Legal relations and the giving of significant consideration

A ‘Construction contract’ is a legal agreement between two or more parties, based on the universal principles of contract law. It is build upon the parties’ intention to create legal relations and the giving of significant consideration. The courts use an objective view while taking into consideration offer and acceptance to establish whether a contract has formed. The following discussion will assess whether the law of contracts have been applied correctly in Straight Building Ltd vs. Duck Tight.

In order to proceed, we will use offer and acceptance analysis as it remains the traditional method of analysis for a contract made by an exchange of letters. (GIBSON V THE MANCHESTER CITY COUNCIL (2)

Offer

It is obvious that the Tender Enquiry sent by Straight Building (main contractor) to Duck Tight (subcontractor) and the reply by the latter, are not mere negotiations ,commonly known as ‘invitation to treat ‘ but is an offer. Palgrave defines an offer as ‘a statement by one party of a willingness to enter into a contract on stated terms, provided that these terms are, in turn, accepted by the party or parties to whom the offer is addressed’ while an invitation to treat is just mere negotiations without any intention to be bound immediately to the contract. (FISHER V BELL). There are generally no requirement that the offer be made in any particular form; it may be orally, in writing or by conduct’.

To validate the contract, there must be clear and unconditional acceptance and made to the person to whom the offer is intended. The issue here is that Duck Tight’s response was one which did not comply with Straight Building’s offer. This does not amount to acceptance as it does not match the terms of the original offer. (ENTORES V MILES FAR EAST).

In response to the new offer, Straight Building sent Counter Offer, which implies that it has rejected Duck Tight’s offer. (HYDE V WRENCH), where it was held that a counter offer destroys the original offer so that it not not possible any more for the offeree to accept it, unless the new terms are clearly approved by the offeror.

The point to be noted here is that the counter offer is in the form of an order, though expressly referring to liquidated damages, is not effective as there were no evidence that it has been accepted by the offeror. Moreover, Straight Building may not assume that the silence of the Duck Tight is same as acceptance. In other words, silence cannot be imposed on the offeree. (FELTHOUSE V BENTLEY). Hence, no contract has been formed between the parties so far.

The letter that Straight Building sent to Duck Tight afterwards is an offer and not an invitation to treat. Although the letter contains a significant typing error which contradicts the order made previously, the offer is valid as by commencing performance, the offeree proved that it has accepted the offer. (CARLILL V SMOKE BALLS).In this case, the defendants put an advertisement in which they offered to pay £100 to any person who used their smoke balls and then succumbed to influenza. Mrs Carlill saw the advertisement and used the smoke ball, but then immediately caught influenza. She sued for the £100.The defendants argued that it was not possible in English law to make an offer to the whole world. The court held that it is possible to make an offer to the world and if the offeror either expressly or impliedly stipulates in his offer that it is enough to act without informing him/her of acceptance, then performance amounts to acceptance. Hence, a valid contract has been formed.

TERMS OF CONTRACT:

The terms of the contract expressly stipulate that Duck Tight is to carry the work on site all in accordance with his terms and conditions, that is £100 per day and that would be limited to £ 1,000, in case it fails to complete the work on time. As the intention of the parties are clear, the claim by Straight Building ltd that the letter contained a typing error is to be ignored. The words used must be interpreted in their ordinary meaning to avoid puzzlement. (CASE)

BREACH OF CONTRACT

Duck Tight were 90 days in completing the subcontract works, this amount to a breach of contract terms. A breach of contract arises when ‘ a party without a lawful excuse fails or refuses to perform what is due from him under the contract, or performs defectively or incapitates himself from performing.’(Treitel).

A breach of a contract does not necessarily result in the contract being cancelled. (DECRO-WALL INTERNATIONAL SA V PRACTITIONERS IN MARKETING LTD (1971).

Instead, It gives the parties to the contract several options, namely: 1.It allows the innocent party to recover damages in respect of the loss suffered. (CASE)

2, It gives the innocent party right to put an end to additional performance. (CASE) 3. The party in breach is not allowed to bring a claim against the innocent party to compel the latter to fulfill its part of the contract. (CASE)

As result of this, Straight Building is entitled to damages which it has suffered.

DAMAGES FOR BREACH OF CONTRACT

Generally, to calculate the damages to be awarded, the judge will ‘ put the victim of the breach, so far as is possible and so far as the law allows, into the position he would have been in if the contract had not been broken.’ Parker J in (ROBINSON V HARMAN (1848), pg 405 palgrave. The test is one of causation and remoteness of damage. (HADLEY V BAXENDALE 1854)

In this case, the above test seems to be irrelevant as the terms of the contract include a “liquidated damages clause". Such a clause sets out the amount of money payable by one party to the other in the event of breach of contract and must be approved by both parties before being included as a contract term. It is legitimate provided that it is not penal in nature. (DUNLOP PNEUMATIC TYRE CO. LTD V NEW GARAGE AND MOTOR CO 79). It is worth noting here that the pre-estimate of the loss stated in the liquidated damages clause had not been agreed upon by both parties. In deciding whether the liquidated clause is enforceable or not, we need to see if the parties regard it as such. This is an important aspect but it is not conclusive. (ELPHIMSTONE V MONKLAND IRON & CO (18886).

The next factor to consider is, whether the clause is penal in nature or liquidated damages clause. This issue can be clarified by applying the principles set out by Lord Dundin in DUNLOP to the facts of this case as it is an authority on penalty clause.

The first principle is that a clause will be a penalty “if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach."

“The second principle is that a clause is a penalty clause “if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid."

The third principle is that “there is a presumption (but no more) that it is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage."

The fourth principle is that “it is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.

Applying the above principles to the facts of this case, we can see that the clause stipulating that the sum of £9,000 is to be paid to Straight Building Ltd is indeed a liquidated damages clause. This is because the sum stated is not extravagant when compared to the loss. It is true that it was difficult to forecast the loss but the court will enforce the liquidated damages clause even if this implies that Straight Building Ltd will receive less than its actual loss as a result of the breach. This is due to the fact that the clause provide for damages and this amounts to one of the settled contractual terms. (CELLULOSE ACETATE SILK CO LTD v WIDNES DOUNDRY LTD)

CONCLUSION

To conclude, I think that the judge correctly applied the law of contract in this case but its decision to award the Plaintiff only £1,000 for the very serious and expensive delay is wrong. It is clear that the contract between Straight Building Ltd and Duck Tight Ltd is valid. Duck Tight Ltd offered and it has been accepted by Straight Building. The agreement being commercial in nature showed that there was intention to create legal relations and consideration was provided by Duck Tight Ltd by commencing performance. Straight Building Ltd is entitled to damages, as provided in the liquidated damages clause, as Duck Tight breached the contract. The judge should award the sum of £9,000 (90 days @ £100) for the 90 days delay to Straight Building Ltd and not limit it to £1,000.