Legal in Business - Case Study Example

Morris sold his photocopying and laminating business for $95,000 to Beth. Because Beth did not have the money to pay cash, Morris agreed to an immediate payment of $35,000 with the balance payable out of future profits over the next three (3) years. In the first six (6) months the business did well and Beth was able to pay Morris a further $5,000. A competitor then opened nearby. This competitor was part of a well known chain of photocopying shops and as such had access to cheap overseas supplies of laminating and copying materials. Consequently, the competitor was able to undercut Beth's business. Beth's profits fell alarmingly. Beth advised Morris that financially she could no longer continue with the agreement and would have to close the business. Further, she accused Morris of knowing that the competitor was about to open up and therefore she was commencing legal action to rescind the contract based on fraudulent misrepresentation. Morris contacted Beth and made the following comments: "I absolutely deny your accusation. By my reckoning you still owe me $55,000. However, if you continue with the agreement I'll reduce that amount to $35,000." Beth accepted the deal. Six (6) months later Beth landed a huge contract laminating all the posters for a chain of tourist attractions along the north coast of New South Wales. Beth's profits have soared. Morris is now demanding that the original contract price be complied with (i.e. Beth pays the remaining $55,000). Part A] Is Beth liable to pay the original contract price This discussion is going to specifically deal with what a valid contract contains, because if these elements are essential to determining a valid contract. This is done from a sale of goods perspective; however the basics are the same whatever the type of contract. Finally this discussion will stress the importance of these elements and the necessity for all three, i.e. agreement, consideration and intention, to be present or the contract is void or voidable. The first element that will be dealt with is the notion of agreement between the seller and the buyer. This element contains the ingredients of offer and acceptance. The notion of a valid offer has to be distinguished from a mere invitation to treat, for example goods in a store on display is a mere invitation to treat and an offer happens until the buyer takes the goods to the sales person and it is the discretion of the sales person to accept the individual's offer to buy. The sale of goods concerns a bilateral agreement which consists of an exchange of promises, i.e. Item on sale for 10.00 (Invitation to Treat); Item taken to till which equates to - I will buy this item for 10 pounds (Offer); 10 pounds asked for by sales person (Acceptance); hence important with the sales of goods, when it comes to the standing of an advertisement or goods display or the communication of acceptance because there has to be an exchange of promises as opposed to the offeror alone making a promise and the acceptance is the act that the offeror has promised to pay for (unilateral agreement), i.e. rewards for lost items returned to the offeror. Therefore the sale of goods concerns a bilateral agreement, where two promises are exchanged as the offer and acceptance. An offer is a clear promise to be bound, as long as terms are accepted. A valid offer must be clearly communicated by writing, mouth or act in order to allow the other person or group of persons1 to decline or accept. In relation to sales of goods there is no requirement for the agreement and offer to be in writing, as with the sale of property; however the offer has to be certain in its terminology and must be clearly distinguishable from an invitation to treat. In respect to certainty of terms both parties must make their intentions clear, as the courts will not enforce a vague agreement2 or an incomplete agreement3; in addition it has to be more than a wish to enter negotiations, which the individual does not want to be bound (invitation to treat)4. Therefore the elements of a valid offer have been explored and the notions of agreement and termination of an offer needs to be considered. A termination of an offer can occur by the following methods; a revocation by the offeror anytime before acceptance5; a lapse of time (stipulated or reasonable)6; death; failure to satisfy a condition (express or implied)7; or a rejection, either express or a counter-offer8 (implied rejection). The counter-offer is usually a more valid option for business dealings9, rather than sale of goods. If there is to be an acceptance there must be the following actions; communication whilst offer is still valid; made by the offeree; acceptance contains exact terms of the offer, i.e. not a counter-offer10 which is considered an implied rejection; and the communication can be written, oral or by act in line with the requirements of the offer, i.e. if offer is in writing then the acceptance, in practice, should also be in writing or an equally suitable form11. The communication of acceptance is a very important part of a valid contract because silence can never be valid communication12, in a similar vein a person cannot accept an offer that individual has no knowledge of13. The communication must be done by the offeree or an agent employed by offeree on the express condition to accept the offer14. There are exceptions to the rule that acceptance must be communicated; the first deals with unilateral agreements15, which has nothing to do with the sale of goods; where the failure of communication is the fault of offeror16; and where post is the correct form of acceptance17, i.e. the postal rule. The postal rule is as follows that acceptance is in effect from posting, as long as correctly addressed and stamped18, even if lost in the postal system19; however revocation occurs when the letter is received20. There are limitations on the postal rule which are that; it only applies to letter and telegrams; it must be the reasonable form of communication; as mentioned earlier properly addressed and stamped; by exclusion by the offeror21; and does not apply to instantaneous forms of communication, such as fax, voicemail, e-mail, telephone or telex22 with these forms of communication it only applies when the message is received23. Therefore offer and acceptance of a bi-lateral agreement must be fully satisfied, when it comes to sale of goods, such offer and acceptance may be simple as purchasing an item in a shop or buying an item at an auction or through mail-order. The courts will always try to ensure a valid contract is upheld when executed and will find that the price is reasonable as long as no price is fixed or the contract holds that the price is to be agreed by the two parties. The element of a valid contract that there may be problems with in this case is with consideration, which is defined as an indication that the promisor intended to be bound, and has the capacity to be bound. Consideration must be of some value24, where there is a right, interest, profit or benefit to one party and a detriment to the other. There must be sufficient detriment to one party to be valid