The Contract between GG and YE - Essay Example

Contract Law Introduction The legal issues arising out of the contracts between GG and YE and Johnny and Ed are related to the effects of variation of the terms of a contract, waiver and promissory estoppel. In other words, if GG, anticipating that YE might breach the terms of the contract and in doing so chose to vary the terms of the contract, it is possible that the variation of the terms of the contract formed a new contract to which GG is bound. Moreover, Ed’s signing off on the debt as repaid in full may provide a waiver in Jonny’s favour preventing Ed pursuing the balance of the unpaid debt. In both cases the main question is whether or not promissory estoppel applies to prevent GG and ED reneging on promises to increase and decrease obligations under pre-existing contracts. Each of these issues are discussed in detail below. The Contract Between GG and YE At all stages of a contract, there must be consideration in order for the contract or the varied contract to be legally binding on the parties.1 This means that not only is consideration necessary for forming a contract, but it is also necessary for varying the terms and conditions of a contract and thus creating a new contract. When a party increases his or her own obligations under an existing contract this is referred to as the gratuitous variation of the contract by increasing obligations.2 Arguably, GG made a gratuitous variation of the contract by increasing its obligations pay for the supply of circuit boards. The initial contract was for 5,550 pounds for 10 circuit boards over a period of one year. Realizing that there has been an increase in the cost of parts, GG acknowledges that YE offered a competitive price and that a better deal would be impossible. Anticipating that YE could fall short on their obligations under the contract, GG promised to pay an additional 2500 pounds should YE live up to their supply obligations under the contract. However, it was held in Williams v Roffey Bros, that in some circumstances a promise to increase obligations so as to achieve a practical benefit is tantamount to valid consideration.3 The circumstances in which increasing one’s obligations may be deemed valid consideration are applicable to situations in which the promisor obtains a practical benefit.4 However, the facts of the case to be discussed can be distinguished from the facts of the case in Williams. In Williams the contract for completion of construction works contained an penalty clause in which the defendant would have been subject to a penal fine if the contract was not completed within the agreed time. When it became obvious that the plaintiff could not complete the contract on time, the defendant offered to pay the plaintiff an additional 575 pounds. However, upon completion of the contract, the defendant only paid the plaintiff 500 pounds. The Court of Appeal ruled that the variation of the terms of the contract was under consideration because it conferred a benefit on the defendant by ensuring that the defendant avoided a penalty.5 On the facts of the case for discussion, there was no penalty clause applicable to the contract. However, the fact that GG derived a benefit in that it could not obtain a contract more competitive than the contract with YE. The fact is the ruling in Williams has been followed to the extent that it has been determined that if the party increasing his or her obligations under a contract is deriving a practical benefit, then the variation is not perceived as a gratuitous variation, but rather a variation under consideration.6 In addition, the doctrine of promissory estoppel may also apply to prevent GG reneging on the promise to pay the additional funds to YE for completion of the contract. Promissory estoppel arises to prevent one party reneging on a promise in circumstances where the other party relied on that promise to his or her detriment.7 In Central London Property Trust v High Trees House Ltd. the plaintiff leased property in Central London to the defendant in 1937. However during the Second World War, rental in the area was low and thus, the plaintiff agree to reduce the rent by half. Once rental in Central London picked up, the defendant continued to collect the reduced rent. It was held in the High Court that once the rents were fully occupied, the full rents can be claimed. However, in an obiter dicta judgment, Denning J. argued that any claim for the full rent during the time of low occupancy, was barred by the doctrine of promissory estoppel since the defendant acted in reliance on the promise that the full rent would not be claimed.8 Based on the authorities discussed it would appear that GG cannot renege upon its promise to pay YE an additional 2,500 pounds for completion of the contract. To begin with, the promise is arguably not a gratuitous promise to increase obligations since there is a practical benefit for GG. The practical benefit arises because, the price of the circuits increased and it was doubtful that YE could complete the contract on time. Moreover, GG was aware that it could not obtain a comparable contract elsewhere. Therefore the variation of the terms of the contract was subject to consideration and thus represents a legally binding contract. In addition, pursuant to the doctrine of promissory estoppel, GG cannot renege on its promise to pay the additional 2,500 pounds since arguably YE acted to its detriment to complete the contract on time. It would appear that, since the price of the circuits increased, YE went to extra expense to complete the contract on time and only did so in reliance on the promise that GG would compensate them for the extra expense by paying an additional 2, 500 pounds, provided the contract was completed on time. Unless