The Law of Contract: Golden Antiques and White Halls Ltd - Case Study Example

In order to advise the parties with regard to their legal position, it is necessary to evaluate the following Whether there was in fact a legally enforceable contract between Golden Antiques and White Halls Ltd, or alternatively whether the contract between Golden Antiques and Roger is valid; 2) If there was a legally enforceable contract whether Golden Antiques validly revoked the contract thereby negating any claim by White Halls Limited for breach of contract or specific performance; and 3) Alternatively, the legal implications for Golden Antiques if the revocation is found to constitute breach of contract. It is important to note that parties entering into a contract must also have legal capacity to do so. To this end, McIntyre highlights the fundamental point that “contracts are formed by agreement between the parties to the contract. A person cannot become liable under a contract unless it can be inferred that he chose to enter into a legally binding agreement.1” In current scenario David was purporting to enter into a contract on behalf of a company, which initially raises the issue of capacity to bind a company. David must have authority to enter into this purchase contract on behalf of White Halls Limited. Sections 39 and 40 of the Companies Act 2006 (CA)2 address contractual authority with regard to companies. Section 39(1) of the CA provides that “the validity of any act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.” Additionally, section 40(1) provides that: “In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company’s constitution”. Section 40 (2) of the CA further implements a presumption that a third contracting party acts in good faith. Furthermore, a contractual party is not bound to enquire as to any limitation on the powers of the board or authorise others to do so3. Therefore in the absence of facts indicating otherwise, it is presumed in the current scenario that there is no issue regarding capacity to enter into the contract between White Halls Limited and Golden Antiques. Moreover, the law of contract stipulates three fundamental requirements to establish a legally enforceable contract, namely offer, acceptance and consideration. To this end, Lord Wilberforce asserted the rule for formation of contract in New Zealand Shipping Co Limited v A M Satterthwaite, The Eurymedon4: “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”5. 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.6” The “expression7” may take different forms. The intention element is an objective consideration and the case of Smith v Hughes 8emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. 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 contract9. Indeed, McIntyre highlights the essence of an invitation to treat being “therefore an invitation to negotiate”10 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. Indeed, the Gibson decision challenged the traditional view for formation of contractual agreement. In this case, Lord Denning asserted that when considering whether there is a binding contractual agreement, it could be argued that “there is no need to look for strict offer and acceptance. You should look at the correspondence as a whole and at the conduct of the parties and see therefore whether the parties have come to an agreement on everything that was material12”. In the current scenario Golden Antiques printed an advertisement on their website, which stated “For sale, three Victorian beds, gorgeous, £5000 each, cash, will brighten up any bedroom”. With regard to the status of advertisements; McIntyre highlights that if the advert is an offer, then acceptance will form a legally binding contract13. For example, in Partridge v Crittenden14, the advert in the case had offered “Quality British…. Bramblefinch cocks, bramblefinch hens… 25s. each”. However no specific reference was made in the advert for the product actually being offered for sale and as a result, it was held that the advert constituted an invitation to treat. However, McIntyre highlights the point that some adverts will constitute offers and that it is ultimately a matter of construction depending on the nature of the case. For example, in the current scenario Golden Antiques’ advert clearly made reference to the point that beds were for sale. If we consider the case law further, the decision in Carlil v Carbolic Smoke Ball Limited highlights that adverts can constitute distinct offers15. In this case, the defendant was the proprietor of a medical substance and placed and advert in the Pall Mall Gazette promising to pay $100 to anyone who used the carbolic smoke ball for two weeks and who for a limited time after contracted the flu virus. Carbolic Smoke Ball Limited argued that the advert did not constitute an offer but was rather an invitation to treat. The Court of Appeal rejected this argument and held that there was a legally enforceable contract. The advertisement constituted an offer to the whole world and was capable of amounting to an offer of a unilateral contract without the requirement for acceptance. The Carlill decision had far reaching implications for contract law, with some commentators arguing that there is no difference between an “invitation to treat” and a contractual “offer”16. However the facts of the current scenario suggest that Golden Antiques’ website advertisement was a distinct offer to sell and will be binding on acceptance of the offer by a customer. Nevertheless, the central issue of contention in the current scenario is the timing of acceptance and whether failure to accept White Halls Limited’s offer was valid and not in breach of contract. This will hinge on the rules pertaining to acceptance and 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 Boar17, 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”18. Additionally, the general presumption as illustrated in Adams v Lindsall19 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. Moreover, in Henthorn v Fraser20 it was asserted that : “where the circumstances are such that it must have been within the contemplation of the parties, that according to the ordinary usages of mankind, post might be used as a means of communicating acceptance of an offer21”. However, in the current scenario, there have been numerous correspondences with regard to the purchase of the Victorian style beds and contractual negotiations will often involve several exchanges between the commercial parties involving offers and counter offers22. The case of Hyde v Wrench23 established that a counter offer brings an end to the original offer. Additionally, as contractual parties will often as in the current scenario negotiate through exchanging correspondence, with a series of counter offers as to price and the contract terms; this has been referred to as the “Battle of the Forms”24. In considering this Chitty on Contracts25 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 all26.” In order to address this legally, the courts have adopted the “last shot principle”, which was established in the case of Butler Machine Tool Co –v- Ex Cell-O-Corp27 . 