Contract Law: Advise Big Clucker Company and Kima - Case Study Example

Introduction In attempting to secure a contract with Hunger Solutions, Justin engaged in a of questionable conduct which may give rise to a claim against his company by Kima for misrepresentation. Justin’s approach to Big Cluckers is tantamount to an anticipatory breach of the conditions under the contract for the sale of the Chicken Chopper. Moreover, the 10,000 pound load was obtained by virtue of economic duress. Anticipatory Breach When Justin purchased the Chicken Chopper from Cluckers it was agreed that Justin would allow Cluckers’ prospective purchasers to view the machine in operation at his place of business. When Justin requested a 10,000 pound loan from Cluckers he threatened to renege upon his agreement to permit Cluckers’ prospective purchasers to view the machine. As a result, Cluckers was induced to grant the loan. It can be argued that Cluckers did not accept the repudiation with the result that the contract remains alive.1 Anticipatory breach occurs when one party to a contract communicates to the other party that he intends to renege on a fundamental term or condition of the contract.2 By threatening to stop Clucker’s perspective customers viewing the chopper gives rise to an anticipatory breach. The chopper does not vest in Justin until he allows Cluckers’ prospective purchasers to view the machine in operation and is an ongoing condition of Justin’s exclusive right to possession. Under the Sale of Goods Act 1979 an agreement for the sale of goods does not become a sale until the “conditions are fulfilled subject to which the property in the goods is to be transferred.”3 Whether or not Justin’s anticipatory breach rises to the level of repudiation will depend upon the facts and circumstances of the case. As Lord Selborne explained in Mersey Steel v Naylor Benzon it is necessary to look at the conduct to determine if it “amounts to renunciation” of the duty to perform under the contract “and whether the other party may accept it as a reason for performing his part.”4 On the facts it appears that the initial purchase price negotiated between Cluckers and Justin was modified to discount for Justin’s allowing Cluckers prospective purchasers to view the machine in operation. Using Lord Selborne’s test, Justin’s conduct was such that it alters the terms of the purchase price and Cluckers could sue for the discounted difference. The House of Lords considered whether or not the broken term in respect of a breach was such that it could give rise to a claim in damages. In the case Federal Commerce and Navigation v Molena Alpha the House of Lords determined that even if the term broken was not a condition, if it had the impact of depriving one party of practically the entire benefit of the original contract, it could give rise to a claim in damages on the grounds of wrongful repudiation.5 Justin’s anticipated repudiation would deprive Cluckers of a big part of its benefit under the terms and conditions of the contract. It can be argued that Cluckers parted with possession of the chopper in exchange for a purchase price discounted for showcasing the chopper. Therefore the showing of the chopper goes to the root of the contract and Justin’s promise to refuse to allow further showing of the chopper is wrongful repudiation. The difficulty for Cluckers arises out of the managing director’s response to Justin’s anticipatory breach. It was at that point that Cluckers was entitled to treat the contract as discharged and sue Justin for damages for the breach.6 Cluckers via its managing director however did not accept the repudiation and by advancing the loan instead kept the contract alive. It would seem that Cluckers is therefore estopped from claiming a breach of contract.7 However, it is clear that Justin used unlawful pressure by threatening to renege upon the terms of the original contract. Such a threat by itself would make the contract voidable for economic duress.8 However, the passage 12 months will give way to affirmation of the original contract with the result that Cluckers continues to be bound by it.9 As for the 10,000 pound loan it can be viewed as a variation of the original agreement or a separate contract since perceived benefit (the showing of the chopper) can be viewed as consideration.10 Moreover, consideration is not necessary for variation of an existing contract.11 In either case, Cluckers can insist upon repayment of the loan in whole or in part. The chopper could be recovered in lieu of payment of the loan. Misrepresentation Misrepresentation arises in scenarios where one party communicates false facts so that it induces the receiving party to enter into legal obligations. Justin misrepresents the company’s financial