Law of Contract - Assignment Example

Question In order to advise Posh Posters with regard to its rights against Pretty Paintings Limited it will be necessary to evaluate the following: 1) Whether there was in fact a legally enforceable contract between Posh Posters and Pretty Paintings; 2) If there was a legally enforceable contract whether Posh Posters are entitled to revoke the contract thereby negating any claim by Pretty Paintings for breach of contract; and 3) Alternatively, the legal implications for Posh Posters if the revocation is found to constitute breach of contract. The law of contract stipulates three fundamental requirements to establish a legally enforceable contract; namely offer, acceptance and consideration (it is important to note that parties entering into a contract must also have legal capacity to do so and it is presumed from the facts given that capacity is not an issue in this case). Lord Wilberforce asserted the rule for formation of contract in New Zealand Shipping Co Limited v A M Satterthwaite, The Eurymedon1: “English law having committed itself to a rather technical….. doctrine of contract, in application takes a practical approach…… into the marked slots of offer, acceptance and consideration”2. 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. 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. The facts of the current scenario indicate that there is no contention that Pretty Paintings made a distinct offer to sell the posters, which was accepted by Posh Posters. The issue of contention here is the nature of acceptance, the exact terms of the contract and whether Posh Posters’ proposed termination of contract constitutes breach of contract. 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 Boar6, 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”7. As Posh Posters wrote to Pretty Paintings Limited indicating that it was happy to accept the offer and unequivocally communicated acceptance, the general presumption as illustrated in Adams v Lindsall8 is that if post was the normal and anticipated method of acceptance, then the contract will be formed when the letter is posted and not when it is received by the offeror. If we apply these principles by analogy to the current scenario, there is clearly a contractually binding agreement between Posh Posters and Pretty Paintings Limited. However, the central issue in the current scenario is whose terms of conditions were applicable to the contract. Contractual negotiations will often involve several exchanges between the commercial parties involving offers and counter offers9. The case of Hyde v Wrench10 established that a counter offer brings an end to the original offer. The parties will negotiate through exchanging correspondence, with a series of counter offers as to price and the contract terms, which has been referred to as the “Battle of the Forms”11. The difficulty with this as evidenced with the current situation is determining the exact terms of the eventual contract. Indeed “Chitty on Contracts” underlines this problem and concludes: “Thus it is possible by careful draftsmanship to avoid losing the battle of the forms, but not…….. to win it. The most that the draftsman can be certain of achieving is the stalemate situation where there is no contract at all12.” Despite the possibility of conflict in the current situation as to the exact terms of the contract, there is clearly a contract between both parties by virtue of course of conduct13. However, to clarify the issue of whose terms are applicable, the courts have adopted the “last shot principle”, which was established in the case of Butler Machine Tool Co –v- Ex Cell-O-Corp14 . According to this principle, the presumption is that the last offer which has been accepted without qualification will be determined as covering the conditions of the contract. If we apply this reasoning by analogy to the current scenario, the acceptance of the offer to sell posters was on Posh Poster’s terms and conditions. This was then signed and returned by Pretty Pictures with an express note that they were insisting on the applicability of their terms and conditions. Posh Posters then waited a further two weeks before making a payment of £5,000 to Pretty Pictures. In this period it does not appear that Posh Posters objected to Pretty Pictures’ insistence on the applicability of their terms and conditions, therefore under the “last shot principle”, it would appear that Pretty Pictures’ terms and conditions were applicable to the contract. On this basis, the contractual conditions contained an express term that terms regarding delivery would not constitute a condition. Accordingly, whilst the failure to meet the specified June delivery technically constitutes a breach of contract, it will not entitle Posh Posters to terminate the contract per se. As such, Posh Posters’ attempt to terminate the contract could arguably render them in breach vis-à-vis Pretty Pictures. Alternatively, it is arguable that persistent failure to deliver whilst constituting minor breaches under Pretty Pictures’ terms and conditions may, nevertheless constitute a fundamental breach of contract by 5th July 2008 