Formation of a Contract Case: Andalasia and Arundel PLC - Essay Example

OBLIGATIONS A: Formation of a Contract Case Study Introduction A contract refers to a legal relationship that subsists between two or more parties with a lawful object voluntarily entered by the parties having legal obligations between them.1 There should be a proof of achievement of all elements of a contract in writing, orally or by conducts of the parties. Under the modern commercial contracts, negotiations have been regarded as inevitable due to a complexity of contract relationships.2 Adequate negotiation is essential in order to enable the contracting parties to explore all necessary details of a possible future contractual relationship.3 In the milieu of lengthy negotiations between the contracting parties, it becomes difficult to establish whether the contract has been formed and the time when it becomes effective or the conditions under which it was formed.4 This document examines a case study involving a negotiation between Andalasia and Arundel PLC to determine whether their negotiations could be construed as offer and acceptance leading to a legal agreement. A contract must have an offer by from one party to the contract that must be accepted by the other party to signify mutual consent to form a legal agreement.5 Offer expresses the willingness of one party to enter into an agreement with another party under the terms specified in the offer and which the other party must accept outright. The offer must communicate their intention to the other party whose acceptance forms the basis of the legal relationship.6 The acceptance of an offer should not alter the terms of an offer a condition referred as “mirror image rule.”7 However, in case the party to whom the offer is made introduces new terms as the prerequisite for acceptance that will amount to counteroffer that is tantamount to rejection of the offer.8 As described in the principle of UNIDROIT, a contract can be established by an acceptance of an offer or conduct of the parties as long as they are sufficient to demonstrate agreement.9 The parties intending to form a contract must demonstrate their intentions to be legally bound before a contract is recognized as binding. In addition, there should be the consideration between the parties forming a contract though it needs not be adequate.10 Consideration could be anything of value exchanged between the parties or a detriment one party is likely to suffer due to the breach of conditions set in the agreement. There are other requirements the parties must satisfy in order to establish a formal agreement. For example, the parties must have contractual capacity such as having attained the age of majority and have the sound mind. Also, the agreement must have been intended to be legal with the consent of both parties.11 The purpose for which the parties decide to establish an agreement must be legal and clearly stipulated in the agreement. A contract can be oral or written although written contract of preferred by the common law legal system.12 For this reason, the parties can have a legal relationship if they satisfy all the requirements and the negotiation declares their intentions of getting into a legal agreement at a determinable time.13 A contract comes into effects after the acceptance of an offer or as agreed by the parties. For this reason, the terms of the contract must be certain in order to enable parties to be bound by those terms.14 In case, one of the parties does not understand all or some of the terms of the agreement the contract does not come into force. In addition, the contract will not become effective without “consesus ad idem (agreement on identical terms)” between the contracting parties.15 Therefore, the parties forming contract must be aware of the terms of the agreement at the time of forming the contract. Case Study In the case study, Anadalasia Ltd and Arundel PLC entered into negotiations in which Anadalasia was to install an electrical supply in Arundel’s new office complex at a contract value of £463,000. The negotiations continued from February 15th, 2014 until 20th April 2014 when Arundel PLC sent a letter containing some of the terms and conditions. In the letter, Arundel had objected increase in a contract price for whatever reason and indicated that the letter was not to be confused with agreement of the contract. The agreement was supposed to be in writing according to Arundel. However, they did not specify when the written agreement could be made and who would make it. On 25th of April Anadalsia sent a letter to Arundel specifying their terms of work in which they had declared that the contract price was dependent on changes in prices of copper on the wholesale market. The other requirement of the letter was that the Arundel was supposed to sign, indicate the date and return the letter to Anadalasia. Arundel fulfilled all the requests and returned the letter on 28th April 2014. However, the parties did not decide on when the contract would begin or any other steps that would be taken before the contract could begin. Despite the parties having not signed any formal agreement Andalasia commenced installation of an electrical system in the building on 9th May 2014. On June, they sent the first invoice to Arundel, but there was a surcharge of 6% caused by increases in global copper prices. However, Arundel refuses to pay on the claim that there was no legal agreement signed between the two since the original letter was an expression of interest to form a contract in the future. In addition, they argued that even if there was a legal agreement between them the increase in price was against the clause that objected any increase in price. Uncertainty of the agreement Sometimes the parties may discuss the terms of the contract in order to agree on the nature of the relationship before establishing a contract. Such discussion does not constitute an agreement, and the parties are not bound by such agreement. The parties are bound by the terms that are certain in the eyes of the law. Failure to specify particular issues of the contract can render the agreement void, and neither of the parties is held responsible for such terms recognized uncertain.16 An example of uncertainty is when the parties fail to establish the safety or price requirements for the contract. For example, in the case of G Scammell and Nephew Ltd v HC&JG Ouston,17 the claimant had entered into a contractual relationship with the defendant with intention to trade in the old car with a new one. The parties agreed on the value of the old car and stated that the price of the new car would be settled by hire purchase for two year on equal monthly instalment. However, the