The Issue of Contention in Contract Law - Essay Example

Q1) Advise Owen The law of contract stipulates three fundamental requirements to establish a legally enforceable contract; ly offer, acceptance and consideration1 as highlighted by Lord Wilberforce in New Zealand Shipping Co Limited v A M Satterthwaite, The Eurymedon2 An “offer” in the context of contract law has been described as “an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed, the “offeree.3” The “expression4” may take different forms. The intention element is an objective consideration and the case of Smith v Hughes 5emphasised the relevant consideration as being a focus on how a reasonable person would view the situation. Furthermore, the law distinguishes between an offer and an invitation to treat, which is not an offer but an indication of willingness to negotiate a contract6. For example, in the case of Gibson v Manchester City Council7, the words “may be prepared to sell” constituted an invitation to treat and not a distinct offer. Indeed, the Gibson decision challenged the traditional view for formation of contractual agreement. In this case, Lord Denning asserted that when considering whether there is a binding contractual agreement, it could be argued that “there is no need to look for strict offer and acceptance. You should look at the correspondence as a whole and at the conduct of the parties and see therefore whether the parties have come to an agreement on everything that was material8”. However, there has been some uncertainty in this area of law as evidenced by the case of Carlil v Carbolic Smoke Ball Limited9. In this case, the defendant was the proprietor of a medical substance and placed and advert in the Pall Mall Gazette promising to pay $100 to anyone who used the carbolic smoke ball for two weeks and who for a limited time after contracted the flu virus. Carbolic Smoke Ball Limited argued that the advert did not constitute an offer but was rather an invitation to treat. The Court of Appeal rejected this argument and held that there was a legally enforceable contract. The advertisement constituted an offer to the whole world and was capable of amounting to an offer of a unilateral contract without the requirement for acceptance. The Carlil decision had far reaching implications for contract law, with some commentators arguing that there is no difference between an “invitation to treat” and a contractual “offer”10. However the facts of the current scenario indicate that Owen’s letter was a distinct offer to sell the car to Andrew for £30,000 and the central issue in contention is whether Andrew accepted Owen’s offer to create a binding contract. Valid acceptance in law follows a valid offer and the formation of a contract follows immediately. Furthermore, valid acceptance is final and unqualified acceptance of an offer as demonstrated in the case of Peter Lind Limited v Mersey Docks & Harbour Boar11, highlighting the “mirror image” rule, where acceptance must be unequivocal and unconditional, therefore acceptance must “mirror” the offer. Moreover, acceptance is a “final and unqualified expression of assent to the terms of an offer”12. The issue of contention in the current scenario is whether Andrew’s conduct constituted valid acceptance at law and whether the subsequent revocation by Owen constitutes valid revocation or alternatively, breach of contract. In the current scenario, Owen clearly stated that the offer would be open for a week. On the 4th May, within the time deadline, Andrew sent a letter to Owen indicating intention to consider buying the car at a different price and the general presumption as illustrated in Adams v Lindsall13 is that if post was the normal and anticipated method of acceptance, then the contract will be formed when the letter is posted and not when it is received by the offeror. On this basis, Andrew may argue that he has a binding contract with Owen. However his letter indicated a willingness to purchase if Owen reduced the price and thereby constitutes a counter offer. The case of Hyde v Wrench14 established that a counter offer brings an end to the original offer. Moreover, in the case of Butler Machine Tool Co –v- Ex Cell-O-Corp15it was held that in the case of counter offers, the presumption is that the last offer which has been accepted without qualification will be determined as covering the conditions of the contract. As such, Andrew’s letter constituted a counter offer and required acceptance by Owen and terminated the original offer at 9am in the morning. On the other hand, Andrew sent an email on the same day accepting Owen’s original offer and the leading case of Entores Ltd v Miles Far East Corporation16 highlights the difference between acceptance of offer by post and “instantaneous” communication. With regard to instantaneous communication it was held that such methods of communication could only be accepted once they had been heard or received by the offeror. The House of Lords asserted that it would be illogical for an instantaneous reply to an offer to be deemed accepted at the place of origin as a fault in communication could lead to communication being uncertain. Therefore, on this basis as Owen didn’t read Andrew’s email, it was not validly accepted at law. Furthermore, the letter that Owen received at 