under the last straw principle; whereby a series of minor breaches are sufficient to constitute a fundamental breach of contract when considered in conjunction15. The onus would be on Posh Posters to prove this. If Posh Posters can establish breach of contract against Pretty Pictures, it would have two options. Firstly the remedy of specific performance, which would then effectively force Pretty Pictures’ hand in ensuring prompt delivery of the posters16. I would then recommend that Posh Posters re-negotiate contractual terms with Pretty Pictures to preserve commercial certainty going forward and redress the bargaining imbalance between the two under the contract. Alternatively, Posh Posters could terminate the contract and sue for damages for loss caused by the breach. Posh Posters would 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 Baxendale17, which provided that the following losses are recoverable: 1) All loses which flow naturally from the breach; and 2) All loss which was 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 recovered18. Accordingly, it is possible that Posh Posters may be simply be able to claim for reliance loss where the objective is to place the innocent party into the position they would have been in had the contract never been made, which is effectively an indemnity for out of pocket expense incurred in reliance on the contract as evidence in the case of Anglia TV v Reed19, which in this case is the £5,000 paid by Posh Posters. Posh Posters also have a positive duty to mitigate its loss and this will again reduce any damages awarded to it for breach of contract. In conclusion, it is evident that there is a contractually binding agreement between the parties. Moreover, under the last shot principle, it appears that Pretty Pictures’ terms and conditions are applicable to the contract, which means that failure to deliver on time will not constitute a fundamental breach of contract entitling Posh Posters to terminate the contract. Accordingly, Posh Posters’ attempt to terminate will constitute breach of contract. Alternatively, Posh Posters’ could argue that the persistent failure to deliver in conjunction constitute fundamental breach of contract entitling Posh Posters’ to specific performance or termination of the contract with a refund of the £5,000 paid to date. 2) Given the advances in communication systems since the postal rule was created, concluding that the postal rule does not apply to email would seem sensible (Capps, 2003), 153, NLJ 906). Discuss The rules regarding offer and acceptance are sacrosanct principles of contract law. The evolution of business transactions in the 19th century however required the reshaping of existing offer and acceptance rules to ensure a reasonable degree of precision and certainty in contractual negotiations20. This led to the introduction of the postal rule, which in general terms stipulates that contractual acceptance becomes effective once posted rather than when it is received by the offeror21. The overriding purpose of the rule was to create certainty in contractual transactions, however the current methods of communication such as internet, fax and telephone has rendered the postal rule a difficult model to apply in practice. The focus of this analysis is to consider the development of the postal and critically evaluate Capps’ assertion above that “given the advances in communication systems since the postal rule was created, concluding that the postal rule does not apply to email would seem sensible”. The postal rule undermines the general principle that acceptance must be communicated to the offeror as it provides that acceptance is contractually binding once posted, even prior to the offeror having knowledge of such acceptance22. Moreover, in the case of Household Fire and Carriage Accident Insurance Co v Grant23, Lord Thesiger asserted that “there is no doubt that the implication of a complete, final and absolutely binding contract being formed, as soon as the acceptance of an offer is posted may in some cases lead to inconvenience and hardship. But such there must be at times in every view of the law. It is impossible in transactions which pass between parties at a distance, and have to be carried on through the medium of correspondence, to adjust conflicting rights between innocent parties, so as to make the consequences of mistake on the part of a mutual agent fall equally on the shoulders of both.24” The postal rule is applicable even in the event of the letter being lost in the post and is intended to protect the offeree’s reasonable belief that a binding contract was created when the acceptance was dispatched and remove inherent uncertainty in contract formation stage25. However, the continuous development of technological communication methods often utilised in contemporary business transactions has created ambiguity in situations involving contractual negotiations by email, fax and telephone. The law’s response has been to create a distinction between “instantaneous” methods of communication26. The leading decision in this area is the Court of Appeal decision in Entores Ltd v Miles Far East Corporation27, which considered