The Legal Position of Ace Computers Limited - Case Study Example

Business Law Introduction: There are several aspects to this case study and they need to be taken up from the following positions. As the constituted attorney acting on behalf of the defendant company, Ace Computers Limited, the following aspects need to be considered in order to understand the issues in its proper perspective and offer resolutions. 1. The legal position that has evolved due to supply of faulty computers sold to the accounting firm Stevens, Wiley and Company, and also a defective system sold to their partner, Damien. The provisions of Sections 14 (3) (amended) of the Sale of Goods Act 1979 with regard to implied warranties in contract of sales. Under it, the quality or fitness of the product states : “Where the buyer, categorically or otherwise, informs the seller the particular objective or need for which the goods are being requisitioned , so as to show that the buyer places trust and faith on seller’s skill or judgment, and the goods are of a description which it is in the course of the seller’s business to supply (whether he is the manufacturer or not), there is an implied condition that the supplied product will serve this purpose...” (Modification of Act for Certain Contract: Implied Terms About Quality of Terms. 1979). It could be said that the clients had relied on the skill and expertise of the vendor company, Ace Computer Ltd., but unfortunately fourteen of the twenty computers supplied turned out to be defective. In such a situation, it is possible that by applying the Warranty clause that is in force, Ace Computers would need to replace the defective computers with good ones. It needs to be argued that under such circumstances, the question of taking back the defective computers and repaying the amount does not arise, since the contractual obligation between Ace Computers Ltd. and the clients, Stevens, Wiley and Company, does not consider refund of the purchase price. The contract does not enjoin that costs of defective goods would be refunded, but it is possibly that replacements of four defective computers could be made, and also the models supplied to Damien, could be replaced. It could be argued in this case, that the contractual obligations under the agreement signed between the parties are binding, and there being no clause that specifically provides for refund of purchase price, it may be not be enforceable under law. However, when considering arguments from point of view of the clients, their main allegations would be in terms of the fact that they are not in the regular business of buying computers, but Ace Computers are in the business of providing computer business solutions for years. They have placed the order on the basis of assurances provided by Gerald, the director, which subsequently proved to be based on false and misleading on several counts. Their contention would be that they had relied on the word of the director of Ace Computers Ltd., which proved a disaster for them. On these grounds, they would like to rescind the contract and claim compensation for loss of revenue and business opportunities. Under these circumstances, Ace Computers would have to use its disclaimer clause with discretion and caution. In effect, the disclaimer notice places onus on the buyers to consider and ascertain the performance of the systems purchased by them, and it was therefore necessary for Steven, Wiley and Company to thoroughly inspect and test the computers before installing them. The fact that defects arouse was due more to a lowered degree of care and discretion on the part of the buyers, while testing and ensuring performance, rather than on the part of the sellers to sell such goods to the buyers. Ace Computers would argue on the grounds that they have been in the field for many years, and this is the first occasion that such kind of product complaints has come up. However, being a genuine and reputed company, it is in a position to offer replacement for defective products. Thus the legal position that has to be taken by defendants would be in terms of the fact that, in the non existence of clauses in the Sale Agreement specifically providing for refund of purchase price, it may not be enforceable in this case. 2. The second aspect is the legal position arising out of claims made by Gerard, director of Ace Computers Ltd. During the course of the pre-sale presentation made by Gerald to decision makers of accounting firm Stevens, Wiley and Company, and their director, Damian, he had said that the proposed model XL Model 8000 possessed the fastest IPCIS 40 processor, and there were no other models available in the market that could offer speedier solutions than this. Vicarious liability: The aspect of vicarious liability is a major aspect in present day business, and in real terms the company could be held liable for the acts and omissions of its representatives. However, it needs to be seen that the buyers, Stevens, Wiley and Company, need to have also assessed the facts for themselves without relying