Terms and Conditions and Unfair Contract Terms - Case Study Example

Introduction and facts of the case: Ace Computers, a computer vendor and manufacturer had sold 20 personal computers and a lap top to an accounting firm called Stevens, Wiley and Co. Within a week, four of the computers became faulty, and a further ten followed suit after a few weeks of installation. A case of misrepresentation of processor speed also was an issue. This is a report advising Ace Computers on their legal position in the case and the recourse if any that they can follow in case a suit is filed against them. 1. Legal position of Ace Computers with regard to Stevens, Wiley & Co: The director of Ace Computers Mr. Gerald had specifically told the customers that the processor used in the XL8000 model is the fastest available and that the particular model is the best performing PC available for its price and configuration. Ace Computers can be held liable for the authorised acts of an employee under the vicarious liability clause. The House of Lords in the judgement of a case in 2001 has now ruled that “the correct test is to concentrate on the connection between the nature of the employment and the particular wrong and to ask whether looking at the matter in the round it is just and reasonable to hold the employers vicariously liable.” (Commentary: Vicarious Liability: Basic Position. 2006). It is assumed that Mr. Gerard had acted in such a manner with the authority of Ace Computers. There are three legal issues involved here in this case, the first two that can be potentially damaging to Ace Computers, and the last one which may offer an escape route for the company. The two damaging issues are misrepresentation of facts and defective goods, the escape route being the exclusion clause. Each of these issues will be dealt in the later sections of this report. 2. Misrepresentation: The misrepresentation (about processor speed and performance of the computer) was what made the firm purchase the computers from this vendor in the first place. The two factors namely wrong statement, material element, and the inducement to buy because of the two is clearly present in this case and hence can be construed as a genuine misrepresentation. (Misrepresentation. 2006). According to the book titled ‘Business Law’, “Misrepresentation can be divided into three types, each of which involves distinct procedures and provides different remedies.” (Kelly, David, Holmes and Hayward 2005, p. 158). They are fraudulent, negligent, and innocent misrepresentation. Fraudulence occurs when the statement is made by a person who knows that it is false or does it recklessly without verifying about its truthfulness. In normal circumstances, it would be difficult to prove in court whether a misrepresentation was made with intention to deceive. Since Ace Computers is a technically sound company well versed in the technologies of the day, it can be proved that this is a type of fraudulent misrepresentation. There are two remedies for misrepresentation and they are rescission of the contract, damages, or both. The aggrieved party can resort to the Misrepresentation Act of 1967. “Section 2 is particularly troublesome, containing both the puzzling “fiction of fraud” in subsection (1) whereby misrepresentations are to be treated as if they were fraudulent (unless the misrepresentor can show he had reasonable grounds to believe their truth).” (O’Sullivan 2001). This would be difficult for the management of Ace Computers and there is every chance of being found guilty of intentional wrongful acts. There are four instances by which a misrepresentor can escape rescission. They are, undue delay on the part of the aggrieved party, if rescission is physically impossible, involvement of third party rights, and if the product has been used (by the aggrieved party) after finding out the fact of the misrepresentation. Ace Computers may be able to get recourse from the last clause, since it appears that their customer had continued to use the computers that were not defective. They may have to pay damages though, if directed by a court of law. In this regard, Stevens, Wiley & Co will have to prove the following two facts in order to get damages from a court of law. The first one is that a faster processor would have not caused the delay in dealing with their clients (resulting in a loss of business). The second one is that a faster processor would not have caused the delay even if only six of the undamaged computers were used. 3. Compensation claims made by Steven, Wiley & Co: It has been informed that the customer of Ace Computers have made the following claims against the company. The first is that the company take back all defective computers and refund the costs of the same. The