The Main Elements of a Commercial Transaction - Case Study Example

Name Instructor Course Date Commercial Law Introduction A commercial law contract is an agreement that has the ability to create obligations that are enforceable by law. The main elements of a commercial transaction are legality, capacity, consideration, and mutual assent. Available remedies for the breach of the agreement in a contract include specific performance, reliance damages, consequential and general damages. Generally, the law enforces contracts, and provides remedies in case of breach. Commercial transactions are mainly governed by common law, statute and private law. The main issues raised by the facts include; whether Nathan, the refugee from Sri Lanka has the capacity to enter into a legally binding contract with Dubious Connections Pty Ltd, a telephone company from Australia; the issue of misrepresentation by John; the issue of language barriers; and whether the contract entered into by Nathan with Dubious Connections Pty Ltd was valid. Validity of a contract The validity of a contract entails enforceability and the fact that it is legally binding. A contract is supposed to provide a clear outline of the agreement so as to avoid disputes that can lead to litigation in the future. For a contract to be valid, the parties involved must be capable of contracting. There is a fear of exploitation and vulnerability for the parties who lack capacity. Nathan, despite of being a refugee is capable of entering into a valid contract with Dubious Connections Pty Ltd. He has the capacity to contract. However, his inability to fully understand John1, the sales representative, due to the language barrier creates an error in the contract. John was aware of the fact that Nathan spoke very little English and yet he did not bother to get an interpreter for Nathan so that they could be on a level ground and reach mutual understanding. In Printing and Numerical Registering Co. V Sampson Sir George Jessel asserted that, “... If there is one thing more than another which public policy requires then it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts when entered into freely and voluntarily shall be enforced in the courts of justice.” Consent is another vital element in a commercial transaction. For a contract to be valid, the parties must give mutual and free consent, which in turn must be communicated to the parties in question. Consent is not free when obtained through mistake, undue influence, fraud, menace or duress. Also, consent is not perceived to be mutual when the parties in question do not agree on the same issue in the same sense. This can be referred to as the “meeting of minds”. A meeting of minds is also known as a consensus between two or more people involved in the creation of the contract. During the formation of a contract, there should be a common understanding on the material issues of the contract2. This is a necessary condition for the formation of a valid contract. There is no meeting of minds when the parties come to an agreement with different ideas on the same subject matter in mind; this is often as a result of misunderstandings and therefore invalidates the contract. In Raffles v Wichelhaus [1864] 2 H & C 906 the claimant and the defendant entered into a contract for the sale of cotton from India. The claimant was the seller while the defendant was the purchaser. According to the contract, the cotton was supposed to arrive in Liverpool on Peerless, a ship. However, there were two ships arriving from India by the name of Peerless; the first one was to arrive in October while the second one was to arrive in December. The defendant had understood that the ship would arrive in October while the claimant had thought that the ship would arrive in December. Due to this misunderstanding, the defendant refused to take the possession of the cotton in December and cancelled the contract; his reasons were that the contract was for cotton that was supposed to arrive in October. The court tried to preserve the contract by finding a reasonable understanding of the situation. However, the court could not come into a conclusion on which ship was specifically being referred to and hence there was no valid contract due to the lack of meeting of minds. [Che01] There is also no meeting of minds in the case of Nathan as he has a different idea of what the contract entails; this is because he has little or no knowledge of telephone contracts. Nathan concluded the contract with the understanding that he could return the phone whenever he wanted, while in fact the contract was for three years and if he wanted to terminate it, he would have to pay the full contract price of $3120 plus the price of the iOS7.1 telephone and an additional $80D. Thus he returned the telephone after a period of only two months. Misrepresentation Using sketchy ways to get consent for a contract can make the contract unenforceable in law; this includes improper persuasion and uttering false statements (as well as being silent so as to mislead the other party). The court has the onus of striking the contract down due to the unenforceability or the victim of the unfairness has the right to void it. Statements of misrepresentation that occur before the existence of the contract have remedies both at the statutory level and in common law. The Competition and Consumer Act of 2010 (Cth) is used in such circumstances as it provides better remedies generally and it operates in a wider area of scope. This act was previously known as the Trade Practices Act of 1974 (Cth) Misrepresentation refers to a misleading statement of fact that is made by one party to another; the false statement has the effect of inducing the other party into entering the contract. For example, in some instances, false promises or statements made by the seller of goods as to the nature or quality of the goods may form part of misrepresentation. Most times a remedy of damages or rescission may be allowed depending on the type and extent of misrepresentation. In Peyman v Lanjani [1985] 2 WLR 154 the defendant entered into a lease agreement that required the landlord’s signature. The defendant happened not to attend the meeting where the agreement was struck out, but rather sent an agent whom he thought he would impress the landlord by creating a good impression on him. Later on, he decided to sell the same lease to the claimant; this was also going to need the landlord’s approval. He sent his agent once again. The claimant got aware of the fact that he had been deceived after paying over ten thousand Euros under the agreement with the Lanjani. Luckily, he was able to apply successfully to rescind the contract. The defendant had made a misrepresentation of the legitimacy of the transaction by using an agent; the landlord and the defendant had not agreed to this before. This case shows that the statement of misrepresentation must have been made by one party to the contract to another. [Paw02] Another