Objective Approach in the Law of Contract - Coursework Example

OFFER AND ACCEPTANCE LAW REPORT INTRODUCTION A contract is a legally binding agreement between two or more contracting parties. For a contract to exist between Large Store Ltd (LSL) and Massive Engineering Ltd (MEL) there is a great need to establish the existence of an offer and acceptance. Courts will always use the traditional approach of ‘mirror image’ to determine the existence of a contractual agreement between the parties. According to the rule of ‘mirror image’ the court must unequivocally find that the documents exchanged by the parties have a clear and unequivocal offer which should be perfectly matched by unequivocal and clear acceptance. A purported acceptance which does not agree with all the original terms of the contract doesn’t amount to acceptance. An example is a counter offer illustrated in the case of Hyde v Wrench1. Mr. Wrench in this case had offered some piece of his land for sale to a tune of £1000, to the claimants. The claimants on the other hand replied by quoting a price of £950 which was categorically rejected by the defendants. Consequently, the claimants wrote back to the defendants agreeing to accept the original offer of £1000. The court held that there was no existence of a contract between the parties since the second ‘acceptance’ by the claimants amounted to a counter offer. The effect of the counter offer is to ‘kill off’ the original offer, thus the existence of a contract is extinguished. This traditional approach was echoed too in the case of Butler v Ex-cell Ltd2 which compares perfectly with the scenario of LSL. In this case the Butler who was also the sellers of a machine made some standards of business which also included a price variation clause. The buyers had sent an order which contained their own standard terms of business. The buyers’ standard of business terms did not include a price variation clause and clearly stated that the price of the machine tool was fixed. Sellers received the buyers order, signed it and returned it back saying that they were going to carry on with the terms according to the original offer of the contract. After completing the machine tool, the sellers tried to give effect to the price valuation clause. This was before the delivery of the machine tool, the effect of this was to enable the sellers to claim an additional amount of £2892. The buyers as expected refused to pay the additional sum imposed by the sellers. The Court of Appeal by a majority held that the contract had been concluded on the buyers terms and they ought not to pay the increased amount. Using this approach the MEL may find it extremely difficult to prove their case in the circumstances. The persuasive view in determining the suit was the ‘mirror image’ rule. The court held that the buyers order could not at all be construed to be the seller’s offer, since there must be unequivocal acceptance and offer. The court held that a counter offer was accepted when the sellers signed the tear off acknowledgement. LSL may be seen to have accepted the variation clause by signing the MEL letter dated 28th June. The advantages of the traditional approach is firstly because it gives a welcomed standard to be applied by the court of law wherever and whenever there is a conflict as to the existence of a contractual agreement. Secondly the traditional approach is supported since it seems to promote certainty in contracts. This is so because the legal advisers can easily advise and guide both the court and their clients on the established laid down principles that the court will use in deciding the existence, formation and conclusion of a contractual agreement. The rules is considered simple, because once the party can prove the existence of an unequivocal offer and acceptance, then the contractual agreement is said to be in existence. The traditional approach however attracts a lot of criticisms from various quarters. Firstly it is considered to be a rigid rule of application and construction. This is in the sense that only the sellers or the buyer’s terms of the contract will govern the contractual relationship. The courts will not be obliged to come to a respective compromise, but rather will base its decision on a specific party side of view. This becomes very unfortunate then to parties who may be having a ‘battle of forms’ contractual agreement, for example LSL and MEL company Ltd. Each party from its own perspective have a reasonable believe that its terms are the most suitable to determine the kind of the contractual relationship. This complicates the situation since the court will not enter into a compromise at the end, but will fully support a single handed opinion or decision of a party.3 Lord Denning in the case of Butler4 though in the minority held that the traditional approach in considering the contractual formation, is a very ‘out-of-date’ approach, since it would be a grave mistake to think that all the contracts could be easily categorized and analyzed into the form of acceptance and offer only. He opined that where there were contradictory terms between the parties, the court would intervene in order to ‘scrap’ the unfair terms and replace them with’ reasonable ones’.5 GLOBAL OR OBJECTIVE APPROACH Even though there are instances the court still believes that the traditional approach should prevail, this position is changing. The conservative approach has