LW 56-806-01 (21) “C.P.E. (POST-GRADUATE DIPLOMA IN ENGLISH &HONG KONG LAW): YEAR I” (2002/03)

Contract Tutorial Questions

1. Alan Pitchpond is a landscape gardener with his own TV series. He has recently invented a self-propelling lawnmower. It cuts grass and disposes of the cuttings automatically. At this stage, there is only one machine in existence and Charlie Hammock, the winner of the Gardener of the Year 2000 competition, is keen to acquire it in his effort to retain the title. Charlie’s main rival Basil Flowers is also keen to obtain the lawnmower to help him win his first Gardener of the Year title.

On Monday, Alan places an advertisement in the Garden Gazette:-

“Original model, self propelling lawnmower, one only £5,000 or nearest offer”.

Later that day, Charlie telephones Alan and says: “the lawnmower for sale, I’ll take it for £3,500”. Alan replies “I cannot accept less than £4,000, but I am an admirer of your work, so I will not sell it to anyone else before Saturday. Let me know if you want it”. Charlie is delighted to hear that Alan is a fan of his work and says “that is kind of you, I will send you a copy of my new book ‘Creating Prize Winning Gardens’.”

On Wednesday, Charlie telephones Alan and leaves a message on his answering machine saying “I accept your offer”. Unfortunately, the answering machine does not have a tape in it and the message is not recorded. Later that day, Alan sells the lawnmower to Basil Flowers for £4750.

On Thursday, Charlie is at the Greendale Garden show and he meets Basil’s wife, Rosemary, who tells him that Basil is very excited at having acquired the only self-propelling lawnmower in existence.

As soon as he gets home, he posts a letter to Alan confirming the message he had left on the answering machine. On the same day, Alan writes to Charlie withdrawing the offer.

(a) Advise Charlie(b) Would your advice differ in any way if Charlie had e-mailed the confirmation

of the answering machine message rather than posting a letter?

1. OUTLINE ANSWER

OFFER and ACCEPTANCE

(a) This question is concerned with whether there is an agreement with Alan to purchase the lawnmower. In deciding this, the courts will normally apply an objective

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approach GIBSON v MANCHESTER CITY COUNCIL and the technical rules of offer and acceptance will be applied.

To achieve a good answer, it is best to adopt a chronological approach to the facts- first find the offer and then the acceptance. It may be that the facts will not be clear cut, so it is quite legitimate to say ‘if this statement is an offer, the following consequences flow…. But if it is an invitation to treat, then the following consequences will follow….

The advertisement in the newspaper

Is this statement an offer or an invitation to treat?

On the facts, it is likely that this will be interpreted as an invitation to treat for the following reasons:

(1) The courts normally regard an advertisement as an invitation to treat on the grounds that if the advertisement is an offer, and like here, the advertiser has only one item to sell, this would mean that if a number of people respond accepting the offer, the advertiser is going to be in breach to all but one of them as he has only one item for sale. Therefore, to avoid this conclusion, and also to give the owner discretion as to which party he is going to sell to the court will normally infer the intention of the advertisement is to invite people to make offers to buy – hence, the advertisement is an invitation to treat. PARTRIDGE v CRITTENDEN

(2) The fact that the advertisement says £5000 or nearest offer again objectively indicates Mike’s intention that he wants members of the public to respond by making offers to him. The facts are therefore different from CARLILL v CARBLIC SMOKE BALL COMPANY where on the facts of the case, the wording of the advertisement was an offer.

Charlie telephones Alan

This seems to be an offer. An offer exists when it is clear that one party regards negotiations as at an end and intends objectively to commit himself to an agreement. This is the case here. Charlie does not wish to negotiate further but is making it clear that he wants to enter an agreement to purchase the lawnmower for £3500. Thus it is an offer.

Alan’s reply

Alan’s reply is not an acceptance. He is introducing a new condition that the price should be £4000. It is therefore likely to be construed as a counter offer as in HYDE v WRENCH. This has the legal effect of destroying the original offer. If this is the case, then all that legally exists is Alan’s offer to sell the lawnmower to Charlie for £4000.

It could be argued that all Alan is doing is supplying information to Charlie i.e. if he decides to sell, then he will not take less than £4000. STEVENSON v McCLEAN.

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However, ‘let me have a reply by Saturday’ suggests that it is more likely to be an offer.

Alan’s statement

Is the promise to keep the offer open until Saturday legally binding on Alan? – no this is not binding on the offeror unless the offeree has provided consideration for it. ROUTLEDGE v GRANT. The fact the Charlie states that he will let Alan have a copy of his book is not consideration. The suggestion comes after Alan’s promise and therefore, it seems to be past consideration ROSCORLA v THOMAS. The exception to the past consideration rule does not apply, as there is no suggestion that when Alan made the promise, he expected to be paid RE CASEY’s PATENTS

Charlie’s telephone call

Charlie appears to be attempting to accept Alan’s offer at £4000. However, to be a valid acceptance it must be communicated to the offeror ENTORES v MILES FAR EAST CORPORATION. This is not the case here. There is a possible exception if the offeror has not learned of the acceptance through his own default see BRINKIBON and on the facts, perhaps some blame can be attributed to Alan for failing to ensure that the machine had a tape in it.

