication that they intended would be binding upon his acceptance. All Storer had to do to bind himself to the later sale was to sign the document and return it. In similarity, MorrisBury could make an unconditional offer which could be accepted by Freeze'n'Go.In this case, if the supplier informs buyer that the offer is accepted, there will be a binding contract.It is particularly important for the buyer wanting to purchase frozen foods are interpreted as a legal binding contract.If MorrisBury constitute a formal offer to receive certain foods, then the they may be in breach of civil and even criminal laws if there are certain categories of Freeze'n'Go who would not ordinarily be entitled to sell which are being offered [1]. For an offer to be effective, an offer must be communicated. Another way of stating this is to say that there can be no acceptance of the offer without knowledge of the offer. The reason for this requirement is that if we say that a contract is an agreed bargain, there can be no agreement without knowledge. There can be no meeting of the minds if Freeze'n'Go is unaware of the MorrisBury. Stated another way, an acceptance cannot mirror an offer if the acceptance is made in ignorance of the offer. In an exemplary case of [14], a policeman was allowed to recover a reward when he sent information in ignorance of the offer of reward. There cannot be assent without knowledge of the offer and ignorance of the offer is the same thing whether it is due to never hearing of it or forgetting it after hearing. In the binding of contract agreement, it is important that the terms of contract are expressly to be determined. It is also very important to realise from the outset that not all communications will lead to offers. They will lack the requisite intention to be bound upon acceptance. If they are not offers, what are they At this point, there are methods of negotiation process other than a standard offer. Other steps in the negotiation process might include a statement of intention, a supply of information or an invitation to treat. But for this case scenario, an offer is most appropriate as a mutual partnership agreement has already been established between the buyer and supplier respectively. Acceptance of Contract Local UK and EC laws are generally very flexible about how a physical offer can be accepted.For a contract to be formed, there must be an acceptance of the offer. The acceptance must be an agreement to each of the terms of the offer. It is sometimes said that the acceptance must be a mirror image of the offer. The acceptance can be by words or by conduct. See [2], where the offeree accepted the offer by performance. More recent instances of acceptance by conduct can be found in [7] where Confetti Records sent Warner a music track and an invoice. This was an offer capable of acceptance by Warner's conduct in producing an album which contained the track. In [8], it was held that an estate agent's offer to market a property had been accepted by the conduct of the client. The client's conduct was allowing the agent to advertise the property and show large numbers of people around it. Acceptance occurs when MorrisBury's words or conduct give rise to the objective inference that Freeze'n'Go assents to the MorrisBury's terms. If MorrisBury attempts to add new terms when accepting, this is a counter-offer and not an acceptance. A counter-offer implies a rejection of the original offer, which is thereby destroyed and cannot subsequently be accepted. See [19]. Where Freeze'n'Go queries the offer and seeks more information, this is neither an acceptance nor a rejection and the original offer stands. See [24]. The general rule is that acceptance is not effective until it is communicated to Freeze'n'Go. This is sometimes expressed by saying that the acceptance cannot be made through silence. See [13]. MorrisBury cannot waive communication if that would be to the detriment of Freeze'n'Go. Acceptance could be communicated by an acknowledgment via E-mail, or by a physical act, such as the shipping of frozen food. The general rule under these laws is that an offer is not accepted by supplier until acceptance is communicated to buyer.Other instantaneous and allowable forms of communication for acceptance, such as telexes and facsimiles, are normally sent during business hours. The major exception to the general rule on acceptance concerns acceptance by post.See [17]. In this case, acceptance takes place when the acceptance is posted and not when it is received by the buyer. The postal rule means that even if an acceptance via post does not reach the buyer, the contract will already have been made and buyer will be bound to perform its obligations, provided the supplier can prove that it posted its letter of acceptance. The validation for the rule of acceptance via post is to trust communication with postal carriers