second is a compensation claim with regard to loss of business and income by the company. The compensation liability with regard to misrepresentation has already been dealt with in the previous section. In the case of defective goods, the vendor can be held liable under various statutes. “There are three potential sources of civil liability under English law of a manufacturer or distributor for damage resulting from a defective product. These are under contract law, under the law of tort and under the strict liability regime of the Consumer Protection Act 1987.” (Lee 2002). In the case of the contract law, the most significant statute is the Sale of Good Act of 1979. Under Section 14, subsections (2), the Act states that “Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.” (Sale of Goods Act 1979: Implied Terms about Quality or Fitness. 2003). The term satisfactory is quite ambiguous in the sense that quality is said to exist when a ‘reasonable’ person feels that the goods correspond with what has been said in the contract on the basis of the description of the goods therein, and can include the price and other relevant factors. Quality is also further qualified as the fitness, appearance, finish, freedom from minor defects, safety, and durability. Fitness implies that the goods should serve the purpose for which the goods were manufactured. In the present case, the fitness and freedom from defects are issues which can be used against Ace Computers. Under the Act, Stevens, Wiley & Co can require Ace Computers to repair or replace the goods under 48B. The buyer can also have the right to rescind the contract or ask for a reduction in price. In this instance the customer has required the vendor to take back the goods and return the cost of the same. It appears that they are well within their rights to do so. As to fitness, the customer should prove that using a slower processor had resulted in a fall in revenue and loss of a new contract. There is no possibility that a minor difference in processor speed could jeopardise the performance of the company’s business. Other statutes which the customer can resort to in case of a suit against the vendor are “Supply of Goods and Services Act 1982, Sale and Supply of Goods Act 1994 and The Sale and Supply of Goods to Consumers Regulations 2002.” (Sale of Goods Act Quick Facts. 2009). The customer can also possibly resort to the tort of negligence. “Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.” Per Alderson B., Blyth v Birmingham Waterworks Co. (1856).” (Tufal). If Ace Computers had known that the components used inside the computers were of poor quality and had foreseen that problems will occur in the foreseeable future, liability under negligence can also be used against them. But this is difficult to prove and hence may not be problematic for Ace Computers. It would appear that Stevens, Wiley & Co may not be able to claim damages under the Consumer Protection Act of 1987 since there is no provision for “pure economic loss” in the case of economic loss. “A person suffering loss because of a defective product can claim, but under s 5, damages can only be awarded for property damage over £275 and for death or injury.” (Kelly, David, Holmes and Hayward 2005, p. 223). 4. Protection by the use of an exclusion clause: It has been seen that Ace Computers had included an exclusion clause which specifically states that the company is not liable for the breach of any terms of contract, whether express or implied. This condition if upheld by law, will exonerate the company from any liability incurred towards the customer. Under UK law, agreements can be made by the inclusion of whatever clauses parties to the agreement deem fit. But there are several governing statutes that provide protection to aggrieved parties. One of the most relevant one is the Unfair Contract Terms Act 1977 (UCTA). Under this Act, and exclusion clause will not be valid under if it involves death, injury, negligence and defective goods. In the case of negligence and defective goods, the test of reasonableness must also be applied. “UCTA doesnt define precisely what is meant by reasonable, but courts will usually take into account: the information available to both parties when the contract was drawn up whether the contract was negotiated or in standard form Whether the purchaser had the bargaining power to negotiate better terms. ” (Buyers’ Terms and Conditions and Unfair Contract Terms). In effect the protection mentioned above is available for individual consumers and not for business contracts. Ace Computers can put forward a claim that as a business unit, Stevens, Wiley & Co should have checked the contract in detail and have objected to the exclusion clause at the time of drawing