Analysis of Business Law - Case Study Example

QUESTION In order to advise William Doors with regard to the whether the price variation clause forms part of the contract between Doors' Software Limited and Hard Water Co, it will be necessary to evaluate the law relating to formation of contract and in particular the principles relating to the "battle of the forms" scenario in contractual negotiation. The law of contract stipulates three fundamental requirements to establish a legally enforceable contract; namely offer, acceptance and consideration (it is important to note that parties entering into a contract must also have legal capacity to do so and it is presumed from the facts given that capacity is not an issue in this case). Lord Wilberforce asserted the rule for formation of contract in New Zealand Shipping Co Limited v A M Satterthwaite, The Eurymedon1: "English law having committed itself to a rather technical'.. doctrine of contract, in application takes a practical approach'' into the marked slots of offer, acceptance and consideration"2. An "offer" in the context of contract law has been described as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the "offeree.3" The "expression4" may take different forms and Hard Water's original quotation will satisfy this requirement. The intention element is an objective consideration and the case of Smith v Hughes 5emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. Furthermore, the law distinguishes between an offer and an invitation to treat, which is not an offer but an indication of willingness to negotiate a contract6. For example, in the case of Gibson v Manchester City Council7, the words "may be prepared to sell" constituted an invitation to treat and not a distinct offer. Furthermore, valid acceptance in law follows a valid offer and the formation of a contract follows immediately. Moreover, a valid acceptance is a final and unqualified acceptance of an offer as demonstrated in the case of Peter Lind Limited v Mersey Docks & Harbour Boar,8 highlighting the "mirror image" rule, where acceptance must be unequivocal and unconditional, therefore acceptance must "mirror" the offer. With regard to the current scenario, the issue in contention is whose terms are applicable to the contract. Contractual negotiations particularly in the context of quotations and bids for, will often involve several exchanges between the commercial parties involving offers and counter offers9. The case of Hyde v Wrench10 established that a counter offer brings an end to the original offer. However, the "battle of the form" creates real problems in practice11. The difficulty with this as evidenced with the current situation is determining the exact terms of the eventual contract. Indeed "Chitty on Contracts" underlines this problem and concludes: "Thus it is possible by careful draftsmanship to avoid losing the battle of the forms, but not''.. to win it. The most that the draftsman can be certain of achieving is the stalemate situation where there is no contract at all12." Despite the possibility of conflict in the current situation as to the exact terms of the contract, there is clearly a contract between Doors Software and Hard Water by virtue of course of conduct13. However, to clarify the issue of whose terms are applicable, the courts have adopted the "last shot principle", which was established in the case of Butler Machine Tool Co -v- Ex Cell-O-Corp14 . According to this principle, the presumption is that the last offer which has been accepted without qualification will be determined as covering the conditions of the contract. In the current scenario, Hard Water returned and acknowledgment slip incorporating the terms and conditions of Doors Software Limited and on a strict interpretation of the "last shot" principle, this would suggest that the contract was concluded on Doors Software's terms and conditions and therefore the price variation clause does not form part of the contract. However, the problematic nature of Hard Water's clause as that it was phrased as a prevail clause, which raises the question as to whether Doors Software accepted this. If we further consider the facts of the Butler Machines case15, which are analogous to the current scenario, the trial judge upheld the sellers claim on the ground that the sales terms were to prevail since they had stipulated this in the opening offer and subsequent negotiations were subject to that. However, the buyers appealed and this was upheld in the Court of Appeal. The mirror image rule was referred to by the seller and the Court of Appeal distinguished this asserting that the rule requires acceptance of the precise terms of the offer; which must be distinguished from purported acceptance of an offer which introduces terms at variance with the original offer16. It was held that the prevail clause tendered by the seller was not sufficient for formation of contract as it could not acceptance but a counter offer and cancels the original offer by the buyer to provide a quotation and only give rise to contract if accepted in due course by conduct. Accordingly, the buyer's form and acknowledgment slip further constituted a counter offer and the sellers' completion and acknowledgement of the form duly accepted the buyer's offer, thereby concluding the contract on the buyer's terms and conditions. Alternatively, the sellers relied on the covering letter they had sent with the acknowledgment form making clear that price variation clause in original quotation was to remain part of the agreement and therefore overrule buyer's terms and conditions. However, this argument was rejected by the Court of Appeal. If we apply this by analogy to the facts of the current scenario, it is evident that notwithstanding the covering letter sent by Hard Water, the acknowledgement slip containing Doors' Software's terms and conditions constituted a counter offer, which was accepted by Hard Water in completion and return of the slip. As such, Doors Software won the battle of the forms in line with the Butler case rationale and the price variation clause does not form part of the contract. QUESTION 2 With regard to the Council's rights against Doors Software under the contract, there is no contention that this is an enforceable contract for the sale of goods. Accordingly, with regard to whether or not the products provided were fit for purpose and of satisfactory quality; if the representations made by Doors Software regarding the product were expressly incorporated as a term of the contract between Doors and the Council, the central issue is whether the term constitutes a condition or warranty. On the basis of the facts the product description and functionality requirements were clearly a central motivation behind granting the contract to Doors Software and therefore as such, went to "the root of the contract,"17thereby pointing in favour of being a condition18. Accordingly it is arguable that this claim amounts to a misrepresentation causing damage to the Council, it will have the right to repudiate the contract and sue for damages on grounds that the misrepresentation constituted a breach of condition19. Moreover, the Sale of Goods Act 1979 (SGA) implies terms into sale of goods contracts which can be relied on by consumers20. Whilst the current scenario relates to a business to business transaction, unless expressly excluded in the contract itself, the "Sale of Goods Act 1979 implies terms in the agreement for the sale of goods in the UK. By default, the implied terms are