to deliver the acceptance without the knowledge of exactly when the acceptance will be received. In comparison on some ways, notwithstanding its instantaneous nature, acceptance by electronic methods does have similarities to postal acceptance.There are, therefore, arguments in favour of both the general rule and the postal rule applying to acceptance of offers in an electronic contract. As modern forms of communication such as fax and email have become almost instantaneous, courts have shown a marked reluctance to extend the postal acceptance rule to these new forms of communication. In an early case involving a telegram, a form of the postal acceptance rule was however applied. See [3]. Given that it is not clear when actually acceptance of an offer will occur, if the question is left to the law to decide in seclusion, the buyer should take care to set out precisely how and when acceptance will take place.This has long been the principle adopted in physical contracts. The buyer should be able to exercise control over the manner in which the whole physical contracting process is concluded. Under the law, the standard terms and conditions set out by buyer on their invoices and other contractual documentation, are to be incorporated into any contract with the supplier.This is particularly a problem where the supplier will have its own terms and conditions set out on its order form documentation.This has often led to the so-called battle of the standard forms where both buyer and supplier try to ensure that a contract should be concluded on their own terms.There will bound to be considerable uncertainty over precisely what terms are incorporated in the above circumstances [1, 16, 22]. Implied terms in the contract not expressly stated Contracts can either be express or implied. The latter contract is one in which some of the terms are not expressed in words. The former contract is one in which the terms are expressed verbally, either orally or in writing. A number of statutes imply terms into contracts, most notably for the sales of goods and services. The Sale of Goods Act 1979 (later amended in 1994) implies four terms which are applicable to MorrisBury-Freeze'n'Go contract made within the UK [4, 10]. Section 12 implies that the seller has the right to sell goods: the idea of direct selling is to transfer title of ownership, not possession. If MorrisBury buys frozen vegetables, then that it does not have ownership over the foods. If MorrisBury sells the vegetables to a third party, then Freeze'n'Go can sue MorrisBury to get the vegetables back (an act of single conversion, i.e. converting physical title of ownership from one party to another). MorrisBury has no right to sell the vegetables to another buyer. Section 13 implies that the goods should correspond with any description applied to them. If the sale of sample frozen foods do not relate to their actual description, then it is not sufficient for the bulk foods to correspond to their description and with any sample, the sale may be prevented by MorrisBury. Section 14.2 implies that, where the sale is made in the course of business, the goods shall be of satisfactory quality. The delivered foods to MorrisBury should always appear fresh in appearance and well maintained frozen at all times. MorrisBury has the right to randomly inspect the frozen foods to check for inconsistencies. Section 15 implies that all frozen foods should be free from any defects and the bulk would correspond with the sample in quality. The Sale and Supply of Goods to Consumers Regulations 2002 add in a number of implied terms to the Sale of Goods Act [28]. Under these regulations, MorrisBury is entitled to take into account any claims made by Freeze'n'Go, even in advertisements to other consumers. Furthermore, if the frozen food goods fail to conform to the description or the agreed contract, the MorrisBury may require a replacement (in some cases, up to six months after delivery). This time factor is flexible, for example, in [6], the buyer rejected a yacht two years after communications were concluded. Similar terms have been implied into contracts involving hire purchase and hire of goods. These terms cannot be excluded when goods are supplied to a consumer and can only be excluded when supplied to a business in the case of MorrisBury, if it is reasonable to do so. The Sale of Goods and Services Act 1982 applies mainly to services but includes goods supplied during the course of the contract [11]. Section 13 implies that a service will be carried out with reasonable care and skill. This explicit points to the delivery service methods used by Freeze'n'Go to maintain frozen food qualities. Section 14 implies that, if not otherwise expressly stated, the service will be carried out in a reasonable time. Delivery times should be within the specified times agreed before and after implementation of