Alan sells to Basil for £4750

Clearly this means there is a contract between Alan and Basil. However, the fact that Alan has sold to Basil does not destroy the offer to Charlie. The revocation must be communicated to the offeree in order to be effective. BYRNE v VAN TIENHOVEN

Charlie’s meeting with Rosemary

Does this destroy the offer to Charlie? It is sufficient if the offeree learns of the revocation of the offer from a reliable source DICKINSON v DODDS. If it should have been clear to Charlie that Rosemary was talking about the lawnmower that Charlie wanted to buy, then he now knows that Alan no longer wants to sell it to him and he cannot accept. This means that there is no contract between Alan and Charlie.

Charlie posts the letter to Alan

Charlie attempts to accept by post. As we have seen, he cannot do this if he knows that the lawnmower has been sold elsewhere. It appears that he does know, by his haste in rushing home to write the letter. However, if he does not know, then he can invoke the postal rule which states that acceptance takes place when the letter is validly posted even if not received ADAMS v LINDSELL. If this is the case, then Alan’s letter of revocation only takes effect when received and this is too late to revoke the offer BYRNE v VAN TIENHOVEN

The postal rule does not apply where it is made clear that the letter of acceptance must actually be received before there is a contract HOLWELL SECURITIES v HUGHES or where it would be unreasonable to reply by post – QUENERDUANE v COLE – do any of these restrictions apply here? It would not be reasonable to reply

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by post if the letter is posted at a time when there is no chance of it meeting the Saturday deadline.

If Charlie has an email address or fax number for Alan, would it have been better to use these methods?

Also, is Alan’s statement let me have a reply by Saturday similar to the case of HOLWELL SECURITES v HUGHES in that it asks for notice in writing? In that case, the offeror was making it clear that he must actually receive the reply before the contract existed. If the postal rule does not apply, then there is no contract because Charlie learns of Alan’s revocation before Alan learns of Charlie’s acceptance.

CONCLUSION

On the facts, there seems to be an offer by Alan to sell the lawnmower for £4000. If Charlie reads Alan’s letter of revocation, there can only be a contract if Charlie has accepted before then. The only time this can have occurred is on Thursday when Charlie posted his letter of acceptance. If the postal rule applies, acceptance would take place as soon as the letter is posted. There are two points to make in relation to this:

(1) If Charlie knew that the offer had been withdrawn after his meeting with Rosemary, then it would be too late for him to accept when he posted the letter. DICKINSON v DODDS

(2) Does the postal rule apply? Or by asking for a reply by Saturday, is Alan indicating that there is to be no contract until he has received a reply, thus excluding the postal rule. HOLWELL SECURITIES v HUGHES

(b) if Charlie had emailed the information instead of posting it to Alan, it is suggested that the position would be the same as for telex. This would mean that the acceptance would be effective when it was received by the offeror (BRINKIBON v STAHAG STAHOL). This view was accepted in HONG KONG : SUSANTO-WING SUN v YUNG CHI HARDWARE.

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LW 56-806-01 (21) “C.P.E. (POST-GRADUATE DIPLOMA IN ENGLISH &HONG KONG LAW): YEAR I” (2002/03)

Contract Tutorial Questions

2.(a) Elizabeth, a successful artist, contracts with Tony, a builder, to construct an extension to her house. Elizabeth proposes to use the extension as a studio for her work. It is agreed that the work will be completed by May 2000 and that the price will be £12,000. Both parties realise that this figure is slightly below the true commercial rate for the job and this is to reflect the fact that Elizabeth is an old family friend of Tony’s and she has painted portraits of Tony’s family free of charge in the past.

The electrical work in the extension is to be completed by John who has a separate contract with Elizabeth.

Tony commences building the foundations for the extension and discovers that the ground is especially hard due to the presence of a layer of rock. This will involve the hire of extra digging equipment and means the job will take longer than anticipated.

Tony contracts Elizabeth to explain the situation and, as she has arranged to hold an exhibition of art in the studio in June 2000, she is anxious to have the building work completed on time. Consequently, she agrees to pay Tony an extra £3,000 to finish on time.

Additionally, John, the electrician, promises Tony an extra £500 if he will finish on time because John needs to finish work for Elizabeth in May as he is due to go on a 6 month holiday to Australia in June.

Tony completes the work on time but Elizabeth will only pay the original £12,000 and John will not pay the £500.

Advise Tony.

(b) Milo, the owner of Greendale Post Office is anxious about the decline of the small rural post office and decides to expand his business by building a gift shop and tea room to attract tourists. He borrows £50,000 from Goggins Bank to make the improvements. The money is to be repaid at £10,000 per year over five years plus interest at the Bank’s variable rate.

