Contract law

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Contract law problem question – Posh Posters (2500 words) This scenario relates to two companies, Pretty Paintings Limited (“Paintings”), and Posh Posters Limited (“Posters”), who are engaged in the poster trade. They have entered into commercial relations with one another in respect of some stock, namely 1000 posters, which Paintings has offered to sell to Posters. This offer has been made by way of a letter to Posters. We will look at what, if any, contractual obligations and rights have arisen in the dealings between the two parties in respect of this stock. As often happens in commercial relationships, certain problems develop in relation to the delivery of the posters. In order to assess whether either party has contractual recourse in these circumstances will depend on what terms are considered to constitute the contract between the two. We will look at the correspondence between Paintings and Posters in order to establish what terms governed the commercial relationship in order to assess whether Posters is able to bring a claim for breach of contract against Paintings. We will begin by considering the correspondence between the parties chronologically in order to establish what, if anything, constitutes the binding contractual agreement between the two parties. The starting point in any discussion of contractual arrangements is that contracts are fundamentally premised on the fact of agreement between the parties; this is, after all, the purpose of contracts. In the present case, for example, there is certainly an agreement between Paintings and Posters that 1000 posters will be sold to Posters by Paintings for a consideration of £1000. This is not, of course, sufficient on its own to amount to a contract imposing obligations on either party. Furthermore, as Norweb Plc v Dixon (1995) tells us, in order for a contract to be found, the agreement in question must have been entered into voluntarily by the parties (as opposed, for example, to being entered by legal compulsion). It is clearly the case here, however, that the two commercial parties have freely chosen to enter into this commercial relationship. We have seen that the basis of any contractual arrangement, agreement between the parties, is present in this case. We have also seen that this arrangement was entered into through the choice of the parties in question. What, then, were the terms of this agreement? Steyn LJ famously considered there to be four important aspects of contract formation in G Percy Trentham Limited v Archital Luxfer Limited (1993). Firstly, English law will generally adopt an objective theory of contract formation.[1] Secondly, in the vast majority of cases, the coincidence of offer and acceptance will represent the mechanism of contract formation. Thirdly, where a transaction has already been performed the court is more likely to find a binding contract, and fourthly in such cases as this, where the contract results from performance, the contract is likely to cover the precontractual performance of the parties.[2] It is the first two of Steyn LJ’s principles that are of relevance to the present circumstances. We must look, objectively, at the relations and dealings between Paintings and Posters in order to assess whether there is a contract between the two, and hence whether Posters has any contractual recourse when the delivery is delayed. Secondly, we should consider whether there was a genuine offer and acceptance with which to analyse the contract. In Gibson v Manchester City Council (1979), Lord Diplock considered the best way of analysing offer and acceptance was on the true construction of the documents.[3] This can be contrasted with an earlier approach adopted by Lord Denning (in the same case in the Court of Appeal), in which Denning had advocated looking at the correspondence as a whole and the conduct of the parties. In the present case, whichever approach is adopted, there is a clear offer made by Paintings to Posters in its letter to Posters. The offer states that Paintings will sell the 1000 posters to Posters “subject to Pretty Paintings’ terms and conditions”. One such term states that “in no event shall Pretty Paintings Limited be liable for any delay”. Secondly, the terms and conditions state that no delivery will be made until payment has been received. This is a clear offer. Once the offer is made, the onus is on Posters to accept that offer. This acceptance must be in the form of a final and unqualified acceptance of the precise terms of the offer made. Upon receiving Paintings’ offer, Posters states that it will be “happy to accept the offer”. In its acceptance letter, however, Posters states that it is accepting for delivery in June 2008, and that all its orders are subject to its terms. This has become a “battle of the forms”. In Butler Machine Tool Co v Ex-Cell-o Corporation Limited (1979), similar circumstances prevailed. The problem is that in order for a contract to be based upon offer and acceptance, the acceptance must precisely mirror the terms of the offer. In the Butler Machine Tool case, which had considerable similarities to the present one, an offer was made by the plaintiff in respect of the sale of machine tools, which offer was subject to the plaintiff’s terms and conditions. The defendants placed an order which was subject to the defendants’ terms and conditions. The defendants’ order contained a cut-off clip for completion by the plaintiff stating “we accept your order on the terms and conditions stated thereon.”