GG can prove that the contract was completed on time and that YE did not incur any additional expenses in doing so, GG is liable to pay YE the additional 2,500 pounds promised. There are any number of reasons why a party to a contract seeks to vary the terms of an initial contract and in doing so makes a promise which is binding. Many times the party seeking to vary the terms of the contract in terms of offering to pay a higher price may be a way of ensuring that the other party is able to meet his or her obligations, or to gain the advantage of acquiring a reputation as being fair. The fact remains, regardless of the motives for waiving or modifying the terms and conditions of a contract, where the other party acts to his detriment in reliance on that waiver or variation, the waiver or variation should be legally binding.9 The Contract Between Johnny and Ed When Ed wrote off the remainder of the debt owed by Johnny upon receipt of partial repayment of the loan, this was a gratuitous variation by decreasing or a gratuitous waiver. As Beale and Bishop explain, a waiver occurs when: One party states or indicates by his conduct that he will not exercise some remedy available to him under the contract, or will not insist on his full contractual rights, without there being any consideration for his promise.10 In other words, a waiver can be binding in the absence of consideration, unlike variations of the terms and conditions of a contract. In this regard, a waiver operates to indemnify one party against the risk of future legal action for failure to fulfil the parts of the contract that were waived. A similar situation occurred in Malik v Bank of Credit and Commerce International SA. In this case, an employee sought damages in respect of difficulty finding alternative employee because the plaintiff had been employed by the defendant. The damages sought were stigma damages. The defendant argued that the plaintiff could not claim stigma damages because upon leaving their employment, the plaintiff had signed a release waiving the right to claim such damages. The Court of Appeal ruled that the release did bar the claim for stigma damages. Sir Richard Scott V-C ruled that the release was not clearly stated so that it could positively be determined that a claim for stigma damages was waived. Chadwick LJ and Buxton LJ however, ruled that the release was sufficiently clear to waive a claim for stigma damages. However, the release could not bind the defendant because the plaintiff withheld information that would have rendered the release uneventful in that the employee was not barred from obtaining alternative employment.11 The ruling of the Court of Appeal was subsequently upheld by the House of Lords. Lord Bingham of Cornhill in explaining the effect and consequences of a waiver stated that: In construing the provision, as any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a while, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties.12 The court will not attempt to determine the parties intentions and the meaning of the waiver by reference to a subjective view of the states of minds of the parties. Rather the court will look at the facts and material placed in evidence.13 In this regard, it becomes relevant that Ed and Johnny were friends and as such they could rely on the other’s promise and thus in making promises, the other party should be able to expect that his friend intended to keep that promise. On the facts of the case for discussion, Ed advanced a loan to Johnny since he was aware that Johnny’s business was struggling to stay afloat. Therefore when Johnny repaid most of the loan, Ed wrote off the remaining debt. However, at the time of making the partial repayment, it appears that Johnny’s company was recovering from its financial struggles and a case can be made by Ed that he was unaware that Johnny was no longer suffering from financial difficulties. Thus Ed may claim that Johnny withheld information that would have prevented Ed waiving the remainder of the debt. On the other hand, it is not altogether clear whether or not Johnny’s company had recovered. The facts of the case merely stated that GG was able to remain afloat as a result of the loan. This does not mean that the company was no longer struggling to remain afloat, but merely that it could remain afloat as a result of the loan. The fact that four months later the company is doing better can be of no real significance to Ed, since the facts and circumstances existing at the time of the waiver are the relevant facts and circumstances.14 Ed may argue that since he waived the fee under the belief that Johnny’s company was suffering financially and as such did not believe that it would recover as quickly as it did as evidenced by Johnny hiring additional staff within four months of the waiver. It would appear that unless, Johnny knew at the time of accepting the waiver that his firm was well on the road to recovery and that his friend was acting on the mistaken belief that GG was not going to recover anytime soon, Ed may be able to claim the balance due, despite the waiver.15 Based on the authorities discussed, it remains a matter of fact whether or not Johnny deliberately concealed information about the true nature of his firm’s recovering upon repaying a part of the loan to Ed. If it can be determined that Johnny knew that his firm was recovering and that he was in a position to repay the entire amount of the debt, the waiver may not be effective and Ed may reclaim the full amount of the debt. However, if at the time of accepting the waiver, Johnny’s firm was still struggling to remain afloat, the waiver would remain effective. It can be argued however, that the fact that Johnny was able to repay most of the debt in one payment, was evidence that Johnny