The improvements go well and the tea room and gift shop are operating successfully. Milo repays the first instalment of the loan. However, Milo then becomes ill and the tea room and the gift shop are closed for prolonged periods. This downturn in business means that Milo is unable to pay the next loan instalment when it falls due. Milo’s difficulties are so great that it is possible that his business may have to close completely. He advises Goggins Bank of this and the Bank agrees to postpone the payment of the next £10,000 for one year and to relinquish their claim to interest on that payment.

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However, 6 months later, the financial security of Goggins Bank is threatened when one of their Directors is involved in a major fraud scandal and the Bank advises Milo that he must pay the missed payment of £10,000 at once together with interest.

Advise Milo.

2. Outline Answer

CONSIDERATION

(a) The central issue here is sufficiency of consideration in relation to the performance of existing contractual duties. We are asked to advise Tony as to whether he can enforce promises made to him by Elizabeth and John to make payments of money. This involves a discussion of consideration - define consideration and then examine the individual agreements.

Tony and ElizabethThe agreement to do the work for £12,000 is an enforceable agreement; consideration is executory on both sides. The fact that the agreed price is below the commercial rate is irrelevant for two reasons:(1) Consideration need not be adequate Chappell v Nestle(2) The portraits of Tony’s family could only amount to past consideration – Re

McArdle and this would not be sufficient. There is no suggestion that the exceptions would be relevant here.

With regard to the further agreement to pay £3000 extra in return for Tony’s promise to complete the work on time, is there consideration to support this promise? If Tony is only doing what he is contractually bound to do, then the consideration may be said to be insufficient STILK v MYRICK. HARTLEY v PONSONBY probably would not apply here despite Tony’s difficulties with the hard ground. If STILK v MYRICK applies, then Tony would not be able to recover the extra payment. However, the case of WILLIAMS v ROFFEY must be examined.

If Elizabeth has promised a further sum in order that the contract may be performed on time and she obtains a practical benefit as a result of giving the promise, then the performance of the existing contractual duties on Tony’s part may amount to sufficient consideration. This would be subject to the requirement that the promise was not given as a result of economic duress or fraud.

In this scenario, Elizabeth does obtain a practical benefit in that she has her studio finished in time for the exhibition. Can this be reconciled with STILK v MYRICK? - The outcome of that case was justified on the basis that parties to a contract should not be permitted to threaten breach in order to secure an extra payment. Obtaining payments in this way is now addressed by the concept of economic duress and the courts appear more willing to uphold a genuine commercial renegotiation as long as economic duress is absent.

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The answer should explain the nature of economic duress and in particular address whether any illegitimate pressure was applied to Elizabeth and if so, did she have any reasonable practical alternative but to agree? ATLAS EXPRESS v KAFCO Here it does not appear that Tony exerted any improper pressure upon Elizabeth to induce her to make the new promise. Thus, the promise of Elizabeth may be enforceable by Tony.

Tony v John.John promised to pay £500 to Tony. Is there consideration provided by Tony doing what he was bound to do in his contract with Elizabeth (a third party as far as John is concerned)? The cases suggest that this is sufficient consideration PAO ON v LAU YUI LONG, THE EURYMEDON. It is not likely that this would be an agreement which the law would hesitate to enforce and John does benefit. It is likely that the promise to pay Tony £500 will be enforceable.

(b) The original contract is for the £50,000 to be repaid at £10,000 over 5 years plus interest.

The Bank then promises to postpone the payment of the next £10,000 for one year and to give up the interest on this sum. Six months later it now wishes to go back on this promise. Can the Bank do so?

Milo should be advised that the rules concerning offer, acceptance and consideration should be complied with in relation to a variation of an existing contract in much the same way as for establishing a contract in the first place.

The first question here is whether Milo provides consideration for the Bank’s promise to defer payment of £10,000 and give up their right to interest.

Applying the rule in Pinnel’s case the answer is clearly ”no”. This decision which was approved of by the House of Lords in FOAKES v BEER establishes that it is not good consideration in return for the discharge of a debt to agree to pay part of the debt. The facts here are similar to FOAKES v BEER agreeing to pay £10,000 less interest is not good consideration when the greater sum of £10,000 plus interest is owed. In the absence of Milo agreeing to do something different from what was contracted for such as paying a lesser sum at an earlier date there is no consideration as in doing less than he had contracted to do Milo is not suffering any detriment.

Could WILLIAMS v ROFFEY BROS be applied to this decision? Applying the rule in that case a promise to perform an existing duty (or in this case lesser duty) can be consideration if there is a benefit to the promisor even if no detriment is suffered by the promisee. It could be argued here whilst Milo suffers no detriment in paying less than he should Goggins Bank receive a benefit – the certainty of receiving their money when if they had pressed for their strict contractual rights Milo might have become bankrupt and they would have received nothing.

This argument seems very logical BUT is it not the law. In Re SELECTMOVE the Court of Appeal agreed with the logic of the argument but reluctantly could not apply WILLIAMS v ROFFEY BROS as it was a Court of Appeal case involving paying

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more for the provision of services and the rule that part payment of a debt is not good consideration was decided in a House of Lords case FOAKES v BEER. Under the system of precedent the Court of Appeal in WILLIAMS v ROFFEY BROS had no choice but to follow the House of Lords decision.