important element of the misrepresentation is that the statement of misrepresentation must be made at the time of entering the contract or prior to entering the contract. In order for the victim to claim that the statement of misrepresentation was indeed used to induce him/her to enter into the contract, the victim must have relied on the statement before or at the time of entering into the contract. If the statement happens to be made after the contract has been made, then it cannot be relied upon as a misrepresentation and thus it is not actionable because it does not affect the actual formation of the contract. In Roscorla v Thomas (1832) 3QED 234 after a contract for the sale and purchase of a horse had been entered, the seller then told the buyer that “the horse was sound and free from vice”. In actual sense, the horse had a vicious character and it was really unruly. The buyer had no claim in law since the promise had been made after the agreement. Since misrepresentation is a vitiating factor that affects the validity of a contract, for an action to be successful; the statement(s) in question must be of material fact, the statement(s) must have been made towards the affected party, and the other party must have been induced by that statement for him to enter into the said contract. If the person making the statement tells the truth, but leaves out some important information that could interfere with the interpretation of the whole transaction, then the omission amounts to misrepresentation. In JEB Fasteners Ltd v Marks Bloom & Co Ltd [1983] 1 All ER 583 the claimant engaged himself in the take - over by another company for the purpose of acquiring the services of its two directors rather than for a financial advantage in the take - over. Before the take –over had occurred, the claimant had relied on the accounts of the company which had been negligently prepared. It was held that there was no misrepresentation since the main aim of the take – over was to acquire the services of the two directors. Therefore, the accounts had not acted to induce anyone as they were not at the core of the contract. However, in contrast to the above statement, if a statement induces the claimant to enter into the contract, it will not matter that that statement was not material to the contract. In that case, action for misrepresentation will be actionable. In regards to the matter in question, John was aware of the fact that Nathan knew virtually nothing about such transactions and that there was a language barrier between them, however, he went ahead to tell him that the telephone contract was on offer. This was not the case; John’s main aim was to get Nathan into the contract so that he (John) attains his target at work. John even went ahead to explain the main features of the contract without bothering to get an interpreter. This amounts to misrepresentation. Another element of misrepresentation is that the false statement should not have been meant to form part of the contract. If the statement was meant to form part of the contract, if anything, it would not amount to misrepresentation, but rather a warranty. The right action to take would be to sue for a breach of contract. The most important requirement for the misrepresentation to be actionable is that the statement must have been made falsely, whether deliberately or innocently. If the statement made was true, it would cause no further action since the contract would be complete. The statement that the telephone contract was on offer was false and thus it qualifies for misrepresentation. There are three types of misrepresentation; fraudulent, negligent and innocent. According to Lord Herschell in Derry V Peek (1889) 14 Cas 337, fraudulent misrepresentation entails proof that the statement was made, “Knowingly or without belief in its truth or recklessly careless whether it be true or false”. Negligent misrepresentation falls short of what Lord Herschell identifies as a fraudulent misrepresentation. The House of Lords accepted the fact that a negligent misrepresentation that causes a financial (pecuniary) loss should be remedied. Nathan suffered a financial loss due to the negligent misrepresentation offered by John. Further, he was unable to maintain the telephone because he could not afford it. If these facts had been well stipulated to him at the onset, he would have evaluated his financial status and seen that he could not have afforded it. Instead, he went ahead and entered into the contract and in the process, he suffered financial loss. Section 2 (1) of the Misrepresentation Act of 1967 UK provides that, “where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then the person making the misrepresentation would be liable to pay damages in respect thereof had the misrepresentation been made fraudulently, that person shall be liable notwithstanding that the misrepresentation was not made fraudulently unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.” This means that a person has the right to seek for damages for any losses that arise from misrepresentation; this is despite the fact that it may be hard or even impossible for the claimant to prove that the elements of fraud really existed. In regards to the case in question, the burden to prove misrepresentation lies on Nathan, the claimant, and it will be for the defendant, Dubious Connections Pty Ltd, to prove that they believed the statement is true after Nathan sues for misrepresentation. Such statements include; the fact that John said the telephone contract was on offer. John, acting on behalf of Dubious Connections Pty Ltd was negligent when he told Nathan that the telephone contract was on offer; he was also negligent when he did not bother to call upon an interpreter so as make Nathan understand the terms and conditions of the telephone contract. John had a duty of care; he was supposed to appoint an interpreter. Remedies A contract made as a result of inducement from false statements is voidable at the option of the victim of the misrepresentation. It cannot be presumed void automatically because this does not allow the victim the right to continue with the contract if they need it. Both common law and the 1967 Misrepresentation Act provide the remedy of damages as an action for negligent misrepresentation. In common law, damages may be calculated according to the standard of tort measure. The 1967Act also calculates damages according to tort measure; this is because the act has provisions for being appropriate where the claimant is having a hard time in trying to prove the fraud. In Sharneyford v Edge [1987] Ch 305, the Court of Appeal confirmed that the tort measure is the best measure. If the misrepresentation acquires contractual force, the victim is entitled by law to obtain damages for the breach of contract. The victim also has a right to rescind the contract for the misrepresentation or breach. Works Cited Che01: , (Chesire, Fifoot and Furmston), Paw02: , (Pawloski), Read More