Contract Agreement and Legal | Free Contract Law Essay

The main focus of attention behind the scenario is based around contract law. Questions raised about the formation of the contract and the consequences of the details of this contract. Were both parties bound by a legally enforceable contract, if so were either party in breach of the terms of the contract and what remedies would be available to resolve any issues?

In the first instance then it would be useful to examine the events leading to the formation of the contract. The contract then in this case would have been an agreement entered into voluntarily between both parties.

In order for a contract to be proper and legally enforceable it must have the following key elements: intention, offer, acceptance and consideration. We will look at each of these elements and the arguments surrounding them in relation to the scenario.

Modern contract law has mainly evolved from case law. Meaning that the outcomes of past cases have shaped what are generally accepted ideas, practices, rules and predicted outcomes of future disputes. Also other pieces of legislation such as the unfair contract terms act 1977 will have an affect or bearing on the rules of contract law. It is required then to examine similar past cases and be aware of all relevant legislation in order to support arguments and try to predict possible remedies or outcomes.

The first element is Intention. This relates to the fact of both parties having an intention to be legally bound by their agreement. Did both D & A Builders and KNW Ltd have this intention to be bound by a legally enforceable contract and to create a legal relationship?

It is normally presumed for commercial agreements that there is an intention to be legally bound unless the different parties expressly state that they do not wish to be legally bound.

As with Rose and Frank Co. v Crompton Bros. Ltd [1925] AC 445 where there was an inclusion of an express statement within the agreement indicating that the parties did not intend to be bound. This was upheld that both parties were not legally bound even though it was a commercial agreement.

The initial letter sent by D & A Builders (Alan) included terms and conditions and was sent on his business letterhead paper. This would suggest that there was intention on his part, subsequently KNW Ltd's (Dan) reply confirming D & A Builders offer letter did not contain any express statements indicating a desire not to be legally bound. It can be reasonably presumed then that there was also intention on the part of KNW Ltd. Dan had replied through his business. So this could be considered to be a commercial agreement.

Next then we would need to consider the circumstances under which there was an offer and an acceptance and the criteria for these.

It could be considered that at the initial meeting Dan's conversation at dinner with Alan was an invitation to treat and not an offer. In other words an invitation to make an offer which he was free to reject. Dan asked if Alan “would be interested in constructing a couple of houses”. There were no specifics of price, time etc. mentioned at this stage. Alan had not been given plans to view and it would appear that although they discussed the construction it was more in a social manner in casual surroundings and not a business meeting. The pair had met at a country club dinner and this was not specifically pre-arranged with the intention of discussing terms and striking a deal.

The terms of an offer must be clear and definite with the intention that it becomes binding when the offeror (the person or party being given the offer) accepts the offer. The offer must be definite to be bound by specific terms and not vague. Gunthing v Lynn

It could be said then that D & A Builders (Alan) had made a clear and definite offer after later seeing the plans and sending the initial letter to KNW ltd. Due to the fact that he had specified a definite price for the construction of the houses of £95,000 each and this letter also contained his standard terms and conditions.

Also of note this offer contained a term that stated “the contract price might be varied according to the price and availability of labour”. These price variation terms are commonplace in construction contracts and may well be of importance at a later stage.

After an offer is given then it must be accepted. Acceptance must also have an intention to be bound by the offeree and must be unconditional / unqualified, in other words on the same terms as the offer. An offer may be revoked by the offeror or rejected by the offeree or even lapsed after a reasonable amount of time. This was not the case as Dan responded promptly by telephone suggesting that “the price looked o.k.” and then KNW Ltd responded by letter one week later .

Dan's response by telephone could not be viewed as an acceptance because in his own words he said that “the price looked o.k”. Which was not saying “yes, I accept the offer”. Secondly and more importantly the offer must be accepted by the offeree on the same terms as the offer using the same medium in this case by letter. This telephone call is not then the same medium. Also the offer was made to KNW ltd and not to Dan. Strictly speaking then Dan was not even the offeree. That offeree was KNW Ltd and therefore Dan alone would not be in a position to accept the offer.