9am on 7th May terminated the original offer in Owen’s letter dated 1 May and therefore required Owen’s acceptance of Andrew’s offer to create a binding contract. Therefore, it is highly likely that Owen can negate Andrew’s claim of a binding contract and that the contract with Theresa is valid and not in breach of contract. Question 2: What are the main factors a court will consider when determining whether a term satisfies the requirement of reasonableness under the Unfair Contract Terms Act 1977? The provisions of the Unfair Contract Terms Act 1977 (UCTA) will be relevant to determining whether the limitation clause is valid. With regard to the exclusion of liability for contractual liability, the effect of section 3(1) of UCTA is that a party cannot exclude liability arising in contract “except in so far as …… the contract term satisfies the requirement of reasonableness”17. UCTA does not defined what it means to be reasonable, however it gives guidance and provides that courts must consider the bargaining power of the parties, whether the party affected by the exclusion clause was offered an incentive to enter into the agreement on particular terms, whether the contract is negotiated on standard form or negotiated and whether the exclusion or limitation clause represents a genuine allocation of risk in the contract18. For example, in SAM Business Systems v Hedley and Co19, a software supplier was allowed to rely on an exclusion clause that allowed it to supply an inadequate product20. However, the Technology and Construction Court found that the parties were of relatively equal bargaining power, and the purchasers could have attempted to negotiate better terms at the outset21. Moreover, it was observed that such clauses were standard practice in computing industry. Additionally, the inherent flexibility of the reasonableness test is applied by the courts practice. For example, in Photo Production Ltd v Securicor Transport Limited,22Securicor had excluded liability for damage caused by a fire as the security guard had responsibility for the destruction of Photo Production’s property. The House of Lords adopted a non-interventionist stance and upheld the exclusion clause on grounds of freedom of contract. In considering the contextual backdrop of the contract and the bargaining position of both parties, the House of Lords felt that the contract reflected a genuine allocation of commercial risk, which the judiciary should not interfere with as a general rule. This decision highlights the distinction between commercial and non-commercial contracts in the court’s approach to the UCTA reasonableness test. Moreover, whilst UCTA provides guidelines, the test inherently requires a practical case by case approach as evidenced by the contrasting decision in George Mitchell (Chesterhall) v Finney Lock Seeds23which struck down an exclusion clause, heavily influenced by post breach conduct and relying on a case by case factual approach. However, in Britvic Soft Drinks Limited v Messer UK Limited24, Tomlinson J asserted that this approach was incorrect and that “it is of course the term which must satisfy the test of reasonableness. The enquiry is not whether, given the circumstances in which reliance is sought to be put upon it, reliance upon the term is reasonable”. Furthermore, in the case of Stewart Gill Limited v Horation Myer & Co Limited25it was held that post clause conduct was irrelevant to the question of whether the term itself was reasonable in the UCTA sense and that reasonableness had “to be determined as at the time when the contract is made and without regard to what particular use one party may subsequently wish to make of it”26. With regard to the Schedule 2 guidelines pertaining to reasonableness, Treitel comments that “guidelines no doubt help to reduce the uncertainty to which the requirement of reasonableness gives rise; but the restrictions on their scope are hard to understand27”. Nevertheless, the courts have referred to the Schedule 2 guidelines for assistance in a wider sense. For example, in Zockoll Group Ltd v Mercury Communications Ltd28 the courts referred to the Schedule 2 guidelines in considering reasonableness under section 3(2) of UCTA. Lord Griffiths indicated that the following factors should always be taken into account when applying the test: 1) Whether the parties were of equal bargaining power; 2) Was it reasonably practical to obtain advice from an independent source, taking into account cost and time considerations? 3) Was the task for which liability was being excluded difficult? 