[4] This slip was completed and returned to the defendants by the plaintiffs. The crucial difference between the plaintiff’s terms and those of the defendants was that the plaintiff’s contained a price variation clause, which the plaintiffs subsequently relied upon. Such a clause was not present in the defendants’ terms, and the defendants refused to pay an increased price claimed by the plaintiffs. When the matter was litigated, it was found in the Court of Appeal that the contract between the plaintiff and the defendants was governed by the defendants’ terms. Upon a conventional offer-and-acceptance analysis, the defendants had never accepted the plaintiff’s “offer” to sell, because in its “acceptance”, the defendants had imposed additional, different, terms. In Brogden v Metropolitan Railway Co (1877), Lord Cairns LC had stated that “there may be a consensus between the parties far short of a complete mode of expressing it, and that consensus may be discovered from letters or from other documents of an imperfect and incomplete description.”[5] Lord Denning drew upon this in the Butler Machine case, and stated that “applying this guide, it will be found in most cases where there is a “battle of forms” there is a contract as soon as the last of the forms is sent and received without objection being taken to it.”[6] The defendants’ “acceptance”, then, was not an acceptance at all; rather it constituted a rejection of the offer and a counter-offer, which the plaintiff had accepted by returning the cut-off slip. How, then, does this apply to Paintings and Posters? The initial offer was made by Paintings subject to its terms and conditions, with no delivery date stated. Posters purported to accept this, subject to its own terms and conditions and with a delivery date of June 2008. adopting the reasoning in the cases mentioned, it is clear that in fact, as between these two letters, there was no acceptance at all. By seeking to impose both a delivery date and make the contract subject to its own terms, Posters in fact rejected Paintings’ offer and made a counter-offer. The position at this stage, then, is that there is in fact no contract between the parties, as no acceptance of identical terms has been made. Again following the facts of the Butler Machine case, Posters’ counter-offer contains a cut-off slip at the bottom, which Paintings signs and returns to Posters. This sounds as though the last form sent and accepted between the parties was Posters’ terms and conditions, which would impose a condition that delivery takes place in June 2008. If this were the case, upon Paintings’ failure to deliver the posters in June 2008, Posters would be entitled to repudiate the contract for breach of a condition (discussed below). With the cut-off slip, however, Paintings also sends a covering letter, which states that “we are happy to confirm your order for delivery in June 2008. However, we really must insist on our terms.” Two weeks after this, Posters makes payment of £5000 to Paintings in respect of its order. This is now the end of May 2008. Adopting a “battle of forms” analysis, it would appear that once again the offer has been rejected, and a counter-offer made. There is still, apparently, no agreement on whose terms are to govern the contract. There is a general recognition at common law, however, that to base any finding of a contractual agreement purely on the existence of correspondence is wrong. It is considered that an offer can be accepted also by words and conduct. In Brogden v Metropolitan Railway Co (1877) (referred to above), for example, the two parties who had been engaged in a commercial relationship for the supply of coal agreed to draft a contract governing the terms of their relationship. The draft was never formally accepted, but the relationship continued adhering to the terms of the draft. When relations broke down between the parties, and it was suggested that there was in fact no contract at all because the draft had, albeit inadvertently, never been accepted, the court held that a binding agreement did in fact exist because the parties had treated it as binding and had acted in reliance upon it. In the present case, the last form to be sent was Paintings’ insistence upon its own terms governing. Posters’ payment of the consideration at the end of May 2008 is likely to be seen as assenting to this offer, and to have been made in reliance upon the latest terms. It is worth noting the views of the Vice-Chancellor expressed in Society of Lloyd’s v Twinn (2000), which was reported in the Times. He stated that “there was no reason why an offeree should not accept an offer unconditionally and, at the same time, make a collateral offer to the original offer.”