Advise Adam and Belinda in the Separate Situations in Business Law - Case Study Example

Business Law [Name of the Student] [Name of the University] Business Law 1. Introduction Adam and Belinda had formed a contract in January 2011, whereby Adam was to construct an extension to Belinda’s house, by the end of July 2011. It is required to advise Adam and Belinda in the following scenarios. First, due to labour shortages and increase in the cost of raw materials, Adam realises that he had grossly underestimated the cost of completing the contract. At the same time Jack approached Adam and expressed his desire to form a much more profitable contract with him. However, this contract was to be started immediately, which would make it impossible to complete the contract with Belinda. Second, Adam has just two earth moving machines and one of these is destroyed by fire, whose cause has not been found out. Adam cannot use the other machine, as it is being used in other on-going contracts. 2. Issues to be considered, while advising Adam and Belinda. a] Whether time is of the essence of the contract. b] If so, whether labour shortages and increase in raw material costs would provide protection to Adam under frustration for breach of contract. c] Whether the principle of frustration can be used as a defence for the unavailability of the earth moving machines. 3. Relevant law and discussion The crucial nature or otherwise of a time obligation in a contract, is determined by the construction of the contract. This is as per the provisions of section 10(2) of the Sale of Goods Act 1979, which permits repudiation of the contract if there is delay in contracts where time is of the essence. Nevertheless, time obligations have been deemed to be central to a contract, by the courts. Time clauses are usually significant in sale contracts, whenever time is central to the contract. The breach of a crucial time clause permits the non – breaching party to repudiate the contract1. However, the construction of the contract, determines whether a time clause on being breached will result in the annulment of the contract. A contract, in general, incorporates a variety of terms. Some instances are date for delivery, quality, and price and payment. In such a situation, some terms acquire greater importance than the others. A condition is a contractual term that is crucial to the contract, whereas a warranty is a contractual term that is of lesser importance. The breach of a condition permits the non – breaching party to repudiate the contract and claim damages for the resulting losses2. On the other hand, breach of a warranty restricts the non – breaching party to a claim for damages. A contractual term specifying a definite date, is generally deemed to be a warranty, unless the contract or the relevant circumstances indicate that time is crucial to the agreement between the parties to the contract3. In their ruling in Bunge Corp v Tradax SA, their Lordships held that specifications of time in the contract served to indicate that time were of the essence4. Moreover, in Stickney v Keeble the court ruled that the buyer of the piece of land could furnish a notice to the seller of the land to complete his obligation before the expiry of the stipulated date. It was also held that if the seller failed to do so, then the buyer was entitled to repudiate the contract. A notice of this type has the effect of making time of the essence, and it allows the party providing the notice to rescind the contract, after the time specified in the notice5. Frustration of a contract absolves the parties from any liability for having failed to fulfil the contractual obligations. This doctrine addresses events that take place after the formation of the contract, which make it impossible to fulfil the contractual obligations. On occasion, the parties may include contractual terms that deal with such occurrences, in order to avoid frustration. Moreover, the courts might intervene and interpret such clauses in a manner that permits the operation of the doctrine of frustration6. In Davis Contractors Ltd v Fareham Urban District Council, the principle that frustration takes place when a contractual obligation cannot be fulfilled. Such failure to fulfil the obligation should be due to changed circumstances that would make it markedly different from what had been specified at the time of formation of the contract. Furthermore, neither of the parties should be in default7. In Taylor v Caldwell, a music hall had been hired for the performance of a music concert. Prior to the performance the hall was razed to the ground by fire. The plaintiffs claimed the expenditure incurred by them on account of advertising and other preparatory actions. The court held that as the destructive event was not the fault of either of the parties, the contract was nullified by frustration8. With the decision in Fibrosia Spolka Akcyjna v Fairbairn Lawson Combe Barbour, Ltd and the Law Reform (Frustrated Contracts) Act of 1943, reliance costs can be apportioned9. 