Law of Contract Assessment - Case Study Example

Law of Contracts Assessment There are two cases referred for advice in respect of two separate contracts. Case 1: SkyReach Ltd. v Holger Brief facts of the case Holger is an owner of a brown-field plot of land and held onto it as an investment. Holger and SkyReach have entered into a contract for the sale of the plot. Consequently, SkyReach apply for planning permission to build a block of offices on the site. This is rejected, and SkyReach are informed by the local planning department that the use of the plot is restricted to ‘educational purposes’ only.  Validity of the contract In this contract there is legal obligation on both the parties through an offer and acceptance with the free consent of the parties. The competency of the parties to the contract is not under question. It is implied that there exists lawful consideration and the lawful object is the plot of land. Legal position of the seller and buyer Based on the validity of the contract, the legal position derived from the contract is fairly defined in this case. The question of building construction is extraneous to the contract, and going by the facts of the case, the performance of the contract is not contingent upon the building permission. This is also strengthened by the fact that the building permission has never been applied for. The statement of Holger made during the course of conversation with Jaki, the manager of SkyReach “of course, it [building permission by the local planning department] should be no problem. As I understand it, inner city development is a top priority here” is based on the information available to him, which could not be construed as a statement of an expert by a manager in a real estate company who is expected to be more knowledgeable in the business. The seller of a property should disclose any material defect in the property. Concealing the information would be an act of fraud. It is only Holger’s understanding, and there is no guarantee or concealment involved. Also, “the plot is restricted to ‘educational purposes’ only” cannot be treated as defect in property as reservation for various purposes is common; SkyReach could not allege concealment of information, and the contract is also not conditional on specific use of the plot. This aspect is extraneous to the contract, and Jaki had a time of one week to verify the position before entering into the contract after his discussions with Holger. Analysis The permission has been rejected on the grounds that the use of the plot is restricted to ‘educational purposes’ only.  A close analysis of the facts of the case reveals that SkyReach has applied for building permission as a rightful owner of the property based on the contract, which it can’t renege. Secondly, reservation of the plot for ‘educational purpose’ exists already, which the SkyReach failed to verify. Thirdly, according to the facts of the case, the sale is not conditional with reference to the purpose for which the plot could be used. The sale of real estate property is enforceable by specific performance in the event of a breach of contract. There are defenses available against specific performance which would avoid specific performance, and the only defence that could be remotely considered as an action in equity is, ‘specific performance would cause severe hardship to SkyReach’, because other defences such as misbehavior and impossibility of performance are not relevant to the case. But, defence against specific performance is not possible due to the reasons discussed under ‘Legal position of the seller and buyer’, based on the facts of the case and analysis. In Tamplin v James,[1]   defendant, the buyer failed to perform in the contract of sale on the grounds that that he expected that two pieces of garden formed part of the lot, when they were in fact held by a railway company and not the vendor. In this landmark case, the court decreed specific performance for purchase of the land. The defendant’s appeal was unanimously dismissed by the Court of Appeal, upholding the earlier judgment. James LJ held “If a man will not take reasonable care to ascertain what he is buying, he must take the consequences. The defence on the ground of mistake cannot be sustained”. James LJ found that the defendant's mistake in the purchase of the garden without verifying the plans cannot be construed as unjust hardship. Upholding the decree for specific performance Brett LJ observed “his mistake was not on a point of vital importance, and arose entirely from his own negligence” suggesting that a purchaser cannot escape from specific performance. Cotton LJ also upheld the decree stating that a purchaser could not be relieved of specific performance for a mistake that "he had no right to make". Cotton LJ argued that where specific performance is not awarded due to any mistake, the court should consider the question of damages to the plaintiff in lieu of specific performance. (James LJ and Bret LJ were also of the same view). ------------------------------------------------------------------------ 1. [1880] 15 Ch D 215 Advice to SkyReach, the buyer Jaki, the manager of SkyReach has negotiated with Holger and entered into contract after one week. In the intervening period, the SkyReach Ltd., being the property developer could have verified with the local planning department about the permission; there is no question of relying on the conversation, because, the contract is neither conditional nor contingent upon granting approval or permission by the local planning department. Therefore, the company SkyReach is advised to perform its part of the contract, because specific performance under the contract can be considered as a basic right. Case 2: Irmina v ReachSkywards Ltd. Brief facts of the case Irmina, a supplier of building materials, is contacted by Michael, who introduces himself as the chairman of ReachSkywards Ltd. They enter into a contract, and Michael takes delivery of the materials. Payment is to be made a month later. However, Michael does not pay. When Irmina, phones Michael, he tells her “too bad – sue us if you like, but there is a long list of creditors ahead of you! Those materials are ours now.”  