[7] This will, of course, be a question of fact dependant upon the particular circumstances of the case. How does this view influence the present case? It is clear that Paintings’ initial “offer” was rejected by Posters who made a counter-offer. It is possible that this counter-offer was accepted by Paintings, incorporating a delivery date of June 2008, and its insistence upon its own terms prevailing was in fact a collateral offer. If this is the case, the delivery date of June 2008 will constitute a condition, and the exclusion of liability in Paintings’ terms will not (as this collateral offer was never accepted by Posters). In such circumstances, when delivery is delayed, Posters will have the right to repudiate the contract. Assuming that it is found that there is a binding contractual arrangement between Paintings and Posters, what are the actual terms of that agreement? In Paintings’ initial offer, although no time for delivery is stated, one of the standard terms states that Paintings shall not be liable for any delay in delivery. As discussed above, however, this is rejected by Posters, which then counter-offers. It is established at common law that in order for something to be a true term of a contract, it must be intended to be such by the parties (see, for example, Bannerman v White (1861)). It subsequently becomes clear that both parties do include something to be a term of their contract. This relates to the delivery in June 2008, which Paintings states in its letter that it is happy to agree to. Regardless of whose standard terms are found to prevail in governing the contract, it is quite likely that there would, at least, be found to be a collateral contract between Posters and Paintings relating to Paintings delivering the order of posters to Posters in June 2008. This would suggest, then, that whether as a part of the same contract for the sale and purchase of the 1000 posters at £5 each, or indeed as a collateral contract, there is a contractual obligation upon paintings to deliver the posters in June 2008. This is a term of the contract. Posters has acted in reliance upon this term by making payment for the posters two weeks after receiving Paintings’ second letter. What options are open to Posters now then? On 5 July Posters writes to Paintings stating that it is terminating the contract. Is Posters justified in doing this? In The Mihalis Angelos (1970), it was established that in circumstances where a party breaches a term of a contract, the injured party may choose to repudiate the contract. Whether Posters has the right to repudiate the contract will depend upon whether it is considered that the delivery date (June 2008) was a term or not. As discussed above, it seems that the parties both intended this to be a term and as such, given that Paintings has breached this, Posters is entitled to repudiate the contract. It is not, however, as simple as this. The cases in this area show that some consideration will be given to the seriousness of the breach. Only can the injured party (Posters in this case) treat the contract as repudiated if the breach of the term by Paintings represents a substantial failure of performance. This is illustrated in the case of Poussard v Spiers (1876), in which a singer fell seriously ill prior to the commencement of a three-month run of a show. This was held to enable the defendant to treat the contract as repudiated. In Bettini v Gye (1876), on the other hand, the breach of the term was not considered sufficient to enable the injured party to repudiate. A delay in performance of three days was not considered to prevent substantial performance. In the present case, however, it is likely that time would be considered to be “of the essence”, and as such, by breaching the delivery term, it is likely that a court would find that Posters was, indeed, able to repudiate the contract and treat it as discharged by Paintings’ breach. BIBLIOGRAPHY Cases Bannerman v White (1861) 10 CBNS 844 Bettini v Gye (1876) 1 QBD 183 Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 Butler Machine Tool Co v Ex-Cell-o Corporation Limited [1979] 1 All ER 965 Gibson v Manchester City Council [1979] 1 All ER 972 G Percy Trentham Limited v Archital Luxfer Limited [1993] 1 Lloyd’s Rep 25 Norweb Plc v Dixon [1995] 1 WLR 636 Poussard v Spiers (1876) 1 QBD 410 Society of Lloyd’s v Twinn (2000) Times, 4 April The Mihalis Angelos [1970] 3 All ER 125 Secondary sources McKendrick, E. (2004) Contract Law (London: Palgrave) Poole, J. (2008) Casebook on Contract Law (Oxford: OUP)

Footnotes

[1] [1993] 1 Lloyd’s Rep 25, per Steyn LJ at 27 [2] Ibid [3] [1979] 1 All ER 972, per Lord Diplock at 974 [4] Quoted at [1979] 1 All ER 965, per Lord Denning MR at 967 [5] (1877) 2 App Cas 666, per Lord Cairns LC at 672 [6] [1979] 1 All ER 965, per Lord Denning MR at 968 [7] Quote in the Times, 4 April 2000
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