Analysis of Contract Law - Case Study Example

Contract Law Part A: The major point of contention in this case is the content of the option clause (Clause 4) and whether its performance can be enforced through a decree of specific performance. In accordance with her rights under the contract, Hilary has validly exercised the option available to her under Clause 4. However, she may not be able to demand specific performance solely on the basis of the option, because the agreement remains incomplete - while other terms have been mutually agreed to between the parties, the new rental price remains to be fixed. On this basis, final agreement has not yet been reached between the parties (per Clause 4f). This was also the case in Goedecke v Kirwan1where the Court found that an agreement on price was a necessary term of offer and acceptance; hence no final, enforceable contract existed since price had not been agreed upon. Thus Hilary may have some rights under the option, but they may not be fully enforceable. In the case of Barack, he seeks re-possession of his flat. Under the option clause in the agreement, Barack may not have the automatic right to reposses the flat, when there is an option available to the lessee to continue. In the case of Butts v O'Dwyer2 a similar situation arose, where there was an option to purchase the lease property subject to fixing of a price by the third party. In this instance, the Court concluded that it could correctly be said that the complete was incomplete until the price was fixed. The existence of the option indicated that the owner had an obligation to do everything in his power to ensure that the price was fixed through the third party. This is applicable in Hillary's case, since Clauses 5(d) and 17(b) lay out the procedure for fixing of the price in the event an agreement cannot be reached between the parties. Hence the Court could order a partial performance of the contract, i.e, for Barack to perform his obligation to get an arbitrator nominated by the President, as laid out under the option clause. This obligation would be distinct and separate from the obligation to continue the lease, since the latter would be contingent upon the price being fixed. While the option clause is not complete enough for the decree of specific performance that Hillary seeks, it may nevertheless place an obligation upon Barack to take necessary steps to ensure that the incomplete term in the contract, i.e, the price is fixed. In the case of Booker Industries Pty Ltd v Wilson Parking (Qld)Pty Ltd3 the situation was very similar to Hilary and Barack's case. In this case, the Court specifically stated that Booker (the lessor in this case) had "no grounds for refusing to discharge its obligation" to appoint an arbitrator merely on the grounds that the rental price was not fixed4. It clearly explained that when specific terms on the appointment of a third party have been set out in the original contract, then it no longer remains as a contingent obligation to be performed first before the ultimate obligation, i.e, re-renting the place can be completed. Since the existing option becomes operation on the day of expiry of the earlier lease, once it has been exercised, it is no longer a "conditional or contingent" obligation5. On this basis, the lessee was entitled to specific performance. Applying this precedent in Hillary's case, it appears that Booker may need to perform his obligation to appoint an arbitrator so the price can be fixed, after which the ultimate obligation, i.e, another lease term can also be accomplished. It must also be noted however, that Clause 4(b) states clearly that the option must be exercised "no later than 2 months prior to the expiration of the initial or previous term". In Hillary's case however, the option has been exercised after this period has expired, therefore there is a possibility that her right to exercise her option may no longer be valid, in which case Barack will not be obliged to perform his obligation to secure a rental price. Part B: The question of whether or not Huckabee has a valid agreement with McCain will be determined by the provisions of the Conveyancing Act of 1919. This Act clearly states that any interest in land, including agreements to lease, are required to be in writing failing which they may be legally unenforceable6 unless there has been a part performance of some of the contractual terms. In the case of Rolet v Baron7 which concerned the lease of retail premises, there were oral discussions between the parties, but the Administrative Decisions Tribunal held that although "there was request for a written lease, for an identified term" by one party, the nature of the discussions between the parties did not indicate grounds to conclude that there was to be lease/occupancy agreement in place. On this basis, it would appear that McCain has not entered into a contract with Huckabee since there have only been discussions but no signed, written declaration of lease exists. But the two parties have met and discussed essential terms such as lease term and rent payable, therefore in this instance, mutually agreed oral terms may have been concluded. In the case of Four Seasons International Agriculture Pty Ltd v Dominic Iacullo & Or8 there was some confusion between the parties on the terms agreed to orally. The Administrative Decisions Tribunal expressed the opinion that those terms mutually agreed to between the parties, albeit oral, could constitute an agreement in some cases, although it did not exercise its jurisdiction in this case because the lease term was less than six months. In the case of Perhauz9, the Court stated that an agreement that was purely oral could be enforceable when it was accompanied by actions such as possession or payment of rent. In the case of Huckabee, the courts may determine whether an agreement exists on the basis of the evidence available. The