however been given a lot of credence by Lord Wilberforce in the case of New Zealand Shipping Co. Ltd v A M Satterwaite & Co Ltd6 that the law of contract is a very technical doctrine, that continue to fit in the slots of offer and acceptance when contracts are constructed by the court of law. The above position seems to cement the position that traditional approach is still the courts view in most cases. Due to the narrow view of the traditional approach, there are problems posed especially where there is multiplicity of communication by the parties. The marked slots of offer and acceptance, otherwise called ‘mirror image’ rule becomes a hard rule to apply since it would result in some injustices to the parties. The court in such a scenario takes into consideration of the whole contractual negotiation in order to determine the very existence of a contractual agreement. This wider approach applied by the court has come to be known as the global or objective approach. This takes into consideration the reasonable man test. It seeks to analyze the situation and come to a point of showing the objective manifestation of the parties. Due to the multiplicity of communication, this approach seeks to ascertain what a very objective bystander would have held in the circumstances. The approach was first considered in the case of Boulder Consolidated Ltd v Tangaere7 the judges held that in the paid up agreement, the traditional approach would be inapplicable. A clear analysis of the contractual agreement showed that there was need to choose objectively the respondent sections that would be applicable. This was the position since it was the view of the bench that there was no definitive offer in the contract. Thus an objective analysis would bring clarity in the construction in holding that there was no clear circumstances and communication to clearly show that the parties had a complete agreement. The major difficulty associated with the objective approach, is that a party to the contract may be imposed some obligations which they had not agreed to be bound to. The objective approach result out of necessary implications made as a result of holistic view of the contract. The court in so doing may take into account or fail to account to some issues which may have been necessary in determining the existence of the contractual obligations.8 Implications of the terms of the contract may make a party to assent to some terms which they would not occasionally have assented to in case their attention was drawn to its very existence. This criticism is illustrated in the case of Aotearoa International Ltd v Scancarriers9the defendants in this case owned some ship and made a telex to the plaintiff who were exporters agreeing to pay for a cargo at $120 per ton. The value was the promotion rate of the plaintiff. The defendants had categorically held that the promotional rate was going to be the baseline of their agreement for the next half year of the shipping agreement. After only shipments the defendants refused to have any further bookings and as a result the plaintiffs sued for breach of contract. The court of the first instance dismissed the suit, but on appeal the court held there was a contract. In using the traditional approach the court had held that the telex communication did not in any way amount to a contractual offer. The court of Appeal in determining the existence of a contract held that the objective analysis would be the best in determining the issues. A construction analysis of the contractual agreement showed that there was a necessary implication of a shipment contract by which goods were to be transported at the shipment promotion rate. In the case of McMahon v Gilberd & Co ltd10 the court was of a majority view that the global approach should only be used in exceptional cases. The role of the court is not to ‘create’ a contract for the parties as seen by most of the cases in objective approach, but rather a restricted one of construction only. Objective approach is seen to be adding or implying terms which the parties did not agree to when making the legally binding bargain. An important area where the objective approach will have a positive effect is experienced in tenders. Most of the tenders contain an important clause that the tenders have a right to accept any tender at all. A traditional approach will infer that an omission of this would essentially bind the tenders to a contractual agreement. This position was dissented in the case of Pratt Contractors Ltd v Palmerston North City Council11the court ruled that the omission of the clause did not affect the insertion of the tender clause. Thus the tenders were assisted by the objective approach and their legal redress upheld. AGREEMENT MAY BE INFERRED BY CONDUCT. Contracts present many difficulties, and in trying to solve them the court of law will not be confined to use the terms of the contract contained in the documents only. The totality of the parties conduct is a derminating factor in establishing the very existence of the contractual agreement. The court has held in the case of Thorton v Shoe Lane Parking Ltd12 the court held that conduct alone may be establish in an objective way the existence of a contract. An example is where a customer pays electronically or through cash in an automated machine. A conduct may essentially not rebut the very existence of the contract; this was echoed and drawn from the