totally upon the reliability, or otherwise, of Gerald’s statements. It is quite businesses like for employees to extol their own products, and this is accepted business practices, however, it would have been in the fitness of things for Gerald to have assessed the facts before making a categorical statement regarding unrivalled speed, efficiency and reliability of his products, especially when its falsehood could be damaging as the present one. In the case of vicarious liability, it is seen that the main aspect is the duty of care which, in this case the company, Ace Computers had towards its clients. It is seen that if a director or officer is expressly empowered to represent the company in official matters to third parties and clients, acting as an agent of the company, and wrongfully makes claims to a client or a third party causing losses or disadvantages, the company will be liable even though the particular act was a misuse of official authority or unauthorized distortion of facts. In Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited [1971] 2 QB 711, a senior officer of the company misused use of car privileges without the knowledge of the management. “Hence, the company was liable.” (Vicarious Liability: The Liability of Corporation in Tort. 2008). However, in this case it is seen that Gerald was not aware of the fact that there was a speedier processor in the market, and therefore, it would strictly not fall within the ambit of fraud, since his intentions were not deliberate but his deliberations were in order to clinch the computer sale deal for his company. The fault that could lie on the part of Gerald, acting as director would be in terms of assessing and verifying facts before making a statement regarding the capability of his products, etc. The legal aspect would be in terms of misrepresentation and negligence not amounting to fraud. It is necessary that the aspect of vicarious liability needs to be deeply studied in this case. It is seen that the Reasonable test needs to be applied, and whether it could be rightly said that the employee or director has acted outside his jurisdiction, even in the expressed case of the Company not encouraging Gerald to speak in the way that he did. In such cases, it would be left to the courts of law to decide whether the company, Ace Computers Ltd could be held responsible under vicarious liability for the acts of its director, Gerald. The legal aspect regarding the compensation being claimed by Stevens, Wiley and Company in relation to the reduction of fees and loss of contract. In the landmark case of Hadley v. Baxendale, the Courts held that “damages only recoverable to the extent that the losses were reasonable contemplated.” (Contract CaseLaw Crib Sheet: Hadley v Baxendale. 2003). This case related to demand for loss of profits when repaired crank shaft of the machine mill was unduly delayed, resulting in shutdown and loss of man-days. Beside the damages directly attributed the plaintiff also claimed compensation for loss of profits. In the case the Court opined that “the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. “ (Cooter and Ulen 1854). Further, the loss of profits was not directly flowing from the contract and was not delineated in it. Similarly in this case study, it is seen that the non availability of computers could have resulted in a delays and consequent reduction of fees. The Courts need to consider that it was possible for the clients to hire other computers for business purposes. The loss of potential contract does not directly stem from contractual obligations on the part of the seller, nor can it be said to have been contemplated by the parties during signing of contract. Hadley v Baxendale (1854) 9 Exch 341: In the Hadley v. Baxendale case , “The court held that Hadley could not recover lost profits in this case - Baxendale could only be held liable for losses that were generally foreseeable, or if Hadley had mentioned his special circumstances in advance. The mere fact that a party is sending something to be repaired does not indicate that they would lose profits if it was not delivered on time.” (Hadley v Baxendale. 1854). Thus, the legal opinion is that while the client could make a reasonable claim for damages arising out of reduced fees, the loss of professed contract benefits cannot be enforced. 4. The likely effectiveness of the exclusion clauses that it has included in the back of the contract in relatins to the potential liabilities that have been considered above Exclusion clause: The main idea behind exclusion clauses is to limit or exempt the extent of liability in the event of any problem relating to performance of the contract. The conditions for the enforcement of the exclusion clause could be in terms of the following salient aspects: 1. The exclusion clause must form an important constituent of the contract and the contracting parties must be aware of their existence and implications. In the case of L’estrange v. Graucob (1934) 2 KB 394 , it was held that a contracting party to the contract could not be freed from being bound to the terms of the contract just because she has not read or understood the terms of the contract. The case relates to the owner of a café, Mrs. L’estrange who purchased a cigarette vending machine which proved to be defective. Although there was an implied clause that the machine should function properly, the exclusion clause absolved manufacturers from “all liability regarding the malfunction of the machine. It was held that Mrs. Lestrange could not claim damages on the grounds that she “did not see” the clause in the contract.” (Lestrange v Graucob (1934). 