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 consider this in relation to the current scenario, in response to the offer David sent an email offering to buy all three beds for £4500 each on credit. This therefore constituted a counter offer. Golden Antiques then replied to reject this counter offer and confirmed that they would not be willing to sell for less than £5000 each and that the granting of a credit facility would be subject to Golden Antiques approving the guarantor. Additionally, Golden Antiques required confirmation of interest by close of business on the same day. The central issue of contention is whether White Halls Limited validly accepted and concluded the contract. On Tuesday, David faxed Golden Antiques to accept the original terms of buying the beds at £5000 each along with a fax from the guarantor Black Halls Limited, prior to the close of business, however the status report said the fax was not transmitted. With regard to fax, in Brinkibon Limited v Stahl und Stahlwarenhandelsgesellschaft mbH28 the House of Lords specified a framework of guidelines, which is utilised to determine the applicability of the postal rule to any form of communication29. 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 acknowledged30. Moreover, it was held with regard to fax and telex communication that there is “no universal rule can cover all cases, they must be resolved by reference to the intentions of the parties, by sound business practice, and in some cases by a judgment where the risks should lie31”. However, McIntyre suggests that “it does seem fairly certain that if an acceptance by telex or fax is received during office hours it is effective when received not when it is noticed”32. Additionally, if the machine is off, Lord Fraser in the Brinkibon decision seems to put the onus on the offeror and Eliot and Quinn33suggest that if a fax reaches office in office hours but is not seen or read it still takes effect on reaching the offeree. However, in the current scenario the fault was at David’s end as the transmission report clearly stated that both faxes did not arrive, and therefore was not received by Golden Antiques. Alternatively, David posted the letter knowing there was a postal strike at 5pm and on Wednesday morning Golden Antiques faxed David to let him know that the beds were no longer for sale and for valid revocation of an offer, revocation must my communicated prior to acceptance34. Therefore, David’s central argument is likely to be conclusion of contract by post on grounds of the postal rule. As highlighted above, 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 negotiations35. 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 offeror36. 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. As highlighted above, 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 acceptance37. Moreover, in the case of Household Fire and Carriage Accident Insurance Co v Grant38, 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.39” 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 stage40. 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 communication41. Additionally, in Holwell Securities Securities v Hughes42, it was held that as the offer had made clear that the acceptance had to reach the offeror in terms of their actual knowledge of receipt, the postal rule was inappropriate. Lawton LJ argued that the postal rule would not apply where it would “produce manifest inconvenience and absurdity43”. Additionally, Lawton LJ opined that “in my judgment the factors of inconvenience and absurdity are but illustrations of a wider principle, namely that the rule does not apply, if having regard to all the circumstances, including the nature of the subject matter under consideration, the negotiating parties cannot have intended that there should be a binding agreement until the party accepting an offer or exercising an option had in fact communicated the acceptance or exercise to the other”44. Therefore, whilst on a strict application of the postal rule White Halls Limited may have a binding contract with Golden Antiques. However, alternatively, Golden Antiques’ email to David made clear that it wanted to receive confirmation of acceptance by close of business and pre-approve the guarantors; which suggests a conditional requirement of acceptance. On this basis, even if David’s acceptance letter had been received, conclusion of the contract appears to be conditional on Golden Antiques’ approval of the guarantor. Therefore, in line with the Holwell argument it is highly likely that Golden Antiques will have strong grounds to refute the argument that there is a valid contract with White Halls Limited. As such, Golden Antiques’ revocation of offer by fax would be valid as communicated prior to acceptance. Alternatively, if White Halls Ltd can a valid contract breach of contract against Golden Antiques, it would have two options. Firstly the remedy of specific performance, which would then effectively force Golden Antiques to sell the beds to them 45. Alternatively, White Halls Ltd could terminate the contract and sue for damages for loss caused by the breach. However, the company 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 Baxendale46, 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 recovered47. Accordingly, in the current scenario White Halls Ltd 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 Reed48, which in this case is nil. The company would also have a positive duty to mitigate its loss and this will again reduce any damages. In conclusion, White Halls Limited’s main argument for a legally binding agreement with Golden Antiques would be acceptance of the offer on Tuesday by post on grounds of the postal rule. However, on the basis of the facts, Golden Antiques’ offer appeared to be conditional on Golden Antiques approving the guarantor and not merely dependent on the provision of a guarantor. Accordingly, it is highly likely that Golden Antiques will be able to refute the argument of a legally binding agreement with White Halls limited. Therefore the ensuing contract with Roger and Golden Antiques’ fax notifying David that the beds are no longer for sale will constitute valid revocation. BIBLIOGRAPHY Chitty (2007)., Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. Eliot, C. & Quinn, F. (2009). Contract Law 7th Edition Pearson Longman. M. P. Furmston (2007) Cheshire, Fifoot & Furmston’s Law of Contract. 15th Edition Oxford University Press. Ewan McIntyre (2008). Business Law, 4th Edition Pearson Longman, 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. Read More