Alternatively could Milo raise the principle of promissory estoppel as a defence? Could Milo argue applying the decision in the HIGH TREES case that Goggins made a promise to him it would not insist on its strict contractual rights and it is therefore estopped from going back on this promise.

There are two difficulties for Milo to overcome.

(1) Is it equitable for the bank to go back on its promise?

Milo would argue no. Unlike D & C BUILDERS v REES he put no great pressure on the Bank to accept the lesser sum. He merely told them he had a financial problem and the Bank, who at the time were under no financial pressure (compare the Rees case), voluntarily agreed to delay payment and waive their right to the interest .

The Bank would argue the contrary. They made the promise when they were financially secure but given the fact their financial position has changed and they are now under extreme financial pressure of their own it is only fair that they be allowed to go back on the promise.

There are arguments both ways on this – one could not predict the outcome with any confidence.

(2) Can promissory estoppel have a permanent effect?

There is a real difficulty here. FOAKES v BEER a House of Lords decision says the creditor is always entitled to his money. Promissory estoppel says that if it is inequitable to go back on the promise and the promise was meant to have a permanent effect the creditor is not entitled to the money owed!

The matter needs to be resolved by the House of Lords but the current situation is that the only way to reconcile the decisions is by saying that promissory estoppel merely has a suspensory effect and by giving reasonable notice the promissor can go back on his promise and demand full payment. This is the view of Professor Treitel.

If this view is taken irrespective of the outcome of 1 above re the equitable point, Goggins Bank by giving reasonable notice to Milo could claim the balance owed to them ie £10,000 together with the interest. (Note they could not claim this sum immediately.)

General Comment

The law is in a very unsatisfactory state and needs a House of Lords decision to clarify it. It seems illogical to have one rule for a promise to pay more for

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the same services (normally this will be a binding new contract and can be set aside on the grounds of duress WILLIAMS v ROFFEY) and to have a different rule when an agreement is made to take a lesser payment (no new contract because of the absence of consideration FOAKES v BEER and very limited help from the principle of promissory estoppel.)

Professor Treitel suggests that one solution to the problem is to abolish the need for consideration when an agreement is made to vary an existing contract and let the principle of economic duress decide which new agreements will be binding.

Currently however the law is as follows:

X agrees to do work for Y for £10,000.

(1) Y then promises to pay £11,000 for this work.

If Y gets a benefit there is a new contract for the extra £1,000.

The issue is then whether the new contract for the extra £1,000 can be made voidable on the grounds of duress.

(2) X and Y agree that Y need only pay £9,000 for the work.

Applying FOAKES v BEER Y is giving X no consideration by paying less.There is therefore no new contract at £9,000 thus economic duress is not relevant.

Y’s only defence is the very limited one of promissory estoppel. (Remember promissory estoppel is a limited exception to the rule that a promise needs consideration to be binding.)

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LW 56-806-01 (21) “C.P.E. (POST-GRADUATE DIPLOMA IN ENGLISH &HONG KONG LAW): YEAR I” (2002/03)

Contract Tutorial Questions

3.(a) Acme Limited, runs a debt recovery business. It purchases software from Byte Limited which is designed to keep accurate records of debts owing to Acme Limited. Due to a fault in the software the records of a number of debts are deleted causing Acme Limited a loss of £50,000. When Acme Limited demands this sum from Byte Limited, Byte states it will only pay Acme Limited £10,000. Byte Limited justifies this by referring Acme to a term in Byte's Conditions of Sale which Acme signed but never read which states “In the unlikely event of any defective software being supplied liability is limited to a maximum of £10,000”.

Advise Acme Limited as to the legal effect of this clause.

(b) John, a keep-fit enthusiast takes out a one year membership with Hot Bodies Fitness Centre. In the membership agreement which John signed are the following terms:

(i) We are not liable for any loss or damage sustained by our members whilst on the premises.

(ii) We reserve the right to change the opening times of the Centre at any time.

John injured his back because of poor advice given to him by a Hot Bodies fitness instructor and had a £1,000 watch stolen because the door of the locker in which he left it was faulty. Hot Bodies have also just announced they are reducing opening times by 2 hours per day.

Advise John who wishes to know (i) can he receive compensation for the losses he has suffered (ii) the legal effect of the term allowing Hot Bodies to reduce opening hours.

3. Outline Answer

In any question involving unfair terms/exclusion clauses the correct approach is as follows:

1) First apply the common law to see if the clause is part of the contract.

2) Then apply the common law to see if the wording protects the party relying on the clause – construction.

3) If answer to 1 and 2 is yes then consider the application of statutory controls:

Unfair Contract Terms Act 1977Unfair Terms in Consumer Contracts Regulations 1999.

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(a) It seems likely that the law limiting the liability of Byte to £10,000 is a term of the contract. We are told that Acme signed Byte’s Conditions of Sale.

