Commercial Contract Law - Case Study Example

In order to advise X with regard to its legal position vis-à-vis Comfort Kitchens Limited, it will be necessary to evaluate the following WhetherComfort Kitchens is in breach of contract; 2) Whether the breach of contract constitutes fundamental breach or breach of warranty; 3) The remedies available to X in the event of Comfort Kitchens Limited’s breach of contract. The underlying basis of commercial contract law is freedom of contract and general commercial law principles advocate that commercial agreements are treated with an implied presumption that legal relations are intended (Chitty, 2007). There is no dispute in the current scenario that there was a legally enforceable contract between the parties for the hire of the watercooled wood work machinery. As such, the express terms of the contract clearly provided for prompt payment of the monthly charge, that Comfort Kitchens Limited should isolate the water supply to the machinery every day and that any faults in the machinery should be notified immediately to X. However, Comfort Kitchens Limited are currently in default of payments, have failed to comply with the conditions of the contract regarding water isolation and have undertaken repairs in breach of the express terms of the contract. As such, there is no contention that Comfort Kitchens is in breach of contract on a strict interpretation of the express contractual terms (Cracknell, 2003). However, the central issue of contention will be X’s rights against Comfort Kitchens for the breach. In business contracts the law distinguishes between breach of conditions and warranties (Treitel, 2007). Only a breach of condition will permit an innocent party to terminate the contract as a fundamental breach (Chitty 2007). Moreover, a fundamental breach will grant the right to sue for damages for the breach (Treitel, 2007). Material breach of contract in contract law is further referred to as repudiatory breach (Treitel, 2007). In the leading case of Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centralem ([1966] 1 Lloyds Rep 166), Lord Reid defined fundamental breach as “a well known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract”. Moreover, as a matter of law, in the case of Photo Productions Limited v Securicor Transport Limited ([1980] AC 827) it was held that the relevant factor in determining whether a term was a condition or not was the intention of the parties. This was further affirmed in the decision of Edward v Skyways ([1964] 1 WLR 349). Nevertheless, it is necessary to protect against abuse of the presumption especially in unequal bargaining power scenarios and case law acknowledges that the presumption in commercial contracts can be rebutted. For example, in the case of JH Milner v Percy Bilton [1966] 1 WLR 1582] it was determined that the presumption of intention could be rebutted if there was uncertainty and ambiguity regarding the nature of the contractual obligation itself. The facts of the current scenario does not suggest that circumstances arise for the rebuttal of the presumption. It is evident from the contract that the condition regarding payment and isolation of the water were stipulated in terms of being “conditions”. However, in the case of Peregrine Systems Limited v Steria Limited ([2005] EWCA Civ 239) it was held that notwithstanding the status accorded to a term in a contract, there were still instances where it was important to consider the effect of the breach in determining whether a term was condition or a warranty. This case concerned the interpretation of a clause that permitted an innocent party to terminate the contract in the event of breach of any term of the contract. Mr Justice Seymour ruled that although the contract stated that the innocent party may terminate for “any breach” the court required a repudiatory breach and that a repudiatory breach should have serious consequences. In determining what is the breach of contract, in the case of Bettini v Gye ((1877) 1QBD 183), Mr Justice Blackburn presiding asserted that in absence of the express intention of the parties, the appropriate test was to ascertain whether a term of a contract was a condition of it and “whether the particular stipulation goes to the root of the matter, so that the failure to perform it would render performance of the rest of the contract a thing different in substance from what the defendant has stipulated for.” Another common test adopted in consideration of whether a term is a condition or warranty is as extrapolated in the case of Hong Kong Fir Shipping Co Limited v Kawasaki Kisen Kasisha Limited ([1962] 2 QB 26)where Lord Diplock asserted: “Does the occurrence of the event deprive the party who has further undertakings to perform substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings”. If we consider this by analogy to the X’s legal position; the terms of the condition of the leasing contract are clear and the principles applying to rebuttal of express or implied intentions are not applicable. Moreover, the payment term and is stated to be of the “essence”. As such, there is a general principle of law that time of performance obligations will not constitute conditions unless expressly state to be a condition, which is satisfied