only factor that supports Huckabee's contention is the existence of legal notes by McCain's solicitor. It would have been possible for Huckabee to rely on notes of discussions as a basis for contending an agreement of terms, as was also the case in Perhauz cited above, but he did not use his own agent to take such notes and McCain's solicitor cannot be forced to reveal any notes he may have taken, because it could compromise his client's interests. In the first instance, the meeting was very brief, hence all the terms were not fully discussed and even if a contract exists, it would be an incomplete contract which may not be legally enforceable. Secondly, these oral discussions between the parties have not been accompanied by any actions of part performance such as payment of rent, or occupation of the premises. Thirdly and most importantly, Section 23 D of the Conveyancing Act of 1919 clearly states that all interests in land which are not clearly set out in writing and signed by the parties can be terminated at will. In the case of Perhauz10 the oral lease was held to be valid and not subject to termination at will because it pertained to a retail shop lease, where a statutory legal interest in the land is created by virtue of the long term nature of such a lease. This is not the case with Huckabee, therefore it appears that the provisions of Section 23D will apply in this case and the oral discussions between the parties may not constitute a legally enforceable contract. On this basis, it may be concluded that McCain does not have a contract with Huckabee. (b) As noted above, the Tribunal has in some instances held oral agreements to be valid and legally enforceable when there has been some partial performance of contractual terms, such as possession or payment of rent. In addition to the case of Perhauz cited above, the case of Thai Star11is another case in point. The basis of the decision of the Tribunal in this case that an oral agreement was enforceable, was based on part performance of the terms of the contract. The tenant in this instance had occupied the premises and paid the rent. On this basis, the bar set up by the provisions of Section 23D of the Conveyancing Act of 1919 did not apply. In the case of McCain's agreement with Washington, there is a deed of memorandum of lease which exists. This clearly sets out in writing the fact that (a) McCain has the right to terminate the three year lease at any time (b) the condition for such termination is a four week notice in writing. It must also be noted that in the original memorandum of lease between McCain and Washington, there is no option which has been included, providing the Lessee (Washington) the option to extend the lease. According to the Retail Leases Act (NSW) (1994), which also takes into account sub-leases to commercial tenants, it has been stated that a lessor may also "refuse in the lessor's absolute discretion, consent to the grant of a sublease, license or concession in respect of the whole or any part of the shop'"12 When these factors are combined with the requirement under Section 23D of the Conveyancing Act of 1919, which states that only a lease executed in writing and signed by the parties will be valid, it would appear that McCain is justified in his contention that he is not obliged to renew the lease. However, as already stated earlier, the requirement for writing may be a bar that will not necessarily hold good where there has already been part performance of the contract. The oral discussions between the parties and the extent to which agreement between them can be inferred, will be an important factor taken into consideration by the Court in arriving at its decision. In this context, the recent case of Roberts and Zhao13 also raised the issue of whether oral communication between the parties can constitute a renewal of lease. In arriving at its decision, the tribunal relied largely on the content of the discussions between the parties. The Tribunal concluded that in Roberts v Zhao, there had been "no agreement between the parties that the lease may be renewed orally."14 On this basis, the applicant's contention that an oral communication between the parties could constitute a notice of renewal of lease, was dismissed. Applying this in the case of Washington, it would appear that the oral communication between the parties would not constitute the renewal of lease. However, it must also be noted that in the Roberts v Zhao decision, the Tribunal also stated that it is to "determine from the content of the discussions if it could be adduced that the option had been verbally exercised."15 Thus, oral communications will not automatically mean a disqualification from the option to renew a lease. The Tribunal may take into the content of the discussions between the parties. It may be noted that in the oral discussions Cain has clearly stated that he will renew the lease unless the head lessor Bush terminated his lease agreement. In the case of Gilbert J McCaul(Aust) Pty Ltd v Pitt Club (Ltd)16 the question of conditions required for renewal of a lease were considered and the Court stated: "In the present case the lessor irrevocably offered to grant a lease. Its offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted and result in an agreement for a lease"17. On this basis therefore, an oral agreement between the parties to renew a lease could be deemed to be an enforceable agreement if it is performance in accordance with the contingent terms. If the contingent terms are not performed, then there may be occasion for a breach or non performance of the contract as originally framed between the parties. Applying this in McCain's case, a Court is likely to find from the evidence that McCain had indeed agreed orally to the grant of a renewal of a lease, because he has clearly stated "I am happy to renew for subsequent three year terms." Furthermore, he has