Validity of the contract In the absence of any details to the contrary, it is assumed based on the facts of the case as furnished, that it is a valid contract between Irmina and ReachSkywards Ltd., for the supply of building materials to the latter by Irmina, consisting of the details of materials, quantity, prices, delivery time and other details which may be relevant for the supply of materials. Misrepresentation in this case is ruled out because misrepresentation means a false statement of fact made by one party to another party, and has the effect of inducing that party into the contract. Michael introduced himself as the chairman of ReachSkywards Ltd., and according to the facts of the case there is no cause for suspecting misrepresentation by Michael, as this question has not been raised. There may be several reasons for buying materials on credit basis, and selling materials on credit basis is common in the business. Placing large orders for building materials in future may be contingent upon making financing arrangements by ReachSkywards, but is extraneous to the existing contract and nothing to do with the performance of the parties in respect of this contract. Though misjudgment about the integrity, honesty and the creditworthiness of the buyer on the part of Irmina has landed her into the present situation, it is a business decision which does not affect the validity of the contract or her rights arising out of the contract, against ReachHighwards. In Merritt v Merrit[2]   it was held, that the Court does not try to discover the intention by looking into the minds of the parties, but looks at the situation to know whether the agreement is intended to be binding. In this case the agreement or contract between the parties was made with the intention to create legal relations and hence binding. ------------------------------------------------------------------------ 2. [1970] EWCA Civ 6, [1970] 1 WLR 1211, Legal position of the seller and buyer The point for consideration is whether there is fraud involved. Fraud means an act committed by a party to a contract with intent to deceive or induce another party to enter into a contract. It includes a suggestion which is not true by one who does not believe it to be true; concealment of a fact or knowledge of the fact; a promise made without any intention of performing it; and any other act which are declared to be fraud under any act. In this case, the intention of Michael is to deceive Irmina, based on the facts of the case, as he has induced Irmina to supply materials on a contract without any intention of making payment for the supplies. A party dissatisfied with the contractual performance of counterparty may (i) “affirm” the contract and seek money damages or specific performance; or (ii) “disaffirm” the contract with the remedy of rescission and restitution. [3]   Irmina has supplied the building materials as per the contract and demand payment for the supply after the credit period of one month as per the terms of the contract. There is no mention of arbitration between the parties to the contract in the facts of the case provided. It can also be stated that buying goods without intention of making payment is an act of fraud. It is a clear case of breach of contract as the buyer has refused to perform his part by making payment for the goods supplied as per the contract. ------------------------------------------------------------------------ 3. Richard Brooks & Alexander Stremitzer, On and Off Contract Remedies, Discussion Paper No. 290, Yale Law School, 2009, p. 1. Analysis The general rule is that anything not included in the corporation's capacity, whether expressly or by implication, is ultra vires, i.e. "beyond the power" of the corporation, and so may be unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected.[4]  When a party to a contract has refused to perform the promise, the promisee would be in a position to claim damages that is suffered as a result of the breach of the contract. In this case, the loss suffered by Irmina has to be made good by ReachHighwards, which accrue from the date the contract is due to be performed, that is after the credit period of one month. The contract is this case could be discharged by performance or discharged by breach of contract. Where there is default in performance when it is due, then there is breach of contract, and it could be actual or anticipatory. When a person refuses before the due date, it is anticipatory breach. Here, Irmina contacts Michael (ReachHighwards) when he fails to pay, and he replies “too bad – sue us if you like, but there is a long list of creditors ahead of you! Those materials are ours now.”  It is an actual breach of contract. Breach remedies if specified explicitly in the contract will be helpful. It may either specify the exact amount of compensation the defaulting party has to pay to the victim of breach, or the way in which this amount is calculated…like liquidated damages, expectation damages, and reliance damages.[5]  ------------------------------------------------------------------------ 4. Ehsan Zarrock, Practical concepts in Contract Law, MRPA, 2008, np. 5. Randolph Sloof, Hessel Oosterbeek & Joep Sonnemans, On the Importance of Default Breach Remedies 2006, p.1 If the buyer is at fault, the buyer is liable for the difference between contract price and market price as on the date of breach. The ReachHighwards is also liable for the liquidated damages and penalties which are agreed to between the parties, in the event of breach of contract by way of compensation. “The contract law has a rich set of remedial rules. We might understand a remedial regime as giving the promisor an option: to perform or not to perform but to make a damage payment”.