the applicability of the postal rule when communication is made by other means. It was held that the use of telex in contract formation along with any “instantaneous” method of communication should be likened to the parties negotiating in each other’s presence. On this somewhat artificial rationale, the Court of Appeal considered Telex and telephone to be a direct method of communication and therefore instantaneous. As such, communication had to be received by the offeror and the postal rule was not applicable. Whilst arguably reaching a sensible approach from a practical business perspective, the rationale is slightly skewed in creating an analogy to a live negotiation process. However, technological advances have clearly redefined the manner in which telex systems operate and as the Entores decision was addressing telex directly, it is arguable that the decision is obsolete28. However, in the leading case of Brinkibon Limited v Stahl und Stahlwarenhandelsgesellschaft mbH29 the House of Lords specified a framework of guidelines, which is utilised to determine the applicability of the postal rule to any form of communication30. In this case, contractual negotiations involved various forms of communication devices and the court applied the general rule that a contract is concluded when acceptance is communicated by the offeree to the offeror. However, in cases involving instantaneous communication methods, the House of Lords asserted the general presumption that the contract would be made when and where the acceptance was received. From a practical perspective in context of emails, the judicial rationale in Brinkibon is clearly a sensible approach and reflects the reality of contemporary business transactions. For example, whilst emails are instantaneous, they do not go directly to destination and are transmitted through a host akin to letters sent via the post office. The problem of email communication and the postal rule is determining at what stage a receipt has been acknowledged31. There is clearly ambiguity as to whether it is received in the contractual sense at the point of being received by ISP, or the point of being delivered to recipient’s mailbox or alternatively, at the point that it is read by the recipient. Delays in transmission of email messages, incorrect addresses and other identifiable factors can impede receipt32. Therefore, the applicability of the Brinkibon rationale suggests that the contract will be concluded when the email is received and the offeror communicates receipt. As such, the Brinkibon decision clearly supports Capps’ view that the common law has adopted a sensible approach to the postal rule with regard to emails as it clearly encourages business certainty, which is vital in contractual relationships. However, the Brinkibon decision is clearly a guide framework and Lord Wilberforce in Brinkibon case asserted that “no universal rule can cover all such sound cases; they must be resolved by reference to the intentions of the parties, by the sound business practice and in some cases a judgment of where the risk should lie33. Clearly it is therefore better for the contractual parties to express their intentions regarding acceptance to circumvent the inherent uncertainties of the postal rule as the common law is unable to accommodate the pace of technological change and nuances of every method of communication. The Electronic Commerce Regulations 2002 provides some welcome clarification to the area of law by implementing express provision on when an electronic contract is deemed to come into force34. In particular, it provides that when consumer clicks on an icon then the contract becomes effective when the offeror receives acknowledgment of acceptance and confirms receipt of acknowledgment35. Whilst this is clearly a sensible approach, it is arguably limited to consumer contracts. Therefore, whilst Capps’ comments are clearly supported by the business and legal need for certainty in contractual negotiation, there remains a degree of ambiguity regarding the point at which email receipts point to a concluded contract and the Brinkibon decision whilst welcome, was by no means a panacea to this complex area of law as clearly indicated by Lord Wilberforce’s comments. Alternatively, particularly in business contracts it would be worth considering the entering into a standard form agreement similar to the EDI Partner Agreement regarding electronic data interface communications36. The EDI Partner Agreement clarifies the issue and states that no contract will be binding until it has been received and thereby eliminates the inherent risk of the postal rule in instantaneous communication scenarios. BIBLIOGRAPHY John Adriaanse (2004). Construction Contract Law: The Essentials. Palgrave Macmillan. Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. M. P. Furmston (2007). Cheshire, Fifoot and Furmston’s Law of Contract. 15th Edition Oxford University Press. E. McKendrick (2008). Contract Law: Text, Cases and Materials. 3rd Edition Oxford University Press. G. H. Treitel., (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Electronic Commerce Regulations 2002 available at www.opsi.gov.uk Read More