was no longer struggling. Thus Johnny was entitled to believe that his friend intended to discharge the remaining debt regardless of how Johnny’s firm was doing as he should have known that Johnny was doing betting financially. The main question is whether or not Ed accepted the partial discharge of the loan upon the condition that Johnny should repay the whole if indeed he is found not to be suffering from financial difficulties.16 While it is stated on the facts of the case for discussion that Ed discharged the remainder of the debt based on the understanding that Johnny was still suffering from financial difficulties it is doubtful that this was a condition relative to future or present circumstances. The fact remains, Johnny and Ed were friends and Johnny was entitled to believe that this friend was merely discharging the remainder of the debt and was satisfied to simply help out a friend. Another issue to consider is whether or not there was consideration at the time of the waiver. It was held in D & C Builders Ltd. v Rees that in cases where a partial discharge of a debt is accepted and the remainder is waived, the creditor may not claim the remainder of the debt unless it is inequitable to bar such a claim.17 A general principle is expressed in the case of Hughes v Metropolitan Railway Co in which it was held that: It is the first principle upon which all courts of equity proceed, that if parties, who have entered into definite and distinct terms involving certain legal results, afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them when it would be inequitable having regard to the dealings which have taken place between the parties.18 As noted in D & C Builders, the principle is applicable to waive the legal rights and obligations of the parties.19 In other words, the main question is whether or not it is equitable for Ed, who is Johnny’s friend to enforce the full repayment of the debt now that he realizes that his friend is not doing as badly as the initially thought. It would appear that the fact of their friendship may operate equally against both parties. Just as Ed may have relied on his friend’s honesty relative to his actual financial situation, Johnny may rely on the friendship to argue that he thought that his friend was merely helping him out when he discharged the remainder of the debt, just as he was helping him out when he extended the loan to him. It might also be argued in Johnny’s favour that in reliance upon Ed’s promise to discharge the remainder of the debt, he was able to use the funds he might have otherwise have paid to Ed to turn his fortunes around. It was held in Collier v P & M J Wright (Holdings) Ltd. that promissory estoppel could arise to prevent a creditor claiming the remainder of a debt previously waived in circumstances where the debtor relied on that promise and assurance in managing his payment obligations. In such cases permitting the creditor to go back on the promise would be inequitable.20 However, the court ruled that the reliance on the promise must be meaningful although it did not define what amounted to meaningful reliance.21 It might therefore be argued that Johnny relied on Ed’s promise to forego the repayment of the balance of the loan and in doing so, management his repayment obligations differently. Instead of repaying the remainder of the debt, Johnny invested the funds in his business and this is how he was able to make a profit and therefore bring in new employees. In this regard, it might be possible for Johnny to argue that the doctrine of promissory estoppel arises to bar Ed’s claim for the remainder of the debt. In all the circumstances, it might be claimed that it is inequitable to permit Ed to renege on his promise. Conclusion Having regard to the authorities discussed, it would appear that both GG and Ed may be barred from reneging on promises that effectively altered the terms and conditions of the initial contracts. GG promised to increase its obligations under the contract with YE and Ed promised to decrease Johnny’s obligations under the contract with him. In both cases the main question is whether or not it would be inequitable to permit GG and Ed to renege on their promises. Based on the facts of the case for discussion, it appears unlikely that either GG or Ed will be permitted to renege on their promises. In the case of GG, YE was able to complete the contract for the supply of circuit boards to GG on time despite the increase in cost. It would appear that in completing the supply of circuit boards on time, YE relied on GG’s promise to increase the obligation under the contract and arguably did so to its detriment. Ed on the other hand, upon promising to discharge the remainder of the debt owed by Johnny, put Johnny in a position where his surplus funds were managed according to his belief that he was no longer liable for the remainder of the debt. Arguably, Johnny invested the funds that he would have otherwise used to discharge his debt into his company. Bibliography Anangel Atlas Comp. Nav. S. A. v Ishikawajima-Harima Heavy Industries Co. Ltd. (No.2) [1990] 2 Lloyd’s Rep. 526. Attorney-General (Hong Kong) v Humphreys Estate Ltd. [1987] AC 14. Beale, H. G. and Bishop, W. D. (2008). Contract Cases and Material, 5th Edition. Oxford, UK: Oxford University Press. Central London Property Trust v High Trees House Ltd. [1956] 1 All ER 256. Charles Rickards Ltd. Oppenheim [1950] 1 All ER 420. Collier v P & M J Wright (Holdings) Ltd. [2007] EWCA Civ 1329. D & C Builders Ltd. v Rees [1965] EWCA Civ 3. Foakes v Beer [1881-1885] All ER 106. Hughes v Metropolitan Railway Co [1877] 2 App Cas 439, 448. Malik v Bank of Credit and Commerce International SA [1998] AC 20. Stilk v Myrick [1809] 2 Camp 317. Williams v Roffey Bros [1990] 2 WLR 1153. Read More