4) The practical consequences of the decision as regards the question of reasonableness. These questions posed by Lord Griffiths mirror the Schedule 2 objectives. Furthermore, section 11 of UCTA specifically refers to the availability of insurance in determining whether a limitation clause is reasonable, which becomes particularly pertinent in commercial contracts. As highlighted in the case of Singer Ltd v Hartlepool Port Authority29it was held that the availability of insurance was the determining factor and not whether insurance had been obtained. Indeed, in Smith v Eric Bush30, it was commented that “everyone knows that all prudent professional men carry insurance, and the availability and cost of insurance must be a relevant factor when considering which of the two parties should be require to bear the risk of a loss31”. Accordingly, whilst there are a set of guidelines and common factors taken into account when considering reasonableness, there is wide scope for judicial discretion and in the George Mitchell case it was commented that “there is room for a legitimate difference in judicial opinion32”. Whilst this clearly creates a tension with legal certainty, the wide scope of contractual scenarios arguably requires a flexible approach in considering factual scenarios. On the other side of the spectrum, this has fuelled academic criticism for lack of consistency and there appears to be strands of judicial approaches to reasonableness in certain industries. For example, Barker posits that the “software cases” such as Pegler v Wang and Horace Holman Group Ltd v Sherwood international Group33 mark a significant example of heightened judicial interventionism when applying the reasonableness requirement; arguably as a response to preventing monopolistic markets. Conversely, Barker suggests that the 21st Century has marked an increasingly individualistic approach to the concept of reasonableness with a focus on parties in commercial contracts knowing at the outset, which party bears the greater risk and the concomitant impact on pricing34. However, in general, the courts whilst attempting to introduce a semblance of consistency via general guidelines, overall the approach to reasonableness is flexible and inherently dependent on the circumstances of the particular contract. Q3). A misrepresentation claim is effectively a remedy claim for a party that has entered into a contract in reliance on a false statement of fact made by the other party; which may not have been incorporated into the contract as an express term35. Misrepresentation commonly becomes an issue in the event of dispute pertaining to pre-contractual statements during the negotiation phase. In order to rely on a statement made in the pre-contractual disclosure phase, the statement must constitute a “statement of fact”, which induces the other party to enter into the contract36. However, confusion has reined as to what constitutes a statement of fact, which is distinct from a statement of opinion or belief, statements of future conduct or intention; statements of law; and cases of silence or non-disclosure, which are not generally actionable37. For example, in the case of Bisset v Wilkinson38, the farm owner stated that he believed the farm would hold a specific number of sheep however the farm had never been used as a sheep farm. It was held that this was merely a statement of opinion not fact. Alternatively, there appears to be a different approach when dealing with statements made by dealers or agents considered to have specific knowledge or skill in relation to the matter39. For example, in Smith v Land and House Property Corporation40, the property was sold with a sitting tenant, yet was described as “desirable” and a “first class investment” to the tenant. The tenant was suspected of running a brothel and was in arrears on rental payments. The courts inferred an implied representation of fact as the agent clearly did not believe in the statement41. Whilst such an approach is arguably necessary to protect the party of unequal bargaining power, it further perpetuates legal uncertainty regarding the status of pre-contractual statements, which is essential in determining the available remedy and extent of liability in the event of contractual breach. This is further evidenced by the inconsistency in ad hoc judicial decisions, often motivated by policy and moral considerations as opposed to defined legal principles42. For example, in the case of Dimmock v Hallet43, the seller described his land as “fertile and improvable”, whereas the seller found the land to be useless and covered in rocks. However, the courts determined that the rocks were still fertile in that they grew moss and therefore there was no actionable cause for misrepresentation. In this case, the courts clearly adopted a literal and narrow approach, which further supports the above statement that the “difficulties surrounding pre-contractual disclosure stem largely from the remedy available for breach rather than the substantive duty”. Indeed, in the case of Edgington v Fitzmaurice44, Bowen LJ stated how “the state of a man’s mind is as much as his stomach45”, thereby suggesting that the courts consider the impact of the representation on the potential remedy available as opposed to the impact of the pre-contractual disclosure on substantive duties under the contract. As such, this can clearly risk retrospective widening of contractual obligations outside the actual contractual intentions of the parties at the outset. The inherent complexity of determining the resultant impact of pre-contractual disclosure is further compounded by the rules relating to silence. The general rule is that pre-contractual silence will not constitute a misrepresentation46. However, as Lord Campbell highlighted in the case of Walters v Morgan47 “although simple reticence does not amount to a legal wrong…a single word or nod or wink or a shake of the head or a smile fm one party might amount to misrepresentation”48. This again highlights the point that the focus of the