up of the contract. But this might not provide protection for Ace Computers if precedence with regard to similar cases in court is taken into account. This is because a fourth condition, namely the existence of substitute products which can be bought without the inclusion of exclusion clause is also there. In this case it is reasonable to expect that Stevens, Wiley & Co could have obtained computers from other vendors without the clause. Whatever may the case, it appears that courts have evolved certain “rules of construction” in deciding on exclusion clauses in business to business contracts. (Kelly, David, Holmes and Hayward 2005, p. 145). They will also see whether the contra proferentem rule (with regard to ambiguity in the clause) and the doctrine of fundamental breach (of contract) have occurred. Conclusion: If the customer had been an individual, Ace Computers would certainly have no recourse by under the UCTA. But it appears that the court may take a favourable view if Ace Computers take recourse under the provisions of the above mentioned act. This is because courts resort to using the rules of construction mentioned above in deciding such cases. This is mainly because of three factors. The first is that the construction of exclusion clause is quite clear excludes Ace Computers from any liability, express or implied. The second related factor is that there is no ambiguity in the clause and hence the contra proferentem factor will not apply. The third factor is that there has been no fundamental breach in the contract and in fact it has already been completed. There is every chance that Ace Computers will get a favourable verdict. Misrepresentation also may not cause problems because it will have to be proved by the customer that the slower processor was instrumental in causing the loss of business and lower income for the company. But it should be noted that the reputation of Ace Computers is at stake here and hence a compromise be attempted before taking on Stevens, Wiley & Co in a court of law. Bibliography Buyers’ Terms and Conditions and Unfair Contract Terms. [online]. Business Link. Last accessed 3 January 2009 at: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1074405689 Commentary: Vicarious Liability: Basic Position. (2006). [online]. Emplaw.co.uk. Last accessed 3 January 2009 at: http://www.emplaw.co.uk/researchfree-redirector.aspx?StartPage=data%2f030003.htm KELLY, David., DAVID, Kelly., HOMLES, Ann E M., and HAYWARD, Ruth. (2005). Business Law. [online]. Routledge Cavendish. P. 145. Last accessed 3 January 2009 at: http://books.google.co.in/books?id=mSJY7eP0VBgC&pg=PA158&lpg=PA158&dq=UK+%22business+law%22+%22misrepresentation%22+definition&source=bl&ots=m_r5nsGZlN&sig=_u-zmAJN8PxAiXPYLtIYqg8WiVs&hl=en&sa=X&oi=book_result&resnum=3&ct=result#PPA160,M1 KELLY, David., DAVID, Kelly., HOMLES, Ann E M., and HAYWARD, Ruth. (2005). Business Law. [online]. Routledge Cavendish. P. 158. Last accessed 3 January 2009 at: http://books.google.co.in/books?id=mSJY7eP0VBgC&pg=PA158&lpg=PA158&dq=UK+%22business+law%22+%22misrepresentation%22+definition&source=bl&ots=m_r5nsGZlN&sig=_u-zmAJN8PxAiXPYLtIYqg8WiVs&hl=en&sa=X&oi=book_result&resnum=3&ct=result#PPA160,M1 KELLY, David., DAVID, Kelly., HOMLES, Ann E M., and HAYWARD, Ruth. (2005). Business Law. [online]. Routledge Cavendish. P. 223. Last accessed 3 January 2009 at: http://books.google.co.in/books?id=mSJY7eP0VBgC&pg=PA158&lpg=PA158&dq=UK+%22business+law%22+%22misrepresentation%22+definition&source=bl&ots=m_r5nsGZlN&sig=_u-zmAJN8PxAiXPYLtIYqg8WiVs&hl=en&sa=X&oi=book_result&resnum=3&ct=result#PPA160,M1 LEE, Robert G. (2002). Statutory Liability for Defective Products. [online]. Last accessed 3 January 2009 at: http://www.fen.bris.ac.uk/engmgt/ps/PS3%20L11%20Statutory%20Liability%20for%20Defective%20Products%20RL.pdf Misrepresentation. (2006). [online]. Legal Owl. Last accessed 3 January 2009 at: http://www.legalowl.com/topics/Misrepresentation?PHPSESSID=ueaq1djeotbdgdfs62rikbkgj1 O’SULLIVAN, Janet. (2001). Remedies for Misrepresentation: Up in the Air Again. The Cambridge Law Journal. [online]. Cambridge Journals. Last accessed 3 January 2009 at: http://journals.cambridge.org/action/displayAbstract;jsessionid=EA99D1B37F1996B375BA3694C05F5C67.tomcat1?fromPage=online&aid=81427 Sale of Goods Act 1979: Implied Terms about Quality or Fitness. (2003). [online]. Crown. Last accessed 3 January 2009 at: http://www.johnantell.co.uk/SOGA1979.htm Sale of Goods Act Quick Facts. (2009). [online]. Crown. Last accessed 3 January 2009 at: http://www.berr.gov.uk/whatwedo/consumers/fact-sheets/page38311.html TUFAL, Asif. The Tort of Negligence. [online]. Law teacher. Last accessed 3 January 2009 at: http://www.a-level-law.com/tort/Negligence/Flowchart.pdf Read More