2006). 2. The second aspect regarding exclusion clause is that it should have been communicated to the party to the contract, or he/she needs to have awareness of the existence of exclusion clause. If the exclusion clause is not known by the party at the time of entering contract, then by application of law, it may not be applicable. In the leading case of Olley v. Marlborourgh Court Hotel (1949) 1 KB 552, a lady deposited her fur cloak in the hotel locker which was subsequently stolen. She sued the hotel for loss of the cloak, but the hotel management pleaded that in the contract of service there was a specific disclaimer for liability arising out of theft. It transpired that the disclaimer notice was in the hotel room and not at the reception where the contract was initiated between the lady and the hotel management. Hence the exclusion clause could not be enforced. (Olley v Marlborough Court (1949). 2006). 3. The duration and regularity of business is also an important aspect with regard to exclusion clause. It is seen in leading cases that where the contracting parties were in business relationship for some time, it is expected that one party need to be aware of the existence of exclusion clause enforceable by the other. In the case of Spurling Ltd. v Bradshaw [1956] 1 WLR 461, the existence of exclusion clause was used to enforce payment in favour of Spurling who, despite causing losses to Spurling, due to negligence in storing food materials, was able to enforce the exclusion clause. This is because, in the opinion of the Court, Spurling had longstanding business dealings with Bradshaw and was deemed to have awareness of the exclusion clause. (The K-Zone: Spurling Ltd v Bradshaw (1956). (Spurling Ltd v Bradshaw (1956). 2007). However, in the case of McCutcheon v Mac Brayne [1964] 1WLR 125, McCutcheaon hired one of MacBrayne’s ferry for transporting his car. The ferry sank and the applicant claimed damages. The defendants sought recourse through the exclusion clause, citing that the applicant had earlier dealings with them. However, the court ruled that “these dealings, although regular, were not of a sufficiently consistent nature to claim incorporation by prior business.” ((The K-Zone : McCutcheon v MacBrayne (1964), 2006). (McCutcheon v ManBrayne (1964). 2006). Application of ‘exclusion clause’ in this case study: In this case study, it is seen that Ace Computers, through its director has exhibited negligence while providing computer although they were fully aware of intended use of these computer. From point of view of Ace Computer, it is seen that they need to seek recourse to Unfair Contract Terms Act 1977, enforcing exclusion clause, which seeks to limit liability and not deny it. The limits to liability would be in terms of loss of fees and damages for supply of apparent damaged products, whose scope needs to be considered in light of Sale of goods Act and Consumer protection Acts. Conclusions: However, in this case, the defendants need to take recourse to the Unfair Contract terms Act by which “A person dealing as consumer cannot by reference to any contract term be made to indemnify another person (whether a party to the contract or not) in respect of liability that may be incurred by the other for negligence or breach of contract, except in so far as the contract term satisfies the requirement of reasonableness.” (Unreasonable Indemnity Clauses. 2008). Again, In the leading case of Philips Products v. Hylam (1977 )the court held that while the plaintiff was not in a position to estimate the risk involved in purchasing of the product or service, the defendants, however, were operating in their main line of business, and should have been able to assess the risk accurately.” (Phillips Products v Hyland (1987). (2006). Thus, it could be seen that in this case study, it is necessary for Ace Computers to seek legal remedies using its exclusion clauses, limiting the amount of liabilities due to breach of contract and misrepresentation on the part of its director, Gerald. Bibliography COOTER., and ULEN. (1854). Hadley v. Baxendale. Last accessed 02 January 2009 at: http://www.law.berkeley.edu/faculty/rubinfeldd/LS145/hadley.html Contract CaseLaw Crib Sheet: Hadley v Baxendale. (2003). [online]. Kevin Boone. Last accessed 02 January 2009 at: http://www.kevinboone.com/PF_contract_cases.html Hadley v Baxendale. (1854). [online]. Law Essays UK: The Law Essay Website. 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