Advising Quark With Regard to its Legal Position - Assignment Example

In order to advise Quark with regard to its legal position vis-à-vis Protoys it is necessary to evaluate the following Whether there was in facta legally enforceable contract between Quark and Protoys; 2) If there was a legally enforceable contract, whether Protoys’ promise of a higher share of the proceeds will be enforceable; 3) Whether Protoys is in breach of contract by distributing Sophos products; and 4) Whether Quark has consented to Protoys’ potential breach of contract. The law of contract stipulates three fundamental requirements for the formation of a legally enforceable contract; namely; offer, acceptance and consideration (it is important to note that contracting parties must have legal capacity to enter into a contract and it is presumed from the facts given that capacity is not an issue in this case). Lord Wilberforce presiding in the case of New Zealand Shipping Co Limited v A M Satterhwaite, The Eurymedon1 asserted the rule for contract formation thus: “Law having committed itself to a rather technical…… doctrine of contract, in application takes a practical approach…Into the market slots of offer, acceptance and consideration2. An “offer” in the context of contract law has been described as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the “offeree.3” The “expression4” may take different forms and in light of the fact that the heads of agreement are stated to legally binding with immediate effect would appear to satisfy this requirement, particularly with regard to determining sufficient intention to create legal relations. The intention element is an objective consideration and the case of Smith v Hughes 5emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. Seddon et al further assert that the “test for existence and the scope for an agreement is that of an objective manner. When a test is objective, it takes account of what the parties actually did say in order to make an offer and agreement”. Moreover, in the case of Storer v Manchester City Council6 it was asserted by Lord Denning that “A man cannot get out of a contract by saying: I did not intend to contract” if by his words he has done so”7. Furthermore, in the case of Acme Grain Co. v Wenaus 8it was asserted: “to constitute a contract, there must be an offer by one person to another and an acceptance of that offer by the person to whom it is made. A mere statement of a person’s intention or a declaration of his willingness to enter into negotiations is not an offer and cannot be accepted so as to form a valid contract9”. If we apply this to the current scenario, both parties intended to enter into a formal agreement, which has never been formalised. Nevertheless, both Quark and Protoys signed the Heads of Agreement, which was clearly expressed to govern the legal relationship between the parties pending finalisation of the formal agreement. Moreover, both parties have been performing obligations pursuant to entering into the heads of agreement, which further provides Quark with strong grounds for arguing enforceability of the heads of agreement. Furthermore, the law distinguishes between an offer and an invitation to treat, which is not an offer but an indication of willingness to negotiate a contract10. For example, in the case of Gibson v Manchester City Council11, the words “may be prepared to sell” constituted an invitation to treat and not a distinct offer. However the facts of the current scenario indicate that this issue is not in contention. Valid acceptance in law follows a valid offer and the formation of a contract follows immediately. Furthermore, valid acceptance is final and unqualified acceptance of an offer as demonstrated in the case of Peter Lind Limited v Mersey Docks & Harbour Boar12, highlighting the “mirror image” rule, where acceptance must be unequivocal and unconditional, therefore acceptance must “mirror” the offer. Moreover, acceptance is a “final and unqualified expression of assent to the terms of an offer”13. However, whilst the heads of agreement are likely to be legally enforceable, the problem remains as to the exact nature of the contractual terms governing the agreement, which is important to Quark’s position regarding the enforceability of Protoys’ agreement to increase profit revenue share. One the one hand, it is arguable that this has become enforceable through Protoys’ agreement and executed consideration defined in the case of Eastwood v Kenyon (1840)14. Alternatively, if Protoys attempted to renege on its agreement to give Quark a higher percentage of the profits, Quark could potentially utilise promissory estoppel as a tool to enforce the promise. The use of promissory estoppel has been utilised to alter a written or oral contract on grounds of actions of the contracting parties. If Protoys has agreed to pay a higher share of the profits and Quark relies on this to their detriment, then Quark would be able to rely on estoppel to prevent Protoys from reneging on the promise. On the other hand, the revised agreement regarding profit share could arguably be