situation to Kima by falsely indicating that unless the company obtains the deal with Hunger Solutions it would fold and Kima would be out of a job. The truth was that Justin wanted to take on a contract that was too big for his company. As such he misrepresented the facts to Kima, a relative novice and who was respectful of Justin’s business expertise. Although Justin did secure the contract with Kima’s assistance and sustained it for the initial 6 months, the company did not suffer serious financial difficulties until the ensuing six months. It appears from the facts of the case that Justin’s communication to Kima was fraudulent. Misrepresentations can be made either negligently, fraudulently or innocently and the distinction is important since the remedies for misrepresentation largely depend on the type of misrepresentation made.12 In a typical case the innocent party will be at liberty to rescind the contract and/or seek damages.13 In Kima’s case the issue is whether or not she is at liberty to withdraw her security or merely seek damages for the loss of her security. The false facts communicated did in fact induce Kima to submit her flat as security. Justin’s misrepresentation to Kima left her with the false impression that if the company did not obtain the contract it would fold and Kima would lose her job. As it turns out, it was the contract itself that caused the company to fold 12 months later and Justin ought to have known the risk he was taking. Knowing that this was her first job and Kima relied on Justin’s business acumen it can be argued that Justin knew that his communication would induce Kima into the contract, and that she was at risk of losing her flat rather than just her job. These facts are relevant since substantiating a claim in misrepresentation requires proof that the facts represented were such that it influenced Kima’s judgment.14 The onus is on Kima as the claimant to prove that she relied upon the misrepresentation or was induced to enter into the contract in response to Justin’s misrepresentation.15 If it appears to the court that Kima did not rely on the misrepresentation and relied on her own information and judgment then she cannot be said to have relied on the misrepresentation.16 However, on the facts, Kima relied entirely on Justin’s representation of the facts and even said that she trusts Justin’s business decisions. Moreover, Kima is not under any obligation to conduct her own investigation of the facts and is at liberty to rely upon Justin’s representation. It was held in Redgrave v Hurd that even if the representee is offered an opportunity to counter the misrepresented facts he will still be taken to have relied upon the misrepresentation if he does not avail himself of the opportunity to counter the misrepresented facts.17 Aside from establishing that the representation made by Justin induced her into agreeing to surrender her flat as security, Kima will have to determine which of the three types of misrepresentation she will proceed on. From the outset innocent misrepresentation can be dismissed. An innocent misrepresentation occurs when one party represents a false fact unaware that the fact is false or reasonably believing it to be true.18 To say the very least, Justin was cunning in his plans to obtain a contract that his company could not afford at that particular time. The company could continue as it was but could not sustain a contract of the size proposed by Hunger and Justin took a calculated risk when he took on the contract. It therefore follows that Justin’s representation of false facts to Kima can be properly characterized as fraudulent. The House of Lords defined faudulent misrepresentation in very broad terms in Derek v Peek. The House of Lords explained that to substantiate a claim of fraudulent misrepresentation the claimant must prove that the defendant knowingly represented false facts, or did not believe they were true or was reckless as to the truth of the informaiton.19 The difficulty for Kima however is in proving fraud. Lord Herschel cautioned that proof of fraud will be strictly adhered to and “nothing short of that will suffice.”20 Based upon this ruling by the House of Lords Kima will be best advised to allege negligent misrepresentation. Negligent misrepresentation is particularly clear in this case since Justin’s statement involved an opinion or belief and the court only needs to satisfy itself that Justin did not have reasonable grounds to hold the belief or opinion that his company was doomed should he not secure the contract with Hunger Solutions.21 More importantly however, Kima can prove negligence since the statement was made by a person whose expertise gave further credibility to his representation of the facts.22 There are