Way in Which the Courts Approach Questions as to the Formation of Contracts - Essay Example

English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration.’ New Zealand Shipping Co v Satterthwaite & Co [1975] AC 154, 167, per Lord Wilberforce. To what extent do you agree with Lord Wilberforce’s analysis of the way in which the courts approach questions as to the formation of contracts? Give your reasons. In order to be able to comment on Lord Wilberforce’s analysis it is necessary to discuss the facts of the case in question. The case of New Zealand Shipping Co v Sattherthwaite [1975]1 concerned the right of the defendant to terminate the contract with the plaintiff. In this case the defendant had entered into a contract with the plaintiff for the supply of leather booties for babies. Within the contract it was stipulated that the contract could only be terminated by the supplier if the distributor failed to order at least the minimum quantity. The contract gave the defendant the exclusive right to distribute the booties within the UK. Several years after the contract was entered into, the plaintiff asked the defendant to extend the product range and include booties for children over the age of 2. The defendant stated that the range would only be extended under a licence agreement, and so the plaintiff began manufacturing its own range of booties for older children. The defendant argued that the plaintiff was marketing the shoes in a manner that traded on the goodwill of their company and they sought to terminate the contract for the provision of the baby booties. Initially the claim by the defendant was overruled, however, on appeal, the court determined that the defendant was allowed to terminate the contract as there was an obligation on both parties to perform the contract on good faith. The court, in this case, felt that the actions of the plaintiff in marketing their own product in this manner, breach the obligation of good faith. Lord Steyn was concerned that the rigid offer and acceptance format …are intolerant of such issues as indefiniteness, agreement to agree, and agreements to negotiate in good faith. Lord Steyn felt that the contract entered into by the parties could not remain binding for an indeterminate period of time, and that the right to terminate should not be limited to only being available if the minimum order requirement of the contract was not met. Lord Wilberforce agreed with this approach and challenged the traditional contract formation of offer, acceptance and consideration, holding that such rigidity did not allow a duty of good faith to be imported into the terms of the contract. The basis for the rigidity of the formation of a contract was to give certainty to the contracting parties. However, Mason (2000) observed "it later emerged, as is the case with many legal concepts rooted in formalism, that the element of certainty was illusory." Banakas (2009) noted that ‘it is…still the case that no general duties of good faith, disclosure, confidentiality or collaboration exist in English law today in the course of contractual negotiations…’ This is part of the rigidity of contract law that was challenged by Lord Wilberforce, and shows his frustration at having to imply ‘good faith’ into the agreement between the parties, in order to correct the unfairness created by the rigidity of contract law. ‘Lock out’ agreement cases can also challenge the traditional contract formation policies. This was evidenced in Walford v Miles [1992]2 in which the defendant had agreed not to enter into negotiations with a third party whilst negotiations with the claimant were still in progress. After the defendant terminated the negotiations with the claimant and entered into a contract with a third party, the claimant discovered that the defendant had been in negotiations with the third party whilst still in negotiation with them. The claimant argued that there had been a breach of the ‘lock out’ agreement. In reaching their decision, the House of Lords held that a ‘lock out’ agreement could only be binding on the parties if the ‘lock out’ period is for a specified period of time. In this case, there was no agreement on the length of time that the ‘lock out’ period should apply, and the court ruled that the clause was unenforceable. It was decided that it was unreasonable to bind the defendant in this manner, as there had been no agreement in relation to when the defendant would be entitled to withdraw from the negotiations with the claimant. Lord Ackner defended this proposition, stating that “The reason why an agreement to negotiate, like an agreement to agree, is unenforceable is simply because it lacks the necessary certainty.” He went on to say that “A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from these negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Accordingly, a bare agreement to negotiate has no legal content”. In Walford v Miles, although the claim for the breach of the ‘lock out’ agreement was disallowed, the claimant was awarded damages on the grounds of misrepresentation. The court held that the defendant had led the claimant to believe that they would be bound by the ‘lock out’ agreement, but their actions proved that it had never been the intention of the defendant to forego the right to continue negotiating with other parties. By contrast in Global Container Lines Ltd v Black Sea Shipping Co3 the court ruled that the ‘lock out’ agreement was enforceable. In this case the agreement to discontinue negotiations with other parties was supported by consideration. The inclusion of the consideration allowed the court to determine how long the defendant would be prevented from negotiating with other interested parties. The court, in this case, felt that although there had been no specific agreement as to when the contract could be terminated, the presence of consideration allowed the court to imply that the contract could be terminated on reasonable notice. Agreements to use ‘best endeavours’ have also created difficulties for the courts in determining whether a contract should be enforceable. Such agreements are outside of the standard form of offer, acceptance and consideration. In general terms, the courts will regard such agreements as merely an agreement to negotiate, and therefore rule them to be unenforceable. However, examples can be found of when such agreements have been deemed to be enforceable. In Little v Courage4 Millet LJ made the observation that “An undertaking to use one’s best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one’s best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable obligation” It could be argued that despite the rigidity attached to the formation of contracts that the principle of a good faith agreement has been protected under the doctrine of proprietary estoppel. Gardner (1999) described proprietary estoppel in the following terms: ‘Proprietary estoppel exists to adjust the prevailing balance of property between claimant and defendant when the claimant has formed the relevant kind of expectation, and has acted detrimentally in reliance on it, and these occurrences are ascribable to the defendant (via his encouragement of or acquiescence in them), so that it would be unconscionable for him to insist on the status quo’. This doctrine was applied in Yeoman’s Row Management v Cobbe5 in which Mr Cobbe had made an agreement in principle to buy the property from Yeoman’s on the expectation of being able to redevelop the properties. Mr Cobbe had obtained planning permission from the local authority in reliance on the promise made by Yeoman’s that they would sell the properties to him. Once the planning permission had been obtained, Yeoman’s reneged on the agreement to sell the properties at the agreed price, and attempted to increase the price from £12m to £20m. At the first instance it was conclude that the doctrine of proprietary estoppel ought to apply. Yeoman’s appealed against this decision, however, Mummery LJ agreed with the decision of the judge in the first instance stating “ proprietary estoppel could be established even where the parties anticipated that a legally binding contract would not come into existence until after planning permission had been obtained, further terms discussed and agreed and formal written contracts exchanged…[e]ven the use of the expression “subject to contract” would not, however, necessarily preclude proprietary estoppel if the claimant established that the defendant had subsequently made a representation and had encouraged on the part of the claimant a belief or expectation that he would not withdraw from the “subject to contract” agreement or rely on the “subject to contract” qualification ”. The above demonstrates that despite the rigidity in contract formation that there are exceptions were a contract will be deemed to have been fully constituted despite the lack of the 3 elements. The conclusion that can be drawn from all of the above, is that although there is a rigid format applied to the formation of a contract, there are exceptions where one of the missing elements might be implied. The doctrine of proprietary estoppel is of great significance because it can prevent a loss occurring where one of the parties has acted in their detriment on reliance of a promise made by the other party to enter into a contract at a future date. In general terms, a promise to enter into a contract will not be binding. However, if proof can be shown that some form of consideration has been given in reliance on that promise, then the court can determine that a contract was created by the parties. This would mean that if the person reneged on the promise an action can be brought for a breach of the implied contract. 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