considered a counter offer, which would compound the issue by creating a new contract between Quark and Protoys. However, as demonstrated by the judicial decision in the case of Dawson v Helicopter Exploration Company15, whilst acceptance of a contractual term or variation can be demonstrated by conduct or acquiescence, it is not solely determinative per se. In this instance, Quark would then potentially be able to rely on past consideration on the basis of the implied assumpsit doctrine, which alleviates against past consideration where an act is done at the request of the promisor. This rule was asserted in the case of Lampleigh v Braithwaite16, which set out the following pre-requisites to the operation of the implied assumpsit doctrine: 1) The act of the promise must be done at the promisor’s request; 2) The parties must have understood that the act was to be remunerated by a payment or the conferment of some other benefit; and 3) The payment or the conferment of benefit must have been legally enforceable had it been made in advance17. However, the central issue in the current scenario in the event of a new contract being operational is the exact terms of the contract. Firstly, a contractual term must be obvious and apparent in order to be incorporated into the contract. A term will usually be considered to be incorporated into a contract if: 1) The affected party knew of the cause; and 2) Reasonable steps have been taken to bring the term to his notice. This isn’t an issue in the current scenario regarding the agreement of higher profit share and on the basis of the facts provided it is highly likely that Quark will be able to enforce the payment provisions against Protoys. With regard to Protoy’s distribution of Sophos’ products, we are not aware of any provisions prohibiting distribution of competitor products in the heads of agreement. Alternatively, Quark may be able to argue that it is an implied term of the contract that Protoys is not to distribute competitor products and that doing so constitutes breach. In considering implied terms, the starting point as demonstrated by the decision in the case of Chapelton v Barry IDC 18is to consider whether it is objectively obvious that a term was intended to form part of the contract. Another relevant consideration is custom and trade. This will clearly be relevant to the current scenario. Moreover, the courts attach great importance to business efficacy and are generally in favour of implying terms to give effect to the clear and obvious intentions of the parties or to give business efficacy to the contract. Whilst Quark would have strong grounds to argue that a prohibition on distributing competitor products (particularly as the appointment of Protoys was on an exclusive basis) is breach of an implied term of the contract, the problem Quark faces in enforcing this is the fact that Quark agreed to this. Whilst the general principle of contract law enables an offeror to revoke an offer before it has been accepted19, revocation must be communicated to the offeree prior to acceptance20. The only other option would be for Quark to demonstrate that it only agreed to the term on grounds of duress or mistake in order to renege on this term without consequence. . 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, it would have to be established that loss was suffered 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 Baxendale21, 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 has been interpreted to mean that only loss which is within the reasonable contemplation of the parties can be recovered22. Any party claiming breach of contract would have a duty to mitigate loss also23. 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 damages24”. An order for specific performance requires performance of the contract and although generally restricted in practice due to the notion of mutuality of obligations.25 In summary, the heads of agreement will be legally enforceable. The agreement to increase the profit share will be enforceable as a variation of contract or alternatively under promissory estoppel. Whilst Protoys’ distribution of competitor products is arguably a breach of a contract, Quark’s agreement to this term is legally binding unless it can establish mistake or duress in agreeing to the term. In any event, it is important to note that both parties agreed to a clause in the heads of agreement to refer the matter to arbitration to agree the terms of the contract. This is a legally binding term and should be preferably be referred to by Quark in order to resolve the outstanding issues in its legal arrangement with Protoys. BIBLIOGRAPHY Carter, Peden & Tolhurst (2007). Cases and Materials on Contract Law in Australia. Lexis Nexis, 5th Edition. Carter, Peden & Tolhurst (2007). Contract Law in Australia. Lexis Nexis, 5th Edition. Paterson, Robertson and Heffey (2005). Principles of Contract Law. Thomson, 2nd Edition. Seddon & Ellinghaus, (2008) Cheshire & Fifoot’s Law of Contract. 9th Edition Lexis Nexis. Wilmott, Christensen & Butler (2005). Contract Law. 2nd Edition Oxford University Press. Read More