incorporated into B2B and B2C contracts"21. Section 14 of the SGA provides that there is an implied term that goods supplied under an SGA contract are of satisfactory quality. Section 14(2A) elucidates and provides that "goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price and all other circumstances". Ultimately, this is a question of fact determined on a case by case basis22. However, section 14(2C) of the SGA expressly provides that the implied term regarding quality does not extend to any matter making goods unsatisfactory that was brought to the buyer's attention before the contract was made. Furthermore, the implied obligations under section 14 will be negated where the buyer examines the goods before the contract is made and the defects were such "that the examination ought to reveal". With regard to the practical application of section 14(2C), Regulation 3 of the Regulations asserts that the relevant circumstances when considering whether the defects should have been discovered upon examination include "any public statements on the specific characteristics of the goods made about them by the seller, the producer or his representative, particularly in advertising or selling". In context of the current scenario, it is evident that the Doors Software Project manager had represented that notwithstanding any errors in any printout, the number to be inserted on the return form could be taken by the transaction processing scheme. In light of section 14C of the SGA, these representations will clearly operate in the Council's favour in alleging that the products failed to meet the standards of being of satisfactory quality. Moreover, Section 14(2B) of the SGA provides that "the quality of goods includes their state and condition and'.. (a) fitness for all the purposes for which the goods of the kind in question are commonly supplied". Therefore in light of the purpose for which the Council required the products and importance of accuracy in processing, this will again strengthen the Council's case that the products provided were not of satisfactory quality. Another issue in applying section 14 is how long the satisfactory quality and fitness of purpose is meant to last after purchase in order to bring a claim, as this is not expressly defined in the SGA. For example, in the case of Bernstein v Pamson Motors23 a new Nissan car was purchased for cash by Mr Bernstein. After three weeks of use and clocking up 140 miles, the car engine seized up on the motorway due to a drop of sealant, which had infiltrated the lubrication system on manufacture. It was held that the car was not of merchantable quality and that a consumer would not expect that the engine of a new car will cease up after 3 weeks. However, there hasn't been a consistent approach to the length of time post purchase and ultimately it is a question of fact dependant on the circumstances. For example, with regard to "appearance", in the case of Rogers v Parish24 the plaintiff purchased a car under conditional sale agreement. On delivery, there were defects in the engine, gearbox and bodywork and the oil seals were defective. Nevertheless, the plaintiff continued to drive the car for 6 months whilst regularly complaining, clocking up 5,500 miles. However the faults remained after the 6 month period and the issue arose as to whether the bodywork defects and the level of comfort fell below the level that should be expected in a new car. The Court of Appeal asserted that appearance defects in a new car could, (depending on the standard expected) render a car, to be of unsatisfactory quality and in this case the period of six months did not negate a claim that the quality of the car supplied was in breach of section 14 for being of unsatisfactory quality. Whilst the bulk of these decisions involved purchases of cars, the general consideration in contracts involving goods is the age of the product and the level of quality one can reasonably expect from the product25. With regard to the current scenario the initial consideration will be the warranty period under the contract of sale and any testing periods which are commonly factored into commercial contracts for the sale of software products. Additionally, whilst the product was operational without any problems for just over a month, the nature of the product and representations made regarding quality points towards a strong case for arguing breach of section 14 of the SGA. QUESTION 3 The provisions of the Unfair Contract Terms Act 1977 (UCTA) will be relevant to determining whether the limitation clause is valid. With regard to the exclusion of liability for contractual liability, the effect of section 3(1) of UCTA is that Doors Software cannot exclude liability arising in contract "except in so far as '' the contract term satisfies the requirement of reasonableness". UCTA does not defined what it means to be reasonable, however it gives guidance and provides that courts must consider the bargaining power of the parties, whether the party affected by the exclusion clause was offered an incentive to enter into the agreement on particular terms, whether the contract is negotiated on standard form or negotiated and whether the exclusion or limitation clause represents a genuine allocation of risk in the contract26. In the case of SAM Business Systems v Hedley and Co27, a software supplier was allowed to rely on an exclusion clause that allowed it to supply an inadequate product28. However, the Technology and Construction Court found that the parties were of relatively equal bargaining power, and the purchasers could have attempted to negotiate better terms at the outset29. Moreover, it was observed that such clauses were standard practice in computing industry. With regard to the current scenario, the contractual negotiation process was a long with regular meetings between the Council and Doors software pursuant to a competitive tender process for the supply contract. Accordingly, the Council was in a relatively strong bargaining position regarding contractual negotiations. Whilst it was concerned about the limitation clause, it is arguable in line with the reasoning in SAM that the Council should have negotiated better terms at the outset. On this basis, the limitation clause may be upheld. Alternatively, the fact that time was of the essence, it could be argued that Doors exploited this to enforce its terms and conditions and limitation clause. Whilst a cogent argument, the fact that the Council had a strong bargaining position and had also received correspondence from the Doors' legal department regarding acceptance of the terms and conditions by over 100 other local authorities, failure to independently verify this will work against the Council in light of its stature and bargaining position at the outset. Accordingly, on the balance of probabilities the factual scenario would suggest that the exclusion clause is likely to be valid in the circumstances. BIBLIOGRAPHY P. S Atiyah (2005). Sale of Goods.11th Edition Longman. Blackstones Statutes on Contract, Tort and Restitution Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. John Hodgson & John Lewthwaite, "Tort Law" (2007). 2nd Edition, Oxford University Press. John Macleod (2006). Consumer Sales Law. 2nd Edition Routledge Cavendish. Linda Mulcahy & John Tillotson (2004). Contract Law in Perspective. Routledge Cavendish. Jill Poole (2006). Contract law. 8th Edition Oxford University Press. G H. Treitel (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Sale of Goods Act 1979 Read More