Formalities of contracts act

Facts

This matter centres on the enactment of the (fictional) Formalities of Contracts Act 2006 (“the Act”). Within this Act, it is common ground that the date of commencement is from 1 January 2007, with all transactions falling within the definition of the Act being subjected to the regulations therein imposed. The Act, in its long title, contains an important provision which reads that it is an “Act designed to make provision to require the agreement of certain contracts within certain sectors in writing in order to improve certainty of contractual relations in those sectors”. Therefore the legislature has taken the opportunity to outline the purpose of the Act, which will become more relevant later in this paper.

The parties, namely Colonsay Mountain Equipment Ltd (“Colonsay”) and Alpine Ski Slopes Ltd (“Alpine”), concluded a verbal agreement whereby Alpine would advertise Colonsay's ski hire service in exchange for Colonsay advertising Alpine's ski slope (“the agreement”). It is common ground that such the agreement was concluded on 14 February 2007, after the commencement date of the legislation.

Both parties are located within the jurisdiction of the UK legislature, particularly in the Scottish Highlands.

Alpine seek to renege on the agreement and claim that the agreement is unenforceable due to it not being reduced to writing. Colonsay claim that they have suffered un-liquidated damages, namely that their loss can be illustrated in anticipated sales only, and has not crystallised.

It is common ground that no money changed hands and that the agreement was essentially based on anticipated profits that the parties expected to receive as a result of the cross-promotion.

Issues

The main issue in this matter is whether section 35 of the Act applies to this dispute, and therefore whether the agreement is enforceable. In the event that section 35 does apply, the agreement will be unenforceable due to it not complying with the written formality requirement.

The issue turns on the concept of statutory interpretation. In other words, whether or not that provision of the Act applies is subject to a substantive review of the various rules and principles of how a judiciary would most likely interpret that provision.

Applicable Rules Of Law

Rules of Statutory Interpretation, namely:

  1. Literal rule;

  2. Golden rule;

  3. Mischief rule; and

  4. Purposive approach rule.

Application To Facts

Literal Rule

If the literal rule was applied to the facts in this matter, it is clear that one would arrive at a conclusion which was somewhat contradictory to the defined purpose of the Act. The literal rule states, inter alia, that:

The only rule for construction of Acts of Parliament is that they should be construed according to the intent of the Parliament which passed the Act. If the words of the Statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in that natural and ordinary sense. The words themselves alone do, in such a case, best declare the intention of the law giver.

Having regard for the above, as elaborated upon by other authorities, it is clear that the use of such an interpretation may lead to absurdity and also an outcome which is contrary to the intention of the legislature. For example, section 35(1) would be construed as referring to virtually any business transaction where financial gain in involved (which, in theory, should be every commercial agreement).

Furthermore, the definition of ‘prescribed transaction' provides that any transaction involving the mountain sporting equipment sector, including the sale of winter clothing. A literal interpretation of this provision would indicate that Colonsay's business would be included in this definition and hence section 35 of the Act would apply.

However, interestingly, the use of the definition of ‘prescribed business' does have its advantages for Colonsay in the sense that, in order to be classed as a ‘prescribed business', one must regularly engage in the prescribed transactions. It is clear from the facts that Colonsay does not regularly engage in the hire of ski equipment, but rather relies on the sale of equipment as its primary source of income. Taking a literal interpretation, and giving the word “regularly” its ordinary meaning, may in fact work in Colonsay's favour in this regard. Furthermore a literal interpretation would allow for Colonsay to satisfy the threshold requirement, given that their estimated damages are in excess of £10,000.00, and the Act does not expressly state that this value necessarily has to be liquidated (i.e. an economic loss).

Golden Rule

The golden rule is a different and more traditional method of statutory interpretation that is preferred by the judiciary. Essentially the rule provides:

It is a very useful rule in the construction of a statute to adhere to the ordinary meaning of the words used, and to the grammatical construction, unless that is at variance with the intention of the legislature to be collected from the statute itself, or leads to any manifest absurdity or repugnance, in which case the language may be varied or modified so as to avoid such inconvenience but no further.

Essentially the golden rule gives preference to the ordinary meaning of a particular word; however liberties are taken in the construction of various phrases where their literal meaning would cause absurdity or a rejection of the intention of the legislature. Taking this concept and applying it to the current matter, it is clear that this may have some applicability. Section 35 of the Act only states that the transaction needs to be recorded in writing, not that the actual contract itself should be. However, having regard for the long title of the Act it is clear that the intention of Parliament is to regulate certain contract and thus the provision should be interpreted to refer to commercial contracts in this area.

Taking the above point again, it is also clear that a draft contract was prepared by Colonsay which did in fact record the terms of the agreement. Therefore it is arguable that, while not executed by the parties, they had a binding agreement which was recorded in writing and accepted verbally. Bearing this in mind, it is arguable that section 35 of the Act is applicable if this interpretation of the statute is taken. It would also be consistent with the purpose of the Act, given that it states that its intention is essentially to reduce the confusion which may arise from ambiguous terms that are not recorded in writing. However Colonsay can then argue that they satisfy the test for a binding contract under the Act as it contains the required written formality, and therefore seek to enforce the terms of this contract in any event.

Mischief Rule

This approach seeks to ascertain what the ‘mischief' was that the previous common law rules did not outlaw, and therefore ascertain the purpose of the statute in that sense. This rule has a somewhat limited ability to operate, in the sense that it can only be reliable in the event that a statute was enacted to remedy a defect in the common law. Based upon the long title of the Act, it is clear that the Act was intended to remedy the defect in the common law regarding these types of contracts, and therefore the rule may be reliable.

The result is similar to that obtained when the golden rule is applied, in the sense that there is clear evidence that a draft contract was prepared by Colonsay recording the terms of the agreement made verbally. It could be argued that the ‘mischief' the Act sought to prevent was uncertainty in contract terms and, subject to the written contract being an accurate representation of the agreement (which the instructions indicate it is), there would be no reason to suggest that Colonsay could not only argue that section 35 applies, but also argue that they have complied with their obligations under the Act to reduce the agreement to writing.

Purposive theory

The instructions do not support the reliability of the purposive theory of interpretation in this case, as no instructions are provided in relation to government debate and the like so as to go into further detail regarding the intention of Parliament. The long title of the Act is all that is available, and this is best reviewed by taking one of the other interpretation approaches.

Conclusion

In summary, whatever the interpretation approach adopted by the judiciary, there are certainly merits in Colonsay's argument to enforce the contract. In a worst case scenario, even if section 35 does apply, there can be little dispute that an agreement was concluded between the parties and recorded in writing, however it is simply that the written agreement was not executed. The burden will be upon Alpine to show why the written agreement should not be taken as an accurate representation of the terms of the agreement, and therefore why the agreement does not satisfy the requirements of section 35. It is also clear that the value of the contract exceeds the threshold of £5,000.00 as well; further compounding Colonsay's legal position. The purpose of this paper is not to explore the substantive issues of the contract; however it is advisable that Colonsay have an arguable case in law to enforce the contract in relation to the Act.