The general rule is that if a party signs a contractual document he is bound by what he signs and it is no defence he did not read it L’ESTRANGE v GRAUCOB.

(An interesting argument that might come before the courts one day is whether the INTERFOTO v STILETTO decision that a particularly harsh clause should be “highlighted” before it can become part of the contract could apply to signed documents as well as unsigned ones. Some writers think it might.)

Does the wording protect Byte bearing in mind the contra proferentem Rule that any ambiguities are construed against Byte HOUGHTON v TRAFALGAR INSURANCE?

It would seem that the fault in the software would mean there is a breach of S14 Sale of Goods Act 1979 – goods (this would include software) must be of satisfactory quality. It would seem the clause would cover this. There is no obvious ambiguity and courts should give words their “natural, plain meaning.” In any event a court will look more favourably at limitations than total exclusions of liability (Ailsa Craig v Malvern).

The next step is to consider the statutory controls.

The UTCC REGULATIONS 1999 can be dismissed as irrelevant for the simple reason the transaction is business to business and the regulations only apply to business – consumer transactions.

What of UCTA 1977?

In limiting Acme’s remedies to £10,000 Byte is in effect excluding S14 SGA. Thus S6 UCTA would apply and the clause would be subject to the reasonableness test discussed in section 11 of the 1977 Act and Schedule 2. (Even applying the narrow view of acting in the course of a business in R & B CUSTOMS BROKERS v UDT Acme would be acting in the course of its business in buying the software – clearly the software is integral to the business. Therefore Acme would not be a consumer under S12 UCTA. This would mean the clause is not void.)

In determining “reasonable” courts must judge a clause as at the time the contract was made [S11(1)]. Relevant factors would be – has Byte got superior bargaining power, and the insurance situation. Again, a limitation demand is likely to be looked on more favourably than a total exclusion.

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If both parties have insurance cover against this loss the courts are more likely to let the loss lie where it falls but if for example Byte could have obtained cheap insurance cover against this loss but Acme could not (MITCHELL v FINNEY LOCK SEEDS) or the amount of insurance protection Byte has is way above the amount of the limitation clause (ST ALBANS v ICL £100,000 limitation when ICL had £20 million insurance cover held unreasonable).

For a recent example of a case which considered the reasonableness test in the context of software see WATFORD ELECTRONICS v SANDERSON [2001] 1 All ER (COMM) 696 – where the fact that both parties were experienced businessmen of equal bargaining power was an important factor in the court deciding the clause was reasonable.

(b) Again the clause here would be incorporated into the contract as John has signed the agreement.

In relation to clause (i) the next issue would be whether the clause covers negligence. (Hot Bodies provide a service and there is an implied term of reasonable care and skill in the contract. On the facts here there appears to be negligence on their part and therefore they are in breach of this implied term.)

The word “negligence” is not used and in some cases the court have used this omission to conclude the clause does not cover negligence see HOLLIER v RAMBLER MOTORS and EE CALEDONIAN v ORBIT VALVE. However the courot might take the view that even though applying the contra proferentem rule any ambiguities are considered against Hot Bodies the clause is meant to cover negligence as here there is nothing else Hot Bodies can be liable for so to give the clause some meaning it must be meant to cover negligence ALDERSLADE v HENDON LAUNDRY.

What of UCTA 1977?

S2 would apply here. Any attempt to exclude liability for negligence causing personal injury is void, thus the clause will not protect Hot Bodies in relation to John’s bad back [S.2(1)]. In relation to loss of property caused by negligence the clause will be subject to the reasonableness test [S.2(2)].

The lack of bargaining power and the fact that the clause is so wide “not liable for any loss or damage” (see SOVEREIGN FINANCE v SILVER CREST – the wider the clause the more likely it is to be unreasonable) would suggest the clause here is likely to be unreasonable. (S3 UCTA also covers this clause and the result would be the same).

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John is also a consumer and therefore unlike (a) the UTCC REGULATIONS would also apply. It is very likely such a clause would be unfair under the Regulations. See Schedule 2 1(a) and (b) which gives examples of clauses in consumer contracts that are likely to be declared unreasonable.

In relation to clause (ii), this is where the UTCC REGULATIONS become important.

Despite attempts in S3 and S13 of UCTA 1977 to bring a wide range of clauses within the Act – UCTA is restricted in that only applies to clauses which are basically exclusion or limitation clauses. The clause in b(ii) does not come into this category. It is a clause giving Hot Bodies the right to vary a term in the contract.

The importance of UTCC REGULATIONS is that it applies to all terms in a business consumer contract other than core terms (these are subject matter and the original price).

If this term has not been “individually negotiated” (ie John had no ability to influence whether the term went in the contract) and looking at the contract as a whole there is a “significant imbalance” in the consumer’s rights (this means the contract is not on the whole for his benefit) and the term is “contrary to requirement of good faith” the clause will be deemed to be unfair (Regulation 5).

It is likely that a clause such as this would be declared to be unfair.