contract. This is to ensure that MorrisBury does not experience a shortfall of frozen foods and such occurrences would affect their business and reputation. Section 15 implies that the service will be carried out at a reasonable price. All delivery services by Freeze'n'Go should be priced according to standard market prices and value of delivery. There are three classes of implied terms to be considered before signing of contract: (i) conditions, (ii) warranties and (iii) in-nominate. A condition is the most important. If a condition is breached, the wronged party can repudiate and claim damages. A breached condition gives an automatic right to reject. Any implied terms from legislation or statute are conditions. A warranty is less important. If a warranty is breached, the wronged party can only sue for damages and cannot repudiate. An in-nominate clause is one where it is unsure whether it is a condition or a warranty. At the time of the contract, it is difficult to know the intention of parties. The hiring of courts will look at the ratio of the breach to the contract as a whole, to determine the importance. They will consider the effect of the breach and whether it affected the core of the contract. Claim of liability for negligence on the part of Freeze'n'Go Since the contract involve sale of foods within UK only, local English law retains considerable freedom of contract. As a result, there are some circumventions of privacy of contract and one of those is the trust of a promise. Yet there is an argument that under equity a constructive trust could be held as would be unconscionable for a supplier to renege on his promise and there had been a change in position by the buyer in reliance upon the promise. In the case of [23], there was a mistake as to the nature of the subject matter. Here a buyer agreed to buy and a seller agreed to sell cotton from Bombay. The buyer had in mind a ship of that name which sailed from Bombay in October and the seller had in mind a different ship of that name which sailed from Bombay in December. It was held if the buyer and seller each had in mind a different ship there was no agreement between them. In our case, it seems that there was no such mistake as both parties new the subject matter of fresh foods business. In addition, it can be assumed that Freeze'n'Go tries to cover the fact that she knew anything of the sale. With respect to consumers, the Unfair Contract Terms Act 1977 terms cannot be excluded, subject to one important exception referred to below, in any circumstances under [12]. In the case of a sale to a business, a supplier can exclude liability for breach of these implied statutory terms where it is reasonable to do so. The Act (1977) not only sets out the circumstances in which the implied terms under the Sale of Goods Act and its equivalent for services can be excluded but it also prescribes the circumstances in which other liability can be excluded or limited [12]. Its main provisions deal with the following liabilities: death and personal injury: this cannot be excluded under any circumstances; negligence other than for death and personal injury: for example, the failure by Freeze'n'Go to take reasonable care in the design or packaging process for a frozen food product - this can be excluded or restricted where reasonable; to a consumer - this can be excluded or restricted only where reasonable except in the case of liability for breach of the terms implied under the Sale of Goods Act. A consumer is defined broadly as effectively an individual buying for non-business purposes at MorrisBury; dealing on the supplier's standard terms and conditions - a supplier can, in its standard terms and conditions, only exclude liability to buyer and its customers where it is reasonable to do so. The question of when, under the above principles, it will be reasonable to exclude or restrict liability is a question of fact which must be looked at in each case. There are a number of factors, however, that the court will generally take into account in looking at this question. These include the question of the insurance carried by both parties; what alternative sources of supply were open to the customer; and whether the buyer would have expected exclusions and limitation clauses in the contract. The courts have also developed a principle that any ambiguity in the terms used to exclude or restrict liability is construed against the party seeking to rely on the clauses.The benefit of the doubt will, therefore, usually be given to the customer.Also, the onus of proving that a particular exclusion or limitation clause is reasonable will fall on the supplier. Businesses acting in their capacity as suppliers will normally seek to limit their liability. Most suppliers' standard terms of sale include a limitation of liability to the contract price and an exclusion of liability for consequential