in the current scenario (Chitty, 2007). It is clear that Comfort have missed the payment by three days. As such, on a strict interpretation of the contract this will give X the right to terminate the contract on grounds of repudiatory breach. Moreover, it was clearly stated to be a condition of the contract that the water be isolated from the machinery and this has been regularly breached, which further entitles X to terminate the contract and bring an action for damages. There are a variety of remedies available at law for breach of contract and the most common form is a claim for damages for loss caused by breach. To succeed, X will have to establish that it suffered loss as a result of the breach and that the loss was not too remote. The principles of remoteness were set out in the case of Hadley v Baxendale (1854] 9 Exch 341), which provided that that following losses are recoverable: 1) All losses flowing as a natural consequence of the breach; and 2) All losses which were in the contemplation of the parties at the time the contract was made. This rule was interpreted in The Heron II ([1969] 1 AC 350) case to mean that only loss which is within the reasonable contemplation of the parties can be recovered. As such, X will have a positive duty to mitigate its loss (Chitty, 2007). The fact that it can now lease the machinery for more than the price of the contract of the current leasing agreement with Comfort Kitchens means that if the marketplace is ripe, X will have to demonstrate positive steps towards loss mitigation (Treitel, 2007). Alternatively, X may try and make a claim for loss of business. As mentioned above, the requirement for damages is to prove that the breach caused the loss and that the loss was not too remote. When considering breach of contract claims a relevant consideration is allocation of risk in commercial contracts. Like other contracts, construction contracts are about prior allocation of risk (Uff, 2005). Accordingly, whether or not the agreement between X and Comfort Kitchens itself addressed risk allocation will be a relevant consideration in the measure of any damages awarded. As discussed above, the rule governing remoteness of loss was laid down in Hadley –v- Baxendale. Accordingly, if X that any loss of business for the period after breach was clearly an expected consequence for the purpose of the remoteness this will also be recoverable from Comfort Kitchens. The most common basis for compensation is to put the innocent party in the same financial position they would have been in had the contract been properly performed (Chitty, 2007). Under the second limb of the Hadley v Baxendale rule, Comfort Kitchen will only be held liable for an “abnormal” consequence if it had actual knowledge that the abnormal consequence might follow. Notwithstanding X’s potential liability in principle, as highlighted above, there is a positive duty on an innocent party to take reasonable steps to mitigate their loss. The case of Brace v Calder ([1895] 2 QB 253) asserts that an example of “reasonable steps” is to try and find an alternative method of performance of the contract. In context of X’s position, whilst in breach of a fundamental term, the fact that Comfort have been regular payers coupled with the delay of three days means that if they offer to make immediate payment, this will clearly reduce X’s loss. Accordingly, any liability Comfort may have for breach of contract will significantly be reduced by X’s failure to mitigate, which X must be aware of As time for performance is essential in construction projects, many construction contracts will incorporate specific clauses dealing with the consequences of failure to meet obligations as to time and will often include a liquidated damages (Uff, 2005). We are not told that this is the case here and therefore X will have to rely on the common law principles as discussed. However, an alternative remedy may be specific performance. The basis of specific performance is rooted in the premise that “it would be unjust to permit the defaulting party simply to buy out the injured party with damages” (Treitel, 2007). An order for specific performance requires performance of the contract and is generally restricted in practice due to the notion of mutuality of obligations (Treitel, 2007). If X went down the specific performance route or alternatively decided to accept the breach and affirm the contract, it may well wish to obtain the higher price it can command on the market of £750 in contrast to the current monthly payments of £500. However, if affirmation of the contract or specific performance would be on the terms of the original contract and any attempt to unilaterally vary this by X to incorporate a higher payment price will constitute breach by X (Chitty, 2007). Therefore, if X pursues this route, it will have to enter into negotiations with Comfort Kitchens to alter the price in the event the leasing agreement does not have a price escalation clause (Treitel, 2007). Another alternative for X would be to preserve alternative dispute resolution (ADR) (Murdoch, 2000). There are many forms of ADR and Roney defines it as a “form of structured negotiation into which there is introduced a third party” (Roney, 1999). Furthermore, Roney refers to