In the Schedule 2 list of clauses likely to be unfair a number apply to situations where a business reserves the right to unilaterally change its terms without any adequate reason and without giving the consumer the chance to cancel the contract if he does not like the term.

For example, Schedule 2 1(j) says a clause is likely to be unfair if it enables “the supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract” and even more relevant to the facts 1(k) says it is likely to be unfair if it enables “…. The supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided”.

This would cover the situation here and unless the rest of the contract is in the consumer’s favour (see D-G OF FAIR TRADING v FIRST NATIONAL BANK 2001 HL) the clause will be unfair.

NB Remember under UCTA 1977 if it applies a clause which is subject to the reasonableness test is presumed unreasonable – there is no such presumption under the UTCC REGULATIONS – the consumer or Office of Fair Trading must prove that the clause is unfair.

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LW 56-806-01 (21) “C.P.E. (POST-GRADUATE DIPLOMA IN ENGLISH &HONG KONG LAW): YEAR I” (2002/03)

Contract Tutorial Questions

FRUSTRATION

4. (a) A agrees to build a garage in the drive adjoining B's house. The price is £5000 of which £500 is to be paid in advance, and the work is to be completed within a month. A receives £350 from B and spends £400 on materials. When he has completed only a small part of the work, A falls off a ladder and breaks his leg. He has to stay off work for three months. In the meantime B is unable to obtain anyone else to complete the work.

(b) The K Hotel agrees to let a room to T for the purpose of celebrating T's wedding. T agrees to pay £500 for the room and £2000 for the dinner for the guests. He pays £1000 on the signing of the agreement. Two days before the wedding T's fiancée is badly injured in a motor accident caused by T's negligent driving. T has to postpone the wedding and wishes to cancel the arrangements for the wedding reception.

Advise T.

4. Outline Answer

(a) The question here is whether the contract has been frustrated because of A’s accident. If time is of the essence and the work had to be completed within a month then an event has occurred after the contract is made making this impossible. (Even if time is not of the essence then the work would have to be completed within a reasonable time, again it is likely that A’s accident makes this impossible).

However the event must not have been self-induced. If the accident was caused by A’s negligence it is uncertain if this would amount to self-induced frustration. In the JOSEPH CONSTANTINE case it was suggested that some types of carelessness eg the careless prima donna who catches cold might not amount to self-induced frustration THE HANNAH BLUMENTAL and also THE DAN KING. While in personal incapacity cases the law is still uncertain – all one can say is that the more A is to blame for the accident the more likely it is to be regarded as self-induced frustration.

If there is found to be frustration and there is nothing in the contract stating how the loss is to be apportioned the Law Reform (Frustrated Contracts) Act 1943 would apply. Under S1(2) B would be allowed to a refund of his £150 but the Court could order that A could keep a sum it thinks just for the expenses A has incurred in performing the contract. The maximum A can claim under this is the amount “paid or

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payable” before the frustrating event occurred. Here £500 was the sum payable and this figure represents the ceiling A can claim under S1(2).

Under 1(3) A can claim for the valuable benefit he has conferred on B before the contract is frustrated. We are told A has only completed a small part of the work so it could be argued that no real benefit has been conferred on B. If a benefit has been conferred the sum awarded will be small as : (1) not much of the garage appears to have been built; (2) in working out compensation the Court will take account of anything awarded under 1(2); (3) B cannot find anyone else to complete the work. NB In deciding if there is a benefit Lord Goff in BP v Hunt held that you focus on events after the frustration occurs – in which case is a partially built garage, a benefit to B or a nuisance? However on the basis it will cost B less to have the work finished off it will be a benefit unless it is impossible to get anyone to finish it – which seems unlikely (was Goff correct in his conclusion that one focuses on events after the breach in deciding if Section 1(3) applies? 1 (3) actually states it applies if a VB was received before the event and thus the literal wording is at odds with Goff’s view). However S1(3) does state that, in assessing the “just sum” to be awarded, the court should take account of the “effect” of the frustrating event.

If there is no frustration then A is in breach of contract and B could treat the contract as discharged if time is of the essence and claim the extra amount above £5,000 it is now going to cost him to build the garage

(b) T would argue that on the authority of Krell v Henry the agreement has become fundamentally different because the foundation of the contract the wedding no longer exists. Just as in Krell v Henry a contract to watch the coronation procession was fundamentally different from a contract for the hire of a room so T will argue that a contract for a wedding reception is fundamentally different from a contract for a meal for friends and there is therefore frustration of the contract. It would strengthen T’s case if the contract actually specified it was a wedding reception (see AMALGAMATED INVESTMENTS v JOHN WALKER) and/or if the hotel are providing lots of things normally associated with a wedding eg wedding decorations in the room, wedding cake etc.

The same arguments in 1(a) apply as to whether there is a self-induced frustration because of T’s negligent driving.