loss. In two recent cases, the courts have considered these provisions with apparently conflicting results. In [18], the High Court found both provisions to be unreasonable and therefore unenforceable. In [26], the Court of Appeal found both provisions to be reasonable and therefore enforceable. Despite the apparent contradiction between these decisions, the overall picture that emerges from these cases is reassuring for suppliers. However, suppliers should certainly not be complacent and there may well be actions they can take which can increase the chances of these provisions being enforceable. The overall picture that emerges from Watford is reassuring for suppliers but it is still worth remembering that, ultimately, whether a limit or exclusion of liability is enforceable will come down to an analysis by a court of all the circumstances. While it is possible to lay down a blueprint (in the form of an amended contract limiting liability) which will guarantee enforceability, the following guidelines can be drawn from these cases that would: Suppliers should make sure that they are well informed about their own insurance cover. They should also make sure that they are well informed about the cover generally available in the market both to them as a supplier for liability for failure to perform and to their customers for losses flowing from failure of the supplier's products to perform. While suppliers may not want to disclose the full details of their own insurance cover, they should seek to have an open discussion about the cover generally available for the sort of risks involved in particular transactions. If a supplier is willing to accept a higher limit of liability if appropriate insurance cover is available, in return for a price adjustment to reflect the cost of the increased insurance, then a statement to that effect in the contract may well help to show that the limitations of liability are reasonable. It can certainly do no harm at all in negotiations for suppliers to spell out that the price offered reflects the allocation of risk in their terms of sale. Suppliers should keep good records of negotiations and of any terms which are amended as a result of negotiation. Not all contracts are caught by the reasonableness rules. Contracts which are heavily negotiated may be able to avoid the rules altogether on the basis that they are not concluded on standard terms. Even if amendments to standard terms are not substantial enough to take a contract outside the scope of the reasonableness rules altogether, they can still help to show that liability provisions are reasonable. REFERENCES [1] Atiyah, P. S. et al (2005). Sale of Goods (UK Edition), Prentice Hall. [2] Brogden v Metropolitan Railway Company (1871). [3] Bruner v Moore (1903). [4] Chalmers, M. D. E. S, Mark, M. and Mance, J. (1981). Chalmers' Sale of Goods Act 1979: including the factors Acts 1889 and 1890. London: Butterworths. [5] Chomsky, C. L. (2004). Sale of Goods, West Group. [6] Clegg v Olle Andersson (2003). [7] Confetti Records v Warner Music UK Ltd (t/a East West Records) [2003] EWHC 1274. [8] Day Morris Associates v Voyce [2003] EWCA Civ 189. [9] Department of Trade and Industry (DTI) (2005). A Trader's Guide:The Law relating to Supply Goods and Services, Downloadable at the following URL: http://www.consumer.gov.uk/ccp/topics1/guide/sogtraderguide05.pdf [10] DTI (2005). Sale of Goods Act 1979: Fact Sheet, See URL: http://www.consumer.gov.uk/ccp/topics1/facts/salegoodsact.htm [11] DTI (2005). Sale of Goods and Services Act 1982: Fact Sheet, See URL: http://www.consumer.gov.uk/ccp/topics1/facts/supplyofservices.htm [12] DTI (2005). Unfair Contract Terms Act 1977: Fact Sheet, See URL: http://www.consumer.gov.uk/ccp/topics1/facts/unfairact1977.htm [13] Felthouse v Bindley (1862). [14] Gibbons v Proctor (1891). [15] Griffiths, S. M. (1994). Law for Purchasing and Supply, Pitman. [16] Grundmann, Mazeaud, S. and Denis (2005). General Clauses and Standards in European Contract Law: Comparative Law, EC Law and Comp Law (European Context), Kluwer Law International. [17] Henthorn v Fraser (1892). [18] Horace Holman Group Limited v Sherwood International Group Limited (2002). [19] Hyde v Wrench (1840). [20] Keenan, J. (2002). Advance Business Law, Pitman. [21] McKendrick, Chapter 3: .Offer and acceptance. 3.9 Acceptance in Ignorance of the Offer, pp. 45.46. [22] Poole, J. (1995). Casebook on Contract, Blackstone Press. [23] Raffles v Wichelhaus (1864) 2 H&C 906 Ex. [24] Stevenson, Jacques & Co. v McLean (1880). [25] Storer v Manchester City Council (1974). [26] Watford Electronics Limited v Sanderson CFL Limited (2001). [27] Zeller, B. (2005). Damages under the Convention on Contracts for the International Sale of Goods, Oceana Publications. [28] Sale of Goods - Sale and Supply of Goods to Consumers Regulations 2002. Mondaq Business Briefing. Read More