also provided an assurance that any demand for Washington to move out of the premises would be contingent upon his own lease with Bush being cancelled. McCain has specifically stated, "I won't be asking you to leave unless Bush asks me to." However, McCain has not satisfied this condition. He has asked Washington to leave, despite no direction from the Head Lessor to terminate the lease. He has therefore violated the implicit oral agreement between the parties that the three year term will continue, unless and until McCain's own lease is terminated by the Head Lessor. This oral agreement is likely to hold good, especially because as was stated in the Thai Star18 case, a partial performance of the contract will supersede the bar under Section 23 D of the Conveyancing Act of 1919. As opposed to McCain's conduct, which shows he has violated the condition of termination only on receipt of such direction from the head Lessor, Washington on the other hand, has adhered to the terms of contract and moved out on receipt of written notice from McCain, rather than choosing to exercise its option to remain in the premises and retain possession. Therefore, it appears likely that based on the evidence supporting the conduct of the parties, the tribunal may well find that McCain has breached the contractual terms. A statutory legal interest in the land may have been created on behalf of Washington which has been breached and the Tribunal may order damages to be paid by McCain to Washington for such breach of contract. Part C: One of the first requirements in order to a valid contract to exist is that there must be an offer and an acceptance of that offer. For a contract to be valid, "there must be a definite offer mirrored by a definite acceptance."19 An acceptance will be said to occur when the offeree's words or conduct can give rise to an objective reference that he/she has assented to the terms offered.20 Another aspect that must also be taken into consideration is that a mere agreement alone will not make a contract and both parties must provide consideration if they wish to enforce a contract. Consideration has been defined as: "' some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other."21 Additionally, the parties must also demonstrate an intent to enter into legal relations, for instance social and domestic agreements may not be held to be legally enforceable.22 Applying the above to the case of the contract which Daniel Lanois has concluded with Robbie Robertson, all of the above conditions have been satisfied between Lanois and Robertson, therefore it may be concluded that a valid contract exists between the parties. However, in the case of Blade, one difficulty that arises is the question of whether or not he has accepted the contractual terms. A contract is based upon the principle of consensus ad idem or a meeting of the minds. The Courts have held that an offeree cannot be forced to accept a contract against his/her wishes merely on the grounds that he/she was silent about the acceptance of the offer.23 Silence cannot be automatically construed to be acceptance. As a result, Blade's intent to enter into legal relations with either Lanois or Robertson is also not clearly established. The important issue that arises in this case however, is the question of privity of contract, since the benefits accruing in this contract for the payment of the consideration as stated above, are to go to a third party rather than one of the parties that is a signatory to the contract. Daniel Lanois has conferred a benefit on Brady, who is a third party to the contract and is not a direct signatory to the terms of the contract. According to the Doctrine of Privity of Contract under common law, no rights or obligations can be imposed upon third parties who are not signatories to the original contract. The rationale behind this principle was established in the case of Dunlop Type Co v Selfridge24where it was held that only a promisee can enforce a promise contained in a contract; i.e, only a person who is a party to a contract can sue under it. Through a strict application of the Doctrine of Privity in this instance, it would appear that Brady, who is not a direct party to the contract may not have rights to take any legal action under the contract. In the case of Trident General Insurance vs. McNiece Bros Pty Ltd25, McNeice could not receive workers compensation he had paid, from the Insurance Company, since he did not have a direct contract with them. In the case of Trident, an attempt was made to alter the Privity Clause around trust principles and did not succeed because it was only obiter dicta. The doctrine of Privity does not allow a third party such as a consumer for example, to sue a manufacturer who has produced defective goods - classified as vertical privity - or indeed sue a retailer who has sold him faulty goods via a friend who has purchased the product for him - this is a case of horizontal privity. In the event of a breach of contract by Robertson, Blade may not have a right to sue him under the existing contract. Brady Blade's rights may still be preserved however, through the application of some of the exceptions that exist in the exercise of the Doctrine of Privity. One of these exceptions. has been developed in equity through the concept of trusts of contractual rights. A trust is an equitable obligation whereby property may be held on behalf of a third party. Alternatively, trusts may also operate through restrictive covenants, especially on land for example, where a contractual arrangement on use of land between two parties will also be binding upon future third party users. This may also apply in the case of chattel, where an original agreement between two parties that lays out guidelines for use of property may also be enforceable against subsequent users and any violation of the original terms would render future users who are