4. Application of the law to the case a] Is time of the essence of the contract? It is not necessary for a contract to stipulate that time is of the essence. A contract usually consists of a number of conditions that highlight the importance of time to the contract. These include contractual terms that declare time to be of the essence or that delivery dates are crucial. Essentially, the parties to a contract have to complete their obligations within the time mentioned in the contract10. In some contracts, performance of the contractual obligations has to be necessarily completed within the specified time. In such contracts, it is customary to include the term time is of the essence. A breach of contract takes place, in such contracts, if the contractual obligations are not fulfilled within the stipulated time11. In our problem, the contract contains a clause that time is of the essence. This makes the term relating to time a condition. Hence, any delay in delivery by Adam will make him liable for breach of contract. Belinda can repudiate the contract, under these circumstances and claim compensation for non-performance of the contract by Adam. b] Whether labour shortages and increase in costs, would provide protection to Adam under frustration? In Davis Contractors Ltd v Fareham Urban District Council case, shortage of labour increased construction costs significantly. The plaintiffs contended that the contract was frustrated, and that completion of the contract would necessitate higher remuneration. The court did not accept this contention and ruled that the delay had not brought about any fundamental change12. In addition, the court held that the delay was commercially anticipatable. Similarly, in our case, change in costs cannot absolve liability for breach of contract, as per the decided case law. In accordance with the case law discussed, Adam cannot rely on the doctrine of frustration, for the non – performance of the contract. c] Whether the principle of frustration can be used as a defence for the unavailability of the earth moving machines? An event is deemed to be frustrating if it has a significant effect on the contractual obligations of the parties to the contract13. Such events are sufficient grounds for refusing performance, because it will no longer be possible to comply with the initially agreed upon terms. In our problem, the destruction of the earth mover was foreseeable. In addition, Adam could have obtained another earth mover, by incurring additional expenditure. This would have enabled him to complete his contractual obligations towards Belinda. Consequently, Adam cannot rely on the defence that the contract had become impossible to fulfil, merely due to increase in cost. Strictly speaking, Adam should have made suitable arrangements for obtaining another earth mover. 5. Conclusion In our problem, time is of the essence of the contract, as visible in the construction of the contract itself. If Adam fails to fulfil his contractual obligations within the specified time, he will be liable for a breach of condition, under the provisions of contract law. Furthermore, neither increase in costs nor enhanced labour charges will make the contract frustrated, as per the decided case law. Regarding the earth moving machines, the doctrine of frustration will not come to Adam’s rescue. He has to make alternate arrangement for completing the work within the stipulated date. Damage to one of his machines will not frustrate the contract , since it is foreseeable and could have been avoided. As such, Belinda can claim against Adam for breach of contract and damages in respect of the losses undergone by her. References Bunge Corp v Tradax SA , 2 All ER 513 (1981). Davis Contractors Ltd v Fareham UDC , AC 696 (1956). ibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd , UKHL 4 (1942). Koffman, L., & Macdonald , E. (2007). The law of contract. Oxford University Press. Law Reform (Frustrated Contracts) Act . (1943). Crown copyright. Piliounis , P. A. (2000). The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law? Pace International Law Review, 12, 1 – 46. Rapsomanikas, M. G. (1979). Frustration of Contract in International Trade Law and Comparative Law. Duquesne Law Review, 18, 551 – 605. Rush, J., & Ottley, M. (2006). Business Law. Cengage Learning EMEA. Sale of Goods Act. (1979). Crown copyright. Stickney v Keeble , AC 386 (1915). Taylor v Caldwell , EWHC QB J1 (1863). Time of the Essence. (2009, March). Retrieved April 12, 2011, from http://www.cfrlaw.co.uk/fs/doc/articles/time-of-the-essence.pdf Willmott, L., Christensen, S., & Butler, D. (2005). Contract Law. Oxford University Press. Wright, D. (2004). Law for project managers. Gower Publishing Ltd. Read More