consideration25. There are different types of consideration; the promise to do something in the future (executory) which can be seen more often in the provision of services, i.e. payment after the completion of the service; an act that performs the contract (executed) more often in the sale of goods, i.e. the exchange of goods and money by the sales person and the purchaser; and an action that is completed before the promise (past), this form of consideration is generally not valid26. Consideration must come from the promisee, i.e. the person who has provided consideration can only enforce the promise; however the consideration does not need to be adequate, i.e. the consideration of the individual but does not need to be equal to the consideration of the other party. The law leaves it to the two parties to determine the amount of consideration, it may be very little27; however there is no consideration if the terms are vague28; and there is no consideration if it is not sufficient29. Insufficient consideration includes performing a duty imposed by law or a duty owed to a contract of another's. Therefore consideration is an important part of a valid contract, however in relation to sales of goods it is usually executed consideration - a price paid for a promise, i.e. a price paid for the goods received. It is here that the varied agreement may have problems, because there is a question if a new contract has been made because there has been no extra consideration by Beth, rather she is breaching her initial contract which Morris could still sue upon, unless it could be shown that was also a benefit to Morris. It is possible that receiving some money is better than no money; however without a court order realizing the reduced debt Morris could still sue for the remaining part of the loan. Also a variation in New South Wales requires a signature therefore this cannot be classed as a varied contract because it has not been signed; therefore Beth would be contracted to sign up the full amount unless it can be shown that a second contract was made. Therefore there would have to be all the four elements, which would be hard because of the lack of consideration, if this were the new element, because if any of these three elements are not present then the contract is not valid and the court will not uphold either of the party's obligations. Therefore it is necessary that all three elements be present, as one will see later that a third party cannot have given any consideration to the contract as not a contracting body therefore one would assume that it is impossible for them to sue against the contract; hence the privity rule. The case of Tweddle v Atkinson30 is the key case in this area, which basically states that a contract cannot confer benefits or impose obligations on persons that are not privy to the contract, which is supported by the lack of consideration. There is one point that it may be shown that there is consideration though, which is that within the contract there is a clause that the repayments were to be paid from the profits of the business. Therefore if Beth closed the business there would be no profits and therefore Morris would not be paid at all; hence it is beneficial for Morris to have Beth continue on with the business and get less money from it. In this case there would be consideration and the second contract of paying a lesser amount would be valid, because consideration is present. Therefore Beth's case arguing for a lower payment is looking in much better standing; however there is the problem with intention, because if it can be shown that Morris' intention was that he was going to get these payments from past sales then his intention was to get the higher payments. Intention is another element of a valid contract, which is the intention to be legally bound by the contract. In relation to the sales of goods it is not a complex scenario because once the money is received and the individual had the intention to sell the item, then the goods must be delivered to the buyer. The only way that intention can be omitted if it is proved that the party did not seek to be included to enter legal relations; however the passing of money and retaining it equates to a legal contract, the only way not to enter a contract is to reject the offer of the buyer and return the price of the goods. Therefore it has been shown that although intention is important to the sale of goods and property it is implied by the taking of money and not rejecting the sale; however if it can be shown that Morris knew of the competitor and knew that the profits were not going to meet his requested payments then the original contract is not valid. This is because it would be a case of misrepresentation, therefore the courts would only require Beth to pay the money to put Morris back to a pre-contract state which the courts would probably decide as the lower payment. It is difficult to determine if there is a case of misrepresentation; however it is more than likely as Morris is benefiting by the second contract that the first would be voided and the lower payment would be applicable. This is because Morris did benefit from the new pricing system Part B] Discuss whether this situation would differ in any way if Morris was the uncle of Beth. It would very little difference if Morris were Beth's uncle, because the elements of a valid contract would still have to be present. The only difference would be in the case of there possibly being valid consideration on behalf of Morris because he would be aiding a family member and a family business. Yet, in truth it would still be very hard to prove therefore it is more than likely that the same rules would apply and that Beth would be not use this line of argument; rather the benefit and consideration of the second contract that can be construed would equate to Beth not being held to the original contract price. Part C] Discuss whether your answer to Part A] would differ in any way if Morris had conducted all his businesses including the printing business as Morris Pty. Ltd. If Morris had conducted himself as a limited business the end result would probably been the same, but as an established business man he would hold a higher legal duty to ensure what he was selling was true to his business knowledge. Therefore if there was any inclination at all that he knew of the competitor opening up it would be a lot easier for Beth to prove as misrepresentation, as Morris would be classed as the stronger party in the contract. The current situation has Beth and Morris as equal parties to the contract; therefore making it more difficult for Beth to claim the original contract price. Yet, in the case of Morris being a Ltd business he would definitely be classed as the stronger party, his actions would be classed as having consideration, and Beth's position would be easier to prove. Bibliography: Beatson & Friedmann, 1997, Good Faith and Fault in Contract Law, Clarendon Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell Monaghan & Barker, 1997, Essential Australian Contract Law, Cavendish Law Society of Western Australia can be found at www.lawsocietywa.asn.au Read More