courts is on the remedy available for breach and morality, which undermines the need for legal certainty. It further highlights the inherent problems of addressing issues of morality within a defined legal framework. Moreover, the rule regarding silence is subject to four exceptions49. Firstly, pre contractual half truth statements, can amount to misrepresentation50. Secondly, a duty of disclosure may arise where the circumstances have changed and the statement may be false by the time it is acted upon. In the case of With v O’Flanagan 51it was highlighted that failure to disclose a change in circumstances resulted in actionable misrepresentation. The third exception is “contracts uberrimae fidei” (which are contracts of good faith), whereby the contracts require full disclosure of all material facts52, for example insurance contracts. Conversely, the situation regarding pre-contractual disclosure in such “good faith” contracts is actually central to enforcement of substantive obligations under the contract. However, as Soyer points out, “in the consumer market, even though the strict letter of the law is not followed anymore, it is beyond doubt that consumers find it rather difficult to understand their legal rights and obligations under insurance contracts as such contracts are regulated by a complex patchwork of law regulations and guidelines53”. Moreover, Lord Bingham criticises the approach of the law to pre-contractual negotiations particularly in god faith contracts by implementing “piecemeal solutions in response to demonstrated problems of unfairness54”. As such, in June 2007, the Law Commission published a joint consultation paper entitled “Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured” to highlight the need for law reform on misrepresentation and non-disclosure at pre-contractual stage by the intermediaries. The goal of the law commission is to present a final bill to Parliament for approval by 201055. At present, in considering these “good faith” contracts, the law appears to adopt an economic perspective in requiring full disclosure of contract terms56. In the case of Interfoto v Stiletto57, one of the contractual parties failed to point out a particularly onerous obligation in the hire contract. Lord Bingham found that the English rules required a “result not very different from the civil law principle of good faith58” and therefore refused to enforce the term. Moreover, once the complex rules regarding the nature of the statement of fact and whether the exceptions to non-disclosure are applicable, the remedies available for problems in pre-contractual disclosure are subject to the patchwork reliance model59. This protects those who reasonably rely, to their detriment on misleading statements, however is subject to complicated limitations60. This is further compounded by the ad hoc development and application of doctrines of estoppel, unilateral and collateral contracts to protect innocent parties based on detrimental reliance. Accordingly, it is submitted that there is clearly no consistent and definitive legal framework for addressing the legal impact of pre-contractual disclosure. Moreover the use of pre-contractual disclosure appears to have been utilised as a tool to incorporate an implied duty of good faith prior to concluding the contract. However, this has led to gaps in the law and it is clear that the overriding consideration of the court appears to be the impact of the remedy for breach as opposed to the substantive cases in many cases as the above statement suggests. Nevertheless, the substantive obligations under contract particularly in insurance contracts have clearly been of paramount consideration when addressing the pre-contractual disclosure requirements and the duty of good faith. Accordingly, it is more appropriate to assert that the difficulties of pre-contractual disclosure ultimately stem from the court’s consideration of morality and fairness in each case. However, the result of this has been the ad hoc development of piecemeal solutions, with no interlinking thread of consistency. Instead, we have the undesirable result of numerous smaller doctrines and complicated exceptions, which enables judicial autonomy in filling the gaps. Whilst such an approach on the one hand necessary to protect against exploitation of unequal bargaining power, the lack of judicial consistency and expansion of equitable doctrines not only perpetuates legal certainty, it clearly undermines the autonomy of parties and the fundamental contractual principle of free will. Bibliography P. S Atiyah (2005). Sale of Goods.11th Edition Longman. D. Barker [2001] A Return to Freedom of Contract. New Law Journal 151 Chitty (2007). Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. John Macleod (2006). Consumer Sales Law. 2nd Edition Routledge Cavendish. E. McKendrick (2008). Contract Law: Text, Cases and Materials. 3rd Edition Oxford University Press. Jill Poole (2006). Contract law. 8th Edition Oxford University Press. Dr B. Soyer, (2007). Reforming Pre-contractual duty of utmost good faith in insurance contracts- An economic perspective. Available at www.canlecon.org/submissions/docs/Soyer. Accessed on 3/12/2008. G H. Treitel (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. Statute Unfair Contract Terms Act 1977 Read More