If there is frustration again if the contract is silent on what is to happen on this event the Law Reform (Frustrated Contract) Act 1943 applies: Under S1(2) T would be entitled to recover the £1,000 paid but K Hotel could retain whatever figure the court thinks just by way of expenses out of this sum. NB Refer to the Gamerco case which took a very wide view of what the court should take into account in deciding what is the “just sum” to award under S1(2) eg if T has incurred considerable losses because of the cancellation this could be taken into account resulting in K Hotel having to return most/all of the money despite the fact they may have incurred expenditure under the contract. Remember also S1(2) only applies in relation to wasted expenditure thus if K Hotel have been able to freeze food bought for T’s wedding and this can be used in fulfilment of some other contract S1(2) would be inapplicable in relation to the cost of this food. On the facts S1(3) is inapplicable as T received no valuable benefit.

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Again if there is no frustration T would be in breach of contract and K Hotel would be entitled to receive its loss of profit subject to the requirement that it must mitigate its loss by finding another reception for this day (but see White & Carter v McGregor). As the cancellation occurs a very short time before the date of the reception it seems unlikely K would be able to find a substitute and therefore could claim its full loss of profit from T.

NB Remember that as frustration makes the contract void it is often used as a defence when a party is sued for breach of contract as if it applies the party is discharged from fulfilling its obligations post the event

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LW 56-806-01 (21) “C.P.E. (POST-GRADUATE DIPLOMA IN ENGLISH &HONG KONG LAW): YEAR I” (2002/03)

Contract Tutorial Questions

5.(a) Clean Limited wins a contract to clean SF Limited’s factory windows. The contract is to last for two years and there are a total of 100 windows to clean.

Advise Clean Limited in each of the following situations:

(i) On two consecutive weeks Clean Limited failed to clean three top-floor windows. SF Limited has informed Clean Limited that it is terminating the contract because of Clean Limited’s failure to comply with clause 3 of the contract.

Clause 3 states: “It is a condition of this contract that all windows must be cleaned each week”.

(ii) One month before Clean Limited was due to start work under the contract SF Limited contacted Clean Limited and informed it that it no longer wanted to go ahead with the agreement. Clean Limited is outraged as it was the first contract it had won on the industrial estate where SF Limited’s factory is situated, and it had hoped, by establishing a presence on the estate, it would be able to gain further contracts from other businesses situated there. Clean Limited therefore informs SF Limited “No! We are sticking to the agreement and will clean your windows”.

(b) Advise Gerry, a builder, in relation to his liability for the following losses that have been incurred because of his breach of contract.

He is six months late in completing an extension to the King Hotel. The extension will increase the number of bedrooms by 10 (the hotel has currently 40 bedrooms). Due to this delay the King Hotel are claiming:

(i) £12,000 – the profit that would have been earned if the rooms had been ready on time;

(ii) £50,000 – a major American film company had agreed to pay five times the normal room rates if it could have exclusive use of all 50 hotel rooms. However when it discovered that , because of the delay, there were only 40 rooms available it elected to go elsewhere;

(iii) compensation for loss of their business reputation.

5. Outline Answer

(a) (i) The issue here is whether SF is entitled to end the contract because of Clean’s breach of Clause 3.

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It is unlikely the court would take this view. The courts are reluctant to allow a party to end a contract for a minor/trivial breach. Judges much prefer the “wait and see” approach adopted in the HONG KONG FIR SHIPPING CO case. Under this approach rather than classify the term in advance as being a condition (this word means in its strict legal sense a term which allows a party to end the contract if broken) or a warranty (a term which if broken only entitles the innocent party to damages) the court prefers to classify the term as INNOMINATE (neither a condition or warranty) and only if the breach is a serious one can the contract be ended.

Relevant cases to be used here are SCHULLER v WICKMAN MACHINE TOOL SALES – where the House of Lords stated that the word condition had not yet acquired a precise legal meaning and just because a clause was referred to as a condition did not mean it would be interpreted as having its “legal” meaning of a term allowing the contract to be ended if the term was broken.

More recently there is the C of A case of RICE v GREAT YARMOUTH BOROUGH COUNCIL (June 2000) where the court refused to construe a clause in a garden maintenance contract that “the contractor shall provide the service in a proper skilful and workmanlike manner” as one allowing the other party to end the contract even if the breach was only a trivial one.

Given the fact here that the breach appears to be a fairly minor one (which damages can compensate for), the clause does not expressly state a breach of it allows the contract to be ended, and there is no evidence produced that in the window cleaning industry such clauses are intended to be construed as a condition (in the strict legal sense) it is likely that clause 3 will be interpreted as innominate and the breach being minor, will not justify SF ending the contract. Therefore if SL does end the contract SF will be in breach to Clean and could be sued by Clean for loss of profit on the two year contract.

(The RICE case is especially instructive in relation to the courts’ preference in interpreting terms as innominate. The court refused to apply literally a general clause at the end of the contract that said any breach of any obligation would allow the Council to end the contract. Such an interpretation was said to be contrary to commonsense. Therefore if in future a draftsman wants to give his client the right to end the contract for any breach of a clause the clause itself should specifically make this clear.)

(ii) SF, in announcing it does not want Clean to go ahead with the contract, is clearly committing a repudiatory breach (an intention not to continue with the contract). The breach is also known as an anticipatory breach in that SF have committed it before the date fixed for performance.