third parties, liable, despite the fact that they are not parties to the original contract. Applying this in Brady's case, it may be noted that although he is not a party to the original contract, the agreement in that contract spells out the benefits that are payable to him, which Robbie Robertson and his assignees would be obliged to carry out. Robbie Robertson has received consideration from Daniel Lanois under the contract. It may be argued that through an application of the Doctrine of Privity, he cannot be held legally liable for an obligation owed to a third party he has not contracted with. In the event there is a breach in the contract, Lanois may not be able to seek remedy under it because the stated benefit in the contract does not accrue to him anyway. But this does not mean that Daniel Lanois cannot enforce Robertson's obligations under the contract, through the exercise of the exceptions to the Doctrine of privity. Remedies of the contractual party offers a means to circumvent the doctrine, allowing a contracting party to recover losses on behalf of a third party who is intended to benefit from the terms of contract. For example, in the case of Jackson v Horizon Holidays26 the plaintiff entered into a contract with the defendants, but when the defendants failed to comply with contractual terms, plaintiff was able to recover damages not only for himself but for his family members who are third parties to the contract. Daniel Lanois can thus be held to be an agent entering into a contract on behalf of a third party, through an agency agreement. In such a case, an agent contracts on behalf of a third party - the principal, as a result of which the principal also has a direct contractual relationship with the other party on the basis of existence of a collateral contract27. The validity of third party rights in such agency agreements has been upheld by the Court in the case of New Zealand Shipping v Satterthwaite.28 On this basis, if there is a breach in contract, Daniel Lanois may be entitled to sue for the consideration paid , requiring performance of the contractual obligation by Robertson, on behalf of the third party, i.e, Blade, who will be deemed to have a collateral contract with Lanois. The Doctrine of Privity remains strong in Australian law and is a contentious issue, impeding recoveries from third parties. Common law principles such as promissory estoppel offer further scope for development in favor of third parties, as in the case of Walton Stores vs. Maher29, where a contractual obligation is enforceable on grounds of equity. Hence, Blade, despite being a third party, would be eligible for relief in the event of a breach, since Robertson would be estopped from non fulfillment of his promise. In the case of Wilson v Darling Island Stevedoring and Lighterage Co Ltd,30 Mason CJ and Wilson J advocate the use of trusts to work around the privity principle and point to the existence of certain specific statutory principles.31 On this basis, the benefit that is to accrue to Blade may be said to be held in trust by Lanois, therefore Lanois, as a signatory to the contract can act on behalf of Blade. The Contracts Review Act was introduced in 1980 on the major premise that any contract that was deemed to be unjust would be afforded relief and protection with no exclusions. As per Section 10 of the Act, the Courts also have the power to grant anticipatory relief as well, by restraining any course of conduct that would lead to injustice in the future. If a contract is deemed to be unjust in some manner, then the Court has wide ranging powers to also alter the rights of third parties who are not signatories to the contract that is under dispute, when relief is deemed to be appropriate and necessary.32 On the basis of the above, it may be noted that the Doctrine of Privity may apply in the case of the contract between Lanois and Robertson. However, it may not actually hinder performance of the contract or restrict remedies available to Blade under it, despite his being a third party. There are several exceptions to the Doctrine of Privity of contract which have been developed, as detailed above, on grounds of equity and fairness to third parties who are the beneficiaries of a contract. These allow Lanois the facility of functioning as an agent on behalf of Blade to ensure performance from Robertson; it also enables him to file suit on behalf of Blade to secure the benefits that are promised to him under the contract. Blade may also be able to approach the courts despite not having the legal standing to do so because he is not a party to the contract -he will be entitled to sue under the contract on grounds of equity. Bibliography * McKendrick, Ewan, 2000. "Contract Law" (4th edn) Basingstoke: Macmillan Cases cited: * Andrews v Hopkinson (1957) 1 QB 229 * Balfour v Balfour (1919) 2 KB 571 * Booker Industries Pty Ltd v Wilson Parking (Qld)Pty Ltd (1982) 149 CLR 600 * Butts v O'Dwyer (1952) HCA 74 * Currie v Misa (1875) LR 10 Exch 153 * Dunlop Tyre Co v Selfridge (1915) AC 847 * Felthouse v Bindley (1862) 11 CBNS 869 * Four Seasons International Agriculture Pty Ltd v Dominic Iacullo & Or [2002] NSWADT 91 (31 May 2002) * Gilbert J McCaul(Aust) Pty Ltd v Pitt Club (Ltd) (1954) 76 W.N. (NSW) 72 * Godecke v Kirwan (1973) 129 CLR 629 * Jackson v Horizon Holidays (1975) 1 WLR 1468 * Perhauz and Another v SAF Pty Properties Ltd and Ors (2007) NSWADT 122 * Rolet v Baron [2002] NSWADT 136 * Thai Star Video Pty Limited v Walpole (2007) NSWADT 193 * Trident General Insurance vs. McNiece Bros Pty Ltd (1988) 165 CLR 107 * Roberts and Zhao (2008) WASAT 67 * New Zealand Shipping v Satterthwaite (The Eurymedon) (1975) AC 154 * Walton Stores v Maher (1988) 164 CLR 387 * Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) HCA 8 Legislation cited: * Conveyancing Act of 1919 * Contracts Review Act (1980) * Retail Leases Act (NSW) (1994 Read More