two significant advantages to a claim founded on negligent misrepresentation rather than fraudulent misrepresentation. First, the onus is on Justin as the misrepresentor to illustrate that he had reasonable grounds for believing that his company would fold if he did not secure the contract. As an established business man running a small company Justin was in a position where he ought to have appreciated the risk that his company was taking. Knowingly accepting the risk was negligent in and of itself. By representing to Kima that the company could only be saved by taking the risk, Justin was further negligent. The facts and circumstances of the case would reveal negligent misrepresentation and would remove the burden of proof from Kima unlike a claim in fraudulent misrepresentation. Secondly, pursuing negligent misrepresentation can be an advantage in the award of damages allowed. Damages will be measured in the same manner that they would be measured for a claim in fraudulent misrepresentation.23 The position is codified by section 2(1) of the Misrepresentation Act 1967.24 Justin might attempt to argue the doctrine of caveat emptor as a defence which permits the representor to argue that he or she is not under a duty to voluntarily disclose harmful facts concerning the subject matter of the contract.25 These harmful facts are the great risk Kima was taking by submitting her flat as security for the purpose of financing a deal which was only undertaken on a trial basis with no guarantee that it would pan out. was only It was determined in Smith v Hughes that if one party is functioning on a misapprehension the other party is not under a duty to offer a clarification.26 However there are exceptions to this rule which will bar a successful defence by Justin. For instance contracts which are of the utmost good faith (contracts uberrimae fidei)27 or in instances of a pre-existing fiduciary contract as between solicitor and client28will defeat such a defence by Justin. Kima can always argue that her relationship with Justin as employee and employer commands that Justin ought to have acted in good faith by disclosing the dynamics of the deal and the substantial risk that it involved. His failure to do so amounts to negligent misrepresentation. As a result Kima is entitled to damages since rescission is not possible as the bank has a separate contract with Justin. Rescission is only possible when the parties can be restored to the position they were in prior to the contract.29 Under Section 2(2) of the Misrepresentation Act the court can award Kima damages in lieu of rescission.30 Bibliography Attwood v Small (1838) 6 CI & F 232 (CH D) Avery v Bowden (1855) 5 E & B 714 (CA) Derek v Peek [1889] 14 AC 337 (HL) Edington v Fitzmaurice [1885] 24 CH D. 459 (CA) Erlanger v New Sombrero Phosphate Co. [1878] 2 KB 86 (HL) Federal Commerce and Navigation v Molena Alpha [1979] AC 757 (HL) Furmston, M.P., Fifoot, C.H.S. and Cheshire, G.C. (2001) Cheshire, Fifoot and Furmston’s Law of Contract. (14th Edition) U.K.: Lexixnexus Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574 (CA) Lambert v Co-Operative Insurance Society [1975] 2 Lloyds Rep 485 (CA) Mersey Steel v Naylor Benzon (1884) 9 AC 437 (CA) Misrepresentation Act 1967 Museprime Properties v Adhill Properties [1990] 2 ALL ER 196 (CH D) Panchaud Freres SA v Establissments General Grain Co [1970] 1 Lloyds Rep 53 (CA) Redgrave v Hurd (1881) 20 Ch D 1(CA) Reese Silver Mining Co. V Smith [1869] LR 64 (HL) Sale of Goods Act 1979 Skyes v Taylor-Rose [2004] EWCA Civ 1736 (CA) Smith v Hughes (1871) LR 6 QB 597 (CA) Smith v Land and House Property Corporation [1888] 28 CHD 7 (CA) The Atlantic Baron [1979] QB 705 (QB) Vitol SA v Norelf Ltd [1996] 3 All ER 193 (HL) Williams v Roffey [1990] 1 All ER 512 (CA) Table of Cases Attwood v Small (1838) 6 CI & F 232. (CHD) Avery v Bowden (1855) 5 E & B 714 (CA) Derek v Peek [1889] 14 AC 337 (HL) Edington v Fitzmaurice [1885] 24 CH D. 459 (HL) Erlanger v New Sombrero Phosphate Co. [1878] 2 KB 86 (HL) Federal Commerce and Navigation v Molena Alpha [1979] AC 757 (CA) Howard Marine & Dredging Co v Ogden & Sons [1978] QB 574 (CA) Lambert v Co-Operative Insurance Society [1975] 2 Lloyds Rep 485 (CA) Mersey Steel v Naylor Benzon (1884) 9 AC 437 (CA) Museprime Properties v Adhill Properties [1990] 2 ALL ER 196 (CHD) Panchaud Freres SA v Establissments General Grain Co [1970] 1 Lloyds Rep 53 (CA) Redgrave v Hurd (1881) 20 Ch D 1(CA) Reese Silver Mining Co. V Smith [1869] LR 64 (HL) Skyes v Taylor-Rose [2004] EWCA Civ 1736 (CA) Smith v Hughes (1871) LR 6 QB 597 (CA) Smith v Land and House Property Corporation [1888] 28 CHD 7 (CA) Vitol SA v Norelf Ltd [1996] 3 All ER 193 (HL) Table of Statutes Misrepresentation Act 1967 Sale of Goods Act 1979 Read More