Clearly Clean is entitled to end the contract but can it elect to continue with the contract which is the preferred option?

The normal rule is that this choice is available and it was applied by the House of Lords in WHITE AND CARTER v McGREGOR where in similar

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circumstances the local authority was held entitled to refuse to end the contract when informed the garage did not want their advertisements displayed on litter bins. They could go ahead, display the ads, and then claim their full payment.

This decision has caused unease because it goes against the principle of mitigation of loss under which an innocent party must do all that is reasonable to keep this loss to a minimum. Under this principle one would have expected the local authority to attempt to find another advertiser and only recover damages if they received less from the new advertiser.

Therefore to date the approach adopted by the courts has been not to apply WHITE AND CARTER if:

(1) The innocent party cannot carry out his obligations under the contract without the co-operation of the guilty party. HOUNSLOW LONDON BOROUGH COUNCIL v TWICKENHAM GARDEN DEVELOPMENTS. This would be the case here – to perform the contract Clean needs SF’s co-operation in allowing it onto SF’s premises so that the windows can be cleaned. By refusing access SF can prevent Clean carrying out its part of the contract and leave it no alternative other than to end the contract and sue for damages. In which case Clean must attempt to mitigate its loss by finding another contract in place of the one with SF.

(2) Damages would be an adequate remedy CLEA SHIPPING v BULK OIL – see also ATTICA SEA CARRIERS case.

It was said by Lord Reid in WHITE AND CARTER the principle in that case would not apply if the innocent party had no “legitimate interest” in continuing with the contract. This has been interpreted as meaning WHITE AND CARTER will not apply if ending the contract and claiming damages would be a perfectly adequate remedy for the innocent party. Damages for loss of profit and the loss of the chance of further contracts would seem a perfectly good remedy here.

However even if this argument were to fail on the grounds that the loss of the chance of further contracts is too speculative for any compensation to be recovered Clean would still fail on the first point regarding co-operation.

(b) (i) This loss is recoverable. It is not too remote. It comes within the first branch of HADLEY v BAXENDALE it is loss that arises “naturally” from the breach. It is obvious that if the work is not completed on time King Hotel will be deprived of the normal profit they would have made if they had had the extra 10 bedrooms.

(ii) This is more problematical. The issue here is how would the court classify the “exceptional” loss of profit if this fact was unknown to Gerry when the contract was made.

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One argument would be that it is analogous to VICTORIA LAUNDRY v NEWMAN. In that case while normal loss of profit was recoverable under the first branch of HADLEY v BAXENDALE the exceptional loss of profit was classified as falling under the second branch “knowledge of special circumstances” category. As the engineers had no knowledge at the time of the contract was made of the fact that if the boiler was not delivered on time the laundry would lose their very lucrative contract with the Ministry of Supply it was held to be too remote. Similarly here if Gerry is unaware when making the contract of the fact regarding paying 5 times the normal rates for exclusive use of all 50 rooms this loss would be too remote.

An alternative argument could be based on PARSONS v UTTLEY INGHAM subsequently applied in BROWN v KMR SERVICES.

Under this approach – taking from tort the principle of HUGHES v LORD ADVOCATE if a particular loss is a serious possibility that fact that its extent is more severe than could have been anticipated is irrelevant.

Applying this – if the loss of profit from the availability on time of the 10 extra bedrooms is not too remote the fact that this loss is greater than would normally have been anticipated because of the American connection is not relevant and the full loss of profit can be recovered.

Clearly everything depends on how the judge will classify this loss – if he classifies it as a separate type of loss from the ordinary business profits as the judge did in the VICTORIA LAUNDRY case it will be too remote if Gerry had no knowledge of this special American agreement when he made his contract with King Hotel.

There is however no easy outcome to the question – as long as you put forward the different arguments that could be used and emphasise that everything depends on how the judge categorises the loss no more could be expected of you!

(iii) The general rule is that damages cannot be given in contract for loss of reputation ADDIS v GRAMOPHONE CO. The courts do not want contract cases to be used as indirect routes for what are really defamation claims.

However, if the breach of contract affects a person’s or a business’s reputation and it can be proved that as a result financial loss which is not too remote has resulted this loss can be recovered MALIK AND MAHMOOD v BCCI (House of Lords). Thus in a business context a butcher who has sold defective meat and suffered loss of sales after his prosecution for breach of food safety legislation was reported in the newspapers was able to sue the person who supplied him the meat for his loss of profits COINTAT v MYHAM.

Again a manufacturer who was supplied with defective components by a supplier thus resulting in the manufacturer supplying faulty goods to retailers was able to recover for loss of repeat orders from these retailers. GKN CENTRAX GEARS v MATBRO.

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Therefore while King Hotel cannot make a general claim for loss of reputation if they can produce evidence that because of the delay by Gerry they have lost the profits claimed in (i) and in (ii) or they have lost future business from regular guests, they can recover compensation, provided these losses are not too remote.

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