An offer can also be rejected by a counter offer. This is where in replying to an offer the offeree introduces new terms or changes the terms of the original offer. This reply then is not treated as acceptance but is treated as a counter offer which the original offeror is free to accept or reject. A counter offer terminates the original offer.

Hyde v Wrench [1840] 3 Beav 334. where it was upheld that because an original offer was made by Wrench and a subsequent different offer was given by Hyde in reply. This reply was a rejection of the original offer and constituted a counter offer.

Acceptance must be timely and communicated using the same medium, in this case by letter. It could be argued then that KNW Ltd's reply to D & A Builders offer letter is a counter offer because it introduced new terms in relation to a start date, time for completion within one month and stated that the order was not valid unless confirmed by return of post. Also it varied from D & A Builders offer by leaving out the price variation term.

So this counter offer would have terminated the original offer. It would be very difficult then based on this point to argue that KNW Ltd gave an unconditional and unqualified acceptance of D & A builders' offer because of the change in the terms.

D & A Builders did not respond to this reply in writing but immediately commenced with the work. In general silence is not deemed as an acceptance.

Felthouse v Brindley [1862]. Where acceptance had not been communicated properly and it was upheld that there was therefore no binding intention.

It could be said then that D & A Builders did not actually accept this counter offer in a complete and unconditional way and therefore could not be bound by its terms. Namely the terms stating completion within one month.

An important point here is the fact that this counter offer made by KNW Ltd asked for acceptance by return of post. This acceptance can be given by a method that is equally as advantageous as post or even quicker. As in the case of Tinn v Hoffaman [1873] 29 LT 271 where J. Honyman said that “you may reply by telegram or by verbal message or by any other means not later than a letter written by return of post”.

It may be said then that D & A Builders accepted this counter offer by their own action of commencing with work immediately on site. This would have been quicker than replying by return of post. KNW Ltd could argue that these actions constituted acceptance.

It is also possible to have a binding contract without a matching offer and acceptance.

As in the case of Gibson v Manchester City Council [1979]. Lord Denning said that the correspondence as a whole and the conduct of the parties must be looked at.

Lord Denning has also said that the traditional way of looking at these cases with offer, counter offer, rejection, acceptance etc. is out of date. This was the approach taken by Lord Wilberforce in New Zealand Shipping Co Ltd v AM Satterthwaite.

“A better way is to look at all the documents being passed between the parties and their conduct. To try to gain an understanding of all the points on which they reach agreement, even though there will be differences between the forms and conditions contained within them” as in Brogden v Metropolitan Railway Co. [1877]. “There may well be a consensus between the parties even though they haven't expressed it which could be drawn from their documents and correspondence”.

This would most likely mean that the main agreement was for the construction of two houses at £95,000 each. Probably the construction time period of one month would be upheld as being a valid term and also the price variation clause would be included to be viewed as part of the contract terms.

The final point is the one of consideration. What is consideration? Galbraith 2006 states “English contract law is based on the idea of a bargain”. Where “consideration can be defined simply as the ‘price' each party pays for the right to enforce the other party's promise”. It is important to note that the consideration does not have to be money. Although in most cases money is the consideration given by one of the parties. This consideration must exist in all contracts.

D & A Builders and KNW Ltd's contract was an example of what is called ‘executory consideration'. Where there is an exchange of promises for a future performance. D & A Builders promise is to build the houses and KNW Ltd's promise is to pay D & A Builders for that work.

It should be mentioned that although consideration must be real and valuable it does not necessarily have to be adequate. It is up to the parties involved to sort out their own ‘bargain'. In this case the houses built for the price agreed which is defined by the parties forming the contract.

By the 28th July an incident had occurred on site and KNW Ltd had written to D & A Builders saying that “It's services were no longer required and that they should leave site and not return”. KNW Ltd at this point then wished to terminate the contract.

D & A Builders although receiving the letter on 30th July decided to continue with the work as they were still within the original construction period of one month. This period ended on 4th July when D & A Builders sent an interim account for the amount of £218,000. KNW Ltd refused to pay this account on the grounds that the houses had not been finished on time.

Examination of the terms of the contract would be required. They can be split into the following types.