case of Thomson v Burrows13where the court held that the conduct of dispatching of the goods in international trade amounted to acceptance of the contract.14 It is however very difficult to ascertain the precise moment when the contract was formed especially when it covers a long period of time. If the negotiations take a long period of time, it becomes difficult in establishing what was the particular conduct and inference of the parties. This was considered in the case of Brogden v Metropolitan Railway Co15both parties had contracted for coal delivery without a very formal agreement. At one point the parties decided to formalize their agreement. The railway company sent an agreement to Brogden that he may sign and agree to the terms of the contract. He inserted an arbitration clause and also sent it back to the company though the document was never executed. When a dispute arose, Brogden denied the existence of a contact on the basis of the formalized agreement. The court held that Brogden upon delivery of the coal had mutually assented to the agreement. Though there was no further communication about the agreement, the conduct of the parties illustrated that the parties had agreed to be bound by the terms of the new agreement. The courts have however taken a restrictive approach in some instances, in the case of Airways Corporation of New Zealand Ltd v Geyserland Airways Ltd16 held that the conduct of the offered will not be taken into account when it is known by the parties that he did not intend to enter into a contract. The courts have established a rule that a party who sign a document is bound by it, therefore the conduct and intention of the party signing is immaterial. This is illustrated in the case of L’Estrange v F. Graucob Ltd17the claimant in this case bought an automatic slot machine from the defendants. The claimants signed a clause which excluded the defendants any express or implied warranties. The machine malfunctioned and the claimants sought to recover damages. The court held that the defendants were excluded from liability by the virtue of the claimants signing the document. This rule implies that parties should be very careful as to what they contract to.18 In deciding the matter through the use of inference, the court also uses the reasonable test. The court determines if a reasonable bystander would have inferred that a contract existed between the parties by merely looking at the conduct of the parties. When examining the conduct of the parties, the court does not necessarily have to fix the exact moment that the contract was formed between the parties. Still while looking at the conduct of the parties; it is important that the customs and usages are examined when determining the existence of a contract. If by the parties conduct the customs imply an existence of the contract, then the party will not absolve liability by mere application of the traditional approach which requires an unequivocal offer which must be matched by unequivocal acceptance. BATTLE OF FORMS. This rule comes in handy when there are standard terms of contract being negotiated by the parties. The problem that the rule seeks to remedy is the rule that seek to treat all conditional acceptances as counter offers. The rule of counter offer established in Hyde v Wrench19would be see n to conclude that there is no existence of a contract so long as the parties keep on exchanging their preferred terms of contract. Adherence to this strict rule of counter offer may result in some injustice, since the parties may not strictly be inferring that there is no contract as between them. The expectations of the parties may be different from the rule. The courts have not come up with one agreed position as to what should happen when there is battle of forms. The persuasive view is however the ruling of Lord Denning in the case of Butler Machine Tool Co v Excel Corporation20that the court should see the objective of the contract by looking at the whole document. The courts should look to see if the parties thought they had contracted and at what precise moments. This should be done carefully not to create a new contract by the parties. This approach tends to support the objective approach earlier on discussed. CONCLUSION The objective approach has been criticized for lack of certainty by the courts and legal advisers. Certainty is an important element in the law of contract, however for the sake of justice in the ‘battle of forms’ the objective approach renders a clear avenue through which justice is exercised. The objective approach shows the credence of the courts discretion and credence. The international covenants however seem to still support the traditional approach, a factor which may persuade the courts to take this approach.21 BIBLIOGRAPHY Atiyah, PS Essays on Contract (Oxford University Press, New York, 2000). Benson, Peter (ed) The Theory of Contract Law: New Essays (Cambridge University Press, Cambridge, 2001). Burrows, JF, Finn, Jeremy and Todd, Stephen MD The Law of Contract in New Zealand (2nd ed, LexisNexis NZ, Wellington, 2002). Gordley, James and Von Mehren, Arthur Taylor An Introduction to the Comparative Study of Private Law: Readings, Cases, Materials (Cambridge University Press, Cambridge, 2006). Smith, Stephen A Contract Theory (Oxford University Press, New York, 2004). Coote, Brian “Reflections on Intention in the Law of Contract” (2006) NZL Rev 183. Read More