Cowan Erwin’s definition of ADR as “any means of providing a resolution of a dispute between two or more parties which does not involve traditional adversarial procedures” (Roney, 1999). As such, ADR has been viewed as a response to litigation, which is costly and sacrifices privacy in bringing the dispute into the public domain. It has been propounded that the business community’s propensity towards negotiation and finding an appropriate alternative to litigation has been the driving force behind the growing acceptance of ADR (Roney, 1999). Furthermore, the established work of Roger Fisher and Peter Ury in “Getting to Yes” has widely been viewed as “the genesis of a new approach to dispute resolution” (1989). It was seized upon by the business community to support its drive towards resolving disputes in a timely and cost effective manner, thereby minimising negative financial consequences and maintaining the possibility of a continued commercial relationship between the parties to a dispute, where significant monies were at stake ADR encompasses a broad range of voluntary informal processes which are alternatives to litigation for parties in dispute, namely, arbitration, negotiation, conciliation and mediation (Warring, 2008). Arbitration and Expert determinations are both formal methods of ADR whereby nominated “expert” third party determines the outcome regarding the dispute. This “award” is legally binding on the parties to arbitration and may be enforced in court. The other informal methods of ADR whilst not legally binding, grant autonomy to individuals to exercise a greater degree of control over their decisions. Furthermore, it has been commented that informal ADR negates the win/lose mentality of litigation with a win/win dichotomy in theory (Warring, 2008). Nevertheless, although the inherent benefits of ADR are obviously important, it has not been without criticism, leading observers to raise concerns regarding regulation of standards and confidentiality of proceedings (Warring, 2008). As such, the decision to enter into alternative dispute resolution will undoubtedly be a cost/risk/benefit exercise for X. It has been commented that the flexibility of arbitration as a method of ADR in permitting the parties to choose arbitrators, the law governing arbitration and the ability to decide upon the rules relating to arbitration renders it a viable alternative to litigation (Tackaberry, A Marriott, & Bernstein, 2003). Another advantage of arbitration is confidentiality compared with litigated court proceedings. Indeed the popularity of arbitration is demonstrated by the inclusion of arbitration clauses in many contracts including employment and commercial contracts, in particular the construction industry where many JCT contracts and other forms have incorporated arbitration clauses to avoid litigation. Arbitration can arise either from contract or from statute and the evolution of arbitration as an alternative to litigation has been encouraged prior to the other forms of ADR (O’Connell, 2006). However, both X and Common Kitchens would have to agree to arbitration either at the outset through the incorporation of an arbitration clause or through renewed agreement to arbitrate. Indeed, section 1(b) of the Arbitration Act 1996 asserts that “the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal, without unnecessary delay or expense;” and section 1(c) asserts that “in matters governed by this Part the court should not intervene except as provided by this Part”. In summary, the factual scenario and terms of the contract suggest that Comfort Kitchens is in fundamental breach of contract, which will entitle X to terminate and sue for damages. However, it is highly likely that the loss will be limited to the actual missed payment and from a commercial perspective it may be better for Comfort and X to agree to specific performance and affirm the contract. Moreover, X should consider opening negotiations to increase the payments under the contract if the agreement itself is silent regarding payment escalation over the five year terms. Alternatively, particularly in context of the other breaches of contract, it may be a commercially better option for X and Comfort to consider alternative dispute resolution through arbitration. BIBLIOGRAPHY Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. John Adriaanse (2004). Construction Contract Law: The Essentials. Palgrave Macmillan. R Fisher & Peter Ury., (1989). Getting to Yes. Hutchinson. John Uff (2005). Construction Law. 9th Edition Sweet & Maxwell. M. Hackett., & Ian Robinson., (2002) Pre-contract Practice and Contract Administration for Building. Blackwell Publishing. J Murdoch., (2000). Construction Contracts: Law and Management. 3rd Edition Spon Press. M.E. O’Connell. (2006) International Dispute Resolution: Cases and Materials. Carolina Publishing John H.B. Roney (1999) “Alternative Dispute Resolution: A Change in Perception”. International Company and Commercial Law Review. 10(11) 329-332. J. Tackaberry, A Marriott., R Bernstein (2003). Bernstein’s Handbook of Arbitration and Dispute Resolution Practice. 4th Revised edition Sweet and Maxwell. M Waring., (2008). Commercial Dispute Resolution. College of Law Publishing. Legislation: Arbitration Act 1996 Read More