  • Express terms: These are agreed by each of the parties and communicated either verbally or in writing. There are two types - Conditions, these are the main terms of the contract and a breach of these terms would entitle the injured party to repudiate the contract and claim damages. Warranties, these are the minor terms which would allow claims for damages only.
  • Implied terms: These are based on customs and are accepted practises, also terms required by statute.
  • Exclusion / exemption clauses: These are clauses that try to exclude or restrict liability for certain events.

Under what conditions then might KNW Ltd have been successfully able to discharge the contract and what following actions would take place?

The general rule is that in order to discharge the contract both parties must perform the terms stated in the contract to discharge their obligation to each other. At this point then neither party have fulfilled the terms of the contract. D & A Builders have not completed the construction and KNW Ltd had not paid for this.

There have been later modifications to this general rule and one these of interest to this scenario is the completion of performance prevented by the promisee.

In this case then by KNW Ltd asking D & A Builders to leave site and not return would be preventing them from being able to complete the construction and fulfil the terms of the contract. It could be possible in this situation for D & A Builders to recover money under quasi-contract and the principle of ‘Quantum meruit' (fair market value for the services provided). As in the case of Planche v Coldurn [1831] 8 Bing 14. where the plaintiff had already carried out work and the defendant had cancelled the contract. The plaintiff was able to claim for the work he had already carried out separate to the main contract under quasi-contract.

For this D & A Builders would need to prove the following.

  • That the claimant (D & A) preformed valuable services.
  • The defendant knowingly received these services.
  • It was clear that the claimant expected to get paid.
  • The defendant was unjustly enriched.

It would be very difficult for KNW ltd to argue then that these points were not the case. D & A Builders should at least be able to recover a reasonable price for the work they had already carried out.

There are other considerations regarding the stipulations as to time of performance. Under common law time was regarded as being of the essence. So if one party did not perform in time then they could not enforce the contract against the other party. Section 41 Law of Property Act 1925 modified this common law rule by saying that the equitable principle prevails. Where time is not of the essence and a right to damages accrues but not a right to terminate the contract.

In equity then time is not of the essence except in three circumstances:

  • The contract expressly states that time is of the essence.
  • Time was made of the essence by giving a notice during the contract period for performance within a reasonable time.
  • Where from the nature of the surrounding circumstances or the subject of the contract it is clear that time is of the essence.

Under the common law principles then D & A Builders had not completed the construction on time and would therefore not be able to enforce the contract against KNW Ltd. Meaning that they would not be able to recover monies. Even under the modifications it was stated by KNW Ltd originally that ‘time was of the essence' so again this would put D & A Builders in a very poor position with regard to being able to enforce the contract against KNW Ltd.

Another point is that of substantial performance, where one party can be said to have substantially performed his promise. It would normally be the case that they could recover the contract price less the amount that the breach had lessened the value if the contract were fully completed. Rather than to leave the party with no right of recovery at all. So then D & A Builders may be able to pursue the avenue of substantial performance to try and recover monies.

What is made by agreement can extinguished by agreement. This would then be a bilateral discharge were both parties agree to discharge the contract. In this case however both parties are not in agreement that they wish to discharge the contract.

There is a breach of contract when there is a failure to perform the terms of the contract. Breaches which are serious enough to give the innocent party the right to treat the contract as discharged can occur in two ways:

  • Anticipatory breach, where one party shows by express words or by the implications of their conduct that they do not intend to comply with their obligations under the terms of the contract.
  • Where one party breaks a condition or breaks the contract in such a way that it amounts to a substantial failure of consideration.

D & A Builders then could argue that although they have not completed the construction on time they had always intended to do so and their actions have implied this. They wish to stay on site and complete the construction. Furthermore it could be said that they have nearly completed the construction and this could not amount to a ‘substantial failure of consideration' and therefore D & A Builders would not be in breach of contract.

The doctrine of frustration exists where, due to changes in circumstances the contract becomes impossible to perform. An incident is said to have occurred on site on 28th July. If this incident were outside the control of D & A Builders then frustration may come into play. The details of the incident would need to be specified in order to pursue this approach if possible.

D & A Builders sent an interim account for the amount of £218,000. This amount is more than the original amount of £190,000 for both houses and was therefore making use of the price variation clause. Under what circumstances then would it seem reasonable that D & A Builders could expect to be paid this amount.