defendant later abandoned the agreement on by issuing that the terms of the agreement were uncertain and could not be enforced. That prompted the claimant to file a lawsuit against the defendant. The House of Lords issued that the contract could be enforced because the terms were uncertain. The court stated that the terms had not established any objective standard that the court could use to establish the price of the car or its reasonable price. Andalasia From the case study, it is apparent that the terms of the agreement were uncertain because there was no specific date when the contract was supposed to commence. Since the Arundel PLC had agreed to the terms stipulate in the letter written by Andalasia it may appear that the letter was a counteroffer that had been accepted in signing by Andalasia. The date, when the contract is to begin, can be on the day the contract is formed if no specific date has been established.18 Considering the negotiations have been on-going between the two parties it is apparent the two parties had an intention to form a legal relationship. Considering the court’s decision in the case of G Scammell and Nephew Ltd v HC&JG Ouston,19 it seems that Arundel cannot deny the existence of a contract because the terms were uncertain in terms of time the contract was set to commence. It was appropriate for Andalasia to rely on the on the letter signed by the other party in performing their parts of the agreement. Under the Statutes of Frauds, parties are required to have a written agreement for specific contracts with high value and lasting for long period in order to prevent one party from taking advantage of the other or acting fraudulently.20 The letter presented by Andalasia to Arundel that the latter signed constitutes an acceptance of an offer by Andalsia hence there was a written agreement. In addition, Andalasia had performed a part of the agreement since May 29th until June 28th without any attempt by Arundel to stop them. Considering that that Arundel only raised complaint concerning the surcharge of the contract price it is apparent that they acknowledged the existence of the agreement. Therefore, the court can apply the doctrine of estoppel to restrain Arundel PLC from taking advantage of non-existence of written agreement in order to benefit at the expense of the contractor. Andalasia had worked for almost one month and incurred cost during the performance of the contract. Andalasia can claim that they relied on the letter signed by Arundel to execute part of the agreement. The facts, in this case, are similar to facts in the case of Riley v. Capital21 Airlines in which the plaintiff raised a claim to recover damages for loss they incurred upon the reliance on the contract. The performance of the contract for a full month formed consideration by Andalasia and Arundel should them as promised. Concerning the increase in value of the contract, Andalasia had indicated in the letter signed by Arundel that the price was subject to changes copper prices in the global market. The signing of that letter implied acceptance of the terms of the agreement hence the two parties had a binding relationship.22 In case Arundel refuses to pay the part of the contract including the surcharge value the court can apply the doctrine of estoppel to restrain Arundel PLC from taking advantage of the other party on the claim of non-existence of written agreement in order to benefit at the expense of the contractor.23 However, Arundel can pay for part of the contract performed and terminate the remaining part or make a legal agreement stating the terms of operations between the Arundel The negotiations between Arundel and Andalasia clarified the intentions of the parties to get into a contractual relationship for specific purpose and value. The contract value was £463,000 although the contract duration or the commencing time was not specified. From the negotiations, Arundel had signed the letter sent by Andalasia specifying the terms of the agreement. From their negotiations, the parties had not agreed on when they would sign a legal agreement or when the work would commence. However, the conducts of the parties had an implication of an existence of a legal relationship. For example, Andalasia worked for Arundel for one month yet Arundel did not show any objection to the performance and the objection they raised concerned the 6% increase in price of the contract. For this reason, by considering the conducts of the parties, it is apparent they all recognized the existence of a legal agreement. In addition, Arundel had signed the letter sent by Andalasia that stated the price subject the global market price of copper on the wholesale market thus demonstrating the acceptance of the offer by Andalasia. In the case of Smith v Hughes, the court issued that parties’ conducts demonstrate their intentions in relation to the contractual relationship.24 For these reasons, Arundel cannot object the existence of a legal agreement although it was uncertain in terms of commencing time. The formation of a contract involves an offer and an acceptance of a specific contract requirements and specific period. Negotiations are inevitable before the formation of a contract, but the issues discussed during a negotiation influence the contract relationship and the commencing period of the contract. The terms of negotiations and the conducts of the parties determines the effects of relationships between the parties and whether the contract was formed and the expectations of each party from the contract. The terms of negotiations between Arundel and Andalasia stipulates the intention of the two parties to form a contract in which Andalasia was required to install electricity in Arundel’s new office complex at a value of £463,000. However, the cost was subject to changes in the global market price of copper as stated in the letter terms and conditions offered by Andalasia and accepted by Arundel in signing. In addition, the conducts of the parties demonstrate the existence of a formal relationship between the parties. Bibliography Bonell, Michael J., An International Restatement of Contract Law. (Martinus Nijhoff Publishers, 2009).1-691. DiMatteo, Larry A. and Saintier Qi Zhou, Severine, Commercial Contract Law, (Cambridge University Press, 2013). 594 Elliott, Catherine and Quinn Frances, Contract Law, Ninth Edition, (Pearson Education, Limited, 2013): 488 Furmston, Michael and Tolhurst G.J., Contract Formation: Law and Practice, (Oxford University Press, 2010). 421 G Scammell and Nephew Ltd v HC&JG Ouston [1941] 1 AC 251 Riley v. Capital Airlines, Inc., 185 F. Supp. 165 (S.D. Ala. 1960) Statutes of Frauds (29 Car 2 c 3) (1677 Smith v Hughes (1871) LR 6 QB 597 Read More