[6]   Advice to Irmina, the seller It is a clear case of breach of contract by ReachHighwards, and Irmina can seek remedy by claiming damages. However, it is important that the delivery is made to ReachHighwards and there are Lorry Receipts or other transport receipts for having delivered the building materials at the site of ReachHighwards, and the delivery memos have been properly acknowledged under company’s seal. In that case, having accepted the supplied materials, the company confirms the existence of contract concluded by Michael. There is no mention of arbitration, liquidated damages or penalties in the facts of the case furnished for give any view in respect of the same. However, Irmina can rightfully claim liquidated damages and penalty in line with the terms and conditions of the contract which are reasonable with reference to the transactions involved. ------------------------------------------------------------------------- 6. Lewis A. Kornhauser & W. Bentley MacLeod, ‘Contracts between Legal Persons’, Discussion Paper No. 5352, December 2010, Institute for the Study of Labor, Bonn, p. 12 Conclusion These two cases are by no means related to each other, because parties to the contracts both buyers and sellers are different. Also, applying for permission or granting planning permission by the local authorities are extraneous to these contracts, since the performance was not contingent upon granting permission by the local authorities. Therefore, both the cases have been analyzed with reference to the merits of the contracts, and advices given accordingly. If a type of private transaction is non-enforceable this means that judges will not impose the terms of the contract on the transacting members, even if one of them breaches the initial agreement.[7]   The evolution of contract law facilitates economic development and non-enforceability of contractual terms (on refusal of performance by a party) means prohibition of certain transactions from taking place, which is not in the interest of the development. The contribution of courts over the period of time as an enforcement institution in the evolution of contract laws has been significant in the economic development of the countries. Apart from the discussions based on the facts of the cases as provided, the contractor’s rights in bankruptcy need to be kept in mind, in view of the number of cases increasing over the period of time, and the strategy of Michael in dealing with the situation is also not very clear. “Although it’s true that creditors usually are paid only a small fraction of what is owed them, exceptions do exist, and knowing your substantive rights and the process to enforce those rights is critical to ------------------------------------------------------------------------- 7. Aristotelis Boukouras, Contract Law and Development, Courant Research CentreDiscussion Paper No. 61, 2010, p. 2. maximizing recovery in bankruptcy.”[8]   It is also pertinent to note that in most of the countries there are separate laws to deal with various types of business activities. In the United Kingdom there are Sale of Goods Act 1979 and Supply of Goods and Services Act 1982 which lay down broad frame work for the sale of goods or provision of services. Also, UCTA [Unfair Contract Terms Act 1977] places a number of restrictions on the contract terms businesses can agree to. Specifically, it lays down rules for the ways in which vendor businesses can use exclusion clauses to limit liability in certain areas.”[9]  In the case of Irmina, though prima facie there is no reason for concern in this regard, it should be ensured that the finer details of the contract do not throw any surprises which act in favour of ReachHighwards. However, the contract theory represents the law of obligations voluntarily undertaken which extends beyond sale of goods or services as against obligations in tort which pervade into the human life with a very wide perspective with obligations towards various categories of third parties. ------------------------------------------------------------------------ 8. David W. Lannetti, Typical Impacts of Bankruptcy, Commonwealth Contractor, Issue 17, Politics and Information, 2011, p. 20. 9. Business Link, Buyers' terms and conditions and unfair contract terms, np. References 1. 73 Wire, Tamplin v James (1880) 15 Ch D 215, accessed 5 May 2011. 2. BAILII, Merritt v Merritt, [1970] EWCA Civ 6, [1970] 1 WLR 1211, accessed 6 May 2011 3. Richard Brooks & Alexander Stremitzer, On and Off Contract Remedies, Discussion Paper No. 290, Yale Law School, December 2009 accessed 6 May 2011. 4. Ehsan Zarrock, Practical concepts in Contract Law, MRPA, 14 August 2008, accessed 5 May 2011 5. Randolph Sloof, Hessel Oosterbeek & Joep Sonnemans, On the Importance of Default Breach Remedies 2006, Tinbergen Institute Discussion Paper, TI 2006-082/1, accessed 5 May 2011. 6. Lewis A. Kornhauser & W. Bentley MacLeod, Contracts between Legal Persons, Discussion Paper No. 5352, December 2010, Institute for the Study of Labor, Bonn, accessed 6 May 2011. 7. Aristotelis Boukouras, Contract Law and Development, Courant Research CentreDiscussion Paper No. 61, 30 September 2010, p. 2, accessed 5 May 2011. 8. David W. Lannetti, Typical Impacts of Bankruptcy, Commonwealth Contractor, March 2011, Issue 17, Politics and Information, accessed 5 May 2011. 9. Business